Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pharma: Settling for more? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Pharma: Settling for more?

Dec 15, 2006

Intense competition and price erosion in the global generic markets has compelled generic players including Indian companies such as Ranbaxy and Dr. Reddy’s to aggressively pursue the Para IV filing route, whereby patents of global innovators are challenged. If successful, then these companies are able to capitalise on the lucrative 180-day exclusivity, which not only augments revenues and profitability during the 6-month period but also enhances the market reach of the generic players. Having said that, successfully challenging a patent has not proven to be a cakewalk for generic companies but has infact fuelled the already mounting legal costs. In such a scenario, generic companies are increasingly looking to settle patent challenges with innovator companies to mitigate the uncertainties and costs associated with legal suits. What’s in it for innovators and generic players?

In patent settlements, the innovator either makes a one-time settlement payment to the generic company or allows the latter to become a authorised generic for a specified period, which is closer to the patent expiry of the branded drug. Thus, the legal suit is dropped and the potential launch of the generic drug gets delayed. Patent settlements are beneficial to generic players in cases where the revenue potential is considerably lesser due to many players vying for a slice of the drug’s revenues. Thus by settling cases, the certainty of revenues from the particular drug gets more pronounced and the costs associated with legal matters no longer eat into the generic company’s profitability.

For innovators, since the possible launch of the generic drug gets delayed, they are able to keep the revenues of their drugs intact upto the period closer to the patent expiry. Such a settlement also results in cost savings for innovators due to reduction in legal expenses in light of the suit being dropped.

Patent challenges: Some important settlements
Brand Indication Sales
(US$ m)
Innovator Generic company Status
Effexor Depression 3,800 Wyeth Teva

Teva has exclusive license to launch the drug 2006 onwards and would pay Wyeth a certain percentage of gross profit from sale of the generic drug

Plavix Blood thinner 5,900 Sanofi-Aventis/BMS Apotex

BMS offered US$ 40 m to Apotex to halt production of generic Plavix until 2011. FTC has rejected this settlement

Provigil Narcolepsy 513 Cephalon Teva, Mylan, Barr & Ranbaxy

All these four have first-to-file status but have decided to launch after 2012 onwards

Imitrex Migraine 1,200 GlaxoSmithKline Plc Dr.Reddy's, Cobalt

Dr.Reddy's will be the authorised generic for this drug prior to patent expiry in Feb 2009.

Adderall XR Attention Deficit Hyperactivity Disorder 731 Shire Impax

Impax will not launch the drug before Jan 2010. In case there is another generic entry before this date then Impax will be the authorised generic and will pay royalties to Shire

However, these settlements are only effective after being examined by the Federal Trade Commission (FTC), which may not always stamp its approval, particularly if it finds the agreements to be anti-competitive and not in interest of the consumers. Case in point is the recent settlement agreement between BMS/Sanofi-Aventis and generic company Apotex for the former’s blood thinning blockbuster drug ‘Plavix’. BMS had agreed to pay US$ 40 m to Apotex for not launching the generic version of the drug before 2011. The FTC has rejected this settlement.

Indian companies: Patent settlement status

As far as Indian companies are concerned, Ranbaxy entered into its first out-of-the-court settlement with Cephalon Inc. with respect to the latter’s sleep disorder drug ‘Provigil’ (generic name: ‘Modafinil’). Modafinil generated revenues to the tune of US$ 513 m in 2005, contributing around 40% to Cephalon’s turnover. Some of the terms of the agreement were as follows:

  1. Cephalon will grant Ranbaxy a non-exclusive royalty-bearing right to market and sell a generic version of ‘Provigil’ in the US. Ranbaxy’s license will become effective in October 2011. However, in the event of a pediatric (for children) extension for ‘Provigil’, the entry would be delayed by six months (to April 2012). This is still 3 years before the scheduled patent expiry of the drug in 2014.

  2. Ranbaxy can make an earlier entry if a generic version of the drug enters the market before 2011. It must be noted that there were three other players besides Ranbaxy, which have the first-to-file status on the drug viz., Teva, Mylan and Barr. Teva has also entered into a similar kind of patent settlement with Cephalon for the same drug. The FTC is still in the process of examining the settlement.

To conclude…
While Para IV filings are a lucrative proposition in the event of a win, it is imperative for Indian pharma companies not to solely rely on the same. Instead, those companies focusing on having a balanced mix comprising both Para III and Para IV filings will be able to survive the competition in the generic market better going forward. Similarly, settling a patent challenge suit is a smart strategy if the risk-reward ratio is skewed towards the former. This particularly reduces the risk of incurring additional legal costs, which would otherwise have dented the profitability of companies.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Apr 1, 2015 (Close)


  • Track your investment in RANBAXY LAB with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks