Event - Lovaza patent trial crucial to halt Pronova's bad run

Analysis

If 2010 was an annus horribilis for Pronova BioPharma, investors in the Norwegian group will be hoping 2011 is an annus mirabilis. This week sees the start of a patent litigation trial against three major generics players in the US over the company’s only product, Lovaza, and the stakes are high.

Uncertainty over Lovaza’s patent life, de-stocking issues at partner GlaxoSmithKline and the emergence of Amarin’s fish oil candidate, AMR101, as a major competitive threat to Lovaza combined to wipe 64% off Pronova’s share price within the space of nine months last year, dipping to a record low of NKr7.5 in early December. The stock has shown little sign of recovery since, suggesting a positive outcome from the patent battle is essential before investor confidence returns.

Company Pronova BioPharma GlaxoSmithKline
Product Lovaza
Market cap  $430m  $95.5bn
Product NPV  $430m  $990m
% of market cap  100%  1%
Event type Patent Litigation Trial
Date Trial starts 29 March 2011; Decision due mid-2011

Damaging uncertainty

Teva, Par Pharmaceuticals and Apotex have all challenged the validity of Lovaza’s two key Orange Book-listed patents, ‘077 which expires in 2013, and ‘667 which offers protection until 2017. A third patent, ‘488, which expires in 2025, is also contested by the generics companies but will be the subject of a separate trial that is scheduled to start in January 2012.

Citing the opinions of patent specialist, Leerink Swann analysts believe that of the two patents under scrutiny in the court case this week, the ‘667 patent is most at risk of being ruled invalid. This means generics could enter the market in 2013 once the ‘077 patent expires. The 30-month stay over approving or launching a generic version of Lovaza, triggered by Pronova’s patent infringement filing, expires in May 2012.

Current expectations for Glaxo’s sales of the product certainly indicate a competitive threat to Lovaza after 2013, although how much is attributable to generics or AMR101 is not clear. US sales last year of $820m are forecast to peak at $1.1bn in 2012, before gradually declining thereafter to $720m by 2016.

Given that Pronova generates all its revenue and subsequent profits from the sale of active pharmaceutical product to Glaxo, as well as a range of European partners, the timing of generic competition is of huge importance.

Pronova’s over-reliance on Lovaza was highlighted in June last year when Glaxo decided to reduce its inventory of the product, reducing Pronova’s expected revenues for 2010; the fact it also meant a long-awaited dividend payout was put on hold did not help either (Glaxo’s cash efficiency drive leaves Pronova reeling, June 14, 2010).

To compound matters, Amarin generated some impressive pivotal data for AMR101, which many now see as offering a significant competitive threat to Lovaza (Amarin soars on good news from Marine biologists on AMR101, November 29, 2010).

Results from a second pivotal trial of AMR101 are expected in the next few months, which if positive for Amarin could cause further pressure on Pronova’s share price.

Not so clear cut

Aside from the outcome of the legal wranglings over Lovaza’s patents, Pronova does have a few potentially important factors in its favour.

First is the undisputed fact that Lovaza is a tricky and costly product to manufacture. Pronova has developed a proprietary five-step manufacturing process, from sourcing the fish oil to extracting the main heavy metals and pollutants.

Reproducing this process is likely to be extremely challenging, and all the while the cost of fish oil itself is going through the roof - $900 per tonne 18 months ago to $2,400 per tonne in today’s market.

Indeed, UBS analysts remain sceptical about the chances of any of the generics players being able to reproduce Lovaza’s manufacturing process and at a competitive cost. Proof of the potential challenges facing generics companies is that no generic product has yet emerged in Europe, despite the main patents on the product having expired 18 months ago.

Another potential roadblock in the way of the generics is Pronova’s citizen’s petition, recently re-filed with the FDA, which seeks to highlight the difficulties in manufacturing the product and potential dangers from exposure to impurities in fish oil if the process is not properly validated.

Third way?

Clearly a ruling that upholds both key patents until at least 2017 would be the best possible outcome for Pronova.

But given uncertainty over both patents holding, an out-of-court settlement between Pronova and the generic makers is clearly a possibility. Unfortunately for Pronova, the company’s bargaining power is likely to be diluted by and deferred to GlaxoSmithKline, which has the most to gain or lose from any settlement.

The UK pharma giant would certainly look to veto any compromise deal, if it meant the economics were unsuitable. A decision from the current patent trial is expected some time in the third quarter.

The complexities inherent in any patent challenge, the practical manufacturing challenges and a looming competitive threat, all make for uncertain and difficult times ahead for Lovaza and Pronova.

One thing is clear though: Without a positive legal verdict or long-term settlement over Lovaza, Pronova will struggle to recover its former glories. Just 12 months ago Pronova’s stock traded at NKr19, a price and a time which must seem a lifetime away now, with the shares trundling along at around NKr9 today.

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