Drugmakers are increasingly embracing new tactics to protect billions of dollars in sales from generic competition. These strategies often involve patent trials, but that's not the only way companies are waylaying generic drugmakers.
In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell explain why companies like AbbVie (NYSE:ABBV) are working so hard to delay generic competition, how legal battles can add years of sales to drugs facing patent expiration, and how reformulating existing drugs to last longer helps keep sales flowing at companies like Teva Pharmaceutical (NYSE:TEVA).
A full transcript follows the video.
This video was recorded on Sept. 20, 2017.
Todd Campbell: There's so much information now. Thanks to technology, we can now record and analyze all the data from the trials that have been going on since 2000. And the more data points you get within your data series, the more useful the information or the output is in doing that analysis. So, these companies are getting smarter and smarter and smarter about figuring out, will this drug work in a broad patient population? If so, I'll go ahead with a full phase 3. Or, will it work in a limited patient population, so I'll do an exploratory phase 2b trial that I can still reference back to when I do my filing, and that may save me some money in having to do two phase 3 trials, depending on what the FDA wants to see. So, I think from an investment standpoint, although having more trials sounds like, "This is going to increase total costs," the amount of money that you save by not running a trial that's going to be likely to fail more than offsets that. So, I think investors should review that as a good thing. And then, of course, keep it all in perspective because, even if you succeed in a phase 1/2 trial or a phase 2b trial, yes it may improve the odds, but you still have failure rates that are so high across clinical trials that you need to still have a healthy dose of skepticism when approaching any clinical stage company.
Harjes: Yeah, absolutely. Brian's email also had a question for us about the creative ways in which drugmakers can extend their drugs' patent lives. Todd, do you want to hit on that a little bit?
Campbell: I think many people probably already know that if you have a patent, it's going to protect you for about 20 years. The problem is, with drug development, is that you're filing that patent as you're doing the clinical-stage work, and that clinical-stage work can take years and years off of your patent period. So, you end up with a commercial drug that only has patent protection for maybe seven to 10 years. And, obviously, that's not nearly as good as 20 years, especially when you consider that at the end of the patent life, you're going to face competition from generic drugs that are going to be priced as much as 80% or 90% less than the price that you were charging for your reference drug. So, I think more and more, companies are looking and trying to find ways to be able to get additional years added on to their patent protection for their drugs. Again, Kristine, to hammer this point home, if you have a $1 billion blockbuster drug, it has paid for itself probably within the first few years. And now it's all pure profit that you're using to fund your other R&D activity. So, every year, every six months, every one month that you extend your protection, that's big money to your bottom line.
Harjes: To give a specific example of the numbers that we're looking at here, I actually pulled these numbers when I was looking at research for the last question that we just answered, but it's applicable here, so I'm going to share it. For a blockbuster drug, meaning $1 billion in revenue, when you break that down into a calendar year, each day is $2.7 million. I think sometimes it's hard to wrap your brain around just how big $1 billion is. But, if you do the math, that's still well over $1 million. $2.7 million every single day. So, even being able to extend your patent protection by a little bit, that's extremely helpful and extremely profitable. One way that the drugmakers can do this is engage the generics in legal battles. There are a ton of different ways that you can do this. Typically, by challenging the generic-drug maker when they try to come at you with their own generic formulation of your branded drug, it'll add a good 30-45 months of additional exclusivity.
Campbell: Yeah. And we've seen that. We've talked about AbbVie in the past on this show, and Humira, which is the world's top-selling medicine, and the fact that its patent is expiring, but it's using these other ways to try and maintain its market share in Humira sales over the course of the next few years. Generic companies have to tell the company that holds the patent that they're filing for FDA approval of the generic drug. And the drugmaker then has 45 days of getting that notice letter to be able to say, "No, I'm going to challenge this in court." And as you said, between the court challenge and the appeals process, you're adding three to four years of protection to your medicine, which, in the case of a drug like Humira, that's tens of billions of dollars in sales. But, that isn't the only way, obviously, Kristine, that these companies can skirt the threat of generic competition.
Harjes: Oh, not nearly. One of the ones that you see all the time is by creating reformulations of the original drug. For example, a sustained-release formulation. This would be something like Adderall XR.
Campbell: Yeah. The example that I was thinking of was Teva's Copaxone, which is the most commonly prescribed multiple sclerosis drug with $4 billion in sales.
Harjes: And that's a fantastic example, just because Teva relies so heavily on Copaxone. They're mostly a generics company, that's their one big hitter brand-name drug. And as soon as generic competition hits for it, it'll be a huge hit for a company that's already struggling.
Campbell: Right. So, what they did was to come up with the formulation that can be dosed less frequently, and then they began switching the patients over to it. So, I think by the time that you end up with generics coming out on the market, the majority of patients have already been transferred over to this extended release drug that has much more patent protection. Again, shares up billions of dollars in revenue. We see other examples, too. We see this with Gilead Sciences, what they did recently with reformulating their Viread to make TAF, which is safer. And now, including that in all their combination drugs to extend the patent protection on all of their HIV franchise. We also saw that with Biogen in creating Plegridy, which is a version of Avonex that lasts longer. So, yes, that's a very common way that companies can basically maintain market share and keep those dollars flowing.
Harjes: There's one more that I'll throw out there which is increasing the efficacy of the drug. An example of this is Nexium, it's a heartburn medication, and it's a form of a drug called Prilosec that only has the effective form of the active molecule. It's a lot of heavy duty science to describe exactly what that means, but it's a process known as chiral switching. Kind of interesting stuff.
Kristine Harjes owns shares of GILD. Todd Campbell owns shares of GILD. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends BIIB and GILD. The Motley Fool has the following options: short October 2017 $86 calls on GILD. The Motley Fool has a disclosure policy.