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Andrx Corp.
October 11, 2006
Research Associate: Shilpa Chandak, CA
Editor: Nelson Bishop, CFA
Sr. Editor: Ian Madsen, CFA: [email protected]: 1-800-767-3771; x417
Ian Madsen, MBA, CFA, Editor, 312.630.9880 x.417
155 North Wacker Drive
Chicago, IL 60606
[email protected]
(ADRX - NASDAQ)
$24.57
Note to Reader: All new material since last update is highlighted.
Reason for Report: Minor changes and news update.
Prev. Ed.: August 22, 2006
Overview
Andrx Corp. (ADRX) is an emerging healthcare company with significant operations in the manufacture
and distribution of generic pharmaceuticals. The company is headquartered in Plantation, Florida. It
formulates and commercializes controlled-release oral pharmaceuticals using its proprietary drug delivery
technologies. Through its distribution operations, it sells generic drugs manufactured by third parties,
primarily to pharmacies that do not maintain their own central warehousing facilities and pharmacy
buying groups.
The company has a number of abbreviated new drug applications (ANDAs) for branded pharmaceuticals
progressing through the FDA review process. The branded business is losing money because of high
R&D expenses and delays in product launches. The company’s website is www.andrx.com. ADRX’s
fiscal year ends in December; the fiscal year coincides with the calendar year.
Analysts have identified the following factors for evaluating the investment merits of ADRX:
Key Positive Arguments
Andrx Corp. is significantly restructuring its internal
activities and marketing initiatives in an effort to expand
business opportunities, which would leverage its
strength in product formulation and development as
well as generic drug distribution.
The company has lined up a large number of
prospective pipeline products which might hit the
market once the Official Action Indicated (OAI) status
of the company is withdrawn by the FDA.
Key Negative Arguments
The company is still under review of the FDA
regarding manufacturing issues.
The company
received its second Form 483 in April 2006.
The royalty rate on generic Prilosec is in decline and
may totally disappear by 2006.
Increased competition for Cardizem CD and Tiazac
may negatively impact ADRX’s business.
On March 13, 2006 Andrx Corporation and Watson Pharmaceuticals, Inc. (WPI) announced that they
have signed a definitive merger agreement providing for the acquisition of Andrx by Watson. Under the
terms of the agreement, Watson will acquire all of the outstanding shares of Andrx common stock for a
cash amount of $25.00 per share. The transaction has a total indicated purchase price of approximately
$1.9 billion. The Boards of Directors of both companies have unanimously approved the transaction.
Recent Events
Andrx reported its 2Q06 results on August 8, 2006. The company reported 2Q06 revenue of $254.7
million and GAAP EPS of $0.02.
© Copyright 2006, Zacks Investment Research. All Rights Reserved.
Revenue
ADRX has a number of co-promotional distribution deals with other branded and generic
pharmaceuticals. The company also manufactures a number of its own branded and generic products,
and receives royalties and licensing revenue on other products. ADRX’s generic oral contraceptive
marketing partner, TEVA, has only managed to capture 3.3% share for the two products it currently
markets. A number of ADRX produced generic and branded pharmaceuticals are:
Cartia XT
Indications: It is indicated for the treatment of hypertension. It may be used alone or in combination
with other antihypertensive medications. It is also used for the treatment of chronic stable angina, an
angina occurring from coronary artery spasm.
Product Life Cycle: Matured, widely sold and distributed. Cartia XT continues to be a core driver of
sales.
Recent Results: Cartia XT is a bioequivalent of Cardizem CD.
Competition: Once Apotex receives the final FDA approval for the generic version of Cardizem CD,
ADRX will face increased competition.
Diltizem HCL
Indications: Used in the treatment of hypertension. It may be used alone or in combination with other
antihypertensive medications.
Product Life Cycle: Matured, widely sold and distributed.
Recent Results: Diltizem HCL is a bioequivalent of Forest Lab’s Tiazac.
Competitors: The generic Cardizem CD or Tiazac markets may face additional competition. The
competitors may act aggressively on pricing to gain share, which will negatively impact ADRX’s business.
Analysts in the digest group are concerned regarding the competition.
Cardizem LA
Indications: Cardizem LA is indicated for chronic stable angina (chest pain) and hypertension (high
blood pressure).
Litigation: On October 19, 2005 Andrx disclosed an ANDA for a generic version of Cardizem LA
120mg, 180mg, 240mg, 300mg, 360mg, and 420mg strengths. Andrx had previously filed on the 420mg
strength. Kos Pharmaceuticals filed a suit against Andrx in BVF’s name on the 420 mg strength on
August 10, 2005. On October 14, 2005, Biovail sued Andrx on the remaining strengths. Andrx believes it
is first to file on all strengths of Cardizem LA and is therefore entitled to 180 days of market exclusivity.
By suing ADRX, BVF has set in motion the 30-month stay on Cardizem LA approvability, assuming that
ADRX’s formulation is deemed approvable. ADRX will likely challenge all of the strengths of Cardizem
LA. The Cardizem LA patent litigation vs. Biovail is currently scheduled for April 9, 2007.
Bupropin HCL
Indications: It is an antidepressant.
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Product Life Cycle: Matured, widely sold and distributed.
Partnership: Bupropin HCL is a bioequivalent of GSK’s Wellbutrin SR. The company has licensed its
exclusive rights to Impax. ADRX will receive a royalty payment from Impax, but it will be less than what it
would have earned if the company could have delivered sales of the product itself. Impax has partnered
with Teva Pharmaceuticals regarding sales. Wellbutrin SR’s royalty expired in September 2005 and was
largely impacted by shelf stock adjustment granted by TEVA.
Competition: The first-to-file status has not paid off. ADRX has been hampered by legal battles as well
as manufacturing issues. Andrx has recently relinquished its 180-day marketing exclusivity rights on the
150mg version (70% of the Wellbutrin SR franchise sales). This provides Eon Labs and Watson the right
to immediately launch their version of the drug.
Loratadine
Indications: It is an antihistamine. It relieves the symptoms of hay fever (sneezing, running nose, and
itchy, watery eyes), and can also treat hives and associated itching of the skin.
Product Life Cycle: Received final FDA approval on November 4, 2003 on the 10mg strength. The
company had 180 days of exclusivity.
Partnership: Loratadine is a bioequivalent of SGP’s Claritin, Claritin D-24, and Claritin Reditabs. ADRX
will partner with Perrigo for co-marketing and sales. Sales have been strong so far.
Valproate
Indications: Treatment of mania, epilepsy, and migraine.
Product Life Cycle: On May 10, 2004, ADRX received tentative approval on 125mg, 250mg and 500mg
strength.
Regulatory Issues: Valproate (divalproex Na) is a bioequivalent of ABT’s Depakote. Andrx has filed
505(b) (2) filing for Depakote and is currently engaged in patent litigation with innovator Abbott
Laboratories in the Southern District of Florida. In December 2005, the court denied Andrx’s motion for
summary judgment though litigation continues. Annual sales for Depakote are approximately $800.0
million.
Glucotrol ER
Indications: Treatment of diabetes.
Partnership: Glucotrol ER is a bioequivalent of PFE/JNJ’s Glucotrol XL. It has been licensed from
Pfizer, and the final deal was closed on January 20, 2004. ADRX will partner with WPI for its own
generic versions but it has also signed a distribution agreement with PFE on the resale of this generic.
The distribution agreement with PFE is of a lower margin.
Competition: PFE recently started marketing its own generic version of Glucotrol XL through its
Greenstone division. This product will compete against ADRX’s generic version. Management stated
that the product launch had a modest effect on ADRX’s market share till date though there has been a
slight decline in prices. Competition and price erosion in generic Glucotrol XL market has contributed to
the decline in generic revenue.
Quinapril
Indications: Treatment of hypertension.
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Product Life Cycle: ANDA filed, and pending at the FDA.
Recent Results: Quinapril –– bioequivalent of PFE’s Accupril.
Metoprolol
Indications: Treatment of hypertension (beta blocker).
Product Life Cycle: ANDA filed, and its Paragraph IV is pending at the FDA. First-to-file 50mg dose
(45% of branded sales). Expected launch in 2007.
Cardura XL
Indications: Treatment for benign prostate hyperplasia.
Product Life Cycle: ADRX received an approvable letter for Cardura XL on June 21, 2004.
Partnership: The company terminated its Cadura XL agreement with PFE and received $10 million
milestone refund in February, 2005.
Biaxin XL
Indications: It is used to treat certain bacterial infections of the respiratory tract.
Product Life Cycle: Received final approval on June 25, 2004 on the 500mg strength. Potential 2H06
launch. Biaxin XL generic is a key driver for Andrx.
Regulatory Issues: On November 11, 2005, ADRX announced that the district court of Northern Illinois
has granted Abbott Laboratories’ motion for a preliminary injunction on Andrx’s generic Clarithromycin
Extended Release Tablets (Biaxin XL) pending a trial on the merits. ADRX is evaluating the court’s
decision and will determine its course of action. Since no specific trial date has been set yet, it appears
that a trial is unlikely before 2H06, which suggests a decision on the patent issue may not be reached
until late ’06 or early ’07. As a result, if Andrx loses the PI case and is unsuccessful in making another
appeal, it may not be able to launch its generic Biaxin XL until later next year. If the outcome is
successful, ADRX intends to launch it immediately.
Abbott had already been granted a preliminary injunction (PI) in similar cases against Teva and Ranbaxy.
This decision blocks Teva from launching until either the PI decision is reversed on appeal or the lower
court rules in its favor.
Competition: Sandoz's generic Biaxin XL, a $311 million antibiotic; Sandoz is the third company to
receive final approval for an AB-rated generic.
Concerta
Indications: Concerta is used to treat attention deficit disorder (ADD), attention deficit hyperactivity
disorder (ADHD), and narcolepsy.
Product Life Cycle: Pending FDA approval.
Competition: Concerta is Johnson and Johnson’s (J&J) $800 million drug that lost its primary patent in
March 2004 but the launch of the generic have been delayed by a Citizen's Petition. Although it is
unlikely J&J will get a 30-month stay against any filer, the patent issued to Johnson and Johnson, could
give competitor Impax Laboratories 180 days of exclusivity on generic Concerta. According to ADRX, it
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was a day late in filing its Paragraph IV for the patent. ADRX’s generic version of Concerta will be
blocked from the market until Impax concludes its 180-day exclusitivity. This news removes a significant
potential drug from Andrx's near-term pipeline. The negative effects on Andrx are twofold: (1) the
obvious timing delay (sales pushed to 2006 or later from 2005), and (2) Teva and an authorized generic
(from JNJ) would have plenty of time to lock up a good portion of the market before Andrx launches its
generic. ADRX has expensed $4.1 million as cost of goods sold related to its pre-launch inventories.
Management stated that the company has submitted questions to the FDA to initiate a dialogue related to
Impax’s FTF status. FDA has not responded to issues related to the 180-day exclusivity rights related to
generic Concerta. In addition, there has been no FDA action on the pending Citizen’s Petition.
Lamisil
Indications: It is an antifungal drug.
Recent Results: Generic Lamisil is a bioequivalent of Novartis’ Lamisil. This is a $585 million product.
ADRX and two other generic companies (Dr. Reddy’s and Teva) have received tentative approval.
Lamisil is protected by two patents, one of which has expired in July 2004 and the other will expire in
December 2006.
Lovenox
Indications: An anticoagulant agent treatment for blood clots.
Product Life Cycle: Approval of Amphastar’s ANDA continues to be delayed by a Citizen’s Petition filed
by innovator Sanofi-Aventis. Potential launch is expected in 2006.
Marketing Rights: On May 2, 2005, ADRX entered into an alliance with Amphastar on generic Lovenox.
ADRX gains exclusive marketing rights for Amphastar’s generic Lovenox. On June 16, 2005, ADRX
received positive news as a court invalidated a patent protecting $1.4 billion Lovenox (an anti-clotting
drug). ADRX’s marketing rights extend to the U.S. pharmacy market, which represents 30% of the total
Lovenox sales. ADRX paid $4.5 million upon execution of the agreement and will make an additional
$5.5 million payment to Amphastar once certain milestones relating to the product are achieved,
including the FDA marketing approval. Retail market opportunity is approximately $500 million at brand
values with Andrx sharing half of the profits.
Prilosec
Indication: Treatment of heartburn and ulcers.
Partnership: The company received 6.25% royalty payment on generic Prilosec from Schwarz pharma.
The deal was structured such that ADRX will receive 15% royalty in the first six months of sales, 9% in
the next 12 months, and 6.25% in the last 24 months.
Toprol-XL (Metoprolol XL): Andrx filed Paragraph IV ANDAs on Toprol XL tablets in the 25mg, 50mg,
100mg, and 200mg strengths. AstraZeneca sued Andrx for patent infringement in the district court of
Delaware in February 2004 on the 50mg strength, in July 2004 on the 25mg strength, and in December
2004 on the 100mg and 200mg strengths. Andrx believes it is first to file on the 50 mg strength. The
summary judgment, however, came in favor of Andrx. Final approval is still pending for all the generic
challengers, and Andrx may not receive final approval until it resolves its manufacturing issues with the
FDA, for which visibility remains limited.
Official Action Indicated
On September 6, 2005 the FDA’s Florida District Office placed ADRX in OAI (Official Action Indicated)
status, thereby placing the FDA approval of the company’s abbreviated new drug applications (ANDAs)
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on hold. This was a further development of the FDA inspection of the company’s manufacturing facilities
that ended in May 2005 after which the FDA had issued a Form 483, List of Inspectional Observations.
ADRX submitted a response to the Form 483, including a proposed corrective action. The FDA has not
commented on this proposal.
ADRX subsequently met with the FDA on December 14, 2005 to address the manufacturing issues
raised by the agency in May, 2005. In January 2006, the FDA conducted a limited regulatory inspection
related to adverse drug event reporting and customer complaint handling and issued a Form 483 List of
Inspectional Observations.
The FDA has begun re-inspection of the company’s manufacturing site on March 6, 2006. Management
believes that the possible key focus of the re-inspection includes the following: (1) the FDA wants to
ensure that the company’s proposed corrective action plan is being properly put in place; (2) general
product capability; and (3) assess if Andrx is maintaining manufacturing quality. Andrx management
believes that the company has had significant experience in these areas by now and sounded confident.
During the 2Q06 conference call, management reported that it met with the FDA in July 2006 and
continues to work toward resolution of its manufacturing deficiencies.
The company recorded an additional $10.0 million milestone from Takeda Chemical Industries, in
connection with its agreement to develop a combination of Actos and Metformin extended release. The
company expects an NDA, or New Drug Application, for the product to be filed in 2006, followed by
approval and launch in 2007.
Generic Oral Contraceptives




Andrx Corp. has launched generic Ortho Tri-Cyclen. ADRX will also seek to gain approval for a
generic Ortho Novum 1/35, and Ortho Novum 7/7/7.
ADRX has two product approvals, and is awaiting other product approvals in order to launch itself
in the oral contraceptive arena. ADRX wants to launch the products all at once as a portfolio.
The company announced a distribution partnership with TEVA to promote the generic OC
business. TEVA’s marketing muscle and financial strength will be a big benefit to ADRX.
For generic oral contraceptive Loestrin, ADRX has received the FDA approval and plans to
launch it shortly.
ADRX is also gaining sales from the CTEX Pharmaceutical acquisition. The FDA had approved an NDA
for an OTC product containing the same active ingredients as Entex. The FDA had announced that
products which are sold via prescriptions, and do not have an approved ANDA or NDA, will be subject to
FDA scrutiny once an ANDA or NDA for a similar product receives approval. Entex falls under this
category and is liable to be assessed by the FDA.
On January 23, 2006, ADRX announced that it had entered into an agreement to market 11 generic
drugs to be manufactured by Invagen Pharmaceuticals Inc. Two ANDAs have been filed already. The
remaining nine ANDAs are expected to be filed during the remainder of 2006 and through early 2007.
This suggests that the first of these products could reach the market in late 2007, assuming no significant
legal/regulatory hurdle, notes one firm (Lehman).
In March 2006, Andrx and Teva amended their previous agreement which gave Teva exclusive rights to
market Andrx’s generic Oral Contraceptives (OC). Under terms of the amended deal, Andrx agreed to
pay Teva $4 million for the right to subcontract its generic OC manufacturing obligations. Upon
acquisition by Watson, ADRX will transfer to Teva all its approved and pending OC ANDAs, as well as
related technical & intellectual assets; and would also increase Teva’s share of net profits from generic
OC sales.
Andrx has filed an ANDA against Shire Pharmaceuticals’ Adderall XR. Shire has reviewed the
certification from Andrx and may file patent infringement litigation. Shire is currently reviewing the details
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of the Andrx notice and this may delay the FDA approval or the launch of the drug because of lawsuits.
Shire has settled lawsuits with Barr Laboratories and Impax Laboratories and is still in litigation against
Teva Pharmaceutical. One firm (Buckingham) views this as a non-issue for Shire as Barr will come into
the market with a generic Adderall XR and first-to-file exclusivity in 2009.
Andrx continues to have about 30 ANDAs pending approval, the most valuable being generic Toprol XL,
Cardizem XL and Concerta. The company currently has 24 products under development, which includes
15 controlled release products, 4 generic OCs, 2 orally disintegrating tablets and 3 immediate release
drugs. In 2005, Andrx filed 7 ANDAs and received 5 final approvals compared to 14 filings and 10
approvals in 2004 and 12 filings and 13 approvals in 2003. One firm (Citigroup) believes that if these
issues are not resolved, the FDA could impose more severe sanctions, potentially shutting down Andrx's
operations which would allow Watson to walk away from the proposed acquisition.
Branded Revs.
Generic Revs.
2005A
2006E
2007E
2008E
$17.6M
$298.5M
$0.0M
$271.6M↓
$0.0M
$347.6M↑
$0.0M
$407.1M
Est.
Growth
0.3%
ADRX continues to walk a tight rope in its generic business with significant potential upside for pipeline
products including Lovenox, Biaxin XL, Concerta, and Toprol XL offset by the threat of competition for its
generic Cardizem CD from KV Pharma (KV.A-SP) or Apotex.
According to the Zacks Digest Report, 2Q06 distributed products revenue was $174.4 million, up 3.3% yo-y. Andrx reported 2Q06 distributed products revenue of $177.4 million, up 5.1% y-o-y. During 2Q06,
distributed products revenues benefited from the launches of generic Pravachol and generic Zocor.
Although the industry continues to experience price erosion on existing products, the top-line trend in the
company’s distribution business returned to normal growth rates as generic versions of high sales
volume brand products were launched.
Distribution
2005A
$667.7M
2006E
$718.7M↑
2007E
$795.3M ↑
2008E
$829.0M
Est. Growth
5.6%↑
Total Revenue Synopsis: Andrx reported 2Q06 revenue of $254.8 million, down 1.6% y-o-y. According
to the Zacks Digest Report, 2Q06 generic product revenue was $67.7 million, down 13.6% y-o-y. Andrx
reported 2Q06 generic product revenue of $68.5 million, down 12.5% y-o-y. The decline is primarily due
to decreased revenues from the generic versions of Glucotrol XL, Glucophage, OTC generic Claritin-D,
and Dilacor XR. These were partially offset by increased revenues from the generic versions of Tiazac
and Cardizem CD, and Ventolin. In the generic products business, revenues continue to be affected by
the lack of any significant product launches. Andrx reported 2Q06 licensing, royalties and other revenue
of $8.8 million, down 40% y-o-y. The decrease was primarily due to decreased revenues from Sciele
Pharma and expiration of revenue generating alliances with KUDCo and Ranbaxy.
Total Revs.
2005A
$1,038.7M
2006E
$1,037.6M↑
2007E
$1,207M↑
2008E
$1,312.3M
Est. Growth
1.8%↑
On July 7, 2006, Andrx announced that Andrx and Watson have agreed on an amended outside closing
date of November 13, 2006. Firms in the Digest Group expect the Andrx/Watson merger to close by
November 2006, subject to FTC approval and provided there is no material change in the agreement.
Margins
According to the Zacks Digest Report, 2Q06 SG&A expenses were $38.4 million, down 1.7% y-o-y and
R&D expenses were $13.0 million, up 30.6% y-o-y. Andrx reported 2Q06 SG&A expenses of $41.0
million, up 4.8% y-o-y and R&D expenses of $13.0 million, up 3.1% y-o-y. The 2Q06 SG&A expenses
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included $3.8 million in merger-related expenses. The increase in the R&D expenses was attributed to
an increase in the contract services R&D. The company submitted 3 ANDAs to the FDA in 2Q06.
2006E Margins:
Digest Average Est.
Gross Margin
23.2%↓
Operating Margin
3.3%
Net Margin
3.0%↑
The company estimates R&D for FY06 to be around $50 million, which will include the company’s internal
R&D efforts focused on the development of primarily controlled-release products. It would further support
the contract services business and external R&D costs in connection with agreements reached with third
parties relating to the development of immediate-release products. The company believes that the
effective tax rate for FY06 would be approximately 38% and anticipates initiating income tax payments in
2006 (it was not required to pay any tax for the last 3 years). The company anticipates the most
significant requirement in 2006 will be funding related to expansion of its Florida manufacturing facilities.
The company anticipates FY06 capital expenditure of $47 million, compared to $29 million in FY05 and
$88 million in FY04.
The company is in late-stage discussions with overseas companies in India and China to leverage its low
cost API and manufacturing to add more IR products to its generic pipeline. Andrx will focus more of its
internal R&D on control-release and niche generic opportunities that will best leverage its broad
technology platform and formulation capabilities.
Earnings per Share
According to the Zacks Digest Report, 2Q06 pro forma EPS was $0.08, down 31.8% y-o-y and GAAP
EPS was $$0.02, down 81.8% y-o-y. Andrx reported 2Q06 GAAP EPS of $0.02. One firm (Lehman)
believes that the bottomline results will have no effect on the investors’ view regarding the pending
acquisition of the company by Watson.
2006E
$0.52↑
$0.15
$0.52
Street Consensus
Company Guidance
Low Estimate
High Estimate
2007E
$0.99
$0.88
$1.12
Analysts believe that the brand business divesture has reduced some of the uncertainties about future
quarters. The FDA inspection of the company’s facility is still ongoing and analysts believe that the future
prospects though still unclear is very much dependant on the FDA ruling. As a result, one analyst
(Wachovia) has still not considered any ANDA approval in 2006 as it believes that the OAI status may be
lifted in 2H06.
Target Price/Valuation
Rating Distribution
Positive
Neutral
Negative
Avg. Target Price
0.0%
85.7%↑
14.3%
$24.88↑
The current price of $24.54 implies that the market is gradually converging to the bid price offered by
Watson to acquire ADRX and this is the reason why all the analysts in the digest group have made an
upward revision to their price targets for the stock. Looking at ADRX’s current price of $24.54, the stock
trades at 47.2X 2006 EPS, above the peer group average of 21X. The Digest group predicts growth to
be 17.8%, so the PEG based on 2006 EPS is 2.6X. This is above the large-cap pharma group average
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of approximately 1.5X. Of the three price targets quoted for ADRX, the lowest is $24.50 (Wachovia) and
the highest is $25 (Citigroup, Lehman). The average target price is $24.88 per share (up from previous
average). The digest group currently bears a neutral view on the stock given its manufacturing issues
with the FDA, its impressive pipeline, and the prospective Watson deal.
One firm (Wachovia) believes that given the announcement of the acquisition by Watson, the ADRX
stock no longer trades on fundamentals.
Potentially Severe Problems
There are none other than those discussed in other section of this report.
Long-Term Growth
ADRX announced plans to restructure its business by divesting the brand unit and focusing on generic
manufacture and distribution. The process may take some time and the brand unit will remain earnings
dilutive until that time. Management stated that with the divesture, the company will refocus on its core
competency in the development of controlled-release and niche generic products. However, ADRX is
now building up a urology sales force in anticipation of the Cardura XL launch. Competitors entering the
markets may act aggressively on pricing to gain share, which would negatively impact ADRX’s business
since it is highly dependent on the two products, Concerta and Biaxin XL. The company met with the
FDA and subsequently delivered a corrective action plan that is still in progress in reference to the
manufacturing issues raised by the FDA. It is difficult to assess to what extent these manufacturing
inefficiencies will impact ADRX’s generic pipeline catalysts as several FDA approvals have been granted
despite the outstanding Form 483s. But currently, analysts are waiting for the resolution of this issue as
they believe it will be instrumental for the future approval of the company’s ANDAs.
The company has what several analysts regard as a less than optimal record of properly capitalizing on
its development of products, citing Wellbutrin and Prilosec as examples. Still, there is time left to profit
from the 150mg Wellbutrin launch, according to analysts. Andrx anticipates approval for several
additional generic OCs to add to its current portfolio of three generics, which will provide its marketing
partner Teva with greater leverage to gain more market share. Andrx would be responsible for marketing
while its potential partners would be responsible for development and manufacture.
Watson Pharmaceuticals has proposed an acquisition of ADRX which may take place in the coming
months but depending on the possible resolution of the manufacturing issues with the FDA. Andrx's
manufacturing, R&D, controlled-release technology, distribution network, and employees, in combination
with Watson's excellent team and capabilities, can create a significant vertically integrated company in
the specialty pharmaceutical industry. Consummation of the merger is subject to the satisfaction of
certain customary conditions including, among others, (i) an approval of the merger by Andrx's
stockholders, (ii) the expiration of the applicable waiting period under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended, and (iii) no material adverse effect having occurred in respect of
Andrx, subject to certain exceptions. Dates for closing the acquisition and for Andrx's stockholders'
meeting to vote on the merger have not yet been determined.
Capital structure/Solvency/Cash flow/Governance/Other
On October 3, 2006 Shire Plc announced that it has bought the rights to use an experimental technology
from privately owned Warren Pharmaceuticals to develop treatments for kidney and genetic disorders.
Shire said it had licensed the worldwide rights to Warren's tissue protective cytokine (TPC) technology for
use in treating non-nervous system diseases. Shire declined to disclose financial terms of the deal.
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On September 12, 2006, ADRX certified that each representation and warranty of the company
contained in the merger agreement, as amended, with Watson Pharmaceuticals is true and correct as of
September 12, 2006. The merger agreement, as amended, provides that in the event that the
representations and warranties made by Andrx in the merger agreement are true and correct on
September 12, 2006, then such representations and warranties will be deemed to be true on all dates
subsequent to September 12, 2006. In addition, in the event that no material adverse effect has occurred
with regard to Andrx or its ability to consummate the merger on September 12, 2006, then if a material
adverse effect were to occur after September 12, 2006, such material adverse effect will not affect the
consummation of the merger. The merger, which remains subject to Federal Trade Commission
approval, is anticipated to close in the fourth quarter of 2006, but not later than November 13, 2006.
One firm (B. of America) believes Watson’s desire to acquire Andrx’s assets has strategic merit, as it
adds to Watson’s pipeline and R&D capabilities both on the branded and generic side. The firm hopes it
will mitigate potential impact from Ferrlecit competition.
Upcoming Events
Date
Event
Comments
2006
2006
2H06
Launch of Lovenox
Launch of Generic Concerta.
Expected trial on Biaxin XL
Delayed due to late filing.
Due to PI granted to Abott
Individual Analyst Opinions
POSITIVE RATINGS (0%)
None
NEUTRAL RATINGS
Buckingham – Neutral: October 3, 2006. INVESTMENT SUMMARY: The firm expects the
Andrx/Watson transaction to close on schedule and expects Watson to benefit from Andrx’s
manufacturing status of Andrx’s pipeline.
Citigroup – Hold ($25): August 10, 2006. INVESTMENT SUMMARY: Although the firm is bullish on
Andrx's pipeline, it is also concerned about the indefinite delay in the approvals for the pipeline products
due to the company's failure to rectify manufacturing deficiencies identified by FDA inspectors.
Lehman – Equal weight ($25): September 20, 2006. INVESTMENT SUMMARY: The firm believes
that one more FDA reinspection would be required before the manufacturing issue can be resolved.
However, the firm is not certain about the timing of the event.
Wachovia – Market perform ($24.50): August 8, 2006. INVESTMENT SUMMARY: With no
substantial regulatory hurdle for the proposed transaction with Watson Pharmaceuticals, and low
prospect of a competing bid, the firm expects ADRX shares to trade near its take-out value of $25.
NEGATIVE RATINGS
Zacks Investment Research
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J.P. Morgan – Under weight: August 14, 2006. INVESTMENT SUMMARY: Given the pending merger
with Watson, the firm does not see meaningful upside to the stock and believes the transaction would
close with the required regulatory approvals.
Appendix-A
Analysts’ EPS, sales by product, and a consensus income statement can be found in the file ADRX.xls.
Copy Editor: Uttara G.
Zacks Investment Research
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