The end of the patent life of a lucrative product can often lead to significant legal strife as aspiring biosimilar equivalents jockey for exclusivity. We have found the recent aggressive move by Mylan noteworthy in our ongoing coverage of Teva’s recent struggles. On a separate but related note, the settlement between Amgen and Abbvie underscores the volatile nature of maneuvers conducted in order to extend the patent life of a highly successful product.
By Alexander J. Poulos and Kris Rosemann
Make no bones about it, the former Best Ideas Newsletter portfolio idea in Teva Pharmaceuticals (TEVA) did not work out as planned. The company was “added” to the Best Ideas Newsletter portfolio in mid-2013 at $41.22 and was a strong performer through the end of 2015. Perhaps we should have heeded our own warnings in February 2016, “Growing Cautious on Teva Pharma,” when shares were changing hands in the mid-50s range. Our position in Teva was eventually “removed” from the portfolio at $28.67 in June 2017, a “loss” even after considering the dividend checks.
In that February 2016 note, we noted that the Teva story no longer held the same allure it once did as concerns surrounding Copaxone began to ramp up. Admittedly, our optimism surrounding the Actavis Generics purchase was a bit high, especially after considering the significant amount of debt it added to the balance sheet, and management did a great job at the time of selling investors on its ability to turn the Actavis Generics business into a winner. That said, we’ve learned from our misstep, and Teva has since begun selling off non-core assets to pay down some its massive debt load, which it took on very near a generic drug market peak, “The Asset Sales at Teva Have Begun.”
A portion of our rationale in removing Teva from the Best Ideas Newsletter portfolio many months ago was the potential for a Copaxone biosimilar to enter the market in 2017. This concern was amplified when a US court invalidated four of the patents that protected the drug from biosimilar challengers. Despite all the challenges Teva has faced in the past 18+ months, Mylan (MYL) may have just dealt it its most punishing blow yet.
Mylan Launches At Risk Competition
At this point in time, we categorize Teva as a mature pharma company with a few qualifiers. The company is significantly exposed to the generic drug industry, which remains mired in a deflationary spiral that is expected to last well into 2018. Though there have been some signs suggesting the firming of a few critical generic products, the overall fundamentals of the industry remain uninspiring. In response to such a dynamic, we are witnessing a number of pure-play generic pharma entities working to diversify their product portfolio with expansion into the generally higher-margin branded drug space, where pricing dynamics are typically more favorable. Regulatory and political pressures exist across the pharma space, though concerns are not as high now as they were a year ago amid the contentious election cycle.
For example, the antagonist in this portion of the Teva downfall story, Mylan, has come under considerable fire related to the lofty pricing of its EpiPen, one of its top-selling products. The company recently reached a $465 million settlement to end claims regarding the misclassification and extremely inflated pricing of the product. However, the launch of a generic version of Copaxone remains one of Mylan’s most significant initiatives as it remains, for the most part, an innovator within the generic drug space.
Mylan aims to capture a material portion of Copaxone’s share in the Multiple Sclerosis market before the drug becomes a multi-source product, which typically leads to a steep drop in the net price of the product as competitive forces accelerate. The company is one of four that have submitted an application for market authorization of a generic biosimilar, but a decision from the FDA regarding its 40 mg product has yet to be reached. In this vein, Mylan’s planned launch of the product should be considered “at risk” as a final resolution of the patent issue has yet to be reached. If Mylan qualifies for a 180-day exclusive launch, it is likely the firm will achieve its goal of eating into Copaxone’s sizable market position–it generated more than $4 billion in sales in 2016 alone.
We’ve slashed our fair value estimate for Teva as a result of the news. We’re now anticipating a lower top-line trajectory and contracting margins as the company battles to defend its drug’s position while searching for potential sources of revenue replacement. If Teva’s strategy had gone according to plan, the Actavis purchase would have eased these concerns, but that deal is looking more and more like a “bust” with no materially positive news coming from Teva’s pipeline. Teva has been left with few redeeming prospects in this area and is buried under a mountain of debt.
Positive Developments on the Patent Front for Abbvie
While Teva continues to grapple with its most meaningful patent defense, good news has been rolling in for AbbVie (ABBV) in its quest to defend the patent estate of its top-selling product Humira. We have covered the issue extensively, “Post-Earnings Update: AbbVie,” as we view the Humira case as the nexus of the coming wave of biosimilar challengers that threatens to upend the ordinary course of business in the branded biotech/pharma world.
The risk of a patent loss related to Humira continues to outweigh relatively positive developments for AbbVie, in our opinion, but price hikes and increased usage rates have helped sustain the drug’s sales performance. However, such performance is not likely sustainable over the long run as new entrants such as Eli Lilly’s (LLY) Jak-1 class (Olumiant) emerge, and the imminent marketing approval of Regeneron’s (REGN) treatment with superior head to head results (Kevzara) can be expected to put a dent in AbbVie’s sales of Humira.
AbbVie’s shares have benefitted from the apparent delaying and defraying of its patent cliff. The company recently announced a deal with Amgen (AMGN) in which it will issue a non-exclusive license to the IP backing Humira in the US on Jan 31, 2023, and in the EU in October 2018 in exchange for royalties from product sales. Amgen agreed to end its litigation with Abbvie and has acknowledged the validity of the patent estate protecting Humira. We find the deal an impressive first step in securing Humira’s future, but we caution Amgen is one of many potential rivals. The settlement with Amgen is largely a positive for Abbvie as Amegn has the knowledge coupled with manufacturing prowess to shepherd a viable biosimilar through the approval process and successfully into the marketplace.
Another competitor worth watching as it relates to AbbVie’s protection of Humira is Samsung Bioespis, which has quietly amassed an enviable lineup of biosilimars. The company, via its partnership with Biogen (BIIB), has gained market approval for Imraldi, a biosimilar for Humira, in Europe. We’ll be watching for another potential licensing deal from AbbVie with the Samsung-Biogen partnership.
Conclusion
We will continue to follow the evolution of the biosimilar industry as it remains in its gestational phase. Biological products remain the last frontier of treatments shielded from price competition–a verifiable monopoly with lush margins for those lucky enough to control the IP backing these innovative products. The biosimilar field has the potential to significantly disrupt