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Patent Fight Bounces Bristol-Myers CEO

The test of a drug company isn't just how good it is at developing new medicines, it's also how well its executives fight the patent wars.

Patents ensure that successful drugs reap monopoly profits, but those monopolies are often fragile and open to challenge. That plunges pharmaceutical companies into an enormously high-stakes game of chicken. Right choices can bring extra billions in revenues. Wrong decisions can send stocks plunging—and cost CEOs their jobs. That's what just happened to Bristol-Myers Squibb's Peter Dolan, who was ousted from his post on Sept. 12.

Dolan's sin was to botch a patent fight with Canadian generic drugmaker Apotex over BMS's (BMY) blockbuster anticlotting drug Plavix. Worried that he might lose the fight, Dolan tried to buy off Apotex to prevent the generic maker from coming to market. But the move backfired: Apotex flooded the market with millions of generic copies of Plavix, slashing BMS's sales by hundreds of millions of dollars. The great irony, though, is that Dolan never had to pay off Apotex in the first place. According to an Aug. 31 ruling in U.S. District Court, the Plavix patent wasn't as vulnerable as Dolan had feared.

But the story is also a window into the larger struggle within the industry—and between the industry and those who regulate it. Because the stakes are so high, brand-name companies are constantly pushing the envelope on schemes to effectively extend their patent protection, and thus keep cheaper generic drugs off the market. And just as surely, generic drugmakers seek ways to end the monopolies. Trying to referee the fight are the regulators, who have their own agenda. They want to help consumers by boosting competition.

LUCRATIVE PATENT EXTENSIONS. In the late 1990s and early 2000s, the Federal Trade Commission was successful in preventing brand-name companies from paying off would-be generic competitors. But the agency lost a key court case in 2005, flinging the door wide open to such settlements—including Bristol-Myers Squibb's. In fiscal 2006, no less than 7 of 10 agreements between brand-name and generic companies involve payments to the generic company in exchange for keeping the generic drug off the market. Now, the FTC is trying to figure out new ways to fight these agreements.

None of these battles would occur if the world of patents were a simpler, more certain place. Here's how it's supposed to work: Drugmakers get patents on innovative drugs. The patents expire 20 years after they were first filed. Once the patents expire, generic competitors can hit the market.

But because patent protection is so lucrative, brand-name companies do everything they can to extend it past the original patent. They try to get patent extensions, for instance, arguing that the delays in the U.S. Patent & Trademark Office cost them valuable years. Or they file additional patents, covering what they claim are crucial new details about a drug, such as the way it's made or the size of the particles in the drug.

Bristol-Myers Squibb has been particularly aggressive with strategies for extending patent life. One long-running joke in the pharmaceutical industry is that the company spent most of its R&D budget on patent lawyers, since the payoff from even a few months of additional monopoly on a blockbuster is so huge—far more than the annual sales of most drugs.

CHALLENGED BY A GENERIC. In the case of Plavix, BMS's current partner Sanofi-Aventis (SNY) originally had one patent that covers a whole class of chemicals with intriguing anticlotting properties. That class of compounds included what would become Plavix. The patent expired in July, 2003.

When Sanofi tried to develop some of those compounds, it made an interesting discovery. Many chemicals actually come in right- and left-handed forms. Each form is chemically identical and has the same physical properties—but is a mirror image of each other. And each form can have different biological properties. Plavix is the right-handed version of the chemical, which turned out to be more effective and far less toxic than either the left-handed version or a mixture of both. So the company filed a patent on that right-handed version. That patent expires on Nov. 17, 2011.

Now, imagine that you are the leader of a generic company. You could wait until 2011 to market a generic Plavix. But you know that some patents are shakier than others. You could take a big risk and mount a legal challenge, claiming that you have a right to market because the patent is invalid or unenforceable or isn't broad enough. The track record of such challenges is surprisingly good. A study by the FTC shows that, between 1992 and 2000, "generics prevailed in cases involving 73% of challenged drug products." Apotex, for instance, was able to get a generic Paxil (a $2.2 billion-per-year antidepressant) on the market in 2003, even though GlaxoSmithKline (GSK) claimed that it had patent protection until 2017. Clearly, many of the follow-on patents are shaky.

PIVOTAL DEAL. Faced with such a challenge then, brand-name companies face a tough decision. "It is a difficult calculation," says Robert Grupp, spokesman for Cephalon (CEPH), which makes the wakefulness drug Provigil and recently settled with four generic companies.

If the patents are strong, you fight. But if you think the patents might not hold up, you'll try to make a deal, perhaps sharing the monopoly profits with the generic drugmaker. That, however, could run afoul of the FTC, which sees such deals as anticompetitive.

The FTC has its own woes, though. A complaint it filed against a deal done by Schering Plough (SGP) was struck down in a 2005 court ruling. Ever since, drugmakers have felt emboldened, and such deals are proliferating. The FTC still believes that consumers are hurt by these deals. The payoffs are simply a way for brand-name companies and their generic competitors to share the monopoly profits, rather than bring lower prices to patients. The agency is now actively scrutinizing these deals, trying to devise a new strategy for blocking or discouraging them.

COSTLY MISTAKES. So, in general, Dolan might have been able to get away with paying off Apotex. But he had two big problems. First, Bristol-Myers Squibb was already in trouble with state attorneys general for allegedly padding quarterly earnings by overloading wholesalers with inventory. As part of a deferred prosecution agreement with the attorneys general, Dolan agreed to an outside monitor, former judge Frederick Lacey.

Second, the deal he stuck with Apotex had colossal miscalculations. To reduce the risk for Apotex in case regulators nixed the deal, Apotex insisted on major concessions. In one of them, Dolan agreed not to go to court to stop Apotex for selling a generic Plavix for five days after it hit the market.

When the attorneys general and the FTC opposed the deal, the concessions kicked in. During its five-day window, Apotex flooded the market with many months' supply of the generic drug, which is now being sold. That's cut hundreds of millions off BMS's revenue.

To the U.S. Attorney General in New Jersey, Dolan's decisions in the Plavix matter were incontrovertible evidence of bad corporate governance. The biggest mistake of all, though, was misreading the strength of the 2011-expiring patent. In his Aug. 31 ruling, U.S. District Judge Sidney Stein gave every indication that BMS would prevail in the patent fight. "In hindsight, maybe we shouldn't have negotiated in the first place," says Bristol's board chairman Jim Robinson.

Because of all these mistakes, the outside monitor, Lacey, had every right to kick Dolan out—and he did.

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