Pharma industry enters critical phase as patent cliff looms large, hastening consolidation

 Pharma industry enters critical phase as patent cliff looms large, hastening consolidation

17 May 2010

- More than 8 in 10 (82 per cent) of those working in the drugs industry believe big pharma will be unable to innovate sufficiently from within to replace blockbuster drugs going off-patent

- Almost 7 in 10 (67 per cent) predict substantial acquisition activity within the next two years

- 62 per cent believe the US intellectual property system has been more responsive to industry needs than Europe, in a call for European patent reform

- Almost 9 in 10 (89 per cent) believe lasting capital will be attracted back to the US market, as optimism emerges over Obama's healthcare reform

The looming patent cliff facing major pharmaceutical companies is pushing the industry into a critical phase in terms of drug innovation and consolidation, according to the latest annual life sciences research from Marks & Clerk. The findings, based on a study of 381 executives across the pharmaceutical and biotechnology sectors, shows that big pharma is becoming increasingly reliant on patent term extensions to safeguard essential blockbuster revenue ahead of a likely ‘make-or-break' round of company acquisitions. Now that the gains from yesterday's small molecule based drug discovery have been largely enjoyed, the picture for R&D is now far more complex, with the research predicting increased industry convergence driven principally by acquisitions.

Despite the global economic outlook improving considerably over the last year, the research paints a far from optimistic picture, identifying a number of industry-specific problems. The most pressing of these is the looming patent cliff facing originator pharmaceutical companies, whereby large numbers of blockbuster drugs are set to come off-patent between now and 2014.

In the context of an incoming Conservative-Liberal Government, the concern expressed raises an interesting question-mark over the direction of Government policy. Under the previous administration, commitments were given to R&D sectors through the creation of a patent box and a strategic investment fund, which committed public money to sectors including biotechnology. The Conservative-Liberal manifesto of this week, however, focuses on other areas of economic activity - in particular energy, utilities and transport.

The research reveals that more than 8 in 10 executives (82 per cent) predict that big pharma will be unable to innovate sufficiently from within to replenish dwindling drug pipelines, leading to an increase in acquisitions. 68 per cent forecast substantial acquisition activity within the next two years, with almost one-fifth (19 per cent) anticipating major activity within the next year. Almost two-thirds (65 per cent) believe the improved economic situation means the industry now has the confidence to go ahead with those mergers, with 63 per cent indicating that the climate for doing business and access to funding have improved in the last 12 months.

Gareth Williams, Partner at Marks & Clerk LLP, comments: "While it is encouraging to see that the pharmaceutical industry is slowly returning to health, our research merely indicates a shift in concern from the global economic backdrop and the subsequent funding drought to more immediate industry-specific problems. Pharmaceutical companies may now have confidence and the support of institutional investors to press ahead with acquisitions although at this stage, selecting the right acquisition targets will be critical to their future R&D success. This may explain the 84 per cent who believe the market is now confident to plough forward with strategic collaborations - they are determined to cherry-pick the best targets, while increasing reliance on patent term extensions buys them some vital time ahead of making a move. What is being predicted is not necessarily driven so much by desire as urgency."

Resolving the problems posed by the looming patent cliff is driving the industry's increased reliance on patent term extensions to squeeze out commercial revenue for as long as possible. 97 per cent believe that the industry's reliance on patent term extensions will continue or intensify as blockbusters near the end of their patent life. 87 per cent of respondents identify that this reliance is driven largely by dwindling drug pipelines at innovator companies.

Europe's regulatory and IP system falls further behind the US

Almost two-thirds (64 per cent) of respondents take the view that European policymakers are "essentially hostile" towards secondary patents for follow-on drugs. Over three-quarters (78 per cent) suggest that critics of secondary, follow-on drug development do not give sufficient recognition to the role incremental innovation plays in advancing medicine.

The research finds that 76 per cent of industry participants believe the Commission's continuing probe to be "concerning" for drugmakers, with almost a fifth (19 per cent) claiming that it will instil worry across the industry at large. 89 per cent of respondents argue that taking full advantage of the rights afforded in law by the patent system should not be classed as anti-competitive and is legitimate commercial practice.

Separately, nearly 6 in 10 (59 per cent) expect serious fines to be levied in the coming months by the European Commission - following in the wake of January's probe into patent settlements, where drug originator companies negotiate the entry of generic competition. The Commission has long taken the view that innovator companies are deliberately seeking to delay market entry.

However, despite the industry's concerns, the research suggests that there are some grounds for competition concerns. Just over half (51 per cent) state that it is generally fair to say that market entry has been improperly delayed, with 72 per cent believing that the Commission's intervention would likely result in earlier market entry by generics.

US optimism and Obama healthcare reforms

Europe's woes stand in stark contrast to the considerable optimism expressed regarding the US, with respondents seeing a more favourable environment for drug innovation across the Atlantic than in Europe. A clear majority of respondents (62 per cent) claim that the US intellectual property system has better managed to reward innovation and keep up with the changing needs of the industry than that in Europe.

Surprisingly, this optimism emerges despite the impact of Obama's recent healthcare reforms - now The Health Care and Education Reconciliation Act 2010 - where a clear majority reject the notion that healthcare reform will ultimately harm drug innovation in the US. Almost two-thirds (65 per cent) believe that margin reduction will be offset by increased sales or that the reforms will even benefit innovation in the long run. Overall, the findings display considerable confidence in the US regime, with 89 per cent of respondents believing lasting capital will be attracted back into the US market for the long term as a result of the reforms.

Furthermore, 88 per cent support the Act's provision for a longer period of data exclusivity for complex biotech drugs - the Act has provided 12 years of exclusivity - instead of the traditional protection for conventional pharmaceutical drugs of only five years.

Dr. Paul Chapman, Partner at Marks & Clerk LLP, comments:"The relative favourability of the US environment for drug innovation is a familiar concern to the industry, but what is most worrying is that recent developments could help accelerate that trend. Our respondents straightforwardly state that the US intellectual property system has better managed to adapt to industry needs. Not only does the US provide greater scope for patent extensions - an issue of increasing importance to the industry - but further reform is soon to be enacted which will improve patent quality and limit damages. These have traditionally been seen as weaker aspects of the US system and, as such, it is not surprising to see these reforms supported by an overwhelming 96 per cent of respondents. There is a clear fear that the gap in securing and exploiting innovation between the US and Europe may grow, and that the future innovations in medicine needed to promote health may be compromised."

For more information about the report and the research findings, contact the authors Paul Chapman at [email protected], Claire Irvine at [email protected], Mike Gilbert at [email protected] and Gareth Williams at [email protected]