The patent cliff problem
Most companies make something that does not change much over time, such as mars bars or steel. The pharmaceutical market is unusual in that you get a patent (licence to be the sole manufacturer worldwide) if you can show your drug is a new invention and not a copy of something else.
The patent lasts typically 20 years, so new drugs have US patent lives, also in the EU and China all with slightly different dates.
Thus, whenever you look at the earnings of, say, GSK, you should bear in mind that its current £14bn of revenues includes about £3.4bn from a singles medication off patent in 2029, an HIV drug £2bn sales off patent the same year, and £3bn from a COPD drug whose device loses its patent in 2027.
So two-thirds of the company’s revenues might shrink sharply in the next four years. Now, of course, they have new drugs coming along to replace the old. But if the revenues fall the dividend will not be stable forever so you need to check the details, which are in the notes to the accounts.
I have sometimes described drug stocks as similar to Arsenal. They make a big fuss of the goals they score, but they do also let others score against them and so, few cups.
When a drug goes off patent, the price typically falls to between 15 and 30 per cent of the original price depending on how many generic drug makers choose to manufacturer it in competition. So the bigger drugs face greater post-patent competition.
The major areas of public health
Diabetes: it is the largest item on the Medicare budget. Over the past five years GLP1 treatments have reduced inflation of this budget somewhat, replacing money spent on insulin.
Diabetes care requires regular blood tests and many patients require dialysis. All these treatments are cheap and well established. Fresenius Medical Care is a leader in dialysis and faces periodic challenges on costs in the US.
Obesity: new drugs such as Ozempic have been much in the news recently and the share prices of Novo Nordisk and Eli Lilly have performed very strongly. However, I doubt these drugs will be a complete solution for obesity across the whole of society.
The affordable and proven clinical treatment for morbid obesity is a gastric band. Ozempic requires behaviour changes during medication and the period of medication to be less than two years. It can be patent challenged in 2031 and before that cheap me-too drugs are likely to emerge from generic manufacturers.
Also, very sadly, the major current trend is childhood obesity. In the UK 22 per cent of 10 to 11-year-olds have this diagnosis. Presumably it needs to be addressed first through education and school sport in the first instance.
