Analysts refer to the problem facing the pharmaceutical business as the “pipeline cliff.” This phrase refers to the approaching revenue decrease that numerous pharmaceutical companies experience when their blockbuster drug patents expire. Due to these expirations, it is estimated that the top 20 pharmaceutical companies alone will lose $183 billion in revenue by 2028.
The developing business is given the sole right to market a new drug after it successfully completes FDA trials, often for a period of 20 years. But when these patents expire, generic substitutes may proliferate, drastically cutting into the original medication’s earnings. For example, AbbVie’s popular medication Humira, which formerly generated 32% of the company’s income, had its patent expire last year, which caused a $4 billion decline in sales right away.
a patent cliff of ‘tectonic magnitude’
Businesses like Bristol-Myers Squibb, whose revenue is at risk of 63%, and Amgen, whose revenue is at risk of 67% owing to patent expirations, are especially vulnerable. Eliquis and Opdivo, two of BMY’s top medications, are predicted to lose their patent protection between 2026 and 2028, potentially resulting in billions of dollars in lost sales.
Impact on R&D Spending
The industry has seen large budget cuts as a result of the pipeline cliff, especially in R&D spending. Pharmaceutical firms are spending less on the discovery of new drugs, which is making the pipeline cliff issue worse. Leading provider of drug discovery services, Charles River, has issued a warning about “deep cuts” at pharmaceutical corporations in addition to revealing a decline in income. For instance, Pfizer declared that they would make further cost reductions of $1.5 billion by 2027, on top of their $4 billion cost-cutting effort from the year before. In a similar vein, Bristol-Myers Squibb intends to reduce expenses by $1.5 billion by 2025 and eliminate 2,200 jobs this year.
The financial strain brought on by the pipeline cliff is the reason behind these budget cuts. Companies run the risk of further delaying progress as they reduce their R&D spending.
Opportunities Challenges
Even with the dire prognosis, astute investors can find opportunities. Acquisitions are big pharma’s main means of filling in pipeline gaps. Many companies are trying to purchase novel medication discoveries from smaller biotech firms as they cut back on their R&D spending. Major pharmaceutical companies may have $383 billion put aside for acquisitions, according to Morgan Stanley analysts, which may be a bonanza for some biotech equities.
A biotech company that specializes in uncommon liver illnesses, Mirum Pharmaceuticals (MRM), is one of the smaller businesses that stands to gain. Mirum, which is valued at $2 billion, has four approved indications and four more that are undergoing late-stage clinical trials. Despite a predicted downturn in the company’s sales, it is anticipated to expand 69% this year, hitting between $310 million and $320 million.
Sarepta Therapeutics (SRPT), a business to keep an eye on, has got enhanced FDA approval for Elevage, a medication it makes for muscular dystrophy. In just two years, this medication alone might raise the company’s yearly revenue by $2 billion. Sarepta’s attractiveness as a possible acquisition target is further reinforced by its current trials in gene therapy, RNA-targeted medicines, and gene editing.
Lastly, with its cutting-edge AI algorithms, Recursion Pharmaceuticals (RXRX) is spearheading a revolution in medication discovery. The company is positioned for success in the future of the sector because to its creative approach to solving tough drug discovery problems and deciphering biology.
The pharmaceutical sector is going through a very turbulent time right now. A difficult environment for businesses as the pipeline cliff approaches and R&D spending falls. There are still possible benefits, though, for those who can spot the correct chances. Smaller biotech companies like Mirum, Sarepta, and Recursion might earn disproportionate gains as large pharma seeks to acquisitions to address gaps in their pipelines; these are stocks to watch in the upcoming years.
