Watson Pharma Starts New Era As Generic Drug Titan

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Generic-drug makerWatson Pharmaceuticals ( WPI ) started off its November with a bang: beating third-quarter estimates, hitting a new high on the stock market and starting a new life as a transformed company.

Late on Oct. 31, Watson announced it has closed its $5.9 billion acquisition of Swiss partner Actavis, making it the world's third-largest generic-drug maker afterTeva Pharmaceutical Industries ( TEVA ) andNovartis ( NVS ) unit Sandoz. The firm unveiled a new management team for its now-global operations, much of it composed of former Actavis execs.

It also said that when the New Year rolls around, it will adopt Actavis as its official name. This was partly to avoid trademark infringement. Since there are other companies around the world named Watson, it would have to use a different name in foreign markets anyway, the way that Germany's Merck goes by EMD in the U.S. to avoid confusion with the N.J.-basedMerck ( MRK ).

On the conference call with analysts Thursday morning, CEO Paul Bisaro said that after an extensive review, the firm decided it was best to have one brand name everywhere.

What's In A Name?

"It became clear that one of the many assets within this acquisition was the Actavis name," Bisaro said. "(It's) not only a dynamic and exciting name, but also is trademarked and protected around the world."

Bisaro also said the stock will trade on the NYSE under a new symbol next year, though he didn't say what it would be.

Meanwhile, Watson performed admirably in its last quarter as a stand-alone company. On Thursday it reported adjusted earnings of $1.35 a share, up 24% from the year-ago quarter and 7 cents above analysts' consensus. Sales increased 18.8% to $1.29 billion, about $20 million more than analysts expected.

The company said full-year sales should come in at $5.9 billion, well ahead of analysts' estimate of $5.54 billion. It guided EPS in the range of $5.85 to $5.95, vs. the Street's $5.80.

On the call, Bisaro also provided the first tentative guidance for 2013. He predicted earnings will grow 30% to 40% from the high end of the 2012 range and affirmed previous guidance that the merger will yield $300 million in annual synergies.

Investors were impressed. The stock hit 90 for the first time in its 19-year trading history Thursday morning.

On Friday afternoon, it was trading near 87.

Watson-cum-Actavis' growth will come from a variety of sources. September 2013 will see the launch of Watson's generic version of Lidoderm, the fruit of a deal hashed out with Lidoderm makerEndo Health Solutions ( ENDP ). By the terms of the FDA's approval in August, it expects to have 180 days of market exclusivity before other generic competitors show up and drive down the price.

Lidoderm, a painkilling skin patch, brought in more than $800 million for Endo last year.

But Morningstar analyst Michael Waterhouse says big launches will likely diminish in the future as the industry nears the bottom of Big Pharma's "patent cliff." Watson has already passed its exclusivity period as the generic manufacturer ofPfizer 's (PFE) mega-blockbuster Lipitor, which went off patent a year ago. Many other big sellers have already gone off patent or will go off soon, leaving the longer-term future a bit cloudy.

That's why the Actavis buyout makes so much sense, says Waterhouse. Watson can now penetrate emerging markets like Eastern Europe and Russia, and can avoid both the U.S. patent cliff and European austerity measures that are driving down drug prices.

"The Actavis deal is mostly attractive because it potentially gives Watson access to attractive markets," he said.

Another strategy that's expected to yield longer-term returns for Watson is its deal withAmgen (AMGN) late last year to develop biosimilar drugs.

Copycat Drugs

Biosimilars are copycat versions of biologic drugs. Since they are made from living cells, they can't be precisely copied the way chemically based drugs are. Thus, creating these drugs is far more expensive and time-consuming than typical generic projects, making for a less competitive environment.

In August, Amgen and Watson struck a deal with Dutch biotech Synthon to develop a biosimilar version of Herceptin,Roche 's (RHHBY) blockbuster cancer drug, whose patent in Europe will expire in 2014. On the call, Bisaro said this "accelerated" Watson's plans with Amgen, which would mean more short-term spending but longer-term gains.

"Nothing comes without a price, and biosimilars are going to come with a big price," he said. "And that's why I think the assets are so valuable. There's just not enough people who can spend that kind of money to get to that point."

Waterhouse says the lack of competition might make up for the fact that Watson is a bit late to the biosimilars party.

In Europe, where biosimilars have been on the market for several years, Teva, Sandoz andHospira (HSP) dominate the market and are expected to have first-mover advantage in the U.S.

"I don't think we can expect to see biosimilar revenue for Watson (before) 2015 at the earliest," he said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
Referenced Symbols: ENDP , MRK , NVS , TEVA , WPI

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