Actavis; pills; drugs

The pharmaceuticals sector has been gripped by a mergers and acquisitions frenzy for the best part of two years, with some of the biggest names in the industry fighting over hot new drugs.

Last year was a record for dealmaking in the sector and 2015 is also off to a strong start, with healthcare transactions worth $193.9bn announced since the beginning of January, according to Thomson Reuters.

As the value of deals has shot up, so has the premium that buyers are willing to pay to secure novel and potentially lucrative medicines. In March, Pharmacyclics, a biotech company that makes a single blood cancer drug, was bought by AbbVie for $21bn, a premium of nearly 50 per cent over what the California-based group was worth before it emerged it was up for sale.

This month, Alexion, a rare-disease drug developer, agreed to acquire smaller rival Synageva Bio-Pharma for $8.4bn, a 139 per cent premium on its market value before the deal was announced.

For many, it was another sign that valuations in the sector are spiralling out of control. One of the main reasons companies are paying such big premiums is because they are facing the loss of exclusivity on some of their best-selling drugs. Since 2011, many of the biggest pharmaceutical companies have been faced with a “patent cliff”, prompting them to buy drugs to fill gaps in their pipelines of treatments under development. For instance, AbbVie’s main drug, Humira, which accounts for more than half its sales, will start losing patent protection by the end of 2016, partly explaining why it was willing to pay so much for Imbruvica, the drug made by Pharmacyclics.

Deals are not the only way of protecting a drug’s revenue base: some companies have also adopted a more vigorous approach to managing their intellectual property (IP). However, they are encountering fierce resistance from those who fund healthcare systems, who often see “copycat” generic medicines as one of their best weapons in the fight against rising drug costs.

Once a patent expires and a drug loses its exclusivity, the market is usually flooded with a wave of generic versions. The makers of these generic drugs are allowed to bring their medicines to market without putting them through lengthy and expensive clinical trials, enabling them to undercut the price of the original version.

Actavis, the US pharma group, had hoped to lessen the impact of the introduction of a generic version of Namenda, its Alzheimer’s drug, by securing a so-called “hard switch”. It tried to remove its twice-a-day Namenda IR from pharmacy shelves and move patients to a newer once-daily version, Namenda XR, which has a longer patent.

If patients and doctors had become used to the newer drug, they would be less likely to move to the generic, which is due to launch in July — or so the theory went. However, Eric Schneiderman, the New York attorney-general, this year secured an injunction that prevented Actavis from pulling Namenda IR off the market.

“A drug company manipulating vulnerable patients and forcing physicians to alter treatment plans unnecessarily simply to protect corporate profits is unethical and illegal,” he said.

Actavis appealed, but at the end of May a US appeals court upheld the decision. According to Ronny Gal, an analyst at Bernstein, the research and brokerage company, the ruling does not bode well for other drugmakers seeking to emulate Actavis’ strategy.

“The direction set by the district and appeals court suggests it would be increasingly difficult to ‘hard switch’ products,” says Mr Gal. “Companies will probably have to demonstrate no hardship for patients and a business rationale, which differs from attempting to force the market to accept their new product.”

Policy makers are not the only ones targeting drugmakers’ IP. Kyle Bass, a hedge fund manager who runs Hayman Capital Management, has started challenging what he sees as spurious drug patents, while simultaneously betting against or “shorting” the stock of the company that makes the medicine.

Mr Bass has created the Coalition for Affordable Drugs and plans to target about 15 companies with a combined market capitalisation of $450bn using the Inter Partes Review process, introduced by the US government in 2012 to allow fast-track patent challenges.

He has promised to focus on hard switching and another type of patent management known as “evergreening”, where a company secures a new patent by making a minor change to a drug.

Mr Bass told investors: “Companies that are expanding patents by simply changing the dosage or the way they are packaged are going to get kneecapped”.

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