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Gemcitabine HCL is a chemotherapy drug for cancer treatment distributed by Eli Lilly (NYSE:LLY) under the brand name Gemzar. In the second quarter of 2010, Lilly made $293M from the drug, its 6th largest product. Lilly has two patents listed in the Orange Book for the drug: patent 4,808,614 (the '614 patent, which has exclusivity through Nov 15, 2010); and, patent 5,464,826 (the '826 patent, which has exclusivity through May 7, 2013). In basic terms, the '614 patent covers the compound gemcitabine itself, while the '826 patent covers the method of using gemcitabine to treat cancer.

Eli Lilly has several patent infringement cases currently pending against generics who want to offer their own versions of gemcitabine. One is against Sun Pharmaceuticals in Michigan. Another is against Teva (NYSE:TEVA) and its subsidiary Sicor in Indiana (Lilly's home court, literally speaking). It also has suits against Hospira and Novartis AG's Sandoz unit. Interestingly, according to its 2010 Q2 report, "Sales [of Gemzar] outside the U.S. decreased 34 percent, to $103.6 million, due to lower demand and lower prices as a result of the entry of generic competition in most major markets."

The Michigan judge (the Sun case) ruled that there was no way the '826 patent could be valid and bypassed a trial on the issue. He did not yet address the '614 patent, because that patent needs to be reviewed by trial. Lilly appealed the decision regarding the '826 patent to the Court of Appeals, which heard oral argument in the case on May 7. After reviewing the matter and listening to the oral argument, I expect the district court decision will be upheld, in effect killing the '826 patent. At worse, the appeals court will reverse the district court's finding and say that the validity of the '826 patent deserves a full trial along with the '614 patent. A decision from the appeals court will likely be issued sometime before September or October.

I know this may be confusing to non-lawyers, so let me explain. If you're on the eve of trial, you can ask the judge to forgo a trial if there's no way your opponent can win. In essence you're saying that even if all the facts are found in your opponent's favor, you'd still win, thus determining what facts are true would be a complete waste of time. This is different than winning at trial, where a judge has to decide what's true and what isn't and you only win if he thinks your facts are true. To make an analogy, let's say it's against the law to wear a red hat. One day you're walking down the street and the police arrest you for wearing a maroon hat. You argue that you weren't wearing any hat, but even if you assume the police's version of the facts is true, you still can't be found guilty because maroon isn't red. If the judge agrees that maroon isn't red, then he'll rule for you without holding a trial. The appeals court could agree with him, or reverse him and say maroon is red. If they do the latter, then it goes back to the judge to have a trial to determine whether your version of the facts (i.e. that you weren't wearing any hat at all) or the police's version of the facts (that you were wearing a maroon hat) is true.

So, in the Sun case, the trial judge held that even assuming all facts in Lilly's favor, the '826 patent would still be invalid. Thus, that's why the appeals court can reverse him, but not necessarily hold the patent is valid. Rather, all they'd be saying is that it is possible the patent is valid and, thus, there needs to be a trial to determine what's true and what isn't. So, on the one hand, the appeals court can agree with the trial judge and say that there's no scenario possible under which the '826 patent is valid. That's what I predict they'll do. On the other hand, the appeals court could say it is possible that there are some circumstances under which the patent is valid, and therefore the trial court needs to investigate those facts via trial. There's no possibility that the appeals court will reverse the trial court and go so far as to additionally hold that there is no way the patent could possibly be invalid. Lilly didn't even ask for such a reversal.

Now, the Indiana judge in the Sicor/Teva case referenced the Michigan ruling and, therefore, held the '826 patent invalid. But, unlike the Michigan judge who put the '614 patent to the side for now, the Indiana judge went ahead and ruled that the '614 patent was valid and infringed. In fact, Sicor/Teva conceded that if the patents are valid, then their generics infringe them. So, the only issue is whether the patents are invalid or not. Both Lilly and Sicor/Teva have appealed the Indiana judge's decision to the Court of Appeals. Briefing of that appeal will occur this summer, with an argument probably late this fall and a decision in early-mid 2011. The district court opinion looks pretty solid to me, but I'll reserve making any kind of prediction until I know which judges at the appeals court are hearing the case (the judges assigned to an appeal can dramatically alter the expected result). I'll also want to listen to the oral argument when it happens to give myself a better feel for what's likely to happen.

So, to review, as of now, we have one trial court that found the '614 patent valid and infringed. The other trial court didn't yet reach the issue of the '614 patent. Then we have one trial court that ruled the '826 patent invalid, a decision the other trial court adopted by reference. Both of the trial courts' decisions have been appealed. The appeal of the '826 patent has been fully briefed and argued, thus we're just waiting on a decision from the appeals court in that case, which should be out this fall. The appeal of the '614 patent is just getting warmed up and won't be fully submitted until early/mid fall with a decision expected in early 2011.

Since the '614 patent exclusivity ends this November anyways, it's largely irrelevant what happens in that appeal, as no generic is likely to launch before then. If I'm right, that the '826 patent's invalidity is confirmed by the appeals court, then generics can enter the market upon expiration of the '614 patent. However, since Teva was the first to file, it is entitled to six months of market exclusivity, which will begin to toll upon the earlier of either Teva's entering the market or a final unappealable decision finding the '826 patent invalid. This is why Sun wanted to leapfrog Teva in the appeals process, so that they could get a decision from the appeals court holding the patent invalid, would begin to tick away at Teva's 6 month generic exclusivity before Teva is able to enter the market. Rewhich gardless of this, if my expectation is accurate, Teva should get a mild boost from the confirmation of the '826 patent's invalidity. I'll be interested to see whether Lilly's stock moves on such news. My instinct would think it shouldn't move much, as this isn't their most important product and they have a diversified revenue stream. But, Leerink Swann analyst Seamus Fernandez says that if Lilly wins that appeal, he'll boost his 2011 revenue forecast by up to $500 million.

UPDATE AS OF 11:45 AM on JULY 28. I wrote this piece last night and just finished uploading it to Seeking Alpha this morning. As I was doing so, the Court of Appeals issued its decision affirming the Michigan court's invalidation of the '826 patent (.pdf).

Disclosure: HSP Aug 21 Calls

Source: On the Generic Gemzar Patent Fight