1 / 24

Watson Pharmaceuticals, Inc. Company Valuation

Watson Pharmaceuticals, Inc. Company Valuation. Sixuan Chen Advanced Corporate Finance Prof. Satya Gabriel April. 11, 2006. Presentation Overview. Industry profile Current situation: company profile Forward looking: strategic plans Business environment: customers and competitors

aqua
Download Presentation

Watson Pharmaceuticals, Inc. Company Valuation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Watson Pharmaceuticals, Inc. Company Valuation Sixuan Chen Advanced Corporate Finance Prof. Satya Gabriel April. 11, 2006

  2. Presentation Overview • Industry profile • Current situation: company profile • Forward looking: strategic plans • Business environment: customers and competitors • Financial performance • Valuation (assumptions, merger analysis)

  3. Industry Profile • Global sales: $300 billion annually • U.S. - largest market share, followed by Europe and Japan • Brand drugs: customer loyalty, exclusive rights • Generic drugs: bioequivalents, cost-efficient

  4. Company Profile • Development, manufacture, marketing, sale and distribution of brand and generic drugs • Fourth largest generic drugmaker by market cap (after Teva, Barr and Mylan) • Key statistics: • Total revenue in 2005: $1.6 billion • Total assets1: $3.1 billion • Market cap2 : $3.2 billion Footnote: 1: as of 12/31/2005 2: as of 4/3/2006

  5. 76% of total revenue More than 125 generic products 47 ANDAs on file Development in 2005: six new launches 24% of total revenue More than 20 brand products Two sales groups: Specialty Products Nephrology Generic vs. Brand segment

  6. Branded Product Pipeline

  7. Strategic Alliances and Collaborations • Somerset Pharmaceuticals, 50-50 JV with Mylan (agreement w/ BMS) • Feb. 2006, FDA approval for Emsam® • Generics development alliance with Cipla • Citalopram (Q4, 2004)

  8. R&D Capacity • R&D expense in 2005: $125.3 million (7.6% of revenue) • R&D facilities: • Corona, California • Danbury, Connecticut • Copiague, New York • Salt Lake City, Utah • Malmo, Sweden • Changzhou, China

  9. Generic: Development of generic drugs that are difficult to formulate Market generic alternatives to brand products Distribute generic versions of third-party brands “Watson Lab”, “Watson Pharma”, “Rugby” Brand: 2005 launches: Trelstar® and Oxytrol® Higher profit margin Continue to expand through Internal product development Strategic alliances and acquisitions Strategic Plans

  10. Business Environment • High entry-barrier • Customers: drug wholesalers, retailers, distributors • Consolidation in distribution network • Pricing pressure

  11. Competitive Landscape • Brand products: • J&J, Novartis, Pfizer • No competitive advantage • Generic products • Teva, Barr, Mylan, brand name companies in the generic market • Key: timing of product’s regulatory approval and launch

  12. Financial Performance • Revenue growth 5-year CAGR: 9.13% • In 2005, total revenue growth 0.34% • Generics: -2.51% • Price declines on nicotine gum due to entry of a competitor • Increase in R&D expenses • Brand: 4.37% • Specialty - Trelstar® • Nephrology - Ferrlecit® • Impairment charge: $25.1 million (2005)

  13. Stock Performance Source: Datastream, Yahoo!-Finance

  14. 1-year Stock Performance WPI vs. Industry 1-year Stock Performance WPI vs. S&P 500 Source: Datastream, Yahoo!-Finance

  15. Valuation – DCF • Key assumptions: • Operations: • Organic revenue growth • Gross/operating margin • CapEx, Depreciation • Working capital

  16. Valuation – DCF (cont’d) • CAPM model: • Risk free rate: 4.86% • Market risk premium: 6.00% • Beta: 1.55 • Default spread: 2.00% (Bond rating: BBB-) • Debt ratio: 15.47% • Tax rate: 37% • WACC = 12.65%

  17. Valuation – DCF Result • 5-year top-line growth: 6% • Continued growth: 5% • Price per share: $30.45 • Current share price1: $29.01 • Consensus estimates: • Valueline 3-5 year price range: $45-$65 • Thompson 12-month target price: $32 1: Share price as of April 3, 2006

  18. Valuation – DCF Sensitivity Analysis

  19. Valuation – DCF Sensitivity Analysis (cont’d)

  20. Valuation – Comps • Brand: Pfizer, J&J, Glaxosmithkline, Novartis, Bayer • Generic: Teva, Barr, Mylan, King, Alpharma, Par • Forward P/E1: $27.21 • Forward Price/Sales1: $44.14 1: For both P/E and Price/Sales used Generic Median; Sales and EPS estimates from Thompson One

  21. Potential Merger Analysis • WPI agreed to acquire Andrx for $1.9 billion in cash ($25 per share, 32% premium) • Andrx – Drug delivery • Total revenue in 2005: $1 billion • Total assets: $1.2 billion • Total market cap: $1.7 billion • Current P/E: 27.9x • Drug distribution (65%), manufacture (35%)

  22. Potential Merger Analysis (cont’d) • Merger positives • Third-largest generic drug maker, 60 generic drugs in pipeline • Synergies in SG&A • Distribution network • Merger negatives • Potential opposition • Creditwatch by S&P • Andrx production halted by FDA

  23. SUMMARY • DCF valuation range: $27-35 • Potential upside • Merger impact • Industry prospect: aging population • Recommendation: cautious buy at low

  24. THANK YOU! Questions?

More Related