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Watson First Quarter 2011 Net Revenue Increases to $877 Million
Date:4/27/2011

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.

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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 ResultsGlobal Generics Segment InformationThree Months EndedMarch 31,(Unaudited; $ in millions)

20112010Product sales

$
585.0$
534.1Other revenue

15.19.7Net revenue

600.1543.8Operating expenses:Cost of sales

289.1287.5Research and development

54.442.2Selling and marketing

30.626.9Segment contribution

$
226.0$
87.2Segment margin

37.7%34.4%Adjusted gross profit (1)

$
307.0$
273.1Adjusted 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

3.45.0Purchase accounting adjustments

-11.8Global 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 InformationThree Months EndedMarch 31,(Unaudited; $ in millions)

20112010Product sales

$
80.3$
72.4Other revenue

16.618.9   Net revenue

96.991.3Operating expenses:   Cost of sales

17.824.7   Research and development

19.917.3   Selling and marketing

36.532.5Segment contribution

$
22.7$
.8Segment margin

23.4%18.4%Adjusted gross profit (1)

$
79.1$
.6Adjusted 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 InformationThree Months EndedMarch 31,(Unaudited; $ in millions)

20112010Net revenue

$
79.5$
221.4Operating expenses:   Cost of sales

148.7192.5   Selling and marketing

18.418.2Segment contribution

$
2.4$
.7Segment margin

6.9%4.8%Adjusted gross profit (1)

$
30.8$
28.9Adjusted 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 ExpensesConsolidated 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 DetailsWatson 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 StatementStatements 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 EndedMarch 31,20112010Net revenues$
876.5$
856.5Operating expenses:Cost of sales (excludes amortization, presented below)455.6504.7Research and development74.359.5Selling, general and administrative164.8152.0Amortization56.639.0Loss on asset sales and impairments14.41.0Total operating expenses765.7756.2Operating income 110.8100.3Non-operating income (expense):Interest income0.80.4Interest expense(21.8)(20.3)Other income (expense)(3.7)26.1Total other income (expense), net(24.7)6.2Income before income taxes and noncontrolling interest 86.1106.5Provision for income taxes41.336.7Net income44.869.8Loss attributable to noncontrolling interest0.5-Net income attributable to common shareholders$
45.3$
9.8Earnings per share:Basic$
.37$
.57Diluted$
.36$
.57Weighted average shares outstanding:Basic123.7121.7Diluted125.7123.4The 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 31,20112010AssetsCash and cash equivalents$
504.5$
282.8Marketable securities10.311.1Accounts receivable, net 532.7560.9Inventories, net592.3631.0Other current assets297.0313.6Property and equipment, net626.7642.3Investments and other assets225.0225.5Product rights and other intangibles, net1,612.51,632.0Goodwill1,528.11,528.1Total assets$
5,929.1$
5,827.3Liabilities & EquityCurrent liabilities$
856.3$
820.7Long-term debt1,020.31,016.1Other Liabilities682.1707.9Total equity3,370.43,282.6Total liabilities and equity$
5,929.1$
5,827.3The 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 EndedMarch 31,20112010Cash Flows From Operating ActivitiesNet income $
44.8$
9.8Reconciliation to net cash provided by operating activities:Depreciation23.024.7Amortization56.639.0Deferred income tax benefit (3.2)(14.8)Provision for inventory reserve12.511.9Share based compensation8.44.9(Earnings) losses on equity method investments4.5(2.5)Gain on sale of securities(0.8)(23.4)Loss on asset sales and impairments14.41.0Excess tax benefits from stock-based compensation(6.7)-Accretion of preferred stock and contingent payment consideration13.66.6Other, net1.0(1.5)Changes in assets and liabilities:Accounts receivable, net31.1(32.3)Inventories33.0(44.1)Prepaid expenses and other current assets13.24.8Accounts payable and accrued expenses(42.1)11.7Deferred revenue(1.3)4.8Income and other taxes payable40.946.5Other assets and liabilities(10.9)5.2  Total adjustments187.242.5Net cash provided by operating activities232.0112.3Cash Flows From Investing ActivitiesAdditions 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 investments0.894.1Other -(1.0)Net cash (used in) provided by investing activities(19.5)68.4Cash Flows From Financing ActivitiesPrincipal 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 compensation6.7-Proceeds from stock plans20.314.9Net cash provided by (used in) financing activities11.2(212.9)Effect of currency exchange rate changes on cash and cash equivalents(2.0)-Net increase (decrease) in cash and cash equivalents221.7(32.2)Cash and cash equivalents at beginning of period282.8201.4Cash and cash equivalents at end of period$
504.5$
9.2The 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 4Watson Pharmaceuticals, Inc.Reconciliation Table(Unaudited; in millions except per share amounts)Three Months Ended

March 31,20112010GAAP to Non-GAAP net income calculationReported GAAP net income $
45.3$
9.8Adjusted for:Amortization (1)57.139.0Global supply chain initiative (2)8.65.2Acquisition and licensing charges (3)4.619.4Interest accretion on contingent obligations (4)9.06.6Non-cash impairment charges (5)14.41.0Other (gains) losses (6)(5.7)(23.4)Legal settlements (7)-3.0Income taxes on items above(21.4)(20.3)Non-GAAP net income$
.9$
.3Diluted earnings per share Diluted earnings per share - GAAP $
.36$
.57Diluted earnings per share - Non-GAAP$
.89$
.81Basic weighted average common shares outstanding123.7121.7Effect of dilutive securities:   Dilutive share-based compensation arrangements2.01.7Diluted weighted average common shares outstanding125.7123.4Notes: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 5Adjusted EBITDA Reconciliation Table(Unaudited; in millions)Three Months Ended
March 31,20112010GAAP net income

$
45.3$
9.8Plus:Interest expense

21.820.3Interest income

(0.8)(0.4)Provision for income taxes

41.336.7Depreciation (includes accelerated depreciation)

23.024.7Amortization(1)

57.139.0EBITDA187.7190.1Adjusted for:Global supply chain initiative (2)

6.53.8Acquisition and licensing charges (3)

4.619.4Non-cash impairment charges (4)

14.41.0Other (gains) losses (5)

(5.7)(23.4)Legal settlements (6)

-3.0Share-based compensation (7)

8.45.0Adjusted EBITDA

$
215.9$
98.9Notes: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 6WATSON 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, 2011LowHighGAAP to non-GAAP net income calculationGAAP net income$
227$
258Adjusted for:Amortization276276Global supply chain initiative1515Acquisition and licensing charges 3434Interest accretion on contingent obligations3838Non-cash impairment charges1414Other (gains) losses(6)(6)Income taxes(99)(99)Non-GAAP net income$
499$
530Diluted earnings per shareDiluted earnings per share - GAAP $
.80$
2.04Diluted earnings per share - Non-GAAP$
3.95$
4.20Diluted weighted average common shares outstanding126.3126.3The 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 7WATSON PHARMACEUTICALS, INC.Reconciliation Table - Forecasted Adjusted EBITDA(Unaudited; in millions)Forecast for Twelve Months Ending December 31, 2011LowHighGAAP net income$
227$
258Plus:Interest expense8888Interest income(1)(1)Provision for income taxes175194Depreciation (includes accelerated depreciation)102102Amortization276276EBITDA867917Adjusted for:Global supply chain initiative1212Acquisition and licensing charges 3434Non-cash impairment charges1414Other gains and losses(6)(6)Share-based compensation2929Adjusted EBITDA$
950$
,000The 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) 261-8141Charlie Mayr(862) 261-8483
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SOURCE Watson Pharmaceuticals, Inc.
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