We recently initiated coverage on Watson Pharmaceuticals, Inc. (WPI) with a “Neutral” recommendation and a target price of $42. The company enjoys a strong position in the generics market. We believe the company’s strategy of developing generics that are difficult to formulate or manufacture will help strengthen its position in the market. Going forward, increasing awareness about generics, initiatives taken by various government and private agencies encouraging the use of low-cost generics, an aging population and a corresponding increase in healthcare costs, as well as the large number of branded products losing patent protection over the coming years, should lead to continued expansion of the generics market.
We also believe that Watson’s recent acquisition of Arrow will help the company expand its footprint in ex-U.S. territories, and will also boost its product offerings and pipeline. Importantly, Arrow has exclusive US rights to launch the authorized generic version of Pfizer’s (PFE) Lipitor in November 2011, which should be a major contributor to the top-line. The acquisition will also provide Watson with operational expertise and manufacturing capability needed to support its long-term investment in bio-generics.
Besides the generics business, Watson has a significant and growing branded pharmaceutical business. The company’s focus on growing its urology and female healthcare product portfolio should bode well for long-term growth.
However, we note that Watson operates in the highly competitive pharmaceutical industry where it faces competition for both its brand and generic products. The generics market is highly crowded and Watson faces competition from players like Teva(TEVA), Mylan (MYL), Dr. Reddy’s (RDY), Sandoz and Par Pharma (PRX) among others.
Therefore, it is very important for generic companies to develop and introduce new products in a timely and cost-effective manner to maintain revenues and gross profit. Moreover, acquisition-related integration risks remain. Any hiccups in the integration process could affect the company’s performance and have an adverse impact on its stock price.
Watson’s earnings performance has been good, though its long-term earnings growth outlook lags that of many of its peers. The Zacks Consensus Estimate for 2009 is $2.59, an increase of 27.6% from 2008. This is slightly above the company’s 2009 earnings guidance of $2.50 – $2.58. Estimates appear to be modestly up, with one of the 16 analysts covering the stock raising estimates in the last 30 days. We believe that Watson’s cost savings initiative and new product launches, both brand and generic, will help drive growth.
In terms of earnings surprises, Watson had a modest positive surprise in the third quarter and a 7% positive surprise in the second quarter of 2009, with the four-quarter average of positive 8%. This means that, on an average, Watson has come ahead of the Zacks Consensus by 8% over the last four quarters. For the upcoming quarter, the Zacks Consensus Estimate is 73 cents, with a potential positive surprise of 6%.
Read the full analyst report on “WPI”
Read the full analyst report on “TEVA”
Read the full analyst report on “MYL”
Read the full analyst report on “RDY”
Read the full analyst report on “PRX”
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