Pharma’s $200B “Patent Cliff” Problem Is Biotech’s Opportunity - The Average Joe


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    Pharma’s $200B “Patent Cliff” Problem Is Biotech’s Opportunity


    March 8, 2023

    Something big is brewing in the pharma-biotech industry. We’ve seen it before, and it’s led to some impressive sector returns.

    Scared of heights? This one’s a 456ft Kingda Ka that’s got the pharma execs on high alert.

    The pharma industry is reaching a major patent cliff. What is it, and why is this a major opportunity for biotech investors? First, let’s get you up to speed…

    Time for a 3-point history lesson

    1/ When drugs are approved, the company is granted a 20-year patent — before competitors can enter with cheaper generics.

    2/ Between 2012-2013, patents on several blockbuster drugs expired — exposing pharma companies to a large sales drop.

    3/ To replenish lost sales, these companies went on a buying spree — acquiring smaller biotech companies with promising drugs.

    That brought significant returns to the market. Between 2012 and 2016, the iShares Biotechnology ETF (NASDAQ:IBB) rose 220% — nearly 4x that of the S&P 500’s 62% increase.

    Patent cliffs are scary (for pharma execs)

    Following generic entries, “80% of the market can be gone in 30 to 90 days,” per a life sciences intellectual property specialist.

    Here’s a chart of upcoming drug expiries and their projected sales (dotted line):

    We’re about to enter an even larger “patent cliff”

    Through 2030, over $200B in annual revenue is at risk, with EY’s health sciences market leader Arda Ural saying, “this is of tectonic magnitude.”

    Big pharma is left with two options: Develop new products internally or buy smaller biotech companies that have drugs near FDA approval.

    And here’s why a wave of acquisitions could be coming:

    • Pharma giants are flushed with cash.
    • Biotech stocks have fallen so low they’re cheaper than they’ve been in many years.
    • Smaller drugmakers are running out of money and are left with few options.

    But things are a bit more complex this time. Last year, Biden doubled down on efforts to rein in drug pricing – which could impact the profitability of these industries.

    Dive deeper: Watch our YouTube vid covering the history and upcoming problems with the biotech industry.

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