Watson Pharmaceuticals Inc.
(WPI) reported fourth quarter earnings of 85 cents per share, well above the Zacks Consensus Estimate of 72 cents and the year ago earnings of 64 cents. Earnings for the full year came in at $3.04, 23% above the year-ago period.
 
While quarterly revenues increased 22% to $785.7 million, full year revenues increased 10% to $2.8 billion. Results include Arrow Group numbers following the completion of the acquisition on December 2, 2009.
 
Performance by Segments
 
Watson’s Generic Product segment posted sales of $467.3 million, up 27%. Full year sales increased 13.2% to $1.67 billion.
 
The increase in sales was driven by contributions from new products like the generic version of metoprolol succinate extended-release, higher sales of the generic version of AstraZeneca’s (AZN) Toprol XL (potassium chloride extended-release capsules), and the Arrow acquisition. This was partially offset by lower sales from omeprazole 40mg.
 
Watson currently has 100 abbreviated new drug applications (ANDAs) pending approval with the US Food and Drug Administration (FDA). New product launches over regular intervals should help drive the generics business.
 
Watson expects generic segment sales in the range of $2.2−$2.4 billion in 2010.
 
Brand Product segment revenues for the quarter increased 4.6% to $121 million. Other revenues in the Brand segment increased $5.7 million to $19.2 million, thanks to higher revenue from the company’s promotion of AndroGel and Femring.
 
Meanwhile, Global Brand Product sales declined slightly from the year-ago period mainly due to lower sales of Ferrlecit and INFed. Full year Global Brand Product sales also declined 1% to $393.7 million due to lower Ferrlecit and INFeD sales, which was partially offset by contributions from new products, Rapaflo and Gelnique.
 
Watson expects this segment to contribute sales in the range of $440−$480 million in 2010. The approval of the six-month formulation of Trelstar, potentially in the first half of 2010, should help boost Brand segment revenues.
 
Distribution segment net revenue increased 22% to $197.4 million in the quarter, mainly due to sales of generic versions of Valtrex and Prevacid and the re-launch of generic Pulmicort.
 
Full year Distribution segment revenues increased 9.5% to $663.8 million, mainly due to sales of new generic and brand products. Distribution segment revenues are expected to increase to $670−$740 million in 2010.
 
2010 Guidance Maintained
 
Watson maintained its previously issued revenue and earnings guidance. The company expects to generate cash EPS of $3.05−$3.30 on revenues of approximately $3.5 billion. The current Zacks Consensus Estimate for 2010 is $3.04.
 
While selling, general and administrative expenses are expected in the range of $630−$680 million, the company expects to spend $240−$260 million on research and development.
 
Our Recommendation
 
We currently have a Neutral recommendation on Watson. We believe that the company’s cost-savings initiative and new product launches, both brand and generic, will help drive growth.
 
We also view the company’s acquisition of Arrow as a smart strategic move. This acquisition should help boost Watson’s product portfolio and expand its footprint in ex-US territories. However, integration risks remain and competition in both the branded and generic market remain fierce.

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