Endo’s attempts to keep generic versions of its topical anaesthetic Lidoderm at bay in the US hit a snag yesterday, with a judge ruling in favour of challenger Watson at an early stage of the case.
This makes it more likely that a settlement will be struck between the two companies. Both have much to gain or lose - with annual sales of $800m forecast over the next four years, the product is by far Endo’s most substantial revenue generator. Watson could feasibly launch in August next year, so any deal is likely to emerge sooner rather than later.
Lidoderm’s days of patented life are numbered anyway – consensus sales forecasts currently imply generics will enter when its strongest patent lapses in October 2015.
The product is set to remain Endo’s most valuable until then. Sales are seen peaking next year at $816m and consensus forecasts give the product a net present value of $926m – equal to 20% of Endo’s market value.
First-to-file Watson’s 30-month stay expires in August 2012, three years before the core patent. This is a significant window, and explains why the ruling increases the pressure on Endo to come to a compromise now. The alternatives are potentially losing the case completely or see Watson decide to launch at risk next year.
Generics entering next August would be the worse case scenario – which also depends on Watson winning timely FDA approval for its product – causing the value of Lidoderm to Endo to more than halve, EvaluatePharma’s Interactive NPV Analyzer shows.
Plunging to a net present value of $395m, the loss in value equates to 11.5% decline in Endo’s market value.
However this eventuality is not anticipated; the small matter of FDA approval alone could well stall Watson’s ambitions. A settlement deal is expected, but this could still take many forms, greatly influencing the remaining value locked up in Lidoderm.
Analysts at UBS believe it would be in Watson’s interest to settle on a later launch date, even as far back as 2014, rather than go for a 2012 launch. Endo could be expected to release an authorised generic at the same time in this situation.
Assuming an August 2014 generic launch, the NPV of Lidoderm only drops $163m, equivalent to a 3.5% drop in Endo’s market value.
Having 12 months on the market as the only generic would be valuable proposition for Watson – UBS analysts calculate that Watson could wait until early 2015 and still be better off than competing with an authorised generic.
Their conclusion: “Losing the Lidoderm case is no longer a significant hit to Endo”.
Still, analysts at RBC reckon the fact that Endo lost the first ruling – the judge agreed with Watson’s interpretation of the patent claims – means the terms of any settlement could be less favourable.
Endo is likely to appeal, while Watson is likely to file for a summary judgement on non-infringement – the outcome of both processes should be known within a number of months. And if a settlement is to be negotiated, it will need to be signed and sealed before Watston’s 30-month stay expires.
Endo shares were trading 3.5% lower in early trade today, at $38.40. Watson jumped 2.5%, to $67.20. This suggests investors are expecting a compromise to emerge between the two companies, with Endo having to give away more than hoped.
Lessening the blow
However, the two significant acquisitions struck by the speciality pharma company in the last six months certainly lessen the blow. The $2.9bn swoop on medtech player American Medical Systems and a move into generics with the purchase of Qualitest, for $1.2bn, have been widely applauded by shareholders (Endo’s holistic approach winning investor support, April 11, 2011).
The stock closed at a record $42.65 in May, having almost doubled in value over the last 12 months. The company is now worth almost $4.5bn.
The loss of a year or two’s worth of Lidoderm revenues will not be appreciated. But Endo has manoeuvred itself into a position where it can take the blow, without too much damage. A notable achievement, considering the failure of many companies to properly prepare for a patent cliff.