Watson Pharmaceuticals Reports Second Quarter 2005 Results

CORONA, Calif., July 27 /PRNewswire-FirstCall/ -- Watson Pharmaceuticals, Inc. , a leading specialty pharmaceutical company, today reported revenue and earnings for its second quarter ended June 30, 2005. Net revenues increased 4 percent to $416.3 million, as compared to $399.4 million for the second quarter ended June 30, 2004, due to an increase in brand and generic product sales, offset in part by lower other revenue.

Net income for the second quarter increased to $40.9 million, compared to $34.9 million for the same period of 2004. Earnings per diluted share was $0.35, compared to $0.29 per diluted share for the prior year period.

Cash flow from operations for the second quarter and the first six months of 2005 was $72.4 million and $177.8 million respectively.

During the second quarter, the company repurchased 3.8 million shares or $113.5 million of its common stock at an average price of $30.12 per share. Since inception of the share repurchase program in February 2005, Watson has repurchased 6.0 million shares, or $182.6 million of its common stock. Under the current authorization by the Board of Directors, an additional $117.4 million of Watson common stock may be repurchased by the Company.

As of June 30, 2005, cash and marketable securities were $649.8 million. Net Revenues Three Months Ended June 30, ($ in thousands): 2005 2004 Change Generic products $312,453 $305,566 2% % of product net sales 76% 78% Brand products Specialty Products 54,710 43,075 27% Nephrology 46,036 41,435 11% Total brand products 100,746 84,510 19% % of product net sales 24% 22% Total product net sales 413,199 390,076 6% Other 3,067 9,292 -67% Total net revenues $416,266 $399,368 4% Six Months Ended June 30, 2005 2004 Change Generic products $605,616 $611,588 -1% % of product net sales 75% 78% Brand products Specialty Products 118,173 87,500 35% Nephrology 87,099 85,386 2% Total brand products 205,272 172,886 19% % of product net sales 25% 22% Total product net sales 810,888 784,474 3% Other 6,206 24,552 -75% Total net revenues $817,094 $809,026 1%

Generic segment product sales for the second quarter were $312.5 million, compared to $305.6 million in the prior year period. Sales from generic oral contraceptives were $78.0 million, compared to $68.1 million in the second quarter 2004.

Brand segment product sales for the second quarter were $100.7 million, compared to $84.5 million in the prior year period. Included in the brand segment revenue was $11.3 million of sales from Oxytrol(R), which increased from $8.6 million in the second quarter 2004.

Other revenue declined to $3.1 million in the second quarter, compared to $9.3 million in the prior year period, primarily because the company received no royalties on sales of ciprofloxacin in the second quarter of 2005.

Gross profit increased by two percent or $4.6 million to $205.1 million in the second quarter 2005 from $200.5 million during same period of 2004.

Gross Margin Three Months Ended June 30, 2005 2004 Change Overall consolidated gross margin 49.3% 50.2% -0.9% Margin on product sales: Generic products 39.8% 41.3% -1.5% Brand products 77.1% 76.8% 0.3%

On a sequential quarter basis, overall gross margin increased from 48 percent in the first quarter of 2005 to 49 percent in the second quarter.

"Both our brand and generic businesses did very well this quarter. In addition, our enhanced operational efficiencies are reflected in improved gross margins and strong cash flow. These fundamentals allow us to continue to invest in research and development, which we feel confident will deliver new products and future growth," said Allen Chao, Ph.D., Watson's Chairman and Chief Executive Officer.

Research and development spending decreased 26 percent to $31.5 million in the second quarter of 2005, compared to $42.5 million in the same period of 2004. During the second quarter 2004, the Company had a $10.0 million research and development milestone payment related to a transaction with Kissei Pharmaceutical Co., Ltd. Watson's generic pipeline currently has 40 Abbreviated New Drug Applications (ANDAs) on file with the Food and Drug Administration (FDA).

Selling, general and administrative expenses for the second quarter of 2005 decreased 14 percent to $68.1 million, compared to $79.2 million in the second quarter of 2004, due primarily to the termination of the Company's agreement with a contract sales organization.

Amortization expense related to the Company's product rights increased $23 million to $41.1 million, representing an increase in amortization of the Company's Ferrlecit(R) intangible asset.

2005 Outlook

Watson's forecasts are based on the Company's actual results for the first half of 2005, and management's current belief about prescription and pricing trends, inventory levels and the anticipated timing of future product launches.

Watson estimates total net revenue for the full year of 2005 of approximately $1.65 billion. The Company's 2005 earnings per share forecast is $1.35 to $1.43 and includes shares repurchased to date pursuant to the share repurchase program announced in February 2005. Cash flow from operations for the full year of 2005 is expected to be between $320 and $350 million.

Webcast and Conference Call Details

Watson will host a webcast and conference call today at 2:00 p.m. Pacific Daylight Time to discuss 2005 second quarter results, full year 2005 forecasts, and recent corporate developments. To access the live webcast, go to Watson's Investor Relations Web site at http://ir.watsonpharm.com/. The dial-in number to access the conference 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 7739093. 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 Pacific Daylight Time, Sunday, August 7, 2005.

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' Web site at http://www.watsonpharm.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 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; variability of revenue mix between the Company's Brand and Generic 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 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 facilities, products and/or business; 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, 2004 and Form 10-Q for the period ended March 31, 2005. Except as expressly required by law, Watson disclaims any intent or obligation to update these forward-looking statements.

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The following table presents Watson's results of operations for the three and six months ended June 30, 2005 and 2004:

Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Income (Unaudited; in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 Net revenues $ 416,266 $ 399,368 $817,094 $ 809,026 Cost of sales 211,213 198,854 418,163 395,335 Gross profit 205,053 200,514 398,931 413,691 Operating expenses: Research and development 31,486 42,529 60,324 72,210 Selling, general and administrative 68,125 79,169 131,776 156,580 Amortization 41,101 17,983 81,739 35,915 Total operating expenses 140,712 139,681 273,839 264,705 Operating income 64,341 60,833 125,092 148,986 Other income (expense): Equity in (losses) of joint ventures (578) (1,700) (158) (3,279) Loss on impairment of investments and other assets -- -- -- (891) Gain on sales of securities -- -- -- 3,938 Loss on early extinguishment of debt -- (3,746) -- (17,752) Interest income 4,546 1,015 8,652 2,222 Interest expense (3,624) (1,647) (6,914) (5,390) Other income (expense) 185 (176) (39) (340) Total other income (expense), net 529 (6,254) 1,541 (21,492) Income before income taxes 64,870 54,579 126,633 127,494 Provision for income taxes 24,002 19,652 46,854 45,908 Net income $40,868 $34,927 $79,779 $81,586 Per share amounts: Diluted earnings per share $0.35 $0.29 $0.68 $0.67 Diluted weighted average shares outstanding 121,253 124,682 122,671 124,973

The following table presents Watson's Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004:

Watson Pharmaceuticals, Inc. Condensed, Consolidated Balance Sheets (Unaudited; in thousands) June 30, December 31, 2005 2004 Assets Cash and cash equivalents $ 488,735 $ 298,653 Marketable securities 161,049 381,679 Accounts receivable, net 271,258 251,459 Inventories 289,308 321,299 Other current assets 110,723 117,096 Property and equipment, net 445,221 427,377 Investments and other assets 71,584 77,779 Product rights, net 831,434 912,746 Goodwill 455,595 455,595 Total assets $ 3,124,907 $ 3,243,683 Liabilities & Stockholder Equity Current liabilities 240,142 255,629 Long-term debt 587,794 587,653 Deferred income taxes and other liabilities 146,739 157,252 Stockholders' equity 2,150,232 2,243,149 Total liabilities and stockholders' equity $3,124,907 $3,243,683

The following table presents Watson's Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2005 and 2004:

Watson Pharmaceuticals, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited; in thousands) Six Months Ended June 30, 2005 2004 Cash Flows from Operating Activities: Net income $79,779 $81,586 Reconciliation to net cash provided by operating activities: Depreciation and amortization 101,378 50,990 Deferred income tax (provision) benefit (12,130) 16,434 Other adjustments to reconcile net income to net cash provided (605) 20,058 Changes in assets and liabilities: Accounts receivable, net (19,799) 555 Inventories 31,991 8,274 Accounts payable and accrued expense (5,893) (4,715) Income taxes payable (8,541) (65,781) Other changes to assets and liabilities 11,622 (10,855) Total adjustments 98,023 14,960 Net cash provided by operating activities 177,802 96,546 Cash Flows from Investing Activities: Additions to property and equipment (38,103) (43,094) Proceeds from sales of marketable securities 221,225 26,706 Additions to long-term investments (1,500) (10,590) Other 2,073 1,737 Net cash provided by (used in) investing activities 183,695 (25,241) Cash Flows from Financing Activities: Repurchase 1998 Senior Notes (including premium) -- (152,977) Repurchase of common stock (182,585) -- Proceeds from stock plans and other 11,175 22,663 Other (5) (5) Net cash used in financing activities (171,415) (130,319) Net increase (decrease) in cash and cash equivalents 190,082 (59,014) Cash and cash equivalents at beginning of period 298,653 318,043 Cash and cash equivalents at end of period $488,735 $259,029