By: Debby Winters
All eyes have been on Washington, D.C. this month as the White House and Congress confront the fiscal cliff, an end-of-the-year deadline for budgeting that will trigger a slew of automatic penalties if an agreement cannot be reached. But that isn’t the only cliff we are facing. There is also a patent cliff that you should be aware of.
Why do they call things like this a cliff? A cliff is a handy geographic metaphor for an impending deadline with perilous consequences. The fiscal cliff is so named because of the condition the country will be in if the current laws slated for 2013 go into effect. The dramatic impact on the economy would be so dramatic as to simulate going off a cliff. As the fiscal cliff begins, the patent cliff for the pharmaceutical industry may end. This cliff is following an estimated time of approximately 18-months during which major drug companies lost exclusive rights to many billion-dollar-selling drugs.
The patent cliff could be seen coming for a long time. Indeed, efforts to mitigate the expected loss in profits kicked in years ago as drug makers struggled to invent and commercialize replacement blockbuster drugs. As, one by one, those efforts failed, the industry turned to more creative ways of going over the cliff and surviving. They shifted their focus to developing drugs for unmet medical needs, expanding in growing geographic markets, licensing drug candidates from biotech companies, buying biotech companies, partnering with innovative research organizations, and gutting bloated research organizations. Some companies played the “if you can’t beat ’em, join ’em” card by bolstering generics portfolios.
While this business revamp was going on, the sector was also being transformed by changes in U.S. health care laws that solidified in 2012 when the Supreme Court upheld the Affordable Care Act and President Barack Obama was reelected. All of these events are coalescing to create a significantly reformed, if for now less profitable, pharmaceutical industry.
Examples of the business revamp started in January 2012, when Bristol-Myers Squibb (BMS) announced the acquisition of Inhibitex, which focuses on hepatitis C drugs. This was a $2.5 billion acquisition. But in the months that followed, multi-billion-dollar acquisitions continued to be outnumbered by more modest research pacts and partnerships in which drug companies acted to add promising compounds to their pipelines. There was a flurry of research pacts focused on oncology, typical of a more targeted approach. Takeda Pharmaceuticals,, Merck & Co., Eli Lilly & Co., and Astra Zeneca all gained access to compounds that biotech firms were developing for cancer.
But the major cause of the cliff was due to patent expirations. The impact was felt in the first quarter nowhere more succinctly than at Pfizer, which lost patent protection for its cholesterol reducer Lipitor, the world’s top-selling drug, at the end of 2011. Lipitor sales dropped 42% in the first quarter of 2012 compared with the year-earlier period.
Another example is Lilly’s October 2011 loss of exclusivity on the schizophrenia treatment Zyprexa that resulted in a 56% hit to first-quarter sales for the drug. AstraZeneca, which lost patent protection for its schizophrenia drug Seroquel IR in March, suffered a 25% drop in sales for the drug in the first quarter. The company also faced generics competition for its breast cancer drug Arimidex and its heartburn drug Nexium.
Most companies pointed to patent expiration as the cause, there could be more factors in play such as the decline to the cliff’s convergence with other economic problems, a kind of “perfect storm” that finally caught up with the drug industry. In other words, the tumble from the patent cliff was worsened by the continued economic crisis worldwide, which has European health care payers in a state of disarray. The combination of these factors just made matters worse.
There could be good news to this situation as well. Despite the doom and gloom for the companies involved, expiring patents open up the market to a generic version of drugs, which offers great opportunities for generic pharmaceutical companies who may pass that on to the consumer.
So, as we watch today, December 31, 2012, to see if Washington can keep us from going over the fiscal cliff, keep in mind that it isn’t the only cliff that might affect your wallet in 2013!