02.19.08 

wpi: DARK DECADE TO NEW DAWN? UPGRADING TO BUY
With FQ4:07 results and the FY:08 outlook coming tomorrow, we are upgrading our rating from Hold to Buy. The dark ages are over, in our view, as we conclude that after 5 years of underperformance and low expectations, which we believe are largely priced in WPI's stock, and deservedly underweighted in most health care and benchmark portfolios (WPI has been a perennial drag on the S&P), the long awaited dawn for Watson Pharmaceuticals is finally upon us, in our opinion. Are we expecting great FQ4 results? Not really. Are we looking for a blow out FY:08? Compared to the last several dismal years, FY:08 could mark the best year over year growth with easy comparisons and, if by chance Watson can deliver on the consensus EPS of $1.94, it would represent a nearly 50% jump that would likely revive the multiple as well. Applying a group 17x P/E multiple to consensus would imply that Watson Pharmaceuticals' stock could have 18% appreciation from current levels to around $33 per share, but we suspect that most investors may be satisfied with 10% upside from current levels to our more humble $31 target price. We'll await new management's (CEO Paul Bisaro) formal discussion and guidance tomorrow, but for investors shuffling their decks trying to find a winning hand for 2008, consider how the following just might result in Watson Pharmaceuticals driving outperformance. Contact Us for Full Report - PDF

05.02.07 

wpi: DID Q1 BENEFIT SQUEEZE DOUBT? BUT MAYBE NO MORE; WITHOUT OXY, 'WISH' DEPENDENT GUIDANCE; WPI EXPENSIVE; BUY TEVA TRADING 19X AND WPI AT 24X? PAIRED TRADE? INDEED
That 8% bump in late day trading and last night's 3% rise to over $30 suggests to us a short squeeze in front of a strong Q1, which beat our revenue estimate by some 20% coming in at $672M, which comparisons of 32% included Andrx (not there last year) but were sequentially flat which given the strength of the pharmaceutical industry in Q1, was not nearly as impressive to us. Watson did indeed have a very good quarter - but without generic Oxycontin worth about $0.05 EPS, which post the settlement with Purdue is all over (and guess who will be the lone provider of generic Oxy in Q2 which presumably should enjoy the pricing power that helped Watson in Q1? You guessed it, TEVA (TEVA: Buy). Q1 was ok, but nothing to crow about for which we suspect we may be at a top for WPI shares right now. Cutting to the chase, if Wall Street values WPI at 24x 2007E, which has some big 'ifs' - generic Duragesic or Flonase hitting in Q3 to name a few - baked in its guidance, how can TEVA trade at a P/E below 24x or just using midpoint of guidance which was $2.15 which today may inch up implies TEVA shouldn't be trading below $50 today. Yet until now, there was nary a bid at $40. Without regurgitating Watson's press release, we highlight the following observations that would make us head for the WPI exit and into TEVA right now. Contact Us for Full Report - PDF

02.28.07 

wpi: THE ICEBERG COMETH: Q4 MISS, BLEAK OUTLOOK MATCHES MARKET MOOD; LOWERING ESTIMATES
The bull market may have hit an iceberg yesterday, but Watson's ship has been taking on water for some time, and with last night's Q4 results and outlook, the promenade deck may have just submerged. Until yesterday, relatively calm seas and sunny skies allowed WPI to stay afloat, astonishingly clinging to a modest premium multiple despite weak fundamentals. So now what? Whether yesterday turns out to be a single rogue wave or an iceberg that brings down a four year bull market, WPI's cash flow story with limited prospects would appear to be worth less even to deep value investors, in our view. While underperforming the S&P for the past three years, WPI fell less than the index. But that was yesterday. Wall Street provided the perfect gift yesterday before Watson reported its weak results and bleak outlook. Yes, the first generic added to the S&P could have beaten estimates and guided higher and the market would still have taken WPI down. WPI's 20 P/E multiple on previous consensus of $1.40 was already too rich, in our view, given the shaky track record and deteriorating fundamentals. So with the predictable 'clear the decks' Q4 charge and 2007 EPS guidance of $1.20-1.30 and a presumably further market multiple compression, how can WPI be worth more than $23? This initial 20 percent haircut could be just the beginning if the caution on the call around deteriorating gross margins plays out. Even Andrx's distribution business, the most consistent bright spot, albeit with lower margins, seems to have lost the visibility it once had. Guidance on a handful of generics, while helpful, left some of us scratching our heads as to why some of these seemingly lay-up launches keep getting pushed out, as have some of the cost cutting measures that Watson initiated last year to slim down for a protracted lower margin outlook. In the most bullish of times, last night's conference call was painful to listen to; details were daunting to fathom, but for the simplicity of direction - most all negative or at least falling short of the last hopeful expectations. After yesterday's meltdown, there is no point in delving into the weeds. We are lowering our 2007 EPS estimate to $1.20 on revenues of $2.5B, in line with guidance. We believe investors who need to own mid cap specialty pharma names in the S&P should gravitate to Barr Pharmaceuticals (BRL: Buy) whose results are out this morning. Contact Us for Full Report - PDF

11.08.06 

wpi: WATSON MISSES AGAIN; ANDRX HELPS BUT NOT ENOUGH
Watson Pharmaceuticals reported lower than expected results for Q3:06, with $0.30 EPS compared to the $0.34 consensus estimate and our $0.39 estimate. Both generic ($348M) and branded sales ($86M) decreased sequentially, due to a decrease in generic pricing and decreased branded product sales, with total revenue coming in $38M lower than the $478M consensus estimate. Gross margins also showed declining trends year-over-year at 41.5%, but were up 500 bp sequentially, due to favorable product mix with lower distributor products. Management gave little color on the recent finalization of the Andrx (ADRX: Buy) acquisition, stating about $30M accretion expected in 2007, with $30M estimated amortization. Although Watson gains 66 ANDA in its arsenal which is targeted at a $50B brand market, we believe this optimism will not be realized until weak fundamental issues are resolved. Plant closings in both Puerto Rico and Phoenix, as well as an offshore production facility investment are steps in resolving this issue, in our view, but we find this slow and painful process clouding any near-term visibility for Watson-Andrx. Although the acquisition provides upside, we believe it will be difficult to raise Watson out of its current ranges, as seen by continued misses at the top and bottom line and as such, we are maintaining our Hold rating on WPI shares. Contact Us for Full Report - PDF

08.09.06 

wpi: CLINGING TO GUIDANCE ON LIMITED VISIBILITY, ERODING MARGINS; ANDRX'S FUNERAL FOR A FRIEND
We didn't completely tune into last night's call. It was almost too painful to hear. Yes, there was some nice sequential growth from a difficult Q1, but the reaffirmed top line and EPS guidance with just four months left in the year, which depends on generic Duragesic and a few other approvals that now probably won't happen, we believe aren't going to help the stock which is astonishingly trading at a higher multiple than TEVA (TEVA: Buy). Even forgiving the usual accounting gymnastics and going with the adjusted $0.27 in Q2 and accepting management's 'we have faith in FDA' strategy as CEO Allan Chao said on the call, and keeping our estimates at around consensus, WPI closed last night at 18x 2006E, while TEVA closed at just 16x after a blow out quarter and raised guidance. We may need to revisit our Hold rating on WPI and after Andrx (ADRX: Buy) tossed out its press release (generics flat, distribution up, but only made 2 cents, that's our 2 cents) and did us all a favor by not having a conference call -- does anybody have a I-tunes copy of Elton John's 'Funeral for a Friend'? -- we think we now have all the material we need. A few notable highlights and lowlights follow in this report. Contact Us for Full Report - PDF

05.09.06 

wpi: ANOTHER CLOUD OF DUST; ADRX SURE LOOKS ATTRACTIVE NOW
Q1 results were expectedly weak with noncompetitive brand products and weak generic pricing depressing results below previous guidance. How WPI can continue to trade at nearly 20X the low end of guidance with management now consistently missing and lowering guidance is, in our view, nothing short of astonishing, particularly when BRL trades at a lower multiple and TEVA only 10% higher (more on TEVA tomorrow when we see official guidance). Stocks' P/E multiples often rise following a series of beats and upward guidance revisions, so why hasn't the reverse happened when WPI keeps missing and lowering guidance? Well, with today's latest measure, Wall Street may finally be listening to the dirges that Watson keeps playing with the 10% hit perhaps only the beginning as we do not see any strategic way out for Watson, even with Andrx, although ADRX could buy some time for a while. Contact Us for Full Report - PDF

03.14.06 

wpi: UNITED THEY STAND? ADRX BOOSTS STRATEGIC POSITION
It won't be visible for at least a year, but Andrx (ADRX: Buy) may provide the way out of the quicksand that Watson has been sinking in for the past five years, in our view, but only if founder, Chairman and CEO Dr. Chao uses this opportunity to revitalize a management team that can respond to the challenges of the new paradigm. Strategically, we were encouraged by how Watson sees its position in the increasingly global generic industry, but it remains unclear whether Watson can successfully transfer Andrx assets into the growth that made Watson a darling growth stock of the late 1990s. Last night's conference call was hardly reassuring to us with management's tone sounding more like dirges than a triumphant business resurrection that would provide shareholders confidence. While neither management team has been inspiring to us, having endured more than its fair share of pain and misfortune, if this merger is commenced, we believe it will represent an important phase of industry consolidation that we have discussed at length previously. As far as WPI's stock goes, we believe there is no reason to become involved until after Labor Day when the deal is expected to close and we have two quarters to look at each company's fundamentals, particularly the ANDA distribution business. Others will be watching too, who may find the combined company's estimated $6B enterprise value, hopefully without the hair it has today, which could make a valuable asset for 2007. We will all have time to discern whether the combined company can keep and maybe gain market share in the new TEVA-IVAX (TEVA: Buy) dominated market and whether ANDA can accelerate growth that is truly leveraged to 2006 patent expirations. Management's ability to impact 2006 may be marginal, but if there are signs that Andrx and Watson united can stand, then 2007 could look good, not great, but good, in our view. But after three years of poor visibility, good visibility would be, well, great. This deal took a long time to commence, but had all the earmarks of an arranged marriage with both parties likely pausing several times along the way to weigh their alternatives. In the end, there weren't any when the final grains of Andrx's 2005 were falling through the hour glass. At least not yet; if the growth story can be revived via a stronger #3 U.S. generic position and the strategic value of ANDA, then we believe Watson could be a far more attractive arranged marriage as soon as 2007, which could include companies from lands where arranged marriages are commonplace. Stay tuned. Contact Us for Full Report - PDF

02.21.06 

wpi: LACK OF GROWTH DRIVERS LIMITS PROSPECTS; ADJUSTING 2006 EPS ESTIMATE DOWNWARD
Watson's Q4 $0.33 EPS excluding charges for the quarter came in below the consensus estimate of $0.35 due to gross margin weakness from low margin distribution of generic OxyContin. The guidance for 2006 was lackluster, with minimal growth and for the most part below expectations, with the high end of the range factoring out stock option expensing and facility closure charges encompassing the consensus estimate. With limited new product launches and no exclusive launches in 2006, fundamentals and growth prospects for Watson remain weak. Our EPS estimate for 2006 is lowered by $0.03 from $1.38 to $1.35, the low end of management's guidance range including stock option expensing, and reflects our expectations for no growth on weak brand business performance and limited generic business drivers. We continue to remain on the sidelines on WPI, and recommend investors interested in mid cap generic names explore more compelling opportunities in the space, namely Barr (BRL: Buy), with its diversified and better positioned brand and generic business, as well as expected upside on its multiple patent challenges. Contact Us for Full Report - PDF

11.03.05 

wpi: NO GROWTH STORY, PROSPECTS REMAIN WEAK
While Watson Pharmaceuticals' reported Q3 EPS of $0.36 came in ahead of the consensus estimate of $0.34, contributing to the quarter were lower than expected operating spend and the company's ongoing share buyback program, in our view lowering the overall quality of the quarter. In our opinion, fundamentals and growth prospects for Watson remain weak, supported by management's revised top line guidance for 2005, which continues to trend downward, earlier reflecting lower expectations for the generic business, and now on lower performance for the brand business, including key product Oxytrol, which was down year-over-year. Our 2005 EPS estimate is raised to $1.38, the low end of management's narrowed guidance range of $1.38-$1.41 for the year, to account for the higher than expected Q3 performance, lower share count, and lower operating spend guidance, though our 2006 EPS estimate remains at $1.38, reflecting no expected growth, on weak brand business expectations and limited generic business drivers, and as we do not view the lowered operating spend as a sustainable earnings contributor. We continue to remain on the sidelines on WPI, and recommend investors interested in mid cap generic names explore more compelling opportunities in the space, namely Barr Pharmaceuticals (BRL: Buy), with its diversified and better positioned brand and generic business, as well as upside on its multiple patent challenges. Contact Us for Full Report - PDF

07.28.05 

wpi: Q2 RESULTS; GROWTH PROSPECTS REMAIN WEAK
While Watson's reported Q2 EPS of $0.35 came in ahead of the consensus estimate of $0.31, contributing to the quarter were lower than expected operating spend and the company's ongoing share buy back program, in our view lowering the overall quality of the quarter. We are raising our EPS estimate for 2005 to $1.35, the lower end of management's guidance of $1.35 to $1.43 for the year, to account for the Q2 out- performance and a lower share count, though in our view, fundamentals and growth prospects for Watson remain weak, supported by management's slightly lowered top line guidance for 2005 reflecting lower expectations for the generic business, as well as a slightly more conservative outlook for key product Oxytrol. We continue to remain on the sidelines on WPI, and believe that investors may want to explore more compelling opportunities in the space including best in breed TEVA/IVAX (IVX: Buy), as well as strategically well-positioned Andrx Corporation (ADRX: Buy), given Watson's lack of near-term growth drivers. Contact Us for Full Report - PDF

07.22.05 

wpi: SHIP STILL WITHOUT A RUDDER; INITIATING COVERAGE WITH A HOLD RATING
We are initiating coverage of Watson Pharmaceuticals, Inc. with a Hold rating, as we believe that growth prospects for the company remain weak. With limited exclusive generics opportunities on the horizon, and partnerships likely on key generic product launches, we believe gross margin expansion from current levels will be challenging, and contraction is a potential risk. In our view, Watson's brand pipeline has few compelling prospects which could contribute to earnings by 2006. While we remain bullish on the generic group as a whole, we believe that value investors may want to explore more compelling opportunities in the space, notably Andrx Corporation (ADRX: Buy), given Watson's lack of near-term growth drivers. Contact Us for Full Report - PDF