Watson Remains Neutral - Analyst Blog

We recently reaffirmed our Neutral stance on Watson Pharmaceuticals Inc. (WPI) following the release of fourth quarter and fiscal year 2010 financial results. Quarterly earnings of 93 cents per share were in line with the Zacks Consensus Estimate and 8 cents above the year-ago earnings.

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.

For full year 2010, Watson Pharma earned $3.42 per share (up 12.5%) on revenues of $3.6 billion (up 28%). The Zacks Consensus Estimate for 2010 was $3.42 per share on revenues of $3.5 billion.

We believe that the company’s cost saving initiative and new product launches, both branded and generic, will help drive growth. We have raised our earnings estimate for 2011, based on the fourth quarter and annual results. Our 2011 earnings expectation of $4.12 lies within the guidance range of $3.85 to $4.15 per share, on revenues of about $4.2 billion.

Watson Pharma enjoys a strong position in the generic pharmaceutical market. The company is a front-runner in the development, manufacture and sale of generic pharmaceutical products.

We believe Watson Pharma’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 2010, Watson Pharma had more than 120 abbreviated new drug applications (ANDAs) pending approval with the US Food and Drug Administration (FDA).

These factors, together with an aging population and a corresponding increase in healthcare costs, as well as the large number of branded products losing patent protection over the coming years, should lead to continued expansion of the generics market. The generic business should also benefit from the US healthcare reform under which more people will have access to prescription drug benefits.

In addition to the generics business, Watson Pharma has a significant and growing branded pharmaceutical business. The company’s branded product portfolio consists of 30 product families including Androderm, INFeD, Oxytrol and Trelstar among others. Three new products, Rapaflo, Gelnique and ella should contribute nicely to revenues.

Meanwhile, Watson Pharma’s focus on growing its urology and female healthcare product portfolio should bode well for long-term growth. Moreover, Watson Pharma received approval for a new oral contraceptive in December 2010, which should help drive revenues.The drug’s launch is planned for the second quarter of 2011. The product, which was licensed from Warner Chilcott (WCRX), is a chewable 25-microgram ethinyl estradiol product with a 24/4 dosing regimen.

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. Although we are positive on the company’s acquisition of Arrow, integration risks remain. Any hiccups in the integration process could affect the company’s performance and have an adverse impact on its stock price.

Further, the pharmaceutical industry is intensely competitive. The generic market is highly crowded and the company faces competition from players like Teva Pharmaceutical Industries Ltd. (TEVA), Mylan, Inc. (MYL), Dr. Reddy’s Laboratories (RDY), Mallinckrodt Pharmaceuticals Generics (a subsidiary of Covidien AG), Novartis AG (NVS) and Par Pharmaceutical Co. Inc. (PRX) among others. In the Distribution business, Watson Pharma competes with large wholesalers and other distributors of pharmaceuticals, like McKesson Corporation (MCK), AmerisourceBergen Corporation (ABC) and Cardinal Health, Inc. (CAH), which distribute both brand and generic pharmaceutical products to their customers.

Watson Remains Neutral – Analyst Blog

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