Drug Giants Look for Growth Fuel as Older Blockbusters Show Age

(Bloomberg) -- The U.S.'s biggest pharmaceutical companies are beginning to prepare for a new and potentially challenging chapter after reaping the rewards of a fruitful period of cancer research that created new blockbusters.

First-quarter earnings reports on Tuesday from three drug giants showed that sales growth for some of the biggest-selling medicines of recent years is beginning to mature and slow -- and that companies are on the hunt for new therapies to keep their growth engines roaring.

Merck & Co.'s cancer blockbuster Keytruda brought in $2.27 billion in the first quarter, but the immuno-oncology medication's rapid growth is beginning to moderate. The company said it would cut costs by eliminating jobs and closing plants, as part of what a spokeswoman said were continuing efforts to “ensure our structure supports the future of our business.”

At the same time, Pfizer Inc.'s cancer drug Ibrance, brought to market in 2015, sold $1.13 billion, but its growth is also beginning to decelerate. Executives said on a call with analysts Tuesday that Pfizer plans to be “very active” about potential mergers and deals.

Merck and Pfizer were the top-performing stocks in the Dow Jones Industrial Average last year, but lately investors' enthusiasm has waned. Merck has gained 2.5 percent in 2019 and Pfizer has fallen 6.2 percent, while the Dow has jumped 14 percent.

Additionally, some of the pharma giants' rivals are already sprinting ahead with makeovers.

Eli Lilly & Co., which also posted results Tuesday, has begun to refashion itself as a cancer-focused maker of innovative new drugs. Earlier this year, it acquired Loxo Oncology for $8 billion in a bet on a new class of cancer therapies, and spun off its Elanco animal-health business.

Bristol-Myers Squibb Co. is increasingly leveraged to lucrative cancer drugs, too. Its Opdivo is battling Merck's Keytruda for supremacy in immunotherapy. And this month, shareholders approved the takeover of Celgene Corp., maker of blood-cancer blockbuster Revlimid. Celgene also has a CAR-T genetic therapy for cancer in development, as well as partnerships with a series of smaller biotechnology companies chasing innovative treatments.

Price Limits

The pressure to bring new, more unique drugs to market has increased as the debate over drug prices in the U.S. has gotten louder. Drugmakers have had to tame the regular price increases they once relied on to bolster profits, and in some cases have had to offer lower-cost versions of their own products. Pfizer, for example, said it would hike the price of 41 drugs around the start of the year, a more moderate package of increases than in the past.

Now, the industry is looking for new drivers for growth, with an eye toward finding the next big class of cancer treatments. Lilly's deal for Loxo is a bid to expand in what are known as “targeted therapies” which go after a tumor's specific genetic markers regardless of where in the body the cancer is located.

“We really like the Loxo acquisition as an opportunity to be a leader in precision medicine,” said Lilly's Chief Financial Officer Joshua Smiley in an interview. “But we want to do more.”

Lilly has been among the companies under the closest pricing scrutiny due to increases for diabetes medications such as insulin, which is taken by millions of Americans. Smiley said that the company's diabetes franchise is more vulnerable to Washington pricing headwinds than most classes of drugs.

“We view Lilly's new drug portfolio as one of the strongest in the industry, and we believe it will make up roughly 60 percent of company sales by 2022, driven by cancer and diabetes,” said Edward Jones & Co. analyst Ashtyn Evans in a note to investors.

Competitive Pressure

Oncology has been one of the hottest areas for drug developers in part because the latest science in immune-harnessing therapies has yielded major advances in some difficult-to-treat cancers. That's led to drugs like Keytruda and Opdivo, which have been racing each other to win approvals to treat more different types of cancer.

While Keytruda sales jumped 55 percent in the first-quarter compared to a year earlier, the pace of growth fell short of expectations -- and has moderated from its first years on the market when it had little competition. AstraZeneca Plc, Pfizer and Roche Holding AG all now have similar treatments on the market.

Bristol-Myers has tried to diversify by planning to spend more than $70 billion for Celgene, the maker of cancer drugs Revlimid and Pomalyst. Like Keytruda, Opdivo sales also came up short of expectations in the quarter when Bristol reported results this month.

For Pfizer, competition for Ibrance resulted in U.S. sales growth of only 2 percent in the first quarter; as recently as 2017, sales were growing at about 40 percent annually. Though the price of Ibrance was increased by 5 percent, it couldn't offset the slower growth trend. But boosting prices of other top-selling drugs, including blood thinner Eliquis, cushioned Pfizer's results.

Chief Executive Officer Albert Bourla said in an interview that the future of cancer treatment is in combinations. Pfizer has recently focused efforts on pairing immuno-oncology drugs with targeted and traditional compounds, however, “it's been much more difficult to crack the combinations,” he said.

Bloomberg Intelligence analyst Sam Fazeli said in a note following Pfizer's report that Bourla faces a major challenge. “With increasing dependence on Ibrance, M&A is becoming more likely,” he said.

To contact the reporters on this story: Cynthia Koons in New York at ckoons@bloomberg.net;Riley Griffin in New York at rgriffin42@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett

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