Nearly every major generic-drug company bought out a smaller competitor or finished up an acquisition last year. Watson Pharmaceuticals (NYSE:WPI) was no stranger to the acquisition game, with its $1.9 billion buyout of Andrx in March 2006. The resulting larger company was able to pump out more drug applications last year than it did in 2005. Now that the year-end results are in, will we be able to gauge how successful the marriage has been?

Well, since the Andrx deal just closed in early November, Watson's year-over-year results are not directly comparable. Regardless, Watson announced its fourth-quarter and year-end financial results yesterday, and we found out that revenue came in at $2 billion for the year, while gross margins were 38%, which is on the low end among companies in the industry. Adjusted earnings, meanwhile, were $1.03 per share last year, compared with $1.35 per share in 2005.

The lifeblood of generic-drug companies consists of the Abbreviated New Drug Applications (ANDA) they file with the FDA so they can market new generic products. Watson did a good job of churning out more ANDAs in 2006, having submitted 27 new ones last year, five more than in 2005.

For 2007, Watson gave revenue guidance in a range of $2.45 billion to $2.65 billion. Adjusted earnings per share are expected to come in between $1.20 and $1.30. On the conference call, management stated it was being conservative with this guidance, but the inclusion in these calculations of items such as the possible launch of a complex generic like Lovenox sounds extremely aggressive to me. So I wouldn't be surprised to see Watson not hit this guidance this year.

Watson is not my favorite generic-drug maker, because in this industry, size and scale are becoming a much more important requirement for continued success as margins get squeezed. With competitors such as Barr Laboratories (NYSE:BRL), Teva Pharmaceuticals (NYSE:TEVA) and Novartis' (NYSE:NVS) Sandoz division accounting for bigger portions of the generics market, Watson is in the tough position of having to get bigger if it wants to keep up with these generic leaders.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.