Watson Pharmaceuticals, Inc. (WPI) recently reiterated its 2010 outlook based on a preliminary review of results. The company said that it expects adjusted cash earnings at or slightly above the midpoint of its guidance of $3.37 – $3.45 per share. Revenues are expected to grow more than 25% to $3.5 billion.
While the Zacks Consensus earnings Estimate currently stands at $3.41 per share, the Zacks Consensus revenue Estimate is above the company’s guidance at $4.1 billion.
Watson Pharma attributed growth in 2010 to the strong performance of its generic extended-release and oral contraceptive franchises in the US, and the Anda distribution business.
The company enjoys a strong position in the generic pharmaceutical market. We believe that the company’s strategy of developing products that are difficult to formulate/manufacture or will complement/broaden its existing product lines will help strengthen its position in the market.
At the end of the third quarter of 2010, Watson Pharma had more than 115 abbreviated new drug applications (ANDAs) pending approval with the US Food and Drug Administration (FDA). Several of the Paragraph IV challenges in the US are first-to-file or shared exclusivity opportunities. New product launches over regular intervals should help drive the generics business. The launches of generic versions of Johnson & Johnson’s (JNJ) Concerta and Pfizer’s (PFE) Lipitor in the US in 2011 should help boost generic segment revenues.
We expect Watson Pharma to provide its 2011 outlook at the upcoming Investor Day meeting on Jan 21. Final results for 2010 will be released on Feb 15.
Neutral on Watson Pharma
We currently have a Neutral recommendation on Watson Pharma, which is supported by a Zacks #3 Rank (short-term “Hold” rating). We believe that the company’s cost saving initiative and new product launches, both branded and generic, will help drive growth. We also view the company’s acquisition of Arrow as a smart strategic move. This acquisition has helped boost Watson Pharma’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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