Healthy Skepticism Library item: 750

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Publication type: news

Abboud , L .
Challenge to Pfizer's Lipitor Has Some Investors Worried
The Wall Street Journal 2005 Jan 11

Full text:

A legal attack on the patents on Pfizer Inc.‘s Lipitor by a little-known generic-drug maker has some on Wall Street worried that a cheap copycat of the world’s biggest-selling drug could come to market years earlier than anticipated.

In a two-week trial that ended late last month, Ranbaxy Laboratories Ltd., a small generic-drug maker from New Delhi, sought to crack two patents that Pfizer says protect the cholesterol-lowering drug until 2009 and 2011.

Like most patent cases, the litigation will be decided by a judge rather than a jury. A decision from Judge Joseph J. Farnan of the U.S. District Court of Delaware could come in the next six to 12 months.

The prevailing view on Wall Street has been that Ranbaxy, which is trying to establish itself in the U.S., wasn’t likely to win the case. But testimony at the trial from both sides on how the patents should be interpreted, as well as disclosures about Pfizer’s conduct in applying for the patents, have left a small but growing clutch of investors less certain that Pfizer will triumph.

“After the trial, the probability of a Pfizer loss has grown a little,” said Ken Tsuboi, a senior analyst at Capital Research & Management Co. Mr. Tsuboi’s $200 million Global Healthcare Fund hasn’t sold Pfizer shares since the trial, but he said he would if Pfizer’s stock rose a bit before the verdict. He rates the stock “underweight” and has reduced his Pfizer position to 9.5% of the fund’s assets from 15% six months ago.

If the challenger prevails, it would send seismic shocks through the pharmaceutical world. Lipitor had global sales of $9.2 billion in 2003, a big chunk of Pfizer’s revenue of $45.2 billion that year.

A loss for Pfizer also could reverberate through the more than 1,300 stock mutual funds that hold its shares, making it one of the most widely held stocks. More funds own Pfizer than own shares of General Electric Co., Exxon Mobil Corp. or Citigroup Inc., according to fund tracker Morningstar Inc.

Still, Bob Millen and Eric Schoenstein, who co-manage Jensen Portfolio with $2.8 billion in assets, don’t think Pfizer’s long-term fate hinges on the outcome of the Lipitor trial. “Pfizer has such a broad pipeline and deep financial resources that even if they were to suffer some patent litigation losses, they are still going to be a very powerful force in the pharmaceutical industry,” Mr. Schoenstein said. They have kept buying Pfizer shares over the past year even as the stock has stumbled; the fund now owns 4.3 million shares.

In 4 p.m. composite trading yesterday on the New York Stock Exchange, Pfizer’s shares — which have been battered by safety questions related to its painkiller Celebrex — were up 14 cents, or 0.5%, to $26.44.

Investors have been keenly interested in patent trials since 2001, when Eli Lilly & Co. lost patent protection on antidepressant Prozac, its flagship product, after generic company Barr Pharmaceuticals Inc. won a lengthy lawsuit allowing it to bring a copycat to market about 2½ years earlier than Lilly expected. After two months, Lilly had lost nearly three-quarters of its sales, an unprecedented rate of decline.

Pfizer already has generics woes. It faces more patent expirations in coming years than any other pharmaceutical company. Drugs that account for a quarter of its U.S. sales are set to lose patent protection, including antidepressant Zoloft, antibiotic Zithromax, blood-pressure drug Norvasc and allergy drug Zyrtec. Generic makers also are challenging its patents on Celebrex and Detrol.

Predicting the outcome of patent cases is difficult because of the complexity of the biochemistry and legal issues. But because verdicts often involve billion-dollar products crucial to drug companies’ profits, investors hire lawyers to sit through the trial and predict the outcome. Such analysts are divided on the Lipitor case.

In the lawsuit, Ranbaxy must beat two Pfizer patents to win the right to sell a generic version of Lipitor. That is a high hurdle, especially when one of the patents covers the molecule itself, rather than the manufacturing process or therapeutic use.

Pfizer first obtained a patent on a molecule made up of two components; it later obtained a second patent on one of those components and marketed that as Lipitor. Ranbaxy argues that the first patent didn’t expressly cover the components. Because its copy only includes the component that mimics Lipitor, Ranbaxy says it doesn’t infringe on the initial patent. Pfizer maintains that the first patent covers the whole molecule and its components.

The arguments on the second patent, however, provided new twists. Ranbaxy essentially says that Pfizer shouldn’t have gotten the second patent because it was too much like the first one. Pfizer counters that, although the second patent was similar, the company deserved extra patent protection because the later version of the molecule had surprising advantages over the older one, a critical requirement for a patent. Specifically, Pfizer claimed that the later molecule showed a significant advantage in efficacy at lowering cholesterol than the older molecule.

But Ranbaxy attacked Pfizer’s scientific data on the cholesterol lowering and accused Pfizer of botching the tests and then cherry-picking the data. Ranbaxy maintains that if all the data were taken into account, the second molecule’s advantage wasn’t statistically significant, and therefore the second patent is illegitimate.

Pfizer said it submitted the most appropriate and reliable test results. And even if the rest of the data were taken into account, Pfizer argued, they only bolstered the case that the second version of the molecule was superior.

The judge peppered a key Pfizer witness — a chemistry expert who was supposed to justify Pfizer’s interpretation of the patents — with questions, causing him to make some statements that contradicted his previous testimony. Some analysts saw this as damaging to the witness’s credibility.

Ranbaxy declined to comment. A Pfizer spokesman said Ranbaxy presented “nothing new or surprising” in court. “Pfizer believes strongly that both patents in the litigation are valid and infringed and that, when all the evidence is considered, our position will be upheld.”

Even some worrywarts such as George Grofik, a pharmaceuticals analyst at Citigroup’s Smith Barney, say that although the risk of a Pfizer loss is underappreciated on Wall Street, Pfizer is “only slightly” more likely than not to win the case. A loss for the drug giant would be an “unexpected outcome,” he said. “If the world’s biggest drug loses patent protection, it will be difficult for a lot of investors to fathom.”