Replies to post #33460 on Biotech Values

[Cougar3]

Correction: January 22, 2007 not January 2006


is the scheduled start of the Plavix Patent Challenge Trial.

[DewDiligence]

How Bristol-Myers Fumbled Defense of Plavix

[Most of this material has been posted in various messages on this board during the past few weeks—the main value of this article is having it all in one place. BMY holds its next BoD meeting on Sep 12; I would not be surprised if BMY’s having to lower 2006 EPS guidance on account of Plavix proves to be the last straw with respect to Dolan’s reign as CEO.]

http://online.wsj.com/article/SB115716250362552502.html

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CEO Dolan's Plan to Delay Generic Went Haywire; Board to Discuss His Fate

By JOHN CARREYROU and JOANN S. LUBLIN
September 2, 2006

On the morning of July 26, Federal Bureau of Investigation agents barged into the plush 44th-floor Manhattan office of Bristol-Myers Squibb Co. Chief Executive Peter R. Dolan. The agents sifted through his emails and riffled through his files for several hours, leaving behind a mess.

Mr. Dolan didn't let on to subordinates that anything was amiss. That afternoon, he attended a meeting about the company's second-quarter earnings and didn't mention the raid. The next day, he flew to Houston and gave a speech to doctors treating AIDS in Africa.

Mr. Dolan has survived many crises in his five years at Bristol-Myers's helm -- in particular a multibillion-dollar accounting scandal that unfolded under his watch. The company's share price is down nearly 60% since he took over. Yet he has held onto his job.

Now the anger of Bristol-Myers shareholders is reaching a boiling point. The issue: Mr. Dolan's strategy for protecting Plavix -- the company's best-selling drug and the source of one-third of its profits -- from generic competition.

Mr. Dolan tried to pay Apotex Inc. of Toronto, the maker of generic Plavix, to go away for a while. But the deal unraveled after the Justice Department's antitrust unit opened a criminal probe into it and the FBI carried out its raid. Apotex has started selling its drug, exploiting concessions it extracted from Bristol-Myers during the negotiations. No charges have been filed against Mr. Dolan or Bristol-Myers.

Bristol-Myers's board, which until recently had steadfastly supported Mr. Dolan, has become worried that his loss of credibility with investors may be impairing his ability to lead the company effectively. The board is scheduled to meet Sept. 12, and Mr. Dolan's fate is likely to top the agenda. Mr. Dolan declined to be interviewed.

Yesterday, Bristol-Myers reduced its earnings forecast for 2006, citing the Plavix problems. The company said it expects to make at least 95 cents a share this year, down from its earlier forecast of between $1.15 and $1.25 share.

On Thursday, Mr. Dolan won a round when a federal judge in New York granted Bristol-Myers's request for an injunction halting sales of Apotex's Plavix knockoff. But the judge refused to recall months' worth of product that Apotex has already sold to wholesalers.

As a result, U.S. pharmacies will continue to dispense the generic version to patients through the end of the year and possibly into 2007, depriving Bristol-Myers of hundreds of millions of dollars in revenue. In the three weeks since its launch, generic Plavix has conquered nearly 75% of the U.S. market for the drug. What's more, the price war the generic has unleashed means Bristol-Myers probably will suffer reduced profits on Plavix even if the judge rules in its favor in its patent litigation against Apotex.

Under a deal last year with the U.S. attorney in Newark, N.J., Mr. Dolan was forced to relinquish his chairman's title to a senior member of Bristol-Myers's board and agree to an outside monitor. That followed a probe into a $2.5 billion scandal at the company involving "channel-stuffing," or overloading wholesalers with inventory to meet quarterly sales targets.

Mr. Dolan also pushed a $2 billion investment in ImClone Systems Inc. in 2001. Shortly afterward, the Food and Drug Administration refused to consider ImClone's cancer drug, which Bristol-Myers planned to co-market. (The drug eventually won FDA approval.) ImClone's chief executive was later sentenced to prison on insider-trading charges.

Mr. Dolan barely escaped those troubles, but by the beginning of this year, things were looking up for him. Analysts were praising Bristol-Myers's research pipeline as one of the best in the industry. And Mr. Dolan was garnering credit for the fact that the company had gained approval to market eight new drugs in the past three and a half years.

Then came the Plavix debacle. Faced with the prospect of generic competition, Mr. Dolan did what other drug makers have done to protect their cash cows: He made a deal to pay Apotex in exchange for an agreement to delay the introduction of its generic.

Mr. Dolan wanted to keep the nearly $4 billion in U.S. annual revenue generated by Plavix while he waited for Bristol-Myers's new products to gain acceptance. The company's other top drug, cholesterol fighter Pravachol, lost U.S. patent protection this year. Bristol-Myers's predicament is common in the industry: Pharmaceutical companies are facing patent losses on drugs with nearly $40 billion in sales in the next few years, and new drugs aren't likely to fill the breach for years, if ever.

Plavix, an anticlotting medicine prescribed to prevent heart attacks and strokes, was originally developed by the French drug maker Sanofi, now part of Sanofi-Aventis SA. Sanofi scientists began work on it in the early 1970s, but it took until 1997 for the drug to receive FDA approval.

To sell the drug in the U.S., Sanofi enlisted New York-based Bristol-Myers. The companies agreed to split the profits. Last year Plavix was the No. 2 selling drug in the world after Pfizer Inc.'s cholesterol medicine Lipitor. Plavix recorded global sales of $5.9 billion, of which $3.9 billion came in the U.S.

In 2002, Apotex filed an application with the FDA for approval to market a generic version of Plavix. Sanofi and Bristol-Myers sued Apotex in New York federal court, alleging it was infringing a patent that runs until 2011. Apotex countered that this patent was invalid because Plavix's composition could be inferred from another Sanofi patent that expired earlier.

In January, the FDA approved Apotex's copycat drug. In letters to Bristol-Myers and Sanofi, Apotex threatened to introduce the generic before the patent litigation was resolved. Such a move is called an "at-risk" launch because, under U.S. law, the generic maker can be liable for triple the damages incurred by the branded-drug company if it ends up losing the patent case.

Apotex's threat was credible because it had once carried out an at-risk introduction and because it had already manufactured the pills it intended to sell. Mr. Dolan decided to seek a settlement to delay Apotex's launch -- even though U.S. regulators have been hostile to such agreements on the ground that they hurt consumers, and even though Bristol-Myers had already successfully defended its patent in court in two other countries.

Mr. Dolan was doing business with a man who had referred to the pharmaceutical industry as "the cartel" and "the devil": Barry Sherman, the Canadian billionaire who founded Apotex. Mr. Dolan assigned one of his closest lieutenants, Andrew Bodnar, to try to negotiate a deal with Dr. Sherman. Flanked by lawyers, Drs. Bodnar and Sherman met at the Manhattan offices of a law firm representing Sanofi and Bristol-Myers.

Drs. Bodnar and Sherman began to establish a rapport and asked the lawyers to step out at times to advance the negotiations, according to people familiar with the discussions. [In hindsight, this was probably not a great idea.]

On March 17, the two sides reached a deal: Apotex agreed to delay the introduction of its generic until early 2011 in exchange for a $40 million payment. While big drug makers sometimes try to stymie the first generic on the market by authorizing other makers to copy the brand-name drug, Bristol-Myers and Sanofi agreed not to do this for the first six months after the Apotex launch. Bristol-Myers and Sanofi also agreed to pay Apotex a $60 million breakup fee if U.S. regulators rejected the deal.

On May 5, state attorneys general, who had regulatory oversight over the deal along with the Federal Trade Commission, told the three parties they opposed the agreement without specifying the reasons. The FTC indicated it was leaning the same way, citing the breakup fee and the agreement to restrict competition during the six months in 2011, according to people familiar with the matter. Though they had announced the March 17 agreement, Bristol-Myers and Sanofi didn't disclose the regulatory setback to shareholders.

To try to salvage the deal, Dr. Bodnar twice flew to Toronto to meet with Dr. Sherman. In what some within Bristol-Myers are now calling a lapse in judgment, Mr. Dolan let Dr. Bodnar go to Canada alone, without any legal representation, partly because company lawyers approved the solo trips. "It was a gesture of goodwill," says a person familiar with the events. "The thinking was that the negotiations would be more effective this way."

Dr. Sherman toughened his negotiating stance. If the deal was rejected again and Apotex lost the patent case, he wanted damages capped at 50% of Apotex's sales of the generic -- not the triple damages to which Bristol-Myers and Sanofi would normally be entitled. In effect, such a condition removed any hurdle to Apotex introducing the generic "at risk."

Dr. Sherman also insisted that Bristol-Myers forfeit its right to file for an injunction stopping Apotex's sales of the generic until five days after an at-risk launch. That would give Apotex enough time to flood U.S. pharmacies with its product. After consulting with Bristol-Myers lawyers by phone, Dr. Bodnar agreed to both concessions.

Unbeknownst to Mr. Dolan and Dr. Bodnar, Dr. Sherman was betting that the new version of the deal still wouldn't pass muster with regulators. "I thought the FTC would turn it down, but I didn't let on that I did," he says in an interview. "But they seemed blind to it."

In several emails to Apotex colleagues, Dr. Sherman made clear that his goal in the negotiations was to extract concessions that would bind Bristol-Myers when regulators turned the revised deal down, according to a person who has seen the emails.

The companies disagree on what happened next. In a filing to the federal court in New York hearing the patent case, Apotex says Dr. Bodnar orally promised to abide by the two clauses that would have to be dropped from the new written agreement in order to placate regulators -- those about the six-month exclusivity period and the breakup fee.

A person close to Apotex says Dr. Sherman also made and filed written notes to himself spelling out the oral side deal, and that at least two Apotex executives witnessed it.

At a hearing before the judge overseeing the patent case, a lawyer for Bristol-Myers, Evan Chesler, said Apotex's allegations are false and there was no oral side deal. Mr. Chesler suggested Dr. Sherman's real goal in raising the supposed oral deal was to sabotage the settlement and trigger the clauses favorable to Apotex.

In late May, according to an Apotex court filing, an Apotex lawyer contacted Bristol-Myers to demand immediate payment of the $60 million breakup fee. Dr. Bodnar then wrote an email to Dr. Sherman telling him to call off his lawyer or "I will consider myself not bound by any restriction as to this issue to which I am bound by agreement with you."

The two sides offer conflicting interpretations of the email. Apotex says Dr. Bodnar was implicitly confirming the existence of the oral side deal, while trying to avoid paying the $60 million right away. A person familiar with Bristol-Myers's position says that's nonsense. This person says Dr. Bodnar was saying that he considered the breakup fee a dead issue and warning Dr. Sherman not to discuss it again.

As for Dr. Sherman's memos, this person says: "It's like Notes from the Underground. This is Dostoyevsky writing to himself. And that's evidence of what? I don't remember that being taught in law school."

The person familiar with Bristol-Myers's position also says it was Dr. Sherman, not Dr. Bodnar, who suggested a side deal during a conversation in which Mr. Chesler was participating by phone. "He said, 'Let's enter into a side agreement and I'll drop it in my drawer.' We said, 'No way.' "

In a statement, Bristol-Myers's board said an internal investigation conducted by Mary Jo White, a former U.S. attorney in Manhattan, has uncovered no evidence of misconduct by any company employees.

The board is nevertheless taking the Justice Department investigation seriously. It convened over the phone within 24 hours of the raid and has held regular conference calls since then. Analysts say the Plavix affair may have made the company more vulnerable to a takeover because the stock price has fallen and management is distracted.

Thursday's injunction suggests that, in hindsight, Mr. Dolan's concessions to keep the generic off the market were unnecessary. U.S. District Judge Sidney Stein said he thought Bristol-Myers and Sanofi have a strong case that the patent expiring in 2011 is valid.

Bristol-Myers has no clear succession plan in place. Should the board decide to force out Mr. Dolan, it would likely tap an insider or possibly a board member for a transitional period while directors look outside for a new CEO, as often happens in such situations.

People who have seen Mr. Dolan recently say he remains upbeat and focused on getting the company out of its difficult situation. According to a Bristol-Myers spokesman, Mr. Dolan recently told a board member: "I have a lot of fight left in me."
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[DewDiligence]

Re: Details of Plavix ruling and SNY/BMY screw-up

I finally got around to reading the Court’s ruling end to end—all 58 pages. There were two important decisions before the Court: 1) Whether to grant a preliminary injunction; and 2) Whether to order a recall.

What I found remarkable was the disparity between the amount of attention devoted to each of these two matters in the ruling. The judge spent more than 50 pages laying out in painstaking detail why SNY (and BMY) had a reasonable probability of prevailing on the merits of the patent at trial and thereby were entitled to a preliminary injunction. Then, in little more than one page, the judge dismissed SNY’s argument for a recall:

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The motion is denied to the extent it seeks a recall of the generic product already manufactured and distributed.

Although “it is well settled that a court has the power to issue a mandatory injunction to restore the situation to the status quo when a party, with notice of impending injunction proceedings, completes or performs the action sought to be enjoined,” …this is not a case where the unusual remedy of a mandatory injunction ordering a product recall is appropriate.

Here, Sanofi specifically foresaw the possibility that Apotex would declare that there had been Regulatory Denial as defined in the agreement…and that Apotex would then be able to launch its generic. Sanofi also agreed that it would “not seek a temporary restraining order or preliminary injunction” for 5 business days after Regulatory Denial became effective…and indeed, even after that 5 day period expired, Sanofi would not file for a preliminary injunction until it had given Apotex 5 business days notice “of its intention to do so,” and that notice “will not be given before Apotex has initiated a launch of a generic clopidogrel product.”

…These provisions all foresaw the possibility that Apotex would launch a generic product and prohibited Sanofi from seeking injunctive relief for a specific period of time after the launch occurred. Thus, Sanofi participated in a knowing business decision, in exchange for which it received valuable consideration…

Under these circumstances, a mandatory injunction ordering recall would be inequitable and the Court will not intervene to reverse the effects of Sanofi’s own agreement [emphasis added throughout].
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Contemplating the above excerpt from the ruling, I think it’s reasonable to surmise that SNY and BMY could have won a full-fledged recall of generic Plavix had they not waived the right to seek an injunction during the first five days of Apotex’s launch.

Given the immense economic consequence of not obtaining a recall, I must conclude that SNY and BMY botched the negotiation with Apotex to an even greater degree than is generally recognized.