Teva Doomsday Scenario Seen Averted as Patients Switch

Teva Pharmaceutical Industries Ltd. may be sitting on the edge of a patent cliff, with 21 percent of its revenue at risk. You wouldn’t know it, though, with its stock near a three-year-high.

Two reasons: Teva’s legal efforts to block cheaper generic versions of the multiple-sclerosis shot Copaxone, which garnered $4.3 billion in sales last year, and its surprising success in shifting patients to a longer-acting version that won’t face competition until 2030.

Teva analysts have raised their estimates for 2014 earnings. When Copaxone’s U.S. patent expires on May 24, it’s possible that none of the companies planning to introduce generics will do so.

“It looks like Copaxone will have a much longer life than previously thought,” said John Park, co-manager of Jackson Park Capital LLC’s Oakseed Opportunity Fund, which has 7 percent of its assets in Teva shares. “Generics will be approved at some point, but it’s no longer going to be devastating.”

Every day that goes by without a copy of the daily Copaxone on the market allows Teva to convert patients to the new three-times weekly product. If generics are delayed another couple of months, Teva may wind up converting as many as 70 percent of users, said Ronny Gal of Sanford C. Bernstein & Co.

Two Forecasts

Copaxone, first introduced in the U.S. in 1997, generated more than half of Teva’s profit, according to Jonathan Kreizman at the Bank of Jerusalem.

Investors have long fretted about the looming patent expiration. Teva’s American depositary receipts slumped as much as 45 percent from the closing record $64.54 set in 2010, even as other drugmakers’ shares soared, on concern sales would be wiped out by generics. The ADRs rose 1.6 percent yesterday to close at $50.40 after reaching a three-year-high of $54.06 on April 3. The Israel-traded shares gained 1 percent to 176.10 shekels at the close in Tel Aviv.

The prospect of a potential Copaxone copycat was so momentous that it prompted Teva to take the unusual step of issuing two earnings forecasts: one with generic Copaxone and one without it.

Now, some analysts say the probability that Teva may sail through 2014 without generic competition has increased. Shares of Momenta Pharmaceuticals Inc., which is seeking to introduce a copycat with Novartis AG’s Sandoz, are down about 34 percent this year and analysts have slashed their earnings estimates for the company.

At the same time, Mylan Inc., which partnered with Natco Pharma Ltd. to copy Copaxone, said this month there may be ‘procedural’’ delays to FDA approval.

Supreme Court

Even if approval is secured this year, the generic drugmakers will need to weigh the risk of paying fines if a patent decision is overturned. The Supreme Court, which in March agreed to hear an appeal by Teva that could revive a 2015 patent, may hear the case starting in October and a decision could come sometime in the first half of next year, according to Kreizman.

“I don’t think the generic companies will launch,” David Maris, an analyst at BMO Capital Markets Corp. in New York. said in a telephone interview. “Because we’re talking about only two or three generic competitors, if they were to lose, the damages would be very substantial.”

‘Must Win’

Teva Chief Executive Officer Erez Vigodman told analysts May 1 that maintaining the Copaxone franchise is a “must-win” and that any “company launching at risk faces significant potential exposure.” Given the “pending case before the U.S. Supreme Court, any ANDA filers that obtain final approval from the FDA and launch purported generic versions of Copaxone would do so at risk,” Teva said yesterday in an e-mailed response to a Bloomberg request for comment.

Teva’s experience from being on the other side of the legal battle should come in handy. Teva has been among the industry’s most aggressive companies when it comes to marketing drugs before the legal status of a patent is settled. While the high-risk strategy of flouting drug patents has mostly worked, Teva was forced to pay Pfizer Inc. $1.6 billion last year for the unauthorized sale of the heartburn drug Protonix.

“They have been aggressive when it comes to at-risk launches,” said Louis Fogel of Jenner & Block in Chicago, who often represents brand-name drugmakers in patent cases. “The fact that they are on the other side is certainly ironic.”

The most likely scenario is that the Supreme Court finds that the appeals court used the wrong standard to review the Copaxone case, he said. The appeals court could still deem the patent invalid or affirm the trial judge’s findings, upholding the patent’s validity, he added.

Calculated Risks

Some analysts, such as Bernstein’s Gal, are ascribing a higher possibility to generic competition this year. The company culture at Sandoz encourages calculated risks and if Momenta and Sandoz are the only ones to get approval for the drug, they may be more inclined to take the risk in order to build market share, he said.

Teva may also agree to settle with the generic makers for a 2015 entry, he wrote in a note. “This looks like a solid option for the generics, if the deal can be negotiated,” he said.

Besides trying to reinstate its 2015 patent, Teva also tried to force the FDA to block the generic drugs. The company sued the agency May 10 after the regulator turned down a sixth request to require generic versions of Copaxone to undergo clinical trials before being approved for sale. A judge threw out the case four days later.

Pill Competitors

Copaxone already faces competition from new branded drugs that come in pill form, and is losing market share. Analysts estimate Copaxone sales will fall about 50 percent by 2016 as the relative ease of oral pills lures patients from Teva’s older injected product.

Still, Copaxone remains the No. 1 multiple sclerosis drug in the U.S. The three-times-weekly version costs $60,500 a year, or $1,000 less than the daily one. It has captured about 11 percent of the market, giving Teva’s two versions of the drug a 34 percent share, Teva said May 1. The company is on track to convert 30,000 patients to its new therapy by May and 40,000 by the end of the year, it said.

“We think that converted patient base will be sticky and less likely to move back,” said Randall Stanicky, an analyst at RBC Capital Markets.

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