UPDATE: Watson Pharma 2Q Net Down 12%; Toprol Seen Boosting Fiscal Year

Watson Pharmaceuticals Inc. (WPI) reported a 12% drop in second-quarter earnings, due to items, but raised its 2009 financial expectations citing the expected approval of a generic version of AstraZeneca Plc's (AZN) blood pressure treatment Toprol XL.

The Morristown, N.J., drug maker reported strong growth in its generic division in the quarter and now expects the contribution of Toprol to be greater than previously expected for the remainder of the year. Although the drug went generic in 2006, manufacturing issues have squeezed supply and could provide pricing advantage and higher margins for Watson.

Watson shares recently rose 29 cents, or 0.8%, to $34.94.

Looking forward, Watson expects adjusted earnings of $2.50 to $2.58 a share, above a Wall Street average estimate of $2.45 a share, according to Thomson Reuters.

The company had previously increased its adjusted earnings projection in April from its initial February guidance of $2.18 to $2.28 a share.

It also increased its revenue guidance to $2.7 billion from a previous view of $2.65 billion. Analysts had widely expected a stronger topline number, currently projecting $2.72 billion.

Watson said that the raised projections don't include any contribution from Arrow Group, a privately held generic company it agreed to buy in June for $1.75 billion. The acquisition is expected to close later this year.

The guidance includes increased revenue expectations for a Food and Drug Administration approval of Toprol "shortly" and an immediate launch, Chief Executive Paul Bisaro said on a conference call Wednesday.

Bisaro said he had confidence in the coming approval, based on conversations with the FDA, for the 25 milligram and 50 mg pills, with approval for the 100 mg and 200 mg versions coming later in the year.

The company has been awaiting the approval for months and Bisaro has said that the agency was being cautious in light of recent issues surrounding the drug.

Last year, Sandoz, the generic unit of Novartis AG (NVS), recalled generic Toprol XL after the FDA sent a warning letter about a manufacturing facility. K-V Pharmaceutical Co. (KVA, KVB), another generic supplier, stopped manufacturing and shipping all of its products in January and recalled most products already on the market, including Toprol, as it deals with an FDA investigation.

The shortage became a windfall for AstraZeneca, which ramped up production of both the branded version and an authorized generic it makes for Par Pharmaceutical Cos. (PRX). For the three months ended March 31, sales of Toprol XL rose to $176 million, compared with $295 million for all of 2008. Astrazeneca reports second-quarter results on Thursday.

Watson's expected entrance has been watched by Wall Street and Bisaro noted that lack of competition in the market has provided "attractive" pricing that should improve margins.

For the three months ended June 30, Watson earned $53 million, or 46 cents a share, down from $60.3 million, or 53 cents a share, a year ago.

The latest quarter included increased acquisition and licensing charges, while the year-ago quarter included gains from legal settlements.

Excluding items, earnings were 61 cents a share, beating analyst expectations of 57 cents a share.

Revenue rose 8.8% to $677.8 million, also exceeding expectations of $664 million.

Watson reported that generic sales rose 14% to $393.8 million during the period, driven by the sales of new products, including a generic version of K-V Pharmaceuticals' potassium booster Micro-K, which is among that company's halted products.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; [e-mail]