Watson Beats, Revises Outlook

Watson Pharmaceuticals Inc.'s (WPI) third quarter 2012 earnings (excluding special items) of $1.35 per share surpassed the Zacks Consensus Estimate by 6 cents. Earnings increased 23.9% from the year-ago period. Double-digit revenue growth helped boost earnings.

Revenues for the reported quarter increased 18.8% to $1.29 billion, beating the Zacks Consensus Estimate of $1.27 billion. All segments contributed to growth.

On a reported basis, Watson Pharma recorded earnings of 60 cents per share compared with earnings of 54 cents per share in the year-ago period.

Quarterly Details

The company’s Global Generics segment posted sales of $920.9 million, up 15%. The upside was driven by new product launches including the generic versions of Xopenex, Sanofi’s (SNY - Analyst Report) blood-thinner Lovenox, and ViroPharma’s (VPHM - Snapshot Report) Vancocin. International revenues were strong at $198.1 million, up 37%. International revenues were driven by the January 2012 acquisition of Ascent and higher sales in important markets like France, the UK and Canada.

Watson Pharma’s Global Brands revenue came in at $121.3 million, up 10%. Increased contributions from products like Rapaflo, Crinone and Generess Fe aided the performance of the segment.

Net revenue for the Distribution segment increased 44% during the quarter to $243.0 million due to increased third-party product launches. This segment consists of only third-party product sales.

Actavis Acquisition Completed

Watson Pharma recently acquired Actavis Pharma for €4.25 billion. With this acquisition, Watson Pharma has become the third largest generic pharmaceutical company in the world. The company expects to generate annual cost (SG&A, R&D, corporate, purchasing and raw material supply) synergy savings of $300 million within three years.

Watson Pharma also announced its intention to adopt a new global name – Actavis – from 2013. The company will start trading under a new symbol on the New York Stock Exchange in 2013.

Post-Acquisition Outlook

Watson Pharma provided its outlook for 2012 on a post-acquisition basis (from November 1). The company expects to earn $5.85 and $5.95 per share on revenues of about $5.9 billion. The Zacks Consensus Estimate currently stands at $5.84 per share on revenues of $5.6 billion.

The company also provided its outlook for 2013. Watson Pharma expects 2013 earnings to increase 30-40% from the high end of the 2012 guidance range.

We currently have a Neutral recommendation on Watson Pharma, which carries a Zacks #2 Rank (short-term ‘Buy’ rating). Watson Pharma continues to perform well. We are positive on the Actavis acquisition which will be immediately accretive to earnings.