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Is the looming ‘patent cliff’ more of a slope?

Published on 21st March 2023

Science background with molecule or atom Abstract structure for Science or medical background
Science background with molecule or atom Abstract structure for Science or medical background

The number of drugs that reach their patent expiry date in any given year tends to wax and wane, but the 2023-2028 period will see a higher-than-normal number of high-profile drugs reaching this stage in their journey. Industry commentators believe the big pharma/biotech industry could lose in aggregate $200bn in sales per annum by 2030, referring to this period as a ‘patent cliff’.

This is bad news for the industry, as the last patent cliff about a decade ago caused a temporary slowdown in expenditure on drug development in the US, which is the heart of global pharmaceutical research and development (R&D).

The contract with society that has underpinned drug discovery for decades is companies launching successful drugs will enjoy a patent period – typically about ten years from approval to expiry – during which they can recoup the costs of developing the treatment and make a reasonable profit. A portion of this, usually about 25% of revenues, has historically been reinvested into R&D.

Thereafter, many companies specialising in copycat drugs – i.e., generics – can flood the market with cheaper copies of the drug, forcing its price to plummet. The replica drug is then available to society in perpetuity, often for pennies to the pound.

Like all aspects of the biotech industry, this system is evolving. Firstly, due to the fast pace of innovation, many drugs are superseded by a newer, more efficacious, safe or convenient product before the patent expires.

Secondly, many drugs have become much more difficult to copy over recent years. Small molecules, which historically tended to be the basis of most new drugs, are reasonably easy to copy. This type of drug can be put through a process that breaks it down to its chemical building blocks, essentially providing an instantly replicable, low-cost recipe for generic drug manufacturers.

However, in 2022, approvals of drugs based on biologics outstripped approvals of drugs based on small molecules. Biologics are substances derived from living organisms, such as antibodies or enzymes. Because the nature of living organisms varies and their structures are generally more complex, developing copycat versions of biologics is significantly more complex than the manufacture of conventional, small-molecule drugs. In fact, the best copies constructed are called ‘biosimilars’. While these are similar to the original drug in methodology and efficacy, they are not considered identical.

Further adding to this complexity, about half of the biologic drug approvals in 2022 were the next generation of biologic modalities, which are even more complicated than pure biologics. These include bispecific antibodies, antibody-drug conjugates (ADCs) and cell or gene therapies. These more complex versions of therapeutics are even more difficult to copy, and the production process itself becomes the market protection, rather than relying purely on a patent – very much like grandma´s secret sauce or the Coca-Cola recipe.

Humira from AbbVie is a blockbuster biologic drug which, in spite of several market exclusivity extensions gained from a string of approvals for multiple autoimmune disorders, will finally face competition from biosimilars in the US in 2023. Humira treats severe rheumatoid arthritis and inflammatory bowel conditions. It generated sales of more than $21bn for AbbVie in 2022.

If it were a small molecule, one would expect about 80% of its sales to fall away in the first 30-90 days after patent expiry. However, as a biologic, competition is likely to be slower to erode Humira’s sales. Amgen has already launched a biosimilar called Amgevita, and there are expected to be a further six biosimilars launched in 2023.

However, only one of the Humira biosimilars, Cyltezo from Boehringer Ingelheim, has so far been designated ‘interchangeable’, which means doctors can prescribe it as an alternative to Humira without the patient’s consent. Experience shows patients who are taking an effective drug are usually resistant to moving to a biosimilar, so biosimilars tend to be prescribed only to new patients with the disease.

Furthermore, the cost of developing a biosimilar is significantly higher than replicating a small molecule. So, the cost of biosimilars falling to the ‘pennies to the pound’ level historically associated with generic drugs seems unlikely. This will reduce pressure on doctors to opt for the less popular biosimilar over the original biologic.

The blockbuster drugs facing patent expiries in the coming years were first approved 20-30 years ago, when biologics were breaking onto the drug development scene. Therefore, the majority of them are biologics. Watching the rate of decline of Humira’s sales will inform predictions for the rate of decline for other blockbuster biologic drugs facing impending competition from biosimilars. These include ophthalmology drug Eylea from Regeneron Pharmaceuticals, anti-inflammatory treatment Stelara from Johnson & Johnson, osteoporosis drug Prolia from Amgen and oncology drug Opdivo from Bristol Myers Squibb. These four drugs alone generated sales of $23bn in 2022.

Drug companies can also try to extend patent lives through the development of new patents for their drugs, either for the treatment of additional diseases or new, more convenient methods of administering the drugs. For example, Merck is testing a subcutaneous version of its $21bn per annum intravenous immune-oncology cancer drug Keytruda, which will start to lose certain patent protections in 2028. While the treatment would still require delivery by a doctor, a new patent could see years added to Keytruda’s exclusivity period.

By developing a cluster of additional patents – a so-called ‘patent thicket’ – for its rheumatoid arthritis biologic drug Enbrel, Amgen has so far managed to extend its patent life by an extra 17 years beyond the expiry of the original patent in 2012.

What does this mean for corporate strategy for the industry?

Product pipelines are constantly at risk of drugs being outclassed by new competitors before the end of their patents. On top of this, patent expiries are always approaching. The lack of precedent makes the speed at which sales of biologics will be eroded by competition from biosimilars unpredictable. Therefore, we expect companies to be constantly focused on replenishing their product pipelines, most likely through company acquisitions.

The last patent cliff a decade ago saw a series of megamergers in the sector, including Pfizer/Wyeth and Merck/Schering-Plough in 2009. However, this now seems less desirable, partly due to the complexities of integrating two behemoths, and partly because very few large drug companies are free of looming patent cliffs. Instead, corporate development teams at large pharmaceutical companies, held back by Covid-19 and spiralling valuations over 2020 and 2021, are busily trying to plug impending gaps in their revenues by acquiring new products, either through licencing deals or company acquisitions.

In last month’s blog (https://ibtplc.com/investor/bl...), IBT’s managers discussed the healthcare M&A landscape and how companies with an approved product are more likely to be attractive acquisition targets, due to the shorter timeline to profitability. It appears drugs that are harder to copy will likely also be attractive to acquirers concerned about losing revenues through patent expiries.

As such, it is no surprise to see IBT’s largest holding in November 2022, Horizon, being acquired by Amgen and cash-rich Pfizer entering into an agreement to acquire IBT’s largest holding in March 2023, the oncology company Seagen – a pioneer in ADC technology with four products already launched on the market.

So, with many drugs being outstripped by better competitors before their patent expires, successful patent and market exclusivity extensions for some drugs being achieved, less replicable biologics increasingly coming to market, and a reluctance among patients to opt for biosimilars, we could conclude that in the future, patent cliffs will look more like continuous slopes that need steady replenishment.

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