Patent Cliff

We’ve just had the biggest breakthrough our pharmaceutical company has ever seen: we’ve created a drug that treats insomnia, and the only side effect, as far as we can tell, is that it causes patients to lose one eyebrow. Not both, just one. But since everyone draws their brows on nowadays anyway, we figure that’s not going to be a problem, and our employer rushes off to get a patent. Once the patent is secured, the clock starts ticking: we’ve got 20 years to get our new drug out of the lab, through clinical trials, past the FDA approval process, and onto the market. The faster we get it on the shelves, the more money we stand to make.

After 20 years, though, the situation changes. That’s when the patent expires, and after that, any and every pharma company out there can copy our formula and sell it as their own medication. This sad day is what’s known as a “patent cliff,” since the original patent holder’s profits tend to drop like they’ve jumped off a cliff as soon as their patent expires. They’re no longer the sole proprietary owner of their product. And if others can produce the same product, competition will ensue and prices will go down, which means profit margins go down, too. Since pharmaceutical R&D can be exorbitantly expensive, there’s a big impetus to get new drugs on the market ASAP. Because it’s not only profits they’re worried about. They also have to recoup their investment into the drug’s development.