Watson Pharmaceuticals Inc.‘s (WPI) first quarter 2011 earnings (excluding special items) of 89 cents per share beat the Zacks Consensus Estimate by 3 cents and the year-ago earnings by 8 cents. Earnings were bolstered by higher revenues and reduced cost, resulting from a lower number of third-party product launches in the Distribution segment.
Quarterly Details
Revenues increased 2% to $876.5 million, mainly due to increased generic sales during the quarter. First quarter revenues however missed the Zacks Consensus Estimate of $906 million.
Watson Pharma’s Global Generics segment posted sales of $600.1 million, up 10%. The upside was driven by increased sales of extended-release products and the launch of new products such as Zarah (generic version of Bayer AG’s (BAYRY) Yasmin). International product sales for the division in the reported quarter came in at $108.7 million, down 2% due to low prices of products in key markets.
Gross margin (on an adjusted basis) at the division climbed 160 basis points (bps) to 51.8%, mainly due to increased sales of generic products. Research & development (R&D) expenses rose 29% to $54.4 million. The jump was primarily attributable to the addition of international R&D expenditure and the shutdown of R&D facilities in California and Australia.
New product launches over regular intervals should help drive Watson Pharma’s generics sales. The launches of generic versions of Johnson & Johnson’s (JNJ) Concerta and Pfizer Inc.’s (PFE) Lipitor in the US in 2011 should help boost generic segment revenues.
Watson Pharma’s Global Brands revenues came in at $96.9 million, up 6%. Increased contributions from products like Rapaflo and Androderm and the addition of Crinone aided the performance of the Brands segment.
Gross margin (on an adjusted basis) at the division stood at 81.6% as against 72.9% in the comparable period of 2010. R&D expenses for the segment climbed 15% to $19.9 million. The jump was primarily attributable to the increased investment at Eden Biodesign.
Net revenue for the Distribution segment declined 19% during the quarter to $179.5 million, mainly due to a lower number of third-party product launches. Gross margin (on an adjusted basis) at the division was 17.2%, up from 13.1% in the year-ago quarter, as a result of a lower proportion of chain drug store sales during the quarter.
Outlook for 2011
Watson Pharma expects earning (on an adjusted basis) in the range of $3.95 to $4.20 per share (old guidance: $3.85 - $4.15) on revenues of approximately $4.2 billion in 2011. The current Zacks Consensus Estimate of $4.15 per share lies within the company’s guidance range.
Watson Pharma expects Global Generic segment to post revenues of $2.9 billion to $3.1 billion in 2011. Revenues for the Brands segment is expected to lie in the range of $445 million to $465 million. Distribution segment 2011 revenues are forecast to range from $770 million to $800 million.
Prochieve NDA Filed
Watson Pharma along with partner Columbia Laboratories Inc. (CBRX) recently announced the submission of the New Drug Application (NDA) for Prochieve (progesterone gel) to the US Food and Drug Administration (FDA). The NDA seeks to get the candidate approved for reduction of risk of preterm birth in women with short uterine cervical length in the mid-trimester of pregnancy.
Columbia Labs has requested the regulatory body for a priority review status for Prochieve. If granted, the FDA will review the application within six months, rather than in the standard ten months.
Neutral on Watson Pharma
We currently have a Neutral recommendation on Watson Pharma. We believe that the company’s cost saving initiative and new product launches, both branded and generic, will help drive long-term growth.
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