Legal bills lead to Teva's second-quarter loss, including possible settlement of Cephalon pay-to-delay case

Teva Pharmaceuticals officials (from left) CFO Eyal Desheh, Chairman Phillip Frost and CEO Jeremy Levin during opening bell ceremonies of the New York Stock Exchange. (Richard Drew / Associated Press, File)

Teva Pharmaceutical Industries, Ltd., reported a net loss of $452 million in the second quarter of 2013 because of slightly lower revenue for the period but mostly because of legal bills that amounted to $1.4 billion.

Part of that legal bill is coming due now because of the Supreme Court's June ruling in an antitrust case, in which the Court found in favor of the Federal Trade Commission and against drug companies that engaged in so-called "reverse payments" or pay-to-delay deals.

Teva said Thursday it had an "agreement in principle" to settle a lawsuit and would take a charge of $485 million against second quarter earnings.

Teva's $452 million net loss for the quarter compared to a profit of $863 million for the second quarter of 2012.

Teva is based in Israel and its Americas headquarters is in North Wales, Montgomery County. The company did not announce any new layoffs during a conference call with financial analysts Thursday, but previously it said it would cut $1.5 billion to $2 billion in costs by 2015 and that it would close its plant in Sellersville, Bucks County, by 2017. In the last year, it also ceased plans for a $300 million facility in Northeast Philadelphia.

Teva remains the world leading seller of generic medicine. But novel, brand-name drugs have higher profits, Teva tried to acquire and develop brand-name drugs in recent years, most notably the $6.8 billion purchase of Frazer-based Cephalon in 2011.

Both of those business models played into the legal bills that were attributed to the second quarter financial statement.

As a generic company, Teva gambled in 2007 by launching its version of a stomach acid drug that was close Pfizer's Protonix. Pfizer sued in federal court in Newark over patent infringement and argued for $3 billion in damages. After a jury said Teva infringed on Pfizer's patent in 2010, the companies reached a settlement this summer. Teva agreed to pay $1.6 billion, with some due this year and the rest in 2014. (Sun Pharmaceutical Industries, a co-defendant in the suit, agreed to pay $550 million.)

Teva said Thursday it had applied $930 million of the costs in the Pfizer settlement to second quarter financial statement.

Teva had built its generic business, in part, by striking deals with brand-name companies to avoid patent litigation. The deals paid Teva to delay the introduction of its generic medicine. Critics of such deals said it violated antitrust laws and raised the cost of medicine to consumers. Teva, other generic companies who followed the model and brand-name companies argued it made sense to strike such deals to avoid uncertainty, legal costs and did not extend the life of the original patent.

The Federal Trade Commission was among the most powerful critics and - helped by a decision in the Philadelphia-based U.S. Court of Appeals for the Third Circuit - got a hearing on a related case this year before the Supreme Court. In June, the Supreme Court found in favor of the FTC, shocking and troubling much of the pharmaceutical industry, whose companies faced other lawsuits on this topic.

One such suit was filed in 2006 in federal court in Philadelphia. Teva, and generic companies Mylan and Ranbaxy were sued over a deal with Cephalon regarding the drug Provigil, whose active ingredient is modafinil. The FTC investigated and also filed suit in 2008, with much of the legal action combined under the supervision of Judge Mitchell Goldberg.

By purchasing Cephalon in 2011, Teva inherited Cephalon's legal obligations and liabilities.

In July 2012, Goldberg put the case on hold because of a Third Circuit decision in a different-but-similar, which set up the Supreme Court review.

While the Supreme Court decision was not a complete victory for the FTC, the Court said such drug company deals could be more closely scrutinized for antitrust violations.

The Philadelphia suit alleged that Cephalon violated antitrust laws by paying off four generic competitors (including Teva) a combined $200 million or so to delay launch of cheaper versions of Provigil. The FTC said Provigil had worldwide sales of $1.7 billion in 2007, with $800 million of that coming from U.S. sales.

In its 2008 complaint filed in federal court, the FTC quoted then Cephalon CEO Frank Baldino as saying shortly after the agreements, "We were able to get six more years of patent protection. That's $4 billion in sales that no one expected."

Teva apparently did not want any of that discussed in open court or be liable for the results. After the Supreme Court ruled, Goldberg lifted the stay and he scheduled a hearing for Aug. 8 to discuss evidence.

In Thursday's conference call with analysts, chief financial officer Eyal Desheh said Teva had reached a "settlement-in-principle" in the class-action lawsuits and it would take a charge of $485 million against second-quarter earnings.

"The settlement-in-principle is in the best interests of the company given the circumstances of this situation," Desheh said.

Teva's chief legal counsel, Richard Egosi, was asked why Teva was settling now. The Supreme Court decision, Egosi said, "eliminated the uncertainty of the legal standard and brought the sides together."

A spokesman for the FTC declined comment.