Watson reports net revenue of $876.5 million for first quarter 2011

Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue of $876.5 million for the first quarter ended March 31, 2011, compared to $856.5 million in the first quarter 2010. On a non-GAAP basis, net income for the first quarter 2011 was $111.9 million or $0.89 per share, an increase of 12 percent, compared to $100.3 million or $0.81 per share in the first quarter 2010.  GAAP diluted earnings per share for the first quarter 2011 were $0.36, compared to $0.57 in the prior year period. Refer to the attached reconciliation tables for adjustments to GAAP earnings.

For the first quarter 2011, adjusted EBITDA increased nine percent to $215.9 million, compared to $198.9 million for the first quarter 2010.  Cash and marketable securities were $514.8 million as of March 31, 2011.

"As demonstrated by the first quarter results announced today, Watson had a very solid start to 2011," said Paul Bisaro, President and CEO.  "In our Global Generics business, revenue grew 10 percent during the quarter reflecting strong organic growth, and we expanded our adjusted gross margin by 1.6 percentage points. Additionally, we received approval in the United States for two new generic products and initiated three new patent challenges, including a challenge on a generic version of OxyContin^®.  We won the appeal in our generic Seasonique^® patent case and won the district court patent case for generic Mucinex^®."

"In our Global Brands business, net revenue increased six percent, and we had adjusted gross margins of 81.6 percent.  Perhaps the most significant development for our Global Brands business came just after the close of the quarter, when the positive results of the PROCHIEVE^® Phase III PREGNANT study for the prevention of pre-term birth in women with a short cervix were published in a peer-reviewed journal. The study results demonstrated a 45 percent reduction in preterm birth and improvement in infant outcome was noted. Yesterday, we announced the submission of a New Drug Application (NDA), and if accepted for expedited FDA review, look forward to potential action on the PROCHIEVE^® NDA prior to the end of this year."

"We continued to invest substantial resources in Global Generics and Global Brands research and development and concluded the quarter with our lowest debt to adjusted EBITDA ratio in over six years.  We are well positioned for continued growth for the remainder of 2011 and we are actively pursuing opportunities to utilize our strong balance sheet to drive Watson's expansion," concluded Bisaro. 

Global Generics net revenue for the first quarter 2011 increased 10 percent to $600.1 million. Product sales increased 10 percent due to increased sales of extended-release products and the launch of new products including Zarah^®. Other revenue increased primarily as a result of a settlement of a contingent asset acquired as part of a business combination. First quarter international net revenue was $108.7 million, down two percent from the first quarter 2010, as lower pricing in key markets offset the impact of higher unit sales.

Global Generics adjusted gross margin increased 1.6 percentage points to 51.8 percent in the first quarter 2011, compared to 50.2 percent in the first quarter 2010.  Adjusted Global Generics gross margin was positively influenced by increased sales of higher margin extended-release products and increased margins on a number of our base business products.

Global Generics R&D investment for first quarter 2011 increased 29 percent to $54.4 million, primarily due to clinical study costs, global supply chain costs associated with the closure of our R&D facilities in California and Australia and increased investment in international R&D.

Global Brands net revenue increased six percent to $96.9 million in the first quarter 2011. Global Brands net revenue increased primarily due to increased sales of Rapaflo^®, Androderm^® and the addition of Crinone^®.

Adjusted gross margin for the Global Brands segment increased 8.7 percentage points to 81.6 percent from 72.9 percent in the first quarter 2010, primarily as a result of product sales mix.

Global Brands R&D investment increased $2.6 million to $19.9 million in the first quarter 2011 and included increased R&D investment at Eden Biodesign.

Distribution segment net revenue for the first quarter 2011 decreased $41.9 million to $179.5 million, due to the lower number of third-party product launches in the quarter.  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 17.2 percent in the first quarter 2011, an increase of 4.1 percentage points from the prior year, as a result of a lower proportion of chain drug store sales in the quarter.

Other Operating Expenses

Consolidated general and administrative expenses were $79.3 million in the first quarter 2011, an increase of $4.9 million from the first quarter 2010 due primarily to an increase in international general and administrative expenses. Amortization expense for the first quarter 2011 was $57.1 million, including $0.5 million amortization on equity method investments recorded in other income (expense), compared to $39.0 million in first quarter 2010, reflecting higher amortization of intangible assets in our international business as a result of product launches and higher amortization rates.

2011 Financial Outlook

Watson's estimates are based on actual results for the first quarter 2011 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 $2.9 and $3.1 billion

  -- Total Global Brand segment revenue of approximately $445 and $465 million

  -- Total Distribution segment revenue between $770 and $800 million

  -- Adjusted EBITDA between $950 million and $1.0 billion

  -- Non-GAAP earnings per share between $3.95 and $4.20.