As first-quarter earnings season kicks off, it will be interesting to see how several of the country’s top drugmakers are dealing with recent patent expirations. In this roundup, we preview a few of the larger U.S. players including Pfizer Inc. (PFE - Free Pfizer Stock Report), Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report), Eli Lilly & Co. (LLY), and Merck & Co. (MRK - Free Merck Stock Report).
Many investors are anxious to see how the world’s largest drugmaker is coping with the loss of its popular cholesterol-fighting drug Lipitor. Lipitor lost exclusivity back in November, and despite numerous efforts to retain as much of the market as possible, global Lipitor sales plummeted 25% in the fourth quarter. The impact will likely be far greater in the March period as it represents the first full quarter in which the drug competes with cheaper generics. We expect management to feature its pipeline in the upcoming conference call in an attempt to reassure investors of the company’s long-term stability. Pfizer has made some decent progress on this front in recent months with several new drugs having shown promise in late-stage studies, most notably the company’s Prevnar 13 vaccine for the prevention of pneumonia. Any details regarding the potential sale of Pfizer’s animal health and nutrition units will also be highly anticipated within the investment community.
Eli Lilly & Co.
The Indiana-based drugmaker is expected to report significant top- and bottom-line losses when it releases its first quarter results later this month. The company experienced considerable deterioration in the fourth quarter driven primarily by the patent expiration of Zyprexa in October. Zyprexa sales accounted for 23% of LLY’s total revenues in 2011, but sales of the drug plummeted 44% in the December period due to the emergence of generics. While the company has several prospects generating interest in the pipeline, visibility remains limited at the present time. Management will likely highlight recent cost containment efforts in its upcoming conference call, including plans to freeze base pay for the majority of its 38,000 global workforce. We do not anticipate the company will announce any large-scale acquisitions in the near term as Lilly seems content with relying on its own research and development efforts pick up the slack.
Merck & Co.
While Merck will undoubtedly face a challenging road once Singulair comes off patent this August, we look for the company to fare relatively well in the first half of 2012 driven by strong sales momentum from several key products including Januvia/Janumet. The biggest concern in the coming quarters, in our view, deals with another company’s patent loss, rather than one of Merck’s. Pfizer’s loss of Lipitor is not only bad news for Pfizer, it’s also bad news for all branded pharmaceutical companies that manufacture cholesterol-fighting products. In Merck’s case, we question whether Vytorin and Zetia will be able to co-exist with cheaper Lipitor generics in the marketplace. We expect to see considerable top-line erosion on these products when first-quarter results are released.
Johnson & Johnson
Though patent losses on the prescription side of the business are expected to pressure top-line growth somewhat, Johnson & Johnson is far less dependent on pharmaceuticals relative to some of its counterparts. Only about 35% of J&J’s revenues come from this segment and we believe its highly diversified home brand portfolio should help to mitigate the patent impact on earnings. The more pressing issue for the year ahead will be resolving recall issues that have been a bit of nuisance over the past year. Johnson & Johnson was faced with a series of costly recalls on a few of its over-the-counter products, including one on its Tylenol brand earlier this year. Encouragingly, the company appears to be heading in the right direction based on its recently released first-quarter earnings report. For the period, share net advanced 1.5%, year over year, to $1.37, and came in $0.05 ahead of our estimate, as margin expansion helped to mitigate some top-line shortfall.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.