March 24, 2014 Morayea Pindziak

Going the Way of Blockbuster

How much do blockbuster drugs mean to stock prices?

Blockbuster drugs (annual sales > $1B) are important to the future success of pharmaceutical and biotechnology companies. DiMasi and Grabowski (2007) estimated that the average pre-tax R&D cost for approved biopharmaceuticals is around 1.2 billion USD.1 Besides putting the company in the black and rewarding shareholders, the additional revenue helps fund R&D and the purchase of potential drug candidates. New drugs are needed to sustain growth and probability since drugs on market lose their patent and fall victim to a steep decline in revenue due to the introduction of generic competition.

When generics are introduced and revenue for the blockbuster falls, it is often thought that stock price should follow. However, the change in stock price may be a smooth process because the market may price in pipeline drugs, or the market may have taken into account the impending loss of patent exclusivity.

We decided to try and see what kind of impact blockbuster drugs have on large pharmaceutical and biotechnology companies. In order to do this we created a list of the top 12 drugs according to United States sales in the first quarter of 2011. Of the top 12, we excluded ABILIFY® (aripiprazole, Otsuka) and ACTOS® (pioglitazone, Takeda) due to these companies not being traded on US exchanges. Table 1 shows the drugs and their associated companies which were included in the analysis.

Table 1

In total we looked at 10 different blockbuster drugs from 8 separate companies (three drugs from AstraZeneca). To get an idea of what percentage of total sales these drugs make up of these companies we totaled up their combined total revenues per quarter and the combined total sales of each drug in the sample.

Figure 1

Surprisingly, the total sales of these drugs together hovered between $8B and $12B while the total revenue for these companies fluctuated between $80B and $100B. Late 2011 and early 2012 saw a bit of a patent cliff for the big players, Lipitor, Plavix, Advair, Singulair and Seroquel all lost their patents. Lipitor, Plavix, Seroquel and Singulair sales dropped out of our dataset due to highly diminished sales which reflects the loss in sales in late 2012 through Q4 2013. In order to counteract this drop out of sales we assumed that subsequent sales per quarter would be 20% of the sales in the last quarter before patent expiration. In an IMS presentation titled “Spending on Medicines”, they report that 80% of a brand’s prescriptions are replaced by generics within six months of the patent expiration. 2

These drugs from Q1 2011 to Q4 2013 had a drop in total sales of 33%. With a 33% drop in drug prices total revenue for these companies only dropped 4% over the same quarter. The companies seem to be investing their profits wisely in drugs that can replace the earnings lost from the loss of patents.

In order to see how investors viewed the decline in sales of these block buster drugs we created an index for the stock price and total sales starting in Q1 2011 as our base. We then took the average of the sample and plotted them in figure 2.

Figure 2

The graph illustrates the divergence of stock price and sales of these drugs. This could be for several reasons. For one, as these drugs come off patent they are replaced by other drugs making close to, if not more in revenue. The other reason seems to be that the life cycle of these drugs is inherently built into the stock price. As long as the company has a solid pipeline and prospects the street doesn’t seem to worry about the disappearing revenue.

We believe both of these reasons have a high contribution to why stock prices keep increasing.

In the second part of this post, we will explore more reasons why the stock prices keep increasing, and conclusions from our examination.

 

In the second part to our examination into what kind of impacts blockbuster drugs have on large pharmaceutical and biotechnology companies, more support comes in figure 3 which shows the index of total revenue and stock price for the period.

Figure 3

Revenue for these companies continues to remain steady despite large drop offs in revenue from Lipitor, Plavix, Seroquel and Singulair. While revenues remained steady, stock prices soared. The patent cliff was and still is a major concern for these large companies, perhaps revenues remaining steady and not dropping contributed to more investor confidence and the built in cushion for the stock price was initially a bit of an overestimation and prices corrected up.

To assess the loss of patent on a company level we took a look at Pfizer and one of the best selling drugs of all time, Lipitor, we see a major decline in sales but an increase in stock price.

Figure 31

It seems that these drugs aren’t as big a part of the total portfolio as originally thought since they don’t seem to influence stock price on their descent as much as they drove the price higher in their ascent.

Table 2 shows what percentage of total revenue these drugs had of their respective companies during Q1 2011.

Table 2

With the exception of Bristol-Myers Squibb and Amgen where Plavix and Enbrel made up 33% and 22% of their revenue, respectively, most drugs only made up less than 20% of total revenue. Singulair only accounted for 9% of Merck’s total revenues and Remicade was a drop in the bucket at 5%.

Our main conclusion from the research seems to be that if a company has a solid pipeline they should not be too worried about a blockbuster losing market share to a generic as the market seems to have priced this in. Companies need to be reinvesting their profits when they have a block buster in order to prepare for the future.

Data Sources

Sales data was provided by IMS Health via Drugs.com. Company fundamental data was provided by Charles Schwab & Co. Historical stock prices are adjusted closing prices provided by Yahoo! Finance.

References:

1 DiMasi JD, Grabowski HG: The cost of biopharmaceutical R&D: Is biotech different? Manag Dec Econ 28: 469-479 2007

2 IMS Institute for Healthcare Informatics.The Use of Medicines in the United States: Review of 2010.April 2011

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