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AstraZeneca (AZN - Analyst Report) entered into an agreement with Hanmi Pharmaceutical and Amneal Pharmaceuticals (the US marketing partner of Hanmi Pharma), to resolve patent issues related to AstraZeneca’s heartburn drug, Nexium (esomeprazole). The agreement ensures that no trial is required on the issue, thereby saving legal costs.

As per the terms of the agreement, Amneal Pharma and Hanmi Pharma have accepted that two of AstraZeneca’s patents (5,714,504 and 5,877,192) protecting Nexium in the US are valid. The consent judgment provides that Hanmi’s esomeprazole strontium product does not infringe them based on the District Court’s claim construction issued in Dec 12, 2012. AstraZeneca retains the right to appeal the District Court’s claim construction.

We note that Hanmi Pharma’s esomeprazole strontium has already obtained tentative US Food and Drug Administration (FDA) approval on Apr 30, 2013. A final decision from the US regulatory body is expected shortly.

Nexium generated sales of $940 million in the first quarter of 2013, accounting for almost 15% of AstraZeneca’s total revenues. However, the company expects Nexium sales to decline 2014 onwards due to generic competition. We remind investors that AstraZeneca is entangled in patent litigation related to Nexium with several generic companies including Actavis, Inc. (ACT - Analyst Report). We believe sooner-than-expected entry of generics will put additional pressure given that the company is already witnessing plunging revenues due to generic competition for several key drugs including Seroquel.

AstraZeneca carries a Zacks Rank #3 (Hold). Companies that currently look attractive include Santarus, Inc. and Jazz Pharmaceuticals (JAZZ - Analyst Report). Both carry a Zacks Rank #1 (Strong Buy).

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