February 5, 2009 - Watson Pharmaceuticals, Inc. (WPI-NYSE) a specialty pharmaceutical company, engages in the development, manufacture, marketing, sale, and distribution of generic and brand pharmaceutical products primarily in the United States. The company's products are used in various therapeutic areas, including central nervous system, hormones and synthetic substitutes, cardiovascular, nephrology, gastrointestinal, and other areas. It operates in three segments: Generic, Brand, and Distribution.

The Brand segment principally offers products for male hormone replacement, hematinic, overactive bladder, and prostate cancer therapeutics, as well as specialty products for urology and nephrology products for the treatment of iron deficiency anemia.

The Distribution segment distributes generic and brand pharmaceutical products to independent pharmacies; alternate care providers, such as hospitals, nursing homes, and mail order pharmacies; pharmacy chains; physicians' offices; and members of buying groups.

The company markets primarily to drug wholesalers; retailers and distributors, including national retail drug and food store chains; hospitals; clinics; mail order; and government agencies and managed healthcare providers, such as health maintenance organizations and other institutions.

As of December 31, 2008, Watson Pharmaceuticals marketed approximately 150 generic pharmaceutical product families and 27 brand pharmaceutical product families, as well as distributed approximately 8,000 stock-keeping units. The company was founded in 1983 and is based in Corona, California.

Watson is about to buy Arrow Group for $1.75 billion, adding to its generic portfolio. Arrow is a private company with close to $650 million in sales with the rights to the authorized generic version of Pfizer's cholesterol lowering drug Lipitor, the best selling brand name drug in the world. Analysts see the generic version available in November of 2011. The boards of both companies have approved the deal which should close at the end of this year subject to regulatory blessings. It should be accretive to earnings in 2010. The stock is already up by 15% since the announcement in mid-June.

The new purchase should only accelerate an already positive trend in Watson's earnings. In 2006, they were $1.03, then went to $1.37, followed by a jump to $2.03 last year. This year, analysts (17 of them) have a consensus of $2.45, then $2.48 in 2010. The quarterly earnings report will be out on July 29. Look for 57 cents for the second quarter, up from 48 cents last year in the same time period. For the third quarter, estimates are for 62 cents, up from 47 cents last year. For the next 5 years, analysts see annual average earnings growth of 9.37% (without factoring in the Arrow acquisition).

To enhance profitability, the company is transferring manufacturing from its Carmel, NY facility to India. Each product made in India increases operating margins and profits through notable cost savings. Also, the company has 3 new branded urology drugs as well as several generic molecules pending approvals which will help both the top and bottom lines.

As noted in the earnings estimates above, 2010 will show a slowing of earnings growth. Part of that is because the company is losing its license at the end of 2009 for Ferrlecit, a treatment for iron deficiency anemia for patients undergoing chronic hemodialysis. This one drug was 12% of Watson's gross profits last year. Helping to make up the loss will be new drug introductions and the Arrow acquisition, if approved.

The stock took a major blow last year when the market dipped dramatically in October/ November. Topping at $32.70, it hit $20.20 before stopping and moving back up. Since the low, it's up 70%. Investors like the story here.

More numbers: Market Cap is $3.56 billion. Forward P/E is 13.6. For the last 12 months, Operating margin was 16% while Profit margin was 9.2%. Total revenues were $2.58 billion. Total cash is $571 million, making $5.42 per share in cash. Total debt is $876 million or about 10% of the balance sheet. Current ratio is 1.37. Book value is $20.53. There are 105.4 millon shares outstanding with a float of 94.3 million. Insiders own 1.89%. Institutions have almost all the float. There is no dividend.

There's no question generic drugs are gaining market share. With the new government health plan looming, they should gain even more as they help drive down medical costs. Watson has done a good job in a competitive field. With its new acquisition of Arrow (if approved), it should increase revenues and profits noticably. Look further into this stock if you're interested in the pharmaceutical industry.

- Company Web site: www.watsonpharm.com

- Ted Allrich