Wockhardt Research Centre, India
The global generics market, in 2011, generated revenue of around $162 billion, representing around 19% of generic market share in the global pharmaceutical market with a growth rate of 9.3%. In contrast, sales of the branded drugs, fell 4% during the same period, to $174.2 billion from $181.3 billion. By 2017, the generics market is estimated to reach a whooping $231 billion as compared to $124 billion in 2010 with an annual growth rate of 9.3%. During the first nine months of 2012, the total revenue of the global generics market was approximately $39.1 billion. The increase is mainly attributed to patent expiries of blockbuster drugs; besides the contribution of chronic diseases and increasingly ageing populations.
There is a significant fragmentation in the generic pharmaceutical industry as well; in 2011, the top 10 generic pharmaceutical companies accounted for 26% of global generics sales by value. The US has very high levels of generic utilization, with nearly 80% of prescriptions dispensed being generics and accounts for 46% of the global generics market value. Generics, however, are less popular in places like Europe and Japan, although the scenario is now changing.
From the brand company point of view, when we think about the patent cliff, an image of a huge waterfall comes to mind, with the free fall representing revenue of brand companies. We should also consider, though, the waterfall is nourishing a rich, green valley below, which represents the generic pharmaceutical industry. While big pharmaceutical companies are jumbling to add on smaller biotechs with marketed drugs to protect themselves, generics manufacturers are harvesting windfall profits.
The pharmaceutical industry has witnessed loss of patents for drugs having sales worth more than $76 billion during 2011 and is going to experience major patent expiries through 2013 to 2020, and 2014 to 2017 are expected to be peak years. By 2015, branded products with estimated sales of up to $135 billion will face patent cliff, giving immense opportunities to generic pharmaceutical companies to increase their share in the global market. The pharmaceutical companies will also have the opportunity to penetrate the biosimilars market, as the biologics estimated sales of $64 billion in 2011 will go off patent within the coming five years.
The patent cliff of any individual company is nothing but the end of patent protection around its successful product range. It is interesting to note that the patent cliff for the past year is caused by products that were discovered in the late 1980s. Usually, for a company that is approaching a patent cliff for one or more blockbuster drugs, 3-5 years prior to the patent expiry, suffers a standing share price, because of a natural plateau in the net present value of the products which had the highest contribution to the value of the company, and thus, it changes the expectation for future growth potential from an investor’s point of view.
Though the pharmaceutical industry has been nervous about the patent cliff for years, it is also proving to be a blessing, especially for patients and the generic industry. Patients are benefiting over past few decades as they have access to innovative drugs at generic prices. On the other hand, in the absence of a patent cliff, the generic industry would enter a drought that is expected to last about two years. Meanwhile, brand pharmaceutical companies have been left with no choice but to respond to the challenge by sharpening their business strategies and refocusing their attention in Research & Development.
Generic companies are also jumbling to redefine themselves, in a way, either by specializing in difficult-to-make drugs, selling branded products or making major acquisitions. Watson, one of the largest generics company in US, acquired a European competitor, Actavis, in October 2012. The deal has made Watson the third-largest generic drug maker globally.
Few big generic companies have managed to grow by going into the branded-drug business. The best example is Israel Pharma major Teva, which sells the multiple sclerosis drug Copaxone®. Mylan is another big generic company, whose revenue has significantly increased in past few years due to sales of its anti-allergy product EpiPen®. Watson got the boost in its revenue from the sale of women’s health products and branded contraceptives.
As a further consequence of approaching the cliff, generic drug companies possibly would no longer be able to rely much on the profitable 180-days exclusivity period awarded to them following the patent expirations of many drugs. Moreover, there are fewer drugs that are becoming generic and having exclusivity period dedicated to one single company. Cymbalta®, an antidepressant drug sold by Eli Lilly, is expected to get genericized in 2013. However, there are more than five companies that are expecting to share the market for the 180-days exclusivity period.
It is also worth looking at the patent cliff from the brand company point of view, mainly the loss in sales they incur due to generic competition. The best example in recent times being Pfizer’s cholesterol drug Lipitor®. According to Pfizer’s first quarter earnings last year, the reported Lipitor sales was $1.4 billion, with a straightway 42 % plunge from the same period in 2011. It is quite relevant to mention that Lipitor® recorded cumulative sales of $128 billion for Pfizer through the end of 2011. On the other hand, Watson was the first company to begin selling (authorized) generic Lipitor® in November 2011. The strong generic Lipitor® sales and other generic launches including generic versions of Concerta® and Lovenox®, surged Watson’s first quarter revenue by almost 74 % to $1.5 billion, relative to $877 million for the same period in 2011. This increased sales has driven an 87 % increase in net income to $209 million in 2012 from $112 million in first quarter of 2011. Watson expanded its geographic reach on the basis of this financial push with the purchase of the European generics firm Actavis.
In 2012, the pharmaceutical industry witnessed the biggest patent cliff it has ever seen, with $33 billion of sales forecast to be lost. More than 40 branded drugs valued at $35 billion in annual sales have lost their patent protection (Table 1). Moreover, it is estimated that in 2013 the value of brand drugs on the verge of losing their patents and to be sold as generics is expected to decline by more than half, to about $17 billion. This has made companies on the edge of their own patent cliff to invest heavily in licensing, acquisitions and Research & Development in an attempt to replace the revenues and earnings due to be lost.
The patent cliff may not be the problem in its own right to certain companies, and particularly, to those who adopt out-of-the-box strategies in terms of financial stability. If the excess cash is being returned to shareholders via dividends, the waning share price might even be seen as a sign of a successfully run company facing the patent cliff. Alternatively, in a model adopted by PDL Biopharma, if the company simply collects the cash flows and put the money in the bank, its share price would remain stable. However, most companies do not prefer this business model, they spend their liquid cash with the assumption that revenues and earnings can be smoothed, but end up with a riskier company.
Generally, the patent cliff is depicted as a bad occasion for the industry; however, it may turn out to be a good occasion, with companies feeling they have gotten rid of the blockbuster curse of replacing aging cash flow streams. The Industry, however, will continue to be infected by poor R&D productivity and shareholder return until the new wave of drug development is incentivized around efficient company risk and total shareholder return.
Those who think that the industry has surpassed the worst of the patent cliff may wish to think again. This year, several small drugs are expected to loose their patent protection, including Eli Lilly’s antidepressant drug Cymbalta® (Table 2).
During the year 2014 till 2015, notable patents are expected to expire include those for Evista® (Raloxifene), Celebrex® (Celecoxib), Symbicort® (Budesonide and Formoterol), and Nexium® (Esomeprazole).
In 2015, the $33.5 billion in sales is at risk from patent expiries, which is almost similar to that of $35.1 billion in 2012; the year big pharma innovation was thought to be at an all time low. The survival of the drug makers in the new patent storm will come largely down to Research and Development and if they can meet the growing expectations for slowly filling pipelines. The industry needs to hope that success is not momentary, after a bumper year of drug approvals. Figure 1 represents the worldwide sales at risk for period 2013 to 2018 from generic competition. Total sales at risk indicate the sales of the year prior to patent expiry and assigned to the year of expiry. The graph clearly depicts the year 2015 as the upcoming patent cliff year.
Companies fearing unpredictable success rate in situations like this can take lessons from Abbott Laboratories, which broke into individual cash-generating established-products entities and more speculative drug-discovery units. The same strategy might be on the horizon for Pfizer.
The analysis for the patent cliff II includes sales in the US only, because a much clearer impact of the patent expiry can be estimated in US. Table 3 shows the previous year’s revenues at risk from patent expiry, thus for 2015, the table contains sales data from 2014.
In the year 2012, nine products exceeded $1 billion or more in US sales and seven of which were having sales $2 billion and more. The year 2012 was extraordinary in the sense that as generics eroded top lines, the worldwide prescription sales was actually declining to $711.6 billion from $723.5 billion in 2011.
Patent expiration is, of course, an event for which brand pharmaceutical companies can plan and sustain through the conveyor belt of product launches. However, even after the year 2012 both the number and value of new products have been disappointing.
Taking the hint from the recent trends in drug approvals, patent cliff II might not be as demoralizing as 2012 from the innovative pharmaceutical companies point of view. Moreover, unlike the small-molecules, sales of many of these products will not immediately fall off a cliff as a big proportion of these products are biologics. Worldwide prescription sales growth of 8% from $753.1 billion in 2014 to $786.5 billion in 2015 is expected in near future. However, the failure of only a few long anticipated products could change the picture of robust growth.
Certainly there is no doubt that the big selling companies would regret the losses and hope that their new products can successfully take up the loss.
The 2015 list contains seven US blockbuster products and six of them breaking the $2 billion barrier.
While the generic companies are reporting record profits by working around small drug molecules, biotech companies are benefiting from a turbulent market environment.
Lantus® (long-acting insulin) being a biological product, has greater protection from generic erosion than small-molecule products. Sanofi might not suffer the loss of Lantus® market exclusivity unlike many of the others on the 2015 list. As per current forecast, Lantus® remains Sanofi’s biggest seller in 2018.
However, as Eli Lilly and Boehringer Ingelheim are working on a biosimilar Lantus® that is due to report Phase III data any day, the picture could change any time. There are generics available in many countries, meaning this can be yet another source of erosion if competitors opt to navigate the still untested FDA biosimilar pathway for entry in US market.
Companies, which don’t have regulatory fencing around their product, as in biologicals, would hurt more from the patent cliff. Thus, patent expiry of Abilify® would affect Otsuka more severely. The sales forecast of the antipsychotic drug shows a steep drop, from $5.09 billion in 2015 to $1.3 billion in 2016, which would just worsen the situation. Otsuka’s one-month depot formulation got approved recently, which could help counterbalance some of the losses, but could not fully replace them. Even Teva, the worlds’ biggest generic company is not spared with the patent cliff hit. In 2015, both of its biggest-selling branded drug chemotherapy agent Treanda® and the multiple sclerosis -therapy Copaxone® will hit the wall, a situation that matches with that of Eli Lilly’s at present. Teva has struggled extremely to come up with a replacement multiple sclerosis product in the form of laquinimod, but much of its momentum has been taken away by the ominous launch of Biogen Idec’s Tecfidera (BG-12) and clinical stumbles with laquinimod.
Lantus® and Copaxone®, unlike its fellow biological might be subject to more immediate and explicit generic competition. Teva has been in court to defend its patents. With the expiry of Novartis’s Gleevec®, it will be the end of an era of sorts. Being the first kinase inhibitor, Gleevec® has more than $30 billion in sales since its launch in 2001. Their sale in US is estimated to drop to just $129 million in 2018.
The last blockbuster on the list, Namenda® would see a drop in the US sales by more than half after its January 2015 patent expiry. Since patent fencing of the product has already been extended through launch of its long-acting pill, it appears that the product is vulnerable to generic erosion as all protection for the drug lapses in the middle of 2015.
The picture after 2015 is appearing milder; with only three drugs having US $1 billion sales are on the expiry list. It seems that with a focus shifting to develop drugs for rare diseases, the brand companies are making efforts to protect themselves from such major inflections as was seen last year which will be seen again in 2015. However as the regulators and payers are getting wise, big pharmaceutical companies may face a new problem totally different than the patent cliff of 2012, as result of the cost-control pressure rising for orphan drugs.
As the pharmaceutical industry approaches its peak, generic manufacturers are leaving no stone unturned to find the best way to increase their market share due to huge rewards and strong competition. The estimated forecast revenue of the drugs subject to patent expiration between 2013 and 2020 is valued at over $100 billion. This huge revenue size will provide generics and biosimilars manufacturers an excellent opportunity to boost their sales.
Brand drug companies on the other side, are turning to niche markets, such as adjunctive therapies for hard-to-treat schizophrenia symptoms, e.g. negative and cognitive symptoms in order to counter the uprising of the generics. Some brand companies have adopted a completely different strategy; they have entered licensing deals and mergers to counteract the effect of patent cliff. Additionally, such strategy allows companies to gain access to late stage drugs and other niche markets, in order to fill voids in their product pipelines.
The coming few years hold great promise for pharmaceutical industry, there would be furious competition not only from rival generic companies, but also from big pharmaceutical players looking to maintain market dominance through ‘Authorized Generics’. Generic firms, in response, are re-evaluating their approach to penetrate the market. Companies like Hospira are making sure to build a global presence by reaching out to new locales, fighting alongside with governments that aim to reduce healthcare costs. To challenge the intellectual property of the innovator pharmaceutical companies, generic manufacturers have also started to exploit pharmaceutically underdeveloped economies as first to launch opportunity.
It is anticipated that spending on brand-name drugs in years to come is expected to shift to generics, which is a cheerful situation for the generic manufacturers. It is also anticipated that the global spending on generics would increase from $242 billion to $400–430 billion by 2016. In comparison to this, the rise in spending on brand-name drugs is relatively small, from $596 billion to $615–645 billion.
Generic companies are now expanding their skill sets to somewhat align with brand companies. This new breed of generics called “super generics” aims to manufacture complex and difficult to produce generics in order to capitalize on expiring patents.
Unlike the conventional generic copycat makers, super generics are devising the complex generic products by either improving the product design, delivery, or by adopting more efficient manufacturing process. The characteristics of super generics include higher pricing than other generics and incur greater Research and Development costs and high barriers to entry. The major advantage despite high investments is lower risk of failure, competition and likelihood of market exclusivity. The super generics, however, has a significant potential within specific therapeutic areas, such as conditions involving the central nervous system and cancer.
As governments are offering opportunities to provide vital treatments at significantly reduced costs and blockbuster drugs are loosing patent protection, we expect the demand for high-quality generics would certainly increase in the future.
About the Author
Dr. Aman Trehan is General Manager-Global Intellectual Property & Strategic Planning at Wockhardt Ltd. In his previous assignment, he was Head-IP at Pharmaceutical Technology Centre of Zydus Cadila Healthcare Ltd. He obtained his doctorate in Pharmaceutical Sciences from Panjab University, India. He has worked in various multinational pharma companies of repute i.e. Ranbaxy, Wockhardt, and Alembic. He has undergone various specialized training courses on various aspects of Patent Law in US and Europe. His core areas of expertise include: a) Supporting ANDA/dossier filing of solid orals, topicals, pulmonary, transdermals, parenterals, ophthalmics for multiple markets including US and Europe by ensuring development of patent non-infringing technologies/inventions and providing in house opinion on patentability and non-infringement; b) Managing litigation activities which includes providing paragraph IV notice letters, strategizing course of litigation and providing interface and support to outside counsels during lawsuits and minimizing potential risks involved in litigation, managing discovery and depositions; c) Managing global patent portfolio of organization, which includes ensuring legal protection of in house developed technologies and inventions by drafting and prosecuting patent applications in different countries; d) Supporting business teams in identification of products and FTF opportunities.; e) Strategizing expansion and strengthening of company’s product portfolio; f) IP Due-diligence analysis for merger and acquisitions.
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