Add
WPI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| WPI > SEC Filings for WPI > Form 10-Q on 6-Aug-2008 | All Recent SEC Filings |
6-Aug-2008
Quarterly Report
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 Specialty Products and Nephrology product lines. 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 generic 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 products,
which are included in their respective Generic and Brand 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 June 30, 2008 Compared to Three Months Ended June 30, 2007
Three Months Ended June 30, 2008 Three Months Ended June 30, 2007
Generic Brand Distribution Total Generic Brand Distribution Total
Product sales $ 344,289 $ 101,466 $ 127,987 $ 573,742 $ 327,446 $ 96,924 $ 146,631 $ 571,001
Other 32,359 16,535 - 48,894 18,195 13,809 - 32,004
Net revenues 376,648 118,001 127,987 622,636 345,641 110,733 146,631 603,005
Cost of sales(1) 227,586 24,417 107,895 359,898 210,342 26,795 123,301 360,438
Gross profit(1) 149,062 93,584 20,092 262,738 135,299 83,938 23,330 242,567
Gross margin(1) 39.6 % 79.3 % 15.7 % 42.2 % 39.1 % 75.8 % 15.9 % 40.2 %
Research and
development 29,125 10,091 - 39,216 23,968 11,535 - 35,503
Selling and
marketing 13,825 29,574 14,105 57,504 13,197 26,373 12,327 51,897
Contribution $ 106,112 $ 53,919 $ 5,987 166,018 $ 98,134 $ 46,030 $ 11,003 155,167
Contibution margin 28.2 % 45.7 % 4.7 % 26.7 % 28.4 % 41.6 % 7.5 % 25.7 %
General and
administrative 46,791 45,261
Amortization 20,190 44,159
Operating income $ 99,037 $ 65,747
Operating margin 15.9 % 10.9 %
|
(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 include 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 revenue consists primarily of royalties and commission revenue.
Net revenues from our Generic segment for the three months ended June 30,
2008 increased 9.0% or $31.0 million to $376.6 million compared to net revenues
of $345.6 million from the prior year period. This increase in net revenues was
mainly attributable to an increase in other revenue ($14.2 million) and sales of
recently launched Authorized Generics ($14.0 million) in the three months ended
June 30, 2008, including TiliaTM Fe and balsalazide disodium (both launched in
the fourth quarter of 2007), alendronate sodium tablets (launched in the first
quarter of 2008) and dronabinol (launched in the second quarter of 2008).
Increases in net revenues from other new product launches were partially offset
by price erosion within our base business.
The increase in other revenue in the three months ended June 30, 2008 for the
Generic segment was primarily related to the recognition of a $15.0 million
milestone obligation for a 1999 Schein Pharmaceutical, Inc. ("Schein")
litigation settlement with Barr Pharmaceuticals, Inc. ("Barr") related to
Cenestin. Schein was acquired by Watson in 2000. Under the terms of the
settlement, Schein relinquished any claim to rights in Cenestin in exchange for
a payment by Barr of $15.0 million in 1999 and an additional $15.0 million if
Cenestin achieved total profits, as defined in the settlement agreement, which
equal or exceed $100.0 million in any continuous period of twenty consecutive
calendar quarters or less prior to October 22, 2014. Barr achieved the
$100.0 million milestone during the quarter ended June 30, 2008.
Gross Profit
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 increased $13.8 million to
$149.1 million in the three months ended June 30, 2008 compared to
$135.3 million in the prior year period. The increase in gross profit was
primarily due to an increase in other revenue ($14.2 million).
Research and Development Expenses
Generic segment R&D expenses consist predominantly of personnel-related
costs, active pharmaceutical ingredient costs, contract research, biostudy and
facilities costs associated with the development of our products.
Generic segment R&D expenses increased 21.5% or $5.1 million to $29.1 million
in the three months ended June 30, 2008 compared to $24.0 million in the prior
year period due to higher pre-launch validation costs associated with certain
planned product launches ($3.7 million), costs associated with our Global Supply
Chain Initiative ($0.9 million), increased R&D expenditures in India
($0.8 million) and a milestone payment incurred during the current period
($0.5 million).
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 increased 4.8% or $0.6 million
to $13.8 million in the three months ended June 30, 2008 compared to
$13.2 million in the prior year period.
Brand Segment
Net Revenues
Our Brand segment 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 revenue in the Brand segment consists 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
revenue also includes revenue recognized from R&D and licensing agreements.
Net revenues from our Brand segment for the three months ended June 30, 2008
increased 6.6% or $7.3 million to $118.0 million compared to net revenues of
$110.7 million in the prior year period. The increase was primarily attributable
to higher sales within the Specialty Products group ($4.0 million) and higher
other revenue ($2.7 million). The increase within the Specialty Products product
line 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 $9.6 million to $93.6 million in
the three months ended June 30, 2008 compared to $83.9 million in the prior year
period. The increase in gross profit was primarily due to an increase in other
revenues ($2.7 million) and higher sales and gross profit from the Specialty
Products product group ($5.0 million).
Gross margins for our Brand segment increased to 79.3% during the three
months ended June 30, 2008 from 75.8% in the prior year period primarily due to
favorable changes to product mix (1.6 percentage points) and an increase in
other revenues (0.5 percentage points).
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 decreased 12.5% or $1.4 million to $10.1 million
in the three months ended June 30, 2008 compared to $11.5 million in the prior
year period primarily due to reduced clinical study costs related to the
development of silodosin and oxybutynin topical gel.
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 12.1% or $3.2 million
to $29.6 million in the three months ended June 30, 2008 as compared to
$26.4 million in the prior year period primarily related to expenditures to
support pre-launch activities related to silodosin and oxybutynin topical gel.
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 products, which are included in their
respective Generic and Brand segment results.
Net revenues from our Distribution segment for the three months ended
June 30, 2008 decreased 12.7% or $18.6 million to $128.0 million compared to net
revenues of $146.6 million in the prior year period primarily due to a reduced
level of new product launches in the current period.
Gross Profit (Gross Margin)
Gross profit for our Distribution segment decreased $3.2 million to
$20.1 million in the three months ended June 30, 2008 compared to $23.3 million
in the prior year period due to lower product sales. Gross margin was 15.7%
during the three months ended June 30, 2008 compared to 15.9% in the prior year
period.
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.
Distribution segment selling and marketing expenses increased 14.4% or
$1.8 million to $14.1 million in the three months ended June 30, 2008 as
compared to $12.3 million in the prior year period primarily related to higher
fuel surcharges and higher payroll costs in the current quarter.
Segment Contribution
Three Months Ended June 30, Change
($ in thousands): 2008 2007 Dollars %
Segment contribution
Generic $ 106,112 $ 98,134 $ 7,978 8.1 %
Brand 53,919 46,030 7,889 17.1 %
Distribution 5,987 11,003 (5,016 ) (45.6 )%
$ 166,018 $ 155,167 $ 10,851 7.0 %
as % of net revenues 26.7 % 25.7 %
|
For more information on segment contribution, refer to above "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Corporate General and Administrative Expenses
Three Months Ended June 30, Change
($ in thousands): 2008 2007 Dollars %
Corporate general and administrative expenses $ 46,791 $ 45,261 $ 1,530 3.4 %
as a % of net revenues 7.5 % 7.5 %
|
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 June 30, 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 June 30, Change
($ in thousands): 2008 2007 Dollars %
Amortization $ 20,190 $ 44,159 $ (23,969 ) (54.3 )%
as a % of net revenues 3.2 % 7.3 %
|
The Company's amortizable assets consist primarily of acquired product rights. For the three months ended June 30, 2008 amortization expense decreased 54.3% or $24.0 million as our Ferrlecit® product rights were fully amortized as of December 2007.
Loss on Early Extinguishment of Debt
Three Months Ended June 30, Change
($ in thousands): 2008 2007 Dollars %
Loss on early extinguishment of debt $ - $ 1,681 $ (1,681 ) (100.0 )%
as a % of net revenues 0.0 % 0.3 %
|
In November 2006, we entered into a Senior Credit Facility with Canadian
Imperial Bank of Commerce, acting through its New York agency, as Administrative
Agent, Wachovia Capital Markets, LLC, as Syndication Agent, and a syndicate of
banks (the "2006 Credit Facility"). The 2006 Credit Facility was entered into in
connection with the Company's November 3, 2006 acquisition of Andrx Corporation
(the "Andrx Acquisition").
During the quarter ended June 30, 2007, the Company prepaid $100.0 million of
outstanding debt on the 2006 Credit Facility. As a result of this prepayment,
our results for the quarter ended June 30, 2007 reflect debt repurchase charges
of $1.7 million which consist of unamortized debt issue costs associated with
the repurchased amount.
Interest Income
Three Months Ended June 30, Change
($ in thousands): 2008 2007 Dollars %
Interest income $ 1,685 $ 1,803 $ (118 ) (6.5 )%
as a % of net revenues 0.3 % 0.3 %
|
Interest income decreased for the three months ended June 30, 2008 due to a decrease in interest rates over the prior year period.
Interest Expense
Three Months Ended June 30, Change
($ in thousands): 2008 2007 Dollars %
Interest expense - 2006 Credit Facility $ 3,698 $ 8,076 $ (4,378 )
Interest expense - convertible
contingent senior debentures due 2023
("CODES") 3,151 3,151 -
Change in derivative value (60 ) 95 (155 )
Interest expense - other 142 153 (11 )
Interest expense $ 6,931 $ 11,475 $ (4,544 ) (39.6 )%
as a % of net revenues 1.1 % 1.9 %
|
Interest expense decreased for the three months ended June 30, 2008 due to reduced levels of debt on the 2006 Credit Facility from prepayments made during 2007 and the first quarter of 2008.
Other Income
Three Months Ended June 30, Change
($ in thousands): 2008 2007 Dollars %
Earnings on equity method investments $ 1,845 $ 2,284 $ (439 ) (19.2 )%
Gain on sale of securities - 683 (683 ) (100.0 )%
Other income 235 67 168 250.7 %
$ 2,080 $ 3,034 $ (954 ) (31.4 )%
as a % of net revenues 0.3 % 0.5 %
|
Earnings on Equity Method Investments
The Company's equity investments are accounted for under the equity-method
when the Company's ownership does not exceed 50% and when the Company can exert
significant influence over the management of the investee.
Earnings on equity method investments during the three months ended June 30,
2008 primarily represents our share of equity earnings in Scinopharm Taiwan,
Ltd. ("Scinopharm"). Earnings on equity method investments for the three months
ended June 30, 2007 primarily represented our share of earnings in Somerset
Pharmaceuticals, Inc. ("Somerset"), our joint venture with Mylan Inc. ("Mylan").
On July 28, 2008 the Company sold its fifty percent interest in Somerset to
Mylan.
Gain on Sale of Securities
The 2007 gain on sale of securities resulted from the sale of our investment
in Adheris, Inc. During the three months ended June 30, 2007, certain
contingencies were removed relating to additional consideration on our sale of
our investment in Adheris, Inc. Accordingly, the Company received common shares
of inVentiv Health, Inc. ("inVentiv") and cash as additional proceeds on the
sale of its investment in Adheris, Inc. which was recorded as a gain on sale of
securities in the quarter ended June 30, 2007.
Provision for Income Taxes
Three Months Ended June 30, Change
($ in thousands): 2008 2007 Dollars %
Provision for income taxes $ 35,568 $ 21,019 $ 14,549 69.2 %
as a % of net revenues 5.7 % 3.5 %
Effective tax rate 37.1 % 36.6 %
|
The provision for income taxes differs from the amount computed by applying
the statutory U.S. federal income tax rate primarily due to state taxes and
other factors which, combined, increases the effective tax rate.
The provision for income taxes increased in the three months ended June 30,
2008 due to higher pre-tax earnings. The higher effective tax rate for the three
months ended June 30, 2008, as compared to the same period of the prior year,
primarily reflects the loss of the R&D tax credit which has not been extended in
2008.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Six Months Ended June 30, 2008 Six Months Ended June 30, 2007
Generic Brand Distribution Total Generic Brand Distribution Total
Product sales $ 686,748 $ 200,458 $ 272,889 $ 1,160,095 $ 738,921 $ 187,562 $ 292,071 $ 1,218,554
Other 56,656 32,834 - 89,490 31,345 24,711 - 56,056
Net revenues 743,404 233,292 272,889 1,249,585 770,266 212,273 292,071 1,274,610
Cost of sales(1) 457,309 51,943 230,748 740,000 482,965 52,010 250,183 785,158
Gross profit(1) 286,095 181,349 42,141 509,585 287,301 160,263 41,888 489,452
Gross margin(1) 38.5 % 77.7 % 15.4 % 40.8 % 37.3 % 75.5 % 14.3 % 38.4 %
Research and development 51,722 25,509 - 77,231 50,481 22,830 - 73,311
Selling and marketing 27,878 57,569 28,137 113,584 27,746 52,784 26,530 107,060
Contribution $ 206,495 $ 98,271 $ 14,004 318,770 $ 209,074 $ 84,649 $ 15,358 309,081
Contibution margin 27.8 % 42.1 % 5.1 % 25.5 % 27.1 % 39.9 % 5.3 % 24.2 %
. . .
|
|
|