Drug companies are acutely aware of what’s called the ‘patent cliff’, when their expensive brand name medications lose their patent protection, thus opening up the market for cheaper, identical generic competition. This is good news for consumers, but very bad news for Big Pharma. Lipitor*, for example, Pfizer’s blockbuster cholesterol medication, is set to fall off the patent cliff in 2011.

But even last year’s sales of the biggest selling drug on the planet already showed declines due to growing competition from other cholesterol drug manufacturers.  See also: Is Big Pharma Onboard the Titanic?

What is a generic drug? A generic drug must contain the same active ingredients as the original brand name formulation. According to the FDA:

“Generic drugs are identical or within an acceptable bioequivalent range to the brand name counterpart, considered identical in dose, strength, route of administration, safety, efficacy, and intended use.”

Once a brand name drug falls off the patent cliff after several years of patent protection, the purchase price of its generic drug replacement suddenly becomes affordable.

For example, Thailand is prepared to import from India (leading manufacturer of generic drugs) millions of doses of the generic form of the cardiac drug, Plavix, an anti-platelet blood thinner meant to prevent heart attacks, at a retail cost of  3 cents per dose. By comparison, my own brand name Plavix drugs prescribed for me after my heart attack cost $6-10 per dose. See also: Myths and Facts About Generic Drugs.

The expiration of a patent removes the monopoly of the patent holder on drug sales licensing. Over at the drugmaker Eli Lilly, investors are intently focused on the patent cliff  years 2011-14, when Lilly faces generic competition for four of its five top-selling products:  schizophrenia drug Zyprexa, antidepressant Cymbalta, cancer drug Gemzar and osteoporosis treatment Evista.  Sales of these drugs make up about half of the company’s annual revenues.

The Wall Street Journal reported on December 11th that, although the company provided a general financial outlook for the patent cliff period, it “did not predict whether profit would increase or fall, or by what magnitude, during that period.”

But the company’s own numbers suggest sharp profit declines when patent protection expires for these blockbuster drugs. Lilly reports:

“Under this scenario of patent protection loss, our net income would exceed $3 billion in the patent cliff years and beyond.”

Earth to Eli Lilly: this means your profits will fall. Lilly is expected to have a net income this year in the $4.85 billion range. I’m no stock market analyst, but to me this looks like a $1.85 billion loss in those patent cliff years.

Eli Lilly, however, is known for its strong research bent, and apparently expects to have 10 medicines in late stages of clinical testing by 2011. The company told the Wall Street Journal in December that it plans to launch two new medicines per year beginning in 2013.

But analysts have cautioned that Lilly’s most promising experimental treatments so far are for Alzheimer’s disease and cancer — the types of drugs that often fail along the cumbersome research path.    See also: How A New Drug Gets Approved.

Drug data consulting firms like IMS Health and MHS now estimate that $13- 22 billion in branded drug sales will go ‘off patent’ this year, with an additional $8-12 billion coming off patent next year.

But wait. According to Scott Hemphill, a professor at Columbia Law School in New York City, there are presently 10 brand name drugs with about $17 billion in sales annually in North America that are now protected by what critics call “pay for delay” or “pay to go away” agreements.

These agreements happen when the patent-holding drug company pays a generic drug company to delay introducing the generic version of the brand name drug, which of course in turn means  that the consumer ends up paying more for their medications.

The American FTC has fought these “pay to go away” agreements, but the courts have generally upheld these pacts – even though these decisions have been costly to the consumer and very profitable for Big Pharma. Since 2001, the FTC has brought six suits to block these deals, all unsuccessful.

Read more from the Chemical and Engineering News about Big Pharma’s upcoming patent cliff , or about other brand name drugs whose patents are due to expire in the next few years.

* NEWS UPDATE: November 11, 2011

The New York Times has reported that the biggest introduction of a generic drug in pharmaceutical history is being met with tough business strategies by Pfizer and pharmacy benefit companies.  Pfizer has agreed to large sales discounts for benefit managers designed to block the use of generic versions of its Lipitor statin drug for cholesterol control by instructing pharmacists to substitute brand name Lipitor for any doctor’s prescription for its generic replacement, at least until next spring.

See also:

• Lipitor and Nine Other Blockbuster Drugs That Are Falling Off the “Patent Cliff”
• Generic Drugs: Are They Really Exactly the Same as Brand Name Drugs?
• How a New Drug Gets Approved
• Big Pharma’s “Pay For Delay” Tactics Keep Generic Drugs Off the Market
• Is Big Pharma Onboard the Titanic?