Watson Pharmaceuticals Inc.'s (WPI) third quarter 2011 earnings (excluding special items) of $1.09 per share surpassed the Zacks Consensus Estimate by 4 cents and the year-ago earnings by 24 cents. Higher revenues helped boost earnings.
Quarterly Details
Revenues jumped 22.6% to $1.08 billion, but narrowly missed the Zacks Consensus Estimate of $1.09 billion. Revenues increased mainly due to higher generic and branded drug sales during the quarter.
Watson Pharma reports revenues under three segments – Global Generics, Global Brands and Distribution segment.
Global Generics
The company’s Global Generics segment posted sales of $802.5 million, up 39%. The upside was driven by the launch of methylphenidate ER. Methylphenidate ER is the generic version of Johnson & Johnson’s (JNJ) attention deficit hyperactivity disorder (ADHD) treatment, Concerta.
International product sales for the division in the reported quarter came in at $144.6 million, up 41%, driven by the acquisition of Specifar Pharmaceuticals in May 2011 and a larger number of product launches in key markets.
Gross margin (on an adjusted basis) for the segment declined 360 basis points (bps) to 46.5% from the year-ago quarter. Results were negatively impacted by the sale of methylphenidate ER at lower margin. Research & development (R&D) expenses remained flat at $54.6 million. Selling and marketing (S&M) expenses amounted to $45.3 million, reflecting an increase of 71%, due to the addition of Specifar Pharma and higher S&M expenses in certain international markets.
Global Brands
Watson Pharma’s Global Brands revenue came in at $110.3 million, up 11%. Increased contributions from products like Rapaflo, Gelnique, Trelstar, Crinone and Generess Fe aided the performance of the segment.
The segment’s gross margin (on an adjusted basis) was 77.5%, down from 80.1% in the comparable period of 2010. The decline resulted from a change in the product mix. R&D expenses for the segment declined 13% to $18.8 million, primarily due to lower contractual milestone payments. S&M expenses for the quarter went up 19% to $40.8 million, owing to increased field force and support costs, including expansion costs in Canada.
Distribution segment
Net revenue for the Distribution segment declined 18% during the quarter to $168.8 million, due to a lower number of third-party product launches. This segment consists of only third-party product sales.
The segment’s gross margin (on an adjusted basis) was 17.0%, up from 14.9% in the year-ago quarter. The previous-year quarter was negatively impacted by a number of product launches at lower margin. S&M expenses increased 5.8% to $18.3 million.
Revised Guidance for 2011
Following the third quarter financial results, Watson Pharma revised its guidance for 2011.
For 2011, the company now expects earnings (on an adjusted basis) in the range of $4.55 to $4.65 per share (previous guidance: $4.25 – $4.50) on revenues of approximately $4.5 billion. The current Zacks Consensus Estimate of $4.48 per share lies below the company’s new guidance range.
Watson Pharma expects the Global Generic segment to post revenue of about $3.3 billion (previous guidance: $3.1 – $3.3 billion) in 2011. Brand segment revenue is expected to amount to $445 million (previous guidance: $445 – $465 million). Distribution segment revenue is expected to come in at $770 million (previous guidance: $770 – $800 million).
Our View
We currently have an Outperform recommendation on Watson Pharma. The stock carries a Zacks #1 Rank (Strong Buy rating) in the short run.
We expect the new generic product launches over regular intervals to help drive the company’s Global Generic segment’s sales. Additionally, Specifar Pharmaceuticals will contribute to the company’s earnings through its commercial presence in key European markets
In the Global Brands segment, Rapaflo and Crinone should experience continued growth. Further, we expect investor focus to remain on the approvability of Prochieve. The US Food and Drug Administration’s (FDA) decision on the drug is expected in February 2012.
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