11 April 2009

WPI: Financial Analysis through December 2008 (Update)

We previously posted an analysis of the earnings announcement issued by Watson Pharmaceuticals (NYSE: WPI) for the fourth quarter of 2008.  Our evaluation was incomplete because the Balance Sheet in Watson's press release omitted a few details, including those characterizing inventory, current liabilities, and stockholder's equity.

Using the 10-K for 2008 that Watson subsequently submitted to the SEC back in February (we're late), we have updated the analysis and gauge scores to incorporate the data that hadn't previously been disclosed.

Watson Pharmaceuticals, Inc. (NYSE: WPI) develops, manufactures, and sells generic and, to a lesser extent, branded pharmaceutical products.  Sales of generic drugs accounted for 58 percent of Watson's total Revenue in 2008. 

The company became one of the top generic drug manufacturers, along with Teva Pharmaceutical (NASDAQ: TEVA) and Mylan (NYSE: MYL), when it acquired Andrx in late 2006.  This growth continued more recently when Watson purchased the rights to 15 drugs that were divested, to resolve antitrust concerns, when Teva acquired Barr Pharmaceuticals, Inc. (NYSE: BRL).

The data in the 10-K resulted in small variations in the GCFR gauges, but the Overall score remained at 56 points.  Recent tweaks to the scoring algorithms lowered the third-quarter figures from those originally reported.

The 10-K did not alter our earlier examination of Watson's fourth-quarter Income Statement


Inventory levels are something we watch at Watson and similar firms.  The red line on the figure shows that the number of days of Inventory, as measured by the Cost of Goods Sold (CGS), bounced up in late 2007 and early 2008 after a multi-year decline.   However, progress in getting the decline to resume is seen in the last two quarters. 

The blue line represents the percentage of the Inventory that constitutes Finished Goods, ready for sale.  It has stabilized, but we consider it more advantageous when the percentage is decreasing.  Shrinking percentages of Finished Goods suggest that sales were greater than management expected.

Approximately $16.4 million (3.5 percent) of Watson's $473 million Inventory at the end of 2008 are products that haven't yet entered the marketplace for regulatory or contractual reasons.

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