We continue to have an Outperform recommendation on
Watson Pharmaceuticals, Inc. (WPI), with a target
price of $79.00, following the release of second quarter 2011
results.
Watson Pharma’s second quarter earnings of $1.01 per share
(excluding special items) outpaced the Zacks Consensus Estimate by
a penny and the year-ago earnings by 18 cents. Earnings were
bolstered by higher revenues.
Revenues for the quarter climbed 24% to $1.08 billion, beating
the Zacks Consensus Estimate of $992 million. Revenues went up
mainly due to increased generic and branded drug sales. (Read our
full coverage on earnings at: Watson Ups View on Strong
Results)
Following the better-than-expected second quarter results,
Watson Pharma increased its 2011 earning guidance range to
$4.25-$4.50 per share from $3.95-$4.20.
We note that the company enjoys a strong position in the generic
pharmaceutical 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). 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. Sales should benefit from the launch of
generic versions of Micro-K, Cardizem LA, Toprol XL, Seasonique and
Concerta, potential approval and launch of generic versions of
Xopenex (2012), and Loestrin 24 (2014) among others, and increased
sales of oral contraceptives (OCs). Watson Pharma currently has
about 30 oral contraceptive formulations in its portfolio.
In addition to the generics business, the company has a
significant and growing branded pharmaceutical business. Watson
Pharma’s branded product portfolio consists of 30 product families
including Androderm, INFeD, Oxytrol and Trelstar among others.
Meanwhile, the company’s focus on growing its urology and female
healthcare product portfolio should bode well for long-term growth.
The recent launch of three new products, Rapaflo, Gelnique and
ella, should help boost revenues.
Moreover, Watson Pharma launched a new oral contraceptive,
Generess Fe, in May 2011, which should also help drive revenues.
The product, which was licensed from Warner Chilcott
plc (WCRX), is a chewable 25-microgram ethinyl estradiol
product with a 24/4 dosing regimen.
Moreover, in 2008, Watson Pharma announced its intention to
reduce its cost structure through its Global Supply Chain
Initiative, which includes the planned closure of manufacturing
facilities in Carmel, New York, its distribution center in
Brewster, New York and the transition of manufacturing to its
low-cost manufacturing locations in India and within US.
The company has achieved significant savings from the global
supply chain initiative in 2008 and 2009. In its efforts to
continue to streamline operations, increase productivity and reduce
material costs, the company announced additional cost saving
measures in the second quarter of 2010. These involved the closure
of a manufacturing facility in Canada and certain R&D
activities in Canada and Australia.
Further, Watson Pharma has been quite active on the acquisitions
front, as it completed two major acquisitions in the span of two
years. In December 2009, the company acquired privately held Arrow
Group for cash, stock and certain contingent consideration.
This acquisition has helped Watson Pharma expand its footprint
in ex-US territories, especially in countries like Australia, New
Zealand, Brazil, Scandinavia, Germany, Central and Eastern Europe,
Turkey, Japan and South Africa. Importantly, Arrow has exclusive US
rights to launch the authorized generic version of Pfizer
Inc.’s (PFE) Lipitor in November 2011, which should be a
major contributor to the top-line.
Moreover, in May 2011, Watson Pharma acquired Greece-based
generic company, Specifar Pharmaceuticals SA, for 400 million ($562
million) in cash. We believe that this acquisition will help the
company to enhance its commercial presence in key European markets
and strengthen its foothold in the 6 billion Greek pharmaceutical
market, which presently has a generic utilization rate of 17%, one
of the lowest in the European Union (EU). Through this acquisition,
Watson Pharma acquired the rights to market the generic version of
AstraZeneca plc’s (AZN) gastroesophageal reflux
disease drug, Nexium (esomeprazole) in certain ex-US markets.
Specifar Pharma plans to launch the generic drug in the EU in the
fourth quarter of 2011.
Recently, in July 2011, Watson Pharma entered into an agreement
to acquire a portfolio of generic pharmaceutical products that are
being divested as a result of the merger between Perrigo
Company (PRGO) and Paddock Laboratories. We believe this
acquisition should help expand Watson Pharma’s generic
portfolio.
We expect Watson Pharma to continue outperforming riding on the
cost saving initiative and new product launches, both branded and
generic. The stock carries a Zacks #3 Rank (Hold rating) in the
short run.
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WATSON PHARMA (WPI): Free Stock Analysis Report
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