Dr. Ronny Gal: As the business appears to be at or past its zenith, we are growing more concerned about generics long term valuations.
A critical growth engine for generic pharmaceutical companies is US Food and Drug Administration (FDA) Paragraph IV, under which generic companies challenge patents on original drugs. If the Paragraph IV procedure is successful, the first generic drug maker to file the challenge wins a 180-day marketing exclusivity period in the US for the generic version of the drug before other companies can enter the market and the price of the drug falls.
Bernstein Research analyst Dr. Ronny Gal maps possible Paragraph IV challenges to original drugs over the course of 2009. He lists 39 drugs, whose aggregate US sales total $13.8 billion, compared with the possible challenges to 78 drugs, with aggregate sales of $21 billion, in 2008.
Gal notes that the number of Paragraph IV challenges fell from 51 in 2005 to 37 in 2008. He says, "As challenges are a 3-4 year leading indicator of Paragraph IV revenue, we see the data as the beginning of the end of the Paragraph IV challenge growth period."
Gal adds, "As the business appears to be at or past its zenith, we are growing more concerned about generics long term valuations."
Since Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) is the world's largest generic drug company, it will presumably lead many of the Paragraph IV challenges in 2009.
Although Teva's core business is generics, it has original drugs: Copaxone for multiple sclerosis; Azilect for Parkinson's disease; and pulmonary products. Gal mentions two of Teva's asthma treatments: Proair HFA, which has $374.4 million in sales, which is in the list of drugs less likely to be challenged in 2009; and Qvar 40, which has $97.9 million, which is in the list of drugs unlikely to be challenged in 2009.
Gal reiterates his "Outperform" recommendation for Teva with a target price of $52. Teva closed at $42.49 on Nasdaq yesterday.
Gal cites the following risks to Teva: deterioration of Copaxone revenue due to rapid adoption of Tysabri in 2008 or rapid success of a Paragraph IV challenge on Copaxone; an inability to monetize its Paragraph IV portfolio; intensifying global competition in commodity generics beyond our current estimates. Teva could beat the estimate if it wins more Paragraph IV challenges than expected, if the baseline generic business may outperform expectations, or a rapid uptake of Azilect, ProAir or failure of Tysabri
Gal's model for possible Paragraph IV challenges applies five criteria: the size of the drug - the more sales the drug has, the greater likelihood of a challenge; formulation complexity - the less complex (i.e., oral, solid dosage forms), the greater likelihood of a challenge; active pharmaceutical ingredient (API) source - the more sources available to manufacture the drug, the greater the likelihood of a challenge; the number of patents protecting the branded drug - if the drug has only one patent, the lesser the chance of a challenge as that patent is likely to be a composition of matter patent and if the drug has multiple patents, then there is a greater chance of a challenge; and the lack of timely challenge, which suggests that products that could have been challenged but have not been, or have barriers that may delay challenge.
High cholesterol treatment Vytorin, made by Schering-Plough Corp. (NYSE: SPG), and which has $2.44 billion in sales, tops Gal's list of original drugs that may be challenged. The top-ten list includes three HIV treatments, which have aggregate sales of $2.1 billion. As for HIV treatments, he notes, "the combined opportunity for the generics for drugs having patents that may be potentially overcome amounts to approximately $4 billion in branded sales."
Market Data 
Markets 
AI
