We are maintaining our Neutral recommendation on
Warner Chilcott plc
) with a target price of $12.00. The stock carries a Zacks #2
Rank (Buy rating) in the short run.
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Warner Chilcott reported higher-than-expected revenues and
earnings in the third quarter of 2012. Results for the quarter
were announced earlier in the month. Lower selling, general &
administrative costs aided earnings in the third quarter of 2012.
Revenues in the third quarter of 2012 declined 7% to $606
million. The decline was primarily attributable to lower sales of
its osteoporosis drug, Actonel -- acquired from
Procter & Gamble Co.
) in 2009 -- due to generic competition. Moreover, reduced sales
of dermatological product Doryx also hurt revenues in the
reported quarter. Revenues, however, beat the Zacks Consensus
Estimate of $601 million.
With a significant part of its top line likely to be exposed to
generic competition in the next few years, Warner Chilcott is
looking towards cost-cutting initiatives to boost the bottom
line. Following the genericization of Actonel in Western Europe
in late 2010, Warner Chilcott announced in April 2011 its
decision to reorganize its operation in Western European nations,
such as Belgium, the Netherlands, France, Germany, Italy, Spain,
Switzerland and the UK.
Cost savings due to the restructuring led the company to lower
its 2012 guidance for selling, general and administrative
(SG&A) costs. SG&A expenses for 2012 are now expected in
the range of $725-$775 million (previous guidance: $775-$825
million). Research & development (R&D) expenses are now
projected in the range of $90-$110 million (previous guidance:
$100-$120 million). Warner Chilcott's 2012 adjusted earnings
guidance is driven by reduced operating cost projection. The
company now expects adjusted earnings in the range of $3.75-$3.85
(previous guidance: $3.55-$3.65). We expect Warner Chilcott to
achieve the guidance easily.
We remind investors that Warner Chilcott suffered a huge blow
regarding the 150 mg dosage of Doryx earlier in the year. On
April 30, 2012, a US district court issued a verdict regarding
) and I
) applications to the US Food and Drug Administration (FDA) to
sell their generic versions of the drug. The court ruled that the
generic versions of neither of the companies infringed the patent
of Doryx. Following the verdict, Mylan has entered into the US
market with its generic version of Doryx 150 mg.
Furthermore, drugs such as Loestrin and Enablex are expected to
go off patent in the US in 2014 and 2015, respectively. The
genericization of key products will make it challenging for the
company to drive the top line.
Moreover, the weak late-stage pipeline at Warner Chilcott also
bothers us. In view of these challenges, we see limited upside
potential from current levels.