CORONA, Calif., Feb. 16 /PRNewswire-FirstCall/ -- Watson Pharmaceuticals, Inc. , a leading specialty pharmaceutical company, today reported revenue and earnings for its fourth quarter and full year ended December 31, 2005.
Fourth Quarter 2005 Results
Net revenue for the fourth quarter decreased one percent to $418.8 million, compared to $423.5 million for the fourth quarter ended December 31, 2004.
Net income for the fourth quarter was $20.1 million, compared to net income of $54.6 million for the same period of 2004. Earnings per diluted share was $0.19, compared to $0.46 per diluted share for the prior year period. Net income for the fourth quarter includes $25.1 million of asset impairment charges ($16.2 million, net of tax, or $0.14 per diluted share) related to the discontinuation of operations at the Company’s Puerto Rico facility.
Full Year 2005 Results
For the full year ended December 31, 2005, total net revenue increased $5.7 million to $1.65 billion, compared to $1.64 billion for 2004. Net income for 2005 was $138.2 million, or $1.21 per diluted share, compared to net income of $150.0 million, or $1.26 per diluted share, for 2004. Net income for the full year includes $25.1 million of asset impairment charges ($16.2 million, net of tax, or $0.14 per diluted share) related to the discontinuation of operations at the Company’s Puerto Rico facility and $1.6 million ($1.0 million, net of tax or $0.01 per diluted share) related to an accounting requirement to record Watson’s third party investment under the equity method of accounting, as a result of an increase in Watson’s ownership during the fourth quarter of 2005.
Cash flow from operations for the full year 2005 was $325.5 million, an increase of six percent over 2004. As of December 31, 2005, cash and marketable securities were $629.9 million.
Strategic Initiatives Underway to Strengthen Long Term Value
At a meeting with the investment community today, Dr. Chao and other members of senior management will provide an update on Watson’s expanding product pipeline, forecasts on the Company’s 2006 growth prospects and an overview of the major strategic initiatives underway at Watson. The Company has several programs ongoing to enhance operating efficiencies throughout its manufacturing operations, including improved utilization of existing manufacturing facilities, site rationalization and establishment of an off-shore product development and manufacturing capability.
During the fourth quarter 2005, Watson announced plans to discontinue operations at its Puerto Rico solid dosage manufacturing facility. Watson has initiated the transfer of products to its Carmel, NY and Corona, CA sites which have sufficient capacity to absorb additional production volume.
Also during the fourth quarter, Watson acquired a manufacturing facility located in Goa, India, that will ultimately produce solid dosage generic products for the U.S. market, and increased its investment in an FDA approved Chinese/Taiwanese company specializing in development and manufacture of active pharmaceutical ingredients.
During 2006, Watson plans to establish a generic product development center in India. Watson recently entered into a definitive agreement to acquire an Indian company with facilities and expertise in development and manufacturing of selected active pharmaceutical ingredients. The company currently operates an FDA approved active pharmaceutical manufacturing facility. The terms of the definitive agreement, which is subject to certain conditions to closing, are confidential.
“We are executing upon our strategy and adapting to rapid industry change worldwide, positioning Watson for what we believe will be a renewed period of growth in 2006 and beyond,” began Allen Chao, Ph.D., Watson’s Chairman and Chief Executive Officer. “We have taken significant steps to expand our product development and manufacturing capabilities in Asia. Taking these steps now will position us to maintain a competitive cost base while continuing to provide a broad portfolio of quality products to our customers; a strategy that we believe will reap greater rewards for the Company longer term.”
Fourth Quarter and Full Year 2005 Performance Details Net Revenues Three Months Ended December 31, ($ in millions): 2005 2004 Change Generic Products $321.7 $324.5 (1)% % of product net sales 78% 78% Brand Products Specialty Products 45.5 54.4 (16)% Nephrology 47.2 38.9 21% Total Brand Products 92.7 93.3 (1)% % of product net sales 22% 22% Total product net sales 414.4 417.8 (1)% Other 4.4 5.7 (23)% Total net revenues $418.8 $423.5 (1)% Twelve Months Ended December 31, ($ in millions): 2005 2004 Change Generic Products $1,242.6 $1,239.4 0% % of product net sales 76% 77% Brand Products Specialty Products 210.0 196.0 7% Nephrology 179.5 167.8 7% Total Brand Products 389.5 363.8 7% % of product net sales 24% 23% Total product net sales 1,632.1 1,603.2 2% Other 14.1 37.3 (62)% Total net revenues $1,646.2 $1,640.5 0%
Generic product revenue for the fourth quarter of 2005 decreased one percent to $321.7 million, compared to $324.5 million in the prior year period. Sales from generic oral contraceptives were $79.3 million compared to $78.7 million in the prior year period. Brand product revenue for the fourth quarter of 2005 decreased one percent to $92.7 million, compared to $93.3 million in the prior year period. A decline in Specialty Product sales was offset by an increase in Nephrology product sales. Other revenue decreased 23 percent to $4.4 million in the fourth quarter of 2005, compared to $5.7 million in the prior year period, primarily due to lower contract research and development revenue.
Gross Margin Three Months Ended December 31, 2005 2004 Overall consolidated gross margin 46.6% 47.4% Margin on product sales: Generic products 37.2% 37.4% Brand products 77.1% 78.9% Twelve Months Ended December 31, 2005 2004 Overall consolidated gross margin 48.2% 50.0% Margin on product sales: Generic products 38.8% 40.0% Brand products 76.5% 78.8%
Overall gross margin was 46.6 percent in the fourth quarter of 2005, compared to 47.4 percent in the fourth quarter of 2004 and 48.6 percent in the third quarter of 2005. On a quarter-over-quarter basis, the gross margin decline was due primarily to lower gross margins on Specialty Products product sales. On a sequential quarter basis, the overall gross margin decline was due to the launch of oxycodone HCl controlled-release tablets, a distributed generic product with lower gross margins.
Research and development investment in the fourth quarter of 2005 increased 26 percent to $35.1 million, compared to $27.8 million in the prior year period, due primarily to increased investment in Generic product development.
Selling, general and administrative expenses for the fourth quarter of 2005 were unchanged at $64.0 million.
Amortization expense related to the Company’s product rights increased $22.8 million to $41.1 million in the fourth quarter 2005, representing an increase in amortization of the Company’s Ferrlecit(R) intangible asset.
Watson’s net income for 2005 and prior periods has been restated to reflect an accounting change related to an equity investment. The effect of this accounting change for the fourth quarter and full year 2005 was a decrease in net income of $389,000 and $1.6 million, respectively, or approximately $0.01 per diluted share for 2005.
Generic Research and Development
During 2005, Watson submitted 22 new Abbreviated New Drug Applications (ANDAs) with the Food and Drug Administration (FDA). As of December 31, the Company had 47 ANDAs on file, representing over $35 billion in annual brand product sales. Included in the ANDAs on file are nine products that have received tentative approval and seven products that are potential first-to-file or shared exclusivity opportunities. Watson has targeted to submit over 20 ANDAs with the FDA in 2006.
Brand Research and Development
In Watson’s brand product pipeline, the Company has completed patient screening on its Phase 3 silodosin program, a product for benign prostatic hyperplasia and plans to initiate Phase 3 studies on a new gel formulation of oxybutynin for overactive bladder later this Spring.
2006 Financial Outlook
Watson’s forecasts are based on the Company’s actual results for 2005, and management’s current belief about prescription trends, inventory levels and the anticipated timing of future product launches. The Company expects to launch eight or more new products in 2006, including pravastatin sodium tablets through a distribution agreement with Bristol-Myers Squibb Company. While pravastatin sodium is expected to contribute significant revenue, the Company expects the contribution to earnings to be modest. Watson estimates total net revenue for the full year of 2006 at between $1.80 billion and $1.90 billion.
Cash flow from operations for the full year of 2006 is expected to be between $325 million and $350 million.
Net Revenue Estimates By Product Line For the Twelve Months Ended December 31, 2006 (in millions) Generic Product Line $1,400 - $1,500 Brand Product Line $380 - $390 Other $8 Gross margin is expected to be approximately 42 percent.
Research and development investment for 2006 is expected to be approximately 6.5 to 7 percent of expected total net revenue, due primarily to an increase in clinical study costs associated with Watson’s product pipeline.
Selling, general and administrative expenses for 2006 are expected to be approximately 14.5 to 15 percent of expected total net revenue.
GAAP earnings per diluted share for 2006 is expected to be between $1.31 and $1.41. The earnings per diluted share forecast reflects $0.05 to $0.06 related to the expensing of stock options under the Financial Accounting Standards Board’s (FASB) Statement 123(R). The earnings per diluted share forecast also reflects $0.04 to $0.05 per share in expenses related to the closure of the Company’s Puerto Rico facility.
Share Repurchase Plan Authorized
Watson announced today that its Board of Directors has authorized a program to repurchase shares of Watson’s common stock. During 2005, the Company repurchased $300 million of its common stock. The Board approved the repurchase of up to an additional $300 million of common stock over a period of one year.
The authorization and repurchase of shares is conditioned on the Company entering into an amendment to its revolving credit agreement to permit the share repurchases under the newly approved program. The current terms of the agreement limit share repurchases to the amount already purchased during 2005.
The repurchases will be made in open market or privately negotiated transactions from time to time in compliance with the Securities and Exchange Commission’s (SEC) Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. Additionally, Watson’s Board of Directors has authorized that purchases may be made under Rule 10b5-1 promulgated under the Securities and Exchange Act of 1934, as amended. A Rule 10b5-1 plan allows Watson to repurchase its shares during periods when it would normally not be active in the market due to its internal trading blackout periods. All such purchases must be made in accordance with a pre-defined plan that is established when the plan administrator is not aware of any material non-public information.
This share repurchase plan does not obligate Watson to acquire any particular amount of common stock and the plan may be suspended at any time at Watson’s discretion.
Webcast and Conference Call Details
Watson is hosting a meeting with financial investors and analysts today at 4:30 p.m. Eastern Standard Time to discuss fourth quarter and full year 2005 results and the Company’s outlook for 2006. The meeting will be webcast live and can be accessed at Watson’s web site: http://www.watson.com by selecting the investors meeting icon link displayed on the home page, as well as in the Investors section. A replay of the webcast will also be available on Watson’s web site two hours after the live webcast by visiting http://www.watson.com and clicking on “Calendar of Events” in the Investors section. A live audio broadcast of the meeting can also accessed by dialing (877) 251-7980, or from international locations, dial (706) 643-1573.
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; 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 manufacturer’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 September 30, 2005. 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 and twelve months ended December 31, 2005 and 2004:
WATSON PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited; in thousands, except per share amounts) Three Months Ended Twelve Months Ended December 31, December 31, 2005 2004 2005 2004 Net revenues $418,813 $423,507 $1,646,203 $1,640,551 Cost of sales 223,442 222,951 852,414 820,794 Gross profit 195,371 200,556 793,789 819,757 Operating expenses: Research and development 35,099 27,750 125,263 134,221 Selling, general and administrative 64,048 64,051 260,999 301,209 Amortization 41,100 18,332 163,939 72,287 Loss on impairment 25,076 -- 25,076 46,100 Total operating expenses 165,323 110,133 575,277 553,817 Operating income 30,048 90,423 218,512 265,940 Other income (expense): Loss on equity method investments (1,180) (1,656) (2,865) (6,581) Loss on impairment of investments and other assets -- (2,173) -- (7,858) (Loss) gain on sale of securities (401) -- (401) 5,737 Loss on early extinguishment of debt -- -- -- (17,752) Interest income 5,741 2,890 19,321 6,616 Interest expense (2,920) (4,259) (14,524) (13,330) Other (expense) income (138) 809 (627) 2,796 Total other income (expense), net 1,102 (4,389) 904 (30,372) Income before income taxes 31,150 86,034 219,416 235,568 Provision for income taxes 11,065 31,402 81,183 85,545 Net income $20,085 $54,632 $138,233 $150,023 Per share amounts: Diluted earnings per share $0.19 $0.46 $1.21 $1.26 Diluted weighted average shares outstanding 116,645 124,402 120,021 124,727
The following table presents Watson’s Condensed Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004:
WATSON PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited; in thousands) December 31, December 31, 2005 2004 Assets Cash and cash equivalents $467,451 $298,653 Marketable securities 162,475 381,679 Accounts receivable, net 333,832 251,459 Inventories 278,062 321,299 Other current assets 118,610 117,096 Property and equipment, net 436,149 427,377 Investments and other assets 76,051 71,579 Product rights and other intangibles, net 751,808 912,746 Goodwill 455,595 455,595 Total Assets $3,080,033 $3,237,483 Liabilities & Stockholders’ Equity Current liabilities $245,670 $255,629 Long-term debt 587,935 587,653 Deferred income taxes and other liabilities 142,187 157,252 Stockholders’ equity 2,104,241 2,236,949 Total liabilities and stockholders’ equity $3,080,033 $3,237,483
The following table presents Watson’s Condensed Consolidated Statements of Cash Flows for the twelve months ended December 31, 2005 and 2004:
WATSON PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; in thousands) Twelve Months Ended December 31, 2005 2004 Cash Flows From Operating Activities: Net income $138,233 $150,023 Reconciliation to net cash provided by operating activities: Depreciation and amortization 206,726 106,666 Restricted stock and stock option compensation 2,289 -- Loss on impairment 25,076 46,100 Loss on impairment of investments and other assets -- 7,858 Loss on early extinguishment of debt -- 17,752 Deferred income tax (benefit) provision (5,362) 13,463 Other adjustments to reconcile net income to net cash provided by operating activities 6,575 3,460 Changes in operating assets and liabilities: Accounts receivable, net (82,373) (40,285) Inventories 43,237 72,094 Other assets (8,898) (68,862) Total adjustments 187,270 158,246 Net cash provided by operating activities 325,503 308,269 Cash Flows From Investing Activities: Additions to property and equipment (78,833) (69,209) Additions to marketable securities (4,178) (198,696) Additions to long-term investments (21,905) (17,819) Proceeds from sales of marketable securities 220,083 72,364 Other investing activities, net 1,188 6,431 Net cash provided by (used in) investing activities 116,355 (206,929) Cash Flows From Financing Activities: Payments to repurchase 1998 Senior Notes, including premium paid -- (152,977) Proceeds from stock plans 28,424 32,255 Repurchase of common stock (300,000) -- Other (1,484) (8) Net cash used in financing activities (273,060) (120,730) Net (decrease) increase in cash and cash equivalents 168,798 (19,390) Cash and cash equivalents at beginning of period 298,653 318,043 Cash and cash equivalents at end of period $467,451 $298,653 (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/
