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Warner Chilcott Plc: Numerous Sources Of Potential Upside

 February 20, 2013 09:57 AM

(By Mani) Shares of Warner Chilcott Plc (NASDAQ: WCRX) have numerous sources of potential upside given minimal generic competition for its ulcerative colitis franchise and a strong pipeline.

Based in Dublin, Ireland, Warner Chilcott is a leading specialty pharmaceutical company currently focused on the women's healthcare, gastroenterology, dermatology and urology segments of the branded pharmaceuticals market, primarily in North America.

The United States Food and Drug Administration (FDA) approved Warner's new 400 mg mesalamine product indicated for the treatment of ulcerative colitis. The product will be marketed as Delzicol, which would be commercially launched in March 2013. 

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The launch would offset the generic threat to Asacol, which would lose market exclusivity in July 2013. Delzicol is considered to be a follow-on product of the company's core product Asacol, which would no longer be sold once Delzicol hits the market. Asacol had generated $743 million in sales in 2011.

Further, the company does not plan to price Delzicol at a premium to Asacol, which should allow for a more rapid ramp in formulary coverage.

Notably, generic competition for the company's mesalamine based Ulcerative Colitis (UC) franchise (Asacol, Asacol HD and Delzicol) remains highly unlikely over the next few years, given the challenging pathway to approval.

"While we were somewhat disappointed to learn that Delzicol will not enjoy 3 years of new product exclusivity, it is a new formulation (capsule vs. tablet) which leaves the opportunity for the company to secure additional patents to protect the franchise," RBC Capital Markets analyst Shibani Malhotra wrote in a note to clients.

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Meanwhile, the company's pipeline appears to be progressing as its new tetracycline (Doryx follow-on) is expected to enter Phase III studies this year. Doryx had lost patent protection in April 2012, and if the late stage studies for the new Doryx deliver favorable outcome, then a key generic overhang would be removed. In 2011, Doryx generated sales of $173 million.

The company made it clear that business development remains a priority, and they continue to believe that they have the necessary access to debt capital to pursue deals. It remains open to acquiring products and companies and will also consider assets outside of drug maker's core branded prescription pharmaceutical business.

While they prefer to fund deals with debt capital, they remain highly sensitive to valuation and would not rule out issuing equity to complete a highly value-generative transaction. Media reports say that Warner Chilcott is the possible suitor for Endo Health Solutions, Inc. (NASDAQ: ENDP).

If the deal happens, Warner Chilcott's earnings could increase by at least 40 percent due to a lower tax rate at the company and the consolidation of operations. The company has reportedly hired Goldman Sachs to advise it on the acquisition.

"We continue to anticipate Warner Chilcott will engage in attractive business development, which we expect will drive a rally in shares," Malhotra said.

Shares of Warner Chilcott gained 26 percent in the past three months and trades at just 4 times its 2013 consensus earnings estimate, which would increase if the firm acquires Endo Health.

Moreover, the company's earnings potential would remain intact even if it fails to buy Endo Health. The shares may sell-off on the news, but it could create a better entry point.

The company is expected to report its fourth-quarter results on Feb.22. Wall Street sees earnings of 73 cents on revenue of $564.34 million, according to analysts polled by Thomson Reuters.

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