Generics Stay Hot

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Shares of Watson Pharmaceuticals (NYSE: WPI) jumped 10% to $42.32 yesterday on the strength of its third-quarter earnings. Sales were up 17% to $359 million, while gross margins improved from 53% a year ago to 60%. Meanwhile, net income rose 27% to $51.5 million, or $0.47 per share, beating estimates.

The drug maker enjoyed strong growth in sales across the board. Branded drugs sales grew 14% to $184.6 million, with contributions from a pair of acquired products and Oxytrol, a bladder treatment approved in May 2003. Meanwhile, generic-drug sales gained 13% to $154.2 million.

And things only look better going forward.

In early September, Watson received FDA approval for generic versions of Pfizer's (NYSE: PFE) Glucotrol -- a $320 million diabetes drug -- as well as Endo Pharmaceuticals' (Nasdaq: ENDP) $145 million painkiller, Percocet. The following week, it got FDA OK for a generic of Bristol-Myers Squibb's (NYSE: BMY) Serzone, a $220 million antidepressant.

As a result of the strong Q3, Watson raised the low end of its full-year guidance. The company now expects to earn between $1.82 and $1.85 per share. But that also includes a $0.06 per share inventory reserve on generic versions of a pair of GlaxoSmithKline (NYSE: GSK) drugs, Wellbutrin and Zyban. If Watson is able to launch these products in the fourth quarter -- contingent on a third party launching a substitutable product -- the door is open for Watson to raise guidance further.

Regardless of contingencies, Watson came through with another strong showing. And, likeTeva Pharmaceuticals (Nasdaq: TEVA), Watson has a bright, not-so-generic future.

Jeff Hwang can be reached at JHwang@fool.com.