Watson Pharmaceuticals Inc.‘s (WPI) fourth quarter 2010 earnings (excluding special items) of $0.93 per share were in line with the Zacks Consensus Estimate and $0.08 above the year-ago earnings. Earnings, however, dropped 70.6% to $0.15 per share on a reported basis (including special items) because of legal charges.
Revenues increased 21.2% to $952.7 million, mainly due to the strong performance of the generics business. Fourth quarter revenues surpassed the Zacks Consensus Estimate of $921 million.
Performance by Segment for the Quarter
Watson Pharma’s Global Generics segment posted sales of $646 million, up 38.2%. The increase in sales was driven by contribution from new international markets, the launch of new products such as metoprolol succinate extended-release, Zarah (generic version of Bayer’s (BAYRY) Yasmin) and diltiazem extended-release. International product sales for the division in the reported quarter came in at $148.6 million.
Gross margin (on an adjusted basis) for the division climbed 3.9% to 50.6%. Research & development (R&D) expenses climbed 24% to $53.7 million. The jump was primarily attributable to the addition of international R&D expenditure.
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.
Global Brands revenues continued to decline, coming in at $103.3 million, down 14.6%. Despite increased contributions from products like Rapaflo, Gelnique, Androderm, the loss of Ferrlecit in December 2009 continued to impact the performance of the Brands segment.
Gross margin (on an adjusted basis) for the division stood at 80.3% as against 81.5% in the comparable period of 2009. R&D expenses for the segment climbed 165% to $45.3 million. The jump was primarily attributable to the commencement of a late-stage study of a contraceptive patch, the addition of Eden Biodesign and milestone payments for pipeline candidates at Watson Pharma.
Net revenue for the Distribution segment increased 3% to $203.4 million in the quarter, mainly due to the sales of generic versions of Shire’s (SHPGY) Adderall XR and Pfizer’s Aricept and Effexor XR. Gross margin (on an adjusted basis) for the division was 13.7% as against 14.6% in the year ago quarter. Higher inventory reserves were primarily responsible for the decline.
Annual Results
For full year 2010, Watson Pharma earned $3.42 per share (up 12.5%) on revenues of $3.6 billion (up 28%). The Global Generics, Global Brands and Distribution divisions contributed $2.3 billion (up 40%), $397.8 million (down 13.7%) and $830.7 million (up 25.1%) respectively to the net revenues of 2010. The Zacks Consensus Estimate for 2010 was $3.42 per share on revenues of $3.5 billion.
2011 Projection
Apart from disclosing financial results, Watson Pharma also provided guidance for 2011. The company expects to earn (on an adjusted basis) in the range of $3.85 to $4.15 per share on revenues of approximately $4.2 billion in 2011. The Zacks Consensus Estimate for 2011 is currently $4.11 per share on revenues of $4.2 billion.
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. Competition in both the branded and generic market also remains fierce.
BAYER A G -ADR (BAYRY): Free Stock Analysis Report
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WATSON PHARMA (WPI): Free Stock Analysis Report
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