Off a Cliff: $100 Billion in Revenues Will Disappear From Drug Business by 2013

Last Updated Jun 16, 2011 10:28 AM EDT

Pfizer (PFE) will lose more revenues than any other company -- $29.2 billion in through 2013 -- when its cholesterol blockbuster Lipitor and other drugs lose the patent protections that give them exclusive marketing rights, according to research by Prof. Ken Kaitin of Tufts University's Center for the Study of Drug Development. Eli Lilly (LLY) and Bristol Myers-Squibb (BMY) aren't far behind, with $12.9 billion and $11.3 billion on the chopping block, respectively.

The "patent cliff" is old news in the pharmaceutical business -- who isn't aware of the unusual number of drugs going off patent right now, and the economic damage it's wreaking on Big Pharma? -- but it's not until you see that damage in a chart ranking companies by vulnerability that the scale of the problem really hits you. Here are the "industry leaders" in lost revenues over the next four years:

Kaitin created the chart for a presentation he gave at Bernstein Research's R&D Productivity Conference last month. The total amount of lost revenues, as brand-name drugs get replaced by cheap generic versions will be $114.3 billion. That's a staggering sum. It will be the economic equivalent of both Pfizer and Novartis (NVS) being wiped from the face of the Earth. Or, after 2013, if Sanofi, (SNY), AstraZeneca and GlaxoSmithKline (GSK) never existed. Here is the detail on which drugs are affected:

Note that in 2012, the world really will end for many in the drug business: $44 billion in revenues will pass away into their (generic) afterlife. These are only the top 10 branded drugs, bear in mind. Many smaller products at smaller companies will also be lost. It's a particular problem right now, Kaitin noted, because the industry is heavily reliant on a "tentpole" economic model:
... the industry consistently relies on only three out of ten products in its portfolio to recoup average R&D costs. That is, seven out of every ten compounds in a company's portfolio don't earn average cost of R&D. They earn less than the cost to develop a new product. Therefore industry is highly reliant on those three out of ten products to generate the revenue to sustain growth. As it turns out, many of those three out of ten products are on this chart right here and they're about to go off patent.
Here's the same data ranked by company:

Three conclusions stand out from the data: First, Johnson & Johnson (JNJ), with only $4 billion at stake, is in a relatively luxurious position as a large company with a broad portfolio and few significant expirations ahead of it.

Second, Pfizer CEO Ian Read's sudden desire to radically remake his company as a smaller, more focused enterprise with fewer units and fewer employees suddenly looks a lot more reasonable.

And third, shouldn't Lilly, BMS and GSK being making a lot more Pfizer-esque noise about restructuring, given their smaller sizes and the large impending losses they face?