I was diagnosed with multiple sclerosis five years ago. My neurologist asked me to choose one of the classic CRAB (Copaxone, Rebif, Avonex, or Betaseron) therapies, and I settled on Teva Pharmaceutical Industries' (NYSE:TEVA) blockbuster Copaxone treatment. There was nothing wrong with the equally proven Rebif, Avonex, or Betaseron from my perspective; Copaxone just came with the least side effects.
But that also meant submitting myself to daily Copaxone shots. None of the other options requires a dose every single morning.
Yay, fewer shots!
Taking my shots is a daily torture, even if the needle is hidden in this big, plastic injection tool. Needles freak me out. I'll watch zombie movies with gore splattering all over the screen, but give me a medical show with doctors and nurses wielding syringes, and I'll look away until it's over.
So you can imagine my relief when Teva said that Copaxone had been FDA-approved for a less rigorous dosing schedule. Now I have the option to drop down to three shots a week, with each syringe holding twice the payload of my original shots. I love it.
Normally, I'd be all over this option like pastrami on rye. But not this time.
What's not to love?
You see, it ain't that simple. Copaxone patents are about to expire on May 24, potentially leaving a big hole in Teva's annual revenue if biosimilars, or copycat versions of the drug, move into the market.
The modified dosing schedule offers MS patients a better way to manage the disease, but I wonder if it also has to do with protecting Teva's bottom line and stretching the golden goose to last as long as possible. The company is trying to shift as many patients as possible to the improved dosing schedule in order to differentiate its product from potential generic competitors. Additionally, the patent on the new formulation extends to 2030.
As a consumer, I dislike this kind of thing more than I despise needles. While I don't know what Teva's development schedule for this product has been, but as a patient, I have questions. I wonder if it could have introduced this new product, with its advantageous dosing, years ago. However, it's strategically better to extend the new patent on this particular variation as far into the future as possible and not overlap with the classic seven-shots-a-week version, and also move patients onto the new and improved version as soon as possible.
The strategy of reformulating products and trying to shift patients onto a new drug before generic competitors enter the market is not unique to Teva; many companies try to evergreen products by reformulating or combining drugs in a single pill. For example, drug giant Pfizer (NYSE:PFE) saw patents expiring on its blockbuster blood pressure medication Norvasc in 2007, so it combined Norvasc with cholesterol-reducer Lipitor to create a patented combination called Caduet. With $339 million in 2011 sales, Caduet is but a shadow of its two powerful parents and their history of multibillion-dollar annual sales, especially since the Lipitor patent also expired in 2011.
These strategic moves to generate sales despite patent expirations aren't always successful. Caduet, for example, quickly faced generic competition with the argument that combining two generic drugs into one pill shouldn't be a patentable invention. Pfizer settled these suits quickly, and now competes against several authorized generic versions.
So expired patents lead to dramatically reduced sales of many blockbuster drugs, and reformulated versions don't always claw back much of the lost revenue. And yet, there's often enough financial incentive in the system to hold back real progress just to extend a dramatically less valuable patent just a little bit longer.
Teva and Pfizer don't stand alone. Trying to stretch patents or evergreen drugs is fairly ubiquitous across the industry.
Welcome to the real world
The investor angle is different from the consumer view, of course. Teva shareholders absolutely require that the company go this route. It would have been mismanagement, to some extent, to introduce the revised Copaxone patent any earlier than absolutely necessary.
Assuming that Copaxone gets no generic competition in 2014, Teva would expect the drug to deliver about $500 million lower operating profit due to the rise of oral MS drugs.
But fellow generic drug makers Momenta and Mylan are looking to bring generic Copaxone to market as soon as possible. If they get their alternatives to market by June 1, Teva would expect about 25% of Copaxone patients to jump over to the generics and cause another $500 million hit to Copaxone's 2014 operating profits.
The MS drug is expected to contribute $2.60 per share to Teva's 2014 earnings. If generics enter the market, it'll be more like $2 per share. That's out of Teva's total earnings estimates in the $5 range per share, so losing exclusivity on Copaxone could lower Teva's earnings by 12% this year -- and much more in the long term.
And that's just the beginning, as Teva is aware of another two potential Copaxone generics working their way through FDA approvals. With numbers like these, it's easy to see why Mylan and Momenta are chomping at the bit to steal some market share.
Teva, coincidentally, happens to be an expert at exactly this business method. The company collects more than half of its annual revenues on selling generic versions of other drug developers' expired medical patents. It has been on the other side of this controversy many times before.
But the shoe is on the other foot now.
The show must go on
Given the huge financial impact that Copaxone has on Teva's business, I can't blame the company for fighting the generics with every weapon in its arsenal. But I can sigh over a broken health-care system that gives companies the flexibility to delay and drag out improvements to existing treatments just to extend the patent reach. In a perfect world, Teva should gain more from developing more user-friendly medications right off the bat.
But in that perfect world, we would also have magical unicorns and free donuts for everybody. And every cow would be perfectly spherical.
In the real world, the angry consumer and patient in me must yield to cold, hard business rules. And it won't hurt me much, since Obamacare provisions enacted more than two years ago removed the lifetime limits on insurance benefits. So maybe I'll end up taking Teva's patent-protected, higher-dosage Copaxone anyway.
But I reserve the right to mutter something about crazy patents while loading the syringe.
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Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Momenta Pharmaceuticals and Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.