What do patent expirations mean for the pharma industry?
In recent years a number of patents on big selling products from global pharmaceutical companies have come to an end, and more are set to do so over the next few years. This is forcing big pharma firms to look for new revenue streams, and it is having an impact on the overall shape of the market.
What is the patent cliff?
The term 'patent cliff' refers to the period between 2011 and 2016 when hundreds of billions of dollars worth of brand drug sales lose patent protection. These are blockbuster drugs that account for a large percentage of big pharma company sales, typically more than $1 billion per year.
Examples of these include cholesterol drug Lipitor and blood thinner Plavix, which went off patent in 2011 and 2012 respectively and were both major sources of income for their makers Pfizer and Bristol-Myers Squibb/Sanofi-Aventis
When patents expire, generic drug companies are free to create their own replicas, and these can cost up to 80 per cent less than the originals, which inevitably leads to a sharp and sudden loss in sales for the companies that developed them.
Within this six-year patent cliff period, there are effectively two cliffs, with the first hitting the industry in 2012. This was a particularly tough year for big pharma; according to Casey Research, data from the IMS Institute for Healthcare Informatics shows that $35.1 billion worth of brand drug sales lost patent protection in 2012.
In 2013 and 2014, the value of drugs going off patent remained high, but it was below the $20 billion mark. Now, the second cliff is imminent, with potential branded drug losses due to balloon again next year and reach an estimated $33.5 billion.
How is it affecting drug companies?
The patent cliff is obviously having a big impact on revenue for the big pharma companies, and this means they are either having to cut costs, increase their prices or find new sources of profit, ideally in the form of brand new blockbuster drugs.
Eli Lilly laid off hundreds of sales staff when its antidepressant Cymbalta went off patent at the end of 2013, while the loss of protection on Merck's asthma medication Singulair prompted the drug maker to axe almost a third of its workforce.
Several other big pharma firms have announced job cuts in the last few years as they have fought to deal with revenue erosion as a result of patent expirations in 2012. So could the same thing happen again in 2015 when the next wave of patent expiration's hits?
Well, maybe not. Lisa Urquhart of pharma analysts EP Vantage told Casey Research that although the figures regarding patent expiration's and expected sales losses for the next couple of years look depressing, the situation is actually not that bad.
"The efforts the industry has put in to change business models, which have included investing more in niche busters, mean this time round things might not be as bad," she explained. Indeed, we are seeing some rather interesting trends emerging within big pharma in response to this new environment where generic competition is rife.
How are patent expiration's reshaping the industry?
There are two rather interesting things happening within big pharma as the loss of exclusivity on the production of blockbuster drugs hits the industry's major players. The first is a greater focus on research and development as drug makers look to replace the old with the new.
It seems the patent cliff is ushering the pharmaceutical industry into a new wave of product innovation, and this time companies have learned the lessons of the past. Instead of ploughing money into a small number of big blockbuster drugs, they are looking to diversify their product portfolios and create smaller volumes of specialist drugs.
It's this focus on niche, specialised areas that is prompting the second major trend in pharmaceuticals at the moment, and that is an increase in merger and acquisition activity. So far this year we've seen a number of takeovers, tie-up and asset swaps as companies look to refocus their activities and concentrate on what they do best.
One example was the deal between Novartis and GlaxoSmithKline (GSK), which saw Novartis purchase GSK's cancer drugs and GSK acquire Novartis' vaccines business. This allowed both companies to build on their respective expertise in the areas of oncology and immunisation. It also meant they could free up resources by getting rid of assets in areas where they stood little chance of competing on a global scale.
This kind of restructuring could be what saves big pharma firms from suffering the kind of losses they did two years ago, allowing them to weather the next phase of the patent cliff more easily. And of course, patent expirations are also having huge benefits for generic drug makers, who are busy replenishing their portfolios with new products and expanding into new markets and territories.