The pharmaceutical industry is staring at a revenue loss of around $300 billion due to patent expirations this decade.  After the patent on a drug expires, generic manufacturers can replicate and sell the product at much cheaper prices, generally leading to a steep decline in the original drug’s revenues. Like many big pharma companies, Merck (NYSE:MRK) is faced declining revenues in 2012 due to the patent expiration of its once largest selling drug, Singulair (Read Singulair Patent Loss Hits Merck’s Earnings But International Growth Helps). As we move forward in 2013, we take a look at how patent cliff impacts the drug maker’s Musculoskeletal drugs division.
- Merck Earnings Preview: It Is Going To Be All About Keytruda
- The Year 2016 In Review: Merck Can Look Back And Smile
- Merck’s Q3 Earning Review: Keytruda, The Key To Merck’s Growth
- What To Expect From Merck’s Q3 Earnings?
- Why We Believe Merck Could Grow In Future?
- Why Vallee S.A. Acquisition Could Boost Merck’s Animal Health Business’ Growth In South America?
The musculoskeletal system consists of body’s bones, muscles, cartilage, tendons, ligaments, joints and other connective tissues and is what enables humans to move physically. Merck has a number of well known drugs in the division including Remicade, Simponi (follow on product to Remicade) and Fosamax. The division generated more than $3.5 billion in sales in 2012, on back of these drugs. However, revenues from the division have been declining since 2009 on a number of factors. First, Fosamax, an osteoporosis drug, lost its patent protection in 2008 and revenues from the drug have nearly halved since. The trend is expected to continue going forward, which will weigh on Merck’s growth.
The sales of Remicade and Simponi, both arthritis drugs, have also declined in 2012, pursuant to an agreement between Merck and Johnson & Johnson (J&J) to amend the distribution rights. Under the terms of the amended distribution agreement, Merck relinquished exclusive marketing rights for Remicade and Simponi to J&J, effective July 1, 2011, in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific. The drug maker retained rights for Western Europe, which has been witnessing severe pricing pressure, hurting its growth potential. We therefore expect relatively flat growth in near term.
But, concerns arise from the fact that Remicade is set to lose its patent protection in 2015, putting at risk nearly $2 billion in sales the drug garnered in 2012. The drug constitutes about 60% of the segment’s revenues, signifying a major risk. However, Remicade is a biologic and generic erosion for biologics could be much slower and more limited than smaller molecules. In addition, it is expensive to make biosimilars, thus limiting the pricing advantage over the original biologics.
Odanacatib To Lend Support
While there is no reprieve in near term, we believe that the drug maker’s pipeline has the potential to fend-off revenue loss. We are particularly bullish on osteoporosis drug Odanacatib. In 2012, the drug maker closed phase III trials for osteoporosis drug Odanacatib before time, due to impressive efficacy in increasing bone mineral density (fewer fractures) in post-menopausal women with osteoporosis (see Merck’s Stock Gets A Boost From Osteoporosis Drug Trials).  Earlier, the drug was expected to receive FDA approval by mid-2013. However, during Q4 earnings, Merck disclosed that launch of Odanacatib may get pushed to early 2014. (Read Singulair Patent Loss Hits Merck’s Earnings But International Growth Helps)
Once the drug hits the market, it has the potential to earn blockbuster status though we estimate its peak sales on the lower side at around $500 millions due to generic competition. Odanacatib will hit the market with two of its major competitors – Eli Lily’s Evista and GSK and Roche’s Boniva – going off patent. These drugs garnered close to $2 billion in sales. However, this also provides an opportunity to tap the osteoporosis market. Notes:
- BIO 2012: Implications of the ‘Patent Cliff’, The Life Science Report, June 19 2012 [↩]
- Update on Phase III Trial for Odanacatib, Merck’s Investigational Cat-K Inhibitor for Osteoporosis, Merck News Room, July 11 2012 [↩]
- Will Merck’s Odanacatib Sufficiently Fill Singulair’s Void?, The Montley Fool, Nov 30 2012 [↩]