Why big pharmaceutical companies are heading for a fall

As Viagra goes off-patent in the UK, Keely Lockhart explains the implications and why it matters to you

The pharma patents cliff is big news for blockbuster drugs. Leading pharmaceutical companies are becoming increasingly concerned about losing their exclusive rights to sell their most profitable, life-changing drugs when their patents expire. Most patents last for a maximum of 20 years but a drug patents boom in the 70s and 80s has created what's known as the drug "patents cliff," when many patents suddenly expire within a small timeframe. Without the financial protection that drug patents provide, Big Pharma - a term for the world's largest pharmaceutical companies - is exposed to competition from smaller businesses who will sell the same drug for a lower price. This is a major issue for the pharmaceutical industry but at the same time it opens up to market and improves accessibility to pharmaceuticals.

Viagra's got some stiff competition

On 21 June 2013 the patent on Viagra, one of the most famous prescription drugs, expired. The little blue pill is owned by the world's largest drug company, Pfizer, and is one of its most profitable drugs, generating just over $2 billion (£1.3 billion) in revenue last year. If you fancy an easy-going Viagra history lesson featuring Jake Gyllenhaal (with a little romantic drama thrown in) then watch Love and Other Drugs.

Viagra's patent expiry will hit Pfizer where it hurts the most - its profit margins - as it opens up the market to more competitive pricing. Soon, rival drug companies will be able to sell something known as a "generic" - versions of Viagra under the name of its active ingredient, sildenafil. This will be a welcome boom to pharmerging markets, where pharmaceuticals is a fast-growing industry. In addition, there's speculation that these companies will sell their own versions of Viagra for 10 times less than its current price, perhaps for even as little as 85p. It certainly sticks two fingers up to all those spam ads for "cheap Viagra." But Pfizer is prepared to play generic manufacturers at their own game. It's planning to launch its own cheaper version - known as Sildenafil Viagra.

What have these drugs got to do with the City?

You may be wondering why the drug patents cliff matters in the City. The pharmaceutical sector is one of the fastest-growing industries, expanding at a rate of $300 billion a year and anticipated to be worth over $1 trillion by 2014, according to IMS Health. It's big bucks business and as a result many professional services firms are likely to be advising their pharmaceutical clients about business strategy as they face the expiry of the patents of some of their most profitable drugs.

One recent graduate, who prefers not to be named, is currently working at one of the major professional services firms in London, and is helping pharmaceutical clients deal with this very issue. He said: "I think there's no doubt that the patents cliff is massively damaging to Big Pharma. It could cause drops in profitability and revenue, so the only way to deliver shareholder value is by cost-cutting." He adds: "This means laying off expensive research staff and reducing capital expenditure which will slow the development of new drugs." Professional services firms won't just be advising Big Pharma. Smaller rivals offering generics will also need their assistance because they're headed for a business boom as the patents cliff opens the market.

The patents cliff doesn't just concern professional services firms. Pharmaceutical companies are also recruiting City law firms to help them use the letter of the law to delay or even prevent the sale of generic drugs. On the less contentious side of things, City law firms will also be responsible for drawing up licensing agreements between large pharmaceutical companies and generic manufacturers. The aim of these is to retain some profit for the Big Pharma companies, while allowing generic manufacturers to market their drug without dispute.

So what will become of Pfizer? Well, don't get too excited yet - Viagra is still going strong across the pond. The US patent for Viagra isn't due to expire for another seven years.