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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