The US Supreme Court will soon hear a case which will
determine whether "pay-for-delay" agreements between drug
manufacturers violate anti-trust legislations. These "reverse
payment" agreements enable patent holders to pay generic drug
manufacturers to delay the launch of generic versions of their
drugs. This runs contrary to normal practice, where patent
holders sue violators and then seek damages, in some cases
through an out of court settlement.
The companies standing to benefit in this case were
Watson Pharmaceuticals, Inc.
), Paddock Pharmaceuticals - now owned by
) - and Par Pharmaceuticals, Inc. - which was acquired this year
by private equity firm TPG Capital. Solvay Pharmaceuticals Inc,
now owned by
), was paying them to delay launch of a competing drug.
These companies received annual payments of between $31
million to $42 million in order to delay launching generic
versions of AndroGel until 2015, when Solvay's patent on the drug
would expire. Such an agreement would have helped Solvay maintain
annual profits to the tune of $125 million.
The Federal Trade Commission, which is the appellant in the
case, has said that 28 such deals concluded last year have cost
consumers and taxpayers a minimum of $3.5 billion in
synthetically inflated prices.
That pharma giants are resorting to such measures comes as no
surprise when one considers the fact that 2012 has seen an
industry-wide decline in drug sales. According to Ernst and
Young, combined sales of the leading global thirteen drug firms
will decline by nearly 4% from around $557 billion in 2011.
Expirations of drug patents are a major factor. A "patent
cliff" is characterized by a steep fall in revenues when one or
more of the firm's best-selling products lose their patent
protection. The most grievously affected firm in terms of patent
expiration has been
), whose patent on blockbuster drug Lipitor expired in 2011.
Subsequently, sales of the drug declined 42% during the 2012's
first quarter compared with the same period a year ago.
Eli Lilly and Company
) are among other firms to be affected by this phenomenon. Sales
have dropped by 56% and 25% for their drugs Zyprexa and Seroquel
IR during the first quarter of this year following the expiry of
their patents. The march of generics continued through the first
nine months of the year. As a result, the industry as a whole
finished with lower sales for the year compared to 2011.
The good news is that the end of 2012 will also mean an end to
the current patent cliff, which has lasted for nearly eighteen
months. By next year, the worst will be over.
Meanwhile, despite such conditions, share prices of industry
Merck & Co. Inc.
) and Pfizer have risen 25% this year -- nearly twice as much as
the increase in the S&P 500. Drug-makers have delivered
steady earnings and large dividends, even while taking a hit from
This is because they have spent these trying times reorienting
their focus. Historically good at marketing and distribution,
pharma companies have spent more time on cost reduction
initiatives and have invested in research in a big way. The
emphasis on research has resulted in large investments in
According to CLSA, a unit of French bank Credit Agricole, by
2012, six of the top twenty drugs will be biologics. This will
probably change the game in favor of patent holders, since it is
much tougher to produce "biosimilars," the generic versions of
Though generic manufacturers will lose many opportunities as a
result, some of them are already readying strategies to cope.
Teva Pharmaceutical Industries
) and Watson Pharmaceuticals have resorted to inorganic growth.
Teva acquired Israel-based Cephalon for $6.5 billion last year,
while Watson purchased Actavis for $5.6 billion in October this
In summary, the loss of patent protection has been a major
factor which has propelled changes in the way the industry
operates. Companies have radically changed their business models
and reoriented their focus in response to the current situation.
And by now, the worst is most likely over.
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