Patent Secured. Next Stop: Sale?

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A drug loses value as it gets closer to its patent exclusivity; once generic drugs come on the market, sales of the branded drug plummet. You have to look no further than Eli Lilly (NYS: LLY) and its epic patent cliff to see that phenomena on a grand scale: Revenue has gone up on average 9% annually over the last five years, but the value of its shares are down 23% over that time frame.

So, if a drug like Amarin's (NAS: AMRN) triglyceride-reducer AMR101 were to be approved with minimal protection -- a five-year token award that everyone gets for a new chemical entity -- it wouldn't be worth a whole heck of a lot.

Fortunately for Amarin, that doesn't seem to be an issue anymore. The U.S. Patent and Trademark Office determined that the biotech's application for a patent on its formulation of AMR101 could be granted. The stock shot up 10%, a reasonable figure given the value of the longer protection, muted slightly by the fact that there are still 16 U.S. patents across 11 patent families pending with the USPTO (and shares had already run up nearly 50% since the start of last week).

AMR101 is a fish oil that's similar to GlaxoSmithKline's Lovaza, but more pure and with apparently better effects on cholesterol levels. In addition to patenting the formulation, Amarin might be able to get a patent on the purification, although those can be harder to defend.

With the patent situation clearer, the acquisition rumors can begin to fly again. Pfizer (NYS: PFE) , AstraZeneca, Merck (NYS: MRK) , and Abbott Labs (NYS: ABT) would all be likely candidates given their interest in cholesterol and other heart drugs.

While I agree that Amarin will likely get taken out -- without any other pipeline drugs, it's an easy acquisition -- I wouldn't count on it happening before AMR101 gets approved around July 26. Think about it from the pharmaceutical executive's standpoint: Who wants to be the guy or gal that spent billions a few months ago to buy a drug that was just rejected by the FDA? Even with the chance of AMR101 getting turned down being minimal, it makes more sense for a pharmaceutical company to just wait for an approval and pay a little more than to be left holding the bag if an unexpected rejection comes.

Shares are twice what they were before I made a long call in CAPS over a year ago. I'm keeping that call on, but I'm fully aware that it could take another year to realize the full value of the CAPScall.

Fool analysts think they've found another health care company with just as much upside potential. You can read about it in their new free report: "Discover the Next Rule-Breaking Multibagger." You can get your copy for free by clicking here.

At the time this article was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Pfizer, GlaxoSmithKline, and Abbott Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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