One crucial test of a drug company is 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 drives pharmaceutical companies into a high-stakes game of chicken. Right choices can bring billions in revenues. Wrong decisions can send stocks plunging -- and cost CEOs their jobs. That's what happened to Bristol-Myers Squibb Co.'s (BMY) Peter R. Dolan, who was ousted on Sept. 12.
Dolan's latest sin was to botch a patent fight with Canadian generic drugmaker Apotex Inc. over BMS's blockbuster anti-clotting drug, Plavix. Worried that he might lose the fight, Dolan tried to pay Apotex to prevent the generic maker from coming to market. But the move backfired: Starting on Aug. 8, Apotex flooded the market with millions of generic copies of Plavix, slashing BMS's current and future sales by hundreds of millions of dollars. The great irony is, Dolan never had to pay 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.
The story offers a window into the larger struggle within the industry, and between the industry and those who regulate it. Because so much hangs in the balance, brand-name companies are constantly pushing the envelope on schemes to extend their patent protection and thus keep cheaper generic drugs off the market. And just as surely, generic drugmakers seek ways to shorten the monopolies. The referees are the courts and the regulators who want to help consumers by boosting competition.
In the late 1990s and early 2000s, the Federal Trade Commission largely prevented brand-name companies from paying would-be generic competitors. But the agency lost a key court case in 2005, opening the door to such settlements. So far this year, 7 out of 10 agreements between brand-name and generic companies involve payments in exchange for delays in marketing generic drugs, according to the FTC.
These battles wouldn't take place 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're filed. When the patents expire, generic competitors hit the market.
But because patent protection is so lucrative, brand-name companies do everything they can to keep it going. They try to get patent extensions. Or they file additional patents, covering what they claim are crucial new details about a drug, such as the way it's made. Bristol-Myers Squibb has been particularly aggressive in its pursuit of strategies for extending patent life. One long-running joke in the industry is that the company must be spending most of its research and development budget on patent lawyers. The payoff from even a few months of additional monopoly on a blockbuster is huge -- far more than the annual sales of most drugs.
In the case of Plavix, BMS's current partner, Sanofi-Aventis, originally had one patent that covered a whole class of hundreds of thousands of chemicals with intriguing anti-clotting properties. One would become Plavix. The patent expired in July, 2003.
When Sanofi tried to develop drugs from some of those compounds, it made a crucial discovery: Many chemicals come in right- and left-handed forms. These mirror images are chemically identical but can have different biological properties. Sanofi found that a right-handed chemical -- now Plavix -- is more effective and less toxic than either the left-handed version or a mixture of both. It filed a patent on that right-handed version, which expires on Nov. 17, 2011.
A generic drugmaker might wait until 2011 to market a generic Plavix. But some patents are shakier than others. So the generic company could take a risk and mount a legal challenge, claiming that the patent is invalid or unenforceable, or isn't broad enough. The track record of such challenges is surprisingly good. According to FTC testimony, from 1992 to 2000, "generics prevailed in cases involving 73% of challenged drug products." Apotex, for instance, got a generic Paxil (once a $2.2 billion per year antidepressant) on the market in 2003, even though GlaxoSmithKline PLC (GSK) claimed patent protection until 2017. Clearly, many of the follow-on patents are vulnerable.
Faced with such a challenge, brand-name companies must make a decision. "It is a difficult calculation," says Robert W. Grupp, spokesman for Cephalon Inc. (CEPH), which makes the wakefulness drug Provigil and has settled with four generic companies.
If the patents are strong, a brand-name company will fight. But if the patents might not hold up in court, it could be better to make a deal. The deals can take many forms, and some settlements involve sharing the monopoly profits with the generic drugmaker.
Until recently, that strategy ran afoul of the FTC, which sees such deals as anticompetitive. But the FTC has had its own woes. A complaint it filed against a deal done by Schering-Plough Corp. (SGP) was struck down in a 2005 court ruling. Ever since, drugmakers have felt emboldened, and deals are proliferating. The FTC is now scrutinizing these deals, and seeking a strategy for discouraging them.
Perhaps Dolan might have been able to get away with paying 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 U.S. Attorney in New Jersey, Dolan agreed to submit to the scrutiny of a court-appointed outside monitor, former federal judge Frederick B. Lacey.
Second, the deal he struck with Apotex had major miscalculations. To reduce the risk for itself in case regulators nixed the deal, Apotex insisted on big concessions. In one of them, Dolan agreed not to go to court to try to stop Apotex from selling a generic Plavix for five business days after it hit the market.
When the attorneys general and the FTC opposed the deal, the concessions kicked in. In its five-day window, Apotex had time to pour many months' supply of its drug onto the market before the courts forced it to stop distributing.
To the U.S. Attorney for 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 patent that expires in 2011. In his Aug. 31 ruling, U.S. District Judge Sidney H. 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, James D. Robinson III.
Because of all these mistakes, the outside monitor, Lacey, had every right to kick Dolan out -- and he did.
By John Carey