Plant Revamp Has Watson Pharmaceuticals Late for an Important FDA Date

A potentially pivotal plant inspection could come as early as this month.
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Watson Pharmaceuticals

(WPI)

is about to find out if it can loosen that crick in its neck.

A long-awaited and potentially pivotal

Food and Drug Administration

inspection of Watson's troubled Corona, Calif., plant could come as early as this month.

Without FDA clearance of the plant, the generic drug company can neither manufacture a major product, the hypertension drug

Dilacor XR

, nor win approval for the three new generic drugs that it expects to develop this year. Until these problems are cleared up, Watson will likely remain a target of short-sellers and continue to face the selling pressure that has knocked more than a third off its stock this year.

The inspection has been pushed back as Watson prolonged a routine shutdown of the plant which, in recent years, has garnered FDA attention over quality-control issues. The company hasn't discussed the delay in resumption of full production with Wall Street, and a short-seller thinks there inevitably will be some negative financial impact. The company, based in Corona, says that's not so.

Michael Boxer, Watson's chief financial officer, says that for years Watson has routinely shut down its facilities in the first part of July and the end of December. "As all pharmaceutical companies do, we shut down for normal equipment and facility maintenance," says Boxer. But this year, as it put in place a new quality-control program, Watson didn't resume full production as quickly as expected. A company spokeswoman adds, "As of today, we have normal production" in the facility.

Boxer says the routine shutdown and the delay "didn't affect our ability to supply customers." He adds that "our customers never have seen anything related to the lack of manufactured products. We have had sufficient inventory."

And while Boxer says Watson's earnings won't be hurt by the delay in returning to normal production, some short-sellers think otherwise. The CFO says Watson continues to be comfortable with Wall Street's third-quarter earnings estimate of 44 to 45 cents a share and its full-year target of $1.75 a share.

But at least one short-seller isn't convinced. "That's classic Boxer," the short-seller contends. "He's a wordsmith. By definition, what you've told me is not routine."

This short-seller says that while full production was delayed, operating costs must have continued, meaning that the outage would have some financial impact, perhaps squeezing margins, for instance. "They are in a mad scramble to save face," says the hedge fund manager.

Watson's stock, down about 43% this year, has suffered as the company has become mired in the FDA probe. But Watson's shares rose around 10% last month as investors came to see the problems as manageable. Wednesday, the stock rose 9/16, or 1.6%, to settle at 36 7/16.

Around July 4, the company shuttered the Corona facility, the subject of an ongoing FDA probe of production-quality problems, for a week. It subsequently resumed partial production but didn't plan to resume full production until Wednesday, according to FDA documents made available under the

Freedom of Information Act

and furnished to

TSC

by a firm that is short Watson. The company verified that a pair of meetings mentioned in the documents with agency officials took place. FDA officials didn't immediately return calls seeking comment.

Originally, the production shutdown was to last only a few weeks, but it took about eight weeks to resume normal production. It typically "takes time to phase into getting back up to normal production standards," Boxer says. Boxer explains the delay by saying that this year, Watson "took advantage" of the shutdown to further implement a new quality-control program. The program was put in place in response to numerous warning letters from the FDA concerning production problems.

Watson believes the FDA will inspect the Corona plant this month. The FDA originally wanted to inspect the plant in August, but the company asked the agency to come later, Boxer says.

If the inspection goes well, Watson expects to be able to produce a key hypertension drug, Dilacor, at the plant. Watson also expects to have "up to three" generic drugs approved by the agency this year, says Boxer.

The two FDA documents reveal an agency that is closely involved in the ongoing effort to clear up Watson's problems. Two FDA documents -- the minutes of a July 21 meeting of FDA officials and Watson officers to discuss the quality-control probe and notes of an Aug. 9 followup telephone conversation -- discuss the shutdown and the delay in resuming full production.

The minutes of the earlier meeting report that Greg Sam, Watson's senior director of corporate quality assurance, "said the shutdown has been longer than anticipated because the teams are working on the Corrective Action Plan," the program Watson is using to remedy problems at the facility.

In another passage, the minutes read that on July 23 an FDA consumer safety officer, Caryn Everly, "called Greg Sam to confirm what he meant about the firm shutting down. He said the firm shut down for a week around the 4th of July holiday and has not resumed full production yet. He said they are performing packaging operations and producing full production batches in preparation for validation. He said the firm would phase in to full production within the next few weeks."

The later document suggests the shutdown lasted longer than Watson anticipated. It says that on Aug. 9, Sam told the FDA's Everly that "the firm would resume full production by September 1, 1999 and would be ready for a followup inspection after the Labor Day Holiday." Everly noted that Sam "asked if I could notify him prior to the inspection. I told him that I may not be able to tell him the exact date, and he understood."

The company awaits the FDA inspection so that it can begin producing Dilacor. The drug is being produced by a unit of

Rhone Poulenc Rorer

of France, but Watson is trying to get its facility approved to produce the drug. The company had wanted to begin producing Dilacor, which produced $78 million in revenue for Watson in 1998, by late last year. Watson's total revenue for the year ended Dec. 31, 1998, was $556 million.

The July 23 letter says that the FDA's director of domestic investigations, James Kozick, "verified that approval has not yet been given for the site transfer on Dilacor. Ron Lapre and Rob Fusten

two Watson officials agreed that Dilacor was not yet approved for manufacture in Corona."