What really caused me to conclude that there was a buying opportunity here was the fact that what Merck & Co (NYSE: MRK) did flies in the face of the entire concept of patent value protection. Merck has in effect shot itself in the foot, and in doing so it has also shot the feet of everyone else in the ethical pharmacological and biotechnology industries. What it did was to announce to the business and healthcare world in the US that it is “breaking the rules and not playing the game.” Such an attitude simply won’t wash in the US, and the entire episode will be forgotten in a month. Let me explain this.
Several years ago, I did a bit of research on Israeli patent legislation. I did this since Israeli law harmed the implementation of local generic products. Israeli generic manufacturers, headed by Teva, in contrast to American, British, European or Japanese manufacturers, could not begin manufacturing before the period of protection for the patented product had expired. US law, for example, allowed a drug manufacturer to produce the generic version of a product and have it ready for distribution before the expiry of the protection period, and then immediately begin marketing it the day after the patent protection expired. Israeli law allows companies to begin manufacturing only three months before the expiry of patent protection. This, of course, was detrimental mainly to Teva, but also to chemical companies.
A certain professor from the Ben Gurion University in the Negev took the article and circulated it among Knesset members who were about to vote on an amendment to the Israeli patent law, to bring it line with US law. Was the amendment passed? Certainly not. Why should Israel have a law that could harm US business? The then-US Ambassador Martyn Indyk lobbied various MKs (few of whom even understood what the patent law was all about), and explained to Israeli legislators what would happen if the amendment went through. It could totally sour US-Israeli relations, he warned. I should mention here that the amendment was proposed after it transpired that sometime earlier, Teva had violated Israeli law by bringing onto the shelves a generic version of a drug made by Eli Lily Company (NYSE: LLY) one day after its patent expired.
"How can you go and break your own laws," fumed the Americans, and enlisted the services of one of Israel’s leading lawyers to sue Teva for violation of Israeli law. Now you know why Teva has began relocating R&D activities to Hungary, Ireland, and even the US.
Merck’s war was predictable since this is the first time that a blockbuster like Zocor has lost its patent protection and billions of dollars are at stake here. Pfizer Inc. (NYSE:PFE), Eli Lilly, and others probably goaded Merck into taking the action it did and the pharmacology industry wanted to see if it would succeed.
But why are patents protected, and why did the generic drug industry arise? After all, Teva, Mylan Laboratories Inc. (NYSE: MYL), and numerous Indian companies could have developed generic versions of Zocor 10 or 19 years ago, no? What’s the point of patent protection if after the patent period the drug’s inventor keeps its lead? A US District Court for the District of Columbia judge dismissed out of hand a petition by Novartis AG (NYSE: NVS) against Teva’s 180-day exclusivity period. The judge’s ruling indicated what the law’s line of thinking on the subject will be if it comes to that.
If you ask me, the mountain will turn out to be a molehill, and Teva has fallen to an excellent price for buyers in the meantime.
Published by Globes [online], Israel business news - www.globes.co.il - on June 27, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.