Big Pharma markets left on a ‘patent cliff’-hanger

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0:32Good morning from the Financial Times. Today is Friday, July 11th, and this is your FT News Briefing. India is having an IPO boom. And Meta heads to court next week for an unusual trial. Plus, the pharmaceutical industry is speeding towards something called a patent cliff. We'll tell you what that means for the sector. I'm Mark Filippino, and here's the news you need to start your day.

1:05India now has the world's biggest initial public offering market outside the U.S. The amount raised in primary public flotation so far this year hit$6.7 billion, and a few highly anticipated listings are expected to push India past the$21 billion mark that was raised last year. All this success comes on the back of India's interest rate cuts and a lot of demand for equities from domestic investors. But there's a bit of a hang-up. New Delhi has not cut a trade deal with Washington yet. And U.S. President Donald Trump is threatening the country with more tariffs, so investors are a bit cautious about calling this a bull market.

1:50A rare type of corporate lawsuit in the U.S. state of Delaware goes to trial next week. Meta shareholders are suing the company's board of directors. They're alleging that mismanagement led to billions of dollars in U.S. government fines. Now, the location of this case is critical here. This is the first time a lawsuit like this is going to trial in Delaware, the legal home of most of America's big companies. I'm joined now by the FT's Wall Street editor, Sujit Indap, to talk more about this. Hey, Sujit. Hey, Mark. Great to talk. Good to have you. So, Sujit, what are these investors alleging here?

2:26Why do they have beef with the board? So, Facebook has gotten into trouble over the years for how it treats its users' data. Most notably, there was the Cambridge Analytica case where it was learned that this third party was getting user data when perhaps they should not have. And so there's just a lot of controversy on how Facebook manages user data. And so they settled with the FTC. The Federal Trade Commission. The Federal Trade Commission, the regulator of companies in the U.S. That$5 billion settlement was very large. And now what these suing shareholders are saying is that misconduct, which they were paying a fine for, the ultimate culpability rises up to the board level for their, not only just their failure to supervise, but their actually specific actions led to the bad behavior that was settled in that deal with the FTC.

3:20And what does Metta say in response? Metta says many things. First of all, they say they had tried earnestly to uphold a deal that they had made with the The FTC, the Federal Trade Commission, earlier in the decade around how it was supposed to be managing data and Facebook can point to many things they did, procedures and consultants and other ways that they thought they were diligently trying to guard customer data. And then from a more legalistic point of view, this kind of claim requires such a high burden of proof that it's very hard to pin this kind of operational wrongdoing at the highest levels of the company.

4:03Now, this case is interesting in and of itself, but you're monitoring it for another reason, because, as I mentioned, this trial is the first of its kind in Delaware. Can you explain why we should care about that? Sure. So the kinds of lawsuits you see in Delaware, which is where most companies are incorporated, are usually around M &A or a proxy fight where you're trying to elect directors. What is unusual about this case is these shareholders are trying to pin like an operational scandal on the board of directors. So another famous case involving this type of plane is Boeing. Recall the 737 MAX disaster.

4:41The planes had crashed. shareholders sued the board saying the reason Boeing is bad at passenger safety is that the board just isn't doing their job in overseeing like the management and safety of the company. So it's the same thing here in this Facebook case where they're saying this user data scandal ultimately goes to the highest reaches of the company. And that's just very unusual. Okay. So Sujit, with all of this in mind, what does this lawsuit potentially mean for Delaware? So Facebook is the latest company, particularly in technology, that's faced a shareholder lawsuit that's gotten traction.

5:19And so companies like Facebook have increasingly left Delaware for Nevada in particular, which has a much higher standard for shareholder lawsuits to reach like a trial phase. And in fact, there was the announcement this week that Andreessen Horowitz, the big venture capital firm, is moving its incorporation to Nevada. And so this trial is very interesting in that this type of claim, it's never made it to trial before. And the fact that it has gives the sense to some people that Delaware is giving too hard a time to founder-controlled companies. And maybe companies like Facebook, to avoid a future trial like this, would want to move where they're going to get more benefit of the doubt.

6:06Sujit Indap is the FT's Wall Street editor. Thanks, Sujit. Thank you.

6:16The cancer drug Keytruda was hailed as a giant leap forward for patients when it launched in 2014. It quickly became a bestseller, and it earned the company behind it, Merck, tens of billions of dollars each year. But massively successful drugs like Keytruda can actually be a huge financial headache when their patents run out. And Merck isn't alone. Pharmaceutical companies are facing a wave of patent cliffs that could do some serious damage to the industry. I'm joined now by the FT's Hannah Kushler to discuss this. She's our global pharmaceutical editor. Hi, Hannah. Hi, thanks for having me. Good to have you.

6:53So first off, can you just remind us how the patent system works? So this is kind of our grand bargain between the government and the private sector when it comes to things around intellectual property. And it's particularly important when you have something like a medicine, which is really hard to create. Like it often takes over 10 years to create a medicine, billions of dollars, but actually then quite easy to copy. And what you want to do is find an incentive that says, you know, you're going to put in that work, even if someone could come along and copy it. And so you get these time-limited kind of government monopolies.

7:29So in the case of Keytruda, which is actually the best-selling drug in the world, that is all going to come to an end in 2028. And so Merck, the company that makes it, is going to have to find other drugs or other ways to replace that revenue. Okay, so you've kind of touched on what are some of the issues for the industry. But just go into a little bit more detail. What are the pros and the cons of this patent system? Well, so the pros are, you know, you incentivize the private sector to invest in something that takes ages and is important. And therefore, maybe the government doesn't have to do so much of that as well.

8:08And then the cons are, during that patent period, we pay a lot of money for drugs. And, you know, you can tell that this is a point of contention because almost every sort of government around the world, all looking at ways to bring the cost of drugs down. So Merck is nowhere near alone in facing these patent cliffs. And in fact, the whole industry is facing big patent cliffs coming up to the end of the decade. You have$180 billion of drugs coming off patent in 27 and 28 alone, which is actually 12 % of the sector's global revenue. So then you've got all these companies almost competing against each other to replace that lost revenue.

8:48All right. So what strategy are companies like Merck taking when facing a looming patent cliff, which I have to assume is pretty daunting? Yeah, it is. It is very daunting. And the main strategy for pharma companies has been to outsource their innovation and therefore to buy up biotechs where they have discovered new drugs. And we saw Merck doing that just this week, actually. They did a$10 billion deal for Verona Pharma, which is a respiratory company. really trying to fill that hole that they would get from Gertruda. In 2009, when there were lots of big patent cliffs, once again, you saw lots of companies doing what we'd call mega mergers, somewhat designed, instead of to add one or two great innovative drugs, but were designed to kind of cut costs by combining two pharma companies.

9:39Those are really not in favor at the moment. Investors really do want the sort of innovative drugs. I don't mean to sound like a Debbie Downer, but is it all bad news for the sector? I mean, where does it go from here? Yes, I think that there's a lot of work. It might be great news for the bankers. There will be a lot of work that they need to do. If you have really, really big drugs like that, you can't be looking to fill them with drugs that are going to make a billion, which we used to call that blockbuster drug. You've got to look for drugs that are going to make four or five billion. That's hard to do.

10:14and they've been facing a lot of political risk that has actually meant that they've really quite held back from that. They're worried about, well, if I do a deal, how will potential tariffs affect it? How will drug pricing policy affect how much money I can actually make out of this? These patent cliffs are causing big headaches for boardrooms and chief executives across the sector. Okay, so I wasn't out of line being a bit of a Debbie Downer. No, not that out of line. Hannah Kuchler is the FT's Global Pharmaceuticals Editor. Thanks, Hannah. Thank you.

10:52Before we go, I wanted to flag something about yesterday's show. We ran a segment about Canada's energy sector with several factual errors. For one, we said Canada ships liquefied natural gas to the U.S. It does not. It ships natural gas. We also misstated how certain energy production works. A listener brought these errors to our attention. We're glad they did. And we decided that they were serious enough to remove the entire segment from yesterday's show. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news.

11:28The FT News Briefing is produced by Sonia Hudson, Henry Larson, Fiona Simon, Ethan Plotkin, Jess Smith, Katya Kumkova, and me, Mark Filipino. Our intern is Michaela Sia. We had help this week from Michael Lello, Peter Barber, and David DaSilva. Our show is mixed by Blake Maples and Kelly Gary. Our acting co-head of audio is Topher Forges. And our theme song is by Metaphor Music.

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