Watson Pharmaceuticals second-quarter 2010 net revenue increases 29%

Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue grew 29 percent for the second quarter ended June 30, 2010 to $875.3 million, compared to $677.8 million in the second quarter 2009. On an adjusted cash basis, net income increased 22 percent to $102.8 million or $0.83 per share, compared to $84.2 million or $0.73 per share in the second quarter 2009.  GAAP earnings for the second quarter 2010 were $0.57 per share, compared to $0.46 per share in the prior year period.

Adjusted EBITDA increased 26 percent to $207.4 million for the second quarter 2010, versus $164.1 million for the second quarter 2009.  Cash and marketable securities were $236.1 million as of June 30, 2010. Please refer to the attached reconciliation tables for adjustments to GAAP earnings.

"The second quarter was one of solid financial growth, consistent performance, and continued progress against the strategies that will ensure growth of Watson's global businesses," said Paul Bisaro, president and CEO.  "We continue to emphasize growing our businesses through product development and portfolio and market expansion.  In the U.S., we have launched five new generic products so far this year and announced twelve new patent challenges.  Outside the U.S., we continue to focus on enhancing our management structure, the profitability of our country operations, and expanding our presence in all of our markets including Finland, Poland and Turkey.  We also invested more than $44 million in generic R&D, an increase of 49 percent.  Our Global Brands business continued to focus on growing our existing products while investing in internal R&D and business development initiatives.  Following the close of the quarter, we completed the acquisition of Columbia Laboratories' progesterone gel product line and announced a licensing agreement with Itero Biopharmaceuticals for a new biologic for infertility."  

"At quarter end, our leverage ratio was just 1.6x Adjusted EBITDA, and we were upgraded by both Moody's and the S&P," Bisaro added.  "I am extremely pleased with our accomplishments this quarter, and our continued progress in achieving our long-term objectives."

Global Generics net revenue for the second quarter 2010 increased 42 percent to $571.0 million, reflecting the addition of product sales from our new international markets, the addition of the 100mg and 200mg strengths of Metoprolol ER and higher sales of oral contraceptives.  Second quarter international net revenue was $110.5 million, essentially flat when compared to the first quarter, as unit growth was offset by lower pricing and the unfavorable impact of foreign currency rates. On a constant currency basis, international net revenues increased approximately four percent.

Adjusted Global Generics gross margin increased five percent to 48.6 percent in the second quarter 2010, primarily due to the addition of new products and increased efficiencies resulting from our Global Supply Chain Initiative.

Global Generics research and development investment increased $14.7 million to $44.6 million in the second quarter 2010, due to increased investment in product development and higher international R&D expense. Watson currently has approximately 110 ANDAs pending in the U.S., including tentative approvals, and more than 900 applications pending outside of the U.S.

Global Brands net revenue decreased 10 percent to $103.5 million in the second quarter 2010.  Global Brands product sales for the second quarter 2010 decreased $20.7 million to $76.9 million, due to the loss of Ferrlecit® in December 2009. The decrease in product sales was partially offset by increased sales of RAPAFLO® and higher sales of INFeD®.  Global Brands other revenue increased $8.9 million to $26.6 million, primarily due to the out-licensing of two legacy brand products, Monodox® and various forms of Cordran®.

Adjusted gross margin for the Global Brands segment decreased 3.7 percent to 77.2 percent in the second quarter 2010 as a result of the loss of Ferrlecit® in December 2009.

Global Brands R&D investment increased $4.5 million to $17.2 million, due primarily to higher clinical spending resulting from the initiation of a phase 3 study for a novel contraceptive and the addition of our newly acquired biologics business, Eden Biodesign.

Distribution segment net revenue for the second quarter 2010 increased 24 percent to $200.8 million. The increase was primarily due to sales of generic versions of Yaz®, Cozaar®, Hyzaar® and Skelaxin® launched in the second quarter 2010, as well as sales of new products launched late in 2009 and the first quarter 2010. Distribution revenue consists of sales of third-party products and excludes sales of Watson's brand and generic products.

Distribution segment adjusted gross margin increased to 16.1 percent in the second quarter 2010, compared to 15.1 percent in the second quarter 2009 and 13.1 percent in the first quarter of 2010. The increase is primarily the result of a favorable product mix.

Other Operating Expenses

Consolidated general and administrative expense increased 22 percent from $62.1 million to $75.9 million primarily as a result of our newly acquired international business and an increase in bad debt expense of $5.8 million which occurred in our distribution business.

Amortization expense for the second quarter 2010 was $43.1 million, which includes $21.4 million in amortization related to the Arrow Group acquisition.  Amortization expense was $22.1 million in the second quarter 2009.

2010 Financial Outlook

Watson's estimates are based on actual results for the second quarter 2010 and management's current belief about prescription trends, pricing levels, inventory levels and the anticipated timing of future product launches and events.  

-- Watson estimates total net revenue for the full year ended December 31, 2010 at approximately $3.5 billion.

-- Total Global Generics segment revenue between $2.25 and $2.35 billion

-- Total Global Brands segment revenue between $440 and $460 million

-- Total Distribution segment revenue between $760 and $800 million

-- Adjusted EBITDA between $820 million and $850 million

-- Cash earnings per share between $3.30 and $3.45