Big Pharma stands to profit by cleaning out its medicine chests

Sun May 4, 2014 8:14am EDT
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By Ransdell Pierson

NEW YORK (Reuters) - 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 (SASY.PA: Quote) and U.S. drugmakers Merck & Co (MRK.N: Quote) and Abbott Laboratories (ABT.N: Quote) 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 (VRX.TO: Quote), 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 development projects.   Continued...

A person holds pharmaceutical tablets and capsules in this picture illustration taken in Ljubljana September 18, 2013. Picture taken September 18. REUTERS/Srdjan Zivulovic