The Myth of the “Patent Cliff”


Xconomy National — 

Doctors, patients, and investors who follow the biopharmaceutical business all recognize that the industry is exceedingly complex and in the midst of change. Companies struggle daily with a multifaceted mix of scientific, clinical, and business unknowns. Will a drug be medically effective and make it through clinical trials? Will it get the thumbs up from the FDA? Will insurance companies pay for it? Will side effects turn out to be a major problem? Will manufacturing ramp up without a hitch? Will drug sales meet expectations?

All of these things are unknown in the early days of a research project. One can make informed predictions, some better, some worse, but uncertainties abound at virtually every stage of the drug development process.

Unfortunately, many predictions turn out to be nothing more than wishful thinking. There is only one dead-on, absolutely predictable element within the industry that companies can determine with certainty: the date on which their drug patents will expire. They can put it on the corporate calendar as soon as the patent is awarded. So how can patent expirations be considered a surprise, and why do drug company executives fail to adequately plan for them?

The current big bugaboo in BioPharma is the “patent cliff.” This phrase has become a neologism, which Wikipedia defines as “a newly coined word or phrase ….. that has not yet been accepted into the mainstream language.” “Patent cliff” certainly fits the bill. I have a sense that the word “cliff” was picked by whoever coined the phrase to give it a sense of danger and foreboding. Picture Indiana Jones dangling by his fingertips over crocodile-filled waters. For some, this phrase wasn’t sufficiently scary, so “patent apocalypse” was fashioned to further invoke fear and terror. Thankfully, “patent armageddon” has already been used in a different tech setting, so we won’t have to read about this one in the biopharma field.

So what, exactly, is the “patent cliff?” It is most often described as an industry-wide expiration of the patents of a number of blockbuster drugs, resulting in their replacement with generics and the emergence of a large hole in the collective financial pocket of the industry. Some define it as being in a single year (2010), while others point to a multi-year drop off ending in 2015. The “patent cliff” casts a long shadow over the bestselling new drugs (that is, those still protected by patents) on the market. Of the 50 top selling medicines in 2006, only six of them were approved for sale before 1993.

During the current five-year period 2010-2014, the sales revenues of drugs having patents that will expire are about $89.5 billion, according to data compiled by IMS Health Midas. The focus of the patent expirations is on small molecules, not biologics, since the FDA is still developing a clearly defined pathway for the approval of biosimilars in the US. At first glance, the $89.5 billion figure quoted above would seem to be a pretty big cavity to fill in the industry’s collective revenue pipeline. However, to truly judge this figure, we should have a comparator number, something we can gauge this against. The value of drugs having patents that expired during the preceding five-year period (2005-2009) was actually slightly higher at about $90.5 billion. On a five-year basis, there is no patent cliff. Not even a patent incline, patent slope, or patent slant. It looks more like a patent plateau. Yes, there are individual drug companies where a significant portion of drugs generating sales revenue will go off patent in the near future. However, as an industry this is not the large problem that some would have you believe. A graph illustrating drug industry revenues at risk due to patent expirations from 2001-2015 resembles the Rocky Mountains, with lots of ups and downs, but no cliff. In fact, despite this loss of patent protection, IMS Health is forecasting that the industry will grow some $300 billion in revenue during the 2010-2014 time frame, with global drug sales topping $1.1 trillion in 2014.

The “patent cliff” is a red herring that distracts us … Next Page »

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Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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5 responses to “The Myth of the “Patent Cliff””

  1. ‘Patent apocalypse’ was meant to be a slightly ironic phrase, and one that I had certainly not invented.

  2. steve says:

    The term patent cliff is not a myth as much as it is a mislabeling of real issues – some of which you detail very well. What seems to be bad karma may not be a cliff but it is just as painful and potentially devastating in the long run.

    The facts suggest the problems are real: 1) the discovery rate for new drugs is declining in total numbers and in per dollar spent as discussed 2) Financial pressure on drug costs is increasing and this will continue 3) According to BIO, the number of biotech companies closing doors is increasing and fewer exist today than just a few years ago 4) Pharma and Biotech have shed more jobs (in absolute numbers!) in the last two years than any other sector in the economy except for government and nonprofits combined. If you look at these numbers as a percentage – Pharma and biotech take first prize.

    Other trends also add to the pain 1) Perceived and real increases in FDA requirements for safety cause increased development costs 2) A reluctancy of venture capital to invest in drug discovery and development 3) The end of double digit growth in revenue for Big Pharma. According to Burrill and Co. sales growth in pharmacueticals (in US) will reach a maximum next year and then flatten or actually begin to fall (this includes M&A and new brand product launches minus patent expirations). Wall street will not like falling sales no matter how you slice it. 4) Biotech drugs are being scrutinized for cost/benefit and if a new wonder drug like Avastin doesn’t provide real benefits the FDA or Medicare will deny its use or reimbursement

    Are their any trends in the positive? A few bright spots exist. Products like Merck’s CTEP inhibitor and Amgen’s denosumab could be monster products that are really needed. Providing examples that drug discovery can still find winners. Another trend good for a few companies is the prediction of massive increases in diabetes in the US and these people will need drugs on a continuing basis.