Patent Attack

Until very recently, brand managers could rely on the timing of a patent expiration. Decisions about sales force allotment, marketing and promotion, manufacturing, and long-term product planning were made under predictable environments during launch and mid-lifecycle phases. Likewise, exit strategies could be created with predictable timing: removing sales and marketing support was the last step of the so-called "harvest" phase before the entry of generic competition.

Genric Challanges

But the dramatic rise in generics manufacturer challenges to brand patents has significantly complicated product management. Now, for many brands—whether they are blockbusters from large companies or small life-blood products for single-product companies—timing certainty has left the product management equation.

Once considered a "legal" problem by brand companies, the in-house legal staff could manage the patent challenge quietly and without interaction from the brand team. Now, many companies face generic challenges for a majority of their product portfolios and a large portion of their revenue. Paragraph IV challenges can no longer be considered a legal problem but instead have become a business and portfolio problem with profound implications. (See "Paragraph IV Primer,")

The good news is that through timing analysis of Paragraph IV certifications, companies can use planning models, such as the ones commonly used in R&D activities, to help manage sales force support, promotion, manufacturing, and product and portfolio planning.

Not If, but When

It is the rare brand-name pharma product whose patents are free from the possibility of generic challenge. A review of annual reports from generics companies such as Teva Pharmaceuticals and Barr Laboratories supports the fact that Paragraph IV filings are simply a matter of doing business and have become a critical part of their core strategies.

paragraph IV Primer

As of March 2005, 104 pharmaceutical products were under active patent challenge. Between November 1, 2003 and March 2005, 35 generic challenges were concluded by court opinion or settlement. (These figures include antibiotics and drugs covered by the Drug Efficacy Study Implementation [DESI] program—products that are challenged but not under the Paragraph IV mechanism.)

The rate of acceleration is illustrated in "Generic Challenges." In 2001 and 2002, generics companies filed 35 and 33 abbreviated new drug applications (ANDA), respectively, with Paragraph IV challenges. In 2003 and 2004, they filed 96 and 97 challenges, respectively. (These figures include only those challenges yielding a patent infringement action.)

The trend is not only happening with larger companies such as Teva, Mylan, and Andrx, but it is also becoming a tactical strategy of many smaller generics companies to focus on select products to challenge. At present, approximately 54 generics companies have an active certification pending. Of those companies, 40 have certifications pending on three or fewer products.

An ancillary effect of the increase in activity is that many products are receiving certifications by several companies, often in a short time span. For example, there are currently seven generics companies that have filed patent challenges against one or more of Aventis' Allegra (fexofenadine) family of products. In addition, Provigil (modafinil), the flagship wakefulness product from Cephalon, received certification notices from four companies within six weeks time.

Products Under Attack

Compared with the brand company's investment, the equivalent generic investment for generics is only $8-$10 million, so the financial proposition of certifying against a product—and winning one case and being first to file—can be substantially rewarding.

Size Doesn't Matter

Contrary to myth often harbored by brand teams, Paragraph IV certifications have shown little propensity to be reserved only for large blockbusters or high-volume primary care products. On the contrary, as competition grows in the generics sector, generics companies look to any product to enhance their portfolios, and some companies are focusing portfolio selection on specific dosage forms and routes of administration.

For example, three products under recent Paragraph IV challenges had annual sales of less than $50 million. These include Retrovir (zidovudine), FemHRT (norethindrone/ estradiol), and Periostat (doxycycline). In addition, several of the products under active certification include specialty formulations such as ophthalmic solutions, patches, nasal sprays, inhalants, powders, gels, and injections. (See "Products Under Attack,")

As these examples indicate, brand teams and portfolio managers cannot focus only on their blockbuster brands in terms of lifecycle defense or post-certification management. The current environment requires them to take a comprehensive approach to their products and to create and execute models that effectively manage their products while they are under Paragraph IV challenge.

Hold Or Fold

Product Managers' Dilemma

To illustrate the marketing and sales support options available to product managers, let's examine the hypothetical Brand A. It is a primary care product with sales of more than $1 billion in a competitive yet growing class. Its primary patent expires at the end of 2012, and the product grows about 1.5 percent per quarter when it has the full sales support of roughly $1 million primary detail equivalents. Like other typical products, it has the full range of expense items, and its fully loaded contribution (deducting overhead and sales force) is roughly 40 percent of net sales.

In the middle of 2004, Brand A receives a Paragraph IV patent challenge from one company, followed by another challenge by year's end, and a third challenger in 2005. The brand company files lawsuits against all three generics makers to defend its primary patent.

The implications of the patent challenges are far from simply being a legal problem. Consider the business ramifications: With eight years left in the growing market, the Brand A team has its full panoply of marketing efforts behind the product. These would include a sales force numbering close to a thousand, marketing and promotional head count, DTC advertising, managed care contracts, clinical support, and manufacturing.

The key dilemma is this: Now that the product is under patent attack, the date when it exits the market has become uncertain. Although the brand team had previously been managing the product through patent expiration (2012), it now may face generic competition much sooner if any one of the three generics companies wins its patent challenge.

To better understand the dilemma and its implications, consider the financial impact in the Brand A example. Before the certifications, the team was planning on maintaining its product support at current levels and reducing them by 50 percent in 2011 (two years before patent expiry) and then by 90 percent in 2012. During this harvest phase, the net present value (NPV) is expected to be around $966 million, representing about 29 percent of its overall NPV of $3.311 billion. (NPVs were calculated using a 12-percent discount rate, starting in the first quarter of 2005 and ending the fourth quarter of 2012 from the annual contribution that included overhead and sales force expense, but not taxes.)

Who Wins Anyway?

The Options

With the three Paragraph IV filings, this strategy is now at risk, creating a problem that becomes quite complicated—yet offers the Brand A team several options.

Do nothing The first option is to do nothing and execute the existing lifecycle strategy. In other words, the brand team would manage the product as though the patent challenges do not exist. There are two advantages to this strategy. First, it focuses the brand team on selling the product. Second, it can make sense if there is no opportunity cost involved, that is, if the company does not have another, better place to put the brand team or the product support.

But choosing this option and managing the product without regard to the patent challenges is extremely risky in financial terms. The patent challenges will yield one of two outcomes: win or lose. If the brand company successfully defends the patent and wins, generic competition does not emerge until 2013 as previously planned. The product's NPV (at the time of the first challenge) is $3.311 billion. However, if the company loses the patent challenge, and a generic competitor enters the market in 2008 (for example), the NPV of this outcome is $1.585 billion.

By having the brand team ignore the patent challenge and execute the lifecycle strategy, the risk exposure—the difference between winning the patent challenge and losing it—is more than $1.726 billion. (See "Hold or Fold,")

Cut and run A second option for managing Brand A is to "cut and run." In other words, the brand company could immediately remove almost all the product support by moving marketing, sales, and clinical support to other products—yet still manage the product with a small number of sales reps, samples, and managed care contracts. Of course, by taking this approach, the company can expect product sales and market share to decrease.

This option may sound somewhat drastic, but it can make a great deal of sense under certain circumstances. First, the brand company may have other products that would greatly benefit by additional support. Second, although not relevant to our Brand A example, in a real scenario, a product may be close enough to its patent expiration when it receives a challenge that the outcomes may support this strategy.

In addition, there are financial advantages to the cut-and-run option, because it greatly reduces risk exposure. If Brand A uses this strategy and wins its patent cases, the NPV is $2.69 billion, yet if it loses, the NPV is $1.724 billion. Hence, the advantage is the reduction of the spread, or risk exposure, of $966 million—the NPV of the difference between winning or losing. (These figures are based on marketing, clinical, and sales costs cut by 90 percent and a sales decline of -1.0 percent per quarter.)

By choosing to cut and run instead of executing the lifecycle strategy, the brand company has reduced its risk exposure from $1.726 billion to $966 million. Of course, reducing risk creates a significant trade-off in either of the win-lose outcomes. If the brand company wins its patent cases, the NPV of option one (managing Brand A as "business as usual") is $3.311 billion compared with the cut-and-run strategy, which would yield an NPV of $2.69 billion, a difference of $621 million.

So, if the company wins the patent challenges, it would have ended up losing $621 million if it had selected to cut and run instead of executing the original lifecycle strategy. However, if it were to lose the patent challenges, the cut-and-run strategy would have ended up saving $139 million in terms of NPV.

Clearly, these strategies are simple, but high risk. For real-life products, companies can use timing probability models and deploy different strategies while considering other factors that would certainly come into play, such as:

• class and market dynamics

• other products in the portfolio

• other sales needs

• pipeline considerations

• managed care responses

Similar to R&D models that employ statistical analysis and techniques, the key ingredients missing from the mix are the probabilities of Paragraph IV cases: Specifically, when will they be resolved?

Timing Probabilities

By looking at the universe of active Paragraph IV cases, companies can establish timing probabilities that will show the likelihood of a court decision at a certain time. Exactly when a court case will be resolved depends on several factors:

• The jurisdiction— Do cases in Philadelphia typically finish quicker than those in Chicago?

• The judge— Does one judge rule more quickly than others?

• How many companies are involved— Does a case involving two companies get decided quicker than a case involving five companies?

• How complicated the case is— Does it involve interpreting six patents or just one?

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The end date is critically important, because if the brand company loses the patent challenge, the generics company can bring its product to the market immediately. The data show that more generics companies are deciding to launch their products directly after they win at trial and not wait for a court of appeals decision.

In examining Paragraph IV cases, patterns begin to emerge that help answer the question of when a certain court case will likely end. And each individual product has particular factors that can be used to help determine probabilities of when its particular case will end. These unique factors include:

• how many challenges it has received

• where the case or cases are pending

• the particular market dynamics

• when its patents expire

• other factors that drive portfolio decisions

These statistical techniques are reasonably reliable. Even though each case has unique factors, Paragraph IV challenges nonetheless have many things in common, including the fact that they all litigate under the same federal law, under the same procedural rules, and with the same types of evidence. Such commonality leads to statistical normal distribution curves once samples are tested.

Test Case

For the Brand A hypothetical example, assume that the historical data inputs, probability distribution, and weighted factors yield an expectation that this case will be decided about 32 months after it starts, with a standard deviation of five months. So, for Brand A, the team can figure that there is a strong likelihood that it will receive a court decision during that time frame and it can strive to manage the product around this time frame. In addition, the other key factor for the company will be to weigh the management of Brand A against the other brands in the portfolio.

One option is for the Brand A team to choose a hedging strategy that would reduce the number of its marketing and sales support for a year, then have that sales support return if the company successfully defends it patents. With the timing probabilities, it may want to reduce the sales force to half (which will slightly reduce market share) for a year starting 25 months after the patent case begins. By doing so, it benefits by maintaining sales while reducing the risk of loss if it were to lose the patent defense.

In terms of financial gain by this hedging strategy, the net present value would be $3.06 billion (if it were to win and afterwards increase its sales force to prior levels) or $1.65 billion (if it were to lose the patent defense and face generic competition in 2008). By using a hedging strategy, the difference between the best case (win) and worst case (lose) is $1.41 billion, in terms of NPV.

Before, without applying the timing probability data, the spread between the best and worst outcome was much greater at $1.73 billion ($3.31 billion minus $1.58 billion). By managing around the time frame, the Brand A team can reduce the overall risk to the brand and company by roughly $320 million. Note that only two cost items were considered in this example, and tweaking more cost items can yield more (or less) significant differences. Also missing from this example are other financial factors that can come into play, such as:

• portfolio issues— Will removing support from Brand A help Brand B or C?

• manufacturing— Will knowing the timing probabilities increase manufacturing efficiencies?

• general expenses— headquarters, headcount, and R&D.

In addition, each real-life situation will have its own sets of factual issues to factor into the analysis. For example, in certain circumstances it might make financial and risk-management sense to frontload costs and spend more on the product right after it receives a patent challenge. Nonetheless, by using timing probabilities set as a backdrop, any product under Paragraph IV challenge can create financial analysis decision points so that the company can weigh decisions by using timing probabilities and clear delineation of risk and reward.

Without a doubt, generics companies will continue to use the Paragraph IV patent challenge as gateway into the marketplace. Brand teams can no longer effectively manage their products by using guesswork, supposition, and the hope that "legal will handle this." Armed with the appropriate data, brands and companies can, at the very least, understand the financial implications of their product management decisions. When factoring in its own risk profile, a company can then make more informed choices and manage the risk to its satisfaction.

Gregory Glass, MBA, is the principal of Gregory Glass Associates in Downingtown, PA, and the editor of the Paragraph Four Report. He can be reached at comments@gregoryglass.com.