Momenta's Lovenox Win Should Value It Higher

Friday’s announcement that Momenta Pharmaceuticals (NASDAQ:MNTA) obtained a preliminary injunction against generic rivals Amphastar and Watson Pharmaceuticals (WPI) is a significant and unexpected win. As a result, MNTA should now be re-valued to account for a higher probability that it will be compensated at the more favorable 45% profit sharing rate as laid out in their 2003 Collaboration and License Agreement with partner Sandoz, a subsidiary of Swiss drug giant Novartis AG (NYSE:NVS).

The 2003 collaboration agreement with Sandoz is a “hybrid” royalty/profit share arrangement, under which Sandoz is obligated to pay MNTA a 45% profit share for the balance of the year ending June 30th, 2012, once the contractual profit on generic Lovenox® reaches 135.0 million (the limit is $99.1 million once an authorized generic is on the market), as long as no other third party is marketing an interchangeable generic version of Lovenox®. The September 19th approval of Amphastar’s (third party) generic Lovenox® would have lowered MNTA’s product revenue to be at 10%-12% of Lovenox® sales, for contractual profits over $99.1 million, versus the 45% profit share that MNTA has been earning as product revenue so far.

Lovenox®, a low-molecular-weight heparin product (LMWH) developed and marketed by Sanofi (NYSE:SNY), is the most widely prescribed LMWH or blood-thinner used for the prevention and treatment of deep-vein thrombosis (DVT) and treatment of acute coronary syndromes (ACS). Its sales, for the 12-monts ending July 30th, 2011, including generic equivalents, stood at $2.6 billion in the U.S. Currently, the market is roughly split evenly between SNY’s Lovenox® and its generic equivalent by MNTA and NVS. In the last reported June quarter, MNTA reported product revenues from the collaboration of $83.8 million, and its product revenues are estimated to exceed $90 million in the just-completed September quarter.

Those revenues to MNTA are resulting from the 10%-12% royalty on net sales until contractual profits reach $99.1 million, and thereafter 45% of contractual profits for net sales exceeding that amount. Since Sandoz sales of generic Lovenox® for the past year were well above $1 billion, most of the product revenue to MNTA (estimating profit from generic Lovenox® is in the 70% range) was from the 45% profit sharing tier.

The entrance of the third party generic from Amphastar and WPI threatens to lower payments to the 10%-12% royalty on net sales tier, which at 70% profit margins, equates to a much lower 15% profit sharing rate versus the 45% profit sharing that they have been earning so far. As a result, Lovenox® product revenue due to MNTA was widely predicted to collapse to a fifth of current levels (including market share losses for Sandoz) once the third party generic was on the market in the fourth quarter, and it was predicted to go from earning $1.30 in the September 2011 quarter to losing 50c for 2012.

The announcement Friday that the U.S. District Court for the District of Massachusetts entered an order enjoining Amphastar Pharmaceuticals, Inc. Watson Pharmaceuticals, Inc. and International Medical Systems, Ltd. from offering to sell or selling their generic Lovenox® before the District Court renders a decision in the on-going litigation, increases the probability that MNTA may keep generating revenues and profits at the higher 45% profit sharing rate going forward. Furthermore, in granting the motion, the District Court found that MNTA demonstrated a reasonable likelihood of success on the merits of their claim that Patent No. 7,575,886 is valid and infringed by the competitor’s enoxaparin sodium product.

This is a significant and unexpected win as getting a judge to conclude that MNTA is likely to win the lawsuit and would suffer irreparable harm if the Amphastar/ WPI competing product is allowed to enter the market is a very high hurdle. The market was probably not pricing in a positive outcome for MNTA, as may be evident from the price action of the stock since the third party generic was approved on September 19th.

Also, it is important to remember here that besides Amphastar and WPI, Israeli developer of branded and generic drugs Teva Pharmaceutical (NASDAQ:TEVA) is also seeking approval of a generic form of Lovenox®, and that MNTA has also sued TEVA for patent infringement.

Generic Lovenox® is MNTA’s lead product. However, MNTA is a unique biotech company that has both generics and novel drugs in its pipeline. Besides generic Lovenox®, MNTA is working with Sandoz on M356, designed to be a generic version of Copaxone®, which is indicated for the reduction of the frequency of relapses in patients with relapsing-remitting Multiple Sclerosis (RRMS).

Other products in MNTA’s development pipeline include M118, a next-generation anticoagulant engineered to address unmet needs in acute coronary syndromes (ACS) which completed phase 2a trials in June 2009, and is the most advanced novel drug in its pipeline, and M402, a novel anti-cancer compound, currently in preclinical development. As of the latest reported June quarter, MNTA had a cash balance of over $246 million or $4.80 per shares, and almost no debt.

We believe that the injunction win should now push MNTA share price higher into the mid- to high-teens based on the higher probability that it may realize the 45% proit-sharing rate going forward. MNTA shares traded between the high teens and above $20 just before the approval of the third-party generic on September 19th, and they traded as high as $26 last year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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