Can Watson Give Birth To A Pregnancy Franchise As It Helps Lay Lipitor To Rest?

Watson is progressing on a multi-year effort to diversify beyond its core U.S. generics business into branded drugs and international markets.

Watson Laboratories Inc.'s long efforts to expand its business mix into the early stages of the pharmaceutical lifecycle and away from generic focus could take an important step forward in 2012 with the potential approval of Prochieve for prevention of pre-term birth.

But as the firm prepares for that launch, it also hopes to be feasting on the remains of the greatest beast of the primary care era, Pfizer Inc.’s cholesterol treatment Lipitor (atorvastatin), when it launches an authorized generic at the end of the month.

Less certain, but also a potentially positive drivers for Watson could be the launch of a generic version of the painkiller Lidoderm, ex-U.S. expansion of generic Nexium, and overseas expansion.

These events take place as Watson progresses on a multi-year effort to diversify beyond its core U.S. generics business into branded drugs and international markets.

The branded drugs effort has met with mixed success to date and still represents only about 10% of 2011’s $4.5 billion in projected revenues. That ratio, after years of effort, illustrates the difficulties of blending generics and proprietary businesses – and also of the risks of relying on innovative R&D for growth (Also see "Watson Talks Up Prochieve And Global Expansion At Analyst Meeting" - Pink Sheet, 2 Feb, 2011.).

Changing The Standard Of Pregnancy Care

With a Feb. 26 PDUFA date, Prochieve (progesterone vaginal gel 8%) is likely to be Watson’s most important branded launch next year.

Watson already sells the drug as Crinone, for treatment of infertility, under a deal it inked with Juniper Pharmaceuticals Inc.in 2010 (Also see "Two Deals Bolster Watson's Position In Branded Women's Health Products" - Pink Sheet, 4 Mar, 2010.).

The drug’s sales are modest ($24 million in 2011, according to Canaccord Genuity estimates), but Watson is putting a different marketing strategy in place for the new indication and some analysts believe sales could reach several hundred million (Canaccord estimates $200 million by 2015, assuming a 2012 launch).

The company isn’t making its own projections public, but it expects to provide overall guidance for the full year 2012 at an analyst meeting planned for the first quarter.

In preparation for a launch, however, it is actively working to persuade medical groups such as the American Congress of Obstetricians and Gynecologists and the Society for Fetal Maternal Medicine, to recommend cervical-length screening and vaginal progesterone gel as standard in obstetrical care.

These groups are making progress on establishing guidelines for both transvaginal ultrasound screening and therapies, said Fred Wilkinson, executive VP, global brands, on a Nov. 1 call with analysts to discuss third quarter 2011 performance.

Watson argues that short cervix, which Prochieve treats as an bioadhesive, is a major cause of pre-term birth, but few pregnant women get screened for it.

In a Phase III placebo-controlled, blinded study published earlier in 2011 and funded in part by the National Institutes of Health, researchers found that progesterone gel 8% administered to women with short cervixes (10 mm to 20 mm) had a 45% reduction in pre-term births – the first study to show any such reduction.

The company also has sponsored pharmacoeconomic studies, which show that routine transvaginal ultrasound screening of low-risk pregnant women to determine if they have short cervix and need treatment saves money and prevents neonatal deaths and long-term disabilities.

The Pipeline Might Broaden With Deals

With an aggressive goal of doubling revenues of branded products to $1 billion in the next few years, largely through organic growth, the company will need Prochieve to succeed.

Other products in its portfolio such as Androderm (testosterone transdermal system), and Rapaflo (silodosin capsules), which FDA approved in 2009 for benign prostate hyperplasia, also will help, but their potential is limited.

Watson believes that these drugs, along with Prochieve and another pipeline compound, Esmya (ulipristal acetate), now in Phase II for uterine fibroids, and which it in-licensed from PregLem SA in 2010, will make the math work. Still, it continues to look for deals in the urology, women’s health and even oncology areas, CEO Paul Bisaro told analysts.

Adhering To A Generic Growth Strategy

In addition, the company will complete its expansion of its Salt Lake City manufacturing plant in time for a timely launch of a generic version of Lidoderm (lidocaine patch 5%), Bisaro said.

The firm is challenging the key patents on the pain medication, which is made by Endo Pharmaceuticals Solutions Inc.. and which has a patent expiration in May 2012.

Although FDA has had issues around bioequivalence and other topical patches, Watson believes it will not need to do additional work on lidocaine to get FDA approval, because Watson has met the requirements of the agency’s 2006 guidance, he added.

The launch of some key generics in the U.S. and Europe, as well as improving sales of certain branded drugs, helped drive 23% growth in Watson’s third quarter 2011 year-on-year revenues, the company reported on Nov. 1.

In May, Watson launched an authorized generic of Johnson & Johnson's attention deficit hyperactivity disorder drug extended-release Concerta (methylphenidate hydrochloride extended release tablet), which had sales of about $1.5 billion in 2010.

The company said that revenue growth of nearly 40% in the global generics segment came from sales of its extended release and oral contraceptive franchises in the U.S. and increased international product sales, along with the recent acquisition of the privately held Greek company Specifar Pharmaceuticals SA.

Generic Lipitor, Front And Center

The eyes of Wall Street and industry currently are fixated on Watson primarily for one reason, however: its central role in the evolving scenario around the introduction of generic Lipitor.

Patent settlements will allow Ranbaxy Laboratories Ltd. to launch a generic and Watson to launch an authorized one at the end of November, but how and even whether those launches play out still looks surprisingly uncertain.

Questions continue to surround the ability of Ranbaxy to enter the market on Nov. 30, or at all, given the company's inability so far to resolve manufacturing problems with FDA. As the first to file an ANDA Ranbaxy has 180-day marketing exclusivity for its generic.

Its ability to launch on time or near the date will determine if the market has two or three competitors in the near term – and thus how low pricing will go. As happens typically in generics, once Ranbaxy's exclusivity ends, anywhere between four to six players are expected to enter the market, leading to further dramatic cuts in prices.

Bisaro said he assumes that Ranbaxy will launch on time, which is in line with comments made by Wall Street analysts, payers and competitors. Their assessments are based on assurances that Ranbaxy and its parent Daiichi Sankyo Inc. have made and the pressure on FDA to approve Ranbaxy's product.

Atorvastatin will be Watson’s biggest volume launch ever, but Watson’s margins from it will be lower than the company’s overall margins for its generics business because of the nature of the deal that the company worked out with Pfizer.

The authorized generics deal entitles Pfizer to collect approximately 70% of Watson’s cost of goods sold on atorvastatin. In addition, Watson pays 85% of after-tax gross profits on the drug to shareholders of Arrow International, which it acquired in 2009.

Nevertheless, Watson forecasts atorvastatin’s contribution to its fourth quarter 2011 diluted earnings per share will be $0.48 to $0.53, based on 10 weeks of shipments at launch.

Pfizer Contracting Aggressively

Also still under wraps, but now emerging, are Pfizer's actions to protect its brand share. Pfizer will retain approximately 40% market share for the Lipitor brand until Ranbaxy's exclusivity runs out and other generics enter the market, Bisaro predicted.

To get that share, Pfizer appears to be contracting with pharmacy benefit managers to get preferred formulary status for Lipitor.

Bisaro said Pfizer is NDC-blocking other generics – that is, offering rebates to payers that in effect lead them to block dispensation of generic alternatives. It is "also working aggressively to move the brand into Tier 1, pushing the generics into Tier 2 or Tier 3," thus making the co-pays for the generic more expensive than for the brand.

Bisaro said Lipitor also has high mail-order utilization and Pfizer has been "inventory aggressive" in the mail-order segment, where he expects it will maintain a large position.

Pfizer's aggressive formulary placement efforts are reminiscent of the novel brand pricing strategy that Merck & Co. Inc. used the last time a big statin went off patent, when it worked to muscle Zocor generics out of preferred tiers (Also see "Merck Pushes Discount Zocor; Health Plans Are Wary, But Pfizer Is Concerned" - Pink Sheet, 26 Jun, 2006.).

Watson would not disclose its pricing plan for Lipitor, which will depend on how Ranbaxy's market exclusivity plays out, that is, whether initially there are two or three players, Bisaro said on the earnings call.

Tim Anderson, an analyst at Sanford C. Bernstein & Co., commented in an Oct. 31 analyst note that, in mail order channels, Pfizer is lowering the price of the brand to match likely generic pricing. He added that even at a lower price, the product will remain highly profitable. Sales of branded Lipitor will likely decline more slowly "partly driven by agreements with certain payers" he stated.

Pfizer also addressed the Lipitor market during its third quarter earnings call held the same day (Also see "With Strong Q3 Financials, Pfizer Says It's Ready For Generic Competition To Lipitor" - Pink Sheet, 1 Nov, 2011.).

Olivier Brandicourt, president and general manager of primary care, said Pfizer launched a new program in September called "Lipitor For You," which includes co-pay assistance and a patient adherence program.

Gregg Gilbert, of Bank of America Merrill Lynch, asked if Pfizer's effort to maximize the brand past the loss of exclusivity is a bridge to an over-the-counter strategy or some other strategy.

"Most of the focus is on ensuring the brand has a robust performance in the rest of '11 and the first 180 days of its loss of exclusivity," Pfizer President and CEO Ian Reed stated.

He added that Pfizer intends to have an OTC version of Lipitor on the marketplace at some point but that the actions the company is taking now "are not specifically directed towards strengthening any potential OTC brand in the future."

Ranbaxy’s End Game

FDA said in June that it was in ongoing discussions with Ranbaxy about issues raised in 2009 after the agency found evidence of falsified data in drug applications generated at Ranbaxy's manufacturing facility in Paonta Sahib, India (Also see "Lipitor Generics Watch: FDA Has Yet To Approve ANDA For The World's #1 Drug" - Pink Sheet, 30 Jun, 2011.).

Other possible scenarios: Ranbaxy could partner with a generic company that does not have manufacturing issues, or possibly even Pfizer, which could then get a cut of its sales, Anderson suggested. Lastly, he said, FDA could strip Ranbaxy of its 180 days of exclusivity, as Mylan has advocated.

Rumors that Ranbaxy had signed a deal withTeva Pharmaceutical Industries Ltd. surfaced Nov. 2, but the companies declined comment. It’s unclear how the mechanism for such a partnership would work and whether Ranbaxy can even transfer its exclusivity in a way that protects it value.

However, Bisaro said he does not expect Ranbaxy to license its exclusivity to another company since Watson's market intelligence indicates Ranbaxy is building inventory of the product.

Watson was asked during the earnings call whether customers were waiting on Ranbaxy's situation to decide whether to sign contracts with Watson.

Siggi Olafsson, exec VP of Watson's global generics division, responded that the company is talking to customers and that it is not unusual that prices haven't been agreed on one month before launch. The contracts are flexible to allow for last-minute changes to the competitive line up, Watson said.

A company spokesperson said after the call that the company has enough product to supply the entire generic market and could provide it to customers within 24 hours notice.