Biotech Values

[DewDiligence]

Pfizer pressures generic companies with ‘authorized generic’ of Neurontin:

[This article from Monday’s WSJ notes that no generic company has ever had to pay damages for an “early” generic launch. Hence Alpharma and Teva, whose generic Neurontin launch prompted Pfizer’s retaliatory action, may not be taking as large a risk as some investors believe.]

http://online.wsj.com/article/0,,SB109745694557841711,00.html?mod=yahoo_hs&ru=yahoo

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Diminutive Alpharma
Takes a Risky Slap
At Drug Titan Pfizer

By LEILA ABBOUD
October 11, 2004

A tiny generic-drug company has launched an assault on the largest pharmaceutical company in the solar system.

On Friday, pint-size Alpharma Inc. took what appears to be a huge risk by beginning to sell the first generic version of Pfizer Inc.'s blockbuster anticonvulsant drug Neurontin. A federal court in New Jersey is still weighing patent issues involving Neurontin.

If Alpharma, with a market value of about $900 million, is found to have transgressed the patents of Pfizer, which has a market capitalization of $225 billion, Alpharma would have to pay treble damages. No wonder the stock of Alpharma fell $1.10, or 6%, to $17.12 a share as of 4 p.m. Friday in New York Stock Exchange composite trading.

But Alpharma, of Fort Lee, N.J., has reasons for taking such risks. The court case that it pre-empted with its early launch has been dragging on. Moreover, another generics maker, Ivax Corp., of Miami, found a way to sidestep the courts with a near-copy of Neurontin -- and already has captured some 20% of the market. Neurontin, generically known as gabapentin, is widely prescribed for a range of psychiatric and pain conditions. It had $2.2 billion in U.S. sales last year. Pfizer will soon launch a successor to Neurontin called Lyrica that will add to the competition. Finally, Alpharma has a muscular ally in its launch -- generic-drug giant Teva Pharmaceutical Industries Ltd. -- which has indemnified it from some of the court penalties should its gamble fail.

An Alpharma spokeswoman declined to comment on the reasons behind the launch.

Also on Friday, New York-based Pfizer was rejected when it asked the court in an emergency hearing to block Alpharma from launching its generic version. A few hours later, Pfizer said it would release its own version of Neurontin through its rarely used generic subsidiary called Greenstone.

Pfizer's release of its own generic is an example of the newest tactic wielded by big branded-drug companies to put pressure on the generic-drug industry. Until recently, the stocks of the generic-drug makers have performed far better than the big drug makers' shares. In the past five years, shares of two of the biggest generics companies, Teva, of Israel, and Mylan Laboratories Inc., of Pittsburgh, have gone up roughly fourfold and more than doubled, respectively. Shares of branded-drug giants Pfizer and Merck have declined a bit during the same period. As concerns over health-care costs mount, generic-drug use has increased with encouragement from insurance companies and government payers such as Medicare and Medicaid.

This year, though, generic-drug stocks have taken a pounding. Wholesalers and retail-drugstore chains, the generics' big customers, have been driving harder bargains. But the biggest cloud over the industry is the trend toward so-called authorized generics.

Here is how the authorized-generics defense works: When a branded drug is about to face a new copycat drug from one generics company, the big pharmaceutical company allows another generics company, or in some cases its own generic-drug subsidiary, to sell an "authorized copy" of the drug.

Why is this a problem? Normally, by law, the generics maker that first challenged a patent on a branded drug would be granted six months of exclusive sales of its copy. The six month period of exclusivity is a key source of profits for generics; prices plunge after six months as several players start selling the drug.

But the authorized copies are allowed to be sold immediately, skirting the six-month restriction on copies. So the authorized copies immediately cut into the rival generic makers' sales. Recent examples include a deal between generics maker Par Pharmaceutical Inc., a unit of Pharmaceutical Resources Inc., and Bristol-Myers Squibb Co. for the diabetes drug Glucophage XR, which had sales of $450 million last year.

Authorized generics have a negative effect on price. When two generics hit the market at the same time, companies have to jostle for market share, which often causes prices to fall. The first generic to market typically only discounts 20% to 30% off the branded price, but another entrant could push that to 40% to 50% off. Analysts and executives fret that the branded companies will start to slash the prices of the authorized generics and ruin the profitability of the market. On Neurontin, "we just don't know how Pfizer will act on price," says Rich Silver, an analyst from Lehman Brothers who doesn't personally own any shares in Pfizer, Alpharma or Teva. "Will they be rational?"

Some branded-drug companies are even bringing back their atrophied generics subsidiaries to put out their own authorized versions. In August, Schering-Plough Corp. put out an authorized generic of its hepatitis drug Rebetol through its Warrick division and gutted the market by coming in at a lower price than expected. "This action...made a potential windfall situation for generic firms into a nonevent," wrote Albert Rauch, an analyst with A.G. Edwards & Sons, in an Aug. 11 research note.

Alpharma isn't the first generic-drug company to make an "at-risk launch." Increasingly, generics companies will start selling a generic copy of a drug after they have won a patent challenge against the branded drug in a lower district court but before an appeal has been decided.

But Alpharma's aggressive move Friday "is a different kind of at-risk launch," Lehman's Mr. Silver says, because no court has actually ruled yet on the patent fight. Mr. Silver doesn't think Alpharma is going out too far on a limb, because NO GENERIC MAKER HAS EVER ACTUALLY PAID DAMAGES FOR LAUNCHING EARLY [emphasis added].

Moreover, Alpharma's action forced Pfizer to launch its own authorized generic, putting the drug giant in an awkward position in the pending patent litigation: How is Pfizer going to argue to the court that it would be irreparably harmed by a generic if it was putting one out itself?

Alpharma has its risk significantly hedged by the big gun of the generics business, Teva. Although specifics haven't been disclosed, the two generics makers in April reached a deal under which Teva would share the six-month period of exclusive sales that Alpharma gets for being the first generic to market. In exchange, Teva would pay Alpharma certain fees and somehow indemnify Alpharma if it lost the patent case and had to pay damages. As one of the biggest and most profitable of the generics companies, Teva presumably has deep enough pockets to take such a risk. Under the terms of the agreement, Teva on Friday also launched its version of Neurontin.

Rodney Hathaway, portfolio manager of the Heartland Value Plus Fund, doesn't see authorized generics as a big problem. [I respectfully disagree.] "There is no way the branded companies are going to put the generics out of business with these pre-emptive attacks," he says. Mr. Hathaway's fund holds 350,000 shares of Alpharma, about 1.7% of the fund's assets. He spent the last year buying Alpharma while others worried about manufacturing and pipeline problems. He isn't adding Alpharma now because it is at the fund's limit for the size of its holdings. But he thinks Alpharma and Par Pharmaceuticals are cheap enough to buy.

Alpharma isn't a likely takeover candidate, because some insiders hold shares with extra voting rights. But for the generics industry, a period of consolidation could be on the way.

"Consolidation has been going on, and I expect it to continue," Mr. Hathaway says.
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