Watson Pharmaceuticals Inc. () recently announced the filing of a lawsuit against the US Food and Drug Administration (FDA), challenging the regulatory body’s decision related to Watson’s entitlement to the shared exclusivity for its generic version of Takeda Pharmaceutical Co. Ltd.’s (TKPYY) diabetes drug, Actos.

Actos (pioglitazone hydrochloride - 15mg, 30mg and 45mg tablets) is used for the treatment of type II diabetes in patients.

Due to the FDA’s decision, Watson's Abbreviated New Drug Application (ANDA), which was filed in 2003, can now get delayed by up to six months. The company filed the lawsuit after the discussions with the FDA failed to resolve the dispute and ensure timely approval of the drug.

Watson stated that the FDA had improperly denied the company’s shared exclusivity for Actos, in spite of the company complying with the FDA’s requirements received from the latter regarding its Paragraph IV certification.

As per IMS Health, US sales of Actos amounted to $2.7 billion, for the twelve months ended May 31, 2012.

We note that Watson intended to launch generic Actos on August 17, 2012 based on the prior settlement agreement with Takeda on March 10, 2010. Watson believes it is entitled to share a 180-day period of generic marketing exclusivity under the provisions of the Hatch-Waxman Act.

However, Watson said that even if the FDA fails to approve its ANDA for generic Actos, it will still be able to achieve its full year 2012 guidance of $5.5 billion. It would result from recent favorable regulatory updates of other generic drugs along with improved condition in the US generics market.

Our Recommendation

We currently have a Neutral recommendation on Watson Pharma. The stock carries a Zacks #2 Rank (Buy rating) in the short run.

We expect new generic product launches over regular intervals to help drive the company’s Global Generic segment sales which climbed 26% during second quarter 2012 to $995 million, driven by the generic launch of Pfizer Inc.’s (PFE - Analyst Report) Lipitor and Sanofi’s (SNY - Analyst Report) Lovonex.