CORONA, Calif., May 1 /PRNewswire-FirstCall/ -- Watson Pharmaceuticals, Inc. , a leading specialty pharmaceutical company, today reported revenue and earnings for its first quarter ended March 31, 2007.
Net revenue for the first quarter 2007 was $671.6 million and net income was $31.6 million, or $0.29 per diluted share. Net income for the first quarter 2007 included charges related to the acquisition of Andrx Corporation (the “Andrx Acquisition”), debt repurchase costs, charges related to a legal settlement 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 $37.3 million, or $0.34 per diluted share.
Excluding special items as detailed in the EBITDA reconciliation table below, adjusted EBITDA for the first quarter 2007 was $137.2 million.
Cash flow from operations for the first quarter of 2007 was $88.3 million; cash and marketable securities were $82.5 million as of March 31, 2007. During the first quarter, the Company made $150 million in debt payments, satisfying its debt repayment obligation for 2007.
“Over the past several years we have been actively working on several strategic initiatives to strengthen our business and provide future growth,” began Allen Chao, Ph.D., Watson’s Chairman and Chief Executive Officer. “These initiatives include expanding our pipeline in both Generic and Proprietary product areas, reducing operating costs, and strengthening our relationships with our alliance partners. We are already beginning to see the benefits of these strategies and believe that our continued focus on them will further enhance our product revenues, operating margins and net income in the future.”
First Quarter 2007 Business Segment Results Generic Segment Information Three Months Ended March 31, (Unaudited; $ in thousands) 2007 2006 Generic segment contribution Product sales $411,475 $321,415 Other revenue 13,150 675 Net revenue 424,625 322,090 Cost of sales 272,623 217,384 Gross profit 152,002 104,706 Gross margin 35.8% 32.5% Research and development 26,513 20,495 Selling and marketing 14,549 12,938 Segment contribution $110,940 $71,273 Segment margin 26.1% 22.1%
Generic segment net revenue for the first quarter of 2007 increased 32 percent or $102.5 million to $424.6 million, compared to $322.1 million in the prior year period.
Generic product sales increased $90.1 million to $411.5 million, primarily due to increased sales of oxycodone HCl controlled-release tablets and the addition of Andrx product revenue. In late February, the Generic division discontinued the distribution of oxycodone HCl controlled-release tablets. Sales of generic oral contraceptives increased $9.6 million to $85.6 million.
Other revenue increased $12.5 million to $13.2 million, due to the addition of commission revenue related to fentanyl citrate.
Gross margin for the Generic segment increased from 32.5 percent in the first quarter 2006 to 35.8 percent in the first quarter 2007 due primarily to an increase in other revenue. Brand Segment Information Three Months Ended March 31, (Unaudited; $ in thousands) 2007 2006 Brand Segment Contribution Product sales $90,638 $83,237 Other revenue 10,902 1,906 Net revenue 101,540 85,143 Cost of sales 25,216 17,370 Gross profit 76,324 67,773 Gross margin 75.2% 79.6% Research and development 11,295 9,342 Selling and marketing 26,411 28,975 Segment contribution $38,618 $29,456 Segment margin 38.0% 34.6%
Brand segment net revenue for the first quarter of 2007 increased 19 percent, or $16.4 million to $101.5 million, compared to $85.1 million in the prior year period due to an increase in Specialty Product sales and revenue from the promotion of AndroGel(R).
Distribution Segment Information Three Months Ended (Unaudited; $ in thousands) March 31, 2007 Distribution segment contribution Product sales $145,440 Other revenue -- Net revenue 145,440 Cost of sales 126,882 Gross profit 18,558 Gross margin 12.8% Research and development -- Selling and marketing 14,203 Total operating expenses 14,203 Segment contribution $4,355 Segment margin 3.0%
Cost of sales for the three months ended March 31, 2007 include $2.5 million in Andrx Acquisition-related inventory charges.
Other Operating Expenses
Consolidated general and administrative expenses for the first quarter of 2007 increased $23.3 million to $48.1 million, compared to $24.8 million in the prior year period, primarily due to the Andrx Acquisition.
2007 Financial Outlook
Watson’s forecasts are based on the Company’s actual results for the first quarter 2007, and management’s current belief about prescription trends, pricing levels, inventory levels and the anticipated timing of future product launches. The current forecast excludes approximately $11 million ($6.8 million net of tax, or $0.06 per diluted share) of anticipated costs associated with the Andrx Acquisition and other non-operating gains and losses.
Watson estimates total net revenue for the full year of 2007 at between $2.50 billion and $2.60 billion.
Net Revenue Estimates by Segment For the Twelve Months Ended December 31, 2007 (in millions) Generic Segment $1,500 - $1,625 Brand Segment $380 - $405 Distribution $575 - $615
Research and development investment for 2007 is expected to be between 6 and 6.5 percent of total revenue, due primarily to an increase in clinical study costs associated with Watson’s product pipeline.
Selling, general and administrative expenses for 2007 are expected to be between 16.5 and 17 percent of total revenue.
Adjusted earnings per diluted share for 2007 is expected to be between $1.20 and $1.30. Excluding special items as detailed in the EBITDA reconciliation table below, adjusted EBITDA is expected to be between $527 and $547 million.
Webcast and Conference Call Details
Watson will host a conference call and webcast today at 5:00 p.m. Eastern Daylight Time to discuss 2007 first quarter results, projections for the remainder of 2007 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 6647992. 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, Friday, May 11, 2007. To access the live webcast, go to Watson’s Investor Relations Web site at http://ir.watsonpharm.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’ 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 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, including the Company’s March 16, 2006 acquisition of Sekhsaria Chemicals, Ltd. and its November 3, 2006 acquisition of Andrx Corporation; the ability to timely resolve with FDA the pending Official Action Indicated status of the Davie, Florida manufacturing facility; the ability to timely and cost effectively integrate Watson and Andrx’s operations; the ability to recognize the anticipated synergies and benefits of strategic transactions, including the Andrx Acquisition; 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 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, 2006. Except as expressly required by law, Watson disclaims any intent or obligation to update these forward-looking statements.
The following table presents Watson’s results of operations for the three months ended March 31, 2007 and 2006:
Table 1 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Income (Unaudited; in thousands, except per share amounts) Three Months Ended March 31, 2007 2006 Restated* Net revenues $671,605 $407,233 Cost of sales 424,720 234,754 Gross profit 246,885 172,479 Operating expenses: Research and development 37,808 29,837 Selling, general and administrative 103,218 66,750 Amortization 43,933 41,100 Total operating expenses 184,959 137,687 Operating income 61,926 34,792 Other (expense) income: Earnings (losses) on equity method investments 1,439 (285) Gain on sale of securities 1,789 3,695 Loss on early extinguishment of debt (2,729) (720) Interest income 2,929 6,252 Interest expense (13,876) (3,301) Other income 175 105 Total other (expense) income, net (10,273) 5,746 Income before income tax provision 51,653 40,538 Provision for income taxes 20,041 15,364 Net income $31,612 $25,174 Diluted earnings per share $0.29 $0.23 Diluted weighted average shares outstanding 116,612 116,541 *Earnings (loss) on equity method investments has been restated for all periods presented to account for our investment in common shares of Andrx prior to the Andrx Acquisition using the equity method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18").
The following table presents Watson’s Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006:
Table 2 Watson Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets (Unaudited; in thousands) March 31, December 31, 2007 2006 Assets Cash and cash equivalents $73,550 $154,171 Marketable securities 8,981 6,649 Accounts receivable, net 375,608 384,692 Inventories 492,345 517,236 Other current assets 151,185 198,928 Property and equipment, net 696,119 697,415 Investments and other assets 136,848 131,725 Product rights and other intangibles, net 735,503 779,284 Goodwill 875,443 890,477 Total Assets $3,545,582 $3,760,577 Liabilities & Stockholders’ Equity Current liabilities $451,639 $689,929 Long-term debt 1,074,210 1,124,145 Deferred income taxes and other liabilities 305,857 266,115 Stockholders’ equity 1,713,876 1,680,388 Total liabilities and stockholders’ equity $3,545,582 $3,760,577
The following table presents Watson’s Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006:
Table 3 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited; in thousands) Three Months Ended March 31, 2007 2006 Restated* Cash Flows from Operating Activities: Net income $31,612 $25,174 Reconciliation to net cash provided by operating activities: Depreciation and amortization 61,962 53,174 Deferred income tax provision (benefit) 52,775 (18,101) Provision for inventory reserve 11,427 5,484 Restricted stock and stock option compensation 3,402 2,850 Other adjustments to reconcile net income to net cash provided (41) (3,837) Changes in assets and liabilities: Accounts receivable, net 12,083 64,440 Inventories 9,063 (23,698) Accounts payable and accrued expense (83,596) (4,524) Income taxes payable (42,206) 34,129 Other changes to assets and liabilities 31,758 619 Total adjustments 56,627 110,536 Net cash provided by operating activities 88,239 135,710 Cash Flows from Investing Activities: Additions to property, equipment and product rights (16,897) (9,765) Acquisition of business, net of cash acquired 0 (29,578) Other (1,429) (7,826) Net cash used in investing activities (18,326) (47,169) Cash Flows from Financing Activities: Payments on term loan and long-term debt (151,661) -- Proceeds from stock plans and other 1,127 3,745 Other -- (3) Net cash (used in) provided by financing activities (150,534) 3,742 Net (decrease) increase in cash and cash equivalents (80,621) 92,283 Cash and cash equivalents at beginning of period 154,171 467,451 Cash and cash equivalents at end of period $73,550 $559,734 *Earnings (loss) on equity method investments has been restated for all periods presented to account for our investment in common shares of Andrx prior to the Andrx Acquisition using the equity method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18").
The following table presents a reconciliation of reported net income and earnings per diluted share to adjusted net income and earnings per share for the three months ended March 31, 2007 and 2006:
Table 4 Watson Pharmaceuticals, Inc. Reconciliation Table (Unaudited; in thousands except per share amounts) Three Months Ended March 31, 2007 2006 Restated* Diluted earnings per share calculation Reported GAAP net income $31,612 $25,174 Adjusted for: Acquisition charges 7,361 93 Gain on sale of securities (1,789) (3,695) Loss on debt repurchase 2,729 720 Legal settlement 1,000 -- Income taxes (3,609) 1,078 Adjusted net income 37,304 23,370 Add: Interest expense on CODES, net of tax 1,943 1,675 Adjusted net income, adjusted for interest on CODES $39,247 $25,045 Basic weighted average common shares outstanding 101,927 101,615 Effect of dilutive securities: Conversion of CODES 14,357 14,357 Dilutive stock options 328 569 Diluted weighted average common shares outstanding 116,612 116,541 Diluted earnings per share - GAAP $0.29 $0.23 Diluted earnings per share - adjusted $0.34 $0.21 *Earnings (loss) on equity method investments has been restated for all periods presented to account for our investment in common shares of Andrx prior to the Andrx Acquisition using the equity method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18").
The following table presents a reconciliation of reported net income for the three months ended March 31, 2007 and 2006 to adjusted EBITDA:
Table 5 Watson Pharmaceuticals, Inc. Adjusted EBITDA Reconciliation Table (Unaudited; in millions) Three Months Ended March 31, 2007 2006 Restated* GAAP net income $31.6 $25.2 Plus: Interest expense 13.9 3.3 Interest income (2.9) (6.3) Provision for income taxes 20.0 15.4 Depreciation 18.0 12.1 Amortization 43.9 41.1 EBITDA 124.5 90.8 Adjusted for: Share-based compensation 3.4 2.8 Acquisition related charges 7.4 0.1 Litigation charge 1.0 -- Loss on debt repurchase 2.7 0.7 Gain on sales of securities (1.8) (3.7) Adjusted EBITDA $137.2 $90.7 *Earnings (loss) on equity method investments has been restated for all periods presented to account for our investment in common shares of Andrx prior to the Andrx Acquisition using the equity method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18"). (Logo: http://www.newscom.com/cgi-bin/prnh/20020214/WATSONLOGO)
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CONTACT: Patty Eisenhaur, Director, Investor Relations of WatsonPharmaceuticals, Inc., +1-951-493-5611
Web site: http://www.watsonpharm.com/
