Watson third quarter net income increases 31% to $138.7 million

Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue of $1.1 billion for the third quarter ended September 30, 2011, an increase of 23 percent when compared to $882.4 million in the third quarter 2010. On a non-GAAP basis, net income for the third quarter 2011 increased 31 percent to $138.7 million or $1.09 per diluted share, compared to $105.9 million or $0.85 per diluted share in the third quarter 2010.  GAAP diluted earnings per share for the third quarter 2011 were $0.54, compared to $0.21 in the prior year period. Refer to the attached reconciliation tables for adjustments to GAAP earnings.

For the third quarter 2011, adjusted EBITDA increased 22 percent to $258.2 million, compared to $211.1 million for the third quarter 2010.   Cash and marketable securities were $172.5 million as of September 30, 2011.

"Our exceptional performance in the third quarter, as measured by double-digit revenue and earnings growth, was driven once again by our focus on the execution of our business growth strategies in Global Generics and Brands and our continued focus on operational excellence," said Paul Bisaro, President and CEO. "Revenue growth of nearly 40 percent in our Global Generics segment came from sales of our extended release and oral contraceptive franchises in the US, and increased international product sales including the addition of Specifar. Growth in our Global Brands segment came from continued strong sales of our key promoted products including RAPAFLO®, which reached a milestone of more than 500,000 prescriptions dispensed since launch."

"With revenues exceeding $1 billion for the second consecutive quarter, we are utilizing our earnings and cash flow to continue our strategic investment into future growth drivers, while strengthening our balance sheet to drive further expansion. Our results have allowed for continued investments in R&D and in sales and marketing, including preparations for the launch of several of our brand products outside of the U.S., as well as continued investment in preparation for the anticipated February 2012 PDUFA date for our progesterone gel product for prevention of preterm birth for women with a shortened cervix."

"Cash from operations for the third quarter 2011 was $118.4 million and we ended the quarter with $172.5 million in cash and marketable securities and a debt to adjusted EBITDA ratio of just 1.2x.  This low level of debt provides us with a great deal of flexibility as we continue to pursue opportunities to expand Watson's businesses," concluded Bisaro. 

Business Segment Results

Global Generics net revenue increased 39 percent to $802.5 million in the third quarter.  Extended release product sales increased 89 percent to $341.7 million as a result of the launch of methylphenidate ER this year.  Third quarter international net revenue was $144.6 million, up 41 percent from the third quarter 2010, as a result of the addition of Specifar Pharmaceuticals in May and a larger number of product launches in key markets during the quarter.

Global Generics adjusted gross margin decreased 3.6 percentage points to 46.5 percent in the third quarter 2011 due to sales of methylphenidate ER at lower margins.

Global Generics R&D investment for third quarter 2011 was $54.6 million, consistent with prior year levels. Selling and marketing expenses for the third quarter 2011 increased $18.8 million to $45.3 million as a result of the addition of Specifar and higher selling and marketing expenses in certain other international markets.

Global Brands net revenue increased 11 percent to $110.3 million in the third quarter 2011 as a result of increased sales of key promoted products, including RAPAFLO®, Gelnique®, Trelstar®,  Crinone®, and Generess™ Fe.  

Adjusted gross margin for the Global Brands segment decreased 2.6 percentage points in the third quarter to 77.5 percent as a result of product mix.

Shortly following the end of the quarter, Watson received approval for its 2 mg and 4 mg formulation of Androderm®. The new smaller size and lower-dose testosterone patch provides highly effective testosterone administration with a 20 percent reduction in the active ingredient from the original strength in a smaller patch size. Watson plans to launch the new Androderm® formulation in the fourth quarter.

Global Brands R&D investment decreased 13 percent to $18.8 million in the third quarter 2011 as a result lower contractual milestone payments when compared with the third quarter of 2010. The decrease was partially offset by increased biosimilar R&D investment and other costs.  Selling and marketing expenses increased 19 percent to $40.8 million as a result of increased field force and support costs, including expansion costs in Canada.

Distribution segment net revenue for the third quarter 2011 decreased 18 percent to $168.8 million due to fewer third-party product launches in the quarter.  Distribution revenue consists only of sales of third-party products.

Distribution segment gross margin increased 2.1 percentage points to 17.0 percent in the third quarter 2011, as the prior year margins were impacted by a number of product launches at lower margins.

During the quarter, Anda began construction of a 234,000 square foot state-of-the-art distribution facility in Olive Branch, MS, which more closely aligns with Anda's plans for the growth of this business in the future.

Other Operating Expenses

Consolidated general and administrative expenses were $85.2 million in the third quarter 2011 compared to $163.5 million in the third quarter 2010. The third quarter of 2010 included an $89.9 million charge associated with the Company's drug pricing litigation. Excluding this prior year charge, general and administrative expenses increased $11.6 million from the third quarter 2010, primarily as a result of higher legal fees and expenses associated with Specifar's operations that were not in the prior year period. Amortization expense for the third quarter 2011 was $71.8 million, compared to $45.9 million in third quarter 2010, due to amortization of intangible assets acquired in the Specifar acquisition, amortization on newly launched products, and higher amortization rates.

2011 Financial Outlook

Watson's estimates are based on actual results for the nine months ended September 30, 2011 and management's current belief about prescription trends, pricing levels, inventory levels and the anticipated timing of future product launches and events.  A number of factors are reflected in the updated forecast, and management has sought to appropriately reflect the potential impact from these factors given current visibility into the complex market environment.

Included in this forecast is the launch of Atorvastatin scheduled for November 30, 2011. We anticipate the fourth quarter contribution of the Atorvastatin launch to result in between $0.48 and $0.53 of diluted earnings per share for Watson.

SOURCE Watson Pharmaceuticals, Inc.