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Revenues fall off the patent cliff, rain down on generics firms.

When patents run out, generic pharmaceutical companies reap the benefits.

Photograph: Getty Images

When we think about the patent cliff, an image along the lines of a massive waterfall, with companies’ revenues in free fall comes to mind. What we usually forget to consider, though, is that the waterfall is nourishing a fertile, green valley below. For while big pharmaceutical companies are scrambling to bolt-on smaller biotechs with marketed drugs to protect themselves, generics manufacturers are reaping windfall profits. While the industry has been nervous about the patent cliff for years, it is turning out to be a blessing in disguise. Patients are benefitting the most by gaining access to the innovative drugs of the past few decades at generic prices. Biotech companies are benefitting from a frenzied M & A environment, and generics companies are reporting record profits. Big pharmaceutical companies, meanwhile, have been forced to respond to the challenge by refocusing their attention and honing their business strategies.

As an example of this phenomenon, it’s worth looking at the biggest loss of the edge of the cliff, Pfizer’s cholesterol drug Lipitor. The company recently released its first quarter earnings, and reported Lipitor sales of $1.4bn, a 42 per cent plunge from the same period in 2011. The drugmaker can hardly complain, though, as the drug recorded cumulative sales of $128bn for Pfizer through the end of 2011. Meanwhile, Watson Pharmaceuticals was the first to begin selling generic Lipitor in November, 2011. As a result of strong generic Lipitor sales, as well as other generic launches including generic versions of Concerta and Lovenox, Watson’s first quarter revenue increased 74 per cent to $1.5bn, compared to $877m for the corresponding period in 2011. Increased sales drove an 87 per cent increase in net income, from $112m in Q1 2011 to $209m in 2012. As a result of its newfound financial heft, Watson was able to expand its geographic reach with the purchase of the European generics firm Actavis. Watson announced the €4.25bn ($5.6bn) acquisition was announced on April 25, and should lead to 2012 pro forma revenue of $8bn for the combined company in 2012, compared to $4.6bn for Watson in 2011 and $6bn in 2012 based on annualized first quarter revenue. Mylan, another major generics company, reported an 18 per cent increase in earnings for the first quarter compared to 2011, to $0.52/share from $0.44/share. This gain was due to a 9 per cent increase in revenue from $1.45bn in Q1 2011 to $1.58bn in 2012.

Pfizer and other big pharmaceutical companies, meanwhile, appear to be on course to successfully navigate the rapids. Although Pfizer saw its earnings drop 19 per cent in the first quarter compared to 2011, there are bright lights on the horizon. The FDA is set to decide on its rheumatoid arthritis drug tofacitinib by August 20, and the drug has the potential to generate up to $1.5bn in revenue before the end of 2012. The company has another drug before the FDA for review, with a decision expected by June 28. Eliquis was co-developed with Bristol-Myers Squibb for the prevention of strokes in patients with arterial fibrillation, and also has blockbuster potential. Finally, Pfizer is flush with cash after selling its infant nutrition unit to Nestle for $11.9bn, and ready for another round of acquisitions that could range from small, bolt-on biotech purchases to another pharmaceutical mega-merger.

The biggest development regarding the patent cliff will be watching large pharmaceutical companies’ attempts to maintain growth in the face of expiring patents. But regardless of how whether Big Pharma stays atop its mountain or goes over the cliff, generics firms will continue to reap the profits of major pharmaceutical patent expirations.

Dr. Jerry Isaacson is the head of GlobalData healthcare industry dynamics. Their website can be found at www.globaldata.com.