Expert Financial Analysis and Reporting

The Issue
On May 31, 2012, Pfizer Inc. (PFE) and Teva (TEVA reached a settlement that licenses to Teva a generic version of Pfizer's antibiotic Zyvox (linezolid). Pfizer first sued Teva in January 2010 for patent infringement after Teva informed Pfizer that it had filed an abbreviated new drug application with the FDA.This was done very quietly and I think that most investors have not thought about what this means for Pfizer and more importantly for Trius Therapeutics (TSRX).

There are three key patents protecting Zyvox. The composition of matter patent expires in November 2014 but Pfizer has a pediatric extension that prolongs exclusivity until May of 2015. In addition to this patent, Pfizer also has a patent on a crystalline form of linezolid which enhances solubility of the injectable formulation and is important to manufacturing; this patent expires in June of 2018. There is a third patent relating to formulation that expires in 2020.

Teva obviously did not have to challenge the validity of the composition of matter patent as it will soon expire, but it did have to overturn the crystalline and formulation patents unless it wanted to launch generic Zyvox at risk. Pfizer and Teva did not announce why they reached the settlement or what the terms were, but I think that it is possible to infer them. I think that Teva must have concluded that the crystalline patent offered significant protection. It would be costly and time consuming to litigate and in the end the patent had a reasonable chance of being upheld.

In looking at when the settlement might allow a generic launch, let’s look at the bargaining position of each party. Pfizer would obviously like to settle as close to the expiration of the crystalline patent in June of 2018, but this would provide no incentive to Teva. Conversely, Teva would like the settlement to be as close to the expiration of the composition of matter patent in May of 2015. If the two companies split the difference, it would allow for a generic launch in late 2016. This is my assumption.

Investment Opinion
For Trius, this is a very significant positive. Along with most investors closely covering Trius, I had been expecting that Teva would launch a generic Zyvox in mid-2015. Trius is expecting to report topline results from its second confirmatory phase III trial of tedizolid in 1Q, 2013 and, if successful, this could put the company on track to launch tedizolid in mid-2014. Tedizolid and Zyvox both belong to the same class of antibiotics. A primary marketing objective is to replace a significant part of Zyvox usage.

I believe that tedizolid has several points of differentiation that will allow it to capture a significant share of Zyvox’s unit sales. I am estimating that tedizolid will achieve US sales of $625 million in the US in 2020 based on the assumption that it will capture 6% of the market. For more detail on my thinking please refer to my August 22, 2012 report “An Update on Trius Therapeutics’ Tedizolid; a Potential Blockbuster for Treating MRSA Infections” and my May 30, 2012 initiation report “Trius Therapeutics' Tedizolid has Blockbuster Potential for MRSA Infections”

The presence of generic Zyvox in the market only a year after tedizolid’s introduction would create marketing issues. Hospitals would be dealing with the generic conversion of Zyvox and concurrently instituting policies to encourage physicians to try Zyvox before tedizolid in order to save money. If I am right on my thinking that the launch of generic Zyvox will now come in late 2016, it gives Trius two and one half years to establish the positioning of tedizolid in the marketplace instead of one year. This is a significant positive as physicians will have much more time to determine how they will position tedizolid in their practices based on its product attributes without the confounding issue of generic Zyvox.

This is a modest positive for Pfizer as it will prevent the generic erosion of Zyvox until 2017. I estimate that Zyvox will have US sales of $800 million in 2014 and with the launch of a generic Zyvox in 2015; these sales would have decreased to $150 million in 2016. While I expect Zyvox to lose sales to tedizolid, I think that it will still have sales of $750 million in 2016. Pfizer will postpone the loss of $600 million of sales by a year or more. However, in the context of global sales of global pharmaceutical sales of $60 billion, this will be barely noticeable.