Watson third quarter net revenue increases 33% to $882.4 million

Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue grew 33 percent for the third quarter ended September 30, 2010 to $882.4 million, compared to $662.1 million in the third quarter 2009. On an adjusted cash basis, net income increased 18 percent to $105.9 million or $0.85 per share, compared to $90.0 million or $0.78 per share in the third quarter 2009.  GAAP earnings for the third quarter 2010 were $0.21 per share, compared to $0.55 per share in the prior year period, and include an $89.9 million charge associated with a potential legal settlement for certain pending drug pricing litigation. Please refer to the attached reconciliation tables for additional adjustments to GAAP earnings.

Adjusted EBITDA increased 18 percent to $211.1 million for the third quarter 2010, versus $178.4 million for the third quarter 2009.  Cash and marketable securities were $265.9 million as of September 30, 2010.

"Watson delivered another quarter of strong financial results and continued progress against our strategic objectives," said Paul Bisaro, president and CEO.  "Our Global Generics revenue increased by 45 percent as a result of continued growth of our extended release and our oral contraceptive franchises, and the addition of international sales. In our Global Brands business, we made significant progress on the expansion of our pipeline and expanding Watson's position in Women's health through the addition of Crinone® for infertility, which we began promoting during the quarter. Also, the U.S. Food and Drug Administration approved ella®, a novel emergency contraceptive we intend to launch in the current quarter under our exclusive distribution agreement with HRA Pharma. Additionally, our Anda distribution business continued to perform well with revenues up 35 percent."

"We continued to invest in our future, increasing our investment in R&D in both our Global Generics and Global Brands segments.  In addition, our long-term strategic alliance with Moksha8 to market a select number of products in Brazil and Mexico demonstrates our continued commitment to global expansion."  

"During the third quarter we also paid the remaining $50 million balance on our revolving credit facility and our leverage ratio was 1.5x adjusted EBITDA at quarter end," Bisaro added.  "2010 continues to be an extremely successful year for Watson and I'm very pleased with our excellent results."

Global Generics net revenue for the third quarter 2010 increased 45 percent to $577.6 million compared to the third quarter 2009, reflecting the addition of product sales from our new international markets, the addition of the 100mg and 200mg strengths of Metoprolol ER, Potassium Chloride and higher sales of oral contraceptives.  Third quarter international net revenue was $102.2 million, slightly lower than the second quarter 2010 as a result of seasonality and lower pricing in certain key markets.

Global Generics adjusted gross margin was relatively unchanged at 50.3 percent in the third quarter 2010 versus the prior year period.

Global Generics R&D investment increased $17.1 million to $54.1 million in the third quarter 2010 compared to the third quarter 2009, primarily due to the addition of international R&D expense.

Global Brands net revenue was $99.7 million in the third quarter 2010 including product sales of $82.4 million and other revenue of $17.3 million. Product sales declined compared to the third quarter 2009 due to the loss of Ferrlecit® in December 2009. The decline was partially offset by increased sales of Rapaflo®, Gelnique® and Androderm® and the addition of Crinone®.  Global Brands other revenue increased compared to the third quarter of 2009 due to higher Androgel co-promote revenue and the addition of Eden Biodesign.

Adjusted gross margin for the Global Brands segment was 80.1 percent in the third quarter 2010.

Global Brands R&D investment increased $6.8 million to $21.7 million compared to the third quarter 2009, due primarily to the addition of Eden Biodesign and milestone payments for pipeline products including rFSH, Uracyst® and ella®. Global Brands selling and marketing expenses increased $1.8 million to $34.3 million, due primarily to higher promotional spending related to the acquisition of Crinone® and pre-launch activities for new women's health products.

Distribution segment net revenue for the third quarter 2010 was $205.1 million. Revenue growth as compared to the third quarter 2009 was driven by third-party sales of generic Effexor XR® launched in the third quarter 2010, as well as sales of new products launched late in 2009 and the first and second 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 was relatively unchanged at 14.8 percent.

Other Operating Expenses

Consolidated general and administrative expense increased on a year over year basis to $163.5 million from $60.1 million due to an $89.9 million charge associated with the Company's drug pricing litigation and the addition of our international business acquired in 2009.

Amortization expense for the third quarter 2010 was $45.9 million, which includes $25.5 million in amortization related to the Arrow Group acquisition.  Amortization expense was $22.2 million in the third quarter 2009.

2010 Financial Outlook

Watson's estimates are based on actual results for the third 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 of approximately $2.3 billion
  • Total Distribution segment revenue of approximately $825 million
  • Total Global Brands segment revenue of approximately $400 million
  • Adjusted EBITDA between $835 million and $850 million
  • Cash earnings per share between $3.37 and $3.45