How Is Pharma Innovating as Patent Cliffs Loom?

Several blockbuster drugs are set to lose their patent protection by the end of the decade. Navigating the sharp fall in revenue will be vital. Bristol-Myers Squibb and Merck are exploring new avenues, while Moderna is innovating to expand its portfolio beyond its mRNA Covid-19 vaccine, its only commercial product to date.

• Merck is M&A hunting ahead of its cancer drug Keytruda losing patent protection.
• Bristol-Myers Squibb is ramping up R&D and investing in India as an innovation hub.
• Moderna is using AI to advance medicine and develop its portfolio beyond its sole product, its mRNA Covid-19 vaccine.

With the Covid-19 pandemic receding into the past, and a patent cliff looming on the horizon, pharma companies are doubling down on innovation.

Several blockbuster drugs have imminent expiration dates, which will inevitably lead to cheaper, inferior products flooding the market. Pharma companies will no longer be able to charge premium prices and are preparing to lose significant chunks of their annual revenue as a result. EY has forecast their revenue hole will be as much as $300bn.

“With the patent cliff for big pharma … faith in innovation will be one of the key pillars in biotechs’ strategies for continuing recovery from the tough times experienced in 2022 and 2023,” noted Rich Ramko, US Biotech Leader at EY, in the firm’s ‘Beyond Borders 2024’ report, released in early June.

Merck Bets on M&A to Drive Innovation Pipeline

Merck’s [MRK] Keytruda is probably the most high-profile blockbuster drug heading towards a patent expiry. Sales of the immunotherapy, used to treat a number of types of cancer, grew 19% to $25bn in 2023, accounting for 41.6% of the firm’s total revenue, which came in at $60.1bn. Merck is expecting the cancer drug to pull in $30bn in annual sales by 2026, before losing its exclusivity in 2028.

For the past few years, Merck has been on the hunt for biotechnology firms it can buy to boost its product pipeline and fill the impending revenue hole. In 2021, it acquired Acceleron for $11.5bn, and in 2023 it bought out Prometheus for $10.8bn. In May, it announced the acquisition of eye treatment biotech EyeBio for $3bn.

“Strategic business development focused on the best external science remains an important priority for our company. We’ve demonstrated that we can leverage our deep discovery prowess to identify important acquisition targets,” commented Merck Chairman and CEO Rob Davis on the Q1 2024 earnings call in April.

Bristol-Myers Squibb Turns to India for R&D

Bristol-Myers Squibb [BMY] faces losing nearly 44% of its revenue by 2028. Sales of blood thinner Eliquis totalled $8.6bn in 2023, accounting for 27.2% of total revenue of $31.6bn, while cancer immunotherapy Opdivo accounted for 16%, bringing in $5.3bn. Patent protections on Eliquis and Opdivo expire in 2026 and 2028, respectively.

In a bid to boost its product pipeline, Bristol-Myers has turned to India for R&D opportunities. The pharma giant opened a $100m innovation hub in Hyderabad in February, where digital technologies will be deployed to advance drug development.

CEO Christopher Boerner wants the plant to become the drugmaker’s largest facility outside of the US by 2025, Reuters reported. It’s already participating in 17 clinical trials testing therapies for cancers, blood disorders and heart diseases.

Moderna Taps AI to Advance mRNA Medicine

While Moderna [MRNA] isn’t facing a patent cliff, it has a revenue problem of its own: its mRNA Covid-19 vaccine is the only product it has brought to market so far. Sales of the vaccine plunged 91.2% year-over-year in Q1 2024, from $1.9bn to $167m.

The pharma has recently shared positive phase-3 results for its combined Covid-19 and flu candidate. It’s also been reported that the US may be willing to fund a trial of its mRNA-based bird flu vaccine. Perhaps most importantly, it was announced in April that the company is partnering with OpenAI to “advance mRNA medicine”.

“Just as the introduction of the personal computer in the 1980s changed the way we work and live, AI is on a path to completely transform our everyday lives — and OpenAI is helping to lead the way,” Moderna CEO Stéphane Bancel said in a statement.

Artificial intelligence (AI) and machine learning could be the key to the future of drug and vaccine development. As Dr Hamed Akbari, Associate Professor in the bioengineering department at Santa Clara University, explained to OPTO, algorithms “can quickly identify potential vaccine targets by predicting which viral proteins are most likely to trigger a strong immune response. This can speed up the early stages of vaccine development from years to months, helping bring vaccines to market faster”.

Since partnering with OpenAI, Moderna has deployed 750 customised versions of ChatGPT, known as GPTs. They include Dose ID GPT, which uses data analytics to determine optimal vaccine doses. The use of AI in vaccine trials has the potential to be not only game-changing, but life-changing.

“AI is not just a supplementary tool but a fundamental force that will help us stay ahead of viral threats,” said Akbari. “By leveraging AI, we can improve our response and effectiveness in dealing with public health challenges, ensuring we’re better prepared for future pandemics.”

Thematic ETFs Offer Exposure to a Range of Therapies

Looming patent cliffs are an overhang for the pharma industry, but the companies that are pushing to research and develop new treatments and therapies will be best placed to offset any impact.

Thematic ETFs offer investors broad exposure to the pharma industry and a range of treatments and therapies.

The Tema Oncology ETF [CANC] has Merck its third-biggest holding, with a weighting of 5.2% as of 14 June; Moderna and Bristol-Myers Squibbs have been allocated 2.5% and 1.2% respectively. The fund is up 652.3% since its launch on 14 August last year through the close of 14 June and up 4% year-to-date.

The Pacer BioThreat Strategy ETF [VIRS] has Merck as its fifth-biggest holding, with a weighting of 5.1%; Moderna has been allocated 1.75%. The fund is up 16.8% in the past year and up 14.3% year-to-date.