Watson Pharmaceuticals Reports First Quarter 2008 Results

CORONA, Calif., May 1 /PRNewswire-FirstCall/ -- Watson Pharmaceuticals, Inc. , a leading specialty pharmaceutical company, today reported financial results for its first quarter ended March 31, 2008.

First Quarter 2008 Results

Net revenue for the first quarter 2008 was $626.9 million and net income was $50.6 million, or $0.45 per diluted share. Net income for the first quarter 2008 included charges related to the Company's Global Supply Chain Initiative, a milestone payment, debt repurchase costs, and a gain on the sale of securities. Excluding special items as detailed in the reconciliation table below, adjusted net income for the first quarter was $62.1 million, or $0.55 per diluted share. Adjusted EBITDA for the first quarter 2008 was $149.3 million and cash flow from operations was $66.6 million. Cash and marketable securities were $186.7 million as of March 31, 2008.

"As we enter the year, we are pleased to report strong financial results and tremendous progress made on our 2008 goals," stated Paul Bisaro, Watson's President and Chief Executive Officer. "The successful resolution of our Official Action Indicated status at our Davie, Florida manufacturing facility announced earlier this week will provide us with important new product opportunities and allow us to transfer new products to the site, as part of our ongoing Global Supply Chain Initiative."

"Our Brand division posted solid results and continues to move our urology pipeline products, silodosin and topical oxybutynin gel, closer to market. As the recent approval of the Trelstar(R) MixJect(TM) delivery system demonstrates, we look to offer products and services that improve the quality of patients' lives, and meet the needs of physicians who specialize in the diagnosis, management, and treatment of urological disorders. While we continue to believe that fiscal 2008 will be a transitional year for Watson, we remain focused in our efforts to drive earnings growth and shareholder value," concluded Mr. Bisaro.

First Quarter 2008 Business Segment Results Generic Segment Information Three Months Ended March 31, (Unaudited; $ in thousands) 2008 2007 Generic Segment Contribution Product sales $342,459 $411,475 Other revenue 24,297 13,150 Net revenue 366,756 424,625 Cost of sales 229,723 272,623 Gross profit 137,033 152,002 Gross margin 37.4% 35.8% Research and development 22,597 26,513 Selling and marketing 14,053 14,549 Segment contribution $100,383 $110,940 Segment margin 27.4% 26.1%

Generic product sales for the first quarter of 2008 decreased $69.0 million to $342.5 million, primarily related to the loss of revenue from oxycodone HCl extended-release tablets following the termination of a distribution agreement. This was partially offset by the addition of new distributed products, such as alendronate sodium.

Generic other revenue increased $11.1 million to $24.3 million, due primarily to the addition of royalties from Sandoz's sales of metoprolol succinate extended-release tablets 50mg.

Gross margin for the Generic segment increased from 36 percent in the first quarter 2007 to 37 percent in the first quarter 2008 due to the increase in other revenue and an improvement in product mix. Cost of sales for the first quarter includes approximately $13 million in costs related to Watson's Global Supply Chain Initiative, which includes the planned closure of its Carmel, New York facilities.

Watson currently has approximately 60 ANDAs on file with the FDA. Brand Segment Information Three Months Ended March 31, (Unaudited; $ in thousands) 2008 2007 Brand Segment Contribution Product sales $98,992 $90,638 Other revenue 16,299 10,902 Net revenue 115,291 101,540 Cost of sales 27,526 25,216 Gross profit 87,765 76,324 Gross margin 76.1% 75.2% Research and development 15,418 11,295 Selling and marketing 27,995 26,411 Segment contribution $44,352 $38,618 Segment margin 38.5% 38.0%

Brand product sales for the first quarter of 2008 increased 9 percent or $8.4 million to $99.0 million, primarily due to higher sales of Ferrlecit(R) and Trelstar(R), slightly offset by a decline in sales of non-promoted products. Brand other revenue increased $5.4 million to $16.3 million, due primarily to increased revenue from the Company's licensing arrangements.

Gross margin for the Brand segment increased from 75 percent in the first quarter 2007 to 76 percent in the first quarter 2008, due to the increase in other revenue.

During the first quarter 2008, Watson's New Drug Application (NDA) for silodosin, a new chemical entity under development for the treatment of the signs and symptoms of benign prostatic hyperplasia, was accepted for filing by FDA. Watson expects to have an NDA on file with FDA for its topical gel formulation of oxybutynin for overactive bladder by mid 2008. In the second half of 2008, Watson expects to submit a supplemental NDA for its six-month formulation of Trelstar(R), a product for the treatment of advanced prostate cancer.

Distribution Segment Information Three Months Ended March 31, (Unaudited; $ in thousands) 2008 2007 Distribution Segment Contribution Net revenue $144,902 $145,440 Cost of sales 122,853 126,882 Gross profit 22,049 18,558 Gross margin 15.2% 12.8% Selling and marketing 14,032 14,203 Segment contribution $8,017 $4,355 Segment margin 5.5% 3.0%

Distribution segment net revenue for the first quarter of 2008 was $144.9 million, essentially even with $145.4 million reported in the first quarter 2007. Revenue from new products launched within the last twelve months offset price erosion and volume decreases in the base business. Distribution revenue excludes sales of Watson products.

Gross margin for the Distribution segment increased from 13 percent in the first quarter 2007 to 15 percent in first quarter 2008. Cost of sales for the first quarter 2007 included $2.5 million in acquisition-related inventory charges.

Other Operating Expenses

Consolidated general and administrative expenses for the first quarter of 2008 increased $2.5 million to $50.6 million.

Amortization expense for the first quarter 2008 declined $23.8 million to $20.2 million, reflecting the full amortization of Ferrlecit(R) product rights as of December 31, 2007.

2008 Financial Outlook

Watson's estimates are based on the Company's actual results for the first quarter 2008, 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 of 2008 at approximately $2.5 billion.

Net Revenue Estimates by Segment For the Twelve Months Ending December 31, 2008 Generic Segment $1.45 - $1.55 Billion Brand Segment $420 - $440 Million Distribution Segment $580 - $610 Million

Research and development investment for 2008 is expected to be approximately $160 million. Selling, general and administrative expenses for 2008 are expected to be $420 to $440 million. Amortization expense for 2008 is expected to be approximately $80 million.

In 2008, the Company expects to incur pre-tax costs associated with the planned closure of its Carmel, NY manufacturing facilities of approximately $32 million which includes accelerated depreciation, severance, retention and other related plant closure costs. The Company also expects to incur $6 million of licensing costs. These charges, together with other items, are excluded from Watson's 2008 adjusted earnings per diluted share forecast as detailed in Table 6 below.

For 2008, the Company expects GAAP earnings per diluted share to be between $1.70 to $1.80 and adjusted earnings per diluted share to be between $1.90 and $2.00. Excluding special items as detailed in the EBITDA reconciliation table below, adjusted EBITDA is expected to be between $551 and $571 million.

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 2008 results, the outlook for 2008 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 43235228. 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 9, 2008. To access the live webcast, go to Watson's Investor Relations website at http://ir.watson.com/.

About Watson Pharmaceuticals, Inc.

Watson Pharmaceuticals, Inc., headquartered in Corona, California, is a leading specialty pharmaceutical company that develops, manufactures, markets, sells and distributes brand and generic pharmaceutical products. Watson pursues a growth strategy combining internal product development, strategic alliances and collaborations and synergistic acquisitions of products and businesses.

For press release and other company information, visit Watson Pharmaceuticals' website 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; successful integration of strategic transactions; the ability to timely resolve with FDA the pending Official Action Indicated status of the Davie, Florida manufacturing facility; 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; changes in generally accepted accounting principles; risks that the carrying values of assets may be negatively impacted by future events and circumstances; timely and successful consummation and implementation of strategic initiatives; 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; costs and efforts to defend or enforce intellectual property rights; 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; uncertainties related to the timing and outcome of litigation and other claims; changes in the laws and regulations, including Medicare and Medicaid, affecting among other things, pricing and reimbursement of pharmaceutical products; 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 year ended December 31, 2007. Except as expressly required by law, Watson disclaims any intent or obligation to update these forward-looking statements.

MixJect(TM) is a trademark of Medimop Medical Projects Ltd., a subsidiary of West Pharmaceutical Services, Inc.

The following table presents Watson's results of operations for the three months ended March 31, 2008 and 2007:

Table 1 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Operations (Unaudited; in thousands, except per share amounts) Three Months Ended March 31, 2008 2007 Net revenues $626,949 $671,605 Cost of sales (excludes amortization, presented below) 380,102 424,720 Gross profit 246,847 246,885 Operating expenses: Research and development 38,015 37,808 Selling, general and administrative 106,633 103,218 Amortization 20,179 43,933 Total operating expenses 164,827 184,959 Operating income 82,020 61,926 Non-operating (expense) income, net: Loss on early extinguishment of debt (1,095) (2,729) Interest income 2,309 2,929 Interest expense (6,796) (13,876) Other income 5,353 3,403 Total non-operating expense, net (229) (10,273) Income before income taxes 81,791 51,653 Provision for income taxes 31,162 20,041 Net income $50,629 $31,612 Diluted earnings per share $0.45 $0.29 Diluted weighted average shares outstanding 117,380 116,612

The following table presents Watson's Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007:

Table 2 Watson Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets (Unaudited; in thousands) March 31, December 31, 2008 2007 Assets Cash and cash equivalents $173,998 $204,554 Marketable securities 12,711 11,799 Accounts receivable, net 273,305 267,117 Inventories 521,322 490,601 Other current assets 182,291 199,705 Property and equipment, net 684,507 688,185 Investments and other assets 131,285 129,920 Product rights and other intangibles, net 583,776 603,697 Goodwill 876,449 876,449 Total Assets $3,439,644 $3,472,027 Liabilities & Stockholders' Equity Current liabilities $435,721 $444,927 Long-term debt 824,473 899,408 Deferred income taxes and other liabilities 276,083 278,227 Stockholders' equity 1,903,367 1,849,465 Total liabilities and stockholders' equity $3,439,644 $3,472,027

The following table presents Watson's Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007:

Table 3 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited; in thousands) Three Months Ended March 31, 2008 2007 Cash Flows from Operating Activities: Net income $50,629 $31,612 Reconciliation to net cash provided by operating activities: Depreciation and amortization 41,984 61,962 Deferred income tax provision 6,443 250 Provision for inventory reserve 9,082 11,427 Restricted stock and stock option compensation 4,322 3,402 Other adjustments (2,676) (41) Changes in assets and liabilities: Accounts receivable, net (6,188) 12,083 Inventories (39,803) 9,063 Accounts payable and accrued expense (26,151) (83,596) Income taxes payable 24,253 10,319 Other assets and liabilities 4,737 31,758 Total adjustments 16,003 56,627 Net cash provided by operating activities 66,632 88,239 Cash Flows from Investing Activities: Additions to property, equipment and product rights (18,535) (16,897) Additions to marketable securities and long-term investments (1,288) (2,243) Proceeds from sale of marketable securities and investments 1,628 699 Other investing activities, net - 115 Net cash used in investing activities (18,195) (18,326) Cash Flows from Financing Activities: Payments on term loan, current debt and other long-term liabilities (88,058) (151,661) Proceeds from issuance of short-term debt 9,076 - Other (11) 1,127 Net cash used in financing activities (78,993) (150,534) Net decrease in cash and cash equivalents (30,556) (80,621) Cash and cash equivalents at beginning of period 204,554 154,171 Cash and cash equivalents at end of period $173,998 $73,550

The following table presents a reconciliation of reported net income and diluted earnings per share to adjusted net income and diluted earnings per share for the three months ended March 31, 2008 and 2007:

Table 4 Watson Pharmaceuticals, Inc. Reconciliation Table (Unaudited; in thousands except per share amounts) Three Months Ended March 31, 2008 2007 GAAP to adjusted net income calculation Reported GAAP net income $50,629 $31,612 Adjusted for: Global supply chain initiative(1) 13,740 - Acquisition and licensing charges 5,000 7,361 Gain on sale of assets (1,355) (1,789) Loss on debt repurchases 1,095 2,729 Legal settlements - 1,000 Income taxes (7,041) (3,609) Adjusted net income 62,068 37,304 Add: Interest expense on CODES, net of tax 1,986 1,943 Adjusted net income, adjusted for interest on CODES $64,054 $39,247 Diluted earnings per share Diluted earnings per share - GAAP $0.45 $0.29 Diluted earnings per share - Adjusted $0.55 $0.34 Basic weighted average common shares outstanding 102,625 101,928 Effect of dilutive securities: Conversion of CODES 14,357 14,357 Dilutive stock options 398 327 Diluted weighted average common shares outstanding 117,380 116,612 (1) Includes accelerated depreciation charges of $1,757.

The following table presents a reconciliation of reported net income for the three months ended March 31, 2008 and 2007 to adjusted EBITDA:

Table 5 Watson Pharmaceuticals, Inc. Adjusted EBITDA Reconciliation Table (Unaudited; in millions) Three Months Ended March 31, 2008 2007 GAAP net income $50.6 $31.6 Plus: Interest expense 6.8 13.9 Interest income (2.3) (2.9) Provision for income taxes 31.2 20.0 Depreciation (2008 includes accelerated depreciation) 21.8 18.0 Amortization 20.2 43.9 EBITDA 128.3 124.5 Adjusted for: Share-based compensation 4.3 3.4 Acquisition and licensing charges 5.0 7.4 Litigation charge - 1.0 Loss on early extinguishment of debt 1.1 2.7 Global supply chain initiative 12.0 - Gain on sale of assets (1.4) (1.8) Adjusted EBITDA $149.3 $137.2

The following table presents a reconciliation of forecasted net income for the 12 months ending December 31, 2008 to adjusted net income and adjusted earnings per diluted share:

Table 6 Watson Pharmaceuticals, Inc. Reconciliation Table - Forecasted Adjusted Earnings per Diluted Share (Unaudited; in millions except per share amounts) Forecast for Twelve Months Ending December 31, 2008 Low High GAAP to adjusted net income calculation GAAP net income $191.6 $203.3 Adjusted for: Licensing charges 6.0 6.0 Global supply chain initiative 32.0 32.0 Loss on early extinguishment of debt 1.1 1.1 Gain on sale of securities (1.4) (1.4) Income taxes (14.4) (14.4) Adjusted net income 214.9 226.6 Add: Interest expense on CODES, net of tax 7.8 7.8 Adjusted net income, adjusted for interest on CODES $222.7 $234.4 Diluted earnings per share Diluted earnings per share - GAAP $1.70 $1.80 Diluted earnings per share - Adjusted $1.90 $2.00 Diluted weighted average common shares outstanding 117.4 117.4

The reconciliation table is based in part on management's estimate of net income for the year ending December 31, 2008. Watson expects certain known GAAP charges for 2008, as presented in the schedule above. Other GAAP charges that may be excluded from adjusted 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, such as potential asset impairment 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 12 months ending December 31, 2008 to adjusted EBITDA:

Table 7 Watson Pharmaceuticals, Inc. Forecasted Adjusted EBITDA Reconciliation Table (Unaudited; in millions) Forecast for Twelve Months Ending December 31, 2008 Low High GAAP net income $191.6 $203.3 Plus: Interest expense 28.0 28.0 Interest income (6.9) (5.9) Provision for income taxes 117.9 125.2 Depreciation (includes accelerated depreciation) 93.9 93.9 Amortization 80.7 80.7 EBITDA 505.2 525.2 Adjusted for: Global supply chain initiative 23.1 23.1 Share-based compensation 16.7 16.7 Licensing charges 6.0 6.0 Loss on early extinguishment of debt 1.1 1.1 Gain on sale of securities (1.4) (1.4) Adjusted EBITDA $550.7 $570.7

The reconciliation table is based in part on management's estimate of adjusted EBITDA for the year ending December 31, 2008. Watson expects certain known GAAP charges for 2008, 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, such as potential asset impairment charges, are dependent upon future events and valuations that have not yet been performed.

CONTACTS: Watson Pharmaceuticals, Inc. Patty Eisenhaur (951) 493-5611 (Logo: http://www.newscom.com/cgi-bin/prnh/20020214/WATSONLOGO)