Roche nears an earnings cliff as landmark patents come to an end
Zurich — Landmark Roche patents that helped launch the modern biotechnology era end next year, extinguishing a source of billions of dollars in income for the Swiss drug maker and piling pressure on its new medicines to succeed.
Roche’s so-called Cabilly patents protect a pivotal step in manufacturing therapeutic antibodies, but end on December 18 2018.
For decades, these patents allowed Roche to extract cash from dozens of drug makers. In 2018 alone, experts estimate the patents will reap $1bn for Roche and California’s City of Hope medical centre, where the technology was developed nearly 40 years ago.
The patent expirations come just as Roche’s $20bn-a-year drug trio Rituxan, Avastin and Herceptin are also losing protection, exposing them to cheaper biosimilar copies.
Roche also has rising financial obligations to other companies whose patented know-how contributed to its newer medicines. "Beyond the sales losses through biosimilars, hundreds of millions in royalties will evaporate," Zurich Cantonal Bank analyst Michael Nawrath said. "Roche faces a double whammy as it becomes a net payer of royalties."
For instance, US-based Biogen is entitled to between 13.5% and 24% of US sales and 3% of sales elsewhere from Roche’s new multiple sclerosis drug Ocrevus, whose annual revenue may hit $4bn by 2022.
The Cabilly manufacturing patents, among the drug industry’s most famous and lucrative, are named after scientist Shmuel Cabilly who led the City of Hope team behind the technology in the early 1980s.
The patents have been pivotal to making hundreds of biotech drugs, including AbbVie’s $16bn-a-year seller Humira, the world’s top-selling prescription medicine.
As sales of such biological medicines boomed, Roche benefited from growing Cabilly licensing fees while also successfully fending off lawsuits from competitors unhappy with the arrangement. Cabilly brought in an estimated $800m in 2016 — about $500m for Roche, $300m for City of Hope — up from $256m in 2007.
Royalty income now accounts for 3% to 4% of Roche’s $41bn annual drug sales. "There will be a significant step change to royalty income," a spokesperson acknowledged.
CEO Severin Schwan insists Roche will continue to grow sales and profit thanks to new, potential blockbusters, including Ocrevus, yet-to-be-approved ACE910 for haemophilia and cancer immunotherapy Tecentriq.
In July, Schwan upgraded 2017 guidance to mid-single-digit percentage growth in sales.
Others are not so upbeat.
I’m losing confidence that they will fight their way out of this," Candriam fund manager Rudi Van den Eynde told Reuters. "I think the pipeline, in the end, will not be enough to fully compensate what is happening there."
Jeffrey Holford, a Jefferies analyst, forecasts Cabilly revenue losses, coupled with expiring patents on Roche’s aging franchise of older drugs, will keep the drug maker from boosting operating margins until at least 2020.
For City of Hope, whose Cabilly share has risen five-fold in a decade, the expiration has big consequences, too. Hospital officials did not respond to Reuters’ queries, but bondholder reports show it aims to cut research and clinical costs "in the face of the expected loss of most royalty revenue", according to a Moody’s note.
Meanwhile, drug makers Mylan, Merck, Sanofi and GlaxoSmithKline that have sought repeatedly to weaken Cabilly at the US patent office and courts won’t regret its demise.
Said Konstantin Linnik, a partner at Boston law firm Nutter McClennen & Fish: "Drug companies that fought unsuccessfully multiple legal battles against the longest-lived biotech patents — effectively 29 years — will no longer face the Cabilly bottleneck."