Watson second quarter net revenue increases 24% to $1.1 billion

Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue of $1.1 billion for the second quarter ended June 30, 2011, an increase of 24 percent when compared to $875.3 million in the second quarter 2010. On a non-GAAP basis, net income for the second quarter 2011 increased 24 percent to $127.9 million or $1.01 per share, compared to $102.8 million or $0.83 per share in the second quarter 2010.  GAAP diluted earnings per share for the second quarter 2011 were $0.42, compared to $0.57 in the prior year period. Watson's results for the second quarter include the results of Specifar Pharmaceuticals since its acquisition on May 25, 2011. Refer to the attached reconciliation tables for adjustments to GAAP earnings.

For the second quarter 2011, adjusted EBITDA increased 17 percent to $243.3 million, compared to $207.4 million for the second quarter 2010.  Cash and marketable securities were $234.0 million as of June 30, 2011.

"Our record $1 billion in net revenues in the second quarter demonstrates the strength of our combined Global Generics and Global Brands strategies.  Our May 2nd launch of methylphenidate ER added significant additional earnings power to our strong, sustained release base business and, combined with the expansion of our international generics business, delivered 39 percent growth in Global Generics net revenues.   Net revenue growth of 9 percent in our Global Brands business, powered by the addition of new products including Crinone® and Generess™ Fe and increased sales of RAPAFLO®, demonstrated that this segment of our business continues to execute on its 2011 plan," said Paul Bisaro, President and CEO. 

"We continued to invest in the growth of our Global Generics business, increasing our R&D investment by 31 percent in the quarter, as well as in our Global Brands business, with R&D spending up 29 percent.  We also announced our acquisition of Specifar Pharmaceuticals, which brings not only additional earnings contribution, but also an expanded international platform for generic growth opportunities. In our Brand business, we announced an anticipated FDA action date for PROCHIEVE®, and shortly after the end of the quarter, entered into an exclusive licensing agreement with Antares Pharma, Inc. for a product that, if approved, will expand our position in the over-active bladder (OAB) market segment."

"We concluded the quarter with $245.0 million in borrowing capacity available on our revolving credit facility and our debt to adjusted EBITDA ratio remains favorable at 1.4x, affording us the ability to continue to pursue opportunities to expand Watson's businesses," concluded Bisaro. 

Business Segment Results

Global Generics net revenue for the second quarter 2011 increased 39 percent to $792.4 million due to increased sales of extended-release products, primarily as a result of the launch of methylphenidate ER during the quarter.  Extended release product sales were $380.1 million, up 138 percent from the second quarter 2010 as a result of the launch of methylphenidate ER and higher sales of metoprolol succinate ER.  Second quarter international net revenue was $119.2 million, up eight percent from the second quarter 2010, as a result of the addition of Specifar Pharmaceuticals in May.

Global Generics adjusted gross margin decreased 3.4 percentage points to 45.2 percent in the second quarter 2011.  Adjusted Global Generics gross margin was negatively impacted by the launch of methylphenidate ER.

Global Generics R&D investment for second quarter 2011 increased 31 percent to $58.3 million, primarily due to increased clinical study costs and increased investment in international R&D.  Six new products were launched in the U.S. and we had seven new patent challenges during the quarter.

Global Brands net revenue increased nine percent to $112.9 million in the second quarter 2011 as a result of the addition of new products including Crinone®, Generess™ Fe and Nulecit™ and increased sales of RAPAFLO®. Global Brands other revenue decreased $5.7 million to $20.9 million. Other revenue in the second quarter of 2010 was favorably impacted by the out-licensing of two legacy brand products.

Gross margin for the Global Brands segment increased 0.6 percentage points to 77.8 percent.

Global Brands R&D investment increased 29 percent to $22.2 million in the second quarter 2011 as a result of increased biosimilar R&D investment, clinical study and other costs.  Global Brands announced the submission of a New Drug Application (NDA) for PROCHIEVE® with expected FDA action in February of 2012, launched a new oral contraceptive Generess™ Fe and announced new research for RAPAFLO®, highlighting its ability to reduce symptoms of moderate to severe chronic prostatitis/chronic pelvic pain syndrome (CP/CPPS), potentially expanding the reach for this important product. Following the close of the quarter, the group also announced an exclusive licensing agreement with Antares Pharma, Inc. to commercialize its topical oxybutynin gel product in the U.S. and Canada.

Distribution segment net revenue for the second quarter 2011 decreased 12 percent to $176.4 million, due to fewer third-party product launches in the quarter.  Distribution revenue consists only of sales of third-party products.

Distribution segment gross margin was 15.4 percent in the second quarter 2011.

Other Operating Expenses

Consolidated general and administrative expenses were $85.4 million in the second quarter 2011, an increase of $9.5 million from the second quarter 2010, which includes $6.0 million in costs associated with the acquisition of Specifar. Amortization expense for the second quarter 2011 was $74.6 million, compared to $43.1 million in second quarter 2010, reflecting higher amortization rates in our international business and accelerated amortization of Nulecit™ product rights due to market conditions.

2011 Financial Outlook

Watson's estimates are based on actual results for the second 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 $4.5 billion.
• Total Global Generic segment revenue between $3.1 and $3.3 billion
• Total Global Brand segment revenue of approximately $445 and $465 million
• Total Distribution segment revenue between $770 and $800 million
• Adjusted EBITDA between $1.025 billion and $1.075 billion
• Non-GAAP earnings per share between $4.25 and $4.50.