What pharma companies are doing to avoid another cliffhanger

About the blogger: Haydn Evans is vice president of intellectual property solutions at CPA Global, one of the world’s leading providers of IP management software and services. He works with a range of clients in sectors such as technology, telecommunications, electronics, chemical, pharmaceuticals and biotechnology. Clients include multinational corporations and smaller technology organisations as well as law firms.

The next two years will be another challenging period for the pharmaceutical industry. Many of the bigger pharma companies will continue to weather the storm of patent expirations on major products, whilst simultaneously attempting to restructure their businesses for a more sustainable future.

An over-reliance on a small number of high-volume blockbuster products has left major pharma companies on the edge of a steadily eroding ‘patent cliff’ as patents on these drugs have expired. It has been a harrowing experience, with massive fall-out in terms of lost revenue and the domino effect on research and development (R&D), business performance and jobs. Now, though, rather than ruefully staring down into the abyss, pharma companies are looking forward with more positive intent and seeking innovative ways to breach the chasm.

The patent cliff has been an ongoing concern for the pharmaceutical industry for some years. The first major wave of patent expirations hit in 2012 and the next two years will see a continued flood of expirations on blockbuster drugs such as Abilify (schizophrenia treatment), Cymbalta (antidepressant) and Nexium (stomach acid treatment). Products that earn a combined $170 billion (€125.5/£103 billion) are scheduled to go off-patent by the end of 2015¹.

R&D investment and rethinks

In an attempt to rebuild the conveyor belt of viable products, pharma companies have invested heavily in R&D. The industry has long been aware that a patent cliff was on the horizon, but it was believed that new products could be created with sufficient financial backing. However, despite investment of $1.1 trillion², there is still a significant void in the pipelines of the major pharmaceutical producers. Furthermore, this increased investment has not correlated to an increase in new patent filings. In fact, nearly all of the major pharmaceutical players have been seeing a steady decrease in patent activity — a worrying trend, given the importance of patents to the pharma industry in terms of protecting their innovation and safeguarding their investment. It is also another sign that R&D is faltering and not currently able to meet the expectations and demands of the pharma industry.

This has led to a reappraisal of R&D strategy and processes. Rather than focusing upon a small number of products distributed in enormous volumes, pharma companies are, in many cases, considering a more diverse portfolio of smaller volume, specialty drugs. Research has predicted the launch of up to 37 new molecular entities (NMEs) per year in 2014 and 2015, compared with 25 in 2010³. This can be seen as recognition that the blockbuster strategy is failing but also as a positive move towards building a more sustainable drug pipeline and revenue stream.

Patent filing strategies

In addition to entirely new products, the pharma industry is also re-evaluating existing products and exploring ways to extend the commercial life of mature brands. There are multiple methods of achieving this, but the core aim remains consistent: to sufficiently improve a mature product such that it overcomes a consumer’s inclination to choose a less expensive generic. Improvements can manifest themselves as better formulations to mitigate side effects, combining two or more drugs and marketing them as one product or producing modified release formulations to better serve the needs of the target market⁴. A successful example of the latter is angina-treatment drug

Procardia XL. By improving the casing of the original Procardia, Pfizer was able to administer the medication at a constant rate and negate the requirement for taking three separate pills daily.

Innovations in improving, reformulating or combining existing products can be protected by patent filings to exclude the same modifications in generic drugs. Therefore, it is reasonable to assume that as pharma companies pursue such product enhancement strategies more aggressively, this will lead to an increase in such modifying patents.

Acquisition

Even so, recognising that however flexible their internal R&D is, they will not have exclusivity on innovation and ideas, many cash rich pharmas are gaining access to technology through collaboration with technology partners in revenue sharing agreements, often leading to direct investment and acquisition. Indeed, acquisitions of smaller producers have become more and more commonplace in the pharmaceutical industry in recent years. Prior to the first major wave of patent expirations in 2012, M&A activity in the pharmaceutical industry hit record levels. These moves were seen as an attempt by pharma companies to fill their short-term revenue gaps but, in many cases, it also demonstrated a shift to a more open and collaborative innovation strategy.

Smaller companies that are developing medicines in Phase II or Phase III trials are a prime target for the big players, although demand is greater than supply in this arena. This perhaps helps explain why the typical takeover premium of biotech firms alone in 2012 was nearly double that of the average across other industries⁵.

Diversification — alternative therapies, medical instruments

Diversification has provided the opportunity for pharma companies to mitigate some of the losses of patent expiries. Investment in biotech, medical devices and consumer goods can provide alternative revenue streams and possibly more predictable and sustainable ones. Medical instruments and consumer goods generally have a much shorter product lifecycle than pharmaceuticals, allowing for more agile development and faster, perhaps more predictable, innovations.

New markets

As well as a focus on alternative products, the pharma industry has also turned towards alternative markets. The US remains the largest global market for pharmaceutical products and is predicted to consume 31% of total production in 2016. However, this is a significant fall from 2006, when it was responsible for 41%. This shift can be attributed to developing economies, which could make up 30% of the world market for pharmaceuticals by 2016⁶.

With this in mind, emerging markets are a priority target for expansion. The rapidly expanding BRIC (Brazil, Russia, India and China) and MINT (Mexico, Indonesia, Nigeria and Turkey) economies experience issues with counterfeit medicines, and many consumers are willing to pay more for a branded product, with the perception of quality and legitimacy that these encapsulate. Novartis CEO Joseph Jimenez has long believed such a strategy could mitigate the sharp fall in sales expected when certain products go off-patent. As Jimenez told PM Live in 2011: “We are already achieving strong growth in emerging markets and continue to expand our presence in these markets⁷.”

In many ways, the wave of patent expirations coming in 2015 may have less dramatic repercussions than 2012. Large pharma companies now have experience of these market-changing dynamics, and many of the major structural and organisational changes have already taken place; although the scale and degree of these changes may escalate. The fact remains that the requirement for alternative approaches to pharmaceutical development and production remains critical, and the search for a viable model continues.

So, while those who are involved in or following this ongoing saga find themselves deeply engrossed in a classic cliff-hanger, unsure of the next twist in the tale, the opportunity is there for pharma companies to script a happier ending — an ending that will benefit the companies, their shareholders and the millions of people around the world who rely on the industry’s research, innovation and product development to find life-changing remedies and cures.

References

¹IMS Institute for Healthcare Informatics: The Global Use of Medicines: Outlook Through 2016 (Online: 2012).

²EvaluatePharma: World Preview 2018 (Online: 2012).

³The Scientist: Opinion: Parachuting Off the Patent Cliff (Online: 6 December 2012).

⁴PharmTech: Can Pharma Defy Gravity at the Patent Cliff? (Online, 11 December 2013).

⁵InvestmentU: Patent Cliff Creates Huge M&A Demand in Little Pharma (Online, 20 January 2012).

⁶Casey Research: Is the Patent Cliff a Lethal Blow to Big Pharma? (Online, 23 May 2012).

⁷PM Live: Interview: Joseph Jimenez, Novartis (Online, 17 October 2011).