Indian pharma: A walk through 'Para IVs'

We keep reading about the various patent challenges being filed in US, against various global generic pharma companies. This includes many Indian names as well. These patent challenges are referred to as 'Para IV' filing. When a generic company intends to sell innovator's drug before its patent expiry, it files an additional document called Para IV with USFDA to get the approval.

Historically, only large cap companies like Ranbaxy, Lupin, Dr Reddy's, Sun Pharma filed Para IVs. But now the list of the companies participating in Para IVs has expanded. Companies like Alembic Pharma, Aurobindo, Claris lifescience, Torrent Pharma etc have also started filing Para IVs since last couple of years.

Indian Companies Participation in Para IVs

Indian companies are present in atleast 50% of Para IV litigations going in US. The table below gives an overview of the Indian Pharma biggies, and their revenues from Para IVs in US during FY12/CY11. As per the table below, the highest revenues from launch of a Para IV, was generated by Ranbaxy. The company had launched one product viz Lipitor in November 2011.

Going forward, as we are approaching the patent cliff, Indian companies have developed a Para IV pipeline in order to be part of the large expiring product basket. For example, Lupin has highest number of Para IV pipeline of around 90 products, addressing market size of US$ 30 bn. Other pharma companies viz; Sun Pharma and Dr Reddy have pipeline of around 35 products each. Followed by, Wockhardt and Cadila at 10 & 9 respectively. Further, Ranbaxy has a Para IV pipeline of 7 products; however the size of these 7 products is US$ 8 bn. This implies various companies have different criteria and focus while filing a Para IV.

Why a Para IV is filed?

The US government enacted, Hatch-Waxman act (Drug Price Competition and Patent Restoration Act). This was enacted to encourage generic companies to launch their generics in US, before the patent expiry, by challenging the innovator's patents. In return the first generic filer (FTF) gets awarded with 180-days of exclusive launch of the drug, if it prevails the litigation challenge.

First to File (FTF) benefit

A company, who holds FTF, is able to enter first in the market gets an advantage of higher market share and higher margins. Also, after 180-days the company is able to govern better market share than the new entrants.

For example: Ranbaxy was first to enter the US market with generic version of Lipitor and was able to gain 40%+ market share during 180-days exclusivity. Post exclusivity other 4-5 generic companies entered the market, yet Ranbaxy was able to maintain its market share in the range of 35%-40%.

Thus, through Para IV, companies not only intend to enter early and generate higher revenues during low competition, but also look for retaining the market share when the other generic companies enter the market.

How do the late Para IV filers benefit?

In most of the cases, many Para IVs are filed, though the generic company is aware that, it is not a FTF. The company is than looking to enter the market under low competition, which it normally does by entering into "settlement" with the innovator. Through settlements, both the companies mutually decide to end the litigation. In return the innovator gives the right to generic company to launch its generic after a specific time frame.

For example: Around 4-5 companies were able to launch Lipitor generics (Lipitor still has unexpired patents) post expiry of 180-days exclusivity, this was because of the settlement done by generic companies with the innovator. Settlement helps to end the litigation and in turn also helps the innovator and generic company to mitigate the litigation cost.

What if the litigation was not settled?

In that case the generic companies can launch the product if it is having drug approval from USFDA, but then that launch will become "launch at risk". This is because the innovator's patents are yet to expire and outcome of the litigation is pending and yet the generic company makes the launch.

Generally companies avoid landing up in a situation of "launch at risk". This is because if the innovator wins the litigation then the generic company is entitled to make the penalty payment as per the court orders, which could be even more than what company had earned from the launch of the said product.

Conclusion

The companies which have healthy Para IV pipeline will be the ones to sustain the competition in US. Thus Indian pharma companies, targeting qualitative Para IVs will be of best fit for an investor.