Pharmaceutical Innovation: The Patent Cliff

With the fiscal cliff negotiations over for now, we turn our attention to the patent cliff. A lot of industry watchers and participants often discuss how important pharmaceutical innovation is and how patents are the key protection to garner income to cover the high costs of drug development. In the past, we’ve looked at patent-driven innovation by country and the shift from patent to generics. But why do we even need the patent system? What kind of returns are being seen on patents?

In a recent study by Deloitte,¹ it was found that the investment into a new drug (and resulting patent) yielded positive revenue, generating “more value from product commercialisation than they have lost from late stage product failure” of other drugs. The bad news is that innovations need to continue to be developed at a constant rate, which is difficult when late stage failures are high. The study found that “it is costing 21% more to develop a new pharmaceutical product on average compared with last year, yet the commercial value of these assets is no greater than last year.”

The innovation “problem” is that it is costing more to develop less effective drugs, not that there are fewer drugs being generated. Light and Lexchin tracked the number of approved new drugs in the past 60 years and the current rate is in line with historical data, with the exception of a large, politically-driven spike in 1997.² Pharma is not only spending more money to develop the same number of drugs, but they are creating drugs that provide smaller medical impact. Pharmaceutical innovation doesn’t carry the same benefit to society as years ago.

“Out of 218 drugs approved by the FDA from 1978 to 1989, only 34 (15.6%) were judged as important therapeutic gains. Covering a roughly similar time period (1974-94), the industry’s Barral report on all internationally marketed new drugs concluded that only 11% were therapeutically and pharmacologically innovative. Since the mid-1990s, independent reviews have also concluded that about 85-90% of all new drugs provide few or no clinical advantages for patients.”

The study also found that “although Pfizer lost market exclusivity for atorvastatin, venlafaxine, and other major sellers in 2011, revenues remained steady compared with 2010, and net income rose 21%” and that marketing outspent new molecule R&D by 19x (25% vs. 1.3%). Effective marketing of a drug can dampen the effect of the patent cliff.

This brings up the idea that maybe the patent cliff isn’t a company killer. Considerable amounts of money will be spent marketing a drug - patent or no patent. If pharma is incentivized in other ways to create more clinically advantageous drugs for the people, it would improve outcomes, lower health costs, and most importantly (to the pharma), provide an easy promotional launch point. Pharmaceutical innovation can be rewarded by initiatives like the Sanders Senate bill to introduce medical innovation prizes,³ or possibly a sort of marketing “patent” that only allows pharma to publicly market a new drug in the first couple years while still allowing the existence of generics. Either way, there is a lot to improve in the drug discovery process if we hope to see better outcomes and cheaper drugs in the future.