What is a patent cliff?

A patent cliff is a colloquialism for the potential steep drop in revenue on patent the expiration of one or more flagship products of a company. A patent cliff occurs when a company’s revenue can “fall off a cliff” when one or more established products are no longer patented, as these products can be replicated and sold at much cheaper prices by competitors .

Although applicable to any industry, the term “patent cliff” has in recent years become almost exclusively associated with the pharmaceutical industry.

Key points to remember

  • The patent cliff refers to a sharp drop in revenue or profitability when a company’s patents expire, opening them up to competition.
  • Patent cliffs are particularly salient in the pharmaceutical industry, where generic drug makers can begin to corner market share.
  • Patents on medicines and other discoveries are generally twenty years from the approval of the patent until its expiration, although other factors can modify this standard period.

Understanding Patent Cliffs

Currently, the term of a new patent in the United States is 20 years from the date the patent application was filed in the United States. However, many other factors can affect the actual life of a patent.

Patent cliffs are the associated revenue drops that can occur when a company sees the patent for a key product expire. When this happens, a competing firm can bring substitutes for the product to market more cheaply and easily, taking market share away from the original product. Drug development is a long and expensive process, with Research and development (R&D).

Approving a drug is also an expensive and time-consuming process with various clinical trials needed to prove the drug is safe. In recent years, costs have decreased due to advances in biotechnology and genomics. Additionally, for every drug that hits the market, a number of drugs never make it out of the lab or end up not being approved by the Food and drug administration (FDA).

Drug exclusivity allows pharmaceutical companies to recoup losses from failed drugs. Profit margins may seem impressive for a single brand name drug, but they are far less impressive given that they subsidize the cost of research and failed drugs. Once exclusivity ends, generic drug companies are allowed to produce the same drug, sold under a different brand name. The cost of a generic drug is significantly lower for the consumer and the pharmacy. For both parties, generic drug costs can be up to 80% to 85% lower than brand name.

The world’s largest pharmaceutical companies, such as Pfizer (DFP) and GlaxoSmithKline (GSK), therefore stand to lose billions of dollars in revenue and profits due to patent expiration on such blockbuster drugs as cholesterol drug Lipitor and asthma drug Advair respectively.

Patent Cliffs and Generic Competition

Many companies have established profitable businesses by manufacturing generic alternatives to off-patent drugs, which can be sold at a fraction of the price of brand name drugs. The threat of the “patent cliff” has spurred increasing consolidation in the pharmaceutical industry, as companies scramble to replace blockbuster drugs whose patents are about to expire with other drugs that have the potential to become big. sellers.

Generic drug manufacturers do not have large research departments to fund. Instead, they simply have to copy the compounds used to make the drug. Compounds are made public due to FDA regulations. Due to much lower research and development expenditures, as well as a significantly lower approval burden, profit margins for generic drugs are higher despite significantly lower prices.

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