Watson Fourth Quarter 2010 Net Revenue Increases 21% to $953 Million

MORRISTOWN, N.J., Feb. 15, 2011 /PRNewswire/ -- Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue increased 21 percent to $952.7 million for the fourth quarter ended December 31, 2010, compared to $785.7 million in the fourth quarter 2009. On a non-GAAP basis, net income for the fourth quarter 2010 was $116.5 million or $0.93 per share, an increase of 23 percent, compared to $94.4 million or $0.85 per share in the fourth quarter 2009.  GAAP earnings per share for the fourth quarter 2010 were $0.15, compared to $0.51 in the prior year period.

For the fourth quarter 2010, adjusted EBITDA increased 17 percent to $220.8 million, compared to $188.8 million for the fourth quarter 2009.  Cash and marketable securities were $293.9 million as of December 31, 2010. Refer to the attached reconciliation tables for adjustments to GAAP earnings.

Full Year 2010 Results

For the full year 2010, net revenue increased 28 percent to $3.6 billion, compared to net revenue of $2.8 billion for full year 2009.  On a non-GAAP basis, net income increased 22 percent to $425.4 million, or $3.42 per share for the full year 2010, compared to 2009 net income of $348.8 million, or $3.04 per share. GAAP earnings per share were $1.48 for the full year 2010, compared to $1.96 in 2009.

For the full year 2010, adjusted EBITDA was $838.2 million, an increase of 22 percent from the full year 2009. Cash flow from operations was $571.0 million.  

"2010 was an extremely successful year for Watson.  From a financial perspective, revenues grew by 28 percent and non-GAAP earnings per share increased by 13 percent. Additionally, strong cash flow from operations of over $570 million enabled us to reduce our debt to adjusted EBITDA ratio to approximately 1.2x, which provides us the flexibility to capitalize on future opportunities to grow the Company," said Paul Bisaro, President and CEO.  "We also reported continued progress in our Global Brands and Generics businesses.  During the year we launched 7 new generic products in the U.S., disclosed the initiation of 17 new patent challenges, and announced an agreement that will enable us to launch generic Concerta® in May 2011. Investing for the future, we filed 34 Abbreviated New Drug Applications in the U.S. and over 145 applications globally."

"In our Global Brands business, we launched three new products in the U.S., completed the phase III study with Columbia Labs on Prochieve® 8% for the prevention of pre-term birth in women with a short cervix, and announced an alliance with Gedeon Richter to develop Esmya® for the treatment of uterine fibroids. We also licensed our first biologic, recombinant follicle stimulating hormone (rFSH)," Bisaro continued.

"During 2010 we continued to successfully integrate our assets in key international markets and invested in the new and exciting high growth markets of Brazil and Mexico through our joint venture with Moksha8.  We also realized significant enhancements to our global supply chain through our Operational Excellence Initiative," concluded Bisaro.  

Global Generics net revenue for the fourth quarter 2010 increased 38 percent to $646.0 million. Product sales increased due to the addition of our international business and new products, including metoprolol succinate extended-release, Zarah® and diltiazem extended-release. Other revenue increased primarily as a result of the contribution from our international markets. Fourth quarter international net revenue was $148.6 million, and includes a $25 million payment from a development partner. Our non-GAAP financial results exclude this payment.

Adjusted Global Generics gross margin increased 3.9 percentage points to 50.6 percent in the fourth quarter 2010, compared to 46.7 percent in the fourth quarter 2009.  Adjusted Global Generics gross margin was positively influenced by increased sales of extended-release products, partially offset by lower gross margins in our international business.

Global Generics R&D investment for the fourth quarter 2010 increased 24 percent to $53.7 million, primarily due to the inclusion of international R&D investments beginning in December 2009.

For the full year 2010, Global Generics net revenue increased 40 percent to $2.34 billion, including product sales of $2.27 billion and other revenue of $69.5 million.  Product sales were driven by increased sales of extended-release products, the launch of new products and the addition of product sales from our international markets.  Global Generics other revenue for 2010 increased $43.1 million compared to 2009, due primarily to higher other revenue from our international business. International net revenues for the full year 2010 were $472.0 million.

Adjusted Global Generics gross margin increased from 45.8 percent in 2009 to 49.9 percent in 2010, due to the launch of new products, an increase in extended-release products and enhanced operational efficiencies resulting from the Company's Operational Excellence Initiative.

Global Brands net revenue was $103.3 million in the fourth quarter. Global Brands net revenue for the fourth quarter 2010 was lower than the previous year due primarily to the loss of Ferrlecit®, partially offset by an increase in sales of Rapaflo®, Gelnique®,  Androderm® and the addition of Crinone®.

Adjusted gross margin for the Global Brands segment decreased from 81.5 percent to 80.3 percent in the fourth quarter 2010 primarily as a result of the loss of Ferrlecit®.

Global Brands R&D investment increased $28.2 million in the fourth quarter 2010, due primarily to milestone payments for pipeline products, including Esmya®, the initiation of the Phase III program for our contraceptive patch and the addition of Eden Biodesign.  Global Brands selling and marketing expenses were consistent with the fourth quarter of 2009 at $35.6 million.

For the full year 2010, Global Brands segment net revenue decreased $63.2 million to $397.8 million, and included product sales of $316.3 million and other revenue of $81.5 million. Product sales decreased compared to 2009, due primarily to the loss of Ferrlecit®, which was partially offset by increased sales of Rapaflo®, Gelnique®, Androderm®, and the addition of Crinone®.

Global Brands segment adjusted gross margin for the full year 2010 was 77.8 percent, compared to 80.6 percent in 2009, reflecting the loss of Ferrlecit®.

Distribution segment net revenue for the fourth quarter 2010 increased three percent, or $6.0 million to $203.4 million. The increase was primarily due to sales of generic versions of Adderall XR®, Aricept®, and Effexor XR®.  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 13.7 percent in the fourth quarter 2010, a decrease of approximately one percentage point from the prior year, due primarily to higher inventory reserves.

For the full year 2010, Distribution segment net revenues increased 25 percent or $166.9 million to $830.7 million, compared to $663.8 million in 2009. This increase was driven by sales of new generic and brand products.

Other Operating Expenses

Consolidated general and administrative expenses were $122.3 million in the fourth quarter 2010, an increase of $56.3 million from the fourth quarter 2009, due primarily to a $40 million legal reserve associated with drug pricing litigation and the addition of our international business acquired in 2009. Amortization expense for the fourth quarter 2010 was $52.0 million, compared to $26.5 million in fourth quarter 2009, reflecting amortization related to the Arrow Group acquisition.

For the full year 2010, consolidated general and administrative expenses were $436.1 million, an increase of $179.0 million from the full year 2009, as a result of a $129.9 million legal reserve associated with drug pricing litigation, and the addition of our international business which was acquired in December of 2009. Amortization expense for the full year 2010 was $180.0 million, compared to $92.6 million in full year 2009, reflecting the Arrow Group acquisition.

2011 Financial Outlook

Watson's estimates are based on actual results for 2010 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 $2.8 and $3.0 billion

 -- Total Global Brand segment revenue of approximately $470 and $490 million

 -- Total Distribution segment revenue between $820 and $840 million

 -- Selling, General and Administrative expenses between $650 and $675 million

 -- Research and Development expenses between $290 and $310 million

 -- Adjusted EBITDA between $925 million and $1.0 billion

 -- Non-GAAP earnings per share between $3.85 and $4.15.

Webcast and Conference Call Details

Watson will host a conference call and webcast today at 8:30 a.m. Eastern Standard Time to discuss fourth quarter and full year 2010 results, the outlook for 2011 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 40449367.  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, March 1, 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 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; 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, including the acquisition of the Arrow Group and acquisition of the Crinone® product rights; 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, 2009 and Watson's quarterly report on Form 10-Q for the period ended September 30, 2010. Except as expressly required by law, Watson disclaims any intent or obligation to update these forward-looking statements.  

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The following table presents Watson's results of operations for the three and twelve months ended December 31, 2010 and 2009:

The following table presents Watson's Condensed Consolidated Balance Sheets for the twelve months ended December 31, 2010 and 2009.

The following table presents Watson's Condensed Consolidated Statements of Cash Flows for the twelve months ended December 31, 2010 and 2009.

The following table presents a reconciliation of reported net income and diluted earnings per share to non-GAAP net income for the three and twelve months ended December 31, 2010 and 2009:

The following table presents a reconciliation of reported net income for the three and twelve months ended December 31, 2010 and 2009 to adjusted EBITDA:

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:

The 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:

The 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.

SOURCE Watson Pharmaceuticals, Inc.

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