Patent Pain Belts Barr

The drug stock sinks 9% as generic competition crowds in.
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Shares of

Barr Pharmaceuticals

(BRL)

dropped 9% in heavy trading Friday after the company said its oral contraceptive Seasonale would probably lose patent protection in September.

Although the company expressed disappointment, Barr has been

hinting at its concerns to Wall Street. The company is pressing ahead with Seasonique, a follow-up oral contraceptive that will have greater patent protection. Last week, Barr predicted the Food and Drug Administration would approve the product this quarter.

Last month, Barr withdrew its application to the FDA for Seasonale Lo, a lower-dose version of Seasonale, saying it would probably need to conduct another expensive, time-consuming clinical trial to secure FDA approval. Both Seasonale and Seasonique enable women to reduce menstrual periods to quarterly from monthly.

By late morning, the stock was down $4.61 to $49.03. The price fell as low as $47.69. Trading volume of 1.7 million shares had already topped the average daily trade for the past three months of 1.22 million.

Barr said Friday it had received a "non-final rejection" notice from the Patent and Trademark Office relating to its effort to have one Seasonale patent reissued. This notice allows a company three months to respond to the patent office, which would then review the company's comments. Barr said it would be "unlikely, given the timing, that the patent in question could be reissued" prior to the Sept. 5 patent expiration date.

"While we are disappointed in the determination by the

patent office, we intend to fully review all options available to protect our patentable invention, and will respond to the non-final rejection as quickly as possible," said Bruce L. Downey, Barr's chairman and CEO.

Barr asked the patent office to reissue one Seasonale patent in July 2004, a month after

Watson Pharmaceuticals

(WPI)

had filed a patent challenge, saying the Seasonale patent is invalid and unenforceable. A few days ago, Watson reported it had received tentative approval from the FDA for Seasonale, pending expiration of the patent.

Although there may be some Hail Mary attempts to extend the Seasonale patent, Elliot Wilbur, of CIBC World Markets, says he views a successful defense as "unlikely." The longer Barr can keep the Seasonale patent, the more time it will have to switch customers to Seasonique, thus easing the reduction in Seasonale sales to generic competition.

In a Friday research note, Wilbur tells clients that he still has a sector outperform rating on Barr, even though losing the Seasonale patent could cost Barr $30 million to $35 million in sales or 15 cents to 20 cents per share for the fiscal year ending June 30, 2007. He doesn't own shares; his firm says it expects to receive or seek investment banking-related compensation from Barr in the next three months.

Although Barr specializes in generic drugs, it has a number of higher-margin brand-name products.

For the quarter ended March 31, Seasonale produced $27 million in sales, up 12% from the same period last year. Seasonale accounted for 29% of brand-name drug sales and 8% of total revenue for the quarter.