Endo Pharmaceuticals Holdings Inc. (NASDAQ:ENDP) and Watson Pharmaceuticals, Inc. Co. (NYSE:WPI) have been battling in the courtroom over Lidoderm, a local anesthetic used to relieve post-shingles pain.
Watson Pharma is planning a generic version of Endo Pharma's Lidoderm, which is expected to lose its U.S. patent protection in 2015.
With the Lidoderm trial between Endo Pharma and Watson Pharma having completed earlier this week, there are a number of potential outcomes that could play out over the next several months that could have a meaningful impact on the stock.
The trial is being closely followed by the investors as Lidoderm accounts for almost 30 percent of total revenue for Endo Pharma.
"We would caveat that we think the consensus view right now is that WPI has a better chance of winning the patent trial based on non-infringement (as opposed to invalidity) given the Markman ruling that went in its favor in the middle of last year, but that ENDP probably has grounds for appeal that would then extend the litigation," Susquehanna Financial analyst Gary Nachman wrote in a note to clients.
However, the analyst thinks that the Street is a little more mixed on the likelihood of Watson Pharma receiving timely approval for its generic given some other potential regulatory hurdles in place.
On the other hand, Watson Pharma has stated publicly that based on dialogue with the FDA, it is very confident that it has addressed the questions in the application and it will receive approval before the thirty month stay expires and would be ready to launch immediately.
Some of this, of course, could be public posturing, but investors are assuming Watson Pharma receives the approval than not. Even, if Watson Pharma receives a tentative approval, it would cause a downfall in Endo Pharma shares.
"In the absence of a settlement, we think a tentative approval for WPI even if it comes before the judge's decision in the trial would cause a fair amount of downside in the stock because then it would seem WPI would have the upper hand in its negotiations with ENDP," Nachman added.
On its part, Endo Pharma is diversifying its product lineup from pain management to areas such as urology, endocrinology and oncology, and trying to reduce its reliance on Lidoderm, whose revenue contribution has fallen to 30 percent from 60 percent in 2008.
For the nine months ended September 2011, sales of pain killer Opana extended release tablets rose 67 percent to $275 million and osteoarthritis pain reliever Voltaren Gel climbed 42 percent to $104.2 million. Still, Lidoderm is the top revenue contributor with sales of $593 million, though it recorded only three percent growth from last year.
Our Take: For the time being, investors would be focusing on the company's fourth quarter numbers, which will be out on Feb.24. It is better to remain on the sidelines on Endo Pharma stock until the overhang on Lidoderm litigation clears and products from other verticals start making higher revenue contributions.