Legal Woes Piling Up for Teva Pharmaceutical Industries Ltd

Editor's Note: Shortly after this article's publication, news outlets reported that the Supreme Court has agreed to a hearing on generic Copaxone. The article has been adjusted to reflect the updated information.

Over the past week Teva's (NYSE: TEVA  ) legal staff has had some mixed news. Recent issues include the loss of a patent dispute with Mylan (NASDAQ: MYL  ) , although at least the Supreme Court has agreed to hear its appeal on the Copaxone issue. To top it off, the Israeli generic powerhouse might have "catastrophic" generic labeling issues to deal with.

Patent disappointment
Last July an appeals court upheld some, but not all, of Teva's patents concerning its multiple sclerosis drug, Copaxone. As a result, the company can expect generic competition for its largest specialty medicine to begin eating into US sales as soon as May. That's about 16 months earlier than the company was expecting before the appeals court dropped its gavel last summer.

Of course, Teva is hoping that the Supreme Court will appreciate its side of the argument. The company's legal team will have its day in court, as the Supreme Court has agreed to hear the appeal.

What's at stake
To the casual observer, 16 months of US exclusivity for one drug might not seem like much to a big company like Teva. A closer look, however, shows the company and its investors have a lot to lose. During 2013, worldwide Copaxone sales reached $4.3 billion. The company doesn't break down exactly how much of that figure came from which region, but U.S. sales comprised about 72% of specialty medicine revenue.

 

Generics 2013

Speciality 2013

Revenue

$9.9 billion

$8.4 billion

Gross profit

$4.1 billion

$7.3 billion

R&D expenses

$0.5 billion

$0.9 billion

Sales & marketing expenses

$1.9 billion

$1.9 billion

Segment profitability

$1.7 billion

$4.6 billion

Source: Teva Form 20-F 2013

With maybe $3 billion in annual U.S. Copaxone sales, that 16 months of exclusivity is clearly a prize worth fighting for. Its loss might nibble at the company's top line, but the bottom line could be hit hard. As you can see in the table above, Teva's speciality medicines segment is far more profitable.

Teva is hoping patients and physicians will consider generic versions somehow inferior. It is also rapidly converting patients to a recently approved extended release version. Management has a great deal of confidence in its strategy. Company guidance suggests a loss of of just $0.5 billion in revenue for the year if the patents don't hold. 

The sharks
The patent case is against Novartis'  (NYSE: NVS  ) subsidiary, Sandoz and its partner Momenta (NASDAQ: MNTA  ) , but Mylan and others are also working on low-cost generic forms of Copaxone. If you're holding shares of Teva you want to keep your eyes peeled for a Supreme Court ruling, if it hears the case.

On the same day the Supreme Court snubbed Teva, its generics arm also suffered an unfavorable ruling. A U.S. District Court upheld Mylan's Perforomist Inhalation Solution patents. Teva's application for generic Perforomist is under review at the FDA. The ruling effectively freezes that application until June 2021.

A generic catastrophe
Last November the FDA proposed amending a labeling rule that has the generic drug industry in an uproar. Currently, generic drug labels must mimic those of branded drugs they replace. Monitoring thousands of patients for long term side effects, then applying label changes is the original company's responsibility.

The FDA's proposed change would make companies marketing generic drugs responsible for updating their labels in response to the original manufacturer, plus their own observations. The cost of monitoring patients for side effects has the industry concerned, and potential legal expenses have them terrified. Ralph Neas, the president and CEO of the Generic Pharmaceutical Association said the "unintended consequences of this rule would be nothing short of catastrophic."

Neas' statement seems a bit alarmist -- although there does appear to be some possibility of additional litigation and other costs, which generic drugmakers may pass on to consumers through price hikes and other tactics.

Final thoughts
The proposed labeling changes would certainly add to the expense of selling generic drugs, but I don't think Teva shareholders should worry too much. If the law cuts across the entire industry, the extra costs will pass through to customers. Investors should be far more worried about the lack of results from Perforomist and Copaxone litigation.

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  • Report this Comment On April 01, 2014, at 1:04 AM, crenauer wrote:

    Well that didn't take long. The Supreme Court just agreed to hear Teva's appeal. The Justices must be avid readers of The Motley Fool!

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