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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline

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June 4, 2009

Perpetual Patents: A Nasty Thought Occurs

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Posted by Derek

A colleague of mine read the "Perpetual Patent" item below, and had a thought of his own. "If I were the head of a company that just discovered something like Lipitor", he said, using the example that the Xconomy piece used as well, "I'm probably going to fire all the early stage research people. Who needs 'em? We've got a never-ending patent on a huge drug".

And you know, I hate to say it, but I can't completely rule that one out myself. Not every management team would do this, but some would indeed transform the place from "Company That Looks For New Drugs" to "Company That Found One And Will Now Live Off It For As Long As Possible". After all, the R&D part of the operation is, most of the time, a huge drag on the bottom line. You only keep it around because you need it to come up with something that'll bring in the revenue eventually. So what happens if you decide that your current level of revenue is pretty good - and would look even better if you got rid of that big cost center?

Comments (18) + TrackBacks (0) | Category: Business and Markets | Patents and IP | The Dark Side


COMMENTS

1. anon on June 5, 2009 7:08 AM writes...

Like, they aren't doing this already?

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2. alig on June 5, 2009 7:13 AM writes...

That is the business model of most small pharma companies.

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3. Mark Spiegel on June 5, 2009 7:13 AM writes...

Any company (for instance, Microsoft with its Windows OS) could do this. The danger is that the world changes and people are always inventing newer and better stuff, and if you decide to milk your business like a no-growth cash cow, you will eventually enter a period of decline. Meanwhile, there will be plenty of other companies out there trying to figure out a way to "steal your milk."

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4. RandDChemist on June 5, 2009 7:56 AM writes...

Then people will start to display "strategic incompetence".

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5. HelicalZz on June 5, 2009 8:01 AM writes...

Derek speculates that perpetual patents could be the death of R&D, but I think it would probably be otherwise. It may diminish, but the incentive for growth by addition of new products would never go away, though new business models would certainly emerge.

With the Lipitor example, what we all saw play out was a massive wave of revenues lasting a good many years. This enabled Pfizer to expand out R&D as the wave grew, and of course begin cutting it back as the wave crested. This should have surprised no one, and for all the lament of R&D cutbacks of late, I don't recall the same cheering for that revenue driven expansion earlier in the decade.

A (theoretical) perpetual revenue stream would likely stabilize the R&D atmosphere, though I expect at a lower level (5% of sales vs. 10-14?). Some would cheer this, others (me) might project lowered R&D efficiency due to the loss of the creative destruction of the boom - bust process. A lot of talk goes into the efficiency of R&D within specific firms, and how it isn't impressive, but across the industry as a whole it measures very differently with alternate metrics.

So, I think R&D would survive, but in a less efficient form.

Zz

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6. Rockford on June 5, 2009 8:06 AM writes...

Let me preface this by saying I am a chemist by profession and worked at Pfizer for a few summers as an intern. I am no longer affiliated with any pharma company.

I second Mark's general comments. There's never a guarantee that a drug like Lipitor will continue to sell well for the life of the patent (in this case, forever). Hopefully, if the pharmaceutical industry is reasonably well funded we will continue to discover better and safer treatment as the level of knowledge and technology increases. Therefore, Lipitor's product life span should be limited in that respect.

I don't believe anon is correct in any way (at least what from my personal experience. Discovery (biologists and chemists who, well, 'discover' the drugs) is usually hit least hard by layoffs. After all, you can sustain a company like Pfizer without a pipeline of research. I am not at all saying they don't get hit, they do, but they are the least flexible arm of any given company.

Finally, I think this has an interesting effect. If Lipitor was discovered and the chemists and biologists responsible for the discovery were then fired we could potentially realize the oft used and ignorant (I'm very opinionated on this) argument that "Pills only cost pennies to make so why are we getting charged so much?" A costs-based pricing approach would allow the company to lower the price considerably (to say nothing of price-based costing). The obvious drawback is less research getting done and less diseases being cured in the long run by the particular company (although I believe the incentive industry-wide to discover would be higher compared to the system we have today). The chemists would find a new place to work.

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7. Rev. Howard Furst on June 5, 2009 8:24 AM writes...

Lest we forget, Bruce Roth, the chemist who first synthesized Lipitor, was in fact laid off from Pfizer in 2007. He's now at Genentech.

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8. Anonymous on June 5, 2009 8:33 AM writes...

Rockford - It is quite clear you are no longer affiliated with any pharma organisations from the content of your post. You are correct that a research pipeline is required, but these days that tends to be filled by acquisitions/alliances. Sadly this makes discovery and early development most exposed, especially as they tend to be most expensive.

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9. Alex on June 5, 2009 9:06 AM writes...

What would happen if the patent expiration clock for drug patents started only at FDA approval? The rationale would be that unlike other patents the revenue could only be generated after that occurs. What would the pro and con of that be?

Or if it was extended only by ten or twenty years or so?

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10. CMCguy on June 5, 2009 9:30 AM writes...

It is indeed a scary thought, partly because there are likely some "MBA types" that would do this.

As eluded to by #2 alig is does seem to happen. Not sure it is a formal model so much as the reality faced by small organizations that have to transition from Discovery to Development. Most often the "old" pieces and personnel can not be interchanged so need to add new functions and individuals. It a hard transition as I have been through it a couple times. Contrary to some statements the "R" part, although expensive and uncertain, is much less costly than the "D" functions (1 small Clinical Trial can be greater than 1-2 years Research Dept Budget). So when faced with survival dependence on Development so companies have decimated Research, which is the ultimate in short-term strategy. Companies, and more so individuals, need to be adaptable but the best organizations are well rounded so that "R&D" plus many other areas can function in unison to create the best products.

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11. Anonymous on June 5, 2009 9:42 AM writes...

Alex - I've been thinking about the same thing myself. Maybe an automatically-granted "use" patent covering all use-in-humans when a drug gets FDA approval.

Also, it could cover natural products and old compounds that don't qualify for "composition of matter" patents. At best that would increase the search space for useful drugs. At worst it would provide a rebuttal to those claiming that a Conspiracy exists to squelch their "natural herbal cures" in favor of "synthetic chemical poisons." "Hey, if the stuff you're pushing is really as great as you claim, then the door is wide open for you to get FDA approval and a patent, and then to make a mint."

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12. weirdo on June 5, 2009 9:59 AM writes...

Anonymous #8. It is clear that you are no longer (if ever) affiliated with any pharma organizations. Discovery and Early Development are, by far, the least expensive parts of an R&D organization.

Yes, we're exposed, but if we had been more productive*, we wouldn't be. Is it really any more complicated than that? Hard to argue the opposite.

*Defined as: "put more good drugs on the market."

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13. partial agonist on June 5, 2009 11:36 AM writes...

#7-

I believe that Bruce Roth was hired away by Genentech rather than laid off, after pretty much all of the other people involved with Lipitor were indeed laid off, including Bob Sliscovic who worked with Bruce.

http://www.pharmalot.com/2007/12/chemist-who-helped-invent-lipitor-gets-laid-off/

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14. That one on June 5, 2009 12:08 PM writes...

Not a chance that a company would sit on its laurels and milk the cash flow. For one, sooner or later, revenues will decline, it's almost a law of science. Probably more pertinently, human nature wouldn't allow this to happy. It is driven by greed, pressure from the top and keeping up with the Jones. Why else would execs scramble for huge bonuses when they already earning huge amounts? Owners of companies demand growth, why else invest in them (private institutions less so) and there is no glory in selling a product that sells it self, people like challenges.

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15. Still Scared of Dinosuars on June 5, 2009 2:43 PM writes...

I was at a company with a big cash cow, a number of drugs in the pipeline, and a number of other assets that made it look like a pretty good investment. Even at that time I couldn't understand how the return to shareholders wouldn't have been better if they had essentially treated the approved drug like a bond and sold it off and then broken up the rest of the company. Given that this was just before the genomics meltdown it, of course, would have been.

What isn't clear to me is why this is not always the case. It seems to me that drugs are like lottery tickets - a few generate huge returns but the average return on dollars invested is negative.

Think of it like a pension which you can take either as a lump sum or over time. How many of you would choose the latter?

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16. Durham on June 5, 2009 3:18 PM writes...

If you look at Pfizer's stock price since 2000 (when they acquired Lipitor), its stock price has been in steady decline, even as Lipitor sales skyrocketed. Investors began to realize that the larger Lipitor's sales were, the harder it would be for R&D to replace that revenue once the patents expired. It's a somewhat counterintuitive result, but suggests that a big blockbuster drug may actually be harmful for the long term organic growth of a pharma company.

Instead of replacing Lipitor's revenue with R&D (a Herculean task), Pfizer has become distracted with megamergers.

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17. Cranial Discomfort on June 5, 2009 8:12 PM writes...

Look at Coca-Cola. They never disclosed their secret recipe and so have a monopoly on that recipe, plus trademarks and such.
This has not kept Pepsi out of the business with an (arguably) very close recipe and Coca-Cola has still spent R&D dollars on the development of new drinks. The question would be how narrow the scope of these perpetual patents would be.

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18. Jonadab the Unsightly One on June 8, 2009 9:08 AM writes...

I would not be opposed to having drug patents expire twenty years after FDA approval, rather than twenty years after the patent is filed. That would hopefully reduce the pressure to push through approval phases as quickly as possible, and I can see how this could have a positive impact on drug safety.

But yeah, they do obviously need to expire at some point, just like patents in any other field.

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