Diving off the Patent Cliff

In 1960, a Harvard Business School professor turned the business world upside down by asking a simple yet profound question - "What business are you in?" Curiously, most businesses answered the question incorrectly. For example, Hollywood was not in the movie business; it was in the entertainment business or in the business of giving people a good time. Theodore Levitt, the guy who later coined the term "globalization", said quite rightly that businesses need to define themselves based on what customers need and not according to what they produce.

Extending the same logic to pharma companies let me ask the question again - "What business are pharma companies in?" Producing drugs? No. Pharma companies are in the business of saving and prolonging life. This answer brings a fresh perspective and broadens the scope to include not only "blockbuster" drugs, but generics drugs as well as health and wellness programs that can prolong life. So, when big pharma companies are losing margins, who is gaining? Big pharma's fascination with the high risk and high return business of big drugs has led to the rise of competitors from unknown corners that turn a profit from generic products. From a patents' perspective, Evaluate Pharma's World Preview 2018 report predicts that more than $290 billion of pharmaceutical sales is at risk from patent expirations in the period 2012-18. So is it a good thing or a bad thing? There is no answer to this as the issue is not clear cut. While patent expiry definitely hurts pharma companies and puts tremendous pressure on them, it also allows them an opportunity to revisit their business model.

From a financial viewpoint, pharma companies would have continued to grow had they not reinvested the gains made from big drugs. But should that mean that pharma companies should stop investing in R&D? While some of the R&D results would tempt us to say yes, new drugs and advances are crucial in the long run. So how do pharma companies meet all the constraints and still make a profit?

Various strategies have been formulated to tackle this issue. Mergers (Pfizer-Wyeth), expansion into generics through acquisitions (Sanofi-Zentiva), partnering with innovative companies (GSK-Five Prime Therapeutics or academia (Gilead-Yale school of Medicine), investment in new sources of revenue (animal health) and expansion into new geographies (emerging markets) are just some of them. After all, collaboration and consolidation help achieve economies of scale. But is this enough, or are we missing the big picture?

By itself, the end of a patent cycle is not as big an issue if we look at it from a seasonal industry perspective. The real issue here is the falling R&D productivity. But this is an issue all innovation-centric industries have to live with, be it pharma, consumer electronics or technology itself. While the probability of success of a new medicine or even a phase III drug is difficult to ascertain, entering the generics market would help strengthen revenues.

About the Author

Shantha Maheswari heads the strategy function for Health care life sciences business unit in Wipro Limited. She is responsible for Strategy planning and execution, industry solutions, partnerships. A business professional with over 16 years work experience across geographies and IT industry.

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