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Operating Ease Eludes Mylan

Robert Steyer

Investors looking for volatility and uncertainty in the generic-drug business need search no further than Mylan Laboratories(MYL Quote).

The latest twist surrounding the company involves its effort to sell cheap copies of Pfizer's(PFE Quote) blood-pressure drug Norvasc.

Mylan began selling three dosage strengths of generic Norvasc on Friday, although Pfizer says it is considering legal challenges. Meanwhile, Pfizer is selling its own reduced-price versions of the medication while also keeping brand-name Norvasc on the market.

A federal court issued a decision Monday preventing the Food and Drug Administration from approving any other company's generic Norvasc until at least April 13. Mylan had asked the court to block the FDA from acting on other applications.

However, Ricky Goldwasser of UBS Securities wrote in a research report Tuesday that it's possible seven other drugmakers ultimately could jump in to the generic Norvasc market, thus dramatically cutting into Mylan's sales and profit.

The court ruling pushed up Mylan's stock by $1.06, or 5.2%, to $21.28.

The Norvasc affair illustrates the cut-throat nature of the generic drug business and the importance of the first-to-file law. This law gives 180 days of marketing exclusivity to the company that files the first generic-drug application with the FDA for a brand-name product. The clock starts ticking once the brand-name drug loses its patent protection.

In a business of thin profit margins, the 180-day rule is a godsend. "It's a net positive," says Brian Laegeler, of the independent financial research firm Morningstar. "A million bucks in legal costs [for a patent challenge and an FDA filing] can return $10s of millions of dollars in profits."

An FDA study shows that when one generic drug enters the market, the price of the copy is only 6% below the price of the brand-name drug. When there are two generic competitors, the average price drops to 52% of the brand name price. With seven competitors, the average price falls to 23% of the brand name price.

Needless to say, investors pay close attention to companies that make the most first-to-file applications, especially for big brand-name drugs. And Norvasc is one of the biggest, producing $4.9 billion in worldwide sales for Pfizer last year, second only to the $12.9 billion from the cholesterol drug Lipitor.

In the U.S. last year, there were 40 million prescriptions for Norvasc, making it the fourth-most prescribed drug, says the medical data firm IMS Health. Pfizer says U.S. sales were $2.5 billion.

Even by the traditional knock-down, drag-out standards of generic-drug competition, the Norvasc case is complex, contentious and confusing. Mylan's chance for 180-day marketing exclusivity is "not a clear-cut case," says UBS' Goldwasser who is neutral on Mylan.

Mylan and Pfizer have been suing each other for five years over the Norvasc patent, with Mylan claiming that the patent is unenforceable or invalid. In October 2005, Mylan received FDA approval to sell three dosage strengths of generic Norvasc once Pfizer lost marketing exclusivity.

The battle took a dramatic turn late last week when Mylan started selling Norvasc copies even though it had lost its latest patent challenge against Pfizer in February.

Mylan said it acted because another drugmaker, Apotex, won a federal appeals court ruling Thursday that invalidated the Norvasc patent. The appeals court overturned a district court ruling that had favored Pfizer. The drug giant says it is reviewing the decision and "considering all options, including seeking reconsideration."

As it started selling generic Norvasc, Mylan went to court to protect its 180-marketing exclusivity. Mylan argues that because Apotex wasn't the first to file a generic application with the FDA, it shouldn't be allowed to sell generic Norvasc for 180 days. Apotex disagrees.

Meanwhile, Pfizer is selling generic Norvasc through its Greenstone subsidiary to fight Mylan's lower-priced drug. Brand-name companies often do this via their own subsidiaries or licensing deals with another generic-drug company.

The generic-drug industry decries this practice of "authorized generics," arguing that it dissuades companies from investing in efforts to win first-to-file status. "Brand-name companies are playing in their sand-box," says Morningstar's Laegeler.

But for each generic-drug maker that complains about the practice, there's another one willing to take advantage of it. Legislation has been introduced in Congress to stop authorized generics.

Even though Pfizer is selling reduced-price Norvasc, it has vowed to "pursue all legal remedies" to protect Norvasc from generic competition in to September 2007.

Pfizer says it has until then because it has secured from the FDA six extra months of marketing exclusivity for Norvasc. Federal law permits this extra protection, known as pediatric exclusivity, if a company conducts tests of a drug to determine if it will help children.