Watson CEO Seeks Brand-Drug Profits in Shift From Copycats

Watson Pharmaceuticals Inc. (WPI) Chief Executive Officer Paul Bisaro is looking to acquire brand-name drug assets and make a future “‘transformational” purchase as he reshapes the generic-drug maker.

Bisaro, 51, said in an interview he wants to use an estimated $6 billion the company will have available for acquisitions to invest in brand-name medicines with the potential for greater growth and consistent returns. Watson will consider drugs for gender-specific conditions as it builds toward a “big brand deal” to supplement its generic lines.

“Everything we need to be a branded pharma company we have, except for the sales force,” the Watson executive said. “And we can create that.”

While medicines with $48 billion in annual sales face generic rivals for the first time in 2012, fattening revenue for generic-drug makers, the figure will fall to an annual average of $24 billion the next three years, according to IMS Health Inc., a Danbury, Connecticut-based researcher. Watson’s strategy resembles actions by Teva Pharmaceutical Industries Ltd. (TEVA) as generic-drug makers, which profit by copying the medicines of brand-name pharmaceutical companies, start to imitate the business models of those companies too.

“It’s a real blurring of the lines,” said Jeff Jonas, an analyst with Gabelli & Co., in Rye, New York. By 2015, such drugmakers may end up “looking a lot more like a brand than a generic,” Jonas said in a telephone interview. The firm has a “buy” rating on Parsippany, New Jersey-based Watson, the world’s fourth-largest company whose main business is generics.

Five-Year Performance

Watson rose less than 1 percent to $58.25 at the close of New York trading. The shares have more than doubled in the last five years, compared with a 7 percent decline in the Standard & Poor’s 500 stock index and a 30 percent gain for Teva. Of 25 Watson analysts tracked by Bloomberg, 15 recommend buying the shares and 10 say “hold.”

Teva, based in Petach Tikva, Israel, the world’s largest generic-drug maker, is one of the first to find success with exclusive medicines. The company’s biggest winner has been Copaxone, a treatment Teva developed for multiple sclerosis. The product surged to $3.32 billion in sales in 2010, from $247 million a decade earlier, according to data compiled by Bloomberg.

Faced with the prospect of generic competition for Copaxone beginning in May 2014, Teva acquired Cephalon Inc. in October to gain drugs -- such as Fentura pills to treat cancer pain -- that still benefit from patent protection. The transaction was valued at $6.8 billion, including assumed debt.

Market Exclusivity

The appeal of the branded-drug business comes from the returns it offers on exclusive products. In the U.S. companies that invent new drugs get a combination of patent protection and exclusive sales rights when they bring the drugs to market. After those protections run out, the generic drug makers can file with regulators to sell copycat versions without paying royalties to the inventors.

Patent and exclusivity periods vary by country, and in the U.S. can be extended if the drugmaker finds new uses for their product. Brand-name medicines enjoy about 12 years on the market before copycat versions become available, according to study published in 2007 in Managerial & Decision Economics.

Generic drug companies are rewarded for being the first to start the process of making a copycat version. The first company to successfully challenge the patent protection gets 180 days of exclusive rights to sell the generic version, typically at a price not much lower than the brand.

Price Decline

Once the first generic company loses its head start, others can enter the market and the price falls further. “You know there’s going to be a certain amount of price decline and unit decline” in the generics business, Bisaro said.

Watson had $2.19 billion in revenue related to generics in the first nine months of 2011, dwarfing its $320.1 million from global brands, according to a company filing.

That may change, for Watson has the pieces in place to become more like traditional pharmaceutical companies, such as Pfizer Inc. (PFE) and Roche Holding AG (ROG), Bisaro said.

He’s aware of the perils, though. “Generic companies in the past, their mistake has been to run their business like they run their generics model, which is pretty opportunistic,” Bisaro said. “With brands, you have to pass on those things that, even though you like the idea, if it’s not in your wheelhouse and you don’t have the sales force, you probably ought not to spend the money on it.”

Acquisition History

Since Bisaro took over as CEO and president in September 2007, Watson has completed or announced nine acquisitions, with a total value of $2.84 billion, according to data compiled by Bloomberg. The biggest was the $1.75 billion purchase of Arrow Group, a generic-drug maker, in 2009. Watson paid AU$375 million ($405 million) last month for Ascent Pharmahealth Ltd., an Australian maker of copycat pills.

In July 2010, Watson bolstered its position in brands by acquiring Columbia Laboratories Inc.’s progesterone assets.

Watson will limit its focus to a few clinical areas, according to Bisaro.

“We have a lot of goodwill built up in the urology space and we’re getting there in the women’s health space,” he said. He might also see opportunities in oncology, such as bladder cancer or malignancies specific to women.

‘Stronger Position’

With more growth in coming years, Watson may be “in a much stronger position to buy a bigger specialty-brand company,” Bisaro said. “That would be a very nice scenario if it worked out that way.”

For Watson, it’s catch-up time, said Michael Faerm, an analyst with Credit Suisse in New York. He rates Watson’s shares “outperform.”

Teva “has been doing this for quite some time,” Faerm said in a telephone interview. About a third of Teva’s revenue now comes from branded drugs, he said.

The company has 20 medicines in the last of three phases of testing before regulatory approval, including products to treat pain, cancer and auto-immune disease, according to data compiled by Bloomberg.

Copaxone, the multiple sclerosis drug, accounted for 24 percent of sales in the 2011 third-quarter, according to the data. The product will see revenue peak this year, William Marth, president of Teva’s Americas unit, said at a conference in San Francisco in January.

Teva has tapped Jeremy Levin to become CEO, starting in May. He spent four years doing business development at Bristol- Myers Squibb Co., and held a similar job at Novartis AG before that. Levin may end up competing with his former employers for deals, according to Faerm, the Credit Suisse analyst.

Levin “brings important strengths to the company on the branded side -- the most obvious being deal-making,” Faerm said.

Teva will be a balanced company whose only bias is toward the best growth opportunities, Marth said. Brands will play an important role, as will stepping up sales in emerging markets such as Brazil, Russia, India and China, he said.

“To me, that’s the market, that’s where we’re going,” Marth said.

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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