The Revolution of The Pharma Industry

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It is the lesser known of the current “cliffs,” however, to some, it’s just as important. It’s called “the patent cliff,” and it’s turning the pharmaceutical industry upside-down.

In 2012, more than 40 brand-name drugs totaling a staggering $35 billion in annual sales fell victim to the patent cliff, watching their patent protection disappear into thin air. As a result, generic companies gained the rights to produce their own cheaper editions of typical name-brand drugs, taking much of the profits that had previously been collected by the name brands.

In 2013, the same is expected of many more pharmaceutical companies, prompting expectations of the value of these drugs to decrease by more than half, leaving the value at about $17 billion.

As a result of the cliff, many generic companies are scrambling to restructure themselves in order to tailor to the situation presented by the cliff. Each one faces a number of choices to make: whether or not to sell branded drugs, purchase other companies, or specialize in drugs that are difficult to make.

In order to increase their market share, one popular generic pharmaceutical company, Watson (NYSE: ACT), acquired Actavis, a European competitor, sending the company up two spots to the third largest generic pharma company worldwide.

This attempt is similar to what most of the generic companies have been doing in attempts to set themselves apart from “the pack.”

January through September sales increased by 19 percent over sales of the same period last year, improving to $39.1 billion from $32.8 billion. However, brand name drug sales fell by 4 percent over the same time frame, decreasing from $181.3 billion to $174.2 billion.

Exclusivity periods, the six months following patent expirations of many drugs, have become less and less reliable, however, for generic drug companies. Out of the many drugs in the transition to generic, fewer have exclusivity periods committed to only one drug producer.

Cymbalta, Eli Lilly’s (NYSE: LLY) anti-depressant drug, is expected to be obtainable as a generic drug. However, sales of the generic form of the drug are expected to be split amongst five different producers. So, not only do the name brands lose their sales; however, generic companies will be forced to compete over the limited profits.

 The same situation is expected to happen to many more of the big-name pharmaceutical brands. Many of the generics are also feeling the heat. “The concept of exclusivity—where only one generic player could actually make money out of the unique moment—has diminished,” said Jeremy M. Levin, CEO of Teva Pharmaceuticals (NYSE: TEVA). As a result, Mr. Levin believes that many companies “have had to really ask the question, ‘How do I really play in the generics world?’”

The answer for Teva, Mr. Levin thinks, is complicated. However, he believes that its market dominance may hold prove critical. In fact, one in six generic prescriptions filled in the U.S. is done so with a Teva drug. This, Levin believes, will become more important for the company now more than with the problems facing the pharmaceutical industry.

He also said he relies on Teva’s reputation for producing quality drugs. This is also essential for Teva in order to comply with the recent statements issued by the F.D.A. admitting that it will be more closely inspecting the quality of generic drugs.

One way in which generic companies could gain that all important advantage, according to Mr. Levin, is through expansion into global markets. The European generic pharmaceuticals market remains relatively untapped compared to the American market, where an estimated 80 of filled prescriptions are generic.

Can global expansion help generics overcome the challenges of the patent cliff? What can big brands do? We’ll see how they try to respond over the coming months.


Michael Nolan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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