Eli Lilly & Co may have a $15 billion wild card up its sleeve as it waits for desperately needed new drugs to bear fruit.
Should an obscure patent on Lilly lung cancer drug Alimta survive a court challenge this year, the company would be able to wring more than five additional years of peak sales out of the fast-growing product that it would otherwise lose to cheaper generics.
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Annual sales of Alimta are expected by Wall Street to climb to $3.5 billion by 2016, when its basic patent lapses. Once faced with generic competition, branded drugs typically lose more than 80 percent of sales within a year.
While the likelihood of a Lilly victory is not a widely held view, a growing number of patent attorneys and industry analysts believe the particular patent being challenged will pass legal muster.
Alimta may keep its marketing exclusivity until 2022, thanks to protection from a separate so-called method-of-use patent on the way the drug is administered that many investors and Wall Street watchers are not aware of or have failed to appreciate.
Historically, method-of-use patents have had a much tougher time holding up in court than basic chemical patents on medicines. They are often viewed as manipulative, blatant efforts to extend the sales life of products.
But this one could be different because of specific safety language in the Alimta label that could provide a road block to cheaper generics.
The so-called '209 patent covers the administration of two nutrients - folic acid and vitamin B12 - to patients before they receive Alimta, to protect against toxic side effects of the cancer drug. Alimta's approved label instructs doctors to administer the nutrients prior to and during use of the medicine.
"For a generic to win approval, it usually has to copy the branded drug's label," said patent attorney Ben Hsing, a partner in the law firm of Kaye Scholer in New York.
Generics could have a hard time doing so because Lilly has a separate patent on the pre-administration of the nutrients, said Hsing, who last year successfully defended Roche Holding AG's Tarceva lung cancer drug from patent challenges by generic drugmaker Mylan Inc. "So I think generics would have a tough time" prevailing.
If generic versions of Alimta cannot mention use of the nutrients in their own labels, they could be compromising patient safety, which is not likely to sit well with health regulators that must approve any generic, according to patent attorneys.
Lilly, whose attorneys declined to comment for this story, is expected to counter legal arguments that use of folic acid and vitamin B12 is "obvious" and therefore not patentable by arguing that its researchers discovered the protective effects of the nutrients with respect to Alimta specifically.
Gary Frischling, a Los Angeles-based patent attorney for Irell & Manella, agreed that the language in Alimta's label could keep cheap generics at bay until 2022.
"This seems to be a case in which research done on how to safely use this particular drug has turned out to be very economically important," said Frischling, who has represented Elan Corp and other drugmakers.
PATENT WIN WOULD PROVIDE NEEDED BOOST
Lilly badly needs new medicines to replace ones that have already lost patent protection or will in the next two years.
In October 2011, the company began facing one of the worst patent cliffs in industry history when its biggest drug, Zyprexa for schizophrenia, began facing generics. Sales of the former $4.5 billion-a-year drug have plunged by two-thirds.
The pain worsens in December of 2013, when Lilly's current top seller, the $5 billion-a-year anti-depressant Cymbalta, goes generic, and after cheap versions of its $1 billion Evista osteoporosis drug arrive in early 2014.
Blockbuster Alimta sales well into 2022 could go a long way toward easing some of that pain, while other new medicines work their way toward approvals.
Generic drugmakers Teva Pharmaceuticals Industries Ltd and APP Pharmaceuticals LLC have challenged the validity of the '209 patent, and will battle Lilly this summer in federal court in the drugmaker's hometown of Indianapolis.
The U.S. Court of Appeals in Washington last August upheld the validity of the patent on the drug's chemical structure, protecting it from generics through late 2016.
If the method of use patent also holds up in court, Alimta would then be protected from 2017 to 2022, according to Seamus Fernandez, an analyst with Leerink Swann, who received a four-star rating from StarMine for his predictions about Lilly over the previous two years.
His "outperform" rating on Lilly is based partly on that expectation, even though the general consensus on Wall Street is to the contrary.
"We see a real opportunity here," said Fernandez, who estimated Lilly's earnings per share would get more than a 25 percent lift in 2017, 2018 and 2019 if the patent is upheld.
"It would provide a pretty nice runway to launch products and get them to market," said Fernandez. He cited Lilly treatments for Alzheimer's disease, arthritis, psoriasis, diabetes and cancer now in late-stage studies.
Michael Liss, portfolio manager at American Century Investments, said Lilly's profits and share price could expand significantly if only a few good-selling drugs are introduced during the next few years.
Sanford Bernstein's Tim Anderson also has an "outperform" rating on Lilly, based largely on confidence the method of use patent will prevail in court. Anderson also received a four-star out of five StarMine professional rating for his analysis of Lilly.
The company has taken a conservative stance, not stressing the possibility of a patent victory. Lilly Chief Financial Officer Derica Rice has said an extension of Alimta's patent would be an "upside" for Lilly.
Attorneys for Lilly declined to comment on the case. A Teva spokeswoman also declined to comment.
To be sure, keeping Alimta patent protection beyond 2016 is no lock. Based on historical precedence, Morningstar analyst Damien Conover offered little hope the patent will pass muster with the federal court. "Most people expect the patent to fail," Conover said. "Method-of-use patents tend to be particularly weak."
But most people may be underestimating the protective differences of this particular patent, according to legal experts.
Patricia Carson, a patent lawyer with the firm of Kirkland & Ellis in New York, said pre-administration of folic acid and vitamin B12 appears to be "specific to Alimta" and not a procedure common with other drugs.
"In development (of Alimta), they came up with this type of method," she said.
Even so, Carson said Lilly may have to convince the court the method would not have been obvious to the ordinary researcher.
Should the Alimta patent prevail, Conover said it would significantly bolster Lilly's attractiveness and profits beginning in 2017. It also would help Lilly cope with a second patent cliff that would begin that year, as its Cialis impotence treatment and Effient blood clot drug begin facing generics. The drugs now have annual sales of $2 billion and $450 million, respectively.
Lilly's fourth-quarter results, due later this month, are expected to show earnings tumbled about 24 percent in 2012. The company expects to begin rebounding from its patent cliff in 2015.
Cowen and Co analyst Steve Scala, called the patent case a "wildcard opportunity" for Lilly.
Lilly shares rose 19 percent in 2012, compared with a 10 percent gain for the ARCA Pharmaceutical Index of large U.S. and European drugmakers, suggesting confidence in an eventual turnaround for Lilly.
"If the court upholds the Alimta patent," Scala said, "Lilly will bounce back a lot more quickly."
(Additional reporting by Bill Berkrot; Editing by Jilian Mincer, Ed Tobin and Richard Chang)