Watson Pharmaceuticals Inc‘s (WPI) third quarter earnings (excluding special items) of $0.85 per share are in line with the Zacks Consensus Estimate but $0.07 above the year-ago earnings. Earnings, however, drooped 61% to $0.21 per share on a reported basis (including special items) because of legal charges.
Revenues increased 33.3% to $882.4 million, mainly due to the strong performance of the generics business. Third quarter revenues surpassed the Zacks Consensus Estimate of $876 million.
Watson Pharma’s Generic Product segment posted sales of $577.6 million, up 45%. The increase in sales was driven by contribution from new international markets, the launch of new dosage strengths (100 mg and 200 mg) of Watson Pharma’s generic version of AstraZeneca‘s (AZN) Toprol ER and higher sales of oral contraceptives. International product sales slipped marginally to $102.2 million mainly because of seasonality and pricing pressure.
Gross margin (on an adjusted basis) for the division came in flat at 50.3%. Research & development (R&D) expenses climbed 46% to $54.1 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. Watson Pharma expects Generic segment sales to be approximately $2.3 billion in 2010.
Global Brands revenues continued to decline, coming in at $99.7 million, down 11.5%. Despite increased contributions from products like Rapaflo, Gelnique, Androderm, the loss of Ferrlecit in Dec 2009 continued to impact the performance of the Brands segment. Watson Pharma expects the Brand segment sales to come in at approximately $400 million in 2010.
Gross margin (on an adjusted basis) for the division stood at 80.1% as against 81.6% in the comparable period of 2009. R&D expenses for the segment climbed 45.6% to $21.7 million. The jump was primarily attributable to the addition of Eden Biodesign and milestone payments for pipeline candidates.
Net revenue for the Distribution segment increased 35.5% to $205.1 million in the quarter, mainly due to the third-party sales of the recently launched generic Effexor XR as well as contributions from new products. Gross margin (on an adjusted basis) for the division was flat at 14.8%. Distribution segment revenues are expected around $825 million in 2010.
2010 Guidance
Apart from disclosing earnings results, Watson Pharma also provided guidance for 2010. The company narrowed its earnings guidance for the year while maintaining the revenue projection. Watson Pharma raised the lower end of its cash EPS guidance by $0.07 and now expects to generate cash an EPS of $3.37 – $3.45 on revenues of $3.50 billion (old guidance: $3.30 – $3.45 on revenues of approximately $3.50 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 Watson Pharma’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 Watson Pharma expand its footprint in ex-US territories, especially in Australia, New Zealand, Brazil, Scandinavia, Germany, Central and Eastern Europe, Turkey, Japan and South Africa. It has also boosted Watson Pharma’s product offerings and pipeline. However, we remain concerned about integration risks and fierce competition in both the branded and generic markets.
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