NEW YORK (CNN/Money) -
If the future of Big Pharma can be read in its pipelines, Eli Lilly & Co. and Sanofi-Aventis are among the few bright spots, analysts say -- but investors should also look at Pfizer, which is experimenting with a drug combo that could outsell all others.
Pfizer (up $0.05 to $21.60, Research), the world's biggest drug company with $52.5 billion in 2004 sales, threw a wet towel on already soggy investor confidence last week when it pulled its guidance while reporting lackluster third-quarter earnings.
But the New York-based druggernaut is experimenting with a potential cholesterol-lowering drug, torcetrapib, that could hit $25 billion in annual sales if combined successfully with top-selling blockbuster Lipitor, said Michael Krensavage, analyst for Raymond James.
"Pfizer's fortune depends on torcetrapib," said Krensavage.
Torcetrapib is still being testing and it's a high stakes gamble for Pfizer, which has already invested $800 million in research and development for the drug, said Krensavage. Pfizer spent $7.6 billion on R&D in 2004 and, in an interview earlier this year, company spokesman Steve Lederer said torcetrapib's development costs could exceed $1 billion.
"That's currently the most expensive clinical trial ever," said Krensavage. "Big risk, but potentially good pay off."
Krensavage said that Pfizer has "a richer pipeline than any drug company," but its pipeline needs to be "massive" to sustain its $1 billion in weekly revenue. This is an all-too-common problem for Big Pharma, since $38 billion in drug sales are slated to lose patent protection through 2008, according to pharmacy benefits manager Express Scripts (up $2.93 to $77.98, Research).
Pipeline promise for Lilly, Merck and eventually, J&J
Lilly (up $0.16 to $49.92, Research), an Indianapolis drugmaker with $13.9 billion in 2004 sales, is Krensavage's pipeline pick, despite his "underperform" rating for what he considers to be an overvalued stock. But Chris Schott, analyst for Banc of America Securities, considers Lilly to be the top-performing drug maker in the industry because of its rich pipeline and low exposure to patent expirations.
"We believe that Lilly is on the cusp of a sustained period of sales growth and margin expansion," said Schott, who calculated that recently-launched drugs and upcoming pipeline products will account for half the company's sales by 2010, with less than 1 percent of its revenue vulnerable to patent expiration over the next six years.
In 2006, Lilly's co-marketing partnership expires with Takeda Pharmaceutical (up $1.51 to $56.14, Research), a Japanese drug maker, and Lilly will lose diabetes drug Actos, which totaled $338 million in sales during the first nine months of 2005.
But Lilly's future earnings are in good stead with two other diabetes treatments, Byetta and Arxxant, said Krensavage of Raymond James. Byetta, a potential blockbuster discovered in the saliva of the Gila monster, was approved by the Food and Drug Administration in April. Lilly plans to file Arxxant with the FDA by the end of this year, and Schott of Banc of America Securities projects that Arxxant annual sales could total $620 million by 2010. More importantly, Schott projects that Lilly's antidepressent Cymbalta could reach $3.5 billion in annual sales by 2010.
At the moment, Johnson & Johnson (down $0.68 to $61.22, Research), a New Jersey-based producer of drugs and consumer products, is at the bottom of a graph used by Krensavage to chart the worth of pipelines compared to patent expirations. However, this could change in 2009 with the potential launch of eight new drugs, including a replacement for outgoing epilepsy and migraine treatment Topamax, said Krensavage.
Merck (down $0.36 to $28.16, Research), a New Jersey drug giant with $22.9 billion in 2004 sales, faces some of the most intimidating patent expirations, said Krensavage. That includes the loss in 2006 of Zocor, a $3.6 billion cholesterol-lowering drug, and the loss in 2008 of Fosamax, a $1.8 billion treatment for osteoporosis.
But Merck has two promising vaccines in its pipeline: RotaTeq, submitted to the FDA in April for the prevention rotavirus, which causes diarrhea in babies, and Gardasil, which completed late-stage clinical testing for the prevention of cervical cancer. Krensavage projects $500 million in annual sales for Rotateq, with $750 million for Gardasil.
Merck's promising pipeline and "below-average" valuation convinced Krensavage to rate the company "strong buy," and he considers the company's legal trouble with withdrawn painkiller Vioxx to be "overblown."
At his company's third-quarter earnings teleconference, Merck chief executive officer Richard Clark said Gardasil would help to bolster future earnings, especially since data released Oct. 7 showed 100 percent effectiveness for blocking cervical cancer.
Since no one can predict whether experimental drugs will be approved by the FDA, investors may want to place their bets with cancer drugs, which are often granted fast track review status because safety issues are less pressing among patients with terminal illnesses, said John Boris, analyst for Bear Stearns.
"The only thing they're approving right now is oncology," said Boris. "There's no safety issue [with cancer drugs.] You either die, or you get an approval with a product."
Sanofi: Europe's pipeline king
Among the European drug makers, French company Sanofi-Aventis (up $0.09 to $39.73, Research) has the most "innovative" pipeline, said Bernstein analyst Gbola Amusa. Sanofi's experimental pill Acomplia has blockbuster potential because, if approved, it could aid in weight control, double the quit rate for smokers, improve cholesterol levels and control blood sugar level for diabetics, said Amusa.
"[Acomplia] could very well be the biggest drug in the world today," said Amusa, who projects about $5 billion in annual sales for Acomplia.
Sanofi is also awaiting an FDA decision on Exubera, an inhalable insulin it produces with Nektar Therapeutics (up $0.39 to $15.21, Research) and Pfizer, to treat America's "diabesity epidemic," said Amusa, referring to the growing closely linked problems with diabetes and obesity in America. Sanofi is also developing a lead contender for the world's first vaccine for bird flu, or H5N1, and was the first private company to receive a contract from the U.S. government to develop the vaccine.
"The way [Sanofi] does R&D is like a power hitter," said Amusa. "They step up to the plate and make big swings. You expect the power hitter to strike, but when they hit, it's a home run. Home runs are the kind of thing that excites the crowd, and the market gets excited by blockbusters."
To read about an anti-HIV gel being developed by Merck and Bristol-Myers, click here.