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Big Pharma Gearing Up To Face The Patent Cliff

Big Pharma Gearing Up To Face The Patent Cliff [The Philadelphia Inquirer]

From Philadelphia Inquirer (PA) (November 12, 2010)

Nov. 12--To the casual observer, the pharmaceutical industry these days may appear to be engaged in a mammoth game of Monopoly.

Johnson & Johnson offers $2.3 billion for Crucell NV (September); Pfizer Inc. swallows King Pharmaceuticals Inc. for $3.6 billion (October); Eli Lilly & Co. scoops up Avid Radiopharmaceuticals Inc. here in Philadelphia for $800 million (this week).

Then there were Pfizer’s $68 billion purchase of Wyeth and Merck & Co. Inc.’s $41.1 billion takeover of Schering-Plough Corp., both deals last year, and involving companies -- Wyeth and Merck -- with huge operations in the Philadelphia area.

What gives?

There is a simple explanation for most of the mergers and acquisitions in the pharmaceutical world these days: the so-called Patent Cliff.

Simply put, many of the drug industry’s biggest earners -- blockbuster medications that have paid the bills for the last decade -- are about to lose their patent protections.

Four of the top five U.S. sellers in 2009 -- Pfizer’s $7.5 billion Lipitor, Bristol-Myers Squibb Co.’s $5.6 billion Plavix, GlaxoSmithKline P.L.C.’s $4.7 billion Advair Diskus, and AstraZeneca P.L.C.’s $4.2 billion Seroquel -- will see their patents expire next year or the year after. Glaxo and Astra, both London-based companies, also have large operations in this region.

While a boon for consumers and insurers who will have access to cheaper generic versions of these drugs, the patent losses mean big pharmaceutical companies are looking at gaping holes in their portfolios.

"Over the next five years, the pharmaceutical industry will face the sharpest revenue decline in history," stated a December 2009 report prepared by Bernstein Research. "Of the top 10 biggest drugs in the world, nine will lose patent protection; of the top 20, 18 will lose protection."

Based on 2009 sales figures, the industry will lose patents on drugs that generated $92 billion or almost a third of the industry’s $300 billion in revenue, according to Michael Kleinrock, director for insights at IMS Health Inc., a health-care information and consulting company.

"This patent cliff is really the success penalty for the significantly successful drugs of a decade ago," Kleinrock said. "Now all of them are reaching their patent expirations at the same time. It is really unprecedented."

Generics can cost between 30 percent and 80 percent less than a brand drug, according to Generic Pharmaceutical Association. That difference is revenue lost to the patent holders.

Hence the rush to find replacement dollars.

Buying other companies with existing products is just one strategy. Others include beefing up research budgets, diversifying into nonprescription drugs or animal-care products, and expanding into new geographic markets such as China.

And almost everybody is cutting costs.

Pfizer, for instance, announced it was trimming 19,000 jobs after the Wyeth deal. Eli Lilly, anticipating its antipsychotic Zyprexa patent loss in 2011, announced last year that it would reduce its workforce by 5,500 to 35,000 over two years.

"Everybody is choosing different approaches," said Les Funtleyder, a portfolio manager with Miller Tabak & Co. L.L.C. specializing in the health-care market. One common denominator, he said, however, was "you have to lose head count."

There seem to be few explanations for the glut of expiring patents beyond coincidence.

Daniel Hoffman, who runs a pharmaceutical-research firm in Glenmoore, Chester County, suggested that it was simply the "cyclic nature of science."

Particular scientific breakthroughs trigger a round of advances, including new drugs, he said.

"The paradigm of medicinal chemistry that pharmacology has been operating on for 40 to 50 years has been pretty well exhausted," he said. "The low-hanging fruit has been picked."

In the past, pharmaceutical companies would have relied on their own research-and-development divisions to identify and deliver the next generation of blockbuster medications.

In recent years, however, that path has been remarkably unproductive. Statistics presented at a Bernstein Research conference this year showed that industry spending on research and development more than doubled since 1999 while the average number of new drugs approved by the FDA each year has declined.

"Drug development is not always linear; the more money you put in does not mean the more drugs you get out," Funtleyder said. "There is no magic bullet out there. No one has found a consistent source of new drugs or compounds."

Albert Wertheimer, a Temple University professor of pharmacy administration, said the industry had come to believe that research and development alone was not the answer.

"The takeaway message is you are better off buying the products from smaller companies or foreign companies that don’t have marketing arms in the U.S.," he said.

As drastic as the coming fall sounds, no one is predicting the demise of the pharmaceutical industry.

Far from it.

Rather, the industry will be more diverse, with a more stable, though smaller, revenue base spread among many more products, said Yali Friedman, founder and president of the website, which reports on patent expirations.

Tony Butler, an analyst with Barclays Capital who follows the pharmaceutical industry, remains bullish, noting that companies and investors have been preparing for the Patent Cliff for some time.

"They have seen this coming for many, many years," Butler said. "You are going to see a deflation of earnings, but you are also going to see them pick up again. . . . These companies have already given us what their trough earnings will be during the worst of times and they are still very attractive."

Contact staff writer Christopher K. Hepp at 215-854-2208 or

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Posted: November 2010