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Feb 14, 2012

Watson Reports Fivefold Increase in Net Income in Q4 2011

  • This Valentine’s Day, Watson Pharmaceuticals had to be in love with the fourth-quarter 2011 results it announced this morning. Net income zoomed more than fivefold to $94.8 million from $18.3 million in the final three months of 2010. Earnings per share jumped exactly fivefold from 15 cents to 75 cents.

    For all of 2011, net income climbed 41% to 260.9 million from $184.4 million for 2010. At $1.77, the full-year earnings per share edged the $1.76 predicted to Reuters by a consensus of analysts assembled by Thomson Reuters I/B/E/S, though Watson itself projected between $1.75 and $1.77.

    "We saw continued growth in our Global Generics and Global Brands businesses, driven largely by key product launches throughout the year,” says Paul Bisaro, Watson’s president and CEO. In 2011, he recounted, the company launched 189 generic products globally, generating “significant revenue contributions” from the U.S. launches of generic versions of ADHD drug Concerta®, birth control tablet Seasonique®, Kadian® pain relief capsules, and cholesterol medication Lipitor®.

    “Investments in our future growth resulted in the filing of 30 new abbreviated new drug applications in the U.S. and more than 130 applications globally,” Bisaro added.

    Watson felt confident enough about this year’s numbers to raise its estimated forecast for 2012 to between $5.50 per share to $5.80 per share, which puts the company more in line with the Thomson Reuters analysts’ expectations of $5.60. A month ago the company was projecting a range of $5.25 to $5.55.

    The new higher range amounts to the expectation of a 15% to 22% growth rate in 2012. In a note to investors, Leerink Swann offered one likely reason for Watson’s optimism: The drug developer this year plans to launch a generic version of the anticoagulant Lovenox for deep vein thrombosis, a launch that the firm noted was not built into earlier management guidance. Leerink Swann had assumed generic Lovenox would contribute 20 cents per share to Watson’s 2012 results.

    To fulfill these rising expectations it is setting for investors, however, Watson must be careful to avoid—or otherwise, win—the patent battles that will result from competing with primarily brand-name pharma giants and the diversion of time, effort, and resources that suits like these pose.

    One such battle made headlines on February 10, when Bayer Pharma and partner Merck & Co. filed papers in U.S. District Court in Wilmington, DE, accusing Watson of infringing on their patent for Beyaz birth control pills. The companies are seeking unspecified “damages and treble damages,” with Bayer also requesting that the sale of any Watson birth control products based on the patent be banned. Watson spokesman Charlie Mayr told Bloomberg soon after that filing that his company will respond by challenging the validity of the patent.

    Another legal wrangle involving Watson is a case where Endo Pharmaceuticals is seeking to block Watson from selling a generic version of the Lidoderm pain patch before its U.S. patent expires in 2015. During a brief trial last week, Watson challenged the validity of the patent, which Endo defended. Post-trial briefs in the case were submitted yesterday, with U.S. District Court Judge Gregory M. Sleet, chief judge for the Delaware U.S. district court. He is scheduled to hear closing arguments later today.

    Watson expects generic Lidoderm to figure into its earnings guidance for 2013, which now calls for 10% growth. “We assume some sequential growth in g-Lovenox contribution from '12 to '13, but we expect management is being conservative in view of potential competitor launches,” Leerinnk Swann commented.

    Perhaps sensing that it’s not good to place all its eggs in one proverbial generics basket, Bisaro told Bloomberg his company is now looking to acquire brand-name drugs. Bisaro said he will pay for such a “big brand deal” through an estimated $6 billion Watson has set aside for acquisitions in brand-name medicines, which the company reasons hold potential for greater growth and consistent returns than the generics. Watson will consider drugs for gender-specific conditions as it builds toward a “transformational” purchase.

    These numbers illustrate why Watson is getting more brand-conscious these days. The company’s Global Generics segment is projected to generate between $3.9 and $4.1 billion in 2012, accounting for between 72% and 76% of Watson’s estimated total net revenue for 2012 of about $5.4 billion. By comparison, total Global Brands segment revenue is forecast at between $500 and $525 million, between 9.3% and 9.7% of projected total net revenue.

    There’s clearly room for growth as well as bigger profits, on the branded side. But in pursuing the bigger bang for the buck of brand name sales, Watson will have to be careful to avoid doing so at the expense of its leadership in generics, a field that should grow once Congress approves the user-fee regulatory framework for that segment of the broader biopharma market.


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