A Bitter Pill For Glaxo?

To the titans of the pharmaceutical industry, the Tabatznik family's little generic-drug outfit has been like an annoying insect buzzing around their ankles. Operating from bases in Britain and South Africa, the family has earned a hard-nosed reputation by winning fights with big drugmakers in Europe and Australia. But with sales estimated at less than $100 million, the Tabatzniks hardly seemed a threat to the big multinationals.

Until now. A tiny Canadian arm of the Tabatznik group is challenging the main U. S. patent protecting ulcer remedy Zantac, the world's biggest-selling prescription drug and the mainstay of Britain's Glaxo Holdings PLC. While Glaxo vows a vigorous defense, many patent lawyers think the publicity-shy Tabatzniks have an even chance of winning. And while any generic copy could not hit the market for four more years, the battle already has the industry abuzz and is casting a cloud over Glaxo's future earnings prospects. No wonder: Glaxo gets half its revenues (chart) and perhaps two-thirds of its profit from Zantac.

At the heart of the dispute are two key Zantac patents. The first, filed in 1977, covers the basic drug. It's called Form 1. Normally, that would have protected Zantac until 1995. But Glaxo in 1985 won a second U. S. patent for a more useful crystalline variant, Form 2. It's this compound that ulcer sufferers are swallowing in ever-increasing amounts--$1.4 billion worth in the U. S. last year, $2.5 billion worldwide.

Glaxo insists the second patent will shield its blockbuster until 2002. But with such a tantalizing market, nearly every major generic drugmaker has been mulling how to break the monopoly after 1995. The Tabatzniks moved first, at least a year before analysts had expected any action.

Those who know the Tabatzniks aren't surprised. The family, of South African origin, has built a privately held group of generic makers in Britain, Australia, New Zealand, and Canada. In each country, they have targeted drugs that are vulnerable to copycatting. The family has even clashed with Glaxo -- and won. In the mid-1980s, they fought all the way to the European Court of Justice to import to Britain a cheap Italian form of Ventolin, an asthma drug. In a rare interview, family leader Anthony S. "Tony" Tabatznik told BUSINESS WEEK: "It's not in our interest, or in the public's interest, to have high drug prices."

This aggressive stance can be traced to patriarch David Tabatznik, described by a former associate as a "very small man but a very tough guy" and a "walking encyclopedia" of the industry. Now in his early 70s, he lives in Johannesburg and is still involved in the company. But he has given day-to-day control to Tony, who says he moved to Britain 22 years ago for "political reasons." One colleague describes Tony as "very clear-headed about objectives."

POWERFUL ALLY. Rivals also give the Tabatzniks high marks. In Canada, the family's Genpharm Inc. is only some five years old. But it already has applied for at least 40 licenses and won the right to sell a generic form of the diabetes drug Diabeta. "This is a company that knows what it's doing," says Jack Kay, executive vice-president at Apotex Inc., Canada's leading generic drugmaker.

Even so, the Tabatzniks have not escaped the controversy that has dogged the generic industry. In 1986, David Tabatznik was a director and vice-chairman of Zenith Laboratories Inc., a New Jersey generic maker, when it ran afoul of the Food & Drug Administration. The FDA faulted its manufacturing practices, saying they differed from those detailed in regulatory filings. No safety questions arose, but Zenith briefly recalled 33 of its 54 drugs. Tabatznik quit the board in April, 1988, a month before Zenith filed for Chapter 11. It emerged a year later under new managers.

In Australia, a Tabatznik affiliate, Alphapharm Ltd., was targeted by a 1987 government probe into the accuracy of drug testing done for it by a South African company. The government advised doctors to restrict prescriptions of the company's drugs, but Alphapharm notes it was quickly cleared after submitting new test data.

None of this deterred a powerful ally from joining the Tabatzniks: Lord Jacob Rothschild. In 1989, RIT Capital Partners PLC, a London investment company that Rothschild chairs, put up $14 million in return for about 20% of the Tabatznik holding company, Amerpharm Holdings. "We think it's a very entrepreneurial group, with a very good ability to identify what drugs to go for," says Andrew Stafford-Deitsch, a director of Rothschild's firm who sits on the board of Amerpharm. He cautions anyone who doubts that the Tabatzniks have the funds to pursue their Zantac case that "Amerpharm and its shareholders are substantial people."

Tony Tabatznik says he's hoping to exploit a clause in the 1984 Waxman-Hatch Act that liberalized generic drugs. Under it, any company that succeeds in invalidating a patent may win exclusive rights to market a generic form of a drug for six months, after which the gates are thrown open to any generic company. "It's a reward for anybody to spend the money on a legal challenge if they think the patent isn't valid," says Tabatznik. He's hoping to invalidate the Form 2 patent, thus permitting a generic Zantac after the Form 1 patent expires in late 1995.

WINDFALL. Given that generics usually take about 50% of the market within a year, that six months could bring a huge windfall to the Tabatzniks. "They have no downside except the cost of the lawsuit," notes Apotex' Kay. "This could be worth hundreds of millions of dollars."

Glaxo's defense rests in part on asserting that Form 2 is distinct enough from Form 1 to deserve a separate patent. That's a matter of some debate, given their chemical similarity. Also, at least some of Glaxo's testing was done with Form 1. "It's a winnable case," says U. S. patent attorney Alfred B. Engelberg. Canadian patent lawyer Malcolm Johnston calls the Form 2 patent "absolute rubbish. It's a distinction without a difference."

But others point out that U. S. courts are loath to invalidate a patent without clear evidence that it was faulty. Moreover, if the case is appealed, it will be heard in Washington. George Repper, a drug-patent specialist at Washington's Rothwell, Figg, Ernst & Kurz, says this appellate court "leans very strongly to the patent holder." He gives the Tabatzniks less than a 50-50 chance.

Glaxo's stock, which had jumped 30% in London trading since Jan. 1, fell by 4% on news of the suit. It later rebounded, and some analysts think investors haven't realized the importance of the Zantac challenge. Jo Walton, analyst at Lehman Brothers International in London, figures Glaxo stock is "fully reflecting the best possible" outcome. If the Tabatzniks win, many investors could get burned. And an obscure South African family will get very, very rich.

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