Patent Attack - Pharmaceutical Executive


Patent Attack
When a patent is under challenge, you can cut and run or stay the course. The only trick, then, is to make the right decision.

Pharmaceutical Executive

The Options With the three Paragraph IV filings, this strategy is now at risk, creating a problem that becomes quite complicated—yet offers the Brand A team several options.

Do nothing The first option is to do nothing and execute the existing lifecycle strategy. In other words, the brand team would manage the product as though the patent challenges do not exist. There are two advantages to this strategy. First, it focuses the brand team on selling the product. Second, it can make sense if there is no opportunity cost involved, that is, if the company does not have another, better place to put the brand team or the product support.

But choosing this option and managing the product without regard to the patent challenges is extremely risky in financial terms. The patent challenges will yield one of two outcomes: win or lose. If the brand company successfully defends the patent and wins, generic competition does not emerge until 2013 as previously planned. The product's NPV (at the time of the first challenge) is $3.311 billion. However, if the company loses the patent challenge, and a generic competitor enters the market in 2008 (for example), the NPV of this outcome is $1.585 billion.

By having the brand team ignore the patent challenge and execute the lifecycle strategy, the risk exposure—the difference between winning the patent challenge and losing it—is more than $1.726 billion. (See "Hold or Fold,")

Cut and run A second option for managing Brand A is to "cut and run." In other words, the brand company could immediately remove almost all the product support by moving marketing, sales, and clinical support to other products—yet still manage the product with a small number of sales reps, samples, and managed care contracts. Of course, by taking this approach, the company can expect product sales and market share to decrease.

This option may sound somewhat drastic, but it can make a great deal of sense under certain circumstances. First, the brand company may have other products that would greatly benefit by additional support. Second, although not relevant to our Brand A example, in a real scenario, a product may be close enough to its patent expiration when it receives a challenge that the outcomes may support this strategy.

In addition, there are financial advantages to the cut-and-run option, because it greatly reduces risk exposure. If Brand A uses this strategy and wins its patent cases, the NPV is $2.69 billion, yet if it loses, the NPV is $1.724 billion. Hence, the advantage is the reduction of the spread, or risk exposure, of $966 million—the NPV of the difference between winning or losing. (These figures are based on marketing, clinical, and sales costs cut by 90 percent and a sales decline of -1.0 percent per quarter.)

By choosing to cut and run instead of executing the lifecycle strategy, the brand company has reduced its risk exposure from $1.726 billion to $966 million. Of course, reducing risk creates a significant trade-off in either of the win-lose outcomes. If the brand company wins its patent cases, the NPV of option one (managing Brand A as "business as usual") is $3.311 billion compared with the cut-and-run strategy, which would yield an NPV of $2.69 billion, a difference of $621 million.

So, if the company wins the patent challenges, it would have ended up losing $621 million if it had selected to cut and run instead of executing the original lifecycle strategy. However, if it were to lose the patent challenges, the cut-and-run strategy would have ended up saving $139 million in terms of NPV.

Clearly, these strategies are simple, but high risk. For real-life products, companies can use timing probability models and deploy different strategies while considering other factors that would certainly come into play, such as:

  • class and market dynamics
  • other products in the portfolio
  • other sales needs
  • pipeline considerations
  • managed care responses

Similar to R&D models that employ statistical analysis and techniques, the key ingredients missing from the mix are the probabilities of Paragraph IV cases: Specifically, when will they be resolved?


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