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The patent cliff signifies the expiry of patent protection for major drugs, causing revenue drops as generics enter the market. Pharma companies face challenges due to high R&D costs and short patent periods. The EU’s proposed Unified Supplementary Protection Certificate (USPC) aims to extend patent life, offering legal certainty and cost savings. What can start-ups learn from big pharma’s strategies to mitigate risks and attract investors?
In the pharmaceutical industry, the term patent cliff has long become synonymous with a dramatic turning point: the moment when patent protection for a blockbuster drug expires and generics flood the market. This often leads to massive revenue losses for the innovating companies and severe price share drops. For investors and start-ups in the life sciences sector, it is therefore essential not only to understand the mechanisms of patent protection. They also need to be aware of the current political developments that could reshape innovation protection in Europe.
From R&D to patent expiry
The patent cliff describes a sudden drop in sales when the patent and thus market exclusivity of a drug ends. The duration of patent protection is 20 years from the filing date. However, drug development until approval takes on average ten to twelve years, so the effective protection time on the market is significantly shorter – often only eight to ten years. After that, generic manufacturers are allowed to copy and market the original product at a lower price. This severely impacts the revenue of the original manufacturer. Pharma companies invest enormous sums in research and development (R&D). In the last 20 years, expenditures often reached double-digit billions per company globally. Developing a new drug until approval costs on average about EUR 1 billion to 2 billion. These investments are risky because many projects fail before drugs even reach the market.
The Supplementary Protection Certificate (SPC)
To partially compensate for the lost time during the approval phase, Supplementary Protection Certificates (SPC) enable companies to extend (supplement) the term of patent protection in the EU, the USA, and other countries. This extends protection for a drug by up to five years beyond the original patent. The SPC is an important incentive for innovation since it prolongs the economic lifespan of a drug and thus supports the amortisation of high R&D costs. Currently, there is discussion about introducing a unified SPC (USPC) on a European level that would apply across all member states as long as they participate in the UPC (Unified Patent Court). At present, each member state has its own regulations. To achieve a Europe-wide extension of protection, companies must apply for an SPC in each country individually. Due to local differences, this process is not only inefficient, but also time-consuming and costly. Pharmaceutical associations have been advocating the introduction of a USPC for several years.
Opportunities and risks of a USPC
For research-based pharmaceutical companies, a USPC would not only offer cost savings through a centralised application process – it would also result in a uniform EU-wide decision providing comprehensive legal certainty (provided that the basic patent is a European patent with unitary effect). This can increase the EU’s attractiveness as a location for pharmaceutical companies in an international context and thus also as an investment location. For startups, this can also mean added value when looking for investors, as the USPCs ensure that they have reliable and predictable intellectual property rights throughout the EU. However, critical voices fear that a unified system could limit the flexibility of individual countries. Furthermore, overly long protection could keep prices high for patients and systems, while overly short protection could weaken innovation incentives. The European Commission and member states are still seeking a balanced approach: the enormous investments in R&D must be rewarded to enable the development of new therapies, but without increasing pressure on healthcare systems, to provide affordable medicines. Investors should closely monitor regulatory developments, as these significantly affect the value of patents and protection rights, but at the same time could benefit indirectly from the simplified extension of patent protection.
Smart patent strategies to mitigate the patent cliff
As long as this process is still in flux, start-ups should make use of strategies from big pharma companies to mitigate their risk of a steep patent cliff at an early stage. For start-ups in the pharmaceutical sector, developing their own protection strategy is essential: on the one hand, it can be crucial for long-term profitability not to concentrate patent protection only on the active ingredient, but to continuously apply for many patents (e.g., for individual development and manufacturing steps, drug components, and administration methods). This can significantly extend patent protection, as some of the additional patents can still be effective after the basic patent for the drug has already expired. On the other hand, start-ups should be cautious when dealing with data that is not subject to mandatory publication. Although reverse engineering often makes it easy to imitate drugs after patent expiry, the protection of trade secrets can offer additional protection against competition for drugs with particularly complex manufacturing processes.
Rethinking investments in the biotech sector
To fill the patent cliff gap, pharmaceutical companies are additionally investing earlier in smaller biotech companies and early-stage pharmaceutical products, e.g., when the drugs are still in their initial clinical trials. Such takeovers are also expected to increase in the future. In particular, investments in assets coming out of China are increasing because of the often smaller upfront costs compared to Western deals. Big pharma companies often purchase early-stage rights in China and conduct the later-stage clinical trials themselves. This business model is not only interesting for investors, but it also offers a great opportunity for start-ups in their search for investors.
Conclusion
The patent cliff remains a central challenge for the pharmaceutical industry. EU discussions on the SPC show ways to make innovation protection more efficient and uniform. There are a number of strategic considerations that start-ups can use to plan against a steep patent cliff, and thereby become more attractive to investors. Start-ups should consider at an early stage how they can benefit from their own innovations in the long term. For them, the USPCs would offer the opportunity to benefit from a simplified and more cost-effective protection system – a decisive factor for competitiveness in a highly innovative market. The future of drug development in Europe will be shaped by the balance between innovation, economic viability, and health policy; a balance that new companies can actively help create. Therefore, companies should not lose sight of the upcoming changes in the SPC system, but proactively incorporate them into their patent and market entry strategies.
About the authors:
Dr Tim Reinhard heads the IP practice group at Osborne Clarke Germany. He advises national and international pharmaceutical, biotech, and medtech companies in IP-related
issues and regulatory matters.
Marina Fröhlich advises at Osborne Clarke Germany national and international clients on all aspects of intellectual property law, competition law and pharmaceutical law. She specialises in the life sciences and healthcare sector.
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