Big Pharma's Blockbuster Curse

The industry’s billion-dollar drugs have become a mixed blessing.

The biggest pharmaceutical companies count on multibillion-dollar drugs to fund their expensive research units and justify high share prices. But now investors want more, demanding that companies queue up the next crop of top products before the current generation even hits peak profitability.

This conundrum is at the heart of the industry’s biggest merger deal. Bristol-Myers Squibb Co. on Jan. 3 agreed to pay $74 billion in cash and stock for Celgene Corp., a New Jersey biotech that gets almost two-thirds of its revenue from a single medicine: the blood cancer pill Revlimid, the third- biggest-selling drug in the world, with almost $11 billion in revenue expected this year, according to analyst estimates compiled by Bloomberg.

Seen one way, Bristol-Myers got a bargain. Investors had already punished Celgene for the lack of a successor to Revlimid, driving down the biotech’s share price almost 40 percent last year. That certainly made the acquisition cheaper. Bristol-Myers insists that its prize will eventually deliver valuable new products. But the market’s worries about Celgene’s product pipeline immediately shifted to its buyer—even though the cancer drug is expected to continue raking in tens of billions of dollars over the three years until cheaper copies emerge. “They need blockbusters. It’s a perpetual chase,” says Ketan Patel, a fund manager at Edentree Investment Management Inc. in London. “The assumption is that every year you’re going to find a fantastic product; it doesn’t work like that.”

The prospect of big drugs going off patent— allowing rivals to market their own versions of a popular medicine at a lower price—causes chronic anxiety in the industry. Japan’s Takeda Pharmaceutical Co., which recently bought Shire for $62 billion, has been trying to refill its pipeline since at least 2012, when its top drug, Actos, lost patent protection.