Awake Alert: Look for Cephalon to Block Generic Nuvigil With "Pay-Not-To-Play" Deals

Last Updated Jan 28, 2010 4:41 AM EST

Cephalon disclosed in a regulatory filing Monday that it filed a patent-infringement lawsuit to try and block Sandoz, a subsidiary of Novartis AG, from selling a generic version of the drug maker's narcolepsy drug Nuvigil. To date, four drug companies have challenged the validity of certain U.S. patents for Nuvigil. If history is any guide, Cephalon has more to lose with its valuable sleep wakefulness franchise than that of its upstart challengers.

The motive of Cephalon (NASDQ:CEPH) is clear: litigate to slow the market entrance of cheaper copycat versions while it continues to transition patients from its older narcolepsy drug Provigil (modafinil) to Nuvigil. Cephalon derived 51 percent of total sales, or almost $925 million, from its Provigil franchise in 2008.

In late 2005 and early 2006, the company entered into Provigil patent settlement agreements with four manufacturers in "pay-not-to-play" agreements. In exchange for payments collectively totaling about $200 million, the parties were each granted non-exclusive royalty-bearing licenses to market and sell generic versions of Provigil in the U.S. come April 2012.

In 2008, the Federal Trade Commission filed suit alleging anti-competitive behavior by Cephalon with intent to prevent lower-priced competition to its branded product.
The stakes are even higher this time around for Cephalon. For the nine-months ending September 30, 2009, Provigil revenue of $726.3 million accounted for 55.8% of total sales (due in part to price hikes aimed at encouraging patients to switch to the less-expensive successor pill).

Nuvigil (armodafinil) is being marketed as a chemically similar drug with longer-lasting effects. Introduced in June 2009, six-month sales totaled $37.8 million.

Feed a dog a bone and watch it come back for a second one, too - especially when the economic incentives are so tasty. In a recent research report by RBC Capital Markets, Pharmaceuticals: Analyzing Litigation Success Rates, the investment bank concluded that there are economic rewards for challenging innovative drug patents. For example, over the last decade, the overall success rate for the generic drug industry is 48 percent for cases that went to trial. However, the success rate climbs to 76 percent when settlements are included -- and more than half of cases tend to be settled or dropped!

The authors also emphasized that the biggest reward came to the generic challenger first-to-file a Paragraph IV certification -- the notification to the FDA (in the "best of its knowledge and opinion") that the patent in question is invalid and is not infringed by its own generic product: First filer recognized by the FDA is awarded a 180-day exclusivity period, during which no other generic applicant can be approved for distribution onto the market.

RBC Capital also estimated that the average revenue garnered by a generic during this period was $60 million, which was 12 times the average cost of litigation ($5 million). Consequently, with very little downside and huge upside, patent challenges are big business.

To the likely frustration of Cephalon, two of the original parties connected to the Provigil patent settlements (Teva Pharmaceuticals and Mylan Labs) have come back, drooling on the table -- and this time around they're sniffing for steak, not bones. (Both companies are elbowing for claim as first-to-file, too).

The patent litigation filed by Cephalon stays generic intrusion(s) for thirty months or until the respective court dates -- whichever comes first.

The clock winding down prior to any judicial decision(s), however, is an overhang for Cephalon -- and could rip apart the planned Provigil to Nuvigil entrenchment campaign: cheaper copycats of Provigil will flood U.S. pharmacy shelves come April 2012 -- just about the time both Teva and Mylan could decide to launch "at-risk" (liable for damages if court invalidates their patent challenges) copies of Nuvigil, alongside their legal introductions of Provigil.

The "give a dog a bone, then leave him on his own" strategy won't work with Teva. Even in the face of litigation, the company is unlikely to back down and walk away, as generic challenges are key to its own growth plans. The generic powerhouse accounted for almost 30 percent of all patent settlements in the past decade, according to RBC Capital's research.

Cephalon stands to lose millions in sales and profits if it bets wrong by counting on litigation to save its sleep wakefulness franchise. Given the historic odds, look for the company to play "Lets Make a Deal" with Teva and Mylan one more time, likely before April 2012 (and before Congress acts to make such payments presumptively illegal).

Related Posts:
Why Cephalon's Provigil Price Hike May Prove FTC's Antitrust Case
Generics Threaten Drugmaker Cephalon's Success

  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.