Watson Pharmaceuticals announces third quarter 2009 financial results

Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net income of $63.0 million, or $0.55 per diluted share for the third quarter ended September 30, 2009. Excluding special items as detailed in the reconciliation table below, adjusted net income for the third quarter was $76.1 million, or $0.66 per diluted share, an increase of $22.1 million or 41 percent over the adjusted net income for the third quarter ended September 30, 2008. As detailed in the attached reconciliation table, adjusted EBITDA for the third quarter was $178.4 million.

Net revenue for the third quarter 2009 was $662.1 million, an increase of $21.4 million or three percent from the third quarter 2008. Cash flow from operations was $74.4 million and cash and marketable securities were $826.0 million as of September 30, 2009.

"Adjusted net income for the quarter increased over 40 percent, driven by sustainable margin improvements resulting from operating efficiencies delivered by our Global Supply Chain Initiative as well as the contribution of new products," said Paul Bisaro, Watson's President and Chief Executive Officer. "Key generic products such as metroprolol extended-release, potassium chloride and Next Choice(TM) contributed to a nine percent increase in generic revenue, while brand revenue for the quarter exceeded $112 million, the result of contributions from new products such as Rapaflo® and Gelnique®, and promoted products such as AndroGel® and Femring®.

"While achieving strong earnings growth, we also increased our investment in product development by 15% to approximately $52 million, and continued to invest in sales and marketing to support our brand portfolio," continued Mr. Bisaro. "In preparation for completing the acquisition of Arrow Group, we completed our bond offering during the quarter at very favorable rates and stand to close as soon as Federal Trade Commission (FTC) clearance is received. Management continues to refine the strategies that will ensure the smooth and efficient integration of this business to maximize its contribution going forward. We remain confident that the addition of Arrow will efficiently expand our global marketing presence and help create a strong platform for future growth," Mr. Bisaro concluded.

Third Quarter 2009 Business Segment Results September 30, September 30, ------------- -------------- (Unaudited; $ in millions) 2009 2008 2009 2008 ---- ---- ---- ---- Generic Segment Contribution Product sales $392.3 $352.2 $1,181.3 $1,038.9 Other revenue 5.7 11.6 19.6 68.3 --- ---- ---- ---- Net revenue 398.0 363.8 1,200.9 1,107.2 Operating expenses: Cost of sales 204.1 212.4 676.7 669.7 Research and development 37.0 31.7 97.0 83.4 Selling and marketing 11.7 14.0 35.8 41.9 ---- ---- ---- ---- Segment contribution $145.2 $105.7 $391.4 $312.2>Generic product sales for the third quarter of 2009 increased $40.1 million or 11 percent to $392.3 million, reflecting the addition of new products, including metoprolol extended-release, potassium-chloride extended-release capsules, and Next Choice(TM). The increase was partially offset by lower sales from omeprazole 40mg. Generic other revenue decreased $5.9 million to $5.7 million, primarily due to a decline in royalties from Sandoz's sales of metoprolol extended-release tablets 50mg.

Adjusted Generic gross profit increased $44.9 million or 29 percent to $200.6 million in the third quarter of 2009, compared to $155.7 million in the third quarter of 2008 and $175.2 million in the second quarter of 2009. The year over year quarterly increase was positively influenced by lower costs resulting from Watson's Global Supply Chain Initiative, as well as the launch of new products. Adjusted Generic gross profit for the third quarter excludes approximately $6.7 million in costs related to the Global Supply Chain Initiative.

Generic research and development expense increased $5.3 million or 17 percent to $37.0 million. Watson currently has approximately 60 ANDAs on file with the Food and Drug Administration (FDA).

Brand Segment Information Three Months Nine Months Ended Ended September 30, September 30, ------------- ------------- (Unaudited; $ in millions) 2009 2008 2009 2008 ---- ---- ---- ---- Brand Segment Contribution Product sales $96.1 $94.3 $291.9 $294.8 Other revenue 16.6 11.7 48.1 44.5 ---- ---- ---- ---- Net revenue 112.7 106.0 340.0 339.3 Operating expenses: Cost of sales 20.7 30.2 66.9 82.1 Research and development 14.9 13.6 39.8 39.1 Selling and marketing 32.5 29.0 108.5 86.6 ---- ---- ----- ---- Segment contribution $44.6 $33.2 $124.8 $131.5>Brand product sales for the third quarter of 2009 increased slightly to $96.1 million, due primarily to sales of new products, including Rapaflo® and Gelnique®, and increased sales of Androderm®. This increase was offset in part by lower sales of Ferrlecit®. Brand other revenue increased $4.9 million to $16.6 million, due primarily to increased revenue from the Company's promotion of AndroGel® and Femring®.

Brand selling and marketing expense for the third quarter of 2009 increased 12 percent to $32.5 million, due to higher spending related to the launches of Rapaflo® and Gelnique®.

Distribution Segment Information Three Months Nine Months Ended Ended September 30, September 30, ------------- ------------- (Unaudited; $ in millions) 2009 2008 2009 2008 ---- ---- ---- ---- Distribution Segment Contribution Net revenue $151.4 $170.9 $466.4 $443.8 Operating expenses: Cost of sales 128.9 144.1 391.9 374.9 Selling and marketing 15.8 15.6 47.6 43.7 ---- ---- ---- ---- Segment contribution $6.7 $11.2 $26.9 $25.2>Distribution segment net revenue decreased 11 percent or $19.5 million to $151.4 million for the third quarter of 2009. The decrease was primarily due to fewer third-party generic new product launches in the third quarter, partially offset by an increase in brand product sales. Distribution revenue excludes sales of Watson products.

Distribution segment adjusted gross margin was 14.9 percent in the third quarter of 2009 compared to 15.7 percent in the third quarter 2008.

Other Operating Expenses

Consolidated general and administrative expenses for the third quarter 2009 increased $17.5 million to $60.1 million, primarily as a result of higher legal expenses and expenses related to the acquisition of Arrow Group. General and administrative expenses for the third quarter 2008 reflect a $5.9 million favorable settlement of a tax-related liability due to the resolution of an Internal Revenue Service audit.

Amortization expense for the third quarter 2009 increased $2.0 million to $22.2 million, reflecting the addition of product rights acquired from Teva Pharmaceutical Industries, Ltd.

2009 Financial Outlook

Based on actual results for the first nine months of 2009 and the forecast for the remainder of the year, Watson is adjusting its estimates for the full year 2009. GAAP earnings per diluted share is estimated to be between $2.04 and $2.12, and as detailed in reconciliation Table 6, Watson has affirmed its estimate for adjusted earnings per diluted share, which is expected to be between $2.50 and $2.58. Excluding special items as detailed in the EBITDA reconciliation Table 7 below, adjusted EBITDA continues to be between $668 million and $685 million.

Watson estimates total net revenue for the full year of 2009 at approximately $2.70 billion. Estimates for segment revenue are as follows:

• Total Generic segment revenue between $1.60 billion and $1.65 billion.
• Total Brand segment revenue between $450 million and $465 million.
• Total Distribution segment revenue between $620 million and $640 million.

Watson's estimates are based on the Company's actual results for the first nine months of 2009, and management's current belief about prescription trends, pricing levels, inventory levels and the anticipated timing of future product launches and events. Watson's forecast for 2009 excludes the impact of the acquisition of Arrow Group, which is expected the close in the fourth quarter of 2009.

Webcast and Conference Call Details

Watson will host a conference call and webcast today at 8:30 a.m. Eastern Standard Time to discuss second quarter 2009 results, the outlook for 2009 and recent corporate developments. The dial-in number to access the call is (877) 251-7980, or from international locations, (706) 643-1573. A taped replay of the call will be available by calling (800) 642-1687 with access pass code 32523724. The replay may be accessed from international locations by dialing (706) 645-9291 and using the same pass code. This replay will remain in effect until midnight Eastern Standard Time, November 13, 2009. To access the live webcast, go to Watson's Investor Relations Web site at http://ir.watson.com.