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Stock Strategist

Deteriorating Moat Makes Warner Chilcott a Value Trap

This pharmaceutical firm appears dirt-cheap, but a deeper look reveals bleak prospects.


Shares of  Warner Chilcott (WCRX) appear cheap, but the firm's economic moat is quickly eroding as generic entrants have severely shrunk the branded women's health market. Private equity owners have harvested the business for its free cash flow, but lack of reinvestment puts the firm on an unsustainable path. Unlike some of its peers, management has been unwilling to admit that Warner faces an extremely challenging environment, or adapt to new market opportunities. We think the recent special dividend, paid for with additional debt, cripples the firm's ability to alter its course. At current prices, we consider the shares to be moderately overvalued.

Latest Product Launches Underwhelm
Warner's two recent product launches, Atelvia for osteoporosis and oral contraceptive Lo Loestrin, are critical to the company's future but have come in below expectations. We believe they are a harbinger of Warner's prospects.

David Krempa does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.