Strategic options for large pharma companies to navigate patent cliffs

Published on July 16, 2024 by Karthikeyan G

Pharma companies hold exclusive rights by way of patent protection to manufacture and market drugs for a specific period of time during which these drugs will not face competition from other drug manufacturers’ products. After such patents expire, other pharma companies are allowed to manufacture the same drug with a similar composition (referred to as “generics”). The original manufacturer’s revenue would drop significantly at this time – termed “the patent cliff” – as generics would gain market share.

Since patent cliffs have a large impact on pharma companies, we look at options that could be explored in addition to the well-known strategies of acquisition, partnership and product licensing.

Over-the-counter (OTC) switching strategy

A drug’s prescription-only status could be switched to OTC by weakening dosage or by providing the drug solely in OTC form. Companies could explore this strategy to sustain revenue, as it expands the market segment by changing the legal status and business strategy. The strategy would also help companies explore new revenue opportunities by accessing new customers who were previously not able to afford the product and by accessing new markets due to its new legal status.

This strategy would also help retain the customer base, as the same branded product is converted into OTC form and can be accessed at a much cheaper price. By negating the competition from generics manufacturers, pharma companies could reduce the risk of losing a large chunk of revenue, but the process is scientifically rigorous and highly regulated. The pharma company should demonstrate a wide safety margin and effectiveness at the weakened dosage at which it applies for OTC status. It would also need to spend heavily on advertising and reduce the price of the drug to match price levels of the OTC drug manufactured by competitors.

Patent term extension

Companies deploy a number of strategies to protect against significant loss of revenue due to patent expiry; these include patent term extension (PTE) or patent term restoration and applying for paediatric exclusivity and supplementary protection certificates.

Companies lose time during the approval process from the date of filing; this significantly reduces the lifespan of the patent. The Hatch-Waxman Act in the US enables a company to extend the patent term for a maximum of five years beyond the actual expiry date if the company meets certain criteria. For example, if it takes three years for a drug to be approved by the regulatory authority, the patent term could be extended by three years. Companies in Europe can use Supplementary Protection Certificates (SPCs) to extend patent protection beyond the original date of expiry until when the product receives approval as the first authorised product in the European Union.

Companies can extend patents by six months under the FDA Modernization Act by evaluating the safety and efficacy of the drug for children. Applying for paediatric exclusivity could increase the lifespan of the patent.

New treatment indications and formulations

Pharma companies can look at exploring marketed products for different indications by modulating formulations used in the currently available marketed drug. This is time-consuming but if successful, a company could file the drug for a different indication and extend the patent’s lifespan. Repositioning a drug refers to using a drug that has undergone extensive clinical trials for safety and efficacy in the original indications for new therapeutic purposes; this would reduce the need for large investment and time for additional clinical trials. It would enable reaching the market quickly and make new treatments available to patients. In addition, investment in R&D for repurposing a drug is far lower than that for developing a new drug.

Key examples include sildenafil that was originally developed to treat hypertension and angina and was repurposed to treat erectile dysfunction under the Viagra brand. Another example is thalidomide that was originally developed as a sedative and was later found to have immunomodulatory properties that led to its use for the treatment of multiple myeloma and leprosy.

Mergers and acquisitions (M&A)

M&A is a well-known strategy companies adopt to acquire interesting new products or a (target) company as a whole based on the unique selling propositions (USPs) of its products. Big pharma companies would look to acquire companies or products that have released either positive trial results in late-stage development drugs or a drug that has significant market potential in the near future for specific indications. Private equity investors have large amounts of dry powder to fund healthcare companies looking for financing options to move drugs to the next stage but face higher costs of financing than in previous years due to their inherent risk. Companies might not consider selling, as the current market would not get them the right valuation.

The biggest question facing the market at the moment is whether pharma companies are ready to pay a premium to get the target company/drug they are interested in, in order to boost their pipelines or whether they are still waiting for the right time for acquisition. Another question is whether smaller pharma companies with potential blockbuster drugs are ready to sell the drugs or their business when they can look for financing options irrespective of the interest rate, which could be covered by future sales of the drug being developed.

Big pharma companies have in the past paid large premiums to acquire companies they are interested in due to a unique drug, technology or field of research in order to boost their pipelines and navigate the effect of patent cliffs. This could be a primary strategy, as the cost of new R&D would be similar to or less than the premium.

Conclusion

Different companies follow different strategies – considering their geographical location, the different sets of rules that apply and their current market positions, to safeguard their bottom lines from the impact of a patent cliff. Some invest large amounts in R&D to build pipelines with long-term goals in place, some evaluate companies that can be acquired and others consider viable options such as product partnerships, in-licensing products or testing two or more drug formulations together to come up with a treatment option for an indication.

How Acuity Knowledge Partners can help

We are a leading provider of high-value research, analytics and business intelligence services to life sciences-, bio-pharma-, medtech- and healthcare-focused investment banks.

We provide bespoke research support on market entry and due diligence, portfolio management, licensing and acquisition, go-to-market strategy, opportunity assessment, regulatory landscaping, product launch analysis, market access and therapy area assessment, indication prioritisation, market research and forecasting, pipeline analysis and benchmarking and competitive intelligence.

Sources:

• Patent term extension

• Mitigation strategy

• Lifecycle management

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