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Summary

  • Teva demonstrates how dependence on patented pharmaceuticals is a poor long-term business strategy.
  • Sales of one such medication, Copaxone, are responsible for one fifth of Teva’s revenue.
  • Teva is willing to do almost anything to preserve its Copaxone patent, which expired in May.
  • Teva’s addiction to Copaxone revenue is now a threat to its future.
  • Teva might be sacrificing long-term survival for short-term profits.

The predicament of Teva Pharmaceutical Industries Limited (NYSE:TEVA) should serve as a warning to investors. There is little or no way for drug makers dependent on patented medications to escape the patent cliff.

Teva is facing a major plunge over the patent cliff because of its superstar multiple sclerosis medication, Copaxone. Copaxone revenues made up 21% of Teva's sales and 42% of the company's earnings in 2013.

Copaxone is critical to Teva's success because it accounts for around one fifth of the company's revenue. Teva made $4.3 billion from Copaxone sales in 2013, and it reported a TTM revenue of $20.54 billion on June 30, 2014. Get the picture, folks? Take Copaxone away, and one fifth of Teva's revenue could vanish.

The Copaxone patent expired on May 24, 2014, which caused Mylan Inc. (NASDAQ:MYL) Novartis AG (NYSE:NVS), and Momenta Pharmaceuticals (NASDAQ:MNTA) to apply to the US Food and Drug Administration, or FDA, for permission to market a generic version of Copaxone. There's no word on when the generic will hit the market, but Teva is certainly scared of it.

Teva Fights Back

Teva isn't taking the potential loss of Copaxone lightly; it sued the FDA and went all the way to the U.S. Supreme Court in an effort to keep a generic off the market. The court has agreed to hear a case that would give Teva patent protection until September 2015 during the term that begins in October. The ruling on that case may not be available until June 2015, so it is hard to see how that action will help the company.

Teva is trying to use the reprieve the legal maneuvering could give it to market a slightly different version of Copaxone, which has a different patent on it. The new drug is a 40 mg dose that patients would take three times a week. The old drug was a 20 mg dose that had to be taken once a day.

If it could get patients to switch to the new drug, Teva could push the patent cliff back to 2030. The problem with that strategy is that patients, doctors, and insurance companies would have to go along with it.

Around 51% of Copaxone patients have converted to the new product, Teva CEO Erez Vigodman claimed. The problem with that claim is that the generic isn't on the market yet. There's no telling how many patients might switch back when the generic goes on sale.

It is obvious that Teva itself isn't confident of the new drug's success. The company has tried other legal maneuvers, including a lawsuit that would force the FDA to conduct full clinical trials on the generic Copaxone. The idea there was to delay the drug's availability. The suit against the FDA was dismissed on May 15, less than a week after it was filed, a clear indication that the courts are not happy with Teva's tactics.

It is too early to tell if Teva's legal obstructionism will succeed in warding off the patent cliff. Yet is easy to see how that strategy could backfire if the courts rule against Teva or if patients and doctors reject the new drug.

Teva's Patent Addiction Exposed

Teva's recent actions show that pharmaceutical houses can easily become addicted to patents and the revenue they bring in. Just as an addict will do anything to get drugs, pharmaceutical companies will do almost anything to preserve the moat and float that patents give them.

This behavior can be very profitable, but it isn't very rational or helpful when the patent cliff looms. Instead of attempting to develop a diversified business, the company becomes focused on the patent. Its only goal is to preserve the patent at all costs, even if the actions it takes to preserve the patent will drive away customers in the future. Long-term survival gets sacrificed for short-term profits.

The moral of the story is that the patent cliff cannot be avoided. Investors need to stay away from those companies that refuse to acknowledge the inevitability of the patent cliff.

Source: Teva Proves You Cannot Escape The Patent Cliff