CORONA, Calif., Feb. 27 /PRNewswire-FirstCall/ -- Watson Pharmaceuticals, Inc. , a leading specialty pharmaceutical company, today reported fourth quarter and full year 2006 financial results, which include Andrx Corporation’s results from the close of the acquisition on November 3, 2006 (the “Andrx Acquisition”).
Net revenue for the fourth quarter increased 48 percent or $202.4 million to $621.2 million, compared to $418.8 million for the fourth quarter ended December 31, 2005. Fourth quarter net revenue growth was driven by increased product sales within the Generic segment and the addition of Distribution segment revenue following the Andrx Acquisition.
Operating performance in the fourth quarter of 2006 was heavily impacted by several special items, including a $497.8 million non-cash in-process research and development charge and $12.3 million of charges related to the Andrx Acquisition. Additionally, the Company incurred $10.3 million in charges relating to the settlement of outstanding legal matters and a $3.3 million asset impairment charge related to the planned closure of the Company’s Puerto Rico facility. As a result of these items, the Company recorded a net loss for the fourth quarter 2006 of $489.0 million, or $4.80 per diluted share, compared to net income of $20.1 million, or $0.19 per diluted share, for the same period of 2005.
Excluding these special items as detailed in the reconciliation table below, adjusted net income for the fourth quarter was $26.9 million, or $0.25 per diluted share, compared to adjusted net income of $36.3 million or $0.32 per diluted share for the fourth quarter 2005.
Watson generated cash flow from operations of $133.6 million in the fourth quarter compared to $46.0 million for the same period last year. For the full year 2006, cash flow from operations increased 45 percent, to $471.4 million, compared to $325.5 million in the prior year period. Cash and marketable securities were $160.8 million, as of December 31, 2006.
“During 2006, we made significant progress in our efforts to build for the future, largely led by the strategic initiatives we have underway to reduce our overall cost structure, enhance operating efficiencies and expand our pipeline,” began Allen Chao, Ph.D., Watson’s Chairman and Chief Executive Officer. “We remain on target to close our Puerto Rico plant by the end of the first quarter and to divest or close our Phoenix facility by the end of the second quarter. Our expansion in India continues as well and we remain on target to have our Goa facility qualified for US manufacture by the end of 2007.”
“Our Generic product pipeline also continues to expand significantly. The acquisition of Andrx, together with our internal development efforts, provides for more than 70 ANDAs on file with FDA, plus additional strategic assets. A number of these opportunities are expected provide us with higher margins and longer lifecycles than commodity products.”
“In our Brand division, we remain solidly on track toward building a focused and strategic urology product portfolio that will serve as a cornerstone for the long-term growth of our business. After completing the efficacy portion of our clinical studies in 2006, we recently announced successful top line results on silodosin, our promising product candidate for BPH (benign prostatic hyperplasia). We anticipate filing a New Drug Application for silodosin in the first half of 2008.”
“We enter 2007 a much stronger company than a year ago, with many opportunities ahead of us. Our strategic initiatives have strengthened our base business and leave us poised for significant growth. I am truly excited about Watson’s future and look forward to an exciting 2007 and beyond,” concluded Dr. Chao.
Full Year 2006 Results
For the year ended December 31, 2006, total net revenue increased 20 percent or $333 million to $1.98 billion, compared to $1.65 billion for 2005. The Company recorded a net loss for 2006 of $445.0 million, or a loss of $4.37 per diluted share, compared to net income of $138.6 million, or $1.22 per diluted share, for 2005. Excluding Andrx-related and other charges, as detailed in the reconciliation table below, adjusted net income in 2006 was $112.9 million or $1.03 per diluted share, compared to adjusted net income of $154.7 million or $1.35 per diluted share in 2005.
Fourth Quarter and Full Year 2006 Business Segment Results
Following the Andrx Acquisition, Watson is providing financial highlights on its three business segments: Generic, Brand, and a new segment, Distribution.
Generic Segment Information Three Months Ended Twelve Months Ended December 31, December 31, (Unaudited; in thousands) 2006 2005 2006 2005 Generic segment contribution Product sales $412,760 $321,734 $1,501,251 $1,242,584 Other revenue 8,458 985 15,559 4,357 Net revenue 421,218 322,719 1,516,810 1,246,941 Cost of sales 300,313 202,188 1,059,234 760,845 Gross profit 120,905 120,531 457,576 486,096 Gross margin 28.7% 37.3% 30.2% 39.0% Research and development 26,593 21,424 83,551 80,879 Selling and marketing 13,762 13,165 52,882 48,914 Segment contribution $80,550 $85,942 $321,143 $356,303 Segment margin 19.1% 26.6% 21.2% 28.6%
Generic segment net revenue for the fourth quarter of 2006 increased 31 percent or $98.5 million to $421.2 million, compared to $322.7 million in the prior year period due to increased sales of oxycodone HCl controlled- release tablets, the addition of commission revenue related to fentanyl citrate and the addition of Andrx product revenue. Sales of generic oral contraceptives increased 10 percent, or $8.1 million, to $87.3 million compared to $79.3 million in the prior year period.
Gross margin for the Generic segment declined from 37.3 percent in the fourth quarter 2005 to 28.7 percent in the fourth quarter 2006 due to increased sales of oxycodone HCl controlled-release tablets, an authorized generic product with lower gross margin.
For the full year 2006, Generic segment net revenue increased 22 percent or $269.9 million to $1.52 billion compared to $1.25 billion for 2005, due primarily to increased sales of oxycodone HCl controlled-release tablets and the launch of pravastatin sodium tablets. Sales of generic oral contraceptives for 2006 were $325.8 million compared to $320.0 million in the prior year period.
Generic segment gross margin for 2006 decreased from 39.0 percent to 30.2 percent. The addition of pravastatin sodium tablets and oxycodone HCl controlled-release tablets, both authorized generic products with lower gross margins, contributed to the year over year decline.
During 2006, Watson submitted 27 new Abbreviated New Drug Applications (ANDAs) with the Food and Drug Administration (FDA). Watson currently has over 70 ANDAs on file, including 17 products that have received tentative approval.
Brand Segment Information Three Months Ended Twelve Months Ended December 31, December 31, (Unaudited; $ in thousands) 2006 2005 2006 2005 Brand Segment Contribution Product sales $97,239 $92,719 $354,070 $389,545 Other revenue 9,743 3,375 15,402 9,717 Net revenue 106,982 96,094 369,472 399,262 Cost of sales 27,595 21,254 92,184 91,569 Gross profit 79,387 74,840 277,288 307,693 Gross margin 74.2% 77.9% 75.0% 77.1% Research and development 14,021 13,675 47,472 44,384 Selling and marketing 27,071 26,561 112,258 113,428 Segment contribution $38,295 $34,604 $117,558 $149,881 Segment margin 35.8% 36.0% 31.8% 37.5%
Brand segment net revenue for the fourth quarter of 2006 increased 11 percent, or $10.9 million to $107.0 million, compared to $96.1 million in the prior year period due to an increase in Specialty Product sales, revenue from the promotion of AndroGel(R) and revenue from the Andrx Acquisition.
Gross margin for the Brand segment declined from 77.9 percent in the fourth quarter 2005 to 74.2 percent in the fourth quarter 2006 due to higher manufacturing costs in anticipation of the divestiture or closure of the Company’s Phoenix manufacturing facility.
For the full year 2006, Brand segment net revenue decreased seven percent or $29.8 million to $369.5 million compared to $399.3 million for 2005 due primarily to lower sales of non-promoted Specialty products.
In Watson’s brand product pipeline, the Company completed the efficacy portion of its Phase 3 silodosin program, a product for benign prostatic hyperplasia, and anticipates completion of its Phase 3 studies on a new gel formulation of oxybutynin for overactive bladder by mid 2007. New drug applications are expected to be submitted for both products in the first half of 2008.
Distribution Segment Information
Watson began recognizing revenue from the former Andrx distribution business following the Andrx Acquisition.
Three and Twelve Months Ended (Unaudited; $ in thousands) December 31, 2006 Distribution segment contribution Product sales $92,796 Other revenue 166 Net revenue 92,962 Cost of sales 82,065 Gross profit 10,897 Gross margin 11.7% Research and development -- Selling and marketing 8,409 Total operating expenses 8,409 Segment contribution $2,488 Segment margin 2.7%
Cost of sales for the three and twelve months ended December 31, 2006 include $5.7 million in Andrx Acquisition-related inventory charges. Excluding these charges, gross margin for the Distribution segment was 17.7 percent.
Other Operating Expenses
Consolidated general and administrative expenses for the fourth quarter of 2006 were $53.8 million, including $10.3 million in charges relating to the settlement of outstanding legal matters and approximately $4.3 million in Andrx Acquisition-related charges. In the fourth quarter of 2005, the company’s general and administrative expenses were $24.3 million.
Amortization expense related to the Company’s product rights intangibles increased to $42.1 million in the fourth quarter 2006, representing an increase in amortization related to the Andrx Acquisition.
2007 Financial Outlook
Watson’s forecasts are based on the Company’s actual results for 2006, and management’s current belief about prescription trends, inventory levels and the anticipated timing of future product launches. The current forecast excludes approximately $9 million ($5.5 million net of tax, or $0.05 per diluted share) of anticipated costs associated with the Andrx Acquisition and debt repurchase charges.
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% 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% of total revenue.
Excluding special items as detailed in the EBITDA reconciliation table below, adjusted earnings per diluted share for 2007 is expected to be between $1.20 and $1.30. Excluding special items as detailed in the 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 Standard Time to discuss fourth quarter and full year 2006 results, projections for 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 7234969. 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 Standard Time, Tuesday, March 13, 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 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; the ability to timely resolve with FDA the pending Official Action Indicated status of the Davie, Florida manufacturing facility; 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 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, 2005 and Watson’s Quarterly Report on Form 10-Q for the period ended September 30, 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 and twelve months ended December 31, 2006 and 2005: Table 1 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of (Loss) Income (Unaudited; in thousands, except per share amounts) Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005 2006 2005 Restated Restated Net revenues $621,162 $418,813 $1,979,244 $1,646,203 Cost of sales (net of amortization, presented below) 409,973 223,442 1,233,483 852,414 Gross profit 211,189 195,371 745,761 793,789 Operating expenses: Research and development 40,614 35,099 131,023 125,263 Selling and marketing 49,242 39,727 173,549 162,342 Corporate general and administrative 53,827 24,321 131,511 98,657 Amortization 42,117 41,100 163,710 163,939 In-process research and development 497,800 -- 497,800 -- Loss on impairment 3,283 25,076 70,264 25,076 Total operating expenses 686,883 165,323 1,167,857 575,277 Operating (loss) income (475,694) 30,048 (422,096) 218,512 Other income (expense): Loss on early extinguishment of debt -- -- (525) -- Interest income 5,652 5,741 28,418 19,321 Interest expense (11,645) (2,920) (22,082) (14,524) Other income (expense) 485 (1,651) 5,336 (3,375) Total other (expense) income, net (5,508) 1,170 11,147 1,422 (Loss) income before income taxes (481,202) 31,218 (410,949) 219,934 Provision for income taxes 7,759 11,090 34,056 81,377 Net (loss) income $(488,961) $20,128 $(445,005) $138,557 Per share amounts: Diluted (loss) earnings per share $(4.80) $0.19 $(4.37) $1.22 Diluted weighted average shares outstanding 101,892 116,645 101,761 120,021 The following table presents Watson’s Condensed Consolidated Balance Sheets as of December 31, 2006 and December 31, 2005: Table 2 Watson Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets (Unaudited; in thousands) December 31, December 31, 2006 2005 Restated Assets Cash and cash equivalents $154,171 $467,451 Marketable securities 6,649 152,467 Accounts receivable, net 384,692 333,832 Inventories 517,236 278,062 Other current assets 198,928 121,731 Property and equipment, net 697,415 436,149 Investments and other assets 131,725 80,092 Product rights and other intangibles, net 779,284 751,808 Goodwill 890,477 455,595 Total Assets $3,760,577 $3,077,187 Liabilities & Stockholders’ Equity Current liabilities $689,929 $245,670 Long-term debt 1,124,145 587,935 Deferred income taxes and other liabilities 266,115 143,113 Stockholders’ equity 1,680,388 2,100,469 Total liabilities and stockholders’ equity $3,760,577 $3,077,187 The following table presents Watson’s Condensed Consolidated Statements of Cash Flows for the twelve months ended December 31, 2006 and 2005: Table 3 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited; in thousands) Twelve Months Ended December 31, 2006 2005 Restated Cash Flows From Operating Activities: Net (loss) income $(445,005) $138,557 Reconciliation to net cash provided by operating activities: Depreciation and amortization 218,346 206,726 Restricted stock and stock option compensation 13,336 2,289 Loss on impairment 70,264 25,076 Provision for inventory reserve 27,436 42,192 In-process research and development 497,800 -- Deferred income tax (benefit) provision (22,489) (5,168) Other adjustments to reconcile net income to net cash provided by operating activities 3,134 6,057 Changes in operating assets and liabilities: Accounts receivable, net 66,172 (82,373) Inventories (59,237) 1,045 Accounts payable 116,709 18,459 Other assets (15,101) (27,357) Total adjustments 916,370 186,946 Net cash provided by operating activities 471,365 325,503 Cash Flows From Investing Activities: Additions to property and equipment (44,431) (78,833) Acquisitions of businesses, net of cash acquired (1,558,322) -- Additions to marketable securities and long-term investments (18,835) (26,083) Proceeds from sales of marketable securities 153,490 220,083 Other investing activities, net 48,679 1,188 Net cash (used in) provided by investing activities (1,419,419) 116,355 Cash Flows From Financing Activities: Proceeds from issuance of long-term debt 650,000 -- Proceeds from stock plans 8,137 28,424 Repurchase of common stock -- (300,000) Payments to repurchase 1998 Senior Notes (14,585) -- Principal payments on long-term debt (8,778) (1,484) Net cash provided by (used in) financing activities 634,774 (273,060) Net (decrease) increase in cash and cash equivalents (313,280) 168,798 Cash and cash equivalents at beginning of period 467,451 298,653 Cash and cash equivalents at end of period $154,171 $467,451 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 and twelve months ended December 31, 2006: Table 4 Watson Pharmaceuticals, Inc. Reconciliation Table (Unaudited; in thousands) Three Months Ended December 31, 2006 2006 2005 2005 GAAP Adjusted GAAP Adjusted Restated Diluted (loss) earnings per share calculation Reported net (loss) income $(488,961) $(488,961) $20,128 $20,128 Add: In-process R&D -- 497,800 -- -- Acquisition charges, net of tax -- 8,578 -- -- Legal settlement, net of tax -- 7,156 -- -- Asset impairment charge, net of tax -- 2,292 -- 16,174 Net (loss) income, GAAP and adjusted (488,961) 26,865 20,128 36,302 Add: Interest expense on CODES, net of tax -- 1,876 1,537 1,537 Net (loss) income, adjusted for interest on CODES $(488,961) $28,741 $21,665 $37,839 Basic weighted average common shares outstanding 101,892 101,892 101,442 101,442 Effect of dilutive securities: Conversion of CODES -- 14,357 14,357 14,357 Dilutive stock options -- 222 846 846 Diluted weighted average common shares outstanding 101,892 116,471 116,645 116,645 Diluted (loss) earnings per share - GAAP and adjusted $(4.80) $0.25 $0.19 $0.32 Twelve Months Ended December 31, 2006 2006 2005 2005 GAAP Adjusted GAAP Adjusted Restated Diluted (loss) earnings per share calculation Reported net (loss) income $(445,005) $(445,005) $138,557 $138,557 Add: In-process R&D -- 497,800 -- -- Acquisition charges, net of tax -- 8,060 -- -- Legal settlement, net of tax -- 6,622 -- -- Asset impairment charge, net of tax -- 45,396 -- 16,174 Net (loss) income, GAAP and adjusted (445,005) 112,874 138,557 154,731 Add: Interest expense on CODES, net of tax -- 7,362 7,477 7,477 Net (loss) income, adjusted for interest on CODES $(445,005) $120,236 $146,034 $162,208 Basic weighted average common shares outstanding 101,761 101,761 104,949 104,949 Effect of dilutive securities: Conversion of CODES -- 14,357 14,357 14,357 Dilutive stock options -- 234 715 715 Diluted weighted average common shares outstanding 101,761 116,352 120,021 120,021 Diluted (loss) earnings per share - GAAP and adjusted $(4.37) $1.03 $1.22 $1.35 The following table presents a reconciliation of reported net income for the twelve months ended December 31, 2005 and 2006 and projected net income for the twelve months ended December 31, 2007 to adjusted EBITDA: Table 5 Watson Pharmaceuticals, Inc. Adjusted EBITDA Reconciliation Table (Unaudited; in millions) Twelve Months Ended December 31, 2005 2006 2007 Low High GAAP net (loss) income $138.6 $(445.0) $126.1 $138.3 Plus: Interest expense 14.5 22.1 49.5 49.5 Interest income (19.3) (28.4) (6.8) (6.8) Provision for income taxes 81.4 34.1 79.9 87.7 Depreciation 42.8 54.6 77.3 77.3 Amortization 163.9 163.7 175.3 175.3 EBITDA 421.9 (198.9) 501.3 521.3 Adjusted for: Non-cash impairment charges 25.1 70.3 -- -- Share-based compensation 2.3 13.3 17.2 17.2 Acquisition related charges -- 510.3 6.8 6.8 Litigation charge -- 10.3 -- -- Loss on debt repurchase -- 0.5 1.8 1.8 Gain on sales of securities (0.4) (3.5) -- -- Adjusted EBITDA $448.8 $402.2 $527
