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Pfizer Lipitor Sales Are Threatened by Ranbaxy Generic Copy

Pfizer Inc.’s $10.7 billion cholesterol pill Lipitor gained a rival today after Ranbaxy Laboratories Ltd. was cleared by U.S. regulators to sell copies of the drug.

Pfizer, the world’s biggest drugmaker, lost on another front when WellPoint Inc., the largest insurer by enrollment, said it will support use of a generic version by its members by assigning a lower co-pay to the copycat than to the brand drug.

U.S. Food and Drug Administration clearance for Ranbaxy, India’s biggest drugmaker, followed a dispute over whether the company could produce the copies given questions about its manufacturing plants. A deal to share profits with Teva Pharmaceutical Industries Ltd., the world’s biggest generic-drug maker based in Israel, helped overcome that hurdle.

The FDA approval gives Ranbaxy exclusive rights to sell copies for 180 days, competing with Lipitor and a Pfizer-authorized version marketed by Watson Pharmaceuticals Inc. Pfizer took advantage of Ranbaxy’s dispute with regulators by making agreements with insurers to block competing generic versions in return for price cuts for the branded medicine.

“Had it been a clear situation that Ranbaxy would not have been able to make it, they could have commanded a better price,” said Jason Gerberry, an analyst with Leerink Swann & Co. in Boston.

Copycat Revenue

Copycat Lipitor may generate as much as $650 million for Ranbaxy in its first 180 days of sale, according to the median estimate of five Mumbai-based analysts surveyed by Bloomberg.

Ranbaxy, 64 percent-owned by Daiichi Sankyo Co. and based near New Delhi, sought to convince the FDA that approval shouldn’t be thwarted by an ongoing dispute about plant violations in India. The FDA approval may have been contingent on the Teva deal, said Bino Pathiparampil, an analyst at IIFL Ltd. in Mumbai.

The source for the active ingredient is approved to be produced in two sites, one of which is a Ranbaxy plant in Toansa, India, Sandy Walsh, a spokeswoman for FDA, said in an e-mail. The other is undisclosed as part of Ranbaxy’s confidential application, she said. The generic, known as atorvastatin, will be manufactured by the company’s unit in New Brunswick, New Jersey, the agency said.

Teva isn’t providing the active ingredient, Denise Bradley, a spokeswoman for the Israeli drugmaker, said in an e-mail. A spokesman at Ranbaxy declined to elaborate and terms of the companies’ agreement haven’t been disclosed.

Teva’s Cut

Michael Meyers, chief executive officer of Arcoda Capital Management in New York, estimated Teva will receive 35 percent of Ranbaxy profit from generic Lipitor during the first six months that the Indian drugmaker has the rights to exclusively sell it. That would make Teva’s cut equivalent to $105 million in revenue, he said.

Ranbaxy gained 2 percent to 443.15 rupees at the close in Mumbai, paring a gain of as much as 11 percent. The Bombay Stock Exchange’s India Healthcare Index lost 0.3 percent. New York-based Pfizer fell less than 1 percent to $20.03 at the close in New York trading. The stock had gained 14 percent this year.

The FDA granted Teva tentative approval today for its version of generic Lipitor. Teva plans to begin selling the product in May, the company said in a statement.

Pfizer’s marketing strategy includes agreements with the health insurer UnitedHealth Group Inc., of Minnetonka, Minnesota, and the pharmacy benefit manager Catalyst Health Solutions Inc., of Rockville, Maryland, to block the copycat versions in return for lower prices on brand-name Lipitor. Pfizer’s effort has had mixed results.

WellPoint, Wal-Mart

WellPoint, based in Indianapolis, today said it would favor Watson’s copy with a $10 to $15 co-payment, charging patients $20 to $35 for brand-name Lipitor.

Wal-Mart Stores Inc., the world’s largest retailer, also said today it began offering the Watson version of Lipitor to customers.

Pfizer is “trying to squeeze the last drops of juice out of the once-fat orange,” said Erik Gordon, a business professor at the University of Michigan in Ann Arbor who follows the industry, said in an e-mail. “The real game at Pfizer is to sell off units, cut R&D and use the cash to prop up the stock price with buybacks and dividends. It’s financial engineering from a company run by an accountant.”

Pfizer plans to divest its animal health and nutritionals units, which generated $5.44 billion in revenue last year. The money is to be used for share buybacks, Chief Executive Officer Ian Read has said.

Rejection of Strategy

“It’s in the best economic interests of our members for several manufacturers to make atorvastatin,” Kristin Binns, a WellPoint spokeswoman, said in an e-mail. The agreement applies to the company’s 10.5 million-person commercial market, as well as the insurer’s Medicare patients.

Three U.S. senators said yesterday in a letter sent to Pfizer that they’ll look into the drugmaker’s agreements with the insurers and pharmacy benefit managers. They’re questioning whether the deals will artificially prop up patient costs, the letter said.

“By working with manufacturers to push brand-name drugs, drug-benefit companies may be abusing Medicare to boost their profits and denying generic alternatives to patients -- a practice that needs to end immediately,” said Senator Max Baucus, a Montana Democrat who leads the Finance Committee, in a statement yesterday.

FTC Demand

The senators’ letter follows a demand by Maryland Democratic Representative John Sarbanes that the U.S. Federal Trade Commission review the agreements.

For Teva, approval of Ranbaxy’s Lipitor copy is a psychological positive, said Leerink Swann’s Gerberry. It’s a “modest negative” for Pfizer and Watson, he said in a note to clients today.

“The uncertainty of Ranbaxy’s situation created a segment of customers that held off on procuring normal inventory stocking in the hope that Ranbaxy would get approved and offer lower pricing,” Gerberry said.

Teva said on Nov. 2 that if it manages to introduce an “important undisclosed product” in the fourth quarter, the company would meet the upper range of a forecast of earnings excluding some costs of $4.92 to $5.02 a share this year. Sanford C. Bernstein & Co. analysts speculated in a report last month that the new product was Lipitor.

Just in Case

Ranbaxy may have sought a marketing deal with Petach Tikva, Israel-based Teva in case it didn’t win timely approval, said Priti Arora, an analyst at Kotak Institutional Securities in Mumbai.

“There is something more in this deal than meets the eye,” Arora said in a telephone interview. “My feeling is that they allied with Teva as a backup measure in case approval was held back due to its manufacturing issues.”

Watson began selling a copy of Lipitor in the U.S. at 12:01 a.m. New York time yesterday under the agreement with Pfizer. Watson’s version didn’t require FDA clearance because Pfizer is providing the drug to sell without the brand label in return for a share of the revenue.

As the first generic to challenge Pfizer’s patent, Ranbaxy is allowed six months under a 1984 law before other generic versions can come on the market.

In addition to Teva’s approval, Mylan Inc. of Canonsburg, Pennsylvania and Dr. Reddy’s Laboratories Ltd. of Hyderabad, India are among those seeking FDA clearance to sell Lipitor copies after Ranbaxy’s six-month exclusivity expires, according to U.S. court filings.

Manufacturing Defects

The U.S. enforcement actions against Ranbaxy, India’s biggest drugmaker, began in 2008 when the FDA cited manufacturing defects at two of the company’s plants in India and subsequently barred the company from importing about 30 different drugs. The following year, the agency said one of those plants, in Paonta Sahib, India, falsified data used in drug applications.

Making generic Lipitor in the U.S. instead of India will reduce the amount of profit Ranbaxy makes on each dollar of sales, Kotak’s Arora said.

“Margins for manufacturing in India are around 60 percent compared to about 40 percent from the U.S.,” she said. The brokerage had estimated Ranbaxy would generate $560 million in generic-Lipitor sales during the six months of exclusivity.

In approving the deal, Janet Woodcock, director of the FDA’s Center for Drug Evaluation and Research, said in a statement it was “important to have affordable treatment options.”

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