Long Bloomberg article on TEVA strategy.
Teva Grabs Billions Gambling on Copies of Brand-Name Drugs
By Catherine Larkin and Susan Decker
Dec. 1 (Bloomberg) -- Teva Pharmaceutical Industries Ltd. turned itself into the world’s biggest maker of generic medicines through a high-risk strategy of flouting drug patents. Its next target may be Eli Lilly & Co.’s Evista, an osteoporosis treatment with more than $700 million a year in U.S. sales.
Teva, Israel’s biggest company by market capital, risks paying billions of dollars in legal damages by taking a calculated gamble: It begins selling copies while patents on a drug are still being disputed in court. Teva bets it will win the court case, allowing it to avoid triple damages for violating valid patents on brand-name drugs.
The company has pulled off the maneuver 13 times since 2004, helping double annual revenue to $9.41 billion. The strategy gets cheaper, copycat drugs to patients quicker as governments and employers are demanding relief from record health-care costs. No other generic-drug maker has staked so much of its business on so-called at-risk launches.
“Teva alone has the resources to do these at-risk launches,” said Joseph O’Malley, a patent lawyer who represents brand-name drugmakers at Paul, Hastings, Janofsky & Walker in New York, in a telephone interview. “If they gamble and are incorrect, the lost profits could be catastrophic to smaller companies that don’t have Teva’s resources.”
The company, which often targets patents it contends are obvious variations on existing ideas, has yet to pay damages. Instead, Teva scooped up sales.
American depositary receipts of Petah Tikva-based Teva, each representing one ordinary share, rose 7 cents to $43.15 in Nasdaq Stock Market composite trading on Nov. 28. Before today, the ADRs had lost 7.2 percent this year.
Pending Acquisition
Teva’s pending $7.3 billion acquisition of Barr Pharmaceuticals Inc., a Montvale, New Jersey-based maker of generics and birth-control pills, provides the opportunity to copy Lilly’s bone-drug Evista. The deal is due to close by the end of the year.
Barr holds approval from the Food and Drug Administration to sell the first generic version of the medicine in the U.S. Lilly says its patents on Evista extend until 2017, while Barr claims the patents are invalid because they don’t break new ground.
Once Teva takes over Barr, it may not wait for the outcome in court. A copy of Evista may go on sale as soon as March, bringing in $90 million to $300 million for Teva in 2009, said Corey Davis, an analyst with Natixis Bleichroeder in New York, in an e-mail.
30-Month Delay
U.S. law allows the sale of generic drugs if they don’t infringe patents held by brand-name drugmakers or if the patents are invalid. The maker of the original drug can sue, claiming infringement, when a generic-drug company applies to the FDA to market copies. That triggers a 30-month delay in approval of the generic medicine while the parties fight in court.
After that, the FDA grants approval of the generic version even if the patent dispute drags on. In such cases, Teva sometimes floods the market with generics on the expectation that it will ultimately prevail in court.
AstraZeneca Plc’s asthma drug Pulmicort was Teva’s most recent target. The generic-drug maker started selling copies on Nov. 18, and London-based AstraZeneca Plc won a restraining order halting sales. Less than a week later, AstraZeneca agreed to let Teva keep selling supplies already on the market and resume new shipments on Dec. 15, 2009, in exchange for undisclosed payments.
Allergy Drugs
Sanofi-Aventis SA also reached a legal settlement last month with Teva and Barr that gave Barr rights to sell generic versions of two allergy drugs, Allegra-D in 2009 and Nasacort by 2013. The threat that Teva wouldn’t wait for a court decision may have prompted Paris-based Sanofi to settle, said Ronny Gal, an analyst with Sanford Bernstein in New York.
“I am sure the possibility Teva could launch at-risk on both Allegra-D and Nasacort played a part in Sanofi’s calculations,” Gal said in an e-mail.
Teva started in 1901 by distributing imported medicines on camels and donkeys. Years later, U.S. and European drugmakers sold licenses to the company to make local versions of their products as a way around Arab embargoes. In the 1980s, Teva expanded into the U.S. through acquisitions and a 1984 law that grants six months’ exclusivity to the first generic-drug maker challenging U.S. patents.
The company’s chief executive officer, Shlomo Yanai, was a major general in the Israel Defense Forces before coming to Teva last year. He has vowed to double revenue again by 2012.
‘Astute Managers’
“I don’t think they’re necessarily such brazen risk-takers as much as they are astute managers that are able to make risk- reward decisions and follow through,” Gal said in a telephone interview.
Even before the July agreement to buy Barr, Teva had about 19 percent of the $28.2 billion U.S. market for generic drugs, according to research firm IMS Health Inc. in Norwalk, Connecticut. That will jump to 23 percent with the addition of Barr. The next-biggest, the Sandoz unit of Swiss drugmaker Novartis AG, has 11 percent.
Bill Marth, head of Teva’s North American unit, confirmed in an interview that Teva is considering other drugs for its at- risk strategy. He declined to say which ones.
“At-risk launches have been a strategy of Teva’s for quite some time, and we feel that it’s something we need to do,” Marth said. “It’s our right and it’s our obligation to do that to get affordable medicines into the system.”
$900 Million Penalty
Teva’s gamble on early copies of Evista would cost the company as much as $900 million if the company places a bad bet, according to Davis, the Natixis analyst.
Assuming a gross profit margin of about 88 percent, a 35 percent tax rate and gradual erosion of market share over the year, generic competition for Evista may reduce Lilly’s net income by more than $300 million in the first year, Davis estimated. That figure may be tripled under the law if a judge later finds the company willfully infringed valid patents.
“The reason that generic companies are more willing to do this is that they don’t believe they’d ever have to pay that much,” Davis said in a telephone interview. “If Teva really believed it was that much at risk, would the board let them do it? No.”
Lilly said it would fight any patent infringement.
“We firmly believe in the validity of our patents for Evista,” and any company selling a copy before they expire may be “required to pay compensatory damages to Lilly,” said Teresa Shewman, a spokeswoman for the Indianapolis-based company, in an e-mail.
65% of Prescriptions
Generic drugs account for 65 percent of prescriptions dispensed in the U.S. market. Teva competes with dozens of companies, with an increasing number seeking to overturn patents by challenging them in court before they expire.
The maker of the first generic can charge almost full price during the six months of exclusive sales. After that, prices may drop to pennies a pill as competitors join in.
Teva has sometimes teamed up with companies holding the rights to the first generic of a top-selling product to support an at-risk launch. Teva joined with Alpharma Inc. to copy Neurontin, an epilepsy drug from New York-based Pfizer Inc., in 2004, and with Barr to copy the original formulation of Allegra in 2005. Allegra-D is a longer-lasting, 12-hour version.
The only way Teva will back off is if it loses a big case, said O’Malley, the patent lawyer.
“If there’s a huge damage award in any of these cases where they’ve launched at-risk, we can imagine Teva and others might rethink this strategy,” O’Malley said.
The Evista case is Eli Lilly & Co. v. Teva Pharmaceuticals USA Inc., 06cv1017, U.S. District Court for the Southern District of Indiana (Indianapolis).
To contact the reporters on this story: Catherine Larkin in Washington at clarkin4@bloomberg.net; Susan Decker in Washington at sdecker1@bloomberg.net.
Last Updated: December 1, 2008 00:00 EST |
