Patent victory sends AstraZeneca soaring

Hemscott, 15/04/08 10:41

Acquisitions could be on the cards after Britain's No. 2 drugmaker settles a key patent dispute over its top-selling drug, the ulcer treatment Nexium.

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AstraZeneca said it had reached a settlement with Ranbaxy Laboratories that will allow the Indian firm to start selling a cheap clone version of Nexium on May 27, 2014, the earliest expiry date for patents on the medicine.

Ranbaxy will then have 180 days of exclusivity as the only distributor of a generic version.

Analysts said that while the settlement provides no immediate earnings upside, it removes the evry significant threat that Ranbaxy would launch seven years early. According to Deutsche Bank, an early appearance of generic Nexium could have taken 13% and 19% off AstraZeneca's 2008 and 2009 EPS respectively.

"Although two litigants remain (Teva and Dr Reddy's) we think Ranbaxy's willingness to settle sends an important signal about that company's assessment of the likelihood of it winning in the courts," Brian Bourdot, a Deutsche Bank analyst, told clients. "The threat of an untimely generic launch must be nearly eliminated. Importantly, this is a demonstration that patent risk does not equate to patent loss."

With sales of £2.6bn last year, Nexium is the world's second-biggest prescription medicine globally behind Pfizer's Lipitor cholesterol pill. A 30-month stay period blocking regulatory approval of generic versions expired last night.

On that deadline, Ranbaxy conceded that all six patents asserted by AstraZeneca are valid and enforceable, and that four would be infringed by its proposed generic product. In return, it will be allowed to formulate a portion of AstraZeneca's US supply of Nexium from May 2010.

The next hurdle is for the US anti-trust regulator to review the settlement.

Dresdner Kleinwort moved AstraZeneca shares to "buy" from "hold" in reaction. It had valued a Nexium patent loss at about £6 per AstraZeneca share.

"A settlement with Ranbaxy on Nexium significantly de-risks the business, it told clients. "We do not expect any anti-competitive issues, (and) the concessions from Ranbaxy concerning the validity of AstraZeneca's patents and potential infringement make another challenger unlikely in our view."

AstraZeneca has still to reach a resolution in the US on patent litigation over its Seroquel schizophrenia drug, which is due to go off patent in September 2011. A summary judgement hearing is set for June 4, with a ruling likely before the court case proper is due to start on August 11.

"We view AstraZeneca's case as strong, although perceive investors are less concerned about Seroquel than they were about Nexium," said Deutsche Bank. "A positive outcome would remove another significant overhang on the stock and would likely see the stock price trade towards our 2,400p target."

Morgan Stanley said the victory over Nexium gave AstraZeneca greater strategic flexibility

"Nexium revenues are now secure until 2014, and Seroquel court proceedings appear to be advancing to AstraZeneca’s advantage, we see no reason why AstraZeneca cannot look at additional debt financed strategic acquisitions," analyst Paul Mann wrote.

"AstraZeneca should be able to raise an additional $10-$15bn in cash without becoming overly stretched, even in the current economic environment."