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Watson Shares Fall 39%

Earnings: Firm blames wider-than-expected quarterly loss on acquisition costs, falling prices for generic drugs.


Watson Pharmaceuticals Inc. shares fell 39% after the third-largest generic drug maker had a wider-than-expected quarterly loss and cut profit projections.

Watson shares fell $18.61 to close at $28.54 on the New York Stock Exchange, wiping out about $1.98 billion of the Corona-based firm's market value, and giving the stock its biggest one-day loss since it went public in 1993.

Watson blamed the $58.6-million loss on costs related to last year's acquisition of Schein Pharmaceutical Inc., delayed product approvals and falling generic drug prices.

The company said profit will be reduced next year as it spends $135 million for marketing and research on higher profit brand-name products such as its Oxytrol skin patch for treating urinary incontinence.

"While Watson is blaming the generics business for the shortfall, it's likely just as much or more because of their inability to execute in their branded [drug] business," said David Moskowitz, an analyst at Friedman, Billings, Ramsey & Co., who rates the stock a "hold." Moskowitz doesn't own its shares.

The company's third-quarter loss narrowed to $58.6 million, or 55 cents a share, from $67.5 million, or 66 cents, in the year-ago period. Net revenue increased 51% to $270.9 million. The company attributed the growth to increased branded product sales in the nephrology and women's health divisions, and to generic product sales of buspirone, the generic equivalent of Bristol-Myers Squibb's BuSpar.

Watson said shortly after its August 2000 purchase of Schein that slow sales and high costs at the pharmaceutical firm would reduce profit. Allen Chao, Watson's chairman and chief executive, said the company will increase its focus on higher-profit brand-name drugs. Watson has been struggling to meet profit projections for the last year as it reduces excess inventories that came with the acquisition of generic drug maker Schein.

The drug maker said it now expects to earn 35 cents to 38 cents a share in the fourth quarter, and $1.55 to $1.60 a share in 2002. Watson was expected to earn 66 cents in the fourth quarter and $2.64 next year, based on the average estimates of analysts surveyed by Thomson Financial/First Call.

"I'm surprised by how severe the downturn in earnings per share was for the third quarter, and what hasn't been explained is how gross margins were so lousy," said Steven Valiquette, an analyst at UBS Warburg.

Several analysts cut stock ratings after the earnings release. Salomon Smith Barney analyst Angela Larson reduced her recommendation to "neutral" from "buy" because of "lack of clarity in potential growth the next 18 months."

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