Teva Pharmaceutical's Strategy Proves to be Brilliant

By Markets Fool.com

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Source: Teva Pharmaceuticals

When Teva Pharmaceutical's patent on its top-selling multiple sclerosis drug Copaxone expired last May, investors fled in fear that biosimilars under development at Novartis' Sandoz unit and Mylan Inc.would cause Teva's sales to crater. However, nearly a year after 20-milligram Copaxone lost exclusivity, the FDA has yet to approve an alternative, and Teva's "switching" strategy has shored-up billions of dollars in market share.

Navigating risk
Small-molecule drug developers are continuously scurrying to overcome the threat of patent expiration, but now biologics as well are increasingly threatened by generic alternatives (known as biosimilars).

Copaxone is among the first group of biologics to lose patent protection. Despite biologics being harder to copy than their small-molecule counterparts, both Novartis and Mylan have been developing their own Copaxone biosimilars in hopes of capturing a share of that drug's $4.2 billion in annual sales.

If those competing biosimilars are ever approved, they could put heavy pressure on Copaxone sales. For comparison, generic versions of small-molecule drugs have historically captured between 70% and 90% market share from the original brands.

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That's a scary risk for Teva investors. Copaxone is one of the most widely used treatments for multiple sclerosis, and its multibillion-dollar revenue stream represents 20% of Teva's sales and roughly 50% of its profit.

Teva has used a variety of levers to stall the threat from Novartis and Mylan, including a series of legal battles that eventually led to the Supreme Court. In January, the high court ruled that an appeals court decision to eliminate Copaxone's patent protection early was not based on the correct legal approach. The ruling kicked the case back to the appeals court; if that court reverses its prior decision, Copaxone would maintain patent protection until September 2015.

While Teva's legal strategy has helped keep competitors at bay, its product switching strategy could be the long-term profit saver.

The company developed a new, long-lasting variation of Copaxone that could be dosed three times weekly, rather than daily. That new 40-milligram formulation is covered by patents until 2030,and the appeal of a less onerous treatment regimen has allowed Teva to convert 60% of legacy Copaxone scripts to the updated version.

That is vitally important to minimizing any potential hit from Copaxone alternatives, but investors should also be happy to learn that the new formulation has strong market share among newly diagnosed patients. In Teva Pharmaceutical's fourth-quarter earnings release, the company said Copaxone has a 25.9% U.S. market share in new patients. Although Teva did not break out how many of these new prescriptions were for the new formulation, it would stand to reason that its more convenient dosing means the 40-milligram version accounts for a large portion.

Looking ahead
It's not absolutely clear sailing for Teva Pharmaceutical from here. The company is doing a great job of insulating itself from potential biosimilars from Novartis and Mylan, but those rival products are likely to win over regulators at some point. If so, Teva sales will surely suffer. How much they'll suffer, however, is up for debate. With every month that goes by without a competitor, Teva should be able to convert more people to the long-lasting version of Copaxone, and that means the competitive threat is increasingly smaller as time goes on.

The article Teva Pharmaceutical's Strategy Proves to be Brilliant originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Legal beagles won't let Todd ask them or let them tell him. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.