Supreme Court ruling could squeeze Big Pharma

Supreme Court's patent ruling: good news for generic drugmakers, bad news for name-brand drugs, some say.

By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The waves from a Supreme Court decision that undermines patents on gas pedals could hit Big Pharma like a truck, say some experts.

The financial health of the name-brand drug industry, dominated by giants like Johnson & Johnson (Charts, Fortune 500), Pfizer Inc. (Charts, Fortune 500) and Merck & Co., Inc., (Charts, Fortune 500) is heavily dependent on protecting the patents of multi-billion dollar blockbuster drugs. As the result of Monday's Supreme Court ruling in KSR International v. Teleflex, patents on name-brand drugs might become more vulnerable to generic drugmakers like Teva Pharmaceutical (Charts), Mylan Laboratories (Charts) and Barr Laboratories (Charts), say some experts.

"It's got huge implications for the pharmaceutical industry," said Bryan A. Liang, professor of health law studies at California Western School of Law in San Diego. "Some people are jumping for joy and other people are scrambling to protect their property."

The Supreme Court ruled that a patent held by Teleflex Inc. combined two previously existing inventions: an adjustable pedal and a electronic throttle control. The combined product was too "obvious" to be considered a new patent, according to the ruling.

"Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, for patents combining previously known elements, deprive prior inventions of their value or utility," read the ruling.

Patent battles between name-brand drugmakers and generic drugmakers are fought in courtrooms all over the world. The generic companies challenge patents held by name-brand companies so they can win the legal right to produce low-cost generic versions. Even when generic companies are unable to get the patents overturned, they're often first in line to produce the drug when the patent naturally expires, securing a 180-day window when they are the only generic producer of the drug.

Sometimes drug companies discover and patent previously unknown molecules that have therapeutic benefits. But other times, they combine or tweak previously patented molecules. Following the new ruling, generic drugmakers could have an easier time challenging the weaker patents.

"Absolutely the generics are going to try and take advantage of this," said Liang. He said that extended-release versions of previously patented drugs are particularly vulnerable to generic challenge, as well as drugs that are re-patented when the deliver system is changed, like a tablet that is changed into a gel cap.

Robert Toomey, analyst for the financial research firm E.K. Riley Investments, said this could be the beginning of the end for "me-too" drugs: tweaked versions of previously patented drugs that do not offer any new, tangible benefit.

"The bad news is that the drugmakers may decide that their return on the investment is not there and they might not put as much money in R&D if they can't see as much return on investment," said Toomey. "The silver lining is that it may make the drug companies' R&D more productive."

Toomey said that Big Pharma might funnel money away from "me-too" drug development and towards the discovery of molecules with previously unknown therapeutic benefit.

Not everyone agrees that the repercussions will be felt in other industries. Mark Banner, patent litigation attorney and partner with Banner & Witcoff, said the ruling specifically targets combinations of mechanical parts and has no equivalent in the drug industry.

"In the drug industry, it's going to have very little impact," said Banner. "In the drug industry, you generally don't have the combination of components acting in therapeutic activity." Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.