Watson Pharma (WPI) Beats; Adjusts View

Watson Pharmaceuticals Inc. (WPI) reported second-quarter earnings of 83 cents per share, a couple cents above the Zacks Consensus Estimate and 13.7% above the year-ago earnings of 73 cents.

Revenues increased 29% to $875.3 million, mainly due to the strong performance of the generics business. Second quarter revenues came in well above the Zacks Consensus Estimate of $846 million.

Performance by Segment

Watson Pharma’s Generic Product segment posted sales of $571 million, up 42%. The increase in sales was driven by contribution from new international markets, the launch of new dosage strengths of Watson Pharma’s generic version of AstraZeneca’s (AZN) Toprol ER, and higher sales of oral contraceptives. International product sales came in at $110.5 million, flat from the year-ago quarter mainly due to pricing pressure and the unfavorable impact of foreign exchange fluctuation.

Watson Pharma currently has 110 abbreviated new drug applications (ANDAs) pending approval with the US Food and Drug Administration (FDA). The company has initiated 12 new patent challenges this year.

New product launches over regular intervals should help drive the generics business. Watson Pharma expects Generic segment sales in the range of $2.25 – $2.35 billion in 2010.

Global Brands revenues continued to decline, coming in at $103.5 million, down 10%. Despite increased contributions from products like Rapaflo and INFeD, the loss of Ferrlecit in Dec 2009 continued to impact the performance of the Brands segment.

Watson Pharma expects the Brand segment to contribute sales in the range of $440 million – $460 million in 2010. The launch of the six-month formulation of Trelstar, which was approved recently, should help boost Brand segment revenues.

Net revenue for the Distribution segment increased 24% to $200.8 million in the quarter, mainly due to sales of generic versions of Yaz, Cozaar, Hyzaar and Skelaxin, as well as contributions from new products. Distribution segment revenues are expected to increase to $760 million – $800 million in 2010.

2010 Guidance Adjusted

Watson Pharma tweaked its guidance for 2010. Although the company narrowed its earnings guidance for the year, Watson Pharma lowered its revenue guidance. The company raised the lower end of its cash EPS guidance by 5 cents and now expects to generate cash EPS of $3.30 – $3.45 on revenues of $3.50 billion (old guidance: $3.25 – $3.45 on revenues of approximately $3.55 billion). We note that the company has lowered the higher end of its previously issued revenue guidance for the Brand and Generic segments. However, Watson Pharma has increased its revenue guidance for the Distribution segment.

Our Take

We currently have a Neutral recommendation on Watson Pharma, which is supported by a Zacks #3 Rank (‘Hold’). We believe that the company’s cost saving initiative and new product launches, both brand and generic, will help drive growth. We also view the company’s acquisition of Arrow as a smart strategic move. This acquisition should help expand Watson Pharma’s product portfolio and expand its footprint in ex-US territories. However, integration risks remain and competition in both the branded and generic market remain fierce.

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