Why Amgen's Giving Novartis a Headache

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What happens when a $121 billion biotech and a $217 billion pharmaceutical giant begin feuding in the courts? We're about to find out.

Recently, Amgen (NASDAQ: AMGN) filed a lawsuit in federal court that alleges Novartis (NYSE: NVS) violated the terms of their Aimovig partnership. Novartis countered with a suit that claims Amgen just wants to cut Novartis out of its share of Aimovig sales following a stronger-than-expected initial launch in the U.S. and abroad.

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Aimovig's becoming more popular among people affected by migraine headaches than anticipated, and Novartis expects its investment to provide billions in annual revenue down the road. Let's weigh both arguments to see which company has the best chance to get what it wants.

Amgen vs. Novartis

Amgen has complained that Novartis breached its contract to develop and commercialize Aimovig, the first of several new migraine-preventing drugs that work by inhibiting calcitonin gene-related peptide (CGRP) receptors.

The partners began collaborating on the development of Aimovig in 2015, and in 2017 they amended their contract again. Amgen argues Novartis didn't keep a promise not to take part in the development, commercialization, or manufacture of other CGRP inhibitors.

According to Amgen, Novartis began breaching the terms of their agreement before it began by acting as a contract manufacturer for Alder Pharmaceuticals (NASDAQ: ALDR) and its CGRP inhibitor, eptinezumab.

In September, Novartis told Amgen that a few months earlier, the Swiss pharma discovered it was in breach of contract. Amgen complains that Novartis failed to cure the breach in January this year because it agreed to provide Alder with a guaranteed capacity of eptinezumab through 2023.

Since Novartis refused to seal the breach, Amgen feels entitled to terminate their collaboration agreements.

Novartis vs. Amgen

By 2022, Aimovig is expected to generate around $3.7 billion in global revenue. Novartis filed a suit that aims to invalidate Amgen's attempt to terminate their agreements. In its complaint, the big pharma didn't mince its words: "Amgen's purpose is all too apparent. On the heels of Aimovig's successful U.S. launch, Amgen wants to cut Novartis Pharma out of future sales of Aimovig in the U.S."

In 2017, Amgen granted Novartis U.S. co-commercialization rights to Aimovig, which encouraged Novartis to invest heavily into the program. Cutting Novartis out of the picture before it has any chance to earn a return on its investment could save Amgen billions down the line.

Novartis thinks it shouldn't be held responsible because it wasn't an intentional breach of contract. The Swiss pharma explained that one hand of its giant operation simply didn't know what the other one was doing. Last September, a few months after Novartis Pharma found out Sandoz CMO signed a contract to manufacture Alder's competing CGRP inhibitor, Novartis told Amgen about the breach.

In January of this year, Novartis began to unwind its contract with Alder Pharmaceuticals, but switching manufacturing sites for an experimental biologic drug requires jumping over regulatory hurdles that can stall a program for years. Immediately terminating manufacturing could delay the ongoing review of a new drug application for eptinezumab.

Novartis also insists the breach it told Amgen about in September wasn't actually a breach for a myriad of reasons -- including the suggestion that Sandoz CMO is a sister company that doesn't take direct orders from Novartis Pharma and is therefore not an affiliate.

How'd that happen?

Novartis claims to have invested around $870 million into Aimovig's development and commercialization since 2015. That's a significant sum, even for a pharmaceutical company that earned $12.6 billion last year. Novartis employs a combined 125,161 people around the world, and it's going to be hard for a jury to understand how three years went by before one of them noticed Sandoz CMO was manufacturing a drug in the same class as Novartis Pharma's exciting new migraine drug.

Novartis is right to suggest Alder's migraine drug isn't a serious threat, but there's no getting around the fact that it is a CGRP inhibitor. Contract law experts might disagree, but it appears Novartis slipped the noose around its own neck.

What's next?

Amgen and Novartis will continue co-commercializing Aimovig while litigation winds its way through the courts. Both companies filed their complaints in early April, so it could be a while before that changes.

Aimovig was the first of three monthly injections approved last year to prevent the frequency of migraine headaches, and its launch was progressing well the last time Amgen checked in. It's still early, but it looks as if annual Aimovig sales could reach $2 billion in a few short years.

Not sharing any of those sales with Novartis seems cruel, but Amgen really doesn't have a choice in the matter. Management teams that let go of billions in potential sales for the sake of kindness don't last very long.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.