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By Ransdell Pierson
NEW YORK May 4 Leading global pharmaceutical
companies have started to view their vast portfolios of older,
established prescription drugs as vehicles for raising large
sums of cash to fuel development of new medicines with far
higher profit margins.
France's Sanofi and U.S. drugmakers Merck & Co
and Abbott Laboratories are exploring selling
off their mature drugs that have lost patent protection, Reuters
reported this week, citing people familiar with the plans.
Officials at the three companies declined to comment.
The divestments could bring in more than $7 billion for
Sanofi, north of $15 billion for Merck and over $5 billion for
Abbott, the sources said, giving them considerable firepower to
develop, or buy, promising experimental medicines.
Such a shift would also remove a source of pricing pressure,
since many of the older medicines are sold in emerging markets,
where governments are increasingly demanding lower prices.
"It makes sense to sell your low-growth assets that drag
down profit margins and to redeploy that cash to higher-value
innovative biotech assets," said John Boris, an analyst with
SunTrust Robinson Humphrey.
The trickier part, according to some people familiar with
the processes, is finding a buyer, particularly if many of these
assets reach the market around the same time. Suitors could
include generic or specialty drugmakers looking to widen their
product line, or private equity firms content to milk the cash
flow from the aging products without having to worry about the
expense of drug development.
The Merck products in particular could attract the interest
of Valeant Pharmaceuticals, which derives a quarter of
its revenue from branded generics sold in emerging markets, said
Alex Arfaei, an analyst with BMO Capital Markets.
Valeant's Chief Executive Michael Pearson has said he favors
established products over pumping cash into risky research and
Once companies divest their mature drugs, good-selling
patent-protected drugs can have a bigger impact on financial
results, said Len Yaffe, portfolio manager of the healthcare
fund at StockDoc Partners in San Francisco.
Patent protection for a new drug is generally 20 years from
the time the patent was approved, but it can then take a
medicine 10 or more years to be developed and reach the market,
giving a limited window for exclusivity.
"From a smaller revenue base, it's easier to grow revenue
and earnings faster," Yaffe said, especially as new drugs are
approved and make contributions.
CASH COWS LOSE APPEAL
The interest in unloading these older assets represents a
shift for Big Pharma, which has relied on them as cash
generators to cushion steep revenue declines from more recent
drug patent expiries. Almost all are sold outside the United
States, where governments are increasingly demanding lower
"That makes them less profitable and attractive," said
Morningstar analyst Debbie Wang. "It's gotten tougher in the
past two or three years."
The divestments would also feed into a larger shakeout of
the pharma industry, whose major players are in the midst of a
series of asset sales and swaps to better focus on the types of
medicines that will bring them the most growth. That logic has
fueled Pfizer Inc's $106 billion unsolicited takeover
bid for AstraZeneca and a $20 billion swap between
Novartis and GlaxoSmithKline.
Merck drugs likely to be sold include blood pressure
treatments Cozaar and Hyzaar, with combined sales of $1 billion
last year; cholesterol fighter Zocor, with sales of $301
million, and hair growth drug Propecia, with sales of $283
Sales of Abbott's aging drugs, which it calls "established
pharmaceuticals," fell 3 percent last year to $4.97 billion,
irking many investors.
When GSK reported quarterly financial results on Wednesday,
it announced separate results for its established products
division. Pfizer on Monday is expected to do the same, as a
possible prelude to eventually divesting its mature drugs.
GSK last September sold two blood clot medicines that are
branded generics, Arixtra and Fraxiparine, and a related
factory, to South Africa's Aspen Pharmacare for $1.1 billion, as
part of its strategy to focus on growth products.
"You should not be surprised if we were able to transact a
disposal of some of that established product portfolio in the
next year or two," Chief Executive Andrew Witty told reporters
last week. "That is not part of our future."
Pfizer, which recently spun off its animal health and
infant formula businesses, is considering whether to divest its
own established products unit, which includes hundreds of
off-patent drugs and ones that will soon lose patent protection.
Some analysts say an AstraZeneca purchase would allow Pfizer
to combine the mature drugs divisions of both for a more
significant sale or spin-off.
But Pfizer has said it would not be able to divest the unit
until 2017, following a review of its financial performance. It
is one of the company's three main businesses, and with revenue
of $9.46 billion last year, it generated 18 percent of total
There are clear risks for Merck, Sanofi and others, however,
in concentrating their bets so much more heavily on the success
of new medicines
"Being more focused cuts both ways: your successes are
magnified, but if you have failures, you feel them more when you
have a less-diverse business," said Edward Jones analyst Judson
(Reporting by Ransdell Pierson,; additional reporting by Ben
Hirschler in London and Bill Berkrot, Soyoung Kim and Olivia
Oran in New York; Editing by Martin Howell)