Landmark Judgment To Create A New Market For Emergency Contraceptive

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A federal judge in Brooklyn, New York has ruled that the morning-after pill (levonorgestrel) used as emergency contraceptive will now be available over the counter with no age restrictions.

Judge Edward Korman’s ruling effectively overturned a previous decision by the Secretary of Health and Human Services which was considered to be “arbitrary, capricious, and unreasonable” by Korman. The previous decision urged the FDA to reject a petition by Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) (TLV:TEVA) to allow the over the counter sale of its Plan B and Plan B One Step without restrictions.

The latest ruling in this regard thus comes as a significant win for not just Teva Pharmaceutical, but also for Actavis Inc (NYSE:ACT) and Perrigo Company (NASDAQ: PRGO) (TLV:PRGO) which make generic versions of the drug.

As a result, the emergency contraceptive will now be more readily available in pharmacies and drug stores to women and girls of all ages without the need for prescription.

Teva Pharmaceutical Industries-Logo

Two major contenders

While the move is a net positive for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) (TLV:TEVA), the company’s exclusivity on the drug expired in July 2012 and thus, the profits it can make on selling this drug over the counter are going to be limited.

According to IMS Health data, the company recorded revenues of $88 million in the U.S. from Plan B One Step for the 12 months ending May 31, 2012. This is not bad even for a company Teva’s size which has a market capitalization of $36.7 billion.

The company trades at a price earnings ratio of 17.3 and even though Plan B One Step is not the most important drug in Teva’s portfolio, it certainly is one of them. Teva welcomed the decision but did not mention how much impact it sees on the sales of the now over the counter drug.

While the oral contraceptives market is highly competitive and fragmented, the competition in the emergency contraceptive market is only now starting to heat up. Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) (TLV:TEVA)’s biggest generic competitor in this space is Actavis Inc (NYSE:ACT) which received FDA approval for its Next Choice One Dose in July 2012.

Even though the $88 million market is a good benchmark, it is not a sacrosanct figure. What happens with the launch of generic drugs is that the overall size of the market is increased as well. Actavis stands to gain the most from the move as it creates a new market for its generic drug by pricing it at a discount to Teva’s product, which is priced at $50. Meanwhile, the company continues to do well with its portfolio with more than 190 pharmaceutical product families. Priced at a forward earnings multiple of less than 11, the stock is finding new investors.

Others are exiting the space

Perrigo Company (NASDAQ: PRGO) (TLV:PRGO) also has a generic version of Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) (TLV:TEVA)’s pill that is sold under the name Levonorgestrel. While the company’s stock is priced attractively at a forward price earnings ratio of 18 and attracts favorable ratings from brokerage houses, it has set a strategic focus on growing its consumer healthcare business.

The negative is that this focus comes at the cost of the generic drug business which saw a decline of 8.2% in revenues in the most recent quarter. The business accounts for just 18.5% of its overall revenues now. As a result, this may not be a good stock if one wishes to play the generics card.

Overall, the decision by Korman looks promising and the justification offered for the same looks too strong to be refuted. As such, it remains unlikely that the decision will be challenged even though the Justice Department, which is defending the administration’s actions in court, is entitled to do so. The decision expands the reach of the pill to below 17 years age-market where emergency contraceptives are much sought after.

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