The pharma megablockbuster model is dead. Rest in peace.
It isn't that drugmakers wanted to kill it. Drugs that hit the multibillion-dollar sales level typically produce higher margins than other drugs. It doesn't cost that much more to market a $5 billion drug than it does to market a $750 million drug.
But alas, investors will need to plan for the future when megablockbusters are the rare exception.
Where's the innovation?
Some people will argue that the problem is simply that drugmakers aren't innovating, perhaps because all the easy discoveries have already been made.
There's probably some truth to that. Some drugmakers have taken to developing me-too drugs as a less risky way pathway to development since the targets of the drug are already validated. Without innovation, drugs are only going to rack up a fraction of the sales of the first-in-class drug that preceded it. For example, sales of Merck's Januvia/Janumet franchise in 2012 were $5.7 billion, while Bristol-Myers Squibb and AstraZeneca's Onglyza/Kombiglyze franchise, which targets the same DPP4 molecule, amassed a little more than $700 million.
We've treated this before
The bigger problem that I see isn't necessarily innovation, but the competition that drugs face once they hit the market. Being first-in-class doesn't guarantee sales anymore.
First, there's the competition before drugs ever get to the market. For some diseases, such as diabetes, placebos aren't allowed, and drugmakers must compare their drugs to a currently approved drug. Can't beat the current offerings? Sorry, game over.
When drugs offer a benefit, it's often slight. Once they hit the market, they have to compete with drugs that doctors are already comfortable prescribing. I think this is the number one reason for the recent rash of slow drug launches.
In addition to the doctor's comfort with safety and efficacy, new brand drugs often have to compete on price with generic versions of drugs that came before them. When generic versions of Merck's Zocor hit the U.S. market in the middle of 2006, sales of Pfizer's Lipitor slipped. Now that generic Lipitor is on the market, we're seeing the same issue with AstraZeneca's Crestor. U.S. prescriptions of Crestor were down 6% in the fourth quarter, despite a 2% increase in total prescriptions for statins, the class of drugs that Crestor, Lipitor, and Zocor belong to.
Exception that proves the rule
Obviously, the corollary should also be true. A drug should do pretty well if it enters a large market where the standard of care isn't very effective and there aren't any competing generics, which is exactly what we saw with Vertex Pharmaceuticals' Incivek.
Sales of the hepatitis C drug hit $420 million in its first full quarter on the market. Annualize that out and you've got a megablockbuster. Sales have pulled back some, but that's just a function of the hepatitis C market -- where drugs cure patients -- so sales are completely dependent on new patients starting medication.
Four singles still scores a run
The death of the megablockbuster isn't the end of the world. Drugmakers can still hit one out of the revenue park; it's just going to take a few drugs to get to the same sales level that one megablockbuster could hit.
The multidrug approach will cut into the bottom line. Developing multiple drugs costs more for R&D than one drug, and margins are likely lower for drugs at lower revenue levels.
But pharma is working to be more efficient with its R&D dollars, going after orphan indications where clinical trials can be cheaper to run for instance. They're also working on increasing the likelihood of success by limiting money spent on drugs that are bound to fail. Amgen's strategy is to "pick winners" by developing drugs with a solid genetic basis, which should increase the likelihood of success.
If pharma can pump out the drugs and the FDA doesn't tighten the approval strings, investors might not feel the need to erect a shrine at the megablockbuster's gravesite.
Can Merck beat the patent cliff?
This titan of the pharmaceutical industry stumbled into 2013 and continues to battle patent expirations and pipeline problems. Is Merck still a solid dividend play, or should investors be looking elsewhere? In a new premium research report on Merck, The Fool tackles all of the company's moving parts, its major market opportunities, and reasons to both buy and sell. To find out more -- and get a full year of free updates -- click here to claim your copy today.
The article Why Is the Blockbuster Model Breaking? originally appeared on Fool.com.Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.