Patent cliff

1. A patent gives a temporary exclusive rightA US patent contains a grant of the right to exclude others from making, using, offering for sale or selling the invention throughout the United States, or importing it into the United States (35 U.S.C. 154(a)(1))⁵. The term of a new US patent is 20 years from the date the application was filed in the United States, and many other factors can affect the duration³.
2. The patent expiresAfter a patent has expired, anyone may make, use, offer for sale, sell or import the invention without permission, as long as those activities are not covered by other unexpired patents⁴. See Patent expiration.
3. Generic competitors seek approvalFor a drug, other companies can seek approval to sell generic versions. The Department of Pharmaceuticals study describes generics as containing the same active ingredients as the innovator drug and typically being sold at lower prices¹. FDA says the timing of first-generic approvals is often dictated by the patent expiry dates of the brand product².
4. Sales and prices fallThe study says that when a market opens to generic competition, sales of the branded drugs often experience a significant decline¹. In FDA's analysis of US generic approvals in 2018, 2019 and 2020, there were many instances where, within a year of the first-generic approval, the average market price of the drug product (all brand and generic versions, weighted by sales) fell by more than 75% compared to the brand price². That is a price comparison, not a measure of the brand company's revenue.

The expiry date of one patent does not always decide when competitors enter. The Department of Pharmaceuticals study says drug patents are typically sought for the compound itself, but patents can also be granted for the manufacturing process, the formulation or the method of use¹. Activities covered by other unexpired patents stay restricted after one patent expires⁴.

For drugs in the US, FDA exclusivity is a separate barrier. FDA explains that patents and exclusivity work in a similar fashion but are distinct from one another and governed by different statutes³.

FDA also says that periods of exclusivity and patent terms may or may not run concurrently³. The exclusivities it lists include orphan drug, new chemical entity, new clinical investigation, pediatric and patent challenge exclusivity³.

Patent terms can be extended too. In the US, patent term adjustment under 35 U.S.C. 154(b) lengthens the term when issue of the patent is delayed in the ways the statute lists⁵. See Patent term adjustment. Under 35 U.S.C. 156, the term of a patent that claims a product, a method of using a product or a method of manufacturing a product can be extended if the statutory conditions are met, including that the product was subject to a regulatory review period before its commercial marketing or use⁶.

Generic competition can also build in stages. In one FDA analysis, further generics entered markets with limited generic competition only after 180-day patent challenge exclusivity, which had been blocking the approval and launch of new generics, expired². FDA lists patent challenge exclusivity as an exclusivity for ANDAs only³.

For biological products, the competing products are biosimilars. An application for approval of a biosimilar may not be made effective until 12 years after the reference product was first licensed (42 U.S.C. 262(k)(7)(A))⁷.

The Department of Pharmaceuticals study says companies with products going off patent closely monitor their patent portfolios and release information about impending expirations in their financial disclosures¹. It describes the effects on different parties as follows¹:

• Innovator companies with drugs going off patent can see a decline in sales and profitability as generic competition enters¹;
• generic manufacturers gain an opportunity to enter the market and increase competition¹;
• healthcare systems and patients can benefit from access to more affordable medications¹;
• and affected companies try to adapt by launching new drugs to replace lost sales, seeking partnerships or acquisitions, investing in research and development, or exploring other revenue streams¹.