Patent and exclusivity expiries

The more profitable a drug, the faster generic manufacturers move to produce a generic version, and the more aggressive they are likely to be in challenging any weak patents — and trying to pull down any other barriers to entry.

There are a number of methods a company can use to try to retain at least some of the revenues lost on patent expiry:

  • multiple patents on a drug, typically separate patents for the active chemical entity and the formulation,
  • introducing an improved version covered by a fresh patent close to expiry,
  • introducing a new drug to replace it close to expiry.

Only the first of these can actually prevent generic competition, and it is the least likely approach to succeed. Generic manufacturers can, these days, be quite aggressive about challenging dubious patents. Patents employed in this particular way are quite likely to be dubious.

An obvious question is why generic manufacturers do not simply use a different formulation. The reason is that they would then be unable to show that the generic is clinically equivalent and would therefore be forced through the entire, expensive, clinical trails process. This expense cannot be justified by the smaller margins on generic drugs.

The success of the tactic of introducing new versions clearly depends on whether prescribers can be persuaded to switch to the new version in preference to the generics. Launching before the generic versions are able to can help it become established and this is a common pattern.

New formulations of drugs are often successful even if the improvements are fairly minor: a particularly common improvement (because it is cheap and easy) is extended release.

The same applies to new drugs that are sold as a successor to the drug about to go out of patent. The advantages of having the sales force that was selling the old drug, and the ability to clearly place it in the market as a natural successor, are likely to help a great deal in doing this.

The initial sales data following the introduction of improved or replacement drugs is clearly very important, as is the rate of decline following the introduction of generics. It is difficult for any one investor to act on this information in a more timely manner than the market, but, at the very least, investors should be aware that share prices may be volatile if an important (to the company) drug is facing patent expiry.

Of more use may be data on the efficacy of the new drugs, which will help assess the extent to which they will successfully stave off generic competition. The question is, how much more can they sell for than the generics?