A pitched court battle got under way on Monday between Japanese pharmaceutical Eisai and the generic tag-team duo of Teva Pharmaceutical (NASDAQ:TEVA) and Dr. Reddy Labs (NYSE:RDY). At stake is some $1.3 billion in sales of Eisai's heartburn-fighting medication Aciphex, which accounts for 40% of the pharma's total U.S. sales.
In the aggressive world of generic-drug manufacturing, patent-infringement lawsuits are commonplace. Generic-drug makers often seek approval to begin marketing their versions well before the patent's expiration. With Aciphex, Teva and Dr. Reddy have agreed to a shared-exclusivity plan for marketing the generic version, though the latter was the first to file. The first manufacturer to win approval gets a window of exclusivity during which no other generic-drug maker can sell a version of the drug. Look at it as patent protection for the first generic.
While Eisai has charged Teva and Dr. Reddy with patent infringement, the generics countered that the patent is unenforceable because of Eisai's "inequitable conduct." Normally, striking down the protection a patent offers is a high hurdle to clear, but when you read the court decisions leading up to Monday's trial, you understand that Eisai is in a precarious position.
Eisai's bad behavior
When Eisai first filed for its patent, it sought protection for two compounds of its proton-pump inhibitor, rabeprazole. That class of drugs also includes AstraZeneca's (NYSE:AZN) Nexium and TAP Phamraceutical's Prevacid.
The two compounds were virtually identical except for a single group of atoms. The patent office rejected each patent application three times as having been an obvious derivation of "prior art." That simply means there was commonly available data out there that would have led to the discovery of the compounds anyway. So Eisai gave up on the one patent and instead pursued the other by narrowing its claims. The patent office finally approved Aciphex in 1991, and Eisai now co-markets it with Johnson & Johnson (NYSE:JNJ).
Eisai's problem stems from not notifying the patent office that it had two patents being considered at the same time for ostensibly the same "invention." Patent regulations specifically prohibit such dual applications to prevent "over-protecting" an invention, but they also place a duty on the applicant to disclose such proceedings, even if it undermines its chances of being approved. Patent offices are swamped with applications, and examiners must rely upon the good faith presentations of applicants.
Yet that's the "inequitable conduct" that Teva and Dr. Reddy are charging Eisai with. Eisai not only had dual applications being considered, but it also never told either examiner about the other application. So even if a patent is otherwise found valid -- and Eisai has already won a summary judgment against Teva proving Aciphex's patent validity -- it can still be vacated because of those actions.
Eisai sought to have the courts find that it had not engaged in inequitable conduct, but the judge was not disposed to give credence to any of Eisai's claims. Indeed, he found that a "reasonable examiner" could easily think that Eisai tried to deceive him, and the case was sent to trial. That's what kicked off on Monday. Eisai has a similar case pending with Mylan Labs (NYSE:MYL), but that is pending the outcome of this trial, and Mylan has said it will abide by the decision that is reached here.
Pre-emptive strike
Eisai stands to lose hundreds of millions of dollars in potential sales. Teva has already won FDA approval for its generic version and undoubtedly would be ready to begin manufacturing right away. It could also launch an at-risk version of the drug, which would be done before a court decision is even reached. The danger inherent in that strategy is should Teva lose the decision, Eisai could claim to recover its "lost profits." Since the generic versions are sold at a lower cost than the branded version, the potential damages would be far greater than simply the revenues Teva took in.
Trying to go to market sooner than patents allow is one of the risks inherent in the generic-drug market. Teva and Eisai are also tangling over the latter's blockbuster Alzheimer's-treatment drug Aricept. Yet when successful, it can reap large profits. For example, it's estimated that Dr. Reddy stands ready to gain $75 million to $100 million if the generic Aciphex is successful. That's a powerful reason to move against a patent, particularly if you can line up the courts on your side.
Need a prescription for a more profitable portfolio? A 30-day free trial to Motley Fool Stock Advisor is just what the doctor ordered.
Johnson & Johnson is a Motley Fool Income Investor recommendation.
Fool contributor Rich Duprey owns shares of Eisai but none of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
