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Watson Pharmaceuticals Inc. recently announced that the US Food and Drug Administration (FDA) granted final approval to the company’s abbreviated new drug application (ANDA) for its generic version of Endo Health Solutions Inc.’s (ENDP - Analyst Report) drug, Lidoderm. Lidoderm (lidocaine patch 5%) is currently approved for the relief of pain associated with post herpetic neuralgia (PHN).

Watson Pharma intends to begin shipments of its generic version of Lidoderm in September 2013 per the terms of its settlement agreement with Endo. Watson believes it is entitled to a 180-day period of marketing exclusivity under the provisions of the Hatch-Waxman Act.

According to IMS Health, US sales of Lidoderm amounted to $1.2 billion for the twelve months ended June 30, 2012.

We note that earlier in May 2012, Watson reported that it entered into an agreement with Endo to settle two patent infringement lawsuits related to Lidoderm. Under the terms of the agreement, Watson is allowed to launch the generic version of Lidoderm on September 15, 2013.

Meanwhile, Endo will provide $12 million (wholesale acquisition cost) worth of branded Lidoderm product to Watson Pharma every month from January through August 2013.

Endo cannot launch an authorized generic unless any company other than Watson Pharma launches generic Lidoderm or for 7.5 months following the launch of Watson Pharma’s product, whichever is earlier.

Watson Pharma is required to pay a royalty of 25% on gross profit during any exclusivity period it may enjoy following the launch of its generic product. The royalty will be payable until another generic including an authorized generic enters the market.

Our Recommendation

We currently have a Neutral recommendation on Watson Pharma. However 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 the 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.

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