How Personalized Medicine Can Change Your Investment Strategy

Pharmaceutical companies have developed numerous strategies to counter the patent cliff. One such tactic? Capitalizing on the personalized medicine market.
Some big drugs went off-patent in 2016, including Zetia and Crestor, cholesterol medications from Merck (NYSE:MRK) and AstraZeneca (NYSE:AZN). Numerous other heart disease medications and four HIV drugs are also on the list, plus several pharmaceuticals that target infections and psychiatric disorders. And those are just the high earners!

The patent cliff

Investors know to pay close attention to the patent cliff. When profitable drugs lose patent protection, a pharmaceutical company—and its stakeholders—can see big losses, as competitors swoop in to make cheaper generic versions of the drug.
“It is likely that within 12 months, US revenues for both Crestor and Zetia will drop by 90 percent,” John LaMattina predicted in Forbes. Indeed, AstraZeneca’s Q3 2016 financial report saw American Crestor sales down by 82 percent. That kind of drop is far from unusual.

Pharmaceutical companies counter the patent cliff by capitalizing on personalized medicine. As it turns out, this niche market is less vulnerable to the patent cliff—which may make it attractive to pharmaceutical companies and investors alike.

What is personalized medicine?

Personalized medicine refers to treatments genetically tailored to the patient. Kalydeco, for example, is a drug developed by Vertex Pharmaceuticals (NASDAQ:VRTX) to treat cystic fibrosis. But it’s only approved for 2,000 of the some 30,000 Americans diagnosed with this disease. Those 2,000 patients have the exact genetic mutation that Kalydeco treats.
Personalized medicine, then, is an expensive development pursuit that only works for a targeted section of the affected population. It is made more costly by the fact that most of these precision drugs are developed from biologic material, rather than synthesized chemicals.
But that is also what insulates personalized medicine from the patent cliff.

Bridging the patent cliff

When a competitor develops a generic version of a chemically synthesized drug, their product must contain the same active ingredient and prove bioequivalent to the original medication.
Getting approval is a relatively short process compared to bringing a new drug to market. That’s because generic manufacturers are not required to duplicate the original drug’s clinical testing results—a process which takes between six or seven years with brand new medications.
But a generic biopharmaceutical—or drug made from biologic material—must undergo more rigorous testing. These “biosimilars” are deemed harder to reproduce than chemically synthesized drugs.
And because of that, many are required to go through a period of clinical testing.

An opportunity for big pharma?

That means that personalized medicine may be a less attractive arena to generic manufacturers. The high costs and lengthy timelines of clinical testing, paired with the fact that such precision drugs are only marketable to a small segment of the population, may make developing biosimilars less appealing.

That creates an interesting window for big pharmaceutical companies, according to Rahul Panjwani, an analyst for The Smart Cube. “It provides them an exclusive market territory, away from generic intervention,” he explained in a recent article. Even more noteworthy? “Developers have the opportunity to extend the drug exclusivity period by developing drug/diagnostic combinations and obtaining patents on them, rather than the drug alone.”

In sum

Watch for pharmaceutical companies—particularly large cap ones—to focus more of their attention on personalized medicine in years to come. These genetically tailored drugs may be costly to develop, but have the potential to bring in huge amounts of revenue.
Even better? Since this niche market is less attractive to generic manufacturers, pharmaceutical companies and their investors may find that the patent cliff is no longer so worrying.
 
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Securities Disclosure: I, Chelsea Pratt, hold no direct investment interest in any company mentioned in this article.