Drugmakers scout for deals, ramp up research spending

By Manas Mishra and Patrick Wingrove

(Reuters) - Drugmakers including Merck & Co, AstraZeneca Plc and AbbVie Inc said on Thursday they are open to acquisitions and reported a ramp up in research and development spending as the industry's larger players look for new sources of future revenue.

Several top drugs such as AbbVie flagship Humira have begun to face competition from new rivals or are expected to lose patent protections in the next few years, and deals could be a quick fix to address the loss of revenue from older therapies.

Merck recently announced a $10.8 billion deal to buy Prometheus Biosciences Inc.

Chief Executive Robert Davis said that deal does not change the company's business development strategy.

"We're focused on building the pipeline, both near and long term, and we do deals across the full spectrum," he said.

Sales of Merck's cancer immunotherapy Keytruda will start losing patent protections in 2028. Meanwhile, it has become the world's top selling prescription drug with first-quarter sales of $5.8 billion, exceeding even analysts' lofty estimates.

Guggenheim analyst Seamus Fernandez said pharmaceutical patent expirations will accelerate from 2026 to 2032 and that most will face competition from biosimilars that compete with complex biologic drugs.

A drop in valuation of smaller U.S. biotech companies from pandemic highs has made deals more attractive, and the collapse of top venture debt provider Silicon Valley Bank (SVB) is expected to worsen a funding drought for those companies.

"It's certainly more difficult to raise money for a biotech company. So it probably makes them a bit more willing to engage with players like us," said an AbbVie executive during a call to discuss first-quarter results.

AbbVie on Thursday reported sales that missed estimates for most treatments, including its blockbuster arthritis drug Humira, and its shares closed down 8%.

Humira's U.S. sales fell 26.1% in the quarter to $2.95 billion as it faced its first biosimilar competition from Amgen's Amjevita, and AbbVie forecast a steeper erosion in Humira's market share in the second quarter.

Amgen, which launched Amjevita in January, slightly increased its forecast for full-year 2023 revenue to $26.2 billion to $27.3 billion, from the previous outlook of $26 billion to $27.2 billion.

That excludes the impact of Amgen's pending $27.8 billion acquisition of Horizon Therapeutics Plc, which the company still expects to complete in the first half of this year.

Like Merck, AstraZeneca continues to reap the rewards of patent-protected cancer therapies for now.

AstraZeneca beat first-quarter estimates as sales of Imfinzi and strong demand in China helped soften the hit from falling sales of COVID-19 drugs.

The Britain-based drugmaker re-emphasized its focus in China, aiming to seize the opportunity to treat patients as the country bounces back from a protracted period of severe COVID restrictions.

In the last few months, AstraZeneca signed three licensing deals with Chinese companies, said CEO Pascal Soriot, adding that more, possibly larger moves are being contemplated.

"We definitely could make acquisitions. There is no limitation to this," Soriot said.

R&D SPENDING RAMPS UP

Most drugmakers reporting on Thursday beat Wall Street estimates for first-quarter earnings, while Eli Lilly and Co missed mainly due to higher costs.

"You gotta spend money, to make money!," BMO Capital Markets analyst Evan Seigerman said of Lilly's results.

Research and development (R&D) costs at other drugmakers also rose in the quarter.

Merck reported a 66% jump in R&D costs, attributing about $1.2 billion to a charge from its acquisition of Imago. AstraZeneca's R&D spending rose 22% in the quarter.

Amgen said its R&D costs rose 12% in the first quarter, while Gilead Science Inc reported a 25% research spending jump to $1.4 billion, driven partly by higher expenses in late-stage clinical studies.

Gilead said it also expected full-year R&D expenses to rise to a low-double-digit percentage compared to 2022.

"We believe that there's a more appropriate level of investment for a company with a broad late-stage clinical portfolio that is targeting attractive opportunities and sustainable revenue growth," said Chief Financial Officer Andrew Dickinson.

(Graphic: Drugmakers ramp up R&D spending - https://www.reuters.com/graphics/HEALTH-PHARMACEUTICALS/znpnbnanwpl/chart_eikon.jpg)

Share movements were mixed on Thursday.

Eli Lilly shares closed 3.7% higher after it raised its annual revenue and profit forecasts on demand for its closely watched diabetes drug Mounjaro, which is being used off-label as an obesity treatment.

Merck's shares had been down earlier but closed up $1.5%, while shares of Bristol Myers Squibb fell 0.6% after it missed first-quarter sales estimates.

Shares of both Amgen and Gilead were down more that 2% in after hours trading.

(Reporting by Bhanvi Satija, Leroy Leo, Raghav Mahobe in Bengaluru, Natalie Grover in London, Michael Erman and Patrick Wingrove in New York; Writing by Manas Mishra; Editing by Caroline Humer and Bill Berkrot)