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Living Dangerously

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Many retail investors in Sun Pharmaceutical — India’s largest drug firm in terms of market capitalisation — may wonder what went wrong with it in the second quarter of 2012-13. In line with its growth in the past few years, Sun Pharma’s recurring net profit for Q2 of 2012-13 was Rs 903 crore, 51 per cent over the same quarter last year. But it had to set aside Rs 584 crore towards potential damages from patent infringement litigation in the US.

Accounting for such damages is new to India’s drug companies, which have been exporting to the US since the 1990s. In the past year, Indian drug companies have begun to launch drugs ‘at risk’ to optimise the potential upside of exclusive generic sales opportunities.

An ‘at risk’ launch of a generic medicine is when a generic pharma company gets marketing approval from the US Food and Drug Administration (FDA)  and launches its generic variant, irrespective of the outcome of a related pending patent litigation. The inherent risk is that damage claims are usually three times the money earned from the sale of the generic medicine during the period. A few months ago, US-based generics company Apotex had to pay $442 million to Sanofi and BMS as penalty for the ‘at risk’ launch of Plavix, a drug used to prevent  clots after a heart attack or stroke.

Earlier, even pioneers in exporting to the US such as Ranbaxy and Dr Reddy’s Laboratories did not dare launch drugs ‘at risk’ and instead banked on the outcome of safe patent litigation or out-of-court settlements with the innovator companies.

According to the rules in the US governing the sale of generic drugs (Hatch-Waxman Act), there is a mandatory 30-month stay on approving a generic marketing application (abbreviated new drug application or Anda) once the innovator company sues the generic maker for patent violation. The FDA is mandated to give its approval to the company that files the Anda first , granting it exclusive rights to sell a drug for six months from the date of patent expiry. As a legal dispute can go on for years, most innovators prefer to settle cases out of court if they feel that the generics’ claims are strong.
Braving The Consequences
Generic companies decide to go for ‘at risk’ launches based on the advice given by experts on the strength of patent claims by the innovator, and the scientific processes used to bypass the patent and make a generic version of the drug. They also study the cost benefit, or the money they can make during the launch period, even providing for damage claims.

“‘At risk’ launches in the recent past are an indication of how strong Indian generic companies have become in studying a drug patent and being ready to take the risk that comes with patent battles,” says Ranjit Kapadia, senior vice-president, Centrum Broking.

“It is the competition and timing of the launch to maximise benefits from the patent challenge which causes drug companies to go for ‘at risk’ launches,” says R.B. Smarta, managing director of Interlink, a marketing consultancy for drug companies.

Sun Pharma, which has a Rs 6,000-crore cash balance, had a patent dispute with innovators Wyeth and Nycomed in 2004 over a generic version of heartburn drug Protonix (pantoprazole sodium). In June 2007, Wyeth moved court to prevent Sun and Teva from launching their generics. The court denied the motion, but did not conclude that the patent was invalid. This prompted Sun Pharma to launch its generic in January 2008. But in April 2010, a US court ruled that Wyeth’s patent was valid, forcing Sun to stop sales. Wyeth, and current owner Pfizer, went on to claim $960 million in damages.

“Sun Pharma continues to believe that it has sound reasons to disagree with the overstated claims of Wyeth, and also continues to believe that the patent is invalid and unenforceable and will pursue all available legal remedies, including appeals,” the company said.

Though the final legal battle is not over, analysts estimate that Sun Pharma could have made profits of $240-280 million from sales between January 2008 and April 2010. If Sun loses the case, it will have to pay thrice the gain — which is the norm in ‘at risk’ damage claims.

The court is likely to take a decision on Protonix’s patent by June next year.

The damages that Glenmark may have to pay for its ‘at risk’ launch are not as severe. Glenmark launched a generic version of Abbott Laboratories’ trandolapril-verapamil ER (Tarka) ‘at risk’ in June 2010. After six months, a federal jury rejected Glenmark’s challenge on the validity of the patent. It said that Glenmark should pay back Abbott potential damages of $16 million, which it had earned from the sale of the drug. Glenmark had to stop sales, and its appeal awaits decision before an upper court. The cholesterol drug’s patent expires only by February 2015, and only two companies make it, thus increaseing the revenue potential.

“Glenmark’s para IV (patent challenge) strategy has been focused on sole first-to-file (FTF) where we are the only generic player in that molecule. We currently have four sole FTFs in our pipeline. Even when we are sole FTF, the objective is to arrive at a settlement with the innovator to launch the product. We have not focused on molecules where there are many FTFs as the molecule can get commoditised in the exclusivity period itself,” says a Glenmark spokesperson.

In October 2011, Lupin had launched ‘at risk’ a generic of a type-2 diabetes drug, Fortamet, after getting FDA approval while a patent litigation on the same drug was pending. It was hoping to make $20-25 million on an annualised basis. Soon, innovator Shionogi and its marketing partner Watson Pharma got a preliminary injunction motion against Lupin’s launch and stayed further sales. The court also asked Shionogi and its plaintiffs to post a $15-million bond in the interim. Lupin appealed in the US Court of Appeals and got the stay vacated to restart sales in April. If it loses the patent battle, the innovator is likely to file for damages. Fortamet’s annual sales are $83 million in the US.

“The launch still remains ‘at risk’ as the litigation on patent validity continues. Earlier, we estimated Lupin to generate $35 million sales from this opportunity. However, this stands limited now,” say analysts Nimish Mehta and Manushi Naik of MP Advisors in their analyst report dated 20 April. Lupin executives were not available for comment.

Industry sources say that more Indian pharma companies — many of them quite big (Lupin’s net profit in FY12 was Rs 924 crore and cash reserve was over Rs 3,787 crore; Glenmark’s net profit was Rs 494.5 crore and net debt Rs 1,924 crore) — are assessing ‘at risk’ launches. That is, they are ready to take on multinationals directly rather than wait for out-of-court settlements. But the risks in this game remain high.


(This story was published in Businessworld Issue Dated 03-12-2012)