Why is Patent Cliff So Tragic for Companies?

Article by: Dhairya Shah

Patent cliff is a very common event under the intellectual property rights for patents. This is generally associated with the pharmaceutical companies. The companies who have achieved patents for a certain material or technology or drug, get the sole benefit for it over a 20 years of time period. This enables such companies to get a breakthrough point from their expenses incurred and get profitable from such expensive research. Hence for the time frame of 20 years such companies have the monopoly to create and sell such products but once the time frame expires, every competitor would penetrate the market and sell the goods at a very cheap price the the inverter. These owls cause a sharp fall in revenues of the inventor company which would let them suffer from a sharp fall in profits. This is the edge point where the company has climbed the hill of profits and now has to share the revenue and profits with others. Hence this event is known as Patent Cliff. We can even say that the company has achieved the heights and on exportation of patents it is bound to fall off the cliff of monopoly and enter the phase of competition.

Why is Patent Cliff So Tragic for Companies?

Imagine a situation where you aev spent years on years on development of a drug or medicine. This would have not only taken a lot of time but also drained numerous financial resources as well. Thus it is very essential to get a success rate in that drug and also develop it to its best level. This Procedure goes through multiple levels of trial periods and hence the research and development part in creation of the drug bears the maximum expenses. Along with this there is manpower and other raw materials. This phase is important for creation of breakthrough medicines which could benefit a lot of people and the company as well.

More people suffering from the disease, more customers would be available to buy the medicine. But before thinking that there is one major obstacle known as AIIMS. The approval from AIIMS and From WORK for global usage is important as well. A recognition from these firms would ensure the credibility in tehd drug. Thus after spending crores of Rs. on Research, annpower, raw materials and approval procedure and not forgetting the time consumed for development of drug - all together is a very big amount of resources.

After all this the company gets a patent which allows it for solo usage and selling of the drug for a 20 years time frame. This period is not essential to get a considerable amount of profits after spending on the process, before the company starts generating considerable revenue and profits the time period expires and hence the company’s monopoly ends. Later on the generic drug makers enter the markets. This gives rise to a new set of problems - COMPETITION. Thus competition leads to cheaper selling price of competitors in comparison to the creator of the drugs.

These creators are majorly the generic drug manufacturers. These people have the lowest cost expenses. The reason is the ready-made drug making process available due to disclosure policy. Once the time frame expires such companies start selling drugs at almost 80% lower prices than the inventor company. Hence the market share of the company crumbles and it suddenly goes into making heavy revenue losses in comparison to previous quarters. This has happened to almspot all the major pharma companies such as Pfizer, GlaxoSmith etc. Hence the revenue loss or decrease with a steep fall is known as cliff in the patent registration business.

Best Strategy for Big Companies

The best strategy that the big companies adopt is to start making another drug with the revenue generation from the already patented drug. Till the time frame expires one would be alw to make new medicines which could cause multiple diseases and also get patent for the same. Acne the patent chain widens over time and the R&D expenses as well. This results in the creation of constant money rotation and product creation at the same time. Once the generic drugs enter the market almost the major share of the market gets into the hands of competitors. So following this strategy one should focus on making the current drug productive enough until 20 years and investing it wisely across multiple projects for constant development of the product line.

This has been mentioned through the example of pharma companies as majorly such a phenomenon is seen in that sector only. The companies have to suffer major losses once the period expires and given the product expiry dates, the sale has to get wrapped up within the given prescribed time frame.

For designing a best strategy one can even refer to the 4P model. Place, promotion, product, price. The pricing should be set at higher margins so that the previous losses and the expenses get covered up before the 20 year time frame expires. Also the price setting needs to be done in line with the expenses aligned for next R&D facilities.

Secondly the place of selling the drugs matters as a better market brings better customers and better customers bring constant revenue. Also one can try to get overseas approval to get a wide range of market participants involved. More the people, more the sales. Hence overseas selling is always beneficial in such fields. One can even try to innovate the place of supply and try to reduce the costs of transport and warehousing as much as possible.

The promotion factor needs to start during the approval phase so that the company has before hand orders pre-approval process. Sometimes taking such steps is risky because if the drg fails it would have a heavy impact on the company’s image and goodwill. However if sales is done properly then only revenue can be generated in an adequate manner.

The fourth and most important is product. One news to design the product and its packaging in a good manner and also create plans for upcoming product research is that the chain of patent and drug creation continues.

All these factors cannot prevent the patient from getting expired. However they would definitely assist in constant revenue generation and also get constant profits by reduction of costs and charging as much higher margins as possible.

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