Par Pharmaceutical Companies Inc. (PRX) posted earnings of 61 cents per share during the fourth quarter of 2010, missing the Zacks Consensus Estimate of 67 cents per share, and the year-ago earnings of 74 cents per share. 2010 earnings of $2.95 per share also missed the Zacks Consensus Estimate of $3.01, but was ahead of the year-ago earnings of $2.93 per share.

Though higher margins boosted earnings, increased selling, general and administrative (SG&A) expenses during the fourth quarter more than undid the good work.

Quarterly revenues of $227.0 million surpassed the Zacks Consensus Estimate of $211 million but were 21.8% below the year-earlier figure of $290.3 million. Annual revenues also dropped 15.4% year over year to $1.01 billion, missing the Zacks Consensus Estimate of $1.15 billion. The decline was primarily due to intense competition for Par Pharma’s generic version of AstraZeneca plc’s (AZN) hypertension treatment, Toprol XL (metoprolol).

Quarterly Highlights

Sales of Par Pharma’s generic version of Toprol XL declined 25.1% sequentially to $73.0 million. Competition was felt across all strengths of the drug leading to a volume and price decline.

Sales of some of Par Pharma’s other generic drugs also dwindled, including Omeprazole sodium bicarbonate capsules (down 67.4%), Meclizine (down 12.9%), Megace ES (down 11.9%) and Nascobal B12 Nasal Spray (down 2.0%), all on a sequential basis.

Among the generics that saw sales climb sequentially were sumatriptan (up 8.7%), Tramadol ER (up 10.9%), and Clonidine (up 11.5%).

Other Details

Despite a decline in revenues, gross profit improved significantly during the quarter, amounting to $95.3 million (41.9% of total revenues), compared with $91.3 million (31.5% of total revenues) in the year-ago period. The launch of generic versions of omeprazole, diazepam, and hydrocodone polistirex and chlorpheniramine polistirex, combined with increased sales of other generic products helped boost gross profit.

Research and development (R&D) expenses dropped to $12.9 million during the fourth quarter, from $19.7 million in the year-ago period. Par Pharma had made a payment for an amendment with MonoSol Rx during the fourth quarter 2009, which benefited year-over-year comparisons.

Selling, general and administrative (SG&A) expenses amounted to $52.1 million, up 21.7% year over year, primarily due to commercialization costs for Oravig and Zuplenz, as well as higher legal fees and severance charges. Both the drugs were launched in the second half of 2010.

Long-Term Outlook

Par Pharma reaffirmed its three-year outlook (ranging from 2011 through 2013) that was announced in January. The company expects to generate cumulative earnings of $10 per share. It further anticipates gross margin to be 50% annually and operating expenses to remain flat at $225 million per year.

Additionally, capital expenditure is expected to amount to $15 million per year over the forthcoming three years.

Our View

We currently have a Neutral recommendation on Par Pharma, which is supported by a Zacks #3 Rank (short-term Hold rating). Even though competition has depleted the Toprol XL franchise sales and affected other generic products, we believe Oravig and Zuplenz will help drive the top line.

Additionally, Par Pharma currently has around 29 Abbreviated New Drug Applications pending approval with the US Food and Drug Administration, 11 of which are expected to be first-to-file opportunities, representing branded sales of about $8.0 billion.

 
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