Teva Pharmaceutical Industries Ltd. (Nasdaq:TEVA; TASE:TEVA) and its partner, Alpharma (NYSE:ALO), have the upper hand in their dramatic and well-publicized struggle for a drug that had $1.7 billion in sales over the past 12 months. But the legal battle over Gabapentin, a generic version of Pfizer's (NYSE:PFE; LSE:PFZ) epilepsy treatment, Neurontin, is still far from over.
I will begin at the end. Teva published two important announcements last Friday. One stated that the US Food and Drug Administration (FDA) had granted final approval for the company’s ANDA (abbreviated new drug application) for Gabapentin Capsules, 100 mg, 300 mg and 400 mg, and that shipment of the product had commenced.
The second announcement referred to Pfizer's failure to obtain a summary judgment by the US District Court for the District of New Jersey preventing Teva from marketing Gabapentin. As a result, Teva and Alpharma are now marketing the drug and starting to earn revenue from it.
"We are pleased to have been able to work with Alpharma in introducing this important generic product to US consumers," said Teva president and CEO Israel Makov in a press release. Makov also referred to Teva's financial results and set out to calm investors, "Our overall business continues to perform strongly and the launch of Gabapentin will further strengthen it. We will provide investors with additional guidance when we report our financial results for the third quarter."
Analysts predict that Gabapentin will contribute $100-150 million to Teva and Alpharma's revenue during their 180-day marketing exclusivity period. Pfizer naturally is not sitting on its hands, and is fighting back on two fronts. One is the legal front, and the other is an effort to develop its own generic version of Neurontin. Last Friday, Pfizer announced that its subsidiary, Greenstone Ltd., part of Pfizer's acquisition of Pharmacia, would market its generic Neurontin.
Teva has also taken legal action, seeking an injunction preventing Pfizer from marketing generic Neurontin.
A hearing next Wednesday
Teva CFO Dan Suesskind sheds some light on the various injunctions and legal hearings. "A hearing on our petition to prevent Greenstone from marketing generic Neurontin will begin next Wednesday. Meanwhile, the judge in the US District Court for the District of New Jersey [John C. Lifland] has to rule on Pfizer's request for an injunction, after twice postponing the hearing. The hearing will be completed on Thursday, when the judge will hand down his ruling.
"When Alpharma announced last Friday that it would launch its generic version of Neurontin, Pfizer immediately petitioned the court for another injunction against us, which the judge rejected. We cannot be certain about the developments regarding the drug, so it would be irresponsible to say we will have X millions in sales and Y cents in earnings from the drug. When we publish our third quarter results, we'll be able an update on developments. By then, we'll know how Pfizer has acted and how the market has developed."
Suesskind added that the hearing on patent infringement - the legal case that Teva had hoped to win last year in an abbreviated procedure - would be held on November 18-19. On this matter, Pfizer announced last Friday that it expected a reduction in its net profit for 2004, due to Teva and Alpharma's marketing of generic Neurontin, after Pfizer failed to obtain an injunction preventing this. Pfizer earned $2.7 billion from the drug in 2003. Ivax (NYSE:IVX) also markets a generic version of Neurontin, in the form of tablets, not capsules, and consequently earns little from the drug.
Leader DS analyst Uri Hershkovitz says Pfizer's generic Neurontin will cut prices by 45-50%, compared with the usual 30% fall in the exclusivity period. "Sales during the 180-day marketing exclusivity period are expected to add $0.08 per share to Teva's profit, or $52 million, $0.04 per share for the fourth quarter of 2004, and $0.04 in the first quarter of 2005. This means 10% growth per quarter. I estimate an additional $100 million in revenue.
Suesskind says Teva "will make a profit regardless of the price for Gabapentin," even if prices fall 70% when generic Neurontin hits the market.
Teva and Alpharma also agreed to certain risk sharing arrangements relating to patent litigation regarding a Gabapentin launch. If Teva and Alpharma lose the case, they may have to compensate Pfizer for an unknown amount. Teva and Alpharma agreed in April to share the marketing exclusivity period, in exchange for a payment by Teva to Alpharma.
Although Teva continues to announce good news, including confirming its forecasts for the third quarter and announcing that it might raise its forecasts, its share continues to be weak. It rose slightly to $24.90 on Nasdaq last Friday, but was still 27% below its June peak.
"We believe that the launch of Gapapentin is a positive move for Teva that will boost its share price," says Hershkovitz. "Nevertheless, we believe that a real breakthrough to over $30 will occur only after forecasts are revised upwards when the financial report is published, or after the court hearing on the patent. Teva has a huge drug pipeline and its current multiple of 15-20, based on forecasts for 2005, is definitely a reasonable entry point for investing in the share.
"I believe that all investors holding short positions on Teva's share will realize their danger, and the share will begin to rise more strongly. However, Teva will probably face a difficult two months, during which it must publish a good financial report, raise its forecasts, and win its court hearing on November 18 and 19. It is also waiting for final FDA approval for Biogen Idec's (Nasdaq:BIIB) antegen, which will compete against Teva's treatment for multiple sclerosis, Copaxone."
Another factor affecting Teva's financial report is the expected dilution of its earning per share, beginning in the fourth quarter of 2004. Since Teva must adopt accounting standards, whereby from December 15 it will include all types of securities, including bonds, which like other companies, intended to include in its profit line only when they were converted to shares. Suesskind estimates that Teva's latest bond issue will dilute its net earnings per share by 4-5%. "This means a reduction of at least $0.01 in our earnings per share for the quarter. 30 million shares will be added to our current 660 million."
Last Friday, the FDA published a list of active pharmaceutical ingredients (APIs) it approved for drug makers during the third quarter. The list included diluted Donepezil hydrochloride 25% for Agis Industries (TASE:AGIS), produced at its Beer Sheva plant; Halobetasol API for Taro Pharmaceutical Industries' (Nasdaq:TARO) Ultravate, produced at the company's Haifa plant; and Taro's Fluticason, a generic version of GlaxoSmithKline's (NYSE; LSE:GSK) ethical Flunaze.
The FDA approved Teva's Lansoporazole, a generic version of Prevacid, manufactured by Takeda Chemical Industries (TSE:4502) of Japan, and marketed in the US and Hungary by Abbott Laboratories (NYSE:ABT); Zaleplon, a generic version of King Pharmaceuticals' (NYSE:KG) Sonata; and Cefadroxil, which is already a generic drug, produced by Secor's plant in Mexico. Teva acquired the plant as part of its acquisition of Secor.
Published by Globes [online] - www.globes.co.il - on October 11, 2004