Large pharmaceutical companies remain pressured and some are bracing themselves for a steep drop off the patent cliff. We believe the loss of patent exclusivity on blockbuster drugs will continue to spur increasing competitive pressure as generic versions of branded medications hit the market. We note that more than $70 billion of branded drug revenues (based on 2010 sales) will lose or have already lost patent protection from the second half 2011 to the end of 2015.

A reduction in workforce has been a common response to cutting costs. Swiss drug maker Novartis recently slashed 1,960 jobs in the U.S. (1,600 were sales positions). The company previously announced 3,400 job cuts in late 2010 and 2011. We feel that lukewarm results from clinical trials for some medications are also adding difficulty for companies struggling to maintain profit margins. Last week, Novartis announced it was terminating development of two drugs, and, on Thursday, AstraZeneca, which recently halted two of its drug studies, said the FDA is seeking additional clinical information on dapagliflozin, its latest diabetes treatment.

While we feel litigation risk is manageable, it remains a concern. On Thursday, Johnson & Johnson settled another one of its cases regarding the mis-marketing of its anti-psychotic drug, Risperdal. Johnson & Johnson will pay the state of Texas $158 million (the state originally sought $579 million). In addition, the European Medicines Agency has begun reviewing Novartis' multiple sclerosis pill Gilenya following seven unexplained deaths.

Despite challenges, we feel that potential growth in emerging markets, new product launches, and an active acquisition environment could aid the pharmaceutical industry as it seeks sustainability.

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