Record number of patent expiration's could slash pharmaceutical industry profits in half

Traditionally, one of the largest and most profitable industries in America has been pharmaceuticals. Pharmaceutical companies are interesting in that they make products that no one wants, but hundreds of thousands of people must have to survive.

The pharmaceutical industry as we know it is due for some big changes. Last month, DailyTech reported that former Intel CEO Andrew S. Grove ripped the pharmaceutical industry for its underperforming research operations. The Wall Street Journal is reporting that high profile medications coming off patent between now and 2012 will result in a loss of about $67 billion USD in income for top U.S. pharmaceutical companies. That amount is about half what the pharmaceutical industry made in combined sales during 2007.

Few will feel sorry for the declining sales of these pharmaceutical giants since many Americans are literally forced to decide between food and their life saving medications each month. Medications moving from patented status to non-patented status allow much lower cost generic medications to come to market.

The Wall Street Journal says that 2010 could be the worst year for Pfizer when it loses its patent for the drug Lipitor -- the most successful medication ever. Drugs are given a patent of 20 years where no other manufacturer can legally make a generic version of the medication. The catch is that it can take large amounts of that 20-year period to get the drug to market. However, drug companies can reap profits on patented medications in the 90% to 95% range.

Three high profile medications from Merck & Co have patents expiring in 2012 including Fosamax, Singulair and Cozaar. Those three drugs combine to provide 44% of Merck’s revenue. To continue operating many of the pharmaceutical companies, like Merck, are diversifying and buying biotech companies, which are seen as the next big area of breakthrough for medications and disease treatments. The reason biotech firms are popular purchases for pharmaceutical giants is that there is currently no U.S. regulatory pathway for generic biotech drugs, effectively allowing biotech drug inventors to sell a brand only product indefinitely until new legislation is mandated.

Many pharmaceutical companies are cutting staff to maintain profits with companies like Eli Lilly & Co announcing it will cut 10% of its workforce and Bristol-Myers Squibb Co. announcing it will cut about 4300 jobs and close 27 manufacturing facilities. Some drug makers are also looking to outsource the manufacture of their medications overseas where the costs are much lower. Such costs saving measures are unlikely to mean lower drug prices for U.S. consumers where the brunt of the cost of development of a medication is made back by drug makers.

The U.S. is one of the few developed nations that doesn’t mandate medication prices. This is the reason so many U.S. consumers flock to Canadian pharmacies where they can get the same medications they would purchase in the U.S. at a fraction of the cost. Drug companies have spent millions lobbying congress to prevent the importation of drugs from Canada, not because of safety concerns but because of profit loss. Canada’s government negotiates the price for medications sold nationally making them significantly cheaper than buying the same medications here.

The fear for many is that the dropping profit margins will result in less research and development funding, leading to less new drugs being developed. This is not only a concern for disease conditions that have few or no treatments, but a concern for more common conditions requiring antibiotics. Antibiotics that worked well in the past are beginning to lose effectiveness as bacteria and viruses mutate into forms that are resistant to current antibiotics.

The FDA says it hasn’t changed the way it approves drugs to make requirements stricter, that drug companies simply don’t submit as many drugs for approval.

“Then they pop up and say ‘Hello, surprise! Give us your money or we will shut you down!' Screw them. Seriously, screw them. You can quote me on that.” -- Newegg Chief Legal Officer Lee Cheng referencing patent trolls
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