Piper Jaffray Initiates Coverage on Watson Pharmaceuticals (WPI) with an Underweight; Hard to Envision Significant Organic Growth

December 10, 2009 4:38 PM EST

Piper Jaffray initiates coverage on Watson Pharmaceuticals (NYSE: WPI) with an Underweight rating. Price target $34.

Piper analyst says, "Though Watson has now established an ex-U.S. presence for its generics business via the recently-completed acquisition of Arrow, we do not envision significant organic top-line and EPS growth in the next 2-3 years. We believe WPI's 2010 P/E of 14x suggests a rich valuation particularly in the context of a an estimated 5-year EPS CAGR of only 4%. We expect that the shares will underperform its specialty pharma peers over the next 6-12 months...Brand business facing challenges; uphill battle for new urology products...Arrow acquisition provides ex-U.S. platform, but does not provide major source of organic growth even with Lipitor generic in 2012. Arrow contributes over $700M in sales, with sizeable generics presence in France, the U.K., and other European markets. Longer-term, it gives Watson the ability to take advantage of overseas territories where penetration of generics is growing (such as France and many Southern Europe countries). Watson also gains access to Arrow's authorized generic of Lipitor, which launches in late Novemeber 2011, but it agreed to pay Arrow shareholders 85% on its first $175M in generic sales, significantly blunting the P&L impact...Concerta and Lovenox are key U.S. generics opportunities for Watson; we view these as high-risk with little visibility to launch. Watson is only one of two generic filers on $1B ADHD agent Concerta but the FDA has sat on a Citizen's Petition for over 5 years, largely due to the product's complicated release profile and related concerns over equivalence. The FDA also has not acted for years on filings for complicated anti-coagulant Lovenox. Though the EPS impact for Watson if the FDA cleared the way for generics would be considerable, we view these as low probability opportunities."

To see all the upgrades/downgrades on shares of WPI, visit our Analyst Ratings page.

Watson Pharmaceuticals, Inc., a specialty pharmaceutical company, engages in the development, manufacture, marketing, sale, and distribution of generic and brand pharmaceutical products primarily in the United States.

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