Market Spotlight: Generic Drugs

NEW YORK -

Emboldened by favorable court rulings and the need to gain an early foothold in the market, generic drug developers are increasingly challenging lucrative drug patents.

In many cases those challenges have been coming in the form of at-risk launches, where a generic version of a patented drug is sold before the patent expires.

Heavyweights including Teva Pharmaceutical Industries Ltd. (nasdaq: TEVA - news - people ), Barr Pharmaceuticals (nyse: BRL - news - people ) Inc. and Mylan Pharmaceuticals Inc. have been growing bolder when it comes to this strategy, as the risk-reward equation seems to have shifted to their favor.

"I think they've just gotten a lot smarter as an industry," said WR Hambrecht analyst Andrew S. Forman. "Generics have the sympathy, pricing advantage and generally have facts on their side; there's been settlements, but no losses."

Often, he said, pharmaceutical companies will try to gain patent extensions to stave off generic competition. With more insurers and Medicare pushing members to generic options because of the price difference, the market seems to have swayed. Generic drug developers now claim more than two-thirds of all prescriptions, up from less than half 10 years ago.

The most recent salvo came from Teva, the largest generic drug developer in the world. The Israel-based company had challenged Wyeth's patent on the blockbuster heartburn drug Protonix. That patent isn't due to expire for three more years, but in December, Teva launched its generic version over the course of several days, before ceasing shipments as part of a deal.

Protonix sales reached $1.9 billion in 2007. Drugstore.com currently lists generic Protonix at a 7.7 percent discount to the branded version. A similar discount currently exists for Lotrel, a blood pressure drug made by Novartis (nyse: NVS - news - people ), for which Teva enjoys market exclusivity with a generic.

Other disputes involve Forest Laboratories Inc. (nyse: FRX - news - people ) and generic drug developers Teva and Barr over the Alzheimer's disease treatment Namenda. Endo Pharmaceuticals Holdings Inc. (nasdaq: ENDP - news - people ) and Penwest Pharmaceuticals Co. (nasdaq: PPCO - news - people ) are suing Impax Laboratories over plans to make a version of the pain reliever Opana ER.

Several pharmaceuticals companies, including Forest and Wyeth, declined comment on the ongoing patent challenges.

"There are just more Paragraph IV (patent dispute) challengers than years ago," said Mike Dzwonczyk, a patent attorney at Sughrue Mion PLLC. "The likelihood of sharing market space is much higher now than it ever used to be."

While generic companies run the risk of paying triple-damages if they conduct an at-risk launch and then lose the patent dispute, several recent court cases have gone in favor of generics, he said. It has become harder for pharma to prove a company willfully infringed a patent, for example, lessening the risk of triple damages.

Also, the downside risk to losing a case has become smaller for large companies like Teva, which can often offset any future losses with big sales gains early on.