Accenture Life Sciences Study: Worst of Pharma’s Patent Cliff is Passing

While the looming fiscal cliff garners attention, what should one make of the infamous patent cliff that the pharmaceutical industry has fallen off? Brace yourself. Not only is the worst over, but there is now data to suggest a modest rebound is within reach in the near future, at least according to a new paper from the Accenture Life Sciences consulting firm.

Specifically, the firm believes sales lost from patent expirations reached a high this year, and the ratio of new sales needed to replace those losses has reached a low. Significantly, as of 2013, the trend reverses as the ratio of new sales from product launches and existing drugs – compared to sales lost to parent expirations – recovers by 2016. Pharma is “poised to close the gap between blockbuster sales loss and new sales,” the firm projects.

Big Pharma – Pfizer (PFE), Novartis (NVS), Merck (MRK), Sanofi (SNY), GlaxoSmithKline (GSK), Bristol-Myers Squibb (BMY) and others – has been struggling to produce revenue growth, as patents expire on existing medicines and company labs have failed to produce enough new drugs.

PFE Revenue TTM Chart

PFE Revenue TTM data by YCharts

Strong cash flow from existing drugs, however, has allowed the companies to continue paying rich dividends, and somewhat-lower stock prices have pushed up dividend yield.

PFE Dividend Yield Chart

PFE Dividend Yield data by YCharts

Another metric used to size up the situation is the enterprise value, which is typically calculated by taking market capitalization plus debt, minority interest and preferred shares, and then subtracting cash and cash equivalents. The value of the 16 global bio-pharma companies studied has been relatively flat over the last eight years. However, enterprise value rose 8 percent in the first nine months this year, a positive sign.

On the other hand, future value has been plummeting since 2006, the firm writes. While this metric varied widely among the drug makers studied, just three had positive future value last year and only two had a higher valuation in 2004. Today, the firm adds, future value is more than 50 percent in the negative compared to enterprise value, which implies “investors have already baked in the impact of patent expirations into their valuations.”

To read the remainder of this article, go to Pharmalot.

Ed Silverman, a contributing editor of YCharts, is the founder and editor of Pharmalot. He previously reported on the pharmaceutical industry and other business topics for the Star-Ledger of New Jersey, New York Newsday and Investor’s Business Daily.



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