In March 2006, Takeda filed an NDA for this combination product and the NDA is under review by the U.S. Food and Drug Administration ("FDA"). If approved and launched, we are eligible to receive future milestone payments and royalties from Takeda's sale of this product.
Our valuation of this IPR&D project at the Andrx Acquisition date was $133 million.
Enoxaparin Sodium (generic version of Lovenox®) On May 2, 2005, Andrx entered into an agreement to obtain certain exclusive marketing rights for Amphastar Pharmaceuticals, Inc.'s ("Amphastar's") generic version of Sanofi-Aventis' ("Aventis'") Lovenox® injectable product. Amphastar submitted its Abbreviated New Drug Application ("ANDA") for generic Lovenox® to the FDA in March 2003. Amphastar's ANDA is the subject of a patent infringement lawsuit filed by Aventis. On February 8, 2007, the District Court ruled that Aventis' patent was unenforceable due to inequitable conduct. Final judgment in favor of Amphastar was entered on March 9, 2007. Aventis has appealed and the matter remains pending in the United States Court of Appeals for the Federal Circuit. Amphastar has not obtained FDA approval for its product and the product continues to be delayed by a Citizen Petition, including two supplements, and other factors. Amphastar has submitted comments to Aventis' Citizen Petition and supplements. Additionally, in November 2007, the FDA requested Amphastar to provide additional data regarding the potential immunogenicity of the product. Amphastar has responded to the FDA's request for additional information. Our marketing rights for this product generally extend to the U.S. retail pharmacy market, and we will receive up to 50% of the net profits, as defined, generated from such sales. The launch of this product is dependent upon Amphastar obtaining FDA approval.
Our valuation of this IPR&D project at the Andrx Acquisition date was $33 million.
Metoprolol Succinate (generic version of Toprol-XL®) In 2003 and 2004, Andrx filed ANDAs seeking FDA approval to market metoprolol succinate extended-release tablets in the 25mg, 50mg, 100mg and 200mg strengths. Andrx was awarded 180-days of market exclusivity for the 50mg strength. During the second quarter of this year, we announced that pursuant to an agreement with Sandoz Pharmaceutical Corporation, a subsidiary of Novartis AG ("Sandoz"), we relinquished our rights to a 180-day period of marketing exclusivity for our 50mg strength product. As a result of our agreement to relinquish our marketing exclusivity, Sandoz obtained final approval of its ANDA for metoprolol succinate extended-release 50 mg tablets. We are entitled to a share of Sandoz's profits on sales of the product, which began in the third quarter of 2007.
We continue to pursue approval of our own pending ANDAs for metoprolol succinate extended-release tablets.
Our valuation of this IPR&D project at the Andrx Acquisition date was $85 million.
Methylphenidate Hydrochloride (generic version of Concerta®) Andrx has pending ANDAs for the generic versions of Concerta® (methylphenidate hydrochloride extended-release tablets) in the 18mg, 27mg, 36mg and 54mg strengths.
In September 2005, ALZA Corporation and McNeil-PPC, Inc. sued Andrx for patent infringement related to the generic version of Concerta®. In December 2007, the United States District Court for the District of Delaware completed the trial of this matter. No decision has been issued to date. The ANDAs remain under review by the FDA and a Citizen Petition has been filed by McNeil-PPC, Inc. relating to approval criteria for generic versions of Concerta®. Final approval may be subject to obtaining a waiver or expiration of a third party's 180 days of market exclusivity.
Our valuation of this IPR&D project at the Andrx Acquisition date was $94 million.

Omeprazole (generic version of Prilosec®) Andrx has pending ANDAs for omeprazole delayed-release capsules, 10mg, 20mg and 40 mg strengths, which are bioequivalent to Prilosec®. In 2001, AstraZeneca filed suit against Andrx alleging infringement of a patent (patent no. 6,013,281) ("the '281 patent") directed to a process for making an omeprazole formulation. Andrx filed counterclaims of non-infringement, invalidity and unenforceability. In May 2004, the district court ruled that the '281 patent was invalid due to obviousness. In April 2007, the U.S. Court of Appeals for the Federal Circuit affirmed the 2004 District Court decision that the '281 patent is invalid.
The ANDAs remain under review by the FDA. Upon approval and launch, we believe that we are entitled to the 180-day period of market exclusivity with respect to the generic version of the 40mg strength of Prilosec®.
Our valuation of this IPR&D project at the acquisition date was $57 million. Diltiazem HCl ER (Cardizem® LA)
Andrx Corporation has pending ANDAs with the FDA for generic versions of Cardizem® LA (diltiazem HCl extended-release tablets), 120mg, 180mg, 240mg, 300mg, 360mg and 420mg strengths. Andrx initially filed its ANDA for the 420mg strength on April 25, 2005, with a Paragraph IV certification and notification to the patent holder. On August 10, 2005, Biovail Laboratories Int'l SRL ("Biovail"), which is the holder of the NDA for Cardizem® LA, initiated a patent infringement lawsuit against Andrx for the 420mg strength in the U.S. District Court for the District of Delaware. Andrx subsequently amended its initial ANDA submission to include the 120mg, 180mg, 240mg, 300mg and 360mg strengths, along with a related Paragraph IV certification and notice letter. On October 14, 2005, Biovail initiated a patent infringement lawsuit on the remaining strengths. On December 4, 2007, we announced that we settled the litigation with Biovail. Under the terms of the settlement, Biovail has granted us an exclusive license to its U.S. patents covering Cardizem® LA for a generic version of Cardizem® LA. The agreement generally provides that we that will not commence marketing our generic equivalent product until April 1, 2009.
The ANDAs remain under review by the FDA.
Our valuation of this IPR&D project at the Andrx Acquisition date was $12 million.
Results of Operations
Prescription pharmaceutical products in the U.S. are generally marketed as either generic or brand pharmaceuticals. Generic pharmaceutical products are bioequivalents of their respective brand products and provide a cost-efficient alternative to brand products. Brand pharmaceutical products are marketed under brand names through programs that are designed to generate physician and consumer loyalty.
Watson has three reportable operating segments: Generic, Brand and Distribution. The Generic segment includes off-patent pharmaceutical products that are therapeutically equivalent to proprietary products. The Brand segment includes the Company's lines of Specialty Products and Nephrology products. Watson has aggregated its Brand product lines in a single segment because of similarities in regulatory environment, methods of distribution and types of customer. This segment includes patent-protected products and certain trademarked off-patent products that Watson sells and markets as Brand pharmaceutical products. The Company sells its Brand and Generics products primarily to pharmaceutical wholesalers, drug distributors and chain drug stores. The Distribution segment mainly distributes generic pharmaceutical products manufactured by third parties, as well as by Watson, primarily to independent pharmacies, pharmacy chains, pharmacy buying groups and physicians' offices under the Anda trade name. Sales are principally generated through an in-house telemarketing staff and through internally developed ordering systems. The Distribution segment operating results exclude sales of Watson generic and brand products, which are included in their respective segment results.
The Company evaluates segment performance based on segment net revenues, gross profit and contribution. Segment contribution represents segment gross profit less direct R&D expenses and selling and marketing expenses. The Company has not allocated corporate general and administrative expenses or amortization as such information has not been used by management, or has not been accounted for at the segment level.

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

                                       Three Months Ended March 31, 2008                                    Three Months Ended March 31, 2007
                          Generic          Brand          Distribution          Total          Generic          Brand          Distribution          Total

Product sales            $ 342,459       $  98,992       $      144,902       $ 586,353       $ 411,475       $  90,638       $      145,440       $ 647,553
Other                       24,297          16,299                    -          40,596          13,150          10,902                    -          24,052

Net revenues               366,756         115,291              144,902         626,949         424,625         101,540              145,440         671,605
Cost of sales(1)           229,723          27,526              122,853         380,102         272,623          25,215              126,882         424,720

Gross profit(1)            137,033          87,765               22,049         246,847         152,002          76,325               18,558         246,885
Gross margin(1)               37.4 %          76.1 %               15.2 %          39.4 %          35.8 %          75.2 %               12.8 %          36.8 %
Research and
development                 22,597          15,418                    -          38,015          26,513          11,295                    -          37,808
Selling and
marketing                   14,053          27,995               14,032          56,080          14,549          26,411               14,203          55,163

Contribution             $ 100,383       $  44,352       $        8,017         152,752       $ 110,940       $  38,619       $        4,355         153,914

Contibution margin            27.4 %          38.5 %                5.5 %          24.4 %          26.1 %          38.0 %                3.0 %          22.9 %
General and
administrative                                                                   50,553                                                               48,055
Amortization                                                                     20,179                                                               43,933

Operating income                                                              $  82,020                                                            $  61,926

Operating margin                                                                   13.1 %                                                                9.2 %

(1) Excludes amortization of acquired intangibles including product rights.

Generic Segment
Net Revenues
Our Generic segment develops, manufactures, markets, sells and distributes generic products that are the therapeutic equivalent to their brand name counterparts and are generally sold at prices significantly less than the brand product. As such, generic products provide an effective and cost-efficient alternative to brand products. When patents or other regulatory exclusivity no longer protect a brand product, opportunities exist to introduce off-patent or generic counterparts to the brand product. Additionally, we distribute generic versions of third parties' brand products (sometimes known as "Authorized Generics") to the extent such arrangements are complementary to our core business. Our portfolio of generic products includes products we have internally developed, products we have licensed from third parties, and products we distribute for third parties.
Net revenues in our Generic segment includes product sales and other revenue. Our Generic segment product line includes a variety of products and dosage forms. Indications for this line include pregnancy prevention, pain management, depression, hypertension and smoking cessation. Dosage forms include oral solids, transdermals, injectables and transmucosals.
Other revenues consist primarily of royalties and commission revenue. Net revenues from our Generic segment for the three months ended March 31, 2008 decreased 13.6% or $57.9 million to $366.8 million compared to net revenues of $424.6 million from the prior year period. This decrease in sales was mainly attributable to higher net sales of Authorized Generics ($72.4 million) in the prior year period including oxycodone HCl controlled release tablets and pravastatin sodium tablets offset in part by sales of alendronate sodium tablets launched in the current quarter. The decrease in sales was offset in part by an increase in other revenue ($11.1 million). Increases in net revenues from new product launches were offset by price erosion within our base business.

The increase in other revenues in the three months ended March 31, 2008 for the Generic segment was primarily related to royalties on sales by Sandoz, Inc. of metoprolol succinate 50 mg extended release tablets (which commenced during the third quarter of 2007).
Gross Profit (Gross Margin)
Gross profit represents net revenues less cost of sales. Cost of sales includes production and packaging costs for the products we manufacture, third party acquisition costs for products manufactured by others, profit-sharing or royalty payments for products sold pursuant to licensing agreements, inventory reserve charges and excess capacity utilization charges, where applicable. Cost of sales does not include amortization costs for acquired product rights or other acquired intangibles.
Gross profit for our Generic segment decreased $15.0 million to $137.0 million in the three months ended March 31, 2008 compared to $152.0 million in the prior year period. The decrease in gross profit was primarily due to reduced gross profit contribution from lower sales of Authorized Generics in the current period ($20.2 million) and facility rationalization costs ($12.9 million) offset by an increase in other revenue ($11.1 million). Increases in gross profit from new product launches were offset by price erosion within our base business.
Gross margins for our Generic segment increased 1.6 percentage points to 37.4% for the three months ended March 31, 2008 from 35.8% in the prior year period. This increase in gross margin was primarily related to the increase in other revenue in the current quarter.
Research and Development Expenses
Generic segment R&D expenses consist predominantly of personnel-related costs, contract research, biostudy and facilities costs associated with the development of our products.
Generic segment R&D expenses decreased 14.8% or $3.9 million to $22.6 million in the three months ended March 31, 2008 compared to $26.5 million in the prior year period due to reduced spending on biostudy costs in the current period. Selling and Marketing Expenses
Selling and marketing expenses consist mainly of personnel costs, facilities costs, insurance and professional services costs.
Generic segment selling and marketing expenses decreased 3.4% or $0.5 million to $14.1 million in the three months ended March 31, 2008 compared to $14.5 million in the prior year period.
Brand Segment
Net Revenues
Our brand pharmaceutical business develops, manufactures, markets, sells and distributes products within two sales and marketing groups: Specialty Products and Nephrology.
Our Specialty Products product line includes urology products such as Trelstar® and Oxytrol® and a number of non-promoted products.
Our Nephrology product line consists of products for the treatment of iron deficiency anemia and is generally marketed to nephrologists and dialysis centers. The major products of the Nephrology group are Ferrlecit® and INFeD®, which are used to treat low iron levels in patients undergoing hemodialysis in conjunction with erythropoietin therapy.

Other revenues in the Brand segment consist primarily of co-promotion revenue, royalties and the recognition of deferred revenue relating to our obligation to manufacture and supply brand products to third parties. Other revenues also include revenue recognized from R&D and licensing agreements.
Net revenues from our Brand segment for the three months ended March 31, 2008 increased 13.5% or $13.8 million to $115.3 million compared to net revenues of $101.5 million in the prior year period. The increase was primarily attributable to higher sales within the Nephrology group ($5.5 million), higher other revenues ($5.4 million) and higher sales within the Specialty Products group ($2.8 million). The increase within the Nephrology group was primarily attributable to customer buying patterns and lower sales in the prior year period due to the loss of a customer. The increase within the Specialty Products group was primarily attributable to higher unit sales of Trelstar® as a result of promotional efforts.
Gross Profit (Gross Margin)
Gross profit for our Brand segment increased $11.4 million to $87.8 million in the three months ended March 31, 2008 compared to $76.3 million in the prior year period. The increase in gross profit was primarily due to an increase in other revenues ($5.4 million) and higher product sales.
Gross margins for our Brand segment increased to 76.1% during the three months ended March 31, 2008 from 75.2% in the prior year period primarily due to the increase in other revenues.
Research and Development Expenses
Brand segment R&D expenses consist predominantly of personnel-related costs, contract research, clinical costs and facilities costs associated with the development of our products.
Brand segment R&D expenses increased 36.5% or $4.1 million to $15.4 million in the three months ended March 31, 2008 compared to $11.3 million in the prior year period primarily due to a $5.0 million milestone payment related to the filing of an NDA for silodosin with the FDA. Selling and Marketing Expenses
Brand segment selling and marketing expenses consist mainly of personnel-related costs, product promotion costs, distribution costs, professional services costs, insurance and depreciation.
Brand segment selling and marketing expenses increased 6.0% or $1.6 million to $28.0 million in the three months ended March 31, 2008 as compared to $26.4 million in the prior year period.
Distribution Segment
Net Revenues
Our Distribution segment mainly distributes generic pharmaceutical products manufactured by third parties, as well as by Watson, primarily to independent pharmacies, pharmacy chains, pharmacy buying groups and physicians' offices. Sales are principally generated through an in-house telemarketing staff and through internally developed ordering systems. The Distribution segment operating results exclude Watson generic and brand products, which are included in their respective segment results.
Net revenues from our Distribution segment for the three months ended March 31, 2008 decreased 0.4% or $0.5 million to $144.9 million compared to net revenues of $145.4 million in the prior year period.

Gross Profit (Gross Margin)
Gross profit for our Distribution segment increased $3.5 million to $22.0 million in the three months ended March 31, 2008 compared to $18.6 million in the prior year period. Gross margins also improved for our Distribution segment increasing to 15.2% during the three months ended March 31, 2008 from 12.8% in the prior year period. Distribution segment gross profit and gross margin improved in the current quarter as the prior year period was negatively impacted by a $2.5 million acquisition-related inventory charge. Selling and Marketing Expenses
Selling and marketing expenses consist mainly of personnel costs, facilities costs, insurance and freight costs, which support the Distribution segment sales and marketing functions.

Segment Contribution

                               Three Months Ended March 31,                Change
      ($ in thousands):          2008                 2007           Dollars        %

     Segment contribution
     Generic                $      100,383       $      110,940     $ (10,557 )     (9.5 )%
     Brand                          44,352               38,619         5,733       14.8 %
     Distribution                    8,017                4,355         3,662       84.1 %

                            $      152,752       $      153,914     $  (1,162 )     (0.8 )%

     as % of net revenues             24.4 %               22.9 %

For more information on segment contribution, refer to above Management's Discussion and Analysis of Financial Condition and Results of Operations and "NOTE 3 - OPERATING SEGMENTS" in the accompanying "Notes to Condensed Consolidated Financial Statements" in this Quarterly Report.

Corporate General and Administrative Expenses

                                                        Three Months Ended March 31,                     Change
              ($ in thousands):                          2008                  2007              Dollars            %

Corporate general and administrative expenses       $     50,553          $     48,055          $ 2,498            5.2 %
as a % of net revenues                                       8.1 %                 7.2 %

Corporate general and administrative expenses consist mainly of personnel costs, facilities costs, insurance and professional services costs, which are general in nature and not directly related to specific segment operations.
Corporate general and administrative expenses increased during the three months ended March 31, 2008 as compared to the same period of the prior year primarily due to costs incurred in the implementation of a new enterprise resource planning system at certain sites.

Amortization

                                Three Months Ended March 31,                Change
      ($ in thousands):            2008               2007           Dollars         %

    Amortization              $     20,179        $     43,933     $ (23,754 )     (54.1 )%
    as a % of net revenues             3.2 %               6.5 %

The Company's amortizable assets consist primarily of acquired product rights. For the three months ended March 31, 2008 amortization expense decreased 54.1% or $23.8 million as our Ferrlecit® product rights were fully amortized as . . .