It's been a sickening week in the courts for UK pharmaceutical giant AstraZeneca (AZN) and its Swiss counterpart Novartis AG. In New Jersey, a Federal Court ruling invalidated a patent on AstraZeneca's Pulmicort Respules asthma treatment, while, in a landmark decision that could have trade implications beyond the sector itself, India's Supreme Court has dismissed an attempt by Novartis to win patent protection for its cancer drug Glivec. Both decisions have effectively cleared the way for generic competition, but at what price?
Although the AstraZeneca ruling is limited to the US and has no impact on the validity of patents for the drug in other jurisdictions, it underlines how vulnerable the group's earnings are to the expiry of key patents. The bulk of the group's sales decline through 2012 was attributable to the expiry of patents on a handful of treatments, with schizophrenia drug Seroquel chief among them. And within a few short years, AstraZeneca's generic competition will gain access to a number of highly profitable patents, including Crestor - the group's best-selling cholesterol medication. Crestor has actually been the subject of a favourable ruling for AstraZeneca that blocked sales of generic versions of the drug in the US until July 2016 (excluding a deal that will temporarily give AstraZeneca a 39 per cent share of net profits from a generic version produced by Actavis and partner Egis Pharmaceuticals) - not a bad result considering the drug grossed $6.25bn (£4.11bn) last year alone.
AstraZeneca's share price was unmoved on the ruling from New Jersey - now subject to appeal - and a fair indication that negative sentiment over the group's existing product pipeline is already priced in. Management said that it would have no impact on revenue and earnings projections for this year, although any rollout of generic alternatives to Pulmicort will mean that the royalty payments AstraZeneca receives from an existing agreement with Israel's Teva Pharmaceuticals will invariably decline from last year's $260m.
The Novartis decision was met with dismay by the pharmaceutical industry, but was welcomed by healthcare lobbyists, such as Médecins Sans Frontières, which have long argued that many patented drugs are simply unaffordable for the majority of Indians. It's impossible not to sympathise with this view, but - in keeping with 'the law of unintended consequences' - western drug companies might think twice about undertaking costly (and often fruitless) research into novel therapies if they feel that their intellectual property rights are being systematically eroded. Both Pfizer and Roche are now involved in the appeals process to get similar Indian rulings overturned, while Bayer AG has also recently fallen foul of India's patent appeals office. The Glivec decision hinges on a legal provision in India's 2005 patent law aimed at preventing companies gaining patent status on drugs that are deemed variations on existing compounds. Critics of the legislation view this definition as something of a 'catch-all'. On this basis, they argue, even patents for successful proprietary drugs - such as Pfizer's Viagra - mightn't stand up in court. Presumably it hasn't occurred to Indian legislators to ask why, if it was that straightforward, the companies involved in the country's $26bn generic drug industry don't submit more patent applications.
