While the industry is fixated on whether Actavis will save Allergan ($AGN) from a hostile takeover by Valeant ($VRX) or whether Pfizer ($PFE) might be sizing up a run at Actavis, there was a development Thursday that holds huge upside potential for Actavis ($ACT). That was the FDA's decision to reclassify Mallinckrodt's Concerta generic as not making the grade in equivalence.
Actavis makes the authorized generic of the Johnson & Johnson ($JNJ) drug for attention deficient hyperactivity disorder, and so stands in line to recapture an estimated $400 million, or maybe even more, in additional sales. Sterne Agee analyst Shibani Malhotra estimates that for every $100 million in extra sales of Actavis captures, it will add $0.16 to earnings per share, so $0.64 or more based on sales estimates.
"This is really positive for Actavis," Malhotra said by phone from New York today. "This is very fundamental stuff in generic space. A year ago everyone would be obsessing about this. Now they just want to know what Ackman is going to do," she said about Pershing Square hedge fund manager Bill Ackman who is partnered with Valeant Pharmaceuticals in a hostile run at Allergan. Actavis is now reportedly readying a bid that would beat out Valeant for the Botox maker.
Malhotra explained that the absolute upside is affected by a lot of things. The drugmaker was selling an estimated $750 million worth of the drug before the other generics hit in 2012. That caused it to lose market share and pricing leverage. Since then, however, the size of the market has grown. With competing drugs marginalized, it should pick up both market share and pricing power, Malhotra said.
Actavis' good fortune as far as generic Concerta ER is concerned is purely serendipitous. Dublin-based Mallinckrodt disclosed Thursday that the FDA, after testing, and based on new guidelines, decided its knockoff of the J&J drug is "presumed to be therapeutically inequivalent." Mallinckrodt has taken issue with that ruling.
The FDA said in a release Thursday that it has similar concerns with a generic made by Kudco Ireland, but that tests of Actavis' product showed it to be the same as the branded drug. The FDA did say it did not find any "serious safety concerns with these two generic products," and that patients should talk to their doctor before switching out their prescription.
Special Reports: Top 10 generics makers by 2012 revenue - Actavis