PropThink: Watson Shares Set Record High on Today's Approval, Previous Settlement Deal

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Watson Pharmaceuticals (NYSE:WPI - News) announced today that the FDA has approved the company's generic version of Lidoderm, a skin patch that delivers the painkiller lidocaine currently sold as a branded product by Endo Pharmaceuticals  (NASDAQ:ENDP - News). The approval and a settlement deal with Endo allows the generic version to go on sale in September of next year, with 25% royalties due to ENDP until the earlier of either another generic product entering the market, or 7.5 months from launch. Endo would have lost market exclusivity for Lidoderm in 2015 had patent litigation not been settled.

Although the royalties will take the edge off of the loss, ENDP stands to lose 70% of sales within the first six months that the generic is on the market, a considerable blow to its income. Lidoderm made up 30% of Endo's net sales in 2011, by far its largest revenue-producer at $825 million. Revenue from Lidoderm has been growing in the last few years while at the same time the company reduced the drug's portion of total sales. Revenue from other sources - like medical devices and services - grew substantially since 2010 and will help to offset the loss in the company's drug portfolio. That said, however, Endo Pharmaceuticals will still lose millions in revenue in the fourth quarter of next year and into 2014. Shares of the company were up slightly in the afternoon and should move sideways with today's news for Watson. The financial effects of generic Lidoderm had largely been factored into the market prior to today, although declines can be expected next year when Endo feels the bigger implications of of the settlement.

Watson is up 5% in the afternoon and marked a new 52-week high earlier in the day at $83.71. The company believes it will receive 6 months of market exclusivity from the FDA after the approval, barring other generics from entering the marketplace. Mylan (NASDAQ:MYL - News), for instance, also filed with the FDA for a generic form of Lidoderm. The settlement deal, reached in May, requires Endo Pharmaceuticals to provide Watson with $12MM of the branded form of Lidoderm every month from January to August of 2013 for distribution. Watson's legal launch date for generic Lidoderm is Sept. 15, 2013. Analysts' Mean Target Price for WPI is $88.38, just higher than today's peaks. After today's gap up, however, a pull-back is likely next week as the stock moves into untested territory for investors. This is the company's highest price since going public in 1993.

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