Typically, the patent of a drug lasts for 20 years, during which the innovator company enjoys a monopoly in the market and hence commands the premium on that drug’s pricing. This period of exclusivity allows companies to maximize their revenues, profits, and overall growth.
Upon patent expiry, the other generic drug manufacturers step into the game and they are allowed to produce and sell the same drug under a different brand name. Due to the sudden influx of manufacturers, the volumes of the drug skyrocket for production ultimately leading to lower cost of manufacturing and lower pricing of the end medicine.
The Impact on Pharmaceutical Industry
This industry runs on a wheel of research and development, but the patent cliff presents a significant challenge to global innovator companies. When a high-yield generating drug’s patent expires, it faces a drastic decline in revenues. To be more precise, during the 2010 patent cliff, some innovator companies recorded a drop in revenue by as much as 90%.
Pfizer’s drug- Lipitor, used for lowering cholesterol, lost its patent protection in 2011. Eli Lilly’s Zyprexa used to treat schizophrenia and bipolar disorder, and Bristol-Myers Squibb’s Plavix, a widely used blood thinner, faced similar fates around the same time.
From 2011 to 2016, more than $100 billion worth of drugs went off-patent. But here’s where the story gets interesting for Indian investors.
Opportunities for Indian Pharma Companies
While the patent cliff poses challenges for innovator companies, it also creates significant opportunities for generic drug manufacturers across the world, particularly those based in India. When a drug’s patent expires, generic companies can produce bioequivalent versions of the drug at a fraction of the original price. This not only makes the drug more accessible to patients but also allows generic manufacturers to strengthen their financials.
India, which is one of the largest producers of generic medicines globally, is likely to benefit immensely from the upcoming patent cliff. With more than 60,000 different generic brands across 60 therapeutic categories, Indian pharma companies have already established themselves as a key player in the global market. In FY23, Indian pharmaceutical exports crossed $25 billion, and the future looks even more promising.
Looking Ahead: The Ongoing Patent Cliff and Investment Opportunities
We are in the midst of a large number of patents getting expired, with more than $200 billion worth of drugs by 2030. This presents a golden opportunity for investors to capitalize on the growth potential of Indian generic pharma companies.
The Nifty Pharma index outperformed the Dow Jones Pharma index between 2010 and 2015. During this period, the Dow Jones Pharma index grew by 99%, while the Nifty Pharma index surged by 219%, doubling its returns.
The ratio chart below illustrates this trend. The Nifty Pharma index outperformed the NASDAQ VANECK Pharma ETF from 2009 to 2016, after which the sector showed a sluggish momentum and moved sideways for the next 7 years. However, the Nifty Pharma sector has started rallying in recent months, and it broke its previous high in June 2024. This current rally and ongoing patent cliff are signaling the strong growth potential of the Indian pharma sector.
India is expected to play a crucial role in the global pharmaceutical market in the coming years. The Indian pharma sector is likely to grow at a CAGR of 12-16% during 2024-30 whereas the global pharma sector is likely to grow at a CAGR of 6-8% during the same period.
The Federation of Indian Chambers of Commerce & Industry (FICCI) estimates that the market size of the Indian pharmaceutical industry will reach $130 billion by 2030. With India exporting approximately 30% of its total pharmaceutical exports to the U.S., the world’s largest pharmaceutical market, the potential for growth is enormous.
The patent cliff may be a challenge for some, but for those who see the potential in the Indian pharma sector, it represents an opportunity for significant gains.
Technical Outlook:
ETMarkets.comNifty closed at 25,236 on Friday, marking a 1.66% gain for the week and a 1.14% rise for the month. Following a period of consolidation in mid-August the Nifty rebounded sharply, advancing for 12 consecutive sessions.
The daily chart reveals a breakout from a diamond pattern, with the rally gaining traction. Nifty is now positioned above all short-term moving averages, while the daily RSI remains robust near the 70 level. Sector-wise, Nifty IT surged 4.13% over the week, strengthening the index’s bullish momentum.
The global markets maintain a positive tone, which the domestic market has mirrored effectively. The India VIX currently stands at 13.39 and remains below the 15 mark, there would be a mixed outlook. Overall, Nifty is anticipated to trade sideways with a positive bias. The important support is placed around 25,000 levels.
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