2008-08-06 06:00:00
Watson Pharmaceuticals Reports Second Quarter 2008 Results
Total Net Revenue of $623 Million; GAAP EPS $0.53; Adjusted EPS $0.48
CORONA, Calif., Aug. 6 /EMWNews/ -- Watson
Pharmaceuticals, Inc. (NYSE: WPI), a leading specialty pharmaceutical
company, today reported financial results for its second quarter ended June
30, 2008.
Second Quarter 2008 Results
Net revenue for the second quarter 2008 was $622.6 million and net
income was $60.3 million, or $0.53 per diluted share. Net income for the
second quarter 2008 included a gain related to a milestone payment and
charges related to the Company's Global Supply Chain Initiative. Excluding
special items as detailed in the reconciliation table below, adjusted net
income for the second quarter was $54.6 million, or $0.48 per diluted
share. Adjusted EBITDA for the second quarter 2008 was $137.5 million and
cash flow from operations was $99.6 million. Cash and marketable securities
were $278.2 million as of June 30, 2008.
"We are pleased with the financial results we delivered this quarter,
driven by a strong performance in our Brand division which posted more than
$100 million in product sales, a first in recent years," stated Paul
Bisaro, Watson's President and Chief Executive Officer. "Our pipeline
products oxybutynin topical gel for overactive bladder and silodosin for
BPH were well received at data presentations at the recent American
Urological Association meeting. Additionally, the FDA accepted our New Drug
Application for our topical oxybutynin gel product and we successfully
launched MixJect(TM), our new delivery system for Trelstar(R)."
"We continue to make progress on our near and long term strategic goals
in the Generics Division, as evidenced by the recent product approvals and
launches out of our Davie, Florida manufacturing facility. These new
generic products will provide important new revenue, leverage our
manufacturing capacity and allow us to build on our number three position
within the U.S. Generics prescription marketplace," continued Mr. Bisaro.
"We are also seeing improved margins within our Anda distribution division,
as recent initiatives to enhance efficiencies are already making an
impact," Mr. Bisaro said.
Six Month 2008 Results
For the six months ended June 30, 2008, net revenue was $1,249.6
million, as compared to $1,274.6 million for the first six months of 2007.
Net income for the first six months of 2008 was $110.9 million, or $0.98
per diluted share, as compared to net income of $68.0 million, or $0.62 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 six
months of 2008 was $116.7 million, or $1.03 per diluted share, as compared
to adjusted net income of $75.2 million, or $0.68 per diluted share, for
the same period of 2007.
Second Quarter 2008 Business Segment Results
Generic Segment Information
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited; $ in thousands) 2008 2007 2008 2007
Generic Segment Contribution
Product sales $344,289 $327,446 $686,748 $738,921
Other revenue 32,359 18,195 56,656 31,345
Net revenue 376,648 345,641 743,404 770,266
Cost of sales 227,586 210,342 457,309 482,965
Gross profit 149,062 135,299 286,095 287,301
Gross margin 39.6% 39.1% 38.5% 37.3%
Research and development 29,125 23,968 51,722 50,481
Selling and marketing 13,825 13,197 27,878 27,746
Segment contribution $106,112 $98,134 $206,495 $209,074
Segment margin 28.2% 28.4% 27.8% 27.1%
Generic product sales for the second quarter of 2008 increased $16.8
million to $344.3 million, reflecting the addition of new products which
were offset in part by price erosion in the base business.
Generic other revenue increased $14.2 million to $32.4 million. Generic
other revenue includes a $15 million sales milestone from Barr
Pharmaceuticals, Inc. following a 1999 legal settlement, and reflects the
addition of royalties from Sandoz's sales of metoprolol succinate
extended-release tablets 50mg.
Generic gross profit was $149.1 million in the second quarter of 2008,
compared to $135.3 million in the second quarter of 2007 and $137.0 million
in the first quarter 2008. Generic gross profit for the second quarter 2008
reflects the sales milestone and approximately $4.5 million in costs
related to Watson's Global Supply Chain Initiative. Excluding these items,
Generic gross profit was $138.5 million, or 38.3 percent of revenue in the
second quarter 2008.
Generic research and development expense increased 22 percent or $5.2
million to $29.1 million. Watson currently has approximately 60 ANDAs on file
with the FDA.
Brand Segment Information
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited; $ in thousands) 2008 2007 2008 2007
Brand Segment Contribution
Product sales $101,466 $96,924 $200,458 $187,562
Other revenue 16,535 13,809 32,834 24,711
Net revenue 118,001 110,733 233,292 212,273
Cost of sales 24,417 26,795 51,943 52,010
Gross profit 93,584 83,938 181,349 160,263
Gross margin 79.3% 75.8% 77.7% 75.5%
Research and development 10,091 11,535 25,509 22,830
Selling and marketing 29,574 26,373 57,569 52,784
Segment contribution $53,919 $46,030 $98,271 $84,649
Segment margin 45.7% 41.6% 42.1% 39.9%
Brand product sales for the second quarter of 2008 increased five
percent or $4.5 million to $101.5 million, primarily due to higher sales of
Trelstar(R). Brand other revenue increased $2.7 million to $16.5 million,
due primarily to increased revenue from the Company's licensing
arrangements.
Gross margin for the Brand segment increased from 75.8 percent in the
second quarter 2007 to 79.3 percent in the second quarter 2008, due to
product mix and the increase in other revenue.
During the second quarter 2008, Watson's New Drug Application (NDA) for
oxybutynin gel, under development for the treatment of overactive bladder,
was accepted for filing by FDA. In the second half of 2008, Watson expects
to submit a supplemental NDA for its six-month formulation of Trelstar(R),
a product for the treatment of advanced prostate cancer.
Distribution Segment Information
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited; $ in thousands) 2008 2007 2008 2007
Distribution Segment Contribution
Net revenue $127,987 $146,631 $272,889 $292,071
Cost of sales 107,895 123,301 230,748 250,183
Gross profit 20,092 23,330 42,141 41,888
Gross margin 15.7% 15.9% 15.4% 14.3%
Selling and marketing 14,105 12,327 28,137 26,530
Segment contribution $5,987 $11,003 $14,004 $15,358
Segment margin 4.7% 7.5% 5.1% 5.3%
Distribution segment net revenue for the second quarter of 2008
declined 13 percent or $18.6 million to $128.0 million. Fewer new product
launches in the quarter contributed to the year over year decline in
revenue. Distribution revenue excludes sales of Watson products.
Distribution segment gross margin was 15.7 percent in the second
quarter of 2008 compared to 15.9 percent in the second quarter 2007 and
15.2 percent in first quarter 2008.
Other Operating Expenses
Consolidated general and administrative expenses for the second quarter
of 2008 increased $1.5 million to $46.8 million.
Amortization expense for the second 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 half 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 first half 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
The Company has revised its revenue estimates for the Generic and Brand
segments to reflect actual results through the first half of 2008.
Estimates for the Distribution segment remain unchanged.
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 $440 million. Amortization
expense for 2008 is expected to be approximately $80 million.
Watson estimates adjusted earnings per diluted share will be between
$1.90 and $2.00 and has increased its estimates for GAAP earnings per
diluted share to between $1.90 and $2.00.
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. The Company also expects to incur
$8.5 million of licensing costs. These and other charges are offset by the
sales milestone from Barr Pharmaceuticals, the divestiture of the Company's
interest in Somerset Pharmaceuticals, Inc. and the resolution of an
Internal Revenue Service audit, and 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 expected to be between $551 and $571 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 second 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 56190878. 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 Daylight
Time, August 15, 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 brand and generic 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; 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.
MixJect(TM) is a trademark of Medimop Medical Projects Ltd., a
subsidiary of West Pharmaceutical Services, Inc.
The following table presents Watson's results of operations for the
three and six months ended June 30, 2008 and 2007:
Table 1
Watson Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(Unaudited; in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net revenues $622,636 $603,005 $1,249,585 $1,274,610
Cost of sales (excludes
amortization, presented below) 359,898 360,438 740,000 785,158
Gross profit 262,738 242,567 509,585 489,452
Operating expenses:
Research and development 39,216 35,503 77,231 73,311
Selling, general and
administrative 104,295 97,158 210,928 200,376
Amortization 20,190 44,159 40,369 88,092
Total operating expenses 163,701 176,820 328,528 361,779
Operating income 99,037 65,747 181,057 127,673
Non-operating (expense)
income, net:
Loss on early extinguishment
of debt - (1,681) (1,095) (4,410)
Interest income 1,685 1,803 3,994 4,732
Interest expense (6,931) (11,475) (13,727) (25,351)
Other income 2,080 3,034 7,433 6,437
Total non-operating expense,
net (3,166) (8,319) (3,395) (18,592)
Income before income taxes 95,871 57,428 177,662 109,081
Provision for income taxes 35,568 21,019 66,730 41,060
Net income $60,303 $36,409 $110,932 $68,021
Diluted earnings per share $0.53 $0.33 $0.98 $0.62
Diluted weighted average
shares outstanding 117,652 117,080 117,511 116,909
The following table presents Watson's Condensed Consolidated Balance
Sheets as of June 30, 2008 and December 31, 2007:
Table 2
Watson Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(Unaudited; in thousands)
June 30, December 31,
2008 2007
Assets
Cash and cash equivalents $265,469 $204,554
Marketable securities 12,718 11,799
Accounts receivable, net 297,171 267,117
Inventories 490,701 490,601
Other current assets 179,300 199,705
Property and equipment, net 672,670 688,185
Investments and other assets 131,385 129,920
Product rights and other intangibles, net 563,924 603,697
Goodwill 876,449 876,449
Total Assets $3,489,787 $3,472,027
Liabilities and Stockholders' Equity
Current liabilities $424,867 $444,927
Long-term debt 824,540 899,408
Deferred income taxes and other liabilities 269,946 278,227
Stockholders' equity 1,970,434 1,849,465
Total liabilities and stockholders'
equity $3,489,787 $3,472,027
The following table presents Watson's Condensed Consolidated Statements
of Cash Flows for the six months ended June 30, 2008 and 2007:
Table 3
Watson Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited; in thousands)
Six Months Ended
June 30,
2008 2007
Cash Flows from Operating Activities:
Net income $110,932 $68,021
Reconciliation to net cash provided
by operating activities:
Depreciation and amortization 84,508 125,613
Deferred income tax provision 17,363 (20,188)
Provision for inventory reserve 22,231 26,946
Restricted stock and stock option
compensation 9,256 6,910
Other adjustments (7,230) 2,034
Changes in assets and liabilities:
Accounts receivable, net (30,054) 86,090
Inventories (22,331) (67,980)
Accounts payable and accrued expense (18,912) (76,366)
Income taxes payable 5,145 18,058
Other assets and liabilities (4,722) 30,104
Total adjustments 55,254 131,221
Net cash provided by operating
activities 166,186 199,242
Cash Flows from Investing Activities:
Additions to property, equipment and
product rights (29,504) (35,833)
Additions to marketable securities
and long-term investments (3,733) (4,230)
Proceeds from sale of marketable
securities and investments 3,878 2,548
Other investing activities, net - (337)
Net cash used in investing activities (29,359) (37,852)
Cash Flows from Financing Activities:
Payments on term loan, current debt
and other long-term liabilities (95,000) (251,881)
Proceeds from issuance of short-term debt 17,003 -
Proceeds from stock plans 2,194 11,172
Other (109) -
Net cash used in financing activities (75,912) (240,709)
Net decrease in cash and cash equivalents 60,915 (79,319)
Cash and cash equivalents at beginning of
period 204,554 154,171
Cash and cash equivalents at end of period $265,469 $74,852
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 six months ended June 30, 2008 and 2007:
Table 4
Watson Pharmaceuticals, Inc.
Reconciliation Table
(Unaudited; in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
GAAP to adjusted net income
calculation
Reported GAAP net income $60,303 $36,409 $110,932 $68,021
Adjusted for:
Global supply chain initiative(1) 5,423 - 19,164 -
Acquisition and licensing charges 500 2,217 5,500 9,578
Gain on sale of assets - (683) (1,355) (2,472)
Loss on debt repurchases - 1,681 1,095 4,410
Legal settlements (15,000) (842) (15,000) 158
Income taxes 3,368 (869) (3,674) (4,478)
Adjusted net income 54,594 37,913 116,662 75,217
Add: Interest expense on CODES,
net of tax 1,945 2,058 3,931 4,001
Adjusted net income, adjusted for
interest on CODES $56,539 $39,971 $120,593 $79,218
Diluted earnings per share
Diluted earnings per share - GAAP $0.53 $0.33 $0.98 $0.62
Diluted earnings per share - Adjusted $0.48 $0.34 $1.03 $0.68
Basic weighted average common
shares outstanding 102,728 102,093 102,676 102,178
Effect of dilutive securities:
Conversion of CODES 14,357 14,357 14,357 14,357
Dilutive stock options 567 630 478 374
Diluted weighted average common
shares outstanding 117,652 117,080 117,511 116,909
(1) Includes accelerated depreciation charges of $1,757 and $3,793,
respectively.
The following table presents a reconciliation of reported net income
for the three and six months ended June 30, 2008 and 2007 to adjusted
EBITDA:
Table 5
Watson Pharmaceuticals, Inc.
Adjusted EBITDA Reconciliation Table
(Unaudited; in millions)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
GAAP net income $60.3 $36.4 $110.9 $68.0
Plus:
Interest expense 6.9 11.5 13.7 25.4
Interest income (1.7) (1.8) (4.0) (4.7)
Provision for income taxes 35.6 21.0 66.7 41.0
Depreciation (2008 includes
accelerated depreciation) 22.4 19.5 44.2 37.5
Amortization 20.2 44.1 40.4 88.1
EBITDA 143.7 130.7 271.9 255.3
Adjusted for:
Share-based compensation 4.9 3.5 9.3 6.9
Acquisition and licensing charges 0.5 2.2 5.5 9.6
Legal settlement (15.0) (0.8) (15.0) 0.2
Loss on early extinguishment of
debt - 1.7 1.1 4.4
Global supply chain initiative 3.4 - 15.4 -
Gain on sale of assets - (0.7) (1.4) (2.5)
Adjusted EBITDA $137.5 $136.6 $286.8 $273.9
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 $214.8 $227.2
Adjusted for:
Licensing charges 8.5 8.5
Global supply chain initiative 30.0 30.0
Loss on early extinguishment of debt 1.1 1.1
Gain on sale of securities (9.6) (9.6)
Legal settlement (15.0) (15.0)
Income taxes (14.7) (15.2)
Adjusted net income 215.1 227.0
Add: Interest expense on CODES, net of tax 8.2 8.2
Adjusted net income, adjusted
for interest on CODES $223.3 $235.2
Diluted earnings per share
Diluted earnings per share - GAAP $1.90 $2.00
Diluted earnings per share - Adjusted $1.90 $2.00
Diluted weighted average common
shares outstanding 117.6 117.6
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.
Forecasted Adjusted EBITDA Reconciliation Table
(Unaudited; in millions)
Forecast for Twelve Months Ending
December 31, 2008
Low High
GAAP net income $214.8 $227.2
Plus:
Interest expense 27.8 27.8
Interest income (6.9) (5.9)
Provision for income taxes 114.9 121.5
Depreciation (includes accelerated
depreciation) 93.1 93.1
Amortization 80.7 80.7
EBITDA 524.4 544.4
Adjusted for:
Global supply chain initiative 22.7 22.7
Share-based compensation 18.5 18.5
Licensing charges 8.5 8.5
Loss on early extinguishment of debt 1.1 1.1
Legal settlement (15.0) (15.0)
Gain on sale of securities (9.6) (9.6)
Adjusted EBITDA $550.6 $570.6
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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