As Predicted, Hospira Jumps on Generic Cancer Drug Ruling

Includes: HSP, SNY
by: Daniel B. Ravicher

Back in July, I analyzed the pending patent infringement lawsuit between Sanofi-Aventis (NYSE:SNY) and Hospira (NYSE:HSP) relating to docetaxel, a $3B/year (globally) blockbuster chemotherapy drug used to treat breast cancer, prostate cancer, and other types of cancers. Docetaxel is sold by SNY under the brand name Taxotere. HSP (along with Apotex and others) want to distribute a generic version of the drug. SNY sued HSP for infringing two patents that expire in July 2012. HSP had conceded it infringed another patent, which expires in November of this year.

In my analysis of the lawsuit, I predicted that,

Sanofi is still the favorite, but not by as much as in a typical brand versus generic patent fight. If the generics can pull out a win from the trial court (remember, they need only win on either invalidity or non-infringement, not both), I wouldn't be surprised if HSP jumps significantly higher and SNY drops meaningfully lower on the news.

I even put money where my mouth was, buying some Aug. 21 calls on HSP, because although HSP was still the dog, I put them at much less of a dog than I expected the market to have predicted their chances.

Monday, the District Court ruled (.PDF; 3.1MB) in favor of HSP, finding that the patents were invalid. As I predicted, HSP immediately moved up, more than 4% on 4X volume on what was otherwise a flat day for the market, and SNY moved down slightly about 1% after the news hit around 2pm. Bloomberg reported that this was the largest single day jump for HSP in over a year. I only wish I had bought calls with a longer time horizon. Lesson learned.

I'll return to this matter when it reaches the appeals court (6-9 months from now). In the interim, it will be interesting to see whether HSP (and/or others) launch a generic version of the drug "at risk", which means before the District Court decision is upheld by the Court of Appeals. This is called "at risk", because if yesterday's district court decision is reversed and HSP began selling a generic version in the interim, they could be found liable to SNY to the tune of SNY's lost profits, which are often much more than whatever profit HSP would make from those sales. The net result could be a negative loss on each sale to HSP. It's also possible that there could be a settlement drawn up between SNY and HSP which allows HSP to sell a generic version in the interim. One thing is for sure, this story is not over yet.

Disclosure: I bought August 21 calls on HSP.