CORONA, Calif., Oct. 29 /PRNewswire-FirstCall/ -- Watson Pharmaceuticals, Inc. (NYSE: WPI), a leading specialty pharmaceutical company, today reported financial results for its third quarter ended September 30, 2008.

Third Quarter 2008 Results

Net revenue for the third quarter 2008 increased $46.0 million or 8 percent from the third quarter 2007 to $640.7 million, and net income was $71.1 million, or $0.62 per diluted share. Excluding special items as detailed in the reconciliation table below, adjusted net income for the third quarter was $53.9 million, or $0.47 per diluted share. Adjusted EBITDA for the third quarter 2008 was $137.2 million and cash flow from operations was $74.0 million. Cash and marketable securities were $352.0 million as of September 30, 2008.

"This has been a positive quarter for Watson, and one that continues to demonstrate the strength and financial health of the Company," began Paul Bisaro, Watson's President and Chief Executive Officer. "Importantly, our performance strength was spread across all of our divisions. The launch of omeprazole 40mg contributed to solid results in our Generics division and two new product launches contributed to a strong performance in our Anda distribution division."

"By far, the biggest news we had this quarter was the approval of RAPAFLO(TM) (silodosin), our new alpha blocker for BPH," continued Mr. Bisaro. "RAPAFLO is the first of three new brand products we expect to introduce in 2009 and will help strengthen the foundation for our future growth in the Urology specialty area. We are committed to achieving strong performances in all of our businesses and remain very optimistic in both our near and long term outlook," concluded Mr. Bisaro.

First Nine Months 2008 Results

For the nine months ended September 30, 2008, net revenue was $1,890.3 million, as compared to $1,869.3 million for the first nine months of 2007. Net income for the first nine months of 2008 was $182.0 million, or $1.60 per diluted share, as compared to net income of $102.6 million, or $0.93 per diluted share, for the same period of 2007. On an adjusted basis, as detailed in the attached reconciliation table, net income for the first nine months of 2008 was $170.6 million, or $1.50 per diluted share, as compared to adjusted net income of $112.4 million, or $1.01 per diluted share, for the same period of 2007.

    Third Quarter 2008 Business Segment Results

    Generic Segment Information

                                  Three Months Ended     Nine Months Ended
                                      September 30,         September 30,
    (Unaudited; $ in thousands)     2008       2007      2008         2007
    Generic Segment Contribution
        Product sales             $352,190  $326,231  $1,038,938  $1,065,152
        Other revenue               11,593    31,489      68,249      62,834
      Net revenue                  363,783   357,720   1,107,187   1,127,986
      Cost of sales                212,367   210,931     669,676     693,896
        Gross profit               151,416   146,789     437,511     434,090
        Gross margin                 41.6%     41.0%       39.5%       38.5%

      Research and development      31,736    26,555      83,458      77,036
      Selling and marketing         13,990    14,018      41,868      41,764
        Segment contribution      $105,690  $106,216    $312,185    $315,290
        Segment margin               29.1%     29.7%       28.2%       28.0%

Generic product sales for the third quarter of 2008 increased $26.0 million to $352.2 million, reflecting the addition of new products which were offset in part by price erosion on the base business.

Generic other revenue decreased $19.9 million to $11.6 million due to a decline in royalties from Sandoz's sales of metoprolol succinate extended-release tablets 50mg.

Generic gross profit was $151.4 million in the third quarter of 2008, compared to $146.8 million in the third quarter of 2007 and $149.1 million in the second quarter 2008. Generic gross profit was positively influenced by the launch of new products, including the launch of omeprazole delayed-release capsules 40mg. Generic gross profit for the third quarter 2008 reflects approximately $4.4 million in costs related to Watson's Global Supply Chain Initiative. Excluding this item, Generic gross profit was $155.9 million, or 43 percent of revenue in the third quarter 2008.

Generic research and development expense increased $5.2 million to $31.7 million, reflecting an acceleration of generic research and development pipeline activities. Watson currently has approximately 60 ANDAs on file with the Food and Drug Administration (FDA).

    Brand Segment Information

                                    Three Months Ended     Nine Months Ended
                                       September 30,         September 30,
    (Unaudited; $ in thousands)       2008      2007        2008       2007
    Brand Segment Contribution
        Product sales               $94,298    $93,534    $294,756   $281,096
        Other revenue                11,677     13,577      44,511     38,288
      Net revenue                   105,975    107,111     339,267    319,384
      Cost of sales                  30,224     22,089      82,167     74,099
        Gross profit                 75,751     85,022     257,100    245,285
        Gross margin                  71.5%      79.4%       75.8%      76.8%

      Research and development       13,586      9,102      39,095     31,932
      Selling and marketing          29,024     26,613      86,593     79,397
        Segment contribution        $33,141    $49,307    $131,412   $133,956
        Segment margin                31.3%      46.0%       38.7%      41.9%

Brand product sales for the third quarter of 2008 increased slightly to $94.3 million, primarily due to increased sales of Trelstar(R). Brand other revenue decreased $1.9 million to $11.7 million, due primarily to decreased revenues from the Company's licensing arrangements.

Gross margin for the Brand segment decreased from 79.4 percent in the third quarter 2007 to 71.5 percent in the third quarter 2008. The decline in Brand gross margin from third quarter 2007 levels reflects an inventory charge taken during the third quarter 2008 related to the Company's INFeD(R) product.

On October 8, 2008, Watson's New Drug Application (NDA) for RAPAFLO was approved by the FDA for the treatment of the signs and symptoms of benign prostatic hyperplasia. The Company anticipates launching RAPAFLO in early 2009. Watson's NDA for oxybutynin topical gel remains under review by FDA for the treatment of overactive bladder and in the fourth quarter 2008, Watson expects to have an NDA on file with the FDA for its six month formulation of Trelstar(R), under development for the treatment of advanced prostate cancer.

    Distribution Segment Information

                                       Three Months Ended   Nine Months Ended
                                          September 30,       September 30,
    (Unaudited; $ in thousands)          2008      2007      2008       2007
    Distribution Segment Contribution
      Net revenue                      $170,933  $129,875  $443,822  $421,946
      Cost of sales                     144,064   113,400   374,812   363,583
        Gross profit                     26,869    16,475    69,010    58,363
        Gross margin                      15.7%     12.7%     15.5%     13.8%
      Selling and marketing              15,558    12,716    43,695    39,246
        Segment contribution            $11,311    $3,759   $25,315   $19,117
        Segment margin                     6.6%      2.9%      5.7%      4.5%

Distribution segment net revenue for the third quarter of 2008 increased 32 percent or $41.1 million to $170.9 million. The increase was primarily due to new products launched in the third quarter, including launches of generic versions of Risperdal(R) and Lamictal(R). Distribution revenue excludes sales of Watson products.

Distribution segment gross margin was 15.7 percent in the third quarter of 2008 compared to 12.7 percent in the third quarter 2007 and 15.7 percent in second quarter 2008.

Other Operating Expenses

Consolidated general and administrative expenses for the third quarter 2008 decreased $16.4 million to $42.7 million and reflects a $5.9 million favorable settlement of a tax-related liability due to the resolution of an Internal Revenue Service audit during the quarter.

Amortization expense for the third quarter 2008 declined $24.0 million to $20.2 million, reflecting the full amortization of Ferrlecit(R) product rights as of December 31, 2007.

2008 Financial Outlook

Based on actual results for the first nine months of 2008 and its forecast for the remainder of the year, Watson is adjusting its estimates for the full year 2008. Watson's estimates are based on the Company's actual results for the nine months of 2008, 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 of 2008 at approximately $2.5 billion.

    Net Revenue Estimates by Segment

        For the Twelve Months Ending December 31, 2008

        Generic Segment                           $1.40 - $1.50 Billion
        Brand Segment                             $450 - $470 Million
        Distribution Segment                      $580 - $610 Million

Research and development investment for 2008 is expected to be approximately $160 million. Selling, general and administrative expenses for 2008 are expected to be between $420 and $430 million. Amortization expense for 2008 is expected to be approximately $80 million.

Watson has increased its estimates for GAAP earnings per diluted share to between $2.05 and $2.10 and adjusted earnings per diluted share is now estimated to be between $1.98 and $2.03.

In 2008, the Company expects to incur pre-tax costs associated with the planned closure of its Carmel, NY manufacturing facilities of approximately $30 million which includes accelerated depreciation, severance, retention and other related plant closure costs. These charges and other items are excluded from Watson's 2008 adjusted earnings per diluted share forecast as detailed in Table 6 below.

Excluding special items as detailed in the EBITDA reconciliation Table 7 below, adjusted EBITDA is now estimated to be between $560 and $570 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 third quarter 2008 results, the outlook for 2008 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 68306114. 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, November 7, 2008. To access the live webcast, go to Watson's Investor Relations website 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 generic and specialty brand 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' website 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; the difficulty of predicting the timing or outcome of litigation; successful integration of strategic transactions; the ability to recognize the anticipated synergies and benefits of strategic transactions; 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; 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, 2007. Except as expressly required by law, Watson disclaims any intent or obligation to update these forward-looking statements.

    Risperdal(R) is a registered trademark of Johnson & Johnson Corporation.
    Lamictal(R) is a registered trademark of SmithKline Beecham Corporation.

The following table presents Watson's results of operations for the three and nine months ended September 30, 2008 and 2007:

                                                                       Table 1
                           Watson Pharmaceuticals, Inc.
                 Condensed Consolidated Statements of Operations
               (Unaudited; in thousands, except per share amounts)

                                   Three Months Ended     Nine Months Ended
                                      September 30,          September 30,
                                     2008      2007        2008        2007

    Net revenues                   $640,691  $594,706  $1,890,276  $1,869,316
    Cost of sales (excludes
     amortization, presented below) 386,655   346,420   1,126,655   1,131,578
    Gross profit                    254,036   248,286     763,621     737,738

    Operating expenses:
      Research and development       45,322    35,657     122,553     108,968
      Selling, general and
       administrative               101,269   112,491     312,197     312,867
      Amortization                   20,200    44,159      60,569     132,251
      (Gain) loss on asset
       sales/impairments                303    (6,118)        303      (6,118)
        Total operating expenses    167,094   186,189     495,622     547,968
    Operating income                 86,942    62,097     267,999     189,770

    Non-operating income
     (expense), net:
      Loss on early extinguishment
       of debt                          -         -        (1,095)     (4,410)
      Interest income                 2,157     1,964       6,151       6,696
      Interest expense               (7,005)  (10,125)    (20,732)    (35,476)
      Other income                   11,942     1,449      19,375       7,886
       Total non-operating income
        (expense), net                7,094    (6,712)      3,699     (25,304)


    Income before income taxes       94,036    55,385     271,698     164,466
    Provision for income taxes       22,975    20,779      89,705      61,839
    Net income                      $71,061   $34,606    $181,993    $102,627

    Diluted earnings per share        $0.62     $0.31       $1.60       $0.93

    Diluted weighted average
     shares outstanding             117,995   117,421     117,661     117,042

The following table presents Watson's Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007:

                                                                       Table 2
                           Watson Pharmaceuticals, Inc.
                      Condensed Consolidated Balance Sheets
                            (Unaudited; in thousands)

                                                   September 30,  December 31,
                                                       2008            2007
    Assets
      Cash and cash equivalents                       $339,354       $204,554
      Marketable securities                             12,683         11,799
      Accounts receivable, net                         314,475        267,117
      Inventories                                      481,559        490,601
      Other current assets                             175,194        199,705
      Property and equipment, net                      660,549        688,185
      Investments and other assets                     149,564        129,920
      Product rights and other intangibles, net        543,891        603,697
      Goodwill                                         868,085        876,449
        Total assets                                $3,545,354     $3,472,027

    Liabilities & Stockholders' Equity
      Current liabilities                             $398,100       $444,927
      Long-term debt                                   824,609        899,408
      Deferred income taxes and other liabilities      272,362        278,227
      Stockholders' equity                           2,050,283      1,849,465
        Total liabilities and stockholders' equity  $3,545,354     $3,472,027

The following table presents Watson's Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007:

                                                                       Table 3
                         Watson Pharmaceuticals, Inc.
               Condensed Consolidated Statements of Cash Flows
                          (Unaudited; in thousands)

                                                           Nine Months Ended
                                                             September 30,
                                                           2008         2007
    Cash Flows from Operating Activities:
    Net income                                          $181,993     $102,627
    Reconciliation to net cash provided
     by operating activities:
      Depreciation and amortization                      127,961      189,185
      Deferred income tax provision                       16,980      (15,509)
      Provision for inventory reserve                     35,940       36,908
      Restricted stock and stock option compensation      14,055       10,337
      Other adjustments                                  (20,415)      (4,311)
    Changes in assets and liabilities:
      Accounts receivable, net                           (47,358)     111,852
      Inventories                                        (26,898)     (48,654)
      Accounts payable and accrued expenses              (45,789)    (142,957)
      Income taxes payable                                 9,933        2,967
      Other assets and liabilities                        (6,180)      13,280
          Total adjustments                               58,229      153,098
              Net cash provided by operating activities  240,222      255,725

    Cash Flows from Investing Activities:
    Additions to property, equipment and product rights  (43,308)     (50,304)
    Additions to marketable securities and long-term
     investments                                          (5,407)      (6,776)
    Proceeds from sale of marketable securities and
     investments                                          13,043        3,223
    Other investing activities, net                          400       15,100
              Net cash used in investing activities      (35,272)     (38,757)

    Cash Flows from Financing Activities:
    Payments on term loan, current debt and other
     long-term liabilities                               (95,633)    (252,910)
    Proceeds from issuance of short-term debt             17,909        1,655
    Proceeds from stock plans                              8,411       15,195
    Repurchase of common stock                              (837)      (1,731)
              Net cash used in financing activities      (70,150)    (237,791)
              Net increase (decrease) in cash and
               cash equivalents                          134,800      (20,823)
    Cash and cash equivalents at beginning of period     204,554      154,171
    Cash and cash equivalents at end of period          $339,354     $133,348

The following table presents a reconciliation of reported net income and diluted earnings per share to adjusted net income and diluted earnings per share for the three and nine months ended September 30, 2008 and 2007:

                                                                       Table 4
                         Watson Pharmaceuticals, Inc.
                             Reconciliation Table
              (Unaudited; in thousands except per share amounts)

                                        Three Months Ended   Nine Months Ended
                                           September 30,       September 30,
                                           2008     2007      2008      2007
    GAAP to adjusted net income
     calculation

      Reported GAAP net income           $71,061  $34,606  $181,993  $102,627
      Adjusted for:
          Global supply chain
           initiative(1)                   4,740      -      23,904       -
          Acquisition and licensing
           charges                         1,000    1,710     6,500    11,288
          Gain on sale of assets          (8,250) (10,617)   (9,605)  (13,089)
          Loss on asset sales and
           impairments                       303    4,499       303     4,499
          Favorable settlement of tax
           related liability              (5,928)     -      (5,928)      -
          Loss on debt repurchases           -        -       1,095     4,410
          Legal settlements                  -      8,500   (15,000)    8,658
          Income taxes                    (9,000)  (1,534)  (12,673)   (6,012)
      Adjusted net income                 53,926   37,164   170,589   112,381
      Add:  Interest expense on CODES,
       net of tax                          1,979    1,905     5,910     5,906
      Adjusted net income, adjusted for
       interest on CODES                 $55,905  $39,069  $176,499  $118,287

    Diluted earnings per share

      Diluted earnings per
       share - GAAP                        $0.62    $0.31     $1.60     $0.93

      Diluted earnings per
       share - Adjusted                    $0.47    $0.33     $1.50     $1.01

      Basic weighted average common
       shares outstanding                102,893  102,453   102,749   102,266
      Effect of dilutive securities:
        Conversion of CODES               14,357   14,357    14,357    14,357
        Dilutive share-based
         compensation arrangements           745      611       555       419
      Diluted weighted average common
       shares outstanding                117,995  117,421   117,661   117,042

    (1) Includes accelerated depreciation charges of $1,807 and $5,600,
        respectively.



    The following table presents a reconciliation of reported net income for
the three and nine months ended September 30, 2008 and 2007 to adjusted
EBITDA:

                                                                       Table 5
                         Watson Pharmaceuticals, Inc.
                     Adjusted EBITDA Reconciliation Table
                           (Unaudited; in millions)

                                         Three Months Ended  Nine Months Ended
                                            September 30,      September 30,
                                             2008     2007     2008     2007

    GAAP net income                          $71.1    $34.6   $182.0   $102.6
    Plus:
          Interest expense                     7.0     10.1     20.7     35.5
          Interest income                     (2.2)    (2.0)    (6.2)    (6.7)
          Provision for income taxes          22.9     20.8     89.8     61.8
          Depreciation (2008 includes
           accelerated depreciation)          23.3     19.4     67.4     56.9
          Amortization                        20.2     44.2     60.6    132.3
    EBITDA                                   142.3    127.1    414.3    382.4
    Adjusted for:
          Global supply chain initiative       2.9      -       18.3      -
          Acquisition and licensing charges    1.0      1.7      6.5     11.3
          Gain on sale of assets              (8.2)   (10.6)    (9.6)   (13.1)
          Loss on asset sales and impairments  0.3      4.5      0.3      4.5
          Favorable settlement of tax
           related liability                  (5.9)     -       (5.9)     -
          Loss on early extinguishment
           of debt                             -        -        1.1      4.4
          Legal settlements                    -        8.5    (15.0)     8.7
          Share-based compensation             4.8      3.4     14.0     10.3
    Adjusted EBITDA                         $137.2   $134.6   $424.0   $408.5

The following table presents a reconciliation of forecasted net income for the 12 months ending December 31, 2008 to adjusted net income and adjusted earnings per diluted share:

                                                                       Table 6
                         Watson Pharmaceuticals, Inc.
    Reconciliation Table - Forecasted Adjusted Earnings per Diluted Share
              (Unaudited; in millions except per share amounts)

                                                    Forecast for Twelve Months
                                                     Ending December 31, 2008
                                                          Low         High
    GAAP to adjusted net income calculation

        GAAP net income                                  $233.0       $239.2
        Adjusted for:
            Licensing charges                               6.5          6.5
            Global supply chain initiative                 30.4         30.0
            Favorable settlement of tax related liability  (5.9)        (5.9)
            Legal settlement                              (15.0)       (15.0)
            Loss on asset sales and impairments             0.3          0.3
            Gain on sale of securities                     (9.6)        (9.6)
            Loss on early extinguishment of debt            1.1          1.1
            Income taxes                                  (15.1)       (14.9)
        Adjusted net income                               225.7        231.7
        Add:  Interest expense on CODES, net of tax         7.9          7.9
        Adjusted net income, adjusted for interest
         on CODES                                        $233.6       $239.6

    Diluted earnings per share

        Diluted earnings per share - GAAP                 $2.05        $2.10

        Diluted earnings per share - Adjusted             $1.98        $2.03

        Diluted weighted average common shares
         outstanding                                      117.8        117.8

The reconciliation table is based in part on management's estimate of net income for the year ending December 31, 2008. Watson expects certain known GAAP charges for 2008, as presented in the schedule above. Other GAAP charges that may be excluded from adjusted 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, such as potential asset impairment 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 12 months ending December 31, 2008 to adjusted EBITDA:

                                                                       Table 7
                         Watson Pharmaceuticals, Inc.
              Reconciliation Table - Forecasted Adjusted EBITDA
                           (Unaudited; in millions)

                                                    Forecast for Twelve Months
                                                     Ending December 31, 2008
                                                          Low          High


    GAAP net income                                      $233.0       $239.2
    Plus:
        Interest expense                                   27.8         27.8
        Interest income                                    (9.2)        (8.7)
        Provision for income taxes                        117.1        120.6
        Depreciation (includes accelerated depreciation)   92.0         92.0
        Amortization                                       80.8         80.8
    EBITDA                                                541.5        551.7
    Adjusted for:
        Favorable settlement of tax related liability      (5.9)        (5.9)
        Loss on asset sales and impairments                 0.3          0.3
        Share-based compensation                           18.4         18.4
        Global supply chain initiative                     22.4         22.0
        Licensing charges                                   6.5          6.5
        Legal settlement                                  (15.0)       (15.0)
        Loss on early extinguishment of debt                1.1          1.1
        Gain on sale of securities                         (9.6)        (9.6)

    Adjusted EBITDA                                      $559.7       $569.5

The reconciliation table is based in part on management's estimate of adjusted EBITDA for the year ending December 31, 2008. Watson expects certain known GAAP charges for 2008, 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, such as potential asset impairment charges, are dependent upon future events and valuations that have not yet been performed.

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SOURCE Watson Pharmaceuticals, Inc.