Established patents threatened by aggressive generic drug firms

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The Independent Online

If you want a justification for sky-high boardroom salaries, try this one. A judgement made by the chief executive of a multibillion-dollar pharmaceuticals company can affect thousands of jobs, the income of hundreds of thousands of investors, the drugs bill for millions of patients, and add or subtract billions of dollars from the value of the company. That's pressure.

So pity, if you will, Peter Dolan, chief executive of the pharmaceuticals giant Bristol-Myers Squibb, who just made a very bad judgement indeed.

BMS makes the second-biggest selling drug in the world, a pill called Plavix that prevents blood clots and cuts the risk of heart attacks and strokes. With sales of almost $13m (£6.7m) a day and growing, it is BMS's most important drug by a long way. Unfortunately for the company, a Canadian rival has started selling a cheap copy, five years before the expiry of the patents BMS claims protect its exclusive right to sell the drug.

The launch of generic Plavix by Apotex will be a boon for patients and health insurers because the competition has already driven down prices. For Mr Dolan, it is the culmination of a series of unfortunate events that saw him misjudge competition regulators, seriously underestimate Apotex's boss, the wily billionaire Barry Sherman, and even become the subject of raids by federal prosecutors looking into anti-competitive behaviour.

BMS was in court yesterday arguing for an injunction and the recall of generic Plavix shipped to wholesalers. If this last-ditch attempt to reverse the disaster fails, Plavix sales will inevitably collapse, BMS will be forced into redundancies and a cut in the dividend. The company might even succumb to a takeover approach. GlaxoSmithKline has already held negotiations with the company at least once before.

Whatever the outcome, Wall Street thinks Mr Dolan's days are numbered. The maverick Dr Sherman, meanwhile, emerges as one of the most cunning negotiators in the pharmaceuticals world, having run rings around his opposite number. In the generics industry - which copies drugs developed by Big Pharma and sells them for a lower price as soon as patent protection expires or is successfully challenged in the courts - Dr Sherman looks set to become first among heroes.

As governments and regulators struggle to reduce the drugs bill for an ageing population, patients are being moved on to generics drugs faster than before, swelling the companies' coffers enough to mount increasingly audacious legal challenges to Big Pharma's patents. Those patents have often been spurious and been overturned. In the face of this onslaught, branded drug sales have been growing at mid single-digit percentage rates, versus mid teens rates for generics sales, and generic drug makers are forecast to take an increasingly large share of the pie.

So Big Pharma's latest tactic has been to try to cut deals with the generics firms threatening their major drugs, offering financial incentives to delay their copycat drug launches and scrap legal challenges to Big Pharma's intellectual property. Congress has already been looking into these deals, smelling anti-competitive behaviour. The Plavix débâcle looks like severely limiting Big Pharma's ability to do these sorts of deals in the future.

BMS began talking to Dr Sherman at the start of this year, after the Food & Drug Administration approved Apotex's version of Plavix and with a court date for the patent hearing looming. BMS got Dr Sherman to agree to scrap the court case and hold off the launch until 2011, in return for special favours to make the eventual launch more lucrative. BMS shares soared.

But Dr Sherman was playing a double game. He had privately concluded that the Federal Trade Commission would block any deal on competition grounds. A private letter to Congressmen in July was revealing. "I must comment on the well-publicised perception that Apotex has entered into an anti-competitive settlement with BMS concerning clopidogrel (Plavix). That perception is incorrect. Apotex has negotiated only to remove barriers to immediate launch. To achieve that objective, we entered into a somewhat bizarre arrangement that will enable immediate launch, if and when FTC refuses to approve a settlement."

So confident were BMS and Mr Dolan that a deal would not be blocked, that they agreed to a string of extraordinary concessions. If it was rejected and Apotex then decided to launch Plavix, they agreed, BMS would wait five days before seeking an injunction, allowing Apotex to flood the market. BMS also waived its right to about five-sixths of the damages they would normally be able to claim if Apotex was later deemed to have infringed their patents.

Dr Sherman was right. The deal was blocked. But BMS was so desperate to protect Plavix that it came back to the negotiating table with new terms it thought would satisfy the FTC, allowing an Apotex launch earlier and ensuring prices would then fall more quickly. To make that more appealing to Apotex, BMS suggested - Dr Sherman says - a side deal to be kept secret from the FTC which would guarantee a certain amount of income to Apotex. When Dr Sherman told the authorities of this, the Department of Justice raided Mr Dolan's office. BMS denies the claims and says it never suggested anything illegal.

The BMS chairman, James Robinson, says he has full confidence in Mr Dolan and BMS insiders say they do not expect the investigation to reveal wrongdoing, but shareholders think the outfoxing of Mr Dolan is grounds enough for his dismissal. The second deal was again rejected and one in three of the new Plavix prescriptions is already being filled with Apotex product. BMS has already had to cut prices.

Jon Fisher, a portfolio manager with Fifth Third Asset Management, said: "They only have three options: continue as is, change management or try to sell the company. But I think if they try to sell the company, they're going to be disappointed with the offers they get from prospective buyers." By a process of elimination, Mr Dolan's elimination seems inevitable.

Dr Sherman, meanwhile, has been boasting that Apotex is a company worth significantly more now than it was this time last month. He bought it in 1974 and has turned it into Canada's largest pharmaceuticals firm.

Whereas less ballsy generics manufacturers waited for Big Pharma's dubious patent claims to be squashed in court, Apotex launched copycat Paxil even before it had won its legal challenge, running the risk of ruinous financial penalties if it had lost. Apotex won, consumers got early access to cheap Paxil, and the value of privately held Apotex swelled to make Dr Sherman one of Canada's richest businessmen.

And as well as providing BMS's rivals with plenty of material to chuckle over, the wiliness of Dr Sherman has also put a line in the sand with regards to deals between Big Pharma and their generics rivals. Last week's deal between Shire Pharmaceuticals and the generics maker Barr Laboratories, which will hold off competition to a children's hyperactivity drug, was limited to a few extra months of exclusivity and no money changed hands between the two sides. Executives know that deals have to be "FTC-friendly", for which read consumer friendly. And that means the relentless downward pressure on drug prices is not going to ease any time soon.

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