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The Current and Projected Impacts of the “Patent Cliff” on the Pharma Industry

Over the past couple of years, concerns about the systematic and widespread expiration of intellectual property patents have been voiced ad nauseum. After falling down the top of this so-called “patent cliff” for the last few months, however, it is important to evaluate the impact it has had on the pharmaceutical industry thus far and to update future projections.

Patent Cliff

The term “patent cliff” implies a sudden and drastic loss of patents in a very concentrated period of time. For this reason, the term is very misleading: a large number of patent expirations are scheduled to continue occurring until 2018. While the word “cliff” does effectively indicate a sense of panic, a more apt term for this industry phenomenon might be “patent hill.” When assessing the impacts of patent losses on the pharma industry, this longer term, broader perspective needs to be taken.

Exactly how far down this hill has the industry already fallen? How big is the hill? How steep is it? These questions can help to create an effective frame of analysis. This year, patents expired on products that previously accounted for $67 billion worth of annual revenue. Some industry leaders with massive market share have been hit undeniably hard. AstraZeneca, for example, recently reported a staggering 19% drop in overall revenue in the 3rd quarter and a 50% drop in earnings per share. It expects to lose roughly half of its blockbuster drug patents over the next five years. Sanofi and Novartis fared better due to diversified portfolios and fewer patent expirations, but both still reported fairly significant declines in revenue.

Impact of Patent Loss

To understand the truly massive impact a patent loss can have on a specific product, one can look to the recent sales number of Singulair, Merck’s asthma and allergy drug. In the four weeks following the expiration of the Singulair patent, ten generic manufacturers lined up against Merck as product sales dropped by 90%.

It appears that the top of the hill is the steepest part, but its downward slope will continue for the next half decade. FiercePharma reports that from now until 2018, there are patent losses scheduled for products that combine to generate about $290 billion in sales.  In the more immediate future, 2013 expects to see patent losses on products that make up $29 billion in annual sales, and the research firm EvaluatePharma projects that 70% of these sales will be lost to generic manufacturers. For a specific example, Sanofi expects next year’s earnings to drop by 12%. What do these present and projected financial impacts mean for the pharma industry?

Obviously, individual firms that stand to lose patents can expect a heavy financial hit. Beyond that, an especially worrisome trend is being anticipated across the industry: a decline in future research and development investments. Research and development is extremely expensive and inherently risky. Many companies that will be hit hard by patent losses will need to immediately limit expenditures wherever possible, and because research and development doesn’t immediately yield fruit, it will be axed by many struggling companies. For an extreme example of the impact of patent losses on research and development, one can look to Africa. 70% of African pharmaceutical products are generic, and as a result, African research investment is essentially non-existent.

Despite discouraging numbers thus far and intimidating market projections, some experts have taken more optimistic perspectives. Some even believe that patent losses will actually force companies to diversify. Anthony Raeside, head of research for EvaluatePharma, stated earlier this year that the patent cliff could “turn out to be a good event, with companies feeling liberated from the mega-blockbuster curse of replacing aging cash flow streams.” Others believe that the worst of the patent expirations are behind the industry, which they claim is ready to get back on its feet. Deutsche Bank analyst Mark Clark recently said that “investors are increasingly willing to accept that pharma companies can navigate the patent cliff through factors including growth in emerging markets, cost management, diversification and in some cases new drug launches.”

The size and scope of this patent hill is vast. While it extends far into the future, there is reason to believe that some of the worst impacts have already been felt. Each individual company will feel the effects of the patent hill differently, but the industry as a whole certainly faces some daunting challenges.

This Latest Insight was originally published by Enlight Research, a Clarkston Consulting adjacency providing customized industry and financial information to help Boards of Directors make smarter, more focused decisions in the boardroom.