• About
  • Introduction
  • Managing Directors
  • Principals
  • Consulting Staff
    • Senior Consultants
    • Consultants
    • Associates
    • Analysts
    • Interns
• Services
  • Introduction
  • Corporate Strategy
  • Technology Strategy
  • Licensing, Mergers, and Acquisitions
  • Portfolio Optimization
  • Commercialization Strategy
• Clients
• Cases
  • Introduction
  • Case Study 1
  • Case Study 2
  • Case Study 3
  • Case Study 4
  • Case Study 5
• Careers
  • Introduction
  • Benefits
  • How to Apply
• Alumni
• Contact
• Blog

A View from a Cliff

February 2011

I stand at the edge of the much maligned patent cliff. For years we have been living in its shadow, with the media encouraging apocalyptic views of the biopharmaceutical industry starting this year. One article in 2007 described it as “the huge patent cliff meant manufacturers of branded products could expect to face a decade of unrelenting generic competition.” Another dire description: “Most of the drug industry’s top sellers will likewise lose patent protection over the next several years. There are no new big sellers to fill the gap.” The basic viability of the biopharmaceutical industry was in question.

The sheer number of the drugs and associated revenue going off patent is staggering. According to IMS, $30 billion worth of sales will face generic competition for the first time in 2011 in the major developed markets. Four major drugs – Lipitor, Plavix, Zyprexa and Levaquin – accounted for $17 billion in the US alone. An analysis by Cowen indicates that ~$81B in US sales are at risk to lose patent exclusivity from 2011 through 2015.¹  Across this 5 year period, 2011 represents the peak of sales at risk by a significant margin and declines in each year afterward.²

The outlook sounds quite ominous indeed! In order to understand the comparative magnitude and significance of this mass patent expiration event we could compare the impact to that seen in the prior period of 2005-2010. Searching back through the archives of the same source that provided the ~$81B estimate from 2011-2015, the 2005-2010 period had ~$91B of sales at risk.³  These data seem completely counterintuitive – the patent cliff that has generated so many headlines seems to have a lower amount (-11%) in sales exposed to generic competition compared to the prior 5 year period. There was no discussion of the great patent cliff of 2005-2010. It certainly does not appear that the industry is facing an unprecedented patent expiration, but rather a continuation of a trend that has been in place for a decade.

Despite the fact that the patent analysis appears to diffuse some of the alarmist sentiment, surely the sales projections for the industry will highlight the impact by means of sales contractions over the same forecast period. IMS predicts that the global pharmaceutical industry sales will grow at 5-7% in 2011 compared to 4-5% in 2010. Generic expansion could be escalating prescription volume, but should be decreasing overall sales if the impact is as significant as some would expect. Perhaps the impact will not be seen in 2011, but more in the out years. Cowen projects pharmaceutical sales expanding at 3% annually through 2015.⁴  A more conservative Datamonitor projection (which also includes only branded pharmaceuticals) shows growth slowing from 2% in 2011 to a contraction of 0.4% in 2012, followed by a recovery of 1.5% growth in 2013-2015.⁵  Therefore the most significant pain of the patent cliff is essentially zero growth for a single year? Certainly not the end of days that some had expected.

While growth is expected to continue in the long term, it is definitely not at the level seen historically. Genericization, increased payer pressures, and healthcare reform have had a chilling effect to be sure. On the other hand, the industry has benefited from the rise of many emerging pharmaceutical markets which has helped blunt some of the pain. Additionally offsetting the potential decline is the continued murkiness around a biosimilar approval pathway. Even when clarified, biologics will likely not experience the sharp rapid price and market share declines of solid oral drugs due to the complexity of the molecules and related difficulty in proving equivalence. In other words the growth curve for monoclonal antibodies has not yet peaked as it has for solid oral generics (monoclonal antibodies have a 9.5% CAGR from 2009-15 compared to -0.3% for small molecules ⁶).

The most pernicious problem that has led the industry to these slower growth years is that research pipelines had become anemic, and were unable to keep pace with the continued advance of patent expirations. If the expirations are relatively constant as previously discussed, then it is the slowing of new drugs to replace those expiring that is to blame. Trends in this area are starting to be encouraging as well. The FDA granted more NDAs in 2010 than in any year since 2006 and granted more BLAs than in any year since 2002. While the overall number of drugs in development is off since a peak in May 2008 in a survey of 48 biopharmaceutical companies, there are currently 133 filed NDAs and 259 drugs in Phase III.⁷  Querying the PharmaVitae database, there are 185 drugs that will have sales in 2015 but are not launched today.⁸  Of these, 11 drugs are projected to have more than $500M in 2015 US sales – meaning 11 major drugs will be born in the next 5 years. These trends are the result of the hard work the industry has been doing to fill the constant need for novel medicines to sustain revenue, both in house research and development in addition to business development. Even Pfizer, which is losing exclusivity to the drug with the highest sales in the world, is expected to shift from 12.8% pharmaceutical industry market share to 11.5% in 2015, which still represents higher sales than today (given industry growth).⁹  While slower growth and expiration of major products such as Lipitor has led to painful reorganizations, it seems as though there is hope that the industry will be able to retool and emerge.

The first place to look to see if growth may be returning is the performance of new drug launches. Performance of each year’s cohort of new drug launches has been declining relatively consistently since 2006 (with some small exceptions – 2009 was better than 2008).¹⁰  Once R&D productivity allows for the launching of the volume and quality of products to reverse that trend, industry growth will return. Any emergence will need to negotiate the continuing impact of reimbursement reform. Payer pressures will increasingly scrutinize me-too products and make health and economics rationale (and related value based pricing) required. Another concern is that some of the new revenue streams that have been created in recent years in lower margin generic products and expansion into emerging markets are not protected and could prove fleeting. The industry has been experimenting with commercial and organizational models to react to the macro trends, but it is not yet clear if a single ideal solution has yet emerged and continued experimentation is warranted.

In order for the industry to breakout into a period of higher than low single digit growth, the development of a new major platform technology will be required – the next step beyond monoclonal antibodies. Likely suspects to create the next R&D renaissance: regenerative medicine, synthetic biology, RNAi (if it can survive the recent growing skepticism), nanotechnology, personalized medicine… As we take time to translate those areas of basic science into prime time therapeutics, at least we can be heartened by the fact that the industry is not going to careen off of the side of a bottomless patent cliff this year.

Some might chose to view the patent cliff of 2011/2012 as a needed correction (leading to greater efficiencies) rather than a cataclysmic event: “Don't be afraid. Although I fell, it was nothing. I am now rather at ease. Before falling I kept thinking 'What will I do if I fall?' and there was no end to my anxiety… If the rest of you want to be at ease, fall quickly!'' ~Yamamoto Tsunetomo, Hagakure (1716)




Tweet



About the author: Tyler Koop is a Senior Consultant at the Frankel Group. To contact him regarding this post, email blog@frankelgroup.com.

1. “Generic Industry Overview and Patent Case Reviews,” Cowen and Company. March 8, 2010.
2. Ibid
3. From review of the annual “Generic Industry Overview and Patent Case Reviews,” Cowen and Company. 2005-2010. Note that the figures for each year were pulled from the report published in that year, or from the next year in the future if possible. An additional check was made to use the first time this series of years was included in a single forecast (coming from the 2007 report with the 2006 figure coming from the prior year report). The sum of these figures was $81B rather than $91B indicating the long range estimates – which we currently have for the 2011-2015 period – may underestimate the amount of sales at risk by ~10%.
4. “Therapeutic Categories Outlook,” Cowen and Company. Cowen and Company. October 2010.
5. “Monoclonal Antibodies: 2010” Datamonitor. October 2010.
6. Ibid
7. “Full Pipelines Provide Foundation For Post Patent Expiration Period Growth,” Cowen and Company. December 2010.
8. “PharmaVitae Explorer” database. Datamonitor. Accessed January 2011.
9. “Therapeutic Categories Outlook,” Cowen and Company. Cowen and Company. October 2010.
10. Frankel Group Analysis of IMS data.