The Impending Patent Cliff: Implications for Pharmacists

As blockbuster drugs begin losing patent protection, pharmaceutical companies and pharmacists will address key marketplace changes.

Pharmaceutical industry leaders are increasingly concerned about the impending “patent cliff.” The patent cliff will play out over the next 5 years as blockbuster brand name pharmaceuticals, which bring in very substantial revenue, approach the end of their patent lives.

Often a company has been highly dependent on the revenue the blockbuster product generates. Bernstein Research reported in December 2009, that 9 of the top 10 and 18 of the top 20 drug products would see the emergence of generic competition in the near future, with profits plummeting unless their manufacturers found creative ways to regain control of the market. ¹ Waiting in the wings are generic companies planning to capitalize on these changes. Because of the drastic reductions in revenue that these expirations will bring, major pharmaceutical firms are beginning to take steps to respond to these challenges.

The current marketplace features both large major pharmaceutical companies and small emerging biotechnology companies. Even though both types of companies must develop plans to address these challenges in the market, the size, functions, and resources of small biotechs and big pharma are drastically different, and the plans being put into place must take these differences into consideration. Some of these unfolding changes in the world of pharmaceuticals may have substantial implications for pharmacists.

Lessons from the Past

Both big pharmaceutical companies and small biotechnology companies can learn from preceding generations by reflecting on similar situations in the industry’s past. In the 1960s, major innovations in cardiology therapeutics, with blockbuster drug categories such as various anti-hypertensives and beta-blockers, were brought to market, followed by advances with antidepressants, antihistamines, nonsteroidal anti-inflammatory drugs, and oral contraceptives in the 1970s. Moreover, standardization of clinical testing and changes at the FDA between 1960 and 1980 influenced the market of the 1980s. ²

Just as pharmaceutical companies today are struggling with the ending of blockbuster patents, the emergence of new drugs in the 1970s led to patent lives ending in the 1980s and the need for major changes and restructuring of the industry to survive. ¹ At that time, the emergence of innovative technology brought a new wave of medications used to treat diseases such as AIDS and cancer.

During the 1980s, pharmaceutical companies changed the methods of their research, but the search was primarily automated to seek out more blockbuster drugs. ³ Big pharmaceutical companies also began to focus more directly on marketing efforts to emphasize the safety and efficacy of drugs in sales and advertising messages. ³ The market was now beginning to split between big pharma with blockbuster products and biotech firms.

Also during the 1980s, small biotechnology companies began to emerge. In today’s market, several biotech companies are major players in the industry; however, in the 1980s they were only newly developing companies trying to compete with the resources of the larger firms. In 2005, it was reported that there were nearly 1500 biotechnology companies in the United States. ¹ Of these 1500 business entities, 320 companies were publicly traded companies with combined revenue of $47.8 billion, and the 1086 private biotech firms, most employing fewer than 50 people, generated combined revenue of $2.9 billion. ⁴

The emergence of biotechnology companies in the 1980s, applying techniques from molecular biology, genomics, and genetics, changed the face of the pharmaceutical industry. By seeking alternative routes for drug development and marketing, these firms expanded the market for pharmaceuticals.

Emergence of Biotech Companies

During the 1980s, 3 major events paved the way for the emergence of biotech companies. The first was the decision of the Supreme Court to allow genetically manipulated organisms to be patented. ³ The second was the Bayh-Dole Act, allowing patents to be secured by universities based on extramural research funding. The third was the development of Genentech, the first publicly traded biotech company. ³

Another factor also came into the mix in 1984, when Congress passed the Drug Price Competition and Patent Term Restoration Act, known colloquially as the Hatch—Waxman Act. ³ This authorized the FDA to approve generic drug products without the extensive preclinical or clinical testing innovator drugs required. Generic companies are now only required to prove bioequivalence, allowing generic drugs to come to the market faster and to be lower priced. ³

Activities of nongovernmental organizations also changed the face of pharmaceutical companies in this decade. Activists fought for the right to access drugs in development to treat life-threatening disease states, with groups focused on HIV/AIDS and breast cancer leading the efforts for change. In 1983, the Orphan Drug Act sped up regulatory processes for potentially life-saving drugs. Activists also protested drug prices and limitations on drug product availability for those seeking life-saving therapies. ³

New Approaches

Because multiple blockbuster drugs— both from big pharmaceutical companies and small biotechs—are coming to the end of their patent term, firms are struggling to think of approaches to restructuring to buffer the inevitable loss of revenue. Between 2001 and 2008, the collective revenues of big pharma grew by 8.6% from year to year, according to Datamonitor’s PharmaVitae Explorer. ⁵ Carried out to 2014, companies will have a collective revenue gain of $628 billion, 5 but during the next 5 years, drugs representing over $142 billion in sales will reach the patent cliff and lose patent protection. ⁶

The blockbuster drugs about to lose patent protection flow from both big pharma and small biotech companies competing in the same industry. Despite this shared challenge, big pharmaceutical companies and small biotechnology firms need to approach the impending change in different ways.

Big pharmaceutical companies will experience big hits upon reaching the patent cliff because they hold many of the drugs with expiring patents. This exposure can be minimized by making changes in the organization, such as acquiring products to go into the product development pipeline to buffer the patent expirations, streamlining the focus of the company, or developing other aspects of the company to increase revenue.

An approach used by both small and big pharmaceutical companies is mergers and acquisitions. There are 2 strategies when it comes to these initiatives. Many major pharmaceutical companies are opting to merge with other well-known, profitable major companies. These mergers can be large and detailed, increasing profit potential substantially. In 2009, for example, Pfizer purchased Wyeth for $68 billion and Merck & Co took over Schering-Plough Corporation for $41.1 billion. ⁴

The other tactic is the merger with many different small biotech companies. By merging with biotechs, companies can expand their niche drugs, enhance their pipeline, and have a greater share of the market. ⁷ Examples of smaller mergers include Johnson & Johnson’s purchase of Crucell NV for $2.3 billion (September 2010), Pfizer’s purchase of King Pharmaceuticals Inc for $3.6 billion (October 2010), and Eli Lilly’s purchase of Avid Radiopharmaceuticals for $800 million (November 2010). ¹ The major purpose of mergers and acquisitions is to refill the pipeline of the company. ⁸

Big pharma could also make a shift back to emphasizing research and development. With the merging of small biotech companies with these big blockbuster companies, it is important to continue to promote the research environment of the smaller biotechnology companies. When increasing research and development, big pharma needs to look to niche markets of products for special populations and disease states. An analysis of big pharma by Datamonitor concluded that these large pharmaceutical firms should be looking into markets other than brand pharmaceuticals. ⁵ Many companies are starting to enter into OTC medications, diagnostics, medical devices, animal health, and health insurance—related opportunities.

Generic Expansion

Another big pharma tactic is generic expansion. Some companies are looking into developing their generic drug lines to include both generics of their own brand drug and generics of competitor’s product. With the increase in drugs going off patent, the generic market is increasing in size, profit, and competition.

While adding drugs to their pipeline, big pharmaceutical companies are also streamlining their focus and inventory. GlaxoSmithKline, for example, cut 1200 employees in its research and development operation. GlaxoSmithKline and Pfizer have also restructured their drug development divisions, creating small “drug performance units” that compete for funding. ² Wyeth has taken a different approach and reduced its therapeutic divisions from 14 to 6 fields and from 55 to 27 disease states while cutting the workforce by 16%. ⁸

Biotech companies still hold a stake in this game. The capital for funding biotechnology companies has been reducing rapidly and many biotech companies only have 6 months of cash in the bank. ⁴ In order to fight the effects of the patent cliff, biotech companies need to focus on using their internal structures to be efficient and productive for all brands. A common goal for both small biotech companies and big pharma companies is to switch from blockbuster drugs to blockbuster disease states with a lot of research and development potential, such as diabetes, cancer, and obesity.

It is also important that pharmaceutical companies find ways to market to the aging population. As this generation heads for Medicare, the generic drug industry is going to boom. Diabetes and obesity treatment are huge areas of disease management potential in the elderly.

Many small biotechs will only have one, if any, major blockbuster facing patent expiration, but these smaller companies will be affected by the changing market. Small biotech companies need to exploit their niche environments and new advertising and marketing opportunities, as well as blockbuster markets, such as diabetes and cancer therapies.

Implications for Pharmacists

For pharmacists, the patent cliff will have a completely different impact. It will mean that an increased number of drug products will have a generic option. For pharmacies, this could translate into increased profit margins and possibly increased patient flow. With the release of new generics into the market, a larger percentage of the population will be able to afford needed medications. This may bring an influx of patients into the pharmacy who can better afford the medications they need.

It is also predicted that pharmacies will have an enhanced profit margin. According to a Bloomberg report in February 2010, profit may rise up to 20% for large pharmacy chains because of larger profit margins with generics. ⁹

Pharmacies can also capitalize on the new structures within the pharmaceutical industry. It is predicted that the market will take a turn away from the blockbuster foundation and shift more toward biotechnology. Pharmacies can break into this market by enhancing and promoting compounding and related specialty services. By compounding products geared toward individual patients, pharmacists can enhance their service to patients as well as their business opportunities.

In summary, both large pharmaceutical firms and biotechnology-based companies have track records of innovation and creative responses to challenges. It is likely that their market expertise will once again position them for success. Pharmacists will need to monitor these developments to come up with new ways to better serve their patients. PT

Joseph L. Fink III, BSPharm, JD, is professor of pharmacy law and policy at the UK College of Pharmacy as well as a professor in the Martin School of Public Policy and Administration at the University of Kentucky. Jennifer M. Hale is a third-year PharmD student in the UK College of Pharmacy and an MPA student in the Martin School.

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