Watson Pharmaceuticals' fourth-quarter net revenue rises 22%

Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue for the fourth quarter ended December 31, 2009 climbed 22 percent to $785.7 million, compared to $645.2 million in the fourth quarter 2008. Watson's results include Arrow Group results since the acquisition on December 2, 2009.  On an adjusted cash basis, net income for the fourth quarter 2009 increased 28 percent to $94.4 million or $0.85 per share, compared to $73.7 million or $0.64 per share in the fourth quarter 2008.  GAAP earnings per share for the fourth quarter were $0.51, compared to $0.50 in the prior year period. The fourth quarter results are in-line with the Company's January 13, 2010 projection, after taking into account the exclusion of $22.2 million ($0.12 per share) in amortization expense for adjusted cash basis reporting purposes.

For the fourth quarter 2009, adjusted EBITDA increased 32 percent to $188.8 million, versus $143.2 million for the fourth quarter of 2008.   Cash and marketable securities were $215.0 million as of December 31, 2009. Refer to the attached reconciliation tables for adjustments to GAAP earnings.

Full Year 2009 Results

For the full year 2009, net revenue increased 10 percent to $2.8 billion, compared to net revenue of $2.5 billion for 2008.  On an adjusted cash basis, net income for 2009 increased 24 percent to $348.8 million, or $3.04 per share, compared to 2008 net income of $282.3 million, or $2.47 per share. GAAP earnings per share for the full year 2009 were $1.96, compared to $2.09 in 2008.

For the full year 2009, adjusted EBITDA was $689.3 million, and cash flow from operations was $376.8 million.  

"Watson achieved strong results across all businesses, and against our aggressive corporate goals in a year that included the fundamental global reshaping of our company through the acquisition of the Arrow Group," said Paul Bisaro, President and CEO.  "We grew our generics business in the U.S. through the introduction of eight new products, and we increased our investment in new product development that resulted in a record filing of 36 Abbreviated New Drug Applications with the U.S. Food and Drug Administration (FDA).  We expanded our brand product portfolio with the back-to-back launches of two new products in urology – Rapaflo® and Gelnique®. We also realigned our brand sales and marketing activities to more closely focus on presenting our expanding urology and women's health portfolios to our targeted physician prescribers."  

"To ensure long-term growth and increased shareholder return, we acquired the Arrow Group to expand globally, restructured our balance sheet to ensure cost effective funding of future expansion opportunities, and realigned our management team to support our global business, particularly with the addition of significant expertise in brands and operations.  We achieved an extraordinary number of goals that will enable our businesses to contribute to substantial and sustainable earnings per share growth for the Company," Bisaro added.  "We believe that these results provide a sound foundation upon which to deliver our goal of 10 percent compound annual growth over the next three years."  

Fourth Quarter and Full Year 2009 Business Segment Results Global Generic Segment Information Three Months Ended Twelve Months Ended December 31, December 31, ------------ ------------ (Unaudited; $ in millions) 2009 2008 2009 2008 ---- ---- ---- ---- Global Generic Segment Contribution Product sales $460.5 $365.1 $1,641.8 $1,404.0 Other revenue 6.8 2.0 26.4 70.3 --- --- ---- ---- Net revenue 467.3 367.1 1,668.2 1,474.3 Operating expenses: Cost of sales 270.4 214.1 947.1 883.8 Research and development 43.4 35.8 140.4 119.2 Selling and marketing 18.0 13.3 53.8 55.2 ---- ---- ---- ---- Segment contribution $135.5 $103.9 $526.9 $416.1>Global Generic net revenue for the fourth quarter of 2009 increased 27 percent to $467.3 million, reflecting the recent launch of new products, including metoprolol succinate extended-release, higher sales of potassium-chloride extended-release capsules and the addition of Arrow.  The increase was partially offset by lower sales from omeprazole 40mg.

Adjusted Global Generic gross profit increased 37 percent to $218.3 million or 46.7 percent of revenue in the fourth quarter of 2009, compared to $159.0 million in the fourth quarter of 2008.  Adjusted Global Generic gross profit was positively influenced by new products and other revenue increases, as well as ongoing savings from Watson's Global Supply Chain Initiative.

Global Generic research and development expense for the fourth quarter of 2009 increased $7.6 million to $43.4 million, primarily due to the inclusion of Arrow R&D expense in December 2009. Watson currently has more than 100 ANDAs pending in the U.S., including tentative approvals, and more than 240 product applications pending outside of the U.S.

For the full year 2009, Global Generic product sales increased 17 percent to $1.64 billion.  The increase was driven by sales of new products including metoprolol extended-release and potassium-chloride extended-release capsules and the inclusion of Arrow sales in December 2009.  Global Generic other revenue for 2009 decreased $43.9 million to $26.4 million, due primarily to a 2008 milestone payment from Barr Pharmaceuticals, Inc. related to Cenestin®, a decline in royalties related to Sandoz's sales of metoprolol succinate extended-release tablets 50mg and a decrease in royalties related to GlaxoSmithKline's sales of Wellbutrin XL®.

Adjusted Global Generic gross margin increased from 41.3 percent in 2008 to 45.8 percent in 2009, due to enhanced operational efficiencies resulting from the Company's Global Supply Chain Initiative and the launch of new products.

Global Brand Segment Information Three Months Twelve Months Ended Ended December 31, December 31, ------------ ------------ (Unaudited; $ in millions) 2009 2008 2009 2008 ---- ---- ---- ---- Global Brand Segment Contribution Product sales $101.8 $102.2 $393.7 $397.0 Other revenue 19.2 13.5 67.3 58.0 ---- ---- ---- ---- Net revenue 121.0 115.7 461.0 455.0 Operating expenses: Cost of sales 22.4 25.0 89.3 107.1 Research and development 17.1 11.8 56.9 50.9 Selling and marketing 36.0 31.6 144.5 118.2 ---- ---- ----- ----- Segment contribution $45.5 $47.3 $170.3 $178.8>Global Brand net revenues increased 5 percent to $121.0 million in the fourth quarter. Global Brand product sales for the fourth quarter of 2009 were slightly lower than the previous year at $101.8 million due to lower sales of Ferrlecit® and INFed®, which were partially offset by sales of Rapaflo® and Gelnique® which were launched in early 2009. Global Brand other revenue increased $5.7 million to $19.2 million due to higher revenues of our co-promoted brand products Androgel® and Femring®.

Adjusted gross margin for the Global Brand segment increased from 78.4 percent in the fourth quarter 2008 to 81.5 percent in the fourth quarter 2009, reflecting the increase in other revenue.

For the full year 2009, Global Brand segment product sales decreased one percent or $3.3 million to $393.7 million, compared to $397.0 million for 2008, due to lower sales of Ferrlecit® and INFeD®, which was partially offset by sales of newly launched products Rapaflo® and Gelnique®.

Global Brand segment adjusted gross margin for 2009 was 80.6%, compared to 76.5% in 2008, reflecting the increase in other revenue.

Distribution Segment Information Three Months Twelve Months Ended Ended December 31, December 31, ------------ ------------ (Unaudited; $ in millions) 2009 2008 2009 2008 ---- ---- ---- ---- Distribution Segment Contribution Net revenue $197.4 $162.4 $663.8 $606.2 Operating expenses: Cost of sales 168.5 137.0 560.4 511.9 Selling and marketing 17.2 15.8 64.8 59.5 ---- ---- ---- ---- Segment contribution $11.7 $9.6 $38.6 $34.8>Distribution segment net revenue for the fourth quarter of 2009 increased 22 percent or $35.0 million to $197.4 million. The increase was primarily due to sales of generic versions of Valtrex® and Prevacid® and the re-launch of generic Pulmicort®. Distribution revenue consists of sales of third-party products and excludes sales of Watson's brand and generic products.

Distribution segment adjusted gross margin decreased to 14.6 percent in the fourth quarter 2009, compared to 15.6 percent in the fourth quarter 2008, due primarily to a higher mix of third-party brand sales.

For the full year 2009, Distribution segment net revenues increased 10 percent or $57.6 million to $663.8 million, compared to $606.2 million in 2008. This increase was largely driven by sales of new generic and brand products.

Other Operating Expenses

Amortization expense for the fourth quarter 2009 was $26.5 million which includes $4.3 million in amortization related to the Arrow acquisition, compared to $20.1 million in 2008.

2010 Financial Outlook

Watson's estimates are based on actual results for 2009 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, 2010 at approximately $3.5 billion.
  • Total Global Generic segment revenue between $2.2 and $2.4 billion, with international revenue between $550 and $610 million
  • Total Global Brand segment revenue of approximately $440 and $480 million
  • Total Distribution segment revenue between $670 and $740 million
  • Selling, General and Administrative expenses between $630 and $680 million
  • Research and Development expenses between $240 and $260 million
  • Adjusted EBITDA between $760 million and $810 million
  • Cash earnings per share between $3.05 and $3.30.