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Watson First Quarter 2011 Net Revenue Increases to $877 Million

- First Quarter 2011 Non-GAAP EPS up 10% to $0.89 -

- Company Increases 2011 Earnings Forecast -


News provided by

Watson Pharmaceuticals, Inc.

Apr 27, 2011, 07:00 ET

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PARSIPPANY, N.J., April 27, 2011 /PRNewswire/ -- Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue of $876.5 million for the first quarter ended March 31, 2011, compared to $856.5 million in the first quarter 2010. On a non-GAAP basis, net income for the first quarter 2011 was $111.9 million or $0.89 per share, an increase of 12 percent, compared to $100.3 million or $0.81 per share in the first quarter 2010.  GAAP diluted earnings per share for the first quarter 2011 were $0.36, compared to $0.57 in the prior year period. Refer to the attached reconciliation tables for adjustments to GAAP earnings.

(Logo:  http://photos.prnewswire.com/prnh/20100121/LA41294LOGO )

For the first quarter 2011, adjusted EBITDA increased nine percent to $215.9 million, compared to $198.9 million for the first quarter 2010.  Cash and marketable securities were $514.8 million as of March 31, 2011.

"As demonstrated by the first quarter results announced today, Watson had a very solid start to 2011," said Paul Bisaro, President and CEO.  "In our Global Generics business, revenue grew 10 percent during the quarter reflecting strong organic growth, and we expanded our adjusted gross margin by 1.6 percentage points. Additionally, we received approval in the United States for two new generic products and initiated three new patent challenges, including a challenge on a generic version of OxyContin®.  We won the appeal in our generic Seasonique® patent case and won the district court patent case for generic Mucinex®."

"In our Global Brands business, net revenue increased six percent, and we had adjusted gross margins of 81.6 percent.  Perhaps the most significant development for our Global Brands business came just after the close of the quarter, when the positive results of the PROCHIEVE® Phase III PREGNANT study for the prevention of pre-term birth in women with a short cervix were published in a peer-reviewed journal. The study results demonstrated a 45 percent reduction in preterm birth and improvement in infant outcome was noted. Yesterday, we announced the submission of a New Drug Application (NDA), and if accepted for expedited FDA review, look forward to potential action on the PROCHIEVE® NDA prior to the end of this year."

"We continued to invest substantial resources in Global Generics and Global Brands research and development and concluded the quarter with our lowest debt to adjusted EBITDA ratio in over six years.  We are well positioned for continued growth for the remainder of 2011 and we are actively pursuing opportunities to utilize our strong balance sheet to drive Watson's expansion," concluded Bisaro. 

First Quarter 2011 Business Segment Results


Global Generics Segment Information












Three Months Ended





March 31,

(Unaudited; $ in millions)

2011


2010








Product sales

$                      585.0


$                 534.1

Other revenue

15.1


9.7

   Net revenue

600.1


543.8

Operating expenses:






   Cost of sales

289.1


287.5

   Research and development

54.4


42.2

   Selling and marketing

30.6


26.9

Segment contribution

$                      226.0


$                 187.2

Segment margin

37.7%


34.4%








Adjusted gross profit (1)

$                      307.0


$                 273.1

Adjusted gross margin

51.8%


50.2%















(1) Adjusted gross profit represents adjusted net revenue less adjusted cost of sales and excludes

amortization of acquired intangibles. Pro forma adjustments for the respective periods include the following:
















Settlement of contingent asset acquired as part
of a business combination

$                        (7.4)


$                       -


Operational Excellence Initiative

3.4


5.0


Purchase accounting adjustments

-


11.8

Global Generics net revenue for the first quarter 2011 increased 10 percent to $600.1 million. Product sales increased 10 percent due to increased sales of extended-release products and the launch of new products including Zarah®. Other revenue increased primarily as a result of a settlement of a contingent asset acquired as part of a business combination. First quarter international net revenue was $108.7 million, down two percent from the first quarter 2010, as lower pricing in key markets offset the impact of higher unit sales.

Global Generics adjusted gross margin increased 1.6 percentage points to 51.8 percent in the first quarter 2011, compared to 50.2 percent in the first quarter 2010.  Adjusted Global Generics gross margin was positively influenced by increased sales of higher margin extended-release products and increased margins on a number of our base business products.

Global Generics R&D investment for first quarter 2011 increased 29 percent to $54.4 million, primarily due to clinical study costs, global supply chain costs associated with the closure of our R&D facilities in California and Australia and increased investment in international R&D.

Global Brands Segment Information












Three Months Ended





March 31,

(Unaudited; $ in millions)

2011


2010








Product sales

$                        80.3


$                   72.4

Other revenue

16.6


18.9

  Net revenue

96.9


91.3

Operating expenses:




  Cost of sales

17.8


24.7

  Research and development

19.9


17.3

  Selling and marketing

36.5


32.5

Segment contribution

$                        22.7


$                   16.8

Segment margin

23.4%


18.4%















Adjusted gross profit (1)

$                        79.1


$                   66.6

Adjusted gross margin

81.6%


72.9%








(1) Adjusted gross profit represents net revenue less adjusted cost of sales and excludes amortization of acquired intangibles.

Global Brands net revenue increased six percent to $96.9 million in the first quarter 2011. Global Brands net revenue increased primarily due to increased sales of Rapaflo®, Androderm® and the addition of Crinone®.

Adjusted gross margin for the Global Brands segment increased 8.7 percentage points to 81.6 percent from 72.9 percent in the first quarter 2010, primarily as a result of product sales mix.

Global Brands R&D investment increased $2.6 million to $19.9 million in the first quarter 2011 and included increased R&D investment at Eden Biodesign.

Distribution Segment Information












Three Months Ended





March 31,

(Unaudited; $ in millions)

2011


2010








Net revenue

$                      179.5


$                 221.4

Operating expenses:




  Cost of sales

148.7


192.5

  Selling and marketing

18.4


18.2

Segment contribution

$                        12.4


$                   10.7

Segment margin

6.9%


4.8%















Adjusted gross profit (1)

$                        30.8


$                   28.9

Adjusted gross margin

17.2%


13.1%








(1) Adjusted gross profit represents net revenue less cost of sales and excludes amortization of acquired intangibles.

Distribution segment net revenue for the first quarter 2011 decreased $41.9 million to $179.5 million, due to the lower number of third-party product launches in the quarter.  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 17.2 percent in the first quarter 2011, an increase of 4.1 percentage points from the prior year, as a result of a lower proportion of chain drug store sales in the quarter.

Other Operating Expenses

Consolidated general and administrative expenses were $79.3 million in the first quarter 2011, an increase of $4.9 million from the first quarter 2010 due primarily to an increase in international general and administrative expenses. Amortization expense for the first quarter 2011 was $57.1 million, including $0.5 million amortization on equity method investments recorded in other income (expense), compared to $39.0 million in first quarter 2010, reflecting higher amortization of intangible assets in our international business as a result of product launches and higher amortization rates.

2011 Financial Outlook

Watson's estimates are based on actual results for the first quarter 2011 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, 2011 at approximately $4.2 billion.

  -- Total Global Generic segment revenue between $2.9 and $3.1 billion

  -- Total Global Brand segment revenue of approximately $445 and $465 million

  -- Total Distribution segment revenue between $770 and $800 million

  -- Adjusted EBITDA between $950 million and $1.0 billion

  -- Non-GAAP earnings per share between $3.95 and $4.20.

Webcast and Conference Call Details

Watson will host a conference call and webcast today at 8:30 a.m. Eastern Daylight Time to discuss first quarter 2011 results, the outlook for the remainder of the year 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 56748589.  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 Daylight Time, May 11, 2011.  To access the live webcast, go to Watson's Investor Relations Web site at http://ir.watson.com.

About Watson Pharmaceuticals, Inc.

Watson Pharmaceuticals, Inc., is a leading integrated global pharmaceutical company. The Company is engaged in the development and distribution of generic pharmaceuticals and specialized branded pharmaceutical products focused on Urology and Women's Health. Watson has operations in many of the world's established and growing international markets.

For press release and other company information, visit Watson Pharmaceuticals' Web site at http://www.watson.com.

Forward-Looking Statement

Statements contained in this press release that refer to Watson's estimated or anticipated future results or other non-historical facts are forward-looking statements that reflect Watson's current perspective of existing trends and information as of the date of this release.  For instance, any statements in this press release concerning prospects related to Watson's strategic initiatives, product introductions and anticipated financial performance are forward-looking statements.  It is important to note that Watson's goals and expectations are not predictions of actual performance.  Watson's performance, at times, will differ from its goals and expectations.  Actual results may differ materially from Watson's current expectations depending upon a number of factors affecting Watson's business.  These factors include, among others, the inherent uncertainty associated with financial projections; the impact of competitive products and pricing; timely and successful consummation of strategic transactions;  the difficulty of predicting the timing or outcome of litigation; successful integration of strategic transactions including the acquisition of the Arrow Group; the ability to recognize the anticipated synergies and benefits of strategic transactions; variability of revenue mix between the Company's Brand, Generic and Distribution business units; periodic dependence on a small number of products for a material source of net revenue or income; variability of trade buying patterns; fluctuations in foreign currency exchange rates; changes in generally accepted accounting principles; risks that the carrying values of assets may be negatively impacted by future events and circumstances; the timing and success of product launches; the difficulty of predicting the timing or outcome of product development efforts and FDA or other regulatory agency approvals or actions; the uncertainty associated with the identification and successful consummation of external business development transactions; market acceptance of and continued demand for Watson's products; difficulties or delays in manufacturing; the availability and pricing of third party sourced products and materials; successful compliance with FDA and other governmental regulations applicable to Watson's and its third party manufacturers' facilities, products and/or businesses; changes in the laws and regulations, including Medicare, Medicaid, and similar laws in foreign countries affecting, among other things, pricing and reimbursement of pharmaceutical products and the settlement of patent litigation; and such other risks and uncertainties detailed in Watson's periodic public filings with the Securities and Exchange Commission, including but not limited to Watson's annual report on Form 10-K for the period ended December 31, 2010. Except as expressly required by law, Watson disclaims any intent or obligation to update these forward-looking statements.  

All trademarks are the property of their respective owners.  

The following table presents Watson's results of operations for the three months ended

March 31, 2011 and 2010:

WATSON PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in millions, except per share amounts)












Three Months Ended





March 31,





2011


2010








Net revenues


$                       876.5


$                       856.5







Operating expenses:






Cost of sales (excludes amortization, presented below)


455.6


504.7


Research and development


74.3


59.5


Selling, general and administrative


164.8


152.0


Amortization


56.6


39.0


Loss on asset sales and impairments


14.4


1.0



Total operating expenses


765.7


756.2

Operating income


110.8


100.3








Non-operating income (expense):






Interest income


0.8


0.4


Interest expense


(21.8)


(20.3)


Other income (expense)


(3.7)


26.1



Total other income (expense), net


(24.7)


6.2

Income before income taxes and noncontrolling interest


86.1


106.5

Provision for income taxes


41.3


36.7

Net income


44.8


69.8


Loss attributable to noncontrolling interest


0.5


-

Net income attributable to common shareholders


$                         45.3


$                         69.8








Earnings per share:






Basic


$                         0.37


$                         0.57


Diluted


$                         0.36


$                         0.57








Weighted average shares outstanding:






Basic


123.7


121.7


Diluted


125.7


123.4








The following table presents Watson's Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010.

WATSON PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(Unaudited; in millions)





March 31,


December 31,





2011


2010















Assets






Cash and cash equivalents


$                    504.5


$                    282.8


Marketable securities


10.3


11.1


Accounts receivable, net


532.7


560.9


Inventories, net


592.3


631.0


Other current assets


297.0


313.6


Property and equipment, net


626.7


642.3


Investments and other assets


225.0


225.5


Product rights and other intangibles, net


1,612.5


1,632.0


Goodwill


1,528.1


1,528.1



Total assets


$                 5,929.1


$                 5,827.3








Liabilities & Equity






Current liabilities


$                    856.3


$                    820.7


Long-term debt


1,020.3


1,016.1


Other Liabilities


682.1


707.9


Total equity


3,370.4


3,282.6



Total liabilities and equity


$                 5,929.1


$                 5,827.3

The following table presents Watson's Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010.

WATSON PHARMACEUTICALS, INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited; in millions)





Three Months Ended





March 31,





2011


2010

Cash Flows From Operating Activities





Net income


$                   44.8


$                   69.8

Reconciliation to net cash provided by operating activities:






Depreciation


23.0


24.7


Amortization


56.6


39.0


Deferred income tax benefit


(3.2)


(14.8)


Provision for inventory reserve


12.5


11.9


Share based compensation


8.4


4.9


(Earnings) losses on equity method investments


4.5


(2.5)


Gain on sale of securities


(0.8)


(23.4)


Loss on asset sales and impairments


14.4


1.0


Excess tax benefits from stock-based compensation


(6.7)


-


Accretion of preferred stock and contingent payment consideration


13.6


6.6


Other, net


1.0


(1.5)


Changes in assets and liabilities:






   Accounts receivable, net


31.1


(32.3)



Inventories


33.0


(44.1)



Prepaid expenses and other current assets


13.2


4.8



Accounts payable and accrued expenses


(42.1)


11.7



Deferred revenue


(1.3)


4.8



Income and other taxes payable


40.9


46.5



Other assets and liabilities


(10.9)


5.2



 Total adjustments


187.2


42.5



    Net cash provided by operating activities


232.0


112.3








Cash Flows From Investing Activities





Additions to property and equipment


(19.3)


(7.3)

Acquisition of product rights


(1.0)


(0.6)

Acquisition of business, net of cash acquired


-


(16.8)

Proceeds from sale of cost/equity investments


0.8


94.1

Other


-


(1.0)



    Net cash (used in) provided by investing activities


(19.5)


68.4








Cash Flows From Financing Activities





Principal payments on debt and other long-term liabilities


-


(3.4)

Principal payments on term loan, revolving loan and other debt


-


(220.0)

Repurchase of common stock


(10.3)


(4.4)

Acquisition of noncontrolling interests


(5.5)


-

Excess tax benefits from stock-based compensation


6.7


-

Proceeds from stock plans


20.3


14.9



    Net cash provided by (used in) financing activities


11.2


(212.9)

Effect of currency exchange rate changes on cash and cash equivalents


(2.0)


-



    Net increase (decrease) in cash and cash equivalents


221.7


(32.2)

Cash and cash equivalents at beginning of period


282.8


201.4

Cash and cash equivalents at end of period


$                 504.5


$                 169.2

The following table presents a reconciliation of reported net income and diluted earnings per share to non-GAAP net income for the three months ended March 31, 2011 and 2010:






Table 4

Watson Pharmaceuticals, Inc.

Reconciliation Table

(Unaudited; in millions except per share amounts)










Three Months Ended
March 31,










2011


2010













GAAP to Non-GAAP net income calculation












Reported GAAP net income


$                 45.3


$            69.8


Adjusted for:






        Amortization (1)


57.1


39.0


        Global supply chain initiative (2)


8.6


5.2


        Acquisition and licensing charges (3)


4.6


19.4


        Interest accretion on contingent obligations (4)


9.0


6.6


        Non-cash impairment charges (5)


14.4


1.0


        Other (gains) losses (6)


(5.7)


(23.4)


        Legal settlements (7)


-


3.0


        Income taxes on items above


(21.4)


(20.3)


Non-GAAP net income


$               111.9


$          100.3







Diluted earnings per share












Diluted earnings per share - GAAP


$                 0.36


$            0.57








Diluted earnings per share - Non-GAAP


$                 0.89


$            0.81








Basic weighted average common shares outstanding


123.7


121.7


Effect of dilutive securities:






  Dilutive share-based compensation arrangements


2.0


1.7


Diluted weighted average common shares outstanding


125.7


123.4













Notes:

1. Amortization of acquired intangible assets, such as product rights, core technology and customer relationships, and amortization related to equity method investments recorded in other income (expense).

2. The global supply chain initiative relates to closing or restructuring operations to gain efficiencies and operational excellence. The types of expenses include employee separation costs, product transfer expenses and accelerated depreciation.

3. Acquisition and licensing include upfront payments for products under development and fair market adjustments related to contingent obligations.

4. Interest accretion represents a non-cash fair value adjustment related to the Company's preferred stock and an adjustment to the fair value of contingent liabilities associated with the acquisition of the Arrow Group and the acquisition of the Progesterone business from Columbia Labs. These adjustments are based upon the passage of time and are classified as interest expense.

5. Non-cash impairment charges recorded to write-down tangible or intangible assets to fair value.

6. Other (gains) losses are excluded from Non-GAAP results.

7. Legal settlements include amount associated with significant matters not related to current operations.

The following table presents a reconciliation of reported net income to adjusted EBITDA for the three months ended March 31, 2011 and 2010:

Table 5

Adjusted EBITDA Reconciliation Table

(Unaudited; in millions)








Three Months Ended
March 31,








2011


2010
















GAAP net income

$              45.3


$             69.8

Plus:





        Interest expense

21.8


20.3

        Interest income

(0.8)


(0.4)

        Provision for income taxes

41.3


36.7

        Depreciation (includes accelerated depreciation)

23.0


24.7

        Amortization(1)

57.1


39.0

EBITDA


187.7


190.1

Adjusted for:




        Global supply chain initiative (2)

6.5


3.8

        Acquisition and licensing charges (3)

4.6


19.4

        Non-cash impairment charges (4)

14.4


1.0

        Other (gains) losses (5)

(5.7)


(23.4)

        Legal settlements (6)

-


3.0

        Share-based compensation (7)

8.4


5.0

Adjusted EBITDA

$            215.9


$           198.9





Notes:

1. Amortization of acquired intangible assets, such as product rights, core technology and customer relationships, and amortization related to equity method investments recorded in other income (expense).  

2. The global supply chain initiative relates to closing or restructuring operations to gain efficiencies and operational excellence. The types of expenses include employee separation costs, product transfer expenses and accelerated depreciation.

3. Acquisition and licensing include upfront payments for products under development and fair market adjustments related to contingent obligations.

4. Non-cash impairment charges recorded to write-down tangible or intangible assets to fair value.

5. Other (gains) losses are excluded from non-GAAP results.

6. Legal settlements include amount associated with significant matters not related to current operations.

7. Share-based compensation relates to a non-cash accounting expense resulting from the issuance of restricted stock or stock options to employees and directors.

The following table presents a reconciliation of forecasted net income for the twelve months ending December 31, 2011 to non-GAAP net income and non-GAAP earnings per diluted share:







Table 6

WATSON PHARMACEUTICALS, INC.

Reconciliation Table - Forecasted Non-GAAP Earnings per Diluted Share

(Unaudited; in millions except per share amounts)












Forecast for Twelve Months Ending December 31, 2011





Low


High















GAAP to non-GAAP net income calculation














GAAP net income



$            227


$            258


Adjusted for:







        Amortization



276


276


        Global supply chain initiative



15


15


        Acquisition and licensing charges



34


34


        Interest accretion on contingent obligations



38


38


        Non-cash impairment charges



14


14


        Other (gains) losses



(6)


(6)


        Income taxes



(99)


(99)


Non-GAAP net income



$            499


$            530








Diluted earnings per share














Diluted earnings per share - GAAP



$           1.80


$           2.04









Diluted earnings per share - Non-GAAP



$           3.95


$           4.20









Diluted weighted average common shares outstanding


126.3


126.3








The reconciliation table is based in part on management's estimate of non-GAAP net income for the year ending December 31, 2011.  Watson expects certain known GAAP charges for 2011, as presented in the schedule above.  Other GAAP charges that may be excluded from non-GAAP net income are possible, but their amounts are dependent on numerous factors that we currently cannot ascertain with sufficient certainty or are presently unknown.  These GAAP charges are dependent upon future events and valuations that have not yet been performed.

The following table presents a reconciliation of forecasted net income for the twelve months ending December 31, 2011 to adjusted EBITDA:






Table 7

WATSON PHARMACEUTICALS, INC.

Reconciliation Table - Forecasted Adjusted EBITDA

(Unaudited; in millions)










Forecast for Twelve Months Ending December 31, 2011




Low


High













GAAP net income


$               227


$               258

Plus:







Interest expense


88


88


Interest income


(1)


(1)


Provision for income taxes


175


194


Depreciation (includes accelerated depreciation)


102


102


Amortization


276


276

EBITDA


867


917

Adjusted for:






Global supply chain initiative


12


12


Acquisition and licensing charges


34


34


Non-cash impairment charges


14


14


Other gains and losses


(6)


(6)


Share-based compensation


29


29







Adjusted EBITDA


$               950


$             1,000

The reconciliation table is based in part on management's estimate of adjusted EBITDA for the year ending December 31, 2011.  Watson expects certain known GAAP charges for 2011, as presented in the schedule above.  Other GAAP charges that may be excluded from estimated EBITDA are possible, but their amounts are dependent on numerous factors that we currently cannot ascertain with sufficient certainty or are presently unknown.  These GAAP charges are dependent upon future events and valuations that have not yet been performed.

CONTACTS:

Watson Pharmaceuticals, Inc.


Patty Eisenhaur


(862) 261-8141




Charlie Mayr


(862) 261-8483

SOURCE Watson Pharmaceuticals, Inc.

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