Watson Pharmaceuticals Inc.‘s (WPI) fourth quarter 2011 earnings (excluding special items) of $1.77 per share surpassed the Zacks Consensus Estimate by a couple of cents and the year-ago earnings by 84 cents. The 2011 earnings of $4.77 per share also beat the Zacks Consensus Estimate of $4.76 and the year-ago earnings of $3.42 per share.
Higher revenues and lower research and development (R&D) expenses helped boost earnings in both fourth quarter and full year 2011.
Revenues for the reported quarter came in at $1.54 billion, significantly above the year-ago figure of $952.7 million. Annual revenues totaled $4.58 billion, compared with the year-ago figure of $3.57 billion. Both figures beat the Zacks Consensus Estimate of $1.52 billion and $4.22 billion, respectively. Revenues climbed mainly due to increased generic and branded drug sales.
Full year 2011 earnings and revenue figures were above the Watson Pharma’s earlier issued guidance. The company had projected 2011 earnings within the range of $4.55 – $4.65 on revenues of $4.5 billion.
Quarterly Details
Watson Pharma reports revenues under three segments – Global Generics, Global Brands and Distribution segment.
Global Generics
The company’s Global Generics segment posted sales of $1.16 billion, up 81%. The upside was driven by the launch of a generic version of Pfizer‘s (PFE) cholesterol drug, Lipitor in the fourth quarter, and continued uptake of the generic version of Johnson & Johnson‘s (JNJ) attention deficit hyperactivity disorder (ADHD) treatment, Concerta (launched in May 2011).
International product sales for the division came in at $151.9 million, up 23%, driven by the acquisition of Specifar Pharmaceuticals in May 2011.
Gross margin (on an adjusted basis) for the segment declined 680 basis points (bps) to 43.8% from the year-ago quarter. Results were negatively impacted by the sale of authorized generic versions of Concerta and Lipitor, which generated lower margins. R&D expenses jumped 12% to $60.3 million, primarily due to an increase in international R&D investment, resulting from the addition of Specifar Pharma, and higher clinical development costs. Selling and marketing (S&M) expenses amounted to $42.5 million, reflecting an increase of 37%.
Global Brands
Watson Pharma’s Global Brands revenue came in at $120.9 million, up 17%. Increased contributions from products like Rapaflo, Crinone and new product launches (Generess Fe) aided the performance of the segment.
The segment’s gross margin (on an adjusted basis) was 78.4%, down from 80.3% in the comparable period of 2010. R&D expenses for the segment declined 85% to $6.9 million, primarily due to reduced revaluation of contingent liabilities. S&M expenses for the quarter went up 31% to $46.5 million, owing to sales force expansion in the US and Canada.
Distribution segment
Net revenue for the Distribution segment increased 24% during the quarter to $251.4 million, due to new third-party product launches. This segment consists of only third-party product sales. We note that this segment’s revenues have been declining on a yearly basis for the past few quarters. This is the first quarter in 2011 in which the Distribution segment recorded an upside in sales.
The segment’s gross margin (on an adjusted basis) was 14.6%, up from 13.7% in the year-ago quarter. S&M expenses increased 22% to $20.8 million.
Guidance for 2012
For 2012, the company expects earnings (on an adjusted basis) in the range of $5.50 to $5.80 per share on revenues of approximately $5.4 billion. The current Zacks Consensus Estimate of $5.58 per share lies within the company’s guidance range.
Watson Pharma expects the Global Generic segment to post revenues of about $3.9 – $4.1 billion in 2012. Brand segment revenue is expected in the range of $500 – $525 million. Distribution segment revenue is expected to come in at about $850 – $900 million.
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