Licensing and the Pharma Patent Cliff


Photo courtesy Dennis Barnes Photography

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Peering over the edge of a “patent cliff” that threatens to cut deeply into its profits, Big Pharma is considering modifying its current business model of in-house development of all-or-nothing blockbuster drugs towards a business model of in-licensing from biotech startups and university researchers.

The time and cost of developing new drugs from scratch is enormous– typically $2 billion per successful drug and 10 to 15 years from initial research to final regulatory approval.

But during the next five years, many top-selling blockbuster drugs will come off patent, and face severe price competition from generic versions, including: Pfizer’s Lipitor; Astra-Zeneca’s Seroquel; and Sanofi-Aventis’ and Bristol-Myers Squib’s Plavix. Between 2011 and 2014, four of Eli Lilly’s top five sellers will fall off the patent cliff: Zyprexa, Symbalta, Gemzar, and Evista. Estimates peg the total revenue loss to Big Pharma as high as $140 billion through 2016.

In response, analysts at Morgan Stanley are advocating a move away from the go-for-broke nature of the blockbuster business model, towards a Pharma 2.0 model of in-licensing from biotechs and academic researchers, who do all early-stage research and testing, and assume most of the risk. According to their analysis, the return on investment of in-licensed drugs is three times higher than drugs developed in-house.

And it appears that some of Big Pharma is listening. According to thepharmaletter.com, in 2009 the top 10 pharmaceutical companies entered into 12% more health-care focused licensing deals than the year before. Andrew Baum of Morgan Stanley estimates that large European pharmas will cut research spending by 40% in the next two years, and focus on licensing and acquisitions of promising drugs in development.

But for other pharmaceutical companies, the “Not Invented Here” syndrome still rules the day. Eli Lilly, which faces probably the most severe patent cliff among the major pharmas (above), has announced that it will meet the challenge mainly through cost cuts, job cuts, and modifications of existing product lines, rather than major new licensing or acquisition initiatives. It argues that slashing in-house research and development to boost return on investment is a short-term fix that would undermine Lilly’s long-term mission.

As we have argued in other contexts, while licensing may not always be appropriate as a complete replacement for in-house research and development, it is almost always appropriate as a complementary business model. When you are looking over the side of a cliff, Not Invented Here goeth before the fall.

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