DEFINITION of 'Patent Cliff'

Patent cliff is a colloquialism to denote the potential sharp decline in revenues upon patent expiry of one or more leading products of a firm. A patent cliff is when a firm's revenues could "fall off a cliff" when one or more established products go off-patent, since these products can be replicated and sold at much cheaper prices by competitors. While it is applicable to any industry, in recent years the term "patent cliff" has come to be associated almost exclusively with the pharmaceutical industry.

BREAKING DOWN 'Patent Cliff'

Patent cliffs are the associated drops in revenue that can come when a firm sees a key product's patent expire. When this happens, a competing firm can bring substitutes for the product to the market more cheaply and easily which takes market share from the original product. The world's biggest pharmaceutical firms such as Pfizer and GlaxoSmithKline stand to lose billions of dollars in revenues from the patent expiration on such blockbuster drugs as cholesterol drug Lipitor and asthma medication Advair respectively. Numerous firms have established profitable businesses by manufacturing "generic" alternatives to off-patent drugs, which can be sold at a fraction of the price of branded drugs. The "patent cliff" threat has spurred increasing consolidation in the pharmaceutical industry, as companies strive to replace blockbuster drugs whose patents are expiring with other drugs that have the potential to become big sellers.

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