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Patent cliff is a colloquialism for the sharp decline in company revenue due to patent expiry of their one or more leading products, This article looks at three major biotech companies facing significant revenue loss in 2013 due to patent expiration - Eli Lilly & Co (LLY), Biogen Idec Inc. (BIIB) and Johnson & Johnson (JNJ).

The patent cliff threat

Between now and 2018, the world's largest companies are at risk of losing $290 billion in revenue due to patent expirations. At the same time, there are many firms that wait for such expiration as they thrive by manufacturing generic alternatives to drugs that have gone off-patent. Competition from generic manufacturers resulted in a revenue loss of 70% to Sanofi (SNY), the French biotech giant, when its blockbuster drug Plavix, a heart thinner, went off-patent.

Drugs going off-patent in 2013

This year, nearly 120 companies will be losing patents of their drugs, drugs that currently account for annual sales of approximately $29 billion. Eli Lilly tops the list of companies that will lose the maximum revenue ($3.65 billion) this year due to patent expiration.

Eli Lilly:

Two of its top selling drugs, Cymbalta and Humalog will go off patent this year. Cymbalta (duloxetine) is a serotonin-norepinephrine reuptake inhibitor (SNRI) used for treating major depressive disorder and generalized anxiety disorder. Cymbalta, whose patent expires on December 11, 2013, accounted for $4.9 billion out of Eli Lilly's total sales of $22.60 billion in 2012.

Humalog (Insulin lispro), a fast acting analogue of insulin engineered through DNA technology, was first approved in 1996 and was the first such drug to enter the market. The patent for Humalog expires on May, 2013, which may cost the company a $2.52 billion loss in annual revenue.

Earlier this year, Eli Lilly was hit hard by the generic knockoffs of Zyprexa. However, the company adopted a policy of raising prices and cutting costs, a strategy that was instrumental in restricting the loss in sales to 51%. The same strategy was responsible for the company beating market estimates by 8.57%. However, revenue for the quarter at $5.6 billion was slightly below analyst forecast.

Biogen Idec

Biogen's major drug that goes off patent is Avonex. This is a drug in the interferon family used to treat multiple sclerosis (MS). Global sales of the drug in 2012 were in the range of $2.9 billion. Avonex's revenue line forms a major portion of the company's total revenue of $5.52 billion. Patent expiry of the drug, expectedly in December this year, is likely to be a major jolt for the company.

However, this expiry is not as simple because Biogen had noted four years earlier that it had extended the original 2013 expiry date to 2026. Biogen's position on this is being challenged. Whereas the company says that its position on the patent is secure, analysts believe that sales will start suffering from this year itself due to expected arrival of new MS drugs.

On its own, Biogen's new MS drug Tecfidera (dimethyl fumarate), was approved in March this year. It is a new oral therapy for the treatment of relapsing forms of multiple sclerosis, including the most common form of the disease, relapsing-remitting multiple sclerosis. Tecfidera holds a lot of promise for the company as it is less expensive than Novartis' (NVS) MS drug, Gilenya. With revenue expected to reach $3.25 billion by 2017, the company's new offering will cover more than what it loses on Avonex going off patent.

Johnson & Johnson

Johnson & Johnson is another big pharmaceutical company that is expected to suffer a revenue loss amounting to $2.27 billion on account of two patents expiring in 2013. Aciphex, the heartburn medication that the company manufactures in partnership with the Japanese company Eisai (OTC:ESALF), is likely to lose $860 million once it goes off patent. This is a small dent in a company of the size of Johnson & Johnson, with total annual revenue of $67.23 billion but Eisai's $1.1 billion revenue loss will have a great impact as the company has only six drugs selling in the U.S.

However, Johnson & Johnson's other drug, Procrit, which goes off patent in August this year, had global sales of $1.41 billion in 2012. Procrit, is used for treating patients suffering from anemia due to kidney failure, HIV and cancer. The drug, along with another anemia drug from Amgen Inc. (AMGN), Epogen, has undergone several label changes due to side effects of stroke, blood clotting and even death.

Cushioning the fall from the patent cliff

Biotech companies facing a patent cliff often look for new products to supplement their drug development activities and also for providing their sales workforce with more drugs to sell.

One of the measures that biotech companies often undertake is to consolidate in an effort to replace drugs that are about to expire with other potentially best seller drugs. This was one of the major reasons why there was a big surge in M&A activity in the industry in 2012. According to a Reuters report, the volume of biotech mergers and acquisitions from January to August 2012 was $25 billion, the highest since Roche's (OTCPK:RHHBF) $46.7 billion takeover of Genentech drove volumes to $54 billion in 2008.

The surge in biotech M&A activity in 2012 is a major indication that the sector is well aware of the danger that lies ahead. Large drug makers are cash rich and also have easy access to credit, which allows them to make aggressive takeover bids. Some of the big pharmaceutical giants may also consider separating their segments the way AbbVie (ABBV) was split from Abbott Laboratories (ABT) for cushioning the fall from the patent cliff.

Another notable factor is presented by the fact of rising rates of FDA approvals. This indicates that companies are again spending big money and lot of time on R&D and there will be more products to replace the blockbuster drugs. This could be one of the reasons why analysts are predicting an 8% growth in worldwide sales.

Conclusion

It is difficult to generalize the effect of approaching patent cliff. A revenue loss of a couple of billion dollars may not be a big deal for Johnson & Johnson and Novartis, which also suffers a revenue loss on account of patent expiration this March for its two drugs, Zometa and Reclast. These contributed roughly $1.87 billion to the company's total revenue of $57.56 billion in 2012.

However, it can have a great impact on a smaller company like Biogen. Smaller companies may also find it difficult to fund their research and development activities. In such a scenario, all that they can hope for is to get noticed by a bigger player and sell themselves.

My take on the patent cliff is that investors need to be cautious and pay special attention to how a company plans to fill the revenue hole. Investors also need to be aware that companies tend to hide patent cliff related bad news by giving them a positive spin.

Source: 3 Bio Companies Facing The Patent Cliff