IPCI: FDA Approves First Focalin XR ANDA; Positive Incremental Step Toward Approval and October Launch for IPCI

On 8/15/12, Mylan (MYL, $23.40, Not Rated) received conditional ANDA approval for the 30mg dose of Focalin XR. This marks the first ANDA approval of a generic Focalin XR product and, in our view, may suggest ANDA approvals for the more commercially important 5mg, 10mg, 15mg and 20mg doses is likely in the near term. These four lower doses collectively account for 90% of Focalin XR scripts and are the basis of IPCI’s settlement to launch generics of all four doses as early as October 2012. As a reminder, the 30mg and 40mg doses of Focalin XR were introduced after the initial ANDA filings for the lower doses and were subject to a separate ANDA review process. IPCI is first to file on at least one of the low doses (5mg, 10mg, 15mg or 20mg doses) and has reached a settlement agreement providing for co-exclusive launch along with Teva Pharmaceutical (TEVA, $40.64, Not Rated) in early October 2012, pending FDA clearance. The 30mg dose is subject to a separate settlement agreement and a generic is unlikely to reach the market before 3Q13. There are currently no ANDA approvals for the 5mg, 10mg, 15mg or 20mg doses of Focalin XR. We’d note that the unique double-peak pharmacokinetics of all Focalin XR doses creates a greater level of regulatory complexity than most immediate release products. That FDA was comfortable with MYL’s characterization for the 30mg dose suggests the agency has developed a roadmap for evaluating the double peak, in our view. We view this as an important de-risking event for all pending Focalin XR ANDAs and are optimistic IPCI will win regulatory clearance in the near term. Reiterate Buy rating and $7.00 PT for IPCI based on the expected launch of Focalin XR.

             What’s New? MYL received FDA clearance for its ANDA of the 30mg dose for Focalin XR. This is the first ANDA approval for any dose of Focalin XR and, in our view, is a meaningful de-risking event for all pending ANDAs of Focalin XR. IPCI is first to file on at least one of the low doses (5mg, 10mg, 15mg or 20mg doses) and has reached a settlement agreement providing for co-exclusive launch along with TEVA in early October 2012, pending FDA clearance. Following the MYL approval, we believe FDA clearance of IPCI’s ANDA for the low doses of Focalin XR is now more likely in the near term.

             Attractive Focalin XR Economics to IPCI – Potential to Reach Breakeven: The 5mg, 10,mg, 15mg and 20mg doses of Focalin XR had combined 2010 branded sales of $465M. IPCI has partnered with Par Pharmaceutical (PRX, $49.85, Not Rated) for the launch of Focalin XR. Our forecast calls for Par and IPCI to recognize gross sales of $35M-40M over the initial six months with 75% gross margins and a long term gross margin of 45% once additional competitors enter the market. Our model assumes IPCI recognizing 30% of gross profit as revenue. Based on this forecast we believe the launch of Focalin XR may allow IPCI to approach cash flow breakeven and provide a solid base for future profitability based on approval of additional ANDA filings for sustained release generics.