Cushioning pharma's fall from the patent precipice

Feb 01, 2010
Volume 22, Issue 2

If there was ever a question about the importance of intellectual property (IP) and patent protection in the pharmaceutical industry, it is about to be answered as the world's top drug makers approach the edge of the 'patent precipice' — the expiry of key product patents coupled with the launch of cheaper generic versions of blockbuster medicines. Because of this, the industry could lose up to £70 billion (€78 billion) in annual sales by 2016.1

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Although the pharma industry is well placed to survive the fall, patents are likely to be crucial to companies as they devise more competitive and acquisitive growth strategies. Companies that invest the time and money upfront on a coherent and comprehensive patent strategy will probably emerge the strongest. To get it right, many of these companies will choose to work with patent and IP specialists, and will outsource certain aspects of their patent work. This article will examine the dangers presented by the patent precipice and discuss what can be done to mitigate its effects and maximise the return on investment in patent portfolios.

Why patent protection is so important

Patents have always been a vital tool for the pharma industry. With the average cost of developing a new medicine estimated in excess of $800 million (€887 million),2 strong patent protection provides the opportunity to recoup investments. It takes approximately 10–15 years to develop a new medicine,3 from compound discovery through to FDA approval, so significant portions of the 20-year patent term for a new drug are lost before a product ever generates any sales. In fact, the average effective patent life for medicines is only 11.5 years,4 meaning that the strength of patent protection and the likelihood of obtaining exclusivity are vital considerations for drug companies investing in new technologies or products.

One of the clearest demonstrations of the value of patent protection will occur in the next few years involving the core patents protecting the best selling drug of all time: Pfizer's cholesterol lowering medicine, Lipitor.5 These patents will expire in June 2011 and many have predicted that, within the first year alone generic competition will cost Pfizer approximately 80% of the £8 billion (€8.9 billion) it receives annually from global sales of the drug.6 This would put the current combined value of the two or three core patent families protecting Lipitor at approximately £6.5 billion (€7.2 billion) a year; equivalent to approximately 20% of Pfizer's total sales for 2008. Pfizer is not alone: Eli Lilly has recently announced that it is to shed 5500 jobs7 because between 2010 and 2013 more than half of Lilly's current revenue will become exposed to generic competition and essential patents on four of its five top-selling drugs will expire.

Looking ahead, patent strategy will also play a key role in supporting new activities that companies will have to undertake to remain competitive, such as the acquisition of companies in adjacent markets — companies will need a good idea of the patent landscape they plan to operate in and will have to conduct adequate due diligence to understand the patent holdings of potential targets. Companies will also have to increase their focus on open innovation, which will require patent protection. All of these factors will lead to an increased focus on innovation and patent protection — not just in company legal departments, but across R&D departments, at board level and, perhaps more crucially, among shareholders and investors.

Responding to patent vertigo

The first reaction to a looming patent expiry for high-grossing products is to cut costs. Once this is complete, pharma companies look to other solutions to recoup the predicted loss of revenue and improve their faltering product pipelines; consolidation being one solution that has been resorted to by a number of firms.

Companies are also looking to generate additional revenues from adjacent markets, with the biotech sector coming under particular scrutiny. In March this year, for example, Roche purchased the biotech company Genentech for $34 billion.8 Other companies are looking at becoming favoured co-development partners for biotechs, with some embracing young start ups, which is a big change for the often risk-averse pharma industry. In the future, pharma companies are also likely to spread their nets even wider by looking at medical device companies or even the generic manufacturers that compete against them.

These measures will go some way to restructuring companies by helping them improve their product pipelines and insulating them from the effects of expiring patents. But what can they do to protect what they already have, or what they are about to invent or acquire?

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