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Weekly Insights #27- Upcoming Patent Cliff; Opportunities & Risks in Indian Stocks

Innovation, IP and Patents are among the strongest frameworks for sustained & highly profitable earnings growth. And pharma is one industry which at its core is driven by these.


But this reliance on innovation & patents have also given birth to the phenomena of large Patent Cliffs. Patent Cliffs are situations wherein companies are on the verge of seeing patents expire on some of their key products that contributes substantially to their business.


The last major patent cliff faced by pharma industry was in the early part of the last decade- starting from 2010 to ~2015; wherein ~$100 billion worth of branded products saw their patents expire over a short period of time (majorly in 2012 & 2013).


The following chart provides a good reflection of how it affected the overall pharma industry in the US-


Some of the major companies that were affected were the likes of Pfizer which saw some of its key products like Lipitor, Protonix and Geodon lose patents over 2010-2012. These products together contributed ~40% of company’s sales at that time. Pfizer’s quarterly revenues fell from ~$17 billion in 2010 to ~$11 billion in 2014.


This erosion in business post patent expiry is obviously a result of entry of generic products at prices as low as 80-90% of existing product price. This fierce competition and sharp erosion post patent expiry is the reason why pharma companies have always fought hard (including using scrupulous tactics) to protect their patents & exclusivity.


The following is a very good article on how Celgene (now part of BMS) tried to protect patent & exclusivity on its blockbuster drug- Revlimid (the drug behind Natco Pharma’s growth story)-


You can access our research report on Natco Pharma here-



This patent cliff of 2010s was a boon to Indian Pharma Industry (which is a generic driven industry); it grew tremendously during this period. It was during this period that the entire Para-IV & FTF business model evolved for the Indian pharma companies.


And there was an extremely strong bull run during this period in the pharma sector; Nifty Pharma went up 4x during this period of 2010-2015. Larger companies like Sun Pharma & Lupin went up 7-8x, whereas smaller companies like Natco and Ajanta Pharma went up 30-100x.


Sun Pharma’s US revenues went up by >10x during this period of 2010-2015;


But once the overall base for these companies grew and the incremental patent expiries faded (along with increased competition) and with stricter regulatory compliance, the sector went through a rough patch post 2015.


Nifty Pharma index reached its 2015 peak only in recent years; that is nearly a decade lost. Sun Pharma’s US revenues recovered to 2015 peak only in the last year.


The Pharma industry is now entering into another major patent cliff period wherein >$200 billion worth of products are expected to see their patents expire over next 5-years. Some reports indicates that during this patent cliff, Top-10 global pharma companies will see products contributing ~50% of their sales lose patent & exclusivity.


The following charts provides insights on some of the major products to face patent cliff along with their current market size-



BMS (Briston Mayers), Amgen and Pfizer are the major companies that are expected to impacted the most.


So, will this upcoming patent expiry be a catalyst for another upcycle for Indian Pharma industry?


Well, there is opportunity for sure; however, there are some major differentiations this time vs the last patent cliff-


1. The size of business for most Indian generics companies in the US is much higher than what it was in 2010. Sun Pharma’s revenue from US in 2010 was ~Rs1000 crores, now it is ~Rs14000 crores; same is the case with most companies.


2. The overall competitive intensity in the business has increased multi-fold not only from Indian companies but also from international companies and even innovators have come out with their generics business divisions. And this has reflected in a much sharper pricing erosion in generics pricing post 2015.


3. A larger part of upcoming patent cliff is in Biologic drugs and not smaller chemical molecules. Some of the major products like Humira (~$19 billion), Keytruda (~$15 billion), Eylea (~$9 billion) etc are all biologic drugs.


Biologic medicines are large, complex molecules that are made in living cells grown in a laboratory. They are often 200 to 1,000 times the size of a small molecule drug that are largely made from synthesis of various chemicals.

Nearly all Indian companies (except for Biocon) have under invested or not invested at all in developing generic versions of these drugs- Biosimilars. This has been on account of long & expensive process of developing these products vs smaller molecule generics.


Biocon is the only Indian company to have material exposure to 1st wave of biosimilars (Biologics that lost exclusivity/patents till now) with ~8-10 products and have a much larger pipeline for the 2nd wave of biosimilars (products that are expected to go off-patent over the coming part of this decade); with total disclosed portfolio of 20 products.


Lupin is the only other Indian company to have some exposure to 1st wave of biosimilars (~3 products) but is already late; rest no other Indian company has any exposure to 1st wave and even the exposure to 2nd wave is quite low compared to Biocon.


In fact, Biocon has one of the largest biosimilars pipeline globally. Which is why it is one of the prime candidates that can benefit out of this upcoming patent cliff. Biocon has stated that its product pipeline will cater to an end market worth ~$100 billion over the coming decade.


Biocon’s placement in the overall biosimilar’s space requires a separate post all-together and is a topic for a later time.


But we had shared some insights on Biocon in an earlier post here-


Another set of companies which we believe would be a beneficiary of this patent cliff would be small, aggressive & niche generics companies. Natco is one that I know of.


Natco’s product pipeline has some of the major products of the upcoming patent cliff like Eliquis (~$9 billion), Imbruvica (~$2 billion; sole FTF), Ozempic (~$4 billion; sole FTF) and Pomalyst (~2.5 billion).


But Natco would also be on the negative side of this patent cliff with its current major product of Revlimid which will go off-patent in 2026.


Read the following resources to understand the whole upside & downside from Revlimid for Natco-




Another company that will face challenge from the coming patent cliff would be Suven Pharma. Suven is a CDMO manufacturing intermediates for patented products of innovators. Suven’s breakthrough came in FY14 when its customer (innovator pharma company) successfully secured approval for some new products (3 products) for which Suven had been supplying raw materials for. And since then, Suven has been supplying intermediates for these patented products.


But these end products have patent protection only till 2025; and thus, in the upcoming patent cliff, the end products will become generic which would most likely lead to a situation wherein the innovator will move the manufacturing to a low-cost producer and that would lead to loss of business for Suven.


Though Suven have stopped sharing how much these products contribute to its revenues since Q3FY20; our rough estimation is that they contribute ~30-35% of Suven’s overall business and these revenues could go down substantially.


You can read our research on Suven including how it was a great optionality setup in 2019 here-



Another example of a company that will face challenge due to a patent expiry (not in the Pharma Industry) is PI Industries. PI is a manufacturer of patented agro-chemicals for innovator companies. Over the last few years, the company has seen a very impressive performance on the back of a key product- Pyroxasulfone, which it manufactures for its customer- Kumai Chemicals.


Some reports indicate that this single product contributes ~50-60% of PI’s exports business; so ~40-45% of its overall business.


This product has already started seeing patent expiries in some of key markets globally and is expected to see entry of generics in the major market of US (~50% of sales for this product) in 2025.


Though in agro-chemicals, the competition & price erosion from generics historically has been much lower as compared to the pharma industry and thus the overall impact on PI would be muted; but more than anything, it can affect the growth rate of the company, which for last many years has been strong & driven by this product.



In summary, Patent Cliff is a major event in Pharma Industry and the patent cliff of the last decade was a major catalyst for the growth of Indian pharma companies. We are about to see another such patent cliff over the coming years and the same will have material outcomes for some of the listed companies like Biocon, Natco and Suven Pharma.




That’s it for this week, new insight coming up next week. So stayed tuned!




 

Disclosure

Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.


“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”


“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”


“The securities quoted are for illustration only and are not recommendatory”



Stock specific investment disclosure:

Biocon- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Natco Pharma- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Sun Pharma- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Ajanta Pharma- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Suven Pharma- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

PI Industries- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Lupin- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

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