Watson Pharmaceuticals, Inc. Reports Second Quarter 2007 Results

CORONA, Calif., Aug. 2 /PRNewswire-FirstCall/ -- Watson Pharmaceuticals, Inc. , a leading specialty pharmaceutical company, today reported revenue and earnings for its second quarter ended June 30, 2007.

Net revenue for the second quarter 2007 was $603.0 million and net income was $36.4 million, or $0.33 per diluted share. Excluding special items as detailed in the reconciliation table below, adjusted net income for the second quarter was $37.9 million, or $0.34 per diluted share.

Excluding special items as detailed in the EBITDA reconciliation table below, adjusted EBITDA for the second quarter 2007 was $136.6 million.

Cash flow from operations was $111.0 million for the second quarter and $199.2 million for the first six months of 2007, respectively. During the second quarter, the Company made $100 million in debt prepayments. Cash and marketable securities were $85.4 million as of June 30, 2007.

"I am pleased with the solid financial performance we reported this quarter," began Allen Chao, Ph.D., Watson's Chairman and Chief Executive Officer. "We continue to make good progress on the strategic initiatives we have in place to expand the pipeline, enhance operating efficiencies and reduce our overall cost structure. The groundwork that was laid several years ago is yielding results and will ensure our long-term growth and success."

"Our generic pipeline is one of the strongest in the industry, and our brand business is poised for growth, with two promising urology products completing late stage development this year. As we move into the second half of the fiscal year and into 2008, we remain excited about the many opportunities in front of us," concluded Dr. Chao.

For the six months ended June 30, 2007, net revenue increased 39 percent to $1,274.6 million, as compared to $917.6 million for the first six months of 2006. Net income for the first six months of 2007 was $68.0 million, or $0.62 per diluted share, as compared to net income of $9.6 million, or $0.09 per diluted share for the same period of 2006. On an adjusted basis, as detailed in the attached reconciliation table, net income for the first six months of 2007 was $75.2 million, or $0.68 per diluted share, as compared to adjusted net income of $49.2 million, or $0.45 per diluted share, for the same period of 2006.

Second Quarter and Six Month Business Segment Results Generic Segment Information Three Months Ended Six Months Ended June 30, June 30, (Unaudited; $ in thousands) 2007 2006 2007 2006 Generic segment contribution Product sales $327,446 $419,441 $738,921 $740,856 Other revenue 18,195 990 31,345 1,665 Net revenue 345,641 420,431 770,266 742,521 Cost of sales 210,342 306,564 482,965 523,948 Gross profit 135,299 113,867 287,301 218,573 Gross margin 39.1% 27.1% 37.3% 29.4% Research and development 23,968 18,124 50,481 38,619 Selling and marketing 13,197 13,526 27,746 26,464 Segment contribution $98,134 $82,217 $209,074 $153,490 Segment margin 28.4% 19.6% 27.1% 20.7%

Generic segment net revenue for the second quarter of 2007 decreased 18 percent or $74.8 million to $345.6 million, compared to $420.4 million in the prior year period.

Generic product sales for the second quarter of 2007 decreased $92.0 million to $327.4 million, primarily due to the loss of revenue from oxycodone HCl controlled-release tablets, following the termination of a distribution agreement, and lower sales of pravastatin sodium tablets. This was offset in part by the addition of product revenue resulting from the Company's recently acquired Florida operations. Sales of generic oral contraceptives increased $12.8 million to $91.4 million.

Other revenue increased $17.2 million to $18.2 million, due primarily to the addition of commission revenue related to fentanyl citrate and the addition of royalties from GlaxoSmithKline's sales of Wellbutrin XL(R) 150 mg.

Gross margin for the Generic segment increased from 27.1 percent in the second quarter 2006 to 39.1 percent in the second quarter 2007 due to the increase in other revenue and lower sales of authorized generics.

Watson currently has over 70 ANDAs on file, including 15 products that have received tentative approval.

Brand Segment Information Three Months Ended Six Months Ended June 30, June 30, (Unaudited; $ in thousands) 2007 2006 2007 2006 Brand Segment Contribution Product sales $96,924 $88,051 $187,562 $171,288 Other revenue 13,809 1,874 24,711 3,780 Net revenue 110,733 89,925 212,273 175,068 Cost of sales 26,795 24,296 52,010 41,666 Gross profit 83,938 65,629 160,263 133,402 Gross margin 75.8% 73.0% 75.5% 76.2% Research and development 11,535 13,001 22,830 22,343 Selling and marketing 26,373 29,765 52,784 58,740 Segment contribution $46,030 $22,863 $84,649 $52,319 Segment margin 41.6% 25.4% 39.9% 29.9%

Brand segment net revenue for the second quarter of 2007 increased 23 percent, or $20.8 million to $110.7 million, compared to $89.9 million in the prior year period due to increases in both Brand product sales and other revenue.

Brand product sales for the second quarter of 2007 increased 10 percent or $8.9 million to $96.9 million, primarily due to increased sales of Androderm(R) and Oxytrol(R). Other revenue increased $11.9 million to $13.8 million, due to the addition of revenue related to the promotion of AndroGel(R) and other product revenue resulting from the Andrx acquisition.

Gross margin for the Brand segment increased from 73.0 percent in the second quarter 2006 to 75.8 percent in the second quarter 2007 due primarily to the increase in other revenue.

In Watson's brand product pipeline, the Company has completed the long term safety study 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 in the third quarter 2007. New drug applications are expected to be submitted for both products in the first half of 2008.

Distribution Segment Information Three Six Months Ended Months Ended (Unaudited; $ in thousands) June 30, 2007 June 30, 2007 Distribution segment contribution Product sales $146,631 $292,071 Other revenue - - Net revenue 146,631 292,071 Cost of sales 123,301 250,183 Gross profit 23,330 41,888 Gross margin 15.9% 14.3% Research and development - - Selling and marketing 12,327 26,530 Total operating expenses 12,327 26,530 Segment contribution $11,003 $15,358 Segment margin 7.5% 5.3%

Distribution segment net revenue for the second quarter of 2007 was $146.6 million, up slightly from $145.4 million reported in the first quarter 2007.

Gross margin for the Distribution segment improved from 12.8 percent in the first quarter 2007 to 15.9 percent in the second quarter 2007. Cost of sales for the first quarter 2007 included $2.5 million in Andrx acquisition-related inventory charges.

Other Operating Expenses

Consolidated general and administrative expenses for the second quarter of 2007 increased $17.8 million to $45.3 million, compared to $27.5 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 six months of 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 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 approximately $2.5 billion.

Net Revenue Estimates by Segment For the Twelve Months Ended December 31, 2007 Generic Segment Approximately $1.5 Billion Brand Segment $400 - $420 Million Distribution $575 - $615 Million

Research and development investment for 2007 is expected to be approximately 6 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 approximately 16.5 percent of total revenue.

Adjusted earnings per diluted share for 2007 is expected to be between $1.25 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 8:30 a.m. Eastern Daylight Time to discuss 2007 second 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 6242338. 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, August 10, 2007. 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., 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.watson.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.

Wellbutrin XL(R) is a registered trademark of GlaxoSmithKline. AndroGel(R) is a registered trademark of Solvay Pharmaceuticals, Inc.

The following table presents Watson's results of operations for the three and six months ended June 30, 2007 and 2006:

Table 1 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Operations (Unaudited; in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Restated* Restated* Net revenues $603,005 $510,356 $1,274,610 $917,589 Cost of sales (excludes amortization, presented below) 360,438 330,860 785,158 565,614 Gross profit 242,567 179,496 489,452 351,975 Operating expenses: Research and development 35,503 31,125 73,311 60,962 Selling, general and administrative 97,158 70,774 200,376 137,524 Amortization 44,159 41,101 88,092 82,201 Loss on asset impairment -- 66,981 -- 66,981 Total operating expenses 176,820 209,981 361,779 347,668 Operating income (loss) 65,747 (30,485) 127,673 4,307 Other (expense) income: Early extinguishment of debt (1,681) 195 (4,410) (525) Interest income 1,803 6,913 4,732 13,165 Interest expense (11,475) (3,322) (25,351) (6,623) Other income 3,034 1,561 6,437 5,076 Total other (expense) income, net (8,319) 5,347 (18,592) 11,093 Income (loss) before income taxes 57,428 (25,138) 109,081 15,400 Provision (benefit) for income taxes 21,019 (9,527) 41,060 5,837 Net income (loss) $36,409 $(15,611) $68,021 $9,563 Diluted earnings (loss) per share $0.33 $(0.15) $0.62 $0.09 Diluted weighted average shares outstanding 117,080 101,666 116,909 102,125 * Net income (loss) for 2006 has been restated for earnings on equity method investments 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 June 30, 2007 and December 31, 2006:

Table 2 Watson Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets (Unaudited; in thousands) June 30, December 31, 2007 2006 Assets Cash and cash equivalents $74,852 $154,171 Marketable securities 10,513 6,649 Accounts receivable, net 301,602 384,692 Inventories 553,869 517,236 Other current assets 153,734 198,928 Property and equipment, net 694,440 697,415 Investments and other assets 133,366 131,725 Product rights and other intangibles, net 691,560 779,284 Goodwill 875,443 890,477 Total Assets $3,489,379 $3,760,577 Liabilities & Stockholders' Equity Current liabilities $459,846 $689,929 Long-term debt 974,276 1,124,145 Deferred income taxes and other liabilities 290,361 266,115 Stockholders' equity 1,764,896 1,680,388 Total liabilities and stockholders' equity $3,489,379 $3,760,577

The following table presents Watson's Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006:

Table 3 Watson Pharmaceuticals, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited; in thousands) Six Months Ended June 30, 2007 2006 Restated* Cash Flows from Operating Activities: Net income $68,021 $9,563 Reconciliation to net cash provided by operating activities: Depreciation and amortization 125,613 106,770 Non-cash impairment charges -- 66,981 Deferred income tax benefit (20,188) (61,887) Provision for inventory reserve 26,946 10,701 Restricted stock and stock option compensation 6,910 6,653 Other adjustments to reconcile net income to net cash provided 2,034 (6,223) Changes in assets and liabilities: Accounts receivable, net 86,090 (13,618) Inventories (67,980) (38,542) Accounts payable and accrued expense (76,366) 84,425 Income taxes payable 18,058 35,106 Prepaids and other changes to assets and liabilities 30,104 (3,704) Total adjustments 131,221 186,662 Net cash provided by operating activities 199,242 196,225 Cash Flows from Investing Activities: Additions to property, equipment and product rights (35,833) (18,481) Acquisition of business, net of cash acquired -- (29,664) Other (2,019) (3,604) Net cash used in investing activities (37,852) (51,749) Cash Flows from Financing Activities: Payments on term loan and long-term debt (251,881) (18,799) Proceeds from stock plans 11,172 7,283 Net cash used in financing activities (240,709) (11,516) Net (decrease) increase in cash and cash equivalents (79,319) 132,960 Cash and cash equivalents at beginning of period 154,171 467,451 Cash and cash equivalents at end of period $74,852 $600,411 * Net income for 2006 has been restated for earnings on equity method investments to account for our investment in common shares of Andrx prior to the Andrx Acquisition using the equity method of accounting in accordance with 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 and six months ended June 30, 2007 and 2006:

Table 4 Watson Pharmaceuticals, Inc. Reconciliation Table (Unaudited; in thousands except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Restated* Restated* GAAP to adjusted net income calculation Reported GAAP net income (loss) $36,409 $(15,611) $68,021 $9,563 Adjusted for: Acquisition charges 2,217 (12) 9,578 81 Gain on sale of securities (683) -- (2,472) (3,695) Loss on asset impairment -- 66,981 -- 66,981 Early extinguishment of debt 1,681 (195) 4,410 525 Legal settlement (842) -- 158 -- Income taxes (869) (25,307) (4,478) (24,229) Adjusted net income 37,913 25,856 75,217 49,226 Add: Interest expense on CODES, net of tax 2,058 1,784 4,001 3,459 Adjusted net income, adjusted for interest on CODES $39,971 $27,640 $79,218 $52,685 Diluted earnings per share - GAAP Diluted earnings per share - GAAP $0.33 $(0.15) $0.62 $0.09 Basic weighted average common shares outstanding 102,093 101,666 102,178 101,742 Effect of dilutive securities: Conversion of CODES 14,357 -- 14,357 -- Dilutive stock options 630 -- 374 383 Diluted weighted average common shares outstanding 117,080 101,666 116,909 102,125 Diluted earnings per share - Adjusted Diluted earnings per share - Adjusted $0.34 $0.24 $0.68 $0.45 Basic weighted average common shares outstanding 102,093 101,666 102,178 101,742 Effect of dilutive securities: Conversion of CODES 14,357 14,357 14,357 14,357 Dilutive stock options 630 181 374 383 Diluted weighted average common shares outstanding 117,080 116,204 116,909 116,482 * Net income (loss) for 2006 has been restated for earnings on equity method investments to account for our investment in common shares of Andrx prior to the Andrx Acquisition using the equity method of accounting in accordance with APB 18.

The following table presents a reconciliation of reported net income for the three and six months ended June 30, 2007 and 2006 to adjusted EBITDA:

Table 5 Watson Pharmaceuticals, Inc. Adjusted EBITDA Reconciliation Table (Unaudited; in millions) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Restated* Restated* GAAP net income (loss) $36.4 $(15.6) $68.0 $9.6 Plus: Interest expense 11.5 3.3 25.4 6.6 Interest income (1.8) (6.9) (4.7) (13.2) Provision (benefit) for income taxes 21.0 (9.5) 41.0 5.9 Depreciation 19.5 12.4 37.5 24.5 Amortization 44.1 41.1 88.1 82.2 EBITDA 130.7 24.8 255.3 115.6 Adjusted for: Non-cash impairment charges -- 67.0 -- 67.0 Share-based compensation 3.5 3.8 6.9 6.7 Acquisition related charges 2.2 -- 9.6 0.1 Litigation charge (0.8) -- 0.2 -- Early extinguishment of debt 1.7 (0.2) 4.4 0.5 Gain on sales of securities (0.7) -- (2.5) (3.7) Adjusted EBITDA $136.6 $95.4 $273.9 $186.2 * Net income (loss) for 2006 has been restated for earnings on equity method investments to account for our investment in common shares of Andrx prior to the Andrx Acquisition using the equity method of accounting in accordance with APB 18. (Logo: http://www.newscom.com/cgi-bin/prnh/20020214/WATSONLOGO)

CONTACT: Patty Eisenhaur, Director, Investor Relations of WatsonPharmaceuticals, Inc., +1-951-493-5611

Web site: http://www.watsonpharm.com/