Is Par Pharmaceutical Settling for Less?

Barr Pharmaceuticals (NYSE:BRL) has been filing abbreviated New Drug Applications (aNDAs) on patented drugs and using the resulting court cases to break the patents. Competitor Par Pharmecutical (NYSE:PRX) is using a different tactic when it comes to its product line.

Earlier this month, Par settled a lawsuit with Johnson & Johnson (NYSE:JNJ) subsidiary Ortho-McNeil Pharmaceutical about possible patent infringement of Ortho-McNeil's Ultracet. Par began selling generic versions of Ultracet, a pain reliever, in April 2005 and will have to pay back royalties on sales from August 2006 to June 2007. Unfortunately for Par, the agreement also requires that it get out of the market by the middle of November, and the royalty payments will continue until then.

Considering the lopsided settlement, Par's lawyers must have thought that the company was going to lose. The royalty payments agreed to are probably less than the court would have assigned if Par had lost.

Last November, Par and partner Spectrum Pharmaceuticals (NASDAQ:SPPI) also avoided going to court with GlaxoSmithKline (NYSE:GSK) over Glaxo's Imitrex. In that case, the duo fared better in negotiations and as part of the settlement received a license to market the drug during Glaxo's pediatric exclusivity period.

Par has also been able to avoid lawsuits altogether by licensing the right to market the generic drug. Also in November, it reached an agreement with AstraZeneca (NYSE:AZN) to make a generic version of AstraZeneca's TOPROL-XL after Novartis' (NYSE:NVS) generics division launched an unauthorized version. That move doesn't seem to have paid off because Novartis was able to break the patent, and a higher court reaffirmed the decision just last week. Par could have just launched its generic version like Novartis did and not paid AstraZeneca any royalties.

Avoiding court by settling lawsuits and licensing products can be a good way for a generic drugmaker to get to market quicker and save court costs, but Par seems to be a little quick to the negotiating table recently. It's possible Par just got into a couple of bad situations and decided to get out without taking the risk of losing even more in a court judgment. But patent lawyers are the lifeblood of a generic drugmaker, and investors should want them to act as aggressively as possible so that Par can expand its product line.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Johnson & Johnson and GlaxoSmithKline are Income Investor recommendations. The Fool's disclosure policy is rock solid.