Watson Pharmaceuticals (WPI)

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Watson Pharmaceuticals (WPI) is the third largest generic pharmaceutical manufacturer in the United States based on total prescriptions dispensed.^[1] Watson is a firm in transition. As late as 2007, Watson's main products were easily replicable generics. While the market for these products has been expanding rapidly in recent years, competition has also increased resulting in downward pressure on Watson's margins.

In an effort to turn around its fortunes, the company has taken several steps to both lower costs and increase revenues. Watson has lagged behind its larger competitors in moving manufacturing to countries like China with lower labor costs. Since 2006, however, the company has acquired interests in several Indian and Chinese R&D and pharmaceutical manufacturing companies. Watson plans to move as much as 50% of its manufacturing capacity overseas in the next few years. In 2006, Watson also broadened its offering to include more controlled release drugs with the acquisition of Andrx. Andrx gives Watson access to 15 different controlled release technologies. Controlled release drugs generally require very specific chemical delivery technologies, putting them outside of the realm of expertise of most generic companies and making them less susceptible to competition and less price sensitive.

[edit] Business Financials

Watson Annual Report^[2]

Watson produces both branded and generic drugs, but it is primarily focused on the latter, marketing 150 different generic and only 25 brand drugs in 2007^[3]. Revenues from generic sales were 77% of total revenue in 2006, or about $1.5 billion. Watson focuses on developing its own generic products, but it also partners with other companies in development, and Watson has acquired other companies, most recently Andrx Corporation, to expand its capabilities. Specifically, Andrx created 15 different proprietary methods for "controlled-release" medications.^[4]

The Acquisition of Andrx gave Watson access to the acquired company's distribution division which distributes products to pharmacies and other large buyers^[5].

The noticeable drop in profit in 2006 was due to increased costs associated with the acquisition of Andrx.

Watson Annual Report^[6]

[edit] Key Trends and Forces

• Growing generic market increases sales opportunities: The US generic market has grown significantly in recent years. The percentage of overall prescriptions filled with generic products grew from 46.5% in 2000 to 57.3% by 2005^[7]. The aging population in the United States, rising health care costs, and insurance companies' attempts to minimize costs could all contribute to a further increase in demand for generic products. Medicare has been increasingly encouraging greater use of generics. In Watson's specific area of expertise, controlled-release products, the market has been growing enormously over the past decade. In 1993, the market for controlled-release products was approximately $4 billion, and this number climbed to $15 billion by the end of the decade.^[8]

• Andrx acquisition provides new technologies: Andrx was a specialist in developing methods of delivering slow release or multistage release drugs, difficult areas which require manufacturing expertise. The acquisition allows Watson to expand into generics that require very specific and difficult release formulations. Given generally steep generic competition, this "niche" position, that is having the expertise necessary to produce difficult-to-produce formulations, allows Watson to capture an area of the market that many other generic producers are unlikely to enter. This is not Watson's first acquisition; in 2000 it acquired Schein Pharmaceuticals, also to boost specialty manufacturing capabilities and knowledge. Royce Laboratories was acquired by Watson in 1996.

• Manufacturing in Asia: Watson is years behind its larger competitors in moving its manufacturing overseas. The main draw for relocating manufacturing and R&D services is the cheaper labor available abroad. This makes it much cheaper to develop and manufacture drugs. From late 2005 through 2007, Watson has engaged in several acquisitions through out India and China, with the purpose of expanding its manufacturing capacity in these destinations. By the end of the decade, the company plans to have moved nearly 50% of its manufacturing overseas.

[edit] Competition

In terms of the third party distributor, Watson competes most heavily with Teva Pharmaceutical Industries (TEVA) again. Anda, Watson's distribution division, distributes products from Watson and other companies. In 2006, Teva Pharmaceutical Industries (TEVA) products accounted for 19.7% of Anda's sales, while Watson products were only 7.5%, but apart from these companies, no other pharmaceutical had such a high percentage of overall sales by Anda.^[9]

Company Annual Reports^[10]

Watson faces competition both from generic and brand name drug producers. Some of its top competitors include:

• Mylan Laboratories (MYL) is the third largest generic producer in the US. Mylan also owns subsidiaries that produce proprietary drugs and hospital packages.
• Barr Pharmaceuticals (BRL): is a split generic/brand manufacturer with about 75% of its sales in generics. Its main product line is contraceptives, and it is dominant in this market.
• Teva Pharmaceutical Industries (TEVA). Teva Pharmaceuticals USA is one if the largest producers of generic drugs. Its products include therapeutic areas such as anti-infective, cardiovascular, oncology, dermatological and anti-inflammatory.
• Dr. Reddy's Laboratories (RDY) is one of the largest generic manufactures in the US by revenue. It also manufactures branded products. Dr. Reddy's products include those for hypertension, allergies, urological disorders, cardiovascular, and antibiotics.

[edit] References

1. ↑ Watson Press Release, November 2007
2. ↑ Watson 10-K 2006 pp. 42
3. ↑ Watson 10-K 2006 pp. 3
4. ↑ Andrx Annual Report 2004
5. ↑ Watson 10-K 2006 pp. 44
6. ↑ Watson 10-K 2006 pp. 42
7. ↑ Barr 10-K 2006
8. ↑ http://www.answers.com/topic/andrx-corporation?cat=biz-fin
9. ↑ Watson 10-K 2006 pp. 9
10. ↑ Watson 10-K, Barr10-K, Mylan 10-K, Teva 20-F, Dr. Reddy's 20-F, Novartis 20-F