Watson Pharma Strikes First

The generic-drug market has been roiled in recent years as more companies enter the field and as more competition squeezes profit margins. Last year, there was a drought of brand-name products going off-patent, but 2006 and 2007 should provide many big targets.

For example, Pravachol, the cholesterol drug from Bristol-Myers Squibb (BMY Quote), loses U.S. patent protection next month. The bigger cholesterol drug, Zocor from Merck(MRK Quote), goes off-patent in June.

Some generic-drug companies have tried to diversify by adding or expanding their menu of higher-margin brand-name drugs. Andrx tried this strategy, but its board decided in December 2004 to focus on generics. Andrx sold its brand-name products division 12 months ago.

Watson's brand-name drugs accounted for about one-fourth of last year's revenue of $1.65 billion. Andrx hasn't released fourth-quarter and full-year 2005 financial results yet, but analysts surveyed by Thomson First Call expect that sales will be just over $1 billion.

Some analysts say the combined company's revenue may be less than Watson and Andrx predict if the Federal Trade Commission rules that the merger would cause overlap in products, most notably oral contraceptives. Chao said he expected "no changes," but indicated that he will have to wait for the FTC.

If the deal is successful, it may put pressure on two prominent generic-drug makers, Barr Pharmaceuticals (BRL Quote) and Mylan Laboratories (MYL Quote). Barr is expected to have sales of $1.28 billion for the fiscal year ending June 30, and Mylan should have revenue of $1.25 billion for the year ending March 31, according to the consensus forecasts.

However, as testimony to what Wall Street thinks of the respective companies, Barr's market capitalization of $6.82 billion is greater than those of Watson, at $3.16 billion, and Andrx, $1.76 billion, combined. Mylan's market value is $4.85 billion.