Watson Turns It Around

Watson Pharmaceuticals (NYSE:WPI) posted strong second-quarter revenues, but the earnings news was overshadowed by a separate announcement that its leader is stepping down.

Revenues in the second quarter of 2007 totaled $603 million, an increase of 18% year over year. The increased sales resulted in profits of $0.33 per share, compared with a loss of $0.15 per share in the prior-year quarter.

Generic product sales for the second quarter of 2007 decreased 22% year over year. The decreased revenue was almost entirely due to lost sales from its authorized generic version of Oxycontin CR, which Watson stopped selling in February. In that same prior-year second quarter, it launched the authorized generic version of Bristol-Myers Squibb's (NYSE:BMY) Pravachol, which competed against TEVA Pharmaceuticals' (NASDAQ:TEVA) exclusivity period.

Consolidation, including closing a plant in Puerto Rico, helped gross margins for the generics business increase to 39.1% in the second quarter, from 27.1% in the prior-year period. Margins also got a boost from an increase in the "other revenue" category, which includes royalties from GlaxoSmithKline's (NYSE:GSK) sales of Wellbutrin XL.

New products, especially those with first-to-file exclusivity periods, are the lifeblood of the generic drug world. Watson currently has more than 70 abbreviated New Drug Applications on file with the FDA, including 15 tentative approvals and 11 first-to-file or shared exclusive opportunities.

Watson's branded drug sales had a more impressive quarter, with revenue up 23% year over year. Given its recently announced deal to co-promote Depomed's (NASDAQ:DEPO) ProQuin XR, I expect we'll continue to see increases in Watson's branded sales for quarters to come.

As mentioned earlier, Watson also announced yesterday that President and CEO Allen Chao is retiring. He will be replaced by Paul Bisaro, the chief operating officer at Barr Pharmaceuticals (NYSE:BRL). Chao founded the company nearly 24 years ago, and will remain as its chairman.

Bisaro played a key role in Barr's assimilation of Croatian drugmaker Pliva, which it acquired last year. Amid the rash of generic drugmaker mergers -- including Mylan Laboratories (NYSE:MYL) swallowing Merck KGaA's generics drug business -- it will be interesting to see if he tries to push his new companies into any additional purchases.

Watson bought Andrx for $1.9 billion last year, but it still trails its competitors in the larger-is-better world of generic drug sales. But its branded drug and distribution businesses offer it a distinct advantage, since they can help it weather the roller-coaster revenue from exclusive sales.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Barr Pharmaceuticals is a recommendation of Motley Fool Stock Advisor. GlaxoSmithKline is an Income Investor recommendation. The Fool's disclosure policy is anything but generic.