There’s a US$180bn Biotech Patent Cliff coming! Here’s why it could spell doom for large caps, but a generational opportunity for small caps

There’s a Biotech Patent Cliff coming over the next decade! Investors aren’t giving this much attention, but we think they should because it could cause substantial upheaval in the biotech sector.

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What is this ‘patent cliff’?

A patent cliff in general terms, refers to the period when a patent for a drug or biotechnology product expires, which can lead to a significant drop in revenue for the company that developed it. In the biotech and pharmaceutical industries, patents are crucial because they grant companies exclusive rights to sell a drug or therapy for a certain period (usually 10-20 years). During this time, the company can charge premium prices without competition from generic or biosimilar versions of the drug.

When the patent expires, other companies can begin producing and selling generic versions of the drug, typically at a much lower price. Consider that when AbbVie’s Humira’s 20-year exclusivity period ended in 2023, nine biosimilars entered within the rest of the year. And this was not just from amateur companies – they came from companies including Pfizer and Novartis. Yes, they have not wiped out Humira’s sales, but they did make a dent. Humira sales were 31% lower in the first 9 months of 2023 compared to 12 months prior.

The ending of exclusivity and the subsequent right of other companies to sell similar products is likely to result in in a steep decline in sales and market share for the original drug, which is why it’s referred to as a “cliff.” For biotech companies, this can lead to a decline in revenue and increased competition, because there is no longer exclusivity.

This can create urgency to develop or acquire new treatments to maintain revenue streams, especially among companies that rely heavily on a single blockbuster drug. But it can represent a good opportunity for smaller companies to get into the market, or perhaps be acquired by a large-cap player.

This patent cliff is a big one

Several major drugs are set to come off patent throughout the remainder of the 2020s, which will have significant impacts on both their manufacturers and the broader pharmaceutical market. EY has estimated that the world’s top 20 biotechs may lose US$180bn in sales due to patents for their drugs expiring.

We won’t provide an exhaustive list, but we will note the biggest drugs year-by-year for the rest of this decade:

• 2025: Stelara, Johnson & Johnson’s autoimmune disease drug;
• 2026: Eliquis from Pfizer & BMS which is an anticoagulant;
• 2027: Trulicity from Eli Lilly for Type 2 diabetes;
• 2028: Keytruda from Merck which is an oncology drug and the world’s top selling drug;
• 2029: Darzalex from Johnson & Johnson, which is an oncology biologic; and
• 2030: Tagrisso from AstraZeneca/Johnson & Johnson, which is also an oncology drug.

Keytruda is a poster child for the cliff

Let’s look at one example – NYSE-listed Merck and Keytruda. Keytruda is a cancer therapy that is the first anti-PD-1 (programmed death receptor-1) therapy used to treat cancers, particularly head and neck squamous cell cancer. Keytruda reaped $55bn in revenue in 2023 and 2024 combined which was nearly half the company’s revenue in both years.

Consider that the next largest revenue stream for Merck is its HPV vaccine Gardasil which only provides US$8bn in revenue. Keytruda comes off patent in 2028, and there could be competition from biosimilar versions. Analysts predict sales could fall by up to 20% in the year after.

Merck has been an active buyer of small and mid-cap pharma, paying a 75% premium to buy out Prometheus in 2023, then Mirus Bio in 2024 and SpringWorks in 2025; although it remains to be seen whether any of these will represent a ‘like for like’ replacement at least from a revenue perspective.

Keytruda is one of the most significant, but ultimately just one of 69 blockbuster drugs expected to lose exclusivity by 2030.

Some companies are at significant risk

Companies will be impacted to differing degrees. Analysis by Morgan Stanley has estimated that Amgen has the most risk, with 67% of its revenues from its top 4 products on the block. Amgen, in anticipation of what is to come bought Horizon for $27.8bn and bought potential drugs in Tepezza for thyroid eye disease, Krystexxa for gout and Uplizna for a rare neurological disorder. BMS has 63% but is addressing the cliff, buying Karuna, Mirati and RayzeBio in late 2023.

Other companies are more moderately impacted. Pfizer and Eli Lilly face just over 30% of their revenue at risk, Gilead at 24% but Vertex just 6%. What about Novo Nordisk with Ozempic, you might ask? Well, this is a moot point for a couple of reasons. One is that its US patent doesn’t expire until 2032. And second, the competing drugs right now are arguably a greater threat than any copycat drugs down the track.

The opportunity for ASX small-cap investors

This means certain ASX companies could be ripe for the picking. Think companies like Dimerix (ASX:DXB) and Paradigm Biopharmaceuticals (ASX:PAR) that have late-stage clinical assets with proven efficacy but just need to pass the final hurdle of a Phase 3 trial. We think these companies could be ripe for the picking. Companies like Telix (ASX:TLX) and Neuren (ASX:NEU) with commercialised goods and an extensive pipeline are less likely, although you can never say never.

So keep an eye on the biotech patent cliff. It could lead to your small-cap biotech stock being bought out, or your large-cap company having to go shopping or risk losing a significant share of revenue.

Dimerix and Paradigm Biopharmaceuticals are research clients of our parent company Pitt Street Research.