We continue to have an Outperform recommendation on Watson Pharmaceuticals Inc. ( WPI ), which posted third-quarter 2011 earnings of $1.09 per share, beating the Zacks Consensus Estimate by 4 cents and the year-ago earnings by 24 cents per share. Earnings were boosted by strong revenues, which jumped 22.6% to $1.08 billion, mainly due to higher generic and branded sales. Following the better-than-expected third quarter results, Watson Pharma increased its 2011 earnings guidance range to $4.55 - $4.65 per share from $4.25 - $4.50. (For full earnings report please check: Watson Beats on EPS, Revises View )
Watson Pharma enjoys a strong position in the generic pharmaceutical market. The company is a front-runner in the development, manufacture and sale of generic pharmaceutical products. We believe Watson Pharma's strategy of developing products that are difficult to formulate/manufacture or complementary to its existing product lines will help strengthen its position in the market.
In addition to the generics business, Watson Pharma has a significant and growing branded pharmaceutical business. The company's branded product portfolio consists of 30 product families including Androderm, INFeD, Oxytrol and Trelstar among others. Meanwhile, Watson Pharma's focus on growing its urology and female healthcare product portfolio should bode well for long-term growth.
We note acquisitions play a dominant role in the company's current economic scenario. It also forms an integral part of Watson Pharma's expansion strategy. The company completed two major acquisitions in the span of two years.
In December 2009, the company acquired privately-held Arrow Group. We view this acquisition as a smart strategic move by the company. Arrow has exclusive US rights to market the authorized generic version of Pfizer Inc. 's ( PFE ) drug Lipitor, (launched on November 30, 2011), which should be a major contributor to the top-line. Watson Pharma expects sale of the generic version of Lipitor (atorvastatin) to contribute 48 - 53 cents per share to fourth quarter 2011 earnings.
Moreover, in May 2011, Watson Pharma acquired Greece-based generic company, Specifar Pharmaceuticals SA, for €400 million ($562 million) in cash. 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 European Union in the fourth quarter of 2011.
We believe the company's cost saving initiative and new product launches, both branded and generic, will help drive growth. However, lower-than-expected generic drug sales or any delay in gaining approval for significant abbreviated new drug application (ANDA) filings could lead us to revisit our recommendation on Watson Pharma.