Revenues fall off the patent cliff, rain down on generics firms.

When patents run out, generic pharmaceutical companies reap the benefits.

When we think about the patent cliff, an image along the lines of a massive waterfall, with companies’ revenues in free fall comes to mind. What we usually forget to consider, though, is that the waterfall is nourishing a fertile, green valley below. For while big pharmaceutical companies are scrambling to bolt-on smaller biotechs with marketed drugs to protect themselves, generics manufacturers are reaping windfall profits. While the industry has been nervous about the patent cliff for years, it is turning out to be a blessing in disguise. Patients are benefitting the most by gaining access to the innovative drugs of the past few decades at generic prices. Biotech companies are benefitting from a frenzied M & A environment, and generics companies are reporting record profits. Big pharmaceutical companies, meanwhile, have been forced to respond to the challenge by refocusing their attention and honing their business strategies.

As an example of this phenomenon, it’s worth looking at the biggest loss of the edge of the cliff, Pfizer’s cholesterol drug Lipitor. The company recently released its first quarter earnings, and reported Lipitor sales of $1.4bn, a 42 per cent plunge from the same period in 2011. The drugmaker can hardly complain, though, as the drug recorded cumulative sales of $128bn for Pfizer through the end of 2011. Meanwhile, Watson Pharmaceuticals was the first to begin selling generic Lipitor in November, 2011. As a result of strong generic Lipitor sales, as well as other generic launches including generic versions of Concerta and Lovenox, Watson’s first quarter revenue increased 74 per cent to $1.5bn, compared to $877m for the corresponding period in 2011. Increased sales drove an 87 per cent increase in net income, from $112m in Q1 2011 to $209m in 2012. As a result of its newfound financial heft, Watson was able to expand its geographic reach with the purchase of the European generics firm Actavis. Watson announced the €4.25bn ($5.6bn) acquisition was announced on April 25, and should lead to 2012 pro forma revenue of $8bn for the combined company in 2012, compared to $4.6bn for Watson in 2011 and $6bn in 2012 based on annualized first quarter revenue. Mylan, another major generics company, reported an 18 per cent increase in earnings for the first quarter compared to 2011, to $0.52/share from $0.44/share. This gain was due to a 9 per cent increase in revenue from $1.45bn in Q1 2011 to $1.58bn in 2012.

Pfizer and other big pharmaceutical companies, meanwhile, appear to be on course to successfully navigate the rapids. Although Pfizer saw its earnings drop 19 per cent in the first quarter compared to 2011, there are bright lights on the horizon. The FDA is set to decide on its rheumatoid arthritis drug tofacitinib by August 20, and the drug has the potential to generate up to $1.5bn in revenue before the end of 2012. The company has another drug before the FDA for review, with a decision expected by June 28. Eliquis was co-developed with Bristol-Myers Squibb for the prevention of strokes in patients with arterial fibrillation, and also has blockbuster potential. Finally, Pfizer is flush with cash after selling its infant nutrition unit to Nestle for $11.9bn, and ready for another round of acquisitions that could range from small, bolt-on biotech purchases to another pharmaceutical mega-merger.

The biggest development regarding the patent cliff will be watching large pharmaceutical companies’ attempts to maintain growth in the face of expiring patents. But regardless of how whether Big Pharma stays atop its mountain or goes over the cliff, generics firms will continue to reap the profits of major pharmaceutical patent expirations.

Dr. Jerry Isaacson is the head of GlobalData healthcare industry dynamics. Their website can be found at www.globaldata.com.

Photograph: Getty Images

Dr. Jerry Isaacson is head of GlobalData healthcare industry dynamics.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation