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| WPI > SEC Filings for WPI > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
• Approximately 16.9 million restricted shares of Common Stock of Watson issued at the Closing;
• $200.0 million face amount of newly-designated non-voting Series A Preferred Stock of Watson issued at the Closing; and
• Certain contingent payments made after the Closing based on the after-tax gross profits on sales of Atorvastatin in the United States as described in the Acquisition Agreement.
The Company intends to fund the cash portion of the consideration by using
available cash and additional borrowings. The Company is evaluating options for
longer-term debt financing. The following discussion does not include or
incorporate the anticipated impact of the Arrow Acquisition on our business,
results of operations, financial condition, cash flows or expectations for the
remainder of 2009.
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 pharmaceutical products that are
therapeutically equivalent to proprietary products. The Brand segment includes
the Company's Specialty Products and Nephrology/Medical 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, net
revenues less cost of sales and contribution. Segment contribution represents
segment net revenues less cost of sales, 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, 2009 Compared to Three Months Ended June 30, 2008
Three Months Ended June 30, 2009 Three Months Ended June 30, 2008
Generic Brand Distribution Total Generic Brand Distribution Total
Product sales $ 393.8 $ 97.6 $ 161.3 $ 652.7 $ 344.3 $ 101.5 $ 128.0 $ 573.8
Other 7.4 17.7 - 25.1 32.4 16.5 - 48.9
Net revenues 401.2 115.3 161.3 677.8 376.7 118.0 128.0 622.7
Operating
expenses:
Cost of sales(1) 234.1 22.0 137.0 393.1 227.6 24.4 107.9 359.9
Research and
development 29.9 12.7 - 42.6 29.1 10.1 - 39.2
Selling and
marketing 11.4 39.1 15.7 66.2 13.8 29.6 14.1 57.5
Contribution $ 125.8 $ 41.5 $ 8.6 175.9 $ 106.2 $ 53.9 $ 6.0 166.1
Contibution margin 31.4 % 36.0 % 5.3 % 26.0 % 28.2 % 45.7 % 4.7 % 26.7 %
General and
administrative 62.1 46.9
Amortization 22.1 20.2
Loss on asset
sales 0.2 -
Operating income $ 91.5 $ 99.0
Operating margin 13.5 % 15.9 %
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(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 revenues consist primarily of royalties and commission revenue.
Net revenues from our Generic segment for the three months ended June 30,
2009 increased 6.5% or $24.5 million to $401.2 million compared to net revenues
of $376.7 million from the prior year period. This increase in net revenues was
mainly attributable to new product launches and products acquired subsequent to
the second quarter of 2008 ($58.6 million) offset in part by a decrease in other
revenue ($25.0 million) and a decrease in sales of certain oral contraceptives.
The significant portion of the decrease in other revenues in the three months
ended June 30, 2009 for the Generic segment was related to the recognition of a
$15.0 million milestone obligation in the prior year quarter for a 1999 Schein
Pharmaceutical, Inc. ("Schein") litigation settlement with Barr Pharmaceuticals,
Inc. ("Barr") related to Cenestin. Other revenues also declined $6.5 million
compared to the prior year quarter due to reduced royalties on sales by Sandoz,
Inc. of metoprolol succinate 50 mg extended release tablets and reduced
royalties on sales by GlaxoSmithKline of Wellbutrin XL® 150 mg. Sales of
metoprolol succinate 50 mg declined as Sandoz, Inc. ceased shipping the product
in the fourth quarter of 2008 and it is uncertain when sales will resume. Sales
of Wellbutrin XL® 150 mg declined due to increased competition.
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.
Cost of sales for our Generic segment increased 2.9% or $6.5 million to
$234.1 million in the three months ended June 30, 2009 compared to
$227.6 million in the prior year quarter. The increase in cost of sales was
primarily due to increased product sales in the current year period partially
offset by manufacturing efficiencies as a result of the implementation of our
Global Supply Chain Initiative and lower unit manufacturing costs due to higher
manufacturing volumes at certain manufacturing sites.
Research and Development Expenses
Generic segment R&D expenses consist predominantly of personnel-related
costs, active pharmaceutical ingredient ("API") costs, contract research,
biostudy and facilities costs associated with the development of our products.
Generic segment R&D expenses increased 2.7% or $0.8 million to $29.9 million
in the three months ended June 30, 2009 compared to $29.1 million in the prior
year quarter due to higher R&D costs in India.
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 17.8% or
$2.4 million to $11.4 million in the three months ended June 30, 2009 compared
to $13.8 million in the prior year period due primarily to cost savings as a
result of the implementation of our Global Supply Chain Initiative.
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/Medical.
Our Specialty Products product line includes urology products such as,
GelniqueTM, RapafloTM and Trelstar® and a number of non-promoted products.
Our Nephrology/Medical 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/Medical 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 June 30, 2009
decreased 2.3% or $2.7 million to $115.3 million compared to net revenues of
$118.0 million in the prior year period. The decrease was primarily attributable
to lower sales within the Nephrology/Medical product line ($12.5 million) which
was partially offset by higher sales within the Specialty Products product line
($8.6 million) and higher other revenues ($1.2 million).
The Nephrology/Medical product line experienced declines in sales of both
INFeD® and Ferrlecit® during the current year quarter. Lower sales of INFeD®
resulted from a supply interruption of INFeD®'s API which is available from only
one source. We resumed shipments of INFeD® in July 2009. Lower sales of
Ferrlecit® resulted from changes in customer buying patterns compared to the
prior year quarter and due to a customer transitioning to a competing product in
the current year quarter. Further declines in sales to this customer are
anticipated until December 31, 2009 at which time our distribution rights for
Ferrlecit® terminate. The increase within the Specialty Products product line
primarily related to the launch of RapafloTM and GelniqueTM during the current
year quarter.
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.
Cost of sales for our Brand segment decreased 10.0% or $2.4 million to
$22.0 million in the three months ended June 30, 2009 compared to $24.4 million
in the prior year period. The decrease in cost of sales was due to lower product
sales in the current year period and lower unit manufacturing costs due to
higher manufacturing volumes at certain of our manufacturing sites.
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 25.4% or $2.6 million to $12.7 million
in the three months ended June 30, 2009 compared to $10.1 million in the prior
year period primarily due to increased clinical spending.
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 32.3% or $9.5 million
to $39.1 million in the three months ended June 30, 2009 as compared to
$29.6 million in the prior year period primarily related to increased product
promotion, field force and marketing costs to support launch activities related
to RapafloTM and GelniqueTM.
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
June 30, 2009 increased 26.1% or $33.3 million to $161.3 million compared to net
revenues of $128.0 million in the prior year period primarily due to an increase
in net revenues from new products launched during the second quarter of 2009
($23.1 million) and higher levels of sales in the brand product category in the
current year quarter.
Cost of Sales
Cost of sales for our Distribution segment increased 27.0% or $29.1 million
to $137.0 million in the three months ended June 30, 2009 compared to
$107.9 million in the prior year period. Distribution segment cost of sales
increased in the current quarter due to increased sales levels.
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 11.7% or
$1.6 million to $15.7 million in the three months ended June 30, 2009 as
compared to $14.1 million in the prior year period primarily related to higher
staffing levels.
Segment Contribution
Three Months Ended June 30, Change
($ in millions): 2009 2008 Dollars %
Segment contribution
Generic $ 125.8 $ 106.2 $ 19.6 18.5 %
Brand 41.5 53.9 (12.4 ) (23.0 )%
Distribution 8.6 6.0 2.6 43.3 %
$ 175.9 $ 166.1 $ 9.8 5.9 %
as % of net revenues 26.0 % 26.7 %
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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 June 30, Change
($ in millions): 2009 2008 Dollars %
Corporate general and administrative expenses $ 62.1 $ 46.9 $ 15.2 32.4 %
as a % of net revenues 9.2 % 7.5 %
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Corporate general and administrative expenses consists mainly of the cost of
personnel, facilities, insurance, professional services and litigation, which is
general in nature and not directly related to specific segment operations.
Corporate general and administrative expenses increased during the three
months ended June 30, 2009 primarily due to acquisition costs incurred in the
current period ($11.9 million) and higher litigation expenses ($3.1 million).
Amortization
Three Months Ended June 30, Change
($ in millions): 2009 2008 Dollars %
Amortization $ 22.1 $ 20.2 $ 1.9 9.4 %
as a % of net revenues 3.3 % 3.2 %
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The Company's amortizable assets consist primarily of acquired product rights. For the three months ended June 30, 2009 amortization expense increased $1.9 million primarily as a result of the amortization of product rights the Company acquired in the fourth quarter of 2008 as a result of the merger between Teva Pharmaceutical Industries, Ltd. ("Teva") and Barr.
Loss on Asset Sales
Three Months Ended June 30, Change
($ in millions): 2009 2008 Dollars %
Loss on asset sales $ 0.2 $ - $ 0.2 100.0 %
as a % of net revenues 0.0 % 0.0 %
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In the three months ended June 30, 2009, we recognized a $0.2 million loss on the disposal of certain property and equipment related to our business restructuring and facility rationalization activities.
Interest Income
Three Months Ended June 30, Change
($ in millions): 2009 2008 Dollars %
Interest income $ 1.3 $ 1.7 $ (0.4 ) (23.5 )%
as a % of net revenues 0.2 % 0.3 %
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Interest income decreased for the three months ended June 30, 2009 due to a decrease in interest rates over the prior year period.
Interest Expense
Three Months Ended June 30, Change
($ in millions): 2009 2008 Dollars %
Interest expense - Senior Credit
Facility due 2011 ("2006 Credit
Facility") $ 1.3 $ 3.7 $ (2.4 )
Interest expense - convertible
contingent senior debentures due 2023
("CODES") 3.2 3.2 -
Interest expense - other 0.1 - 0.1
Interest expense $ 4.6 $ 6.9 $ (2.3 ) (33.3 )%
as a % of net revenues 0.7 % 1.1 %
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Interest expense decreased for the three months ended June 30, 2009 due to reduced LIBOR rates of interest on the 2006 Credit Facility during the current year period.
Other Income
Three Months Ended June 30, Change
($ in millions): 2009 2008 Dollars %
Earnings on equity method investments $ 2.4 $ 1.8 $ 0.6
Other income - 0.2 (0.2 )
$ 2.4 $ 2.0 $ 0.4 20.0 %
as a % of net revenues 0.4 % 0.3 %
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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 primarily represent our share of equity earnings in
Scinopharm Taiwan Ltd. ("Scinopharm").
Scinopharm results for the three months ended June 30, 2009 were higher than
the prior year period due to favorable product mix in the current year quarter.
Provision for Income Taxes
Three Months Ended June 30, Change
($ in millions): 2009 2008 Dollars %
Provision for income taxes $ 37.6 $ 35.5 $ 2.1 5.9 %
Effective tax rate 41.5 % 37.1 %
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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,
non-deductible transaction costs and other factors which, combined, increases
the effective tax rate.
The higher effective tax rate for the three months ended June 30, 2009, as
compared to the same period of the prior year, primarily reflects the impact of
non-deductible transaction costs related to the Arrow Acquisition (5.0%), which
was partially offset by a reduction in the effective tax rate for the R&D tax
credit and certain permanent differences (0.6%).
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Six Months Ended June 30, 2009 Six Months Ended June 30, 2008
Generic Brand Distribution Total Generic Brand Distribution Total
Product sales $ 789.0 $ 195.8 $ 315.0 $ 1,299.8 $ 686.7 $ 200.5 $ 272.9 $ 1,160.1
Other 13.9 31.5 - 45.4 56.7 32.8 - 89.5
Net revenues 802.9 227.3 315.0 1,345.2 743.4 233.3 272.9 1,249.6
Operating expenses:
Cost of sales(1) 472.6 46.2 263.0 781.8 457.3 51.9 230.8 740.0
Research and
development 60.0 24.9 - 84.9 51.7 25.5 - 77.2
Selling and
marketing 24.1 76.0 31.8 131.9 27.9 57.6 28.1 113.6
Contribution $ 246.2 $ 80.2 $ 20.2 346.6 $ 206.5 $ 98.3 $ 14.0 318.8
Contibution margin 30.7 % 35.3 % 6.4 % 25.8 % 27.8 % 42.1 % 5.1 % 25.5 %
General and
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