WPI Actavis, Inc.

Endo Pharmaceuticals (ENDP) recently announced that it has entered into an agreement to settle two patent infringement lawsuits against Watson Pharmaceuticals (WPI), related to Endo’s lead product, Lidoderm (lidocaine patch 5%).

Although a trial was held on one of these two cases in February 2012, a ruling has yet to come. To mitigate the risk regarding the uncertainty of the court’s decision, the companies mutually decided to resolve the issue.  

Under the terms of the agreement, Watson Pharma will not market a generic version of Lidoderm until the US Food and Drug Administration (FDA) approves Watson Pharma's abbreviated new drug application (ANDA) for its product. If Watson Pharma gains approval before September 15, 2013, the company will not be allowed to launch its product until that day except in certain circumstances.

Meanwhile, Endo will provide $12 million (wholesale acquisition cost) worth of branded Lidoderm product to Watson Pharma every month from January through August 2013. If Watson Pharma fails to gain FDA approval by the end of 2013, Endo will provide $6.67 million worth of branded Lidoderm product per month in 2014 until Watson Pharma gains FDA approval.

In the event of Watson Pharma not gaining approval by the end of 2014, the amount of branded Lidoderm will increase to $7.11 million from January 2015 through September 2015 for each month that Watson Pharma fails to gain FDA approval.

Endo cannot launch an authorized generic unless any company other than Watson Pharma launches generic Lidoderm or for 7.5 months following the launch of Watson Pharma’s product, whichever is earlier.

Watson Pharma is required to pay a royalty of 25% on gross profit during any exclusivity period it may enjoy following the launch of its generic product. The royalty will be payable until another generic including an authorized generic enters the market.

We note that Endo filed an amendment to its Citizen Petition (CP) with the FDA in March 2012. The company has asked the FDA to publicly address concerns regarding the approval requirements for generic versions of Lidoderm. The CP is currently under FDA review.

Lidoderm is used for the relief of pain associated with post herpetic neuralgia (PHN) and generated US sales of $1.2 billion for the twelve months ending March 31, 2012, as per IMS Health Data.

Our Recommendation

We have a Neutral stance on Endo Pharma. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

 
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