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Effective Strategies to Combat a Patent Cliff

Issued: November 08 2018

The patent cliff refers to a situation where a company's revenues may "fall off a cliff" in view of the pending expiry of one or more patents of blockbuster products, as other companies may now replicate and sell the products at much cheaper prices, resulting in increased competition and an adverse impact on the company's bottom line.

 

How do companies mitigate the effects of the patent cliff? In this article, we will examine the different strategies employed in the pharmaceutical industry.

 

Creating Obstacles

 

A prominent method is through strategic patenting.An originator product can be protected by filing multiple patents at different timings. For instance, features other than the main active product ingredient, such as process and formulations, can be filed as secondary patents at later stages to create a patent cluster. In fact, the European Commission revealed in its Pharmaceutical Sector Inquiry that the ratio of primary to secondary patents was as high as 1:7.The effect of multiple filings is to create a patent maze, making it harder for the generic producers to determine a safe date to enter the market. Further, secondary patents may mean that generic products are not manufactured in the most cost-effective way, hence creating an obstacle to the generic producers entering the market. 

 

Another strategy for the originator company is to leverage on its manufacturing know-how and actively enter the generic market. This may be done through a wholly owned subsidiary; for instance, Novartis Group with its subsidiary Sandoz.The move would enable the originator company to capture a share of the generic profits and diversify the product portfolio in different markets at the same time. However, the potential conflict between original and generic products will need to be carefully managed in order to mitigate market cannibalisation and maximise the total revenue gained from both segments. 

 

Product Enhancement

 

Product enhancement is another popular mechanism to fend off the effects of the patent cliff. Examples of this include Pfizer’s Procardia XL® with its enhanced formulation and AstraZeneca’s Prilosec® with its improved drug efficacy. A slight variation of this is product bundling. As an illustration, Eli Lilly replaced its blockbuster drug Prozac® with a new patented product Symbyax®, by amalgamating the use of olanzapine and fluoxetine. Generally speaking, the enhancement should not be technical and trivial for the sake of obtaining a new patent. The effectiveness of this strategy depends on the market perception whether it is worth to spend more on the new product over the cheaper generic alternatives.

 

Brand differentiation can also be useful to target the price insensitive segment of the purchasers. The originator can maintain its competitive advantage through brand recognition and a strong public image. However, this strategy is effective as a marginal absorber of the impact of the patent cliff. Public hospitals and health insurers, which constitute a major demand segment, are more likely to favour generic medicines for cost reason. For instance, Malaysia has adopted the Generic Medicines Policy as part of its National Medicines Policy to promote the use of generic medicines at the expense of originator products.

 

Extend Exclusivity

 

Prolonging the period of enjoying patent exclusivity may lend extra buffering time for the originator companies. One tactic is to take advantage of legal provisions such as Supplementary Protection Certificates (SPCs) in the EU or patent term restoration in the US and Japan. Both avenues allow a maximum five years of patent extension to compensate for research effort or to recover time lost during regulatory review. Nevertheless, this strategy is territorially  restrictive and may not be available to all. For example, not only does Malaysia not have such provisions, it allows generic producers to submit their application for regulatory approval before patent expiration.

 

Another strategy is through agreements to withhold generic release. This may result from a pending court case, where generic producers challenge the validity of the patent or the originator company sues for premature generic release. This option is particularly feasible when the price difference between the original and generic product is substantial. For instance, the generic version of Pfizer’s Lipitor Atorvastatin Hexal® was priced 85 percent lower than the originator product upon its launching. An originator company can potentially exploit the wide gap and compensate the generic competitors the equivalent of what they would have earned, thereby preventing them from entering the market. However, such pay-to-delay agreement may violate competition law, such as in the Lundbeck case (2016) as decided by the EU Courts.

 

Conclusion

 

Early planning in anticipation of the patent cliff is of paramount importance. Originator companies will typically identify and execute different strategies which are compatible with their product, in order to diversify the risks and to successfully survive the patent cliff.


About the Author

Ms. Kherk Ying Chew (Partner, Head of Intellectual Property & Technology and Dispute Resolution practice groups) at Wong & Partners, member firm of Baker & McKenzie International 

 

Ms. Adeline Lew (Associate, Intellectual Property & Technology) at Wong & Partners, member firm of Baker & McKenzie International

 

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