Securing Customer Loyalty Recommended to Avoid Patent Cliff

By James DeGiulio --

Brand pharmaceutical companies are expecting a serious financial fallout sometime over the next few years, when several blockbuster drugs lose patent protection, commonly known as a "patent cliff."  The loss in revenue could be substantial.  From 2010 to 2013, brand pharmaceutical companies are projected to lose a total of $137 billion to patent expiration and generic competition.  Brand pharmaceuticals are bracing for decreased profits, and always working toward preventing patent cliffs from occurring again in the future.  While patent expiration is of course a primary cause, it is not the only cause, at least according to a recent Bloomberg Businessweek article ("Pharma Needs an Innovation Intervention").  Brand pharmaceutical companies can also place blame on not developing a customer loyalty base and not fully addressing customer needs.

In the article by G. Michael Maddock and Raphael Louis Vitón, the authors recommend that brand pharma revise its current business model to mitigate the dramatic financial effects of patent expiration.  The authors note that it takes around 8 years to get regulatory approval for a new drug, and the patent covering the drug lasts only 17 years at maximum, resulting in only 9 years of exclusivity.  While these 9 years can be extremely profitable, once the drug goes off patent, the patent holder's market share typically falls by a staggering 89 percent in the first 6 months.  The authors point to the well-publicized situation with Lipitor, an $11 billion-a-year cholesterol drug over which Pfizer will lose patent protection early next year.  It remains extremely difficult to make the research and development process move much faster, so limited patent protection and patent expiration will always be problematic.  Indeed, despite having spent a total of $64 billion in 2010, the industry received approval to market only 21 new drugs.

To try and mitigate the loss in market share to generic versions of the brand drugs, the authors suggest that the pharmaceutical industry take a new approach that shifts focus away from viewing its customers as mere "druggable targets."  Instead, there should be more emphasis placed on better understanding customers' needs, locating target insights, and building brand loyalty.  In the article, the industry is accused of merely "inventing" thus far, when it really needs to be innovating.  Consumer-driven companies like Starbucks, Apple, and Southwest Airlines are presented as examples of what pharma companies should strive to be, pointing out that none of these companies truly sell a superior product over its competitors.  Instead, these companies focus on understanding their customers and their needs better than their competitors, and thus enjoy the maintenance of market share in the absence of a substantially better product.

For brand pharmaceuticals, if customer loyalty could be cultivated to the level of Starbucks and Apple, the expiration of a patent would not be the inevitable end of profitability it is to most brand drugs.  Admittedly, it is impossible not to lose some market share to generics once brand drug patents expire, particularly due to the involvement of third-party insurance restrictions.  However, the authors note that the loss of 89 percent of the market share is far too large to sustain pharma's current business model.  The authors propose that if Pfizer could keep even 50 percent of the revenue that Lipitor currently generates by establishing some level of customer loyalty, the upcoming patent cliff would not loom nearly as large.

Since customer loyalty may not be readily obtained for pharmaceutical companies, partnerships with companies that already have a strong customer base may help facilitate its building.  The authors present a hypothetical example of a "Readi-Clinic at Wal-Mart, Powered by Pfizer," where Pfizer would provide the drugs that the patients at the Wal-Mart clinic would be prescribed.  In addition, Pfizer also could devise a service model that would help customers change their behavior and habits with the goal of achieving better health results than could be obtained by relying only on pills.  In this hypothetical example, Pfizer and Wal-Mart could brand the combined service and product offering, which would maintain value even after the patent on a drug expires and the generic comes to market.  Thus, the value of the drug would not depend completely on patent exclusivity for value, as nearly all of the brand drugs do under the current system.  There is no doubting the maximum value that patent protection provides brand drugs, and patent protection will always be a key component of drug discovery and commercialization.  But as long as brand pharmaceutical companies depend wholly on patent protection for drug value, there will always be the threat of patent cliffs in the future.

Comments

[m]

The authors didn't mention how to deal with 3rd party payer effects. You can buy coffee directly from starbucks or a computer from Apple. You don't need to ask your doctor if you can buy a coffee and then have your insurance provider tell you that you should buy Folgers instead of Starbucks. Isn't that the real issue?

[m]

Also, there is already a common misperception that branded drugs are better than generic drugs. People tend to buy Tylenol instead of generic acetaminophen.