e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-13305
WATSON PHARMACEUTICALS,
INC.
(Exact name of registrant as
specified in its charter)
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Nevada
(State or other jurisdiction
of
incorporation or organization)
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95-3872914
(I.R.S. Employer
Identification No.)
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311
Bonnie Circle, Corona, CA 92880-2882
(Address
of principal executive offices, including ZIP
code)
(951) 493-5300
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.0033 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well known
seasoned issuer (as defined in Rule 405 of the Securities
Act). Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days: Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
Aggregate market value of Common Stock held by non-affiliates of
the Registrant, as of June 30, 2010:
$5,065,021,000 based on the last reported sales price on the
New York Stock Exchange
Number of shares of Registrants Common Stock outstanding
on January 31, 2011: 125,827,379
DOCUMENTS
INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from
the registrants proxy statement for the 2010 Annual
Meeting of Stockholders, to be held on May 13, 2011. Such
proxy statement will be filed no later than 120 days after
the close of the registrants fiscal year ended
December 31, 2010.
WATSON
PHARMACEUTICALS, INC.
TABLE OF
CONTENTS
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
2
PART I
Business
Overview
Watson Pharmaceuticals, Inc. (Watson, the
Company, we, us or
our) is a leading integrated global pharmaceutical
company engaged in the development, manufacturing, marketing,
sale and distribution of generic and brand pharmaceutical
products. We operate in key international markets including
Western Europe, Canada, Australasia, Asia, South America and
South Africa with our key commercial market being the United
States of America (U.S.). As of December 31,
2010, we marketed approximately 160 generic pharmaceutical
product families and approximately 30 brand pharmaceutical
product families in the U.S. and a significant number of
product families internationally through our Global Generics and
Global Brands Divisions, respectively, and distributed
approximately 8,500 stock-keeping units (SKUs)
through our Distribution Division.
Our principal executive offices are located at 311 Bonnie
Circle, Corona, California 92880. Our Internet website address
is www.watson.com. We do not intend this website address to be
an active link or to otherwise incorporate by reference the
contents of the website into this report. Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and all amendments thereto are available free of charge on our
Internet website. These reports are posted on our website as
soon as reasonably practicable after such reports are
electronically filed with the U.S. Securities and Exchange
Commission (SEC). The public may read and copy any
materials that we file with the SEC at the SECs Public
Reference Room or electronically through the SEC website
(www.sec.gov). Within the Investors section of our website, we
provide information concerning corporate governance, including
our Corporate Governance Guidelines, Board Committee Charters
and Composition, Code of Conduct and other information. See
ITEM 1A. RISK FACTORS-CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS in this Annual Report on
Form 10-K
(Annual Report).
Acquisition
of Arrow
On December 2, 2009, Watson completed its acquisition of
all the outstanding shares of common stock of Robin Hood
Holdings Limited, a Malta private limited liability company, and
Cobalt Laboratories, Inc., a Delaware corporation (together the
Arrow Group) for cash, stock and certain contingent
consideration (the Arrow Acquisition). In accordance
with the terms of the share purchase agreement dated
June 16, 2009, as amended on November 26, 2009
(together the Acquisition Agreement), the Company
acquired all the outstanding shares of common stock of the Arrow
Group for the following consideration:
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The payment of cash and the assumption of certain liabilities
totaling $1.05 billion;
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Approximately 16.9 million restricted shares of Common
Stock of Watson (the Restricted Common Stock);
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200,000 shares of newly designated mandatorily redeemable,
non-voting Series A Preferred Stock of Watson (the
Mandatorily Redeemable Preferred Stock) placed in an
indemnity escrow account for the benefit of the former
shareholders of the Arrow Group (the Arrow Selling
Shareholders). The Arrow Selling Shareholders will be
entitled to the proceeds of the Mandatorily Redeemable Preferred
Stock in 2012, less the amount of any indemnity
payments; and
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Certain contingent consideration based on the after-tax gross
profits on sales of the authorized generic version of
Lipitor®
(atorvastatin) in the U.S. calculated and payable as
described in the Acquisition Agreement.
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Arrow Group operating results are included in the Global
Generics segment subsequent to the date of acquisition.
As part of the Arrow Acquisition, Watson acquired a 36%
ownership interest in Eden Biopharm Group Limited
(Eden), a company which provides development and
manufacturing services for early-stage biotech
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companies, which will provide a long-term foundation for the
development of generic biologics. In January 2010, we purchased
the remaining 64% interest in Eden for $15.0 million.
Edens results are included in our Global Brands segment.
Eden will maintain its established contract services model,
while providing the Company with biopharmaceutical development
and manufacturing capabilities.
Business
Description
Prescription pharmaceutical products in the U.S. generally
are 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. Through our Distribution Segment, we
distribute pharmaceutical products, primarily generics, which
have been commercialized by us and others, to pharmacies and
physicians offices. As a result of the differences between
the types of products we market
and/or
distribute and the methods we distribute products, we operate
and manage our business as three operating segments: Global
Generics, Global Brands and Distribution. Outside the U.S., our
operations are primarily in Western Europe and Canada. In many
of these markets, there is limited generic substitution by
pharmacists and as a result, products are often promoted to
pharmacies. Therefore, physician and pharmacist loyalty to a
specific companys generic product can be a significant
factor in obtaining market share.
Business
Strategy
We apply three key strategies to grow our Global Generics and
Global Brands pharmaceutical businesses: (i) internal
development of differentiated and high demand products,
(ii) establishment of strategic alliances and
collaborations and (iii) acquisition of products and
companies that complement our current business. We believe our
three-pronged strategy will allow us to expand both our brand
and generic product offerings. Our Distribution business
distributes products for over 200 suppliers and is focused on
providing
next-day
delivery and responsive service to its customers. Our
Distribution business also distributes a number of Watson
generic and brand products. Growth in our Distribution business
will be largely dependent upon FDA approval of new generic
products in the U.S.
With the Arrow Acquisition in 2009, we now have commercial
operations in a number of established international markets with
the opportunity for rapid growth in many emerging markets around
the world. We believe a global presence will allow us to expand
our revenue base and manage risk through diversification. We
expect to capitalize on opportunities for growth within these
new markets. Additionally, we will continue to look for
opportunities to enhance these capabilities through further
strategic collaborations or acquisitions.
Based upon business conditions, our financial strength and other
factors, we regularly reexamine our business strategies and may
change them at anytime. See ITEM 1A. RISK
FACTORS Risks Related to Our Business in this
Annual Report.
Global
Generics Segment
Watson is a leader in the development, manufacturing and sale of
generic pharmaceutical products. When patents or other
regulatory exclusivity no longer protect a brand product,
opportunities exist to introduce generic counterparts to the
brand product. These generic products are bioequivalent to their
brand name counterparts and are generally sold at significantly
lower prices than the brand product. As such, generic
pharmaceuticals provide an effective and cost-efficient
alternative to brand products. Our portfolio of generic products
includes products we have developed internally, products we have
licensed from third parties and products we distribute for third
parties. Net revenues in our Global Generics segment accounted
for $2.3 billion or approximately 66% of our total net
revenues in 2010. At December 31, 2010, our global generics
business in the U.S. remains the dominant source of revenue
for the Company with approximately 80% of total generic net
revenues coming from our U.S. businesses.
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Global
Generics Strategy
Our Global Generics business is focused on maintaining a leading
position within the U.S. generics market and strengthening
our global position by offering a consistent and reliable supply
of quality generic products. We are leveraging our broad product
line by expanding commercial operations outside of the U.S.
Our strategy in the U.S. is to develop generic
pharmaceuticals that are difficult to formulate or manufacture
or will complement or broaden our existing product lines.
Internationally, our strategy is to grow our market share in key
markets while expanding our presence in new markets. We plan to
accomplish this through new product launches, filing existing
products overseas and in-licensing products through strategic
alliances. Since the sales and unit volumes of our brand
products will likely decrease upon the introduction of generic
alternatives, we also intend to market generic alternatives to
our brand products where market conditions and the competitive
environment justify such activities. 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.
We have maintained an ongoing effort to enhance efficiencies and
reduce costs in our manufacturing operations. Execution of these
initiatives will allow us to maintain competitive pricing on our
products.
Global
Generics Business Development
In conjunction with our strategy to grow and expand
internationally and diversify our business, on October 4,
2010, we announced a partnership with Moksha8 Pharmaceuticals
Inc. (Moksha8) for Moksha8 to market a select number
of our products in Latin America, specifically in the two
largest Latin American markets of Brazil and Mexico. Watson
agreed to make an initial $30.0 million investment in
exchange for a significant minority ownership position in
Moksha8. We have also committed to invest an additional
$20.0 million, further increasing our equity position,
contingent upon successful execution by Moksha8 of additional
third-party product acquisitions. In conjunction with our
investment in Moksha8, we have also designated a representative
to serve as a member of the Moksha8 board of directors. Watson
will manufacture and supply select products to Moksha8, which
will have exclusive rights to market, sell and distribute these
products in Brazil and Mexico. Moksha8 and Watson have initially
identified approximately one dozen product candidates, with the
opportunity to expand the commercialization and marketing
agreement to include additional products in the future. The
products are expected to be launched beginning in the first half
of 2011.
In 2010, Watson entered into an exclusive agreement with
Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI),
to market the Authorized Generic version of
Concerta®
(methylphenidate hydrochloride). Under the terms of the
agreement, OMJPI will supply Watson with the product. Watson
will launch its Authorized Generic of
Concerta®
on May 1, 2011, or earlier under certain circumstances.
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Global
Generics Product Portfolio
Our portfolio of approximately 160 generic pharmaceutical
product families in the U.S. includes the following key
products which represented approximately 57% of total Global
Generics segment product revenues in 2010:
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Watson Generic Product
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Comparable Brand Name
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Therapeutic Classification
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Azurettetm
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Mircette®
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Oral contraceptive
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Bupropion hydrochloride SR
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Zyban®
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Aid to smoking cessation
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Bupropion hydrochloride SR
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Wellbutrin
SR®
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Anti-depressant
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Bupropion hydrochloride XL
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Wellbutrin
XL®
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Anti-depressant
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Desmopressin acetate
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DDAVP®
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Antidiuretic
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Diclofenac sodium
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Arthrotec®
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Osteoarthritis and rheumatoid arthritis
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Diltizem HCl ER
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Cardizem®
LA
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Calcium channel blocker
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Dronabinol
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Marinol®
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Antiemetic
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Fentanyl transdermal system
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Duragesic®
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Analgesic/narcotic combination
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Glipizide ER
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Glucotrol®
XL
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Anti-diabetic
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Hydrocodone bitartrate/
acetaminophen
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Lorcet®,
Vicodin®,
Lortab®,
Norco®/Anexia
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Analgesic
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Levora®
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Nordette®
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Oral contraceptive
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Low-Ogestrel®
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Lo-Ovral®
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Oral contraceptive
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Lutera®
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Alesse®
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Oral contraceptive
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Metoprolol succinate
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Toprol
XL®
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Anti-hypertensive
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Microgestin®/Microgestin®
Fe
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Loestrin®/Loestrin®
Fe
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Oral contraceptive
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Necon®
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Ortho-Novum®,
Modicon®
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Oral contraceptive
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Next
Choicetm
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Plan
B®
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Emergency oral contraceptive
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Nicotine polacrilex gum
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Nicorette®
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Aid to smoking cessation
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Oxycodone/acetaminophen
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Percocet®
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Analgesic
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Potassium chloride ER
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Micro-K®
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Hypokalemia
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Potassium XR
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Augmentin
XR®
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Hypokalemia
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Quasense
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Seasonale®
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Oral contraceptive
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Reclipsen®
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Ortho-Cept®
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Oral contraceptive
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Taztia
XT®
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Tiazac®
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Anti-hypertensive
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TriNessatm
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Ortho
Tri-Cyclen®
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Oral contraceptive
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Trivora®
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Triphasil®
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Oral contraceptive
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Zarahtm
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Yasmin®
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Oral contraceptive
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Zovia®
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Demulen®
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Oral contraceptive
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In the U.S., we predominantly market our generic products to
various drug wholesalers, mail order, government and national
retail drug and food store chains utilizing 21 sales and
marketing professionals. We sell our generic prescription
products primarily under the Watson Laboratories and
Watson Pharma labels, with the exception of our
over-the-counter
generic products which we sell under our
Rugby®
label or under private label.
During 2010, we expanded our generic product line with the
launch of seven generic products. Key U.S. generic launches
in 2010 included diltiazem ER 180 mg and 240 mg,
metoprolol succinate ER 100 mg and 200 mg,
valacyclovir, tacrolimus 5 mg,
Zarahtm
(a generic version of
Yasmin®),
rivastigmine and amlodipine besylate/benazepril.
Watson currently has a leading U.S. market position in
generic oral contraceptives with over 30 product formulations
and a 36% market share. Our top five oral contraceptives,
NextChoicetm,
Microgestin®,
TriNessa®,
Necon®
and
Lutera®,
account for almost 50% of the total Watson oral contraceptives
portfolio. Key
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oral contraceptive products in the pipeline include generic
versions of
Yaz®,
Seasonique®,
LoSeasonique®
and Tri-Cyclen
Lo®.
Operations
in Key International Markets
Outside the U.S., our operations are primarily in Western Europe
and Canada. In many of these markets, there is limited generic
substitution by pharmacists and as a result, products are often
promoted to pharmacies. Therefore, physician and pharmacist
loyalty to a specific companys generic product can be a
significant factor in obtaining market share.
In 2010, certain governments in Europe and Canada implemented
various healthcare reforms in an attempt to manage health care
budget expenditures. As a result of difficult economic
conditions in many of these regions, these healthcare reforms
had a greater than expected impact on our industry when compared
with previous years, as many governments mandated lower generic
pricing as a method of cost savings for their annual health care
expenditures. We expect pricing pressures to continue in many of
our key markets. However, the impact of government healthcare
reform in 2011 is expected to be less than in 2010.
Canada
Canadas generics market, with an estimated value of
approximately $5.6 billion, is one of the largest generic
markets in the world. Generic pharmaceuticals are substituted at
the pharmacy. The provincial governments have direct control
over pricing and reimbursement in Canada.
Watsons Global Generics division operates in Canada as
Cobalt Pharmaceuticals. We actively market 54 products in
Canada and have 40 sales representatives promoting our products
to pharmacies.
U.K.
The U.K. generics market has an estimated value of approximately
$3.6 billion and is one of the worlds largest in
terms of both size and generic penetration. The U.K. government
has direct control over pricing and reimbursement.
We now do business in the U.K. as Arrow Generics and currently
market 100 different products. We also have alliances to assist
in the distribution of these products.
France
France has an estimated generics market value of approximately
$3.5 billion. The French government regulates and promotes
generics and incentivizes pharmacists to dispense them. There
are approximately 23,000 pharmacies in France. It is a strong
branded generic market where substitution at the pharmacy level
is limited.
We now do business in France as Arrow Generiques and market 138
different molecules. We have over 65 sales representatives
calling on the individual pharmacies. The generic market is
expected to grow with doctors incentivized to prescribe
generics. There are also a number of brand products losing
exclusivity in 2011, which should create future opportunities
for growth in this market.
Global
Generics Research and Development
We devote significant resources to the research and development
(R&D) of generic products and proprietary drug
delivery technologies. Watson incurred Global Generics segment
R&D expenses of approximately $195.0 million in 2010,
$140.0 million in 2009 and $119.0 million in 2008. We
are presently developing a number of generic products through a
combination of internal and collaborative programs.
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Our Global Generics R&D strategy focuses on the following
product development areas:
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off-patent drugs that are difficult to develop or manufacture,
or that complement or broaden our existing product lines;
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the development of sustained-release and other drug delivery
technologies and the application of these technologies to
proprietary drug forms; and
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using in-house technologies to develop new products.
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As of December 31, 2010, we conducted R&D in Corona,
California; Copiague, New York; Davie and Weston, Florida; Salt
Lake City, Utah; Ambernath and Mumbai, India; Mississauga,
Canada; and Melbourne, Australia. In 2010, we announced plans to
close R&D facilities in Melbourne, Australia and
Mississauga, Canada. The transfer of development activities from
our Melbourne, Australia facility to other existing research and
development sites will be completed in the first quarter of
2011. In January 2011, we announced plans to close R&D
facilities in Corona, California by the end of 2011.
In 2010, our product development efforts resulted in the
submission of over 30 Abbreviated New Drug Applications
(ANDAs) in the U.S. and more than 145
applications globally. At December 31, 2010, we had more
than 120 ANDAs on file in the U.S. and a significant number
of applications on file internationally. See the
Government Regulation and Regulatory Matters section
below for a description of our process for obtaining
U.S. Food and Drug Administration (FDA)
approval for our products. See also ITEM 1A. RISK
FACTORS Risks Related to our Business
Extensive industry regulation has had, and will continue to
have, a significant impact on our business, especially our
product development, manufacturing and distribution
capabilities. in this Annual Report.
Global
Brands Segment
Newly developed pharmaceutical products normally are patented
and, as a result, are generally offered by a single provider
when first introduced to the market. We currently market a
number of branded products to physicians, hospitals, and other
markets that we serve. We classify these patented and off-patent
trademarked products as our brand pharmaceutical products.
During 2010, we launched
Crinone®,
ella®,
and
Trelstar®
22.5 mg.
Crinone®
was acquired from Columbia Laboratories, Inc.
(Columbia) and is currently used for progesterone
supplementation or replacement as part of an Assisted
Reproductive Technology treatment for infertile women with a
progesterone deficiency.
Ella®
is an emergency contraceptive proven effective in helping
prevent pregnancies for up to five days after unprotected
intercourse or contraceptive failure.
Trelstar®
22.5 mg is a
6-month
intramuscular GnRH agonist for the palliative treatment of
advanced prostate cancer. Net revenues in our Global Brands
segment accounted for approximately $398.0 million or
approximately 11% of our total net revenues in 2010. Typically,
our brand products realize higher profit margins than our
generic products.
Our portfolio of over 30 brand pharmaceutical product families
includes the following products, which represented approximately
70% of total Global Brands segment product revenues in 2010:
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Watson Brand Product
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Active Ingredient
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Therapeutic Classification
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Androderm®
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Testosterone (transdermal patch)
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Male testosterone replacement
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Gelnique®
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Oxybutnin chloride (gel 10)%
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Overactive bladder
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INFeD®
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Iron dextran
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Hematinic
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Oxytrol®
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Oxybutnin (transdermal patch)
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Overactive bladder
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Rapaflo®
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Silodosin
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Benign prostatic hyperplasia
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Trelstar®
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Triptorelin pamoate injection
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Prostate cancer
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We market our brand products through approximately 350 sales
professionals. Our sales and marketing efforts focus on
physicians, specifically urologists, obstetricians and
gynecologists, who specialize in the diagnosis and treatment of
particular medical conditions and each group offers products to
satisfy the unique needs of these physicians. Approximately 60
of these sales professionals are strategic account specialists
who
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focus on institutions and clinics. We believe this focused sales
and marketing approach enables us to foster close professional
relationships with specialty physicians, as well as cover the
primary care physicians who also prescribe in selected
therapeutic areas. We generally sell our brand products under
the Watson Pharma label. We believe that the current
structure of sales professionals is very adaptable to the
additional products we plan to add to our brand portfolio,
particularly in the therapeutic category of womens health.
We actively promote
Rapaflo®,
Gelnique®,
Trelstar®,
Crinone®,
ella®
and
INFeD®.
Our Global Brands segment also receives other revenues
consisting of co-promotion revenue and royalties. We promote
AndroGel®
on behalf of Abbott Laboratories (Abbott) and
Femring®
on behalf of Warner Chilcott Ltd. We expect to continue this
strategy of supplementing our existing brand revenues with
co-promoted products within our targeted therapeutic areas.
Other revenue totaled $81.5 million for 2010 or
approximately 20% of our total Global Brands segment net revenue.
Global
Brands Research and Development
We devote significant resources to the R&D of brand
products and proprietary drug delivery technologies. A number of
our brand products are protected by patents and have enjoyed
market exclusivity. We incurred Global Brands segment R&D
expenses of approximately $102.0 million in 2010,
$57.0 million in 2009 and $51.0 million in 2008.
Our Global Brands R&D strategy focuses on the following
product development areas:
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the application of proprietary drug-delivery technology for new
product development in specialty areas; and
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the acquisition of
mid-to-late
development-stage brand drugs.
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We are presently developing a number of brand products, some of
which utilize novel drug-delivery systems, through a combination
of internal and collaborative programs. We also acquired Eden, a
company involved in biologics research and development.
Products in the brand pipeline include
Prochieve®
8% for the prevention of pre-term birth in women with a short
cervix, as well as two novel long-acting contraceptives in late
stage development, a progestin-only patch and a vaginal ring. We
received approval in December 2010 for a novel chewable oral
contraceptive licensed from Warner Chilcott Ltd., which we
expect to launch in the second quarter of 2011. We also have a
number of products in development as part of our life-cycle
management strategy on our existing product portfolio.
Biopharmaceuticals
or Biologics
Biopharmaceuticals will represent a significant opportunity in
the future, and we have taken strategic steps to enhance our
ability to offer products in this area. We believe biologics
will require selling and marketing resources for promotion.
Therefore, our biologics development efforts are managed by our
Global Brands division.
In January 2010, we acquired the remaining 64% of Eden for
approximately $15.0 million, making Eden a wholly-owned
subsidiary. Eden is a biopharmaceutical development and contract
manufacturing company located in Liverpool, UK. Eden will
maintain its established contract services model, while
providing the Company with proven biopharmaceutical development
and manufacturing capabilities.
In July 2010, we announced an exclusive, worldwide licensing
agreement with Itero Biopharmaceuticals, Inc.
(Itero), a venture-backed specialty
biopharmaceutical company, to develop and commercialize
Iteros recombinant follicle stimulating hormone
(rFSH) product. The product is currently in
preclinical development as a biosimilar molecule for the
treatment of female infertility. Under the terms of the
agreement, Watson paid Itero an undisclosed licensing fee and
will make additional payments based on the achievement of
certain development and regulatory performance milestones. Upon
successful commercialization, Watson will also pay
9
Itero a percentage of net sales or net profits in various
regions of the world. Watson will assume responsibility for all
future development, manufacturing, and commercial expenses
related to Iteros rFSH product.
The licensing of rFSH is an example of how we plan to enter
biologics, with products that are past the pre-clinical
development phase and complement our existing business.
Global
Brands Business Development
In 2010 we entered into a number of agreements as part of our
efforts to expand our brand product portfolio, specifically in
Womens Health.
In February 2010, we announced an exclusive licensing agreement
for Watson to become the U.S. commercial partner for
ella®
(ulipristal acetate), a selective progesterone receptor
modulator.
ella®
is a novel next-generation emergency contraceptive developed by
HRA Pharma specifically for emergency contraceptive use. Under
the terms of the agreement, Watson will be responsible for all
U.S. commercialization and marketing expenses and pay HRA
Pharma a royalty on U.S. sales of the product.
ella®
was approved by the FDA in August 2010 and launched in the
U.S. in December 2010. In September 2010, we expanded our
agreement with HRA Pharma to become the commercial partner for
ella®
in Canada.
In March 2010 we announced the acquisition of the exclusive
U.S. rights to Columbias bioadhesive progesterone gel
business. Products included in the acquisition were
Crinone®
for the treatment of infertility and
Prochieve®
under development for the prevention of pre-term birth in women
with a short cervix. Under the terms of the agreement, we paid
Columbia $62.0 million in cash and agreed to make certain
contingent payments in return for exclusive progesterone gel
product rights in the U.S. and 11.2 million newly
issued shares of Columbia common stock. We also obtained the
right to designate a member of Columbias board of
directors. Contingent payments will be made upon the successful
completion of clinical development milestones, receipt of
regulatory approvals and product launches and could total up to
$45.5 million. In addition, we will pay a royalty on our
sales of the progesterone gel product line and any subsequent
products. Pursuant to a supply agreement, Columbia will be
responsible for manufacturing the progesterone gel products.
Following the initial announcement in March 2010, we entered
into an agreement with Columbia to support Columbias
ongoing investment in the clinical development of the pre-term
birth indication for
Prochieve®,
as well as other Columbia capital requirements.
Following the close of the acquisition, Watson and Columbia
jointly announced top-line results from the PREGNANT Study, a
large, global Phase III clinical trial evaluating
Prochieve®
8% vaginal progesterone gel to reduce the risk of preterm birth
in women with a short cervical length as measured by
transvaginal ultrasound at mid-pregnancy. Columbia expects to
file a new drug application (NDA) in the first half
of 2011. We plan to collaborate with Columbia in the global
development of a second-generation vaginal progesterone product.
In March 2010, we announced an exclusive licensing agreement to
commercialize the Population Councils investigational
contraceptive vaginal ring in the United States, Canada, and
Mexico. The ring, which contains two hormonal
products ethinyl estradiol and
Nestorone®,
a novel, synthetic progestin, has concluded its Phase 3 clinical
development and is currently undergoing safety studies customary
with the introduction of a novel hormonal product.
In December 2010, we announced an exclusive licensing agreement
with PregLem, S.A., (PregLem) now a wholly-owned
subsidiary of Gedeon Richter Plc, to develop and market
Esmyatm
(ulipristal acetate), a product for the treatment of uterine
fibroids, in the U.S. and Canada. The product MMA has
recently been submitted for approval in Europe and Watson
expects to initiate U.S. Phase III clinical studies in
2011. Under terms of the agreement, Watson paid PregLem a
$17.0 million license fee and will pay royalties based on
sales in the U.S. and Canada. Watson will make additional
payments based on the achievement of certain regulatory
milestones. The companies will also collaborate on additional
Esmyatm
formulations, jointly sharing the development costs.
10
Additionally, we intend to market various products within our
Global Brands segment globally. As part of this strategy, we
have filed for regulatory approval of a number of our brand
products with various regulatory agencies internationally
including
Rapaflo®,
Gelnique®
and
ella®
in Canada and
Gelnique®
in Europe.
Distribution
Segment
Our Distribution business, which consists of our Anda, Anda
Pharmaceuticals and Valmed (also known as VIP)
subsidiaries (collectively Anda), primarily
distributes generic and selected brand pharmaceutical products
to independent pharmacies, alternate care providers (hospitals,
nursing homes and mail order pharmacies), pharmacy chains and
physicians offices. Additionally, we sell to members of
buying groups, which are independent pharmacies that join
together to enhance their buying power. We believe that we are
able to effectively compete in the distribution market, and
therefore optimize our market share, based on three critical
elements: (i) competitive pricing, (ii) high levels of
inventory for approximately 8,500 SKUs for responsive customer
service that includes, among other things, next day delivery to
the entire U.S., and (iii) well established telemarketing
relationships with our customers, supplemented by our electronic
ordering capabilities. While we purchase most of the approximate
8,500 SKUs in our Distribution operations from third party
manufacturers, we also utilize these operations for the sale and
marketing of our own products and our collaborative
partners products. We are the only
U.S. pharmaceutical company that has meaningful
distribution operations with direct access to independent
pharmacies and we believe that our Distribution operation is a
strategic asset in the national distribution of generic and
brand pharmaceuticals.
Revenue growth in our distribution operations will primarily be
dependent on the launch of new products, offset by the overall
level of net price and unit declines on existing distributed
products and will be subject to changes in market share.
We presently distribute products from our facilities in Weston,
Florida and Groveport, Ohio. For the year ended
December 31, 2010, approximately 67% of our Distribution
sales were shipped from our Groveport, Ohio facility and 33%
from our Weston, Florida facility, though this percentage can
vary. While our Weston, Florida facility is operating at 70%
capacity, our 355,000 square foot Ohio distribution center
currently operates at approximately 35% capacity, and provides
us with additional distribution capacity for the
U.S. market.
Strategic
Alliances and Collaborations
In 2004, we entered into an exclusive licensing agreement with
Kissei Pharmaceutical Co., Ltd. (Kissei) to develop
and market
Rapaflo®
for the North American market. The compound was originally
developed and launched by Kissei in Japan as
Urief®
and is marketed in Japan in cooperation with Daiichi Sankyo
Pharmaceutical Co., Ltd. for the treatment of the signs and
symptoms of benign prostatic hyperplasia.
In 2006, we entered into an agreement with Solvay
Pharmaceuticals, Inc. (Solvay) to utilize
Watsons Brands sales force to co-promote
AndroGel®
to urologists in the U.S. In February of 2010, Solvay was
acquired by Abbott.
We have an exclusive agreement with Pfizer, Inc. to market the
Authorized Generic version of
Lipitor®
(atorvastatin calcium). Under the terms of the agreement,
Pfizer, Inc. will supply Watson with the product for
distribution beginning in November 2011 or earlier under certain
circumstances.
Financial
Information About Segments
Watson evaluates the performance of its Global Generics, Global
Brands and Distribution business segments based on net revenues
and net contribution. Summarized net revenues and contribution
information for each of the last three fiscal years in the
U.S. and internationally, where applicable, is presented in
NOTE 13 Reportable Segments in the
accompanying Notes to Consolidated Financial
Statements in this Annual Report.
11
Customers
In our Global Generics and Global Brands operations, we sell our
generic and brand pharmaceutical products primarily to drug
wholesalers, retailers and distributors, including national
retail drug and food store chains, hospitals, clinics, mail
order, government agencies and managed healthcare providers such
as health maintenance organizations and other institutions. In
our Distribution business, we distribute generic and certain
select brand pharmaceutical products to independent pharmacies,
members of buying groups, alternate care providers (hospitals,
nursing homes and mail order pharmacies), pharmacy chains and
physicians offices.
Sales to certain of our customers accounted for 10% or more of
our annual net revenues during the past three years. The
following table illustrates any customer, on a global basis,
which accounted for 10% or more of our annual net revenues and
the respective percentage of our net revenues for which they
account for each of the last three years:
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Customer
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2010
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2009
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2008
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Walgreen Co.
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%
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13
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%
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11
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%
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McKesson Corporation
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11
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%
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11
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%
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11
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%
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McKesson and certain of our other customers comprise a
significant part of the distribution network for pharmaceutical
products in the U.S. As a result, a small number of large,
wholesale distributors and large chain drug stores control a
significant share of the market. This concentration may
adversely impact pricing and create other competitive pressures
on drug manufacturers. Our Distribution business competes
directly with our large wholesaler customers with respect to the
distribution of generic products.
The loss of any of these customers could have a material adverse
effect on our business, results of operations, financial
condition and cash flows. See ITEM 1A. RISK
FACTORS Risk Relating to Investing in the
Pharmaceutical Industry in this Annual Report.
Competition
The pharmaceutical industry is highly competitive. In our Global
Generics and Global Brands businesses, we compete with different
companies depending upon product categories, and within each
product category, upon dosage strengths and drug delivery
systems. Such competitors include the major brand name and
generic manufacturers of pharmaceutical products. In addition to
product development, other competitive factors in the
pharmaceutical industry include product quality and price,
reputation and service and access to proprietary and technical
information. It is possible that developments by others will
make our products or technologies noncompetitive or obsolete.
Competing in the brand product business requires us to identify
and bring to market new products embodying technological
innovations. Successful marketing of brand products depends
primarily on the ability to communicate their effectiveness,
safety and value to healthcare professionals in private
practice, group practices and receive formulary status from
managed care organizations. We anticipate that our brand product
offerings will support our existing areas of therapeutic focus.
Based upon business conditions and other factors, we regularly
reevaluate our business strategies and may from time to time
reallocate our resources from one therapeutic area to another,
withdraw from a therapeutic area or add an additional
therapeutic area in order to maximize our overall growth
opportunities. Our competitors in brand products include major
brand name manufacturers of pharmaceuticals. Based on total
assets, annual revenues and market capitalization, our Global
Brands segment is considerably smaller than many of these
competitors and other global competitors in the brand product
area. Many of our competitors have been in business for a longer
period of time, have a greater number of products on the market
and have greater financial and other resources than we do. If we
directly compete with them for certain contracted business, such
as the Pharmacy Benefit Manager business, and for the same
markets
and/or
products, their financial strength could prevent us from
capturing a meaningful share of those markets.
We actively compete in the generic pharmaceutical industry.
Revenues and gross profit derived from the sales of generic
pharmaceutical products tend to follow a pattern based on
certain regulatory and competitive factors. As patents and
regulatory exclusivity for brand name products expire or are
successfully challenged,
12
the first off-patent manufacturer to receive regulatory approval
for generic equivalents of such products is generally able to
achieve significant market penetration. As competing off-patent
manufacturers receive regulatory approvals on similar products,
market share, revenues and gross profit typically decline, in
some cases dramatically. Accordingly, the level of market share,
revenues and gross profit attributable to a particular generic
product normally is related to the number of competitors in that
products market and the timing of that products
regulatory approval and launch, in relation to competing
approvals and launches. Consequently, we must continue to
develop and introduce new products in a timely and
cost-effective manner to maintain our revenues and gross profit.
In addition to competition from other generic drug
manufacturers, we face competition from brand name companies in
the generic market. Many of these companies seek to participate
in sales of generic products by, among other things,
collaborating with other generic pharmaceutical companies or by
marketing their own generic equivalent to their brand products
as Authorized Generics. Our major competitors in generic
products include Teva Pharmaceutical Industries, Ltd., Mylan
Inc. and Sandoz (a division of Novartis AG). See
ITEM 1A. RISK FACTORS Risks Related to
Our Business The pharmaceutical industry is highly
competitive and our future revenue growth and profitability are
dependent on our timely development and launches of new products
ahead of our competitors. in this Annual Report.
In our Distribution business, we compete with a number of large
wholesalers and other distributors of pharmaceuticals, including
McKesson Corporation, AmerisourceBergen Corporation and Cardinal
Health, Inc., which distribute both brand and generic
pharmaceutical products to their customers. These same companies
are significant customers of our Global Generics and Global
Brands pharmaceutical businesses. As generic products generally
have higher gross margins than brand products for a
pharmaceutical distribution business, each of the large
wholesalers, on an increasing basis, are offering pricing
incentives on brand products if the customers purchase a
majority of their generic pharmaceutical products from the
primary wholesaler. As we do not offer a broad portfolio of
brand products to our customers, we are at times competitively
disadvantaged and must compete with these wholesalers based upon
our very competitive pricing for generic products, greater
service levels and our well-established telemarketing
relationships with our customers, supplemented by our electronic
ordering capabilities. Additionally, generic manufacturers are
increasingly marketing their products directly to drug store
chains with warehousing facilities and thus increasingly
bypassing wholesalers and distributors. Increased competition in
the generic industry as a whole may result in increased price
erosion in the pursuit of market share.
Manufacturing,
Suppliers and Materials
During 2010, we manufactured many of our own finished products
at our plants in Corona, California; Davie, Florida; Goa, India;
Birzebbugia, Malta; Mississauga, Canada; Rio de Janeiro, Brazil;
Carmel, New York; Copiague, New York and Salt Lake City,
Utah. As part of an ongoing effort to optimize our manufacturing
operations, we have implemented several cost reduction
initiatives, which included the transfer of several solid dosage
products from our Carmel, New York facility to our Goa, India
facility, and the ongoing implementation of our Global Supply
Chain Initiative at certain of our manufacturing facilities.
We have development and manufacturing capabilities for raw
material and active pharmaceutical ingredients (API)
and intermediate ingredients to support our internal product
development efforts in our Coleraine, Northern Ireland and
Ambernath, India facilities. Our Ambernath, India facility also
develops and manufactures API for third parties.
Our manufacturing operations are subject to extensive regulatory
oversight and could be interrupted at any time. Our Corona,
California facility is currently subject to a consent decree of
permanent injunction. See ITEM 1A. RISK
FACTORS Risks Related to Our Business
Extensive industry regulation has had, and will continue to
have, a significant impact on our business, especially our
product development, manufacturing and distribution
capabilities. Also refer to Legal Matters in
NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
We contract with third parties for the manufacture of certain of
our products, some of which are currently available only from
sole or limited suppliers. These third-party manufactured
products include products that have historically accounted for a
significant portion of our revenues, such as bupropion
hydrochloride
13
sustained-release tablets and a number of our oral contraceptive
products. Third-party manufactured product sales by our Global
Generics and Global Brands segments, accounted for approximately
33%, 38% and 44% of our product net revenues in 2010, 2009 and
2008, respectively.
We are dependent on third parties for the supply of the raw
materials necessary to develop and manufacture our products,
including the API and inactive pharmaceutical ingredients used
in our products. We are required to identify the supplier(s) of
all the raw materials for our products in the drug applications
that we file with the FDA. If raw materials for a particular
product become unavailable from an approved supplier specified
in a drug application, we would be required to qualify a
substitute supplier with the FDA, which would likely interrupt
manufacturing of the affected product. To the extent
practicable, we attempt to identify more than one supplier in
each drug application. However, some raw materials are available
only from a single source and, in many of our drug applications,
only one supplier of raw materials has been identified, even in
instances where multiple sources exist.
In addition, we obtain a significant portion of our raw
materials from foreign suppliers. Arrangements with
international raw material suppliers are subject to, among other
things, FDA regulation, customs clearance, various import
duties, foreign currency risk and other government clearances.
Acts of governments outside the U.S. may affect the price
or availability of raw materials needed for the development or
manufacture of our products. In addition, any changes in patent
laws in jurisdictions outside the U.S. may make it
increasingly difficult to obtain raw materials for R&D
prior to the expiration of the applicable U.S. or foreign
patents. See ITEM 1A. RISK FACTORS Risks
Related to Our Business If we are unable to obtain
sufficient supplies from key suppliers that in some cases may be
the only source of finished products or raw materials, our
ability to deliver our products to the market may be
impeded. in this Annual Report.
We continue to make substantial progress on our Global Supply
Chain Initiative and the transfer of product manufacturing from
our New York facility to our Florida, California, and Goa, India
sites. At the end of 2010, approximately 20% of our internally
sourced manufactured product was produced from our Goa, India
facility. At the end of 2010, we closed our Carmel, New York
solid dosage manufacturing facility. Additionally, during the
year we announced plans to close our manufacturing facility and
R&D facilities in Mississauga, Canada by late 2011 with
product being transferred to facilities with additional capacity
in the Watson global network, including Malta and India and the
transfer of development activities to other existing R&D
sites. In January 2011, the Company announced the closure of
R&D activities in Corona, California and the transfer of
development activities to existing R&D sites. We will
continue to implement operational efficiency programs at our
remaining sites.
Patents
and Proprietary Rights
We believe patent protection of our proprietary products is
important to our Global Brands business. Our success with our
brand products will depend, in part, on our ability to obtain,
and successfully defend if challenged, patent or other
proprietary protection for such products. We currently have a
number of U.S. and foreign patents issued or pending.
However, the issuance of a patent is not conclusive as to its
validity or as to the enforceable scope of the claims of the
patent. Accordingly, our patents may not prevent other companies
from developing similar or functionally equivalent products or
from successfully challenging the validity of our patents. If
our patent applications are not approved or, even if approved,
if such patents are circumvented or not upheld in a court of
law, our ability to competitively market our patented products
and technologies may be significantly reduced. Also, such
patents may or may not provide competitive advantages for their
respective products or they may be challenged or circumvented by
competitors, in which case our ability to commercially market
these products may be diminished. From time to time, we may need
to obtain licenses to patents and other proprietary rights held
by third parties to develop, manufacture and market our
products. If we are unable to timely obtain these licenses on
commercially reasonable terms, our ability to commercially
market such products may be inhibited or prevented. Patents
covering our
Androderm®
and
INFed®
products have expired and we have no further patent protection
on these products. Therefore, it is possible that a competitor
may launch a generic version of
Androderm®
and/or
INFed®
at any time, which would result in a significant decline in that
products revenue and profit. Both of these products were
significant contributors to our Global Brands business in 2010.
14
We also rely on trade secrets and proprietary know-how that we
seek to protect, in part, through confidentiality agreements
with our partners, customers, employees and consultants. It is
possible that these agreements will be breached or will not be
enforceable in every instance, and we will not have adequate
remedies for any such breach. It is also possible that our trade
secrets will otherwise become known or independently developed
by competitors.
We may find it necessary to initiate litigation to enforce our
patent rights, to protect our trade secrets or know-how or to
determine the scope and validity of the proprietary rights of
others. Litigation concerning patents, trademarks, copyrights
and proprietary technologies can often be protracted and
expensive and, as with litigation generally, the outcome is
inherently uncertain.
Pharmaceutical companies with brand products are suing companies
that produce off-patent forms of their brand name products for
alleged patent infringement or other violations of intellectual
property rights which may delay or prevent the entry of such a
generic product into the market. For instance, when we file an
ANDA in the U.S. seeking approval of a generic equivalent
to a brand drug, we may certify under the Drug Price Competition
and Patent Restoration Act of 1984 (the Hatch-Waxman
Act) to the FDA that we do not intend to market our
generic drug until any patent listed by the FDA as covering the
brand drug has expired, in which case, the ANDA will be approved
by the FDA no earlier than the expiration or final finding of
invalidity of such patent(s). On the other hand, we could
certify that we believe the patent or patents listed as covering
the brand drug are invalid
and/or will
not be infringed by the manufacture, sale or use of our generic
form of the brand drug. In that case, we are required to notify
the brand product holder or the patent holder that such patent
is invalid or is not infringed. If the patent holder sues us for
patent infringement within 45 days from receipt of the
notice, the FDA is then prevented from approving our ANDA for
30 months after receipt of the notice unless the lawsuit is
resolved in our favor in less time or a shorter period is deemed
appropriate by a court. In addition, increasingly aggressive
tactics employed by brand companies to delay generic
competition, including the use of Citizen Petitions and seeking
changes to U.S. Pharmacopeia, have increased the risks and
uncertainties regarding the timing of approval of generic
products.
Litigation alleging infringement of patents, copyrights or other
intellectual property rights may be costly and time consuming.
See ITEM 1A. RISK FACTORS Risks Related
to Our Business Third parties may claim that we
infringe their proprietary rights and may prevent us from
manufacturing and selling some of our products. in this
Annual Report.
Because a balanced and fair legislative and regulatory arena is
critical to the pharmaceutical industry, we will continue to
devote management time and financial resources on government
activities. We currently maintain an office and staff a
full-time government affairs function in Washington, D.C.
that maintains responsibility for keeping abreast of state and
federal legislative activities.
Government
Regulation and Regulatory Matters
All pharmaceutical manufacturers, including Watson, are subject
to extensive, complex and evolving regulation by the federal
government, principally the FDA, and to a lesser extent, by the
U.S. Drug Enforcement Administration (DEA),
Occupational Safety and Health Administration and state
government agencies, as well as by various regulatory agencies
in foreign countries where our products or product candidates
are being manufactured
and/or
marketed. The Federal Food, Drug and Cosmetic Act, the
Controlled Substances Act and other federal statutes and
regulations govern or influence the testing, manufacturing,
packing, labeling, storing, record keeping, safety, approval,
advertising, promotion, sale and distribution of our products.
In our international markets, the approval, manufacture and sale
of pharmaceutical products is similar to the United States with
some variations dependent upon local market dynamics.
FDA approval is required before any dosage form of any new drug,
including an off-patent equivalent of a previously approved
drug, can be marketed. The process for obtaining governmental
approval to manufacture and market pharmaceutical products is
rigorous, time-consuming and costly, and the extent to which it
may be affected by legislative and regulatory developments
cannot be predicted. We are dependent on receiving FDA and other
governmental approvals prior to manufacturing, marketing and
shipping new products. Consequently, there is always the risk
the FDA or another applicable agency will not approve our new
products, or the rate,
15
timing and cost of obtaining such approvals will adversely
affect our product introduction plans or results of operations.
See ITEM 1A. RISK FACTORS Risks Related
to Our Business If we are unable to successfully
develop or commercialize new products, our operating results
will suffer. and Extensive industry
regulation has had, and will continue to have, a significant
impact on our business, especially our product development,
manufacturing and distribution capabilities. in this
Annual Report.
All applications for FDA approval must contain information
relating to product formulation, raw material suppliers,
stability, manufacturing processes, packaging, labeling and
quality control. There are generally two types of applications
for FDA approval that would be applicable to our new products:
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NDA. We file a NDA when we seek approval for
drugs with active ingredients
and/or with
dosage strengths, dosage forms, delivery systems or
pharmacokinetic profiles that have not been previously approved
by the FDA. Generally, NDAs are filed for newly developed brand
products or for a new dosage form of previously approved drugs.
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ANDA. We file an ANDA when we seek approval
for off-patent, or generic equivalents of a previously approved
drug.
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The process required by the FDA before a previously unapproved
pharmaceutical product may be marketed in the
U.S. generally involves the following:
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preclinical laboratory and animal tests;
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submission of an investigational new drug application
(IND), which must become effective before clinical
trials may begin;
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adequate and well-controlled human clinical trials to establish
the safety and efficacy of the proposed product for its intended
use;
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submission of a NDA containing the results of the preclinical
and clinical trials establishing the safety and efficacy of the
proposed product for its intended use; and
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FDA approval of a NDA.
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Preclinical tests include laboratory evaluation of the product,
its chemistry, formulation and stability, as well as animal
studies to assess the potential safety and efficacy of the
product. For products that require NDA approvals, these
preclinical studies and plans for initial human testing are
submitted to the FDA as part of an IND, which must become
effective before we may begin human clinical trials. The IND
automatically becomes effective 30 days after receipt by
the FDA unless the FDA, during that
30-day
period, raises concerns or questions about the conduct of the
trials as outlined in the IND. In such cases, the IND sponsor
and the FDA must resolve any outstanding concerns before
clinical trials can begin. In addition, an independent
Institutional Review Board must provide oversight to review and
approve any clinical study at the medical center proposing to
conduct the clinical trials.
Human clinical trials are typically conducted in the following
sequential phases:
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Phase I. During this phase, the drug is
initially introduced into a relatively small number of healthy
human subjects or patients and is tested for safety, dosage
tolerance, absorption, metabolism, distribution and excretion.
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Phase II. This phase involves studies in a
limited patient population to identify possible adverse effects
and safety risks, to determine the efficacy of the product for
specific targeted diseases or conditions, and to determine
dosage tolerance and optimal dosage.
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Phase III. When Phase II evaluations
demonstrate that a dosage range of the product is effective and
has an acceptable safety profile, Phase III trials are
undertaken to further evaluate dosage, clinical efficacy and to
further test for safety in an expanded patient population at
geographically dispersed clinical study sites.
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16
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Phase IV. After a drug has been approved by
the FDA, Phase IV studies may be conducted to explore
additional patient populations, compare the drug to a
competitor, or to further study the risks, benefits and optimal
use of a drug. These studies may be a requirement as a condition
of the initial approval.
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The results of product development, preclinical studies and
clinical studies are submitted to the FDA as part of a NDA, for
approval of the marketing and commercial shipment of the new
product. The NDA drug development and approval process currently
averages approximately five to ten years.
FDA approval of an ANDA is required before we may begin
marketing an off-patent or generic equivalent of a drug that has
been approved under an NDA, or a previously unapproved dosage
form of a drug that has been approved under an NDA. The ANDA
approval process generally differs from the NDA approval process
in that it does not typically require new preclinical and
clinical studies; instead, it relies on the clinical studies
establishing safety and efficacy conducted for the previously
approved NDA drug. The ANDA process, however, typically requires
data to show that the ANDA drug is bioequivalent (i.e.,
therapeutically equivalent) to the previously approved drug.
Bioequivalence compares the bioavailability of one
drug product with another and, when established, indicates
whether the rate and extent of absorption of a generic drug in
the body are substantially equivalent to the previously approved
drug. Bioavailability establishes the rate and
extent of absorption, as determined by the time dependent
concentrations of a drug product in the bloodstream needed to
produce a therapeutic effect. The ANDA drug development and
approval process generally takes three to four years which is
less time than the NDA drug development and approval process
since the ANDA process does not require new clinical trials
establishing the safety and efficacy of the drug product.
Supplemental NDAs or ANDAs are required for, among other things,
approval to transfer certain products from one manufacturing
site to another and may be under review for a year or more. In
addition, certain products may only be approved for transfer
once new bioequivalency studies are conducted or other
requirements are satisfied.
To obtain FDA approval of both NDAs and ANDAs, our manufacturing
procedures and operations must conform to FDA quality system and
control requirements generally referred to as current Good
Manufacturing Practices (cGMP), as defined in
Title 21 of the U.S. Code of Federal Regulations.
These regulations encompass all aspects of the production
process from receipt and qualification of components to
distribution procedures for finished products. They are evolving
standards; thus, we must continue to expend substantial time,
money and effort in all production and quality control areas to
maintain compliance. The evolving and complex nature of
regulatory requirements, the broad authority and discretion of
the FDA, and the generally high level of regulatory oversight
results in the continuing possibility that we may be adversely
affected by regulatory actions despite our efforts to maintain
compliance with regulatory requirements.
We are subject to the periodic inspection of our facilities,
procedures and operations
and/or the
testing of our products by the FDA, the DEA and other
authorities, which conduct periodic inspections to assess
compliance with applicable regulations. In addition, in
connection with its review of our applications for new products,
the FDA conducts pre-approval and post-approval reviews and
plant inspections to determine whether our systems and processes
comply with cGMP and other FDA regulations. Among other things,
the FDA may withhold approval of NDAs, ANDAs or other product
applications of a facility if deficiencies are found at that
facility. Vendors that supply finished products or components to
us that we use to manufacture, package and label products are
subject to similar regulation and periodic inspections.
Following such inspections, the FDA may issue notices on
Form 483 and Warning Letters that could cause us to modify
certain activities identified during the inspection. A
Form 483 notice is generally issued at the conclusion of an
FDA inspection and lists conditions the FDA investigators
believe may violate cGMP or other FDA regulations. FDA
guidelines specify that a Warning Letter be issued only for
violations of regulatory significance for which the
failure to adequately and promptly achieve correction may be
expected to result in an enforcement action.
Our Corona, California facility is currently subject to a
consent decree of permanent injunction. See also
Manufacturing, Suppliers and Materials discussion
above, ITEM 1A. RISK FACTORS Risks
Related to Our Business Extensive industry
regulation has had, and will continue to have, a significant
impact on our
17
business, especially our product development, manufacturing and
distribution capabilities. and Legal Matters in
NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
Failure to comply with FDA and other governmental regulations
can result in fines, unanticipated compliance expenditures,
recall or seizure of products, total or partial suspension of
production
and/or
distribution, suspension of the FDAs review of NDAs, ANDAs
or other product application enforcement actions, injunctions
and criminal prosecution. Under certain circumstances, the FDA
also has the authority to revoke previously granted drug
approvals. Although we have internal compliance programs, if
these programs do not meet regulatory agency standards or if our
compliance is deemed deficient in any significant way, it could
have a material adverse effect on us. See ITEM 1A.
RISK FACTORS Risks Related to Our
Business Extensive industry regulation has had, and
will continue to have, a significant impact on our business,
especially our product development, manufacturing and
distribution capabilities. in this Annual Report.
The Generic Drug Enforcement Act of 1992 established penalties
for wrongdoing in connection with the development or submission
of an ANDA. Under this Act, the FDA has the authority to
permanently or temporarily bar companies or individuals from
submitting or assisting in the submission of an ANDA, and to
temporarily deny approval and suspend applications to market
generic drugs. The FDA may also suspend the distribution of all
drugs approved or developed in connection with certain wrongful
conduct
and/or
withdraw approval of an ANDA and seek civil penalties. The FDA
can also significantly delay the approval of any pending NDA,
ANDA or other regulatory submissions under the Fraud, Untrue
Statements of Material Facts, Bribery and Illegal Gratuities
Policy Act.
U.S. Government reimbursement programs include Medicare,
Medicaid, TriCare, and State Pharmacy Assistance Programs
established according to statute, government regulations and
policy. Federal law requires that all pharmaceutical
manufacturers, as a condition of having their products receive
federal reimbursement under Medicaid, must pay rebates to state
Medicaid programs on units of their pharmaceuticals that are
dispensed to Medicaid beneficiaries. With enactment of The
Patient Protection and Affordable Care Act, (PPACA),
the required
per-unit
rebate for products marketed under ANDAs increased from 11% of
the average manufacturer price to approximately 13%.
Additionally, for products marketed under NDAs, the
manufacturers rebate will increase from 15.1% to 23.1% of the
average manufacturer price, or the difference between the
average manufacturer price and the lowest net sales price to a
non-government customer during a specified period. In some
states, supplemental rebates are additionally required as a
condition of including the manufacturers drug on the
states Preferred Drug List.
PPACA also made substantial changes to reimbursement when
seniors reach the Medicare Part D coverage gap donut
hole. By 2020, Medicare beneficiaries will pay just 25% of
drug costs when they reach the coverage threshold
the same percentage they were responsible for before they
reached that threshold.
The cost of closing the donut hole is being borne by generic and
brand drug companies. Brand drug manufacturers must provide a
50% discount on their drugs, beginning in 2011. Additionally,
beginning in 2013, the government will begin providing subsidies
for brand-name drugs bought by seniors who enter the coverage
gap. The governments share will start at 2.5%, but will
increase to 25% by 2020. At that point, the combined industry
discounts and government subsidies will add up to 75% of
brand-name drug costs. Generic drugs, which cost less than their
brand-name counterparts, are treated different from brand drugs.
Beginning in 2011, government subsidies will cover 7% of generic
drug costs. The government will then subsidize additional
portions each year until 2020, when federal subsidies will cover
75% of generic drug costs. By 2020, the donut hole will be
completely closed through these manufacturers subsidies.
The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (the MMA) requires that manufacturers
report data to the Centers for Medicare and Medicaid Services
(CMS) on pricing of drugs and biologicals reimbursed
under Medicare Part B. These are generally drugs, such as
injectable products, that are administered incident
to a physician service, and in general are not
self-administered. Effective January 1, 2005, average
selling price (ASP) became the basis for
reimbursement to physicians and suppliers for drugs and
biologicals covered under Medicare Part B, replacing the
average wholesale price (AWP) provided and
18
published by pricing services. In general, we must comply with
all reporting requirements for any drug or biological that is
separately reimbursable under Medicare. Watsons
INFeD®
and
Trelstar®
products are reimbursed under Medicare Part B and, as a
result, we provide ASP data on these products to CMS on a
quarterly basis.
Under Part D of the MMA, some Medicare beneficiaries are
eligible to obtain subsidized prescription drug coverage from
private sector providers. Usage of pharmaceuticals has increased
as a result of the expanded access to medicines afforded by the
Medicare prescription drug benefit. However, such sales
increases have been offset by increased pricing pressures due to
the enhanced purchasing power of the private sector providers
who negotiate on behalf of Medicare beneficiaries. It is
anticipated that further pricing pressures will continue into
2011 and beyond.
The Deficit Reduction Act of 2005 (DRA) mandated a
number of changes in the Medicaid program, including the use of
Average Manufacturers Price (AMP) as the basis for
reimbursement to pharmaceutical companies that dispense generic
drugs under the Medicaid program. Three health care reform bills
passed in 2010 significantly changed the definition of AMP,
effective October 1, 2010. These legislative changes were
part of PPACA, the Health Care and Education Reconciliation Act,
and the FAA Air Transportation Modernization & Safety
Improvement Act (Transportation Bill). In PPACA,
Congress substantially revised the definition of AMP to, among
other things, narrow the scope of prices included in the
calculation of AMP to those paid to a manufacturer by
wholesalers for drugs distributed to retail community pharmacies
or by retail community pharmacies that purchase directly from
manufacturers. In August 2010, Congress further amended the
definition of AMP to specify that the exclusion of certain
classes of trade from AMP does not apply to inhalation,
infusion, instilled, implanted, or injected drugs that typically
are not dispensed to retail community pharmacies. PPACA also
requires disclosure of weighted average AMP instead of
manufacturer AMP, which was previously required. The impact of
this new legislation is that there will likely be increases in
Medicaid reimbursement to pharmacies for generics. These changes
became effective on October 1, 2010.
These new laws replaced the reimbursement guidelines that had
been established under the DRA. On November 9, 2010, CMS
issued a final rule withdrawing and amending regulations that
have governed the calculation of AMP and the establishment of
federal upper limits since October 2007. The regulations were
withdrawn to mandate AMP calculation under the recently revised
drug rebate statute, but no replacement regulations have yet
been proposed. The withdrawal required manufacturers to base
October 2010, and subsequent months AMPs on the statutory
language until official guidance is issued. CMS anticipates that
it will offer guidance by the second quarter of 2011.
In the absence of regulatory guidance governing the AMP
calculation, CMS has instructed pharmaceutical manufacturers to
base their AMP calculations on the definitions set forth in the
statute, as amended by the PPACA, the Health Care and Education
Reconciliation Act, and the Transportation Bill. Without the
benefit of interpretive guidance from CMS, Watson has adopted
mechanisms to ensure that we are calculating and reporting AMP
in a manner that is consistent with the statutes text and
intent.
As a result of these changes, in December of 2010, the National
Association of Chain Drugstores (NACDS) and the
National Community Pharmacists Association dropped their 2007
lawsuit that was previously blocking the implementation of the
AMP rule.
Twenty-six states are currently challenging the
constitutionality of PPACA. Ultimate resolution of this matter
remains uncertain.
There has been enhanced political attention, governmental
scrutiny and litigation at the federal and state levels of the
prices paid or reimbursed for pharmaceutical products under
Medicaid, Medicare and other government programs. See
ITEM 1A. RISK FACTORS Risks Related to
Our Business Investigations of the calculation of
average wholesale prices may adversely affect our
business. and Legal Matters in
NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
In order to assist us in commercializing products, we have
obtained from government authorities and private health insurers
and other organizations, such as Health Maintenance
Organizations (HMOs) and
19
Managed Care Organizations (MCOs), authorization to
receive reimbursement at varying levels for the cost of certain
products and related treatments. Third party payers increasingly
challenge pricing of pharmaceutical products. The trend toward
managed healthcare in the U.S., the growth of organizations such
as HMOs and MCOs and legislation to reform healthcare and
government insurance programs could significantly influence the
purchase of pharmaceutical products, resulting in lower prices
and a reduction in product demand. Such cost containment
measures and healthcare legislation could affect our ability to
sell our products and may have a material adverse effect on our
business, results of operations, financial condition and cash
flows. Due to the uncertainty surrounding reimbursement of newly
approved pharmaceutical products, reimbursement may not be
available for some of our products. Additionally, any
reimbursement granted may not be maintained or limits on
reimbursement available from third-party payers may reduce the
demand for, or negatively affect the price of, those products.
Federal, state, local and foreign laws of general applicability,
such as laws regulating working conditions, also govern us. In
addition, we are subject, as are all manufacturers generally, to
numerous and increasingly stringent federal, state and local
environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation,
treatment and disposal of toxic and hazardous substances and the
discharge of pollutants into the air and water. Environmental
permits and controls are required for some of our operations,
and these permits are subject to modification, renewal and
revocation by the issuing authorities. Our environmental capital
expenditures and costs for environmental compliance may increase
in the future as a result of changes in environmental laws and
regulations or increased manufacturing activities at any of our
facilities. We could be adversely affected by any failure to
comply with environmental laws, including the costs of
undertaking a
clean-up at
a site to which our wastes were transported.
As part of the MMA, companies are required to file with the
U.S. Federal Trade Commission (FTC) and the
Department of Justice certain types of agreements entered into
between brand and generic pharmaceutical companies related to
the manufacture, marketing and sale of generic versions of brand
drugs. This requirement could affect the manner in which generic
drug manufacturers resolve intellectual property litigation and
other disputes with brand pharmaceutical companies, and could
result generally in an increase in private-party litigation
against pharmaceutical companies. The impact of this
requirement, and the potential private-party lawsuits associated
with arrangements between brand name and generic drug
manufacturers, is uncertain and could adversely affect our
business. For example, in January 2009, the FTC and the State of
California filed a lawsuit against us alleging that our
settlement with Solvay related to our ANDA for a generic version
of
Androgel®
is unlawful. Beginning in February 2009, several private parties
purporting to represent various classes of plaintiffs filed
similar lawsuits. Additionally, we have received requests for
information, in the form of civil investigative demands or
subpoenas, from the FTC, and are subject to ongoing FTC
investigations, concerning our settlement with Cephalon related
to our ANDA for a generic version of
Provigil®.
Any adverse outcome of these or other FTC investigations or
actions could have a material adverse effect on our business,
results of operations, financial condition and cash flows. See
ITEM 1A. RISK FACTORS Risks Related to
Our Business Federal regulation of arrangements
between manufacturers of brand and generic products could
adversely affect our business. Also refer to Legal
Matters in NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
Continuing studies of the proper utilization, safety and
efficacy of pharmaceuticals and other health care products are
being conducted by industry, government agencies and others.
Such studies, which increasingly employ sophisticated methods
and techniques, can call into question the utilization, safety
and efficacy of previously marketed products and in some cases
have resulted, and may in the future result, in the
discontinuance of their marketing.
Our Distribution operations and our customers are subject to
various regulatory requirements, including requirements from the
DEA, FDA, and state boards of pharmacy and city and county
health regulators, among others. These include licensing,
registration, recordkeeping, security and reporting
requirements. In particular, several states and the federal
government have begun to enforce anti-counterfeit drug pedigree
laws which require the tracking of all transactions involving
prescription drugs beginning with the manufacturer, through the
supply chain, and down to the pharmacy or other health care
provider dispensing or administering
20
prescription drug products. For example, effective July 1,
2006, the Florida Department of Health began enforcement of the
drug pedigree requirements for distribution of prescription
drugs in the State of Florida. Pursuant to Florida law and
regulations, wholesalers and distributors, including our
subsidiary, Anda, are required to maintain records documenting
the chain of custody of prescription drug products they
distribute beginning with the purchase of such products from the
manufacturer. These entities are required to provide
documentation of the prior transaction(s) to their customers in
Florida, including pharmacies and other health care entities.
Several other states have proposed or enacted legislation to
implement similar or more stringent drug pedigree requirements.
In addition, federal law requires that a non-authorized
distributor of record must provide a drug pedigree
documenting the prior purchase of a prescription drug from the
manufacturer or from an authorized distributor of
record. In cases where the wholesaler or distributor
selling the drug product is not deemed an authorized
distributor of record, it would need to maintain such
records. The FDA had announced its intent to impose additional
drug pedigree requirements (e.g., tracking of lot numbers and
documentation of all transactions) through implementation of
drug pedigree regulations which were to have taken effect on
December 1, 2006. However, a federal appeals court has
issued a preliminary injunction to several wholesale
distributors granting an indefinite stay of these regulations
pending a challenge to the regulations by these wholesale
distributors.
Environmental
Matters
We are subject to federal, state, local and foreign
environmental laws and regulations. We believe that our
operations comply in all material respects with applicable
environmental laws and regulations in each jurisdiction where we
have a business presence. Although we continue to make capital
expenditures for environmental protection, we do not anticipate
any significant expenditure in order to comply with such laws
and regulations that would have a material impact on our
earnings or competitive position. We are not aware of any
pending litigation or significant financial obligations arising
from current or past environmental practices that are likely to
have a material adverse effect on our financial position. We
cannot assure you, however, that environmental problems relating
to facilities owned or operated by us will not develop in the
future, and we cannot predict whether any such problems, if they
were to develop, could require significant expenditures on our
part. In addition, we are unable to predict what legislation or
regulations may be adopted or enacted in the future with respect
to environmental protection and waste disposal.
Seasonality
There are no significant seasonal aspects to our business except
in Western Europe. During the months of July and August our
operations in Western Europe experience significantly lower
sales due to pharmacy closures and representatives on summer
vacations.
Backlog
Due to the relatively short lead-time required to fill orders
for our products, backlog of orders is not material to our
business.
Employees
As of December 31, 2010, we had approximately
6,030 employees. Of our employees, approximately 830 are
engaged in R&D, 1,850 in manufacturing, 1,070 in quality
assurance and quality control, 1,380 in sales, marketing and
distribution, and 900 in administration.
21
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements made in this report that are not statements of
historical fact or that refer to estimated or anticipated future
events are forward-looking statements. We have based our
forward-looking statements on managements beliefs and
assumptions based on information available to our management at
the time these statements are made. Such forward-looking
statements reflect our current perspective of our business,
future performance, existing trends and information as of the
date of this filing. These include, but are not limited to, our
beliefs about future revenue and expense levels and growth
rates, prospects related to our strategic initiatives and
business strategies, including the integration of, and synergies
associated with, strategic acquisitions, express or implied
assumptions about government regulatory action or inaction,
anticipated product approvals and launches, business initiatives
and product development activities, assessments related to
clinical trial results, product performance and competitive
environment, and anticipated financial performance. Without
limiting the generality of the foregoing, words such as
may, will, expect,
believe, anticipate, intend,
could, would, estimate,
continue, or pursue, or the negative
or other variations thereof or comparable terminology, are
intended to identify forward-looking statements. The statements
are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to
predict. We caution the reader that these statements are based
on certain assumptions, risks and uncertainties, many of which
are beyond our control. In addition, certain important factors
may affect our actual operating results and could cause such
results to differ materially from those expressed or implied by
forward-looking statements. We believe the risks and
uncertainties discussed under the section entitled Risks
Related to Our Business, and other risks and uncertainties
detailed herein and from time to time in our SEC filings, may
cause our actual results to vary materially than those
anticipated in any forward-looking statement.
We disclaim any obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
Risks
Related to Our Business
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control. The
following discussion highlights some of these risks and others
are discussed elsewhere in this annual report. These and other
risks could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
Risks
Associated With Investing In the Business of Watson
Our
operating results and financial condition may
fluctuate.
Our operating results and financial condition may fluctuate from
quarter to quarter and year to year for a number of reasons. The
following events or occurrences, among others, could cause
fluctuations in our financial performance from period to period:
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development of new competitive products or generics by others;
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the timing and receipt of approvals by the FDA and other
regulatory authorities, including foreign regulatory authorities;
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the failure to obtain, delay in obtaining or restrictions or
limitations on approvals from the FDA or other foreign
regulatory authorities;
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difficulties or delays in resolving FDA-observed deficiencies at
our manufacturing facilities, which could delay our ability to
obtain approvals of pending FDA product applications;
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delays or failures in clinical trials that affect our ability to
achieve FDA approvals or approvals from other foreign regulatory
authorities;
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serious or unexpected health or safety concerns with our
products or product candidates;
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changes in the amount we spend to develop, acquire or license
new products, technologies or businesses;
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changes in the amount we spend to promote our products;
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delays between our expenditures to acquire new products,
technologies or businesses and the generation of revenues from
those acquired products, technologies or businesses;
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changes in treatment practices of physicians that currently
prescribe our products;
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changes in coverage and reimbursement policies of health plans
and other health insurers, including changes that affect newly
developed or newly acquired products;
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changes in laws and regulations concerning coverage and
reimbursement of pharmaceutical products, including changes to
Medicare, Medicaid, and similar state programs;
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increases in the cost of raw materials used to manufacture our
products;
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manufacturing and supply interruptions, including failure to
comply with manufacturing specifications;
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the effect of economic changes in hurricane, monsoon, earthquake
and other natural disaster-affected areas;
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the impact of third party patents and other intellectual
property rights which we may be found to infringe, or may be
required to license, and the potential damages or other costs we
may be required to pay as a result of a finding that we infringe
such intellectual property rights or a decision that we are
required to obtain a license to such intellectual property
rights;
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the mix of products that we sell during any time period;
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lower than expected demand for our products;
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our responses to price competition;
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our ability to successfully integrate and commercialize the
products, technologies and businesses we acquire or license, as
applicable;
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expenditures as a result of legal actions;
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market acceptance of our products;
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the impairment and write-down of goodwill or other intangible
assets;
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disposition of our primary products, technologies and other
rights;
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termination or expiration of, or the outcome of disputes
relating to, trademarks, patents, license agreements and other
rights;
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changes in insurance rates for existing products and the cost of
insurance for new products;
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general economic and industry conditions, including changes in
interest rates affecting returns on cash balances and
investments that affect customer demand;
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our level of R&D activities;
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impairment or write-down of investments;
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costs and outcomes of any tax audits;
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fluctuations in foreign currency exchange rates;
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costs and outcomes of any litigation involving intellectual
property, drug pricing or reimbursement, product liability,
customers or other issues;
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timing of revenue recognition related to licensing agreements
and/or
strategic collaborations; and
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risks related to the growth of our business across numerous
countries world-wide and the inherent international business
risks.
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As a result, we believe that
period-to-period
comparisons of our results of operations are not necessarily
meaningful, and these comparisons should not be relied upon as
an indication of future performance. The above factors may cause
our operating results to fluctuate and adversely affect our
financial condition and results of operations.
If we
are unable to successfully develop or commercialize new
products, our operating results will suffer.
Our future results of operations will depend to a significant
extent upon our ability to successfully develop and
commercialize new brand and generic products in a timely manner.
There are numerous difficulties in developing and
commercializing new products, including:
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developing, testing and manufacturing products in compliance
with regulatory standards in a timely manner;
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receiving requisite regulatory approvals for such products in a
timely manner or at all;
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the availability, on commercially reasonable terms, of raw
materials, including API and other key ingredients;
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developing and commercializing a new product is time consuming,
costly and subject to numerous factors, including legal actions
brought by our competitors, that may delay or prevent the
development and commercialization of new products;
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experiencing delays or unanticipated costs;
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experiencing delays as a result of limited resources at FDA or
other regulatory agencies;
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changing review and approval policies and standards at FDA and
other regulatory agencies; and
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commercializing generic products may be substantially delayed by
the listing with the FDA of patents that have the effect of
potentially delaying approval of the generic product by up to
30 months.
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As a result of these and other difficulties, products currently
in development by us may or may not receive timely regulatory
approvals, or approvals at all, necessary for marketing by us or
other third-party partners. This risk particularly exists with
respect to the development of proprietary products because of
the uncertainties, higher costs and lengthy time frames
associated with research and development of such products and
the inherent unproven market acceptance of such products.
Additionally, we face heightened risks in connection with our
development of extended release or controlled release generic
products because of the technical difficulties and regulatory
requirements related to such products. Additionally, with
respect to generic products for which we are the first applicant
to request approval on the basis that an innovator patent is
invalid or not infringed (a paragraph IV filing), our
ability to obtain 180 days of generic market exclusivity
may be contingent on our ability to obtain FDA approval or
tentative approval within 30 months of FDAs
acceptance of our application for filing. We therefore risk
forfeiting such market exclusivity if we are unable to obtain
such approval or tentative approval on a timely basis. If any of
our products are not timely approved or, when acquired or
developed and approved, cannot be successfully manufactured or
timely commercialized, our operating results could be adversely
affected. We cannot guarantee that any investment we make in
developing products will be recouped, even if we are successful
in commercializing those products.
Our
brand pharmaceutical expenditures may not result in commercially
successful products.
Developing and commercializing brand pharmaceutical products is
generally more costly than generic products. In the future, we
anticipate continuing our product development expenditures for
our Global Brands business segment. For example in 2010, we
acquired rights to
Prochieve®
8% vaginal progesterone gel to reduce the risk of preterm birth
in women with a short cervix. We plan to submit an NDA for FDA
approval
24
of this product in 2011. We cannot be sure this or other
business expenditures will result in the successful discovery,
development or launch of brand products that will prove to be
commercially successful or will improve the long-term
profitability of our business. If such business expenditures do
not result in successful discovery, development or launch of
commercially successful brand products our results of operations
and financial condition could be materially adversely affected.
Any
acquisitions of technologies, products and businesses, may be
difficult to integrate, could adversely affect our relationships
with key customers, and/or could result in significant charges
to earnings.
We regularly review potential acquisitions of technologies,
products and businesses complementary to our business.
Acquisitions typically entail many risks and could result in
difficulties in integrating operations, personnel, technologies
and products. If we are not able to successfully integrate our
acquisitions, we may not obtain the advantages and synergies
that the acquisitions were intended to create, which may have a
material adverse effect on our business, results of operations,
financial condition and cash flows, our ability to develop and
introduce new products and the market price of our stock. In
addition, in connection with acquisitions, we could experience
disruption in our business, technology and information systems,
customer or employee base, including diversion of
managements attention from our continuing operations.
There is also a risk that key employees of companies that we
acquire or key employees necessary to successfully commercialize
technologies and products that we acquire may seek employment
elsewhere, including with our competitors. Furthermore, there
may be overlap between our products or customers and the
companies that we acquire that may create conflicts in
relationships or other commitments detrimental to the integrated
businesses. If we are unable to successfully integrate products,
technologies, businesses or personnel that we acquire, we could
incur significant impairment charges or other adverse financial
consequences.
In addition, as a result of acquiring businesses or products, or
entering into other significant transactions, we have
experienced, and will likely continue to experience, significant
charges to earnings for merger and related expenses. These costs
may include substantial fees for investment bankers, attorneys,
accountants and financial printing costs and severance and other
closure costs associated with the elimination of duplicate or
discontinued products, operations and facilities. Charges that
we may incur in connection with acquisitions could adversely
affect our results of operations for particular quarterly or
annual periods.
If we
are unsuccessful in our joint ventures and other collaborations,
our operating results could suffer.
We have made substantial investments in joint ventures and other
collaborations and may use these and other methods to develop or
commercialize products in the future. These arrangements
typically involve other pharmaceutical companies as partners
that may be competitors of ours in certain markets. In many
instances, we will not control these joint ventures or
collaborations or the commercial exploitation of the licensed
products, and cannot assure you that these ventures will be
profitable. Although restrictions contained in certain of these
programs have not had a material adverse impact on the marketing
of our own products to date, any such marketing restrictions
could affect future revenues and have a material adverse effect
on our operations. Our results of operations may suffer if
existing joint venture or collaboration partners withdraw, or if
these products are not timely developed, approved or
successfully commercialized.
If we
are unable to adequately protect our technology or enforce our
patents, our business could suffer.
Our success with the brand products that we develop will depend,
in part, on our ability to obtain patent protection for these
products. We currently have a number of U.S. and foreign
patents issued and pending. However, issuance of a patent is not
conclusive evidence of its validity or enforceability. We cannot
be sure that we will receive patents for any of our pending
patent applications or any patent applications we may file in
the future, or that our issued patents will be upheld if
challenged. If our current and future patent applications are
not approved or, if approved, our patents are not upheld in a
court of law if challenged, it may reduce our ability to
competitively exploit our patented products. Also, such patents
may or may not provide competitive advantages for their
respective products or they may be challenged or circumvented by
our competitors, in which case our ability to commercially
market these products may be diminished. Patents covering our
Androderm®
and
INFed®
products have expired and we have no further patent protection
on
25
these products. Therefore, it is possible that a competitor may
launch a generic version of
Androderm®
and/or
INFed®
at any time, which would result in a significant decline in that
products revenue and profit. Both of these products were
significant contributors to our Global Brands business in 2010.
We also rely on trade secrets and proprietary know-how that we
seek to protect, in part, through confidentiality agreements
with our partners, customers, employees and consultants. It is
possible that these agreements will be breached or that they
will not be enforceable in every instance, and that we will not
have adequate remedies for any such breach. It is also possible
that our trade secrets will become known or independently
developed by our competitors.
If we are unable to adequately protect our technology, trade
secrets or propriety know-how, or enforce our intellectual
property rights, our results of operations, financial condition
and cash flows could suffer.
If
pharmaceutical companies are successful in limiting the use of
generics through their legislative, regulatory and other
efforts, our sales of generic products may suffer.
Many pharmaceutical companies increasingly have used state and
federal legislative and regulatory means to delay generic
competition. These efforts have included:
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pursuing new patents for existing products which may be granted
just before the expiration of earlier patents, which could
extend patent protection for additional years or otherwise delay
the launch of generics;
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selling the brand product as an Authorized Generic, either by
the brand company directly, through an affiliate or by a
marketing partner;
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using the Citizen Petition process to request amendments to FDA
standards or otherwise delay generic drug approvals;
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seeking changes to U.S. Pharmacopeia, an organization which
publishes industry recognized compendia of drug standards;
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attaching patent extension amendments to non-related federal
legislation;
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engaging in
state-by-state
initiatives to enact legislation that restricts the substitution
of some generic drugs, which could have an impact on products
that we are developing; and
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seeking patents on methods of manufacturing certain API.
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If pharmaceutical companies or other third parties are
successful in limiting the use of generic products through these
or other means, our sales of generic products may decline. If we
experience a material decline in generic product sales, our
results of operations, financial condition and cash flows will
suffer.
If
competitors are successful in limiting competition for certain
generic products through their legislative, regulatory and
litigation efforts, our sales of certain generic products may
suffer.
Certain of our competitors have recently challenged our ability
to distribute Authorized Generics during the competitors
180-day
period of ANDA exclusivity under the Hatch-Waxman Act. Under the
challenged arrangements, we have obtained rights to market and
distribute under a brand manufacturers NDA a generic
alternative of the brand product. Some of our competitors have
challenged the propriety of these arrangements by filing Citizen
Petitions with the FDA, initiating lawsuits alleging violation
of the antitrust and consumer protection laws, and seeking
legislative intervention. For example, in February 2011,
legislation was introduced in the U.S. Senate that would
prohibit the marketing of Authorized Generics during the
180-day
period of ANDA exclusivity under the Hatch-Waxman Act. If
distribution of Authorized Generic versions of brand products is
otherwise restricted or found unlawful, our results of
operations, financial condition and cash flows could be
materially adversely affected.
26
From
time to time we may need to rely on licenses to proprietary
technologies, which may be difficult or expensive to
obtain.
We may need to obtain licenses to patents and other proprietary
rights held by third parties to develop, manufacture and market
products. If we are unable to timely obtain these licenses on
commercially reasonable terms, our ability to commercially
market our products may be inhibited or prevented, which could
have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Third
parties may claim that we infringe their proprietary rights and
may prevent us from manufacturing and selling some of our
products.
The manufacture, use and sale of new products that are the
subject of conflicting patent rights have been the subject of
substantial litigation in the pharmaceutical industry. These
lawsuits relate to the validity and infringement of patents or
proprietary rights of third parties. We may have to defend
against charges that we violated patents or proprietary rights
of third parties. This is especially true in the case of generic
products on which the patent covering the brand product is
expiring, an area where infringement litigation is prevalent,
and in the case of new brand products where a competitor has
obtained patents for similar products. Litigation may be costly
and time-consuming, and could divert the attention of our
management and technical personnel. In addition, if we infringe
the rights of others, we could lose our right to develop,
manufacture or market products or could be required to pay
monetary damages or royalties to license proprietary rights from
third parties. For example, we are engaged in litigation with
Bayer Pharmaceuticals concerning whether our
Zarahtm
product infringes Bayers U.S. Patent Number
5,569,652, and we continue to manufacture and market our
Zarahtm
product during the pendency of the litigation. Although the
parties to patent and intellectual property disputes in the
pharmaceutical industry have often settled their disputes
through licensing or similar arrangements, the costs associated
with these arrangements may be substantial and could include
ongoing royalties. Furthermore, we cannot be certain that the
necessary licenses would be available to us on commercially
reasonable terms, or at all. As a result, an adverse
determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could result in substantial
monetary damage awards and could prevent us from manufacturing
and selling a number of our products, which could have a
material adverse effect on our business, results of operations,
financial condition and cash flows.
Our
distribution operations are highly dependent upon a primary
courier service.
Product deliveries within our Distribution business are highly
dependent on overnight delivery services to deliver our products
in a timely and reliable manner, typically by overnight service.
Our Distribution business ships a substantial portion of
products via one couriers air and ground delivery service.
If the courier terminates our contract or if we cannot renew the
contract on favorable terms or enter into a contract with an
equally reliable overnight courier to perform and offer the same
service level at similar or more favorable rates, our business,
results of operations, financial condition and cash flows could
be materially adversely affected.
Our
distribution operations concentrate on generic products and
therefore are subject to the risks of the generic
industry.
The ability of our Distribution business to provide consistent,
sequential quarterly growth is affected, in large part, by our
participation in the launch of new products by generic
manufacturers and the subsequent advent and extent of
competition encountered by these products. This competition can
result in significant and rapid declines in pricing with a
corresponding decrease in net sales of our Distribution
business. Our margins can also be affected by the risks inherent
to the generic industry, which is discussed below under
Risks Relating to Investing in the Pharmaceutical
Industry.
27
Our
distribution operations compete directly with significant
customers of our generic and brand businesses.
In our Distribution business, our main competitors are McKesson
Corporation, AmerisourceBergen Corporation and Cardinal Health,
Inc. These companies are significant customers of our Global
Generics and Global Brands operations and collectively accounted
for approximately 23% of our annual net revenues in 2010. Our
activities related to our Distribution business, as well as the
acquisition of other businesses that compete with our customers,
may result in the disruption of our business, which could harm
relationships with our current customers, employees or
suppliers, and could adversely affect our expenses, pricing,
third-party relationships and revenues. Further, a loss of a
significant customer of our Global Generics or Global Brands
operations could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
If we
are unable to obtain sufficient supplies from key manufacturing
sites or suppliers that in some cases may be the only source of
finished products or raw materials, our ability to deliver our
products to the market may be impeded.
We are required to identify the supplier(s) of all the raw
materials for our products in our applications with the FDA and
other regulatory agencies. To the extent practicable, we attempt
to identify more than one supplier in each drug application.
However, some products and raw materials are available only from
a single source and, in many of our drug applications, only one
supplier of products and raw materials or site of manufacture
has been identified, even in instances where multiple sources
exist. Some of these products have historically accounted for a
significant portion of our revenues, such as
INFed®,
metoprolol succinate extended release, bupropion sustained
release tablets and a significant number of our oral
contraceptive and controlled substance products. From time to
time, certain of our manufacturing sites or outside suppliers
have experienced regulatory or supply-related difficulties that
have inhibited their ability to deliver products and raw
materials to us, causing supply delays or interruptions. To the
extent any difficulties experienced by our manufacturing sites
or suppliers cannot be resolved or extensions of our key supply
agreements cannot be negotiated within a reasonable time and on
commercially reasonable terms, or if raw materials for a
particular product become unavailable from an approved supplier
and we are required to qualify a new supplier with the FDA, or
if we are unable to do so, our profit margins and market share
for the affected product could decrease or be eliminated, as
well as delay our development and sales and marketing efforts.
Such outcomes could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
Our manufacturing sites in India, Canada and Malta, and our
arrangements with foreign suppliers, are subject to certain
additional risks, including the availability of government
clearances, export duties, political instability, war, acts of
terrorism, currency fluctuations and restrictions on the
transfer of funds. For example, we obtain a significant portion
of our raw materials from foreign suppliers. Arrangements with
international raw material suppliers are subject to, among other
things, FDA and foreign regulatory body regulation, customs
clearances, various import duties and other government
clearances, as well as potential shipping delays due to
inclement weather, strikes or other matters outside of our
control. Acts of governments outside the U.S. may affect
the price or availability of raw materials needed for the
development or manufacture of our products. In addition, recent
changes in patent laws in jurisdictions outside the
U.S. may make it increasingly difficult to obtain raw
materials for R&D prior to the expiration of the applicable
U.S. or foreign patents.
Our
policies regarding returns, allowances and chargebacks, and
marketing programs adopted by wholesalers, may reduce our
revenues in future fiscal periods.
Consistent with industry practice we, like many generic product
manufacturers, have liberal return policies and have been
willing to give customers post-sale inventory allowances. Under
these arrangements, from time to time, we may give our customers
credits on our generic products that our customers hold in
inventory after we have decreased the market prices of the same
generic products. Therefore, if new competitors enter the
marketplace and significantly lower the prices of any of their
competing products, we may reduce the price of our product. As a
result, we may be obligated to provide significant credits to
our
28
customers who are then holding inventories of such products,
which could reduce sales revenue and gross margin for the period
the credit is provided. Like our competitors, we also give
credits for chargebacks to wholesale customers that have
contracts with us for their sales to hospitals, group purchasing
organizations, pharmacies or other retail customers. A
chargeback represents an amount payable in the future to a
wholesaler for the difference between the invoice price paid to
us by our wholesale customer for a particular product and the
negotiated price that the wholesalers customer pays for
that product. Although we establish reserves based on our prior
experience and our best estimates of the impact that these
policies may have in subsequent periods, we cannot ensure that
our reserves are adequate or that actual product returns,
allowances and chargebacks will not exceed our estimates, which
could have a material adverse effect on our results of
operations, financial condition, cash flows and the market price
of our stock.
Investigations
of the calculation of average wholesale prices may adversely
affect our business.
Many government and third-party payers, including Medicare,
Medicaid, HMOs and MCOs, have historically reimbursed doctors,
pharmacies and others for the purchase of certain prescription
drugs based on a drugs AWP or wholesale average cost
(WAC). In the past several years, state and federal
government agencies have conducted ongoing investigations of
manufacturers reporting practices with respect to AWP and
WAC, in which they have suggested that reporting of inflated
AWPs or WACs have led to excessive payments for
prescription drugs. For example, beginning in July 2002, we and
certain of our subsidiaries, as well as numerous other
pharmaceutical companies, were named as defendants in various
state and federal court actions alleging improper or fraudulent
practices related to the reporting of AWP
and/or WAC
of certain products, and other improper acts, in order to
increase prices and market shares. Additional actions are
anticipated. These actions, if successful, could adversely
affect us and may have a material adverse effect on our
business, results of operations, financial condition and cash
flows. See Legal Matters in
NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
The
design, development, manufacture and sale of our products
involves the risk of product liability claims by consumers and
other third parties, and insurance against such potential claims
is expensive and may be difficult to obtain.
The design, development, manufacture and sale of our products
involve an inherent risk of product liability claims and the
associated adverse publicity. Insurance coverage is expensive
and may be difficult to obtain, and may not be available in the
future on acceptable terms, or at all. We regularly monitor the
use of our products for trends or increases in reports of
adverse events or product complaints, and regularly report such
matters to the FDA. In some, but not all, cases an increase in
adverse event reports may be an indication that there has been a
change in a products specifications or efficacy. Such
changes could lead to a recall of the product in question or, in
some cases, increases in product liability claims related to the
product in question. If the coverage limits for product
liability insurance policies are not adequate or if certain of
our products are excluded from coverage, a claim brought against
us, whether covered by insurance or not, could have a material
adverse effect on our business, results of operations, financial
condition and cash flows. See Legal Matters in
NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
The
loss of our key personnel could cause our business to
suffer.
The success of our present and future operations will depend, to
a significant extent, upon the experience, abilities and
continued services of key personnel. For example, although we
have other senior management personnel, a significant loss of
the services of Paul Bisaro, our Chief Executive Officer, or
other senior executive officers without having or hiring a
suitable successor, could cause our business to suffer. We
cannot assure you that we will be able to attract and retain key
personnel. We have entered into employment agreements with many
of our senior executive officers but such agreements do not
guarantee that our senior executive officers will remain
employed by us for a significant period of time, or at all. We
do not carry key-employee life insurance on any of our officers.
29
Significant
balances of intangible assets, including product rights and
goodwill acquired, are subject to impairment testing and may
result in impairment charges, which will adversely affect our
results of operations and financial condition.
A significant amount of our total assets is related to acquired
intangibles and goodwill. As of December 31, 2010, the
carrying value of our product rights and other intangible assets
was approximately $1.63 billion and the carrying value of
our goodwill was approximately $1.53 billion.
Our product rights are stated at cost, less accumulated
amortization. We determine original fair value and amortization
periods for product rights based on our assessment of various
factors impacting estimated useful lives and cash flows of the
acquired products. Such factors include the products
position in its life cycle, the existence or absence of like
products in the market, various other competitive and regulatory
issues and contractual terms. Significant adverse changes to any
of these factors would require us to perform an impairment test
on the affected asset and, if evidence of impairment exists, we
would be required to take an impairment charge with respect to
the asset. Such a charge could have a material adverse effect on
our results of operations and financial condition.
Our other significant intangible assets include acquired core
technology and customer relationships, which are intangible
assets with definite lives, our Anda trade name and acquired
in-process research and development (IPR&D)
intangibles, acquired in recent business acquisitions, which are
intangible assets with indefinite lives.
Our acquired core technology and customer relationship
intangible assets are stated at cost, less accumulated
amortization. We determined the original fair value of our other
intangible assets by performing a discounted cash flow analysis,
which is based on our assessment of various factors. Such
factors include existing operating margins, the number of
existing and potential competitors, product pricing patterns,
product market share analysis, product approval and launch
dates, the effects of competition, customer attrition rates,
consolidation within the industry and generic product lifecycle
estimates. Our other intangible assets with definite lives are
tested for impairment when there are significant changes to any
of these factors. If evidence of impairment exists, we would be
required to take an impairment charge with respect to the
impaired asset. Such a charge could have a material adverse
effect on our results of operations and financial condition.
Goodwill, our Anda trade name intangible asset and our
IPR&D intangible assets are tested for impairment annually
and when events occur or circumstances change that could
potentially reduce the fair value of the reporting unit or
intangible asset. Impairment testing compares the fair value of
the reporting unit or intangible asset to its carrying amount. A
goodwill, trade name or IPR&D impairment, if any, would be
recorded in operating income and could have a material adverse
effect on our results of operations and financial condition.
During the fourth quarter of 2010, the Company recorded a
$28.6 million impairment charge related to certain
IPR&D assets acquired in the Arrow Acquisition.
We may
need to raise additional funds in the future which may not be
available on acceptable terms or at all.
We may consider issuing additional debt or equity securities in
the future to fund potential acquisitions or investments, to
refinance existing debt, or for general corporate purposes. If
we issue equity or convertible debt securities to raise
additional funds, our existing stockholders may experience
dilution, and the new equity or debt securities may have rights,
preferences and privileges senior to those of our existing
stockholders. If we incur additional debt, it may increase our
leverage relative to our earnings or to our equity
capitalization, requiring us to pay additional interest expenses
and potentially lower our credit ratings. We may not be able to
market such issuances on favorable terms, or at all, in which
case, we may not be able to develop or enhance our products,
execute our business plan, take advantage of future
opportunities, or respond to competitive pressures or
unanticipated customer requirements.
Our
business could suffer as a result of manufacturing difficulties
or delays.
The manufacture of certain of our products and product
candidates, particularly our controlled-release products,
transdermal products, and our oral contraceptive products, is
more difficult than the manufacture of immediate-release
products. Successful manufacturing of these types of products
requires precise
30
manufacturing process controls, API that conforms to very tight
tolerances for specific characteristics and equipment that
operates consistently within narrow performance ranges.
Manufacturing complexity, testing requirements, and safety and
security processes combine to increase the overall difficulty of
manufacturing these products and resolving manufacturing
problems that we may encounter.
Our manufacturing and other processes utilize sophisticated
equipment, which sometimes require a significant amount of time
to obtain and install. Our business could suffer if certain
manufacturing or other equipment, or a portion or all of our
facilities were to become inoperable for a period of time. This
could occur for various reasons, including catastrophic events
such as earthquake, monsoon, hurricane or explosion, unexpected
equipment failures or delays in obtaining components or
replacements thereof, as well as construction delays or defects
and other events, both within and outside of our control. Our
inability to timely manufacture any of our significant products
could have a material adverse effect on our results of
operations, financial condition and cash flows.
Our
substantial debt and other financial obligations could impair
our financial condition and our ability to fulfill our debt
obligations. Any refinancing of this substantial debt could be
at significantly higher interest rates.
As of December 31, 2010, we had total debt of approximately
$1.0 billion. Our substantial indebtedness and other
financial obligations could:
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impair our ability to obtain financing in the future for working
capital, capital expenditures, acquisitions or general corporate
purposes;
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have a material adverse effect on us if we fail to comply with
financial and affirmative and restrictive covenants in our debt
agreements and an event of default occurs as a result of a
failure that is not cured or waived;
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require us to dedicate a substantial portion of our cash flow
for interest payments on our indebtedness and other financial
obligations, thereby reducing the availability of our cash flow
to fund working capital and capital expenditures;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; and
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place us at a competitive disadvantage compared to our
competitors that have proportionally less debt.
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If we are unable to meet our debt service obligations and other
financial obligations, we could be forced to restructure or
refinance our indebtedness and other financial transactions,
seek additional equity capital or sell our assets. We might then
be unable to obtain such financing or capital or sell our assets
on satisfactory terms, if at all. Any refinancing of our
indebtedness could be at significantly higher interest rates,
and/or incur
significant transaction fees.
Our
business will continue to expose us to risks of environmental
liabilities.
Our product and API development programs, manufacturing
processes and distribution logistics involve the controlled use
of hazardous materials, chemicals and toxic compounds in our
owned and leased facilities. As a result, we are subject to
numerous and increasingly stringent federal, state and local
environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation,
treatment and disposal of toxic and hazardous materials and the
discharge of pollutants into the air and water. Our programs and
processes expose us to risks that an accidental contamination
could result in (i) our noncompliance with such
environmental laws and regulations and (ii) regulatory
enforcement actions or claims for personal injury and property
damage against us. If an accident or environmental discharge
occurs, or if we discover contamination caused by prior
operations, including by prior owners and operators of
properties we acquire, we could be liable for cleanup
obligations, damages and fines. The substantial unexpected costs
we may incur could have a material and adverse effect on our
business, results of operations, financial condition, and cash
flows. In addition, environmental permits and controls are
required for some of our operations, and these permits are
subject to modification, renewal and
31
revocation by the issuing authorities. Any modification,
revocation or non-renewal of our environmental permits could
have a material adverse effect on our ongoing operations,
business and financial condition. Our environmental capital
expenditures and costs for environmental compliance may increase
in the future as a result of changes in environmental laws and
regulations or increased development or manufacturing activities
at any of our facilities.
Global
economic conditions could harm us.
Recent global market and economic conditions have been
unprecedented and challenging with tighter credit conditions and
recession in most major economies during 2009, 2010 and
continuing in 2011. Continued concerns about the systemic impact
of potential long-term and wide-spread recession, energy costs,
geopolitical issues, the availability and cost of credit, and
the global real estate markets have contributed to increased
market volatility and diminished expectations for western and
emerging economies. These conditions, combined with volatile oil
prices, declining business and consumer confidence and increased
unemployment, have contributed to volatility of unprecedented
levels.
As a result of these market conditions, the cost and
availability of credit has been and may continue to be adversely
affected by illiquid credit markets and wider credit spreads.
Concern about the stability of the markets generally and the
strength of counterparties specifically has led many lenders and
institutional investors to reduce, and in some cases, cease to
provide credit to businesses and consumers. These factors have
resulted in a decrease in spending by businesses and consumers
alike, and a corresponding decrease in global infrastructure
spending. Continued turbulence in the U.S. and
international markets and economies and prolonged declines in
business consumer spending may adversely affect our liquidity
and financial condition, and the liquidity and financial
condition of our customers, including our ability to refinance
maturing liabilities and access the capital markets to meet
liquidity needs.
Our
foreign operations may become less attractive if political and
diplomatic relations between the United States and any
country where we conduct business operations
deteriorates.
The relationship between the United States and the foreign
countries where we conduct business operations may weaken over
time. Changes in the state of the relations between any such
country and the United States are difficult to predict and could
adversely affect our future operations. This could lead to a
decline in our profitability. Any meaningful deterioration of
the political and diplomatic relations between the United States
and the relevant country could have a material adverse effect on
our operations.
Our
global operations expose us to risks and challenges associated
with conducting business internationally.
We operate on a global basis with offices or activities in
Europe, Africa, Asia, South America, Australasia and North
America. We face several risks inherent in conducting business
internationally, including compliance with international and
U.S. laws and regulations that apply to our international
operations. These laws and regulations include data privacy
requirements, labor relations laws, tax laws, anti-competition
regulations, import and trade restrictions, export requirements,
U.S. laws such as the Foreign Corrupt Practices Act, and
local laws which also prohibit corrupt payments to governmental
officials or certain payments or remunerations to customers.
Given the high level of complexity of these laws, however, there
is a risk that some provisions may be inadvertently breached,
for example through fraudulent or negligent behavior of
individual employees, our failure to comply with certain formal
documentation requirements or otherwise. Violations of these
laws and regulations could result in fines, criminal sanctions
against us, our officers or our employees, and prohibitions on
the conduct of our business. Any such violations could include
prohibitions on our ability to offer our products in one or more
countries and could materially damage our reputation, our brand,
our international expansion efforts, our ability to attract and
retain employees, our business and our operating results. Our
success depends, in part, on our ability to anticipate these
risks and manage these difficulties.
32
In addition to the foregoing, engaging in international business
inherently involves a number of other difficulties and risks,
including:
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longer payment cycles and difficulties in enforcing agreements
and collecting receivables through certain foreign legal systems;
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political and economic instability;
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potentially adverse tax consequences, tariffs, customs charges,
bureaucratic requirements and other trade barriers;
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difficulties and costs of staffing and managing foreign
operations;
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difficulties protecting or procuring intellectual property
rights; and
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fluctuations in foreign currency exchange rates.
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These factors or any combination of these factors may adversely
affect our revenue or our overall financial performance.
We
have exposure to foreign tax liabilities.
As a multinational corporation, we are subject to income taxes
as well as non-income based taxes, in both the United States and
various foreign jurisdictions. Significant judgment is required
in determining our worldwide provision for income taxes and
other tax liabilities. Changes in tax laws or tax rulings may
have a significantly adverse impact on our effective tax rate.
Recent proposals by the current U.S. administration for
fundamental U.S. international tax reform, including
without limitation provisions that would limit the ability of
U.S. multinationals to defer U.S. taxes on foreign
income, if enacted, could have a significant adverse impact on
our effective tax rate following the Arrow Acquisition.
Foreign
currency fluctuations could adversely affect our business and
financial results.
We do business and generate sales in numerous countries outside
the United States. As such, foreign currency fluctuations may
affect the costs that we incur in such international operations.
Some of our operating expenses are incurred in
non-U.S. dollar
currencies. The appreciation of
non-U.S. dollar
currencies in those countries where we have operations against
the U.S. dollar could increase our costs and could harm our
results of operations and financial condition.
Risks
Relating To Investing In the Pharmaceutical Industry
Extensive
industry regulation has had, and will continue to have, a
significant impact on our business, especially our product
development, manufacturing and distribution
capabilities.
All pharmaceutical companies, including Watson, are subject to
extensive, complex, costly and evolving government regulation.
For the U.S., this is principally administered by the FDA and to
a lesser extent by the DEA and state government agencies, as
well as by varying regulatory agencies in foreign countries
where products or product candidates are being manufactured
and/or
marketed. The Federal Food, Drug and Cosmetic Act, the
Controlled Substances Act and other federal statutes and
regulations, and similar foreign statutes and regulations,
govern or influence the testing, manufacturing, packing,
labeling, storing, record keeping, safety, approval,
advertising, promotion, sale and distribution of our products.
Under these regulations, we are subject to periodic inspection
of our facilities, procedures and operations
and/or the
testing of our products by the FDA, the DEA and other
authorities, which conduct periodic inspections to confirm that
we are in compliance with all applicable regulations. In
addition, the FDA and foreign regulatory agencies conduct
pre-approval and post-approval reviews and plant inspections to
determine whether our systems and processes are in compliance
with cGMP and other regulations. Following such inspections, the
FDA or other agency may issue observations, notices, citations
and/or
Warning Letters that could cause us to modify certain activities
identified during the inspection. FDA guidelines specify that a
Warning Letter is issued only for violations of regulatory
significance for which the failure to adequately
33
and promptly achieve correction may be expected to result in an
enforcement action. We are also required to report adverse
events associated with our products to FDA and other regulatory
authorities. Unexpected or serious health or safety concerns
would result in product liability claims, labeling changes,
recalls, market withdrawals or other regulatory actions.
Our manufacturing facility in Corona, California is currently
subject to a consent decree of permanent injunction. We cannot
assure that the FDA will determine we have adequately corrected
deficiencies at our Corona manufacturing site, that subsequent
FDA inspections at any of our manufacturing sites will not
result in additional inspectional observations at such sites,
that approval of any of the pending or subsequently submitted
NDAs, ANDAs or supplements to such applications by Watson or our
subsidiaries will be granted or that the FDA will not seek to
impose additional sanctions against Watson or any of its
subsidiaries. The range of possible sanctions includes, among
others, FDA issuance of adverse publicity, product recalls or
seizures, fines, total or partial suspension of production
and/or
distribution, suspension of the FDAs review of product
applications, enforcement actions, injunctions, and civil or
criminal prosecution. Any such sanctions, if imposed, could have
a material adverse effect on our business, operating results,
financial condition and cash flows. Under certain circumstances,
the FDA also has the authority to revoke previously granted drug
approvals. Similar sanctions as detailed above may be available
to the FDA under a consent decree, depending upon the actual
terms of such decree. Although we have instituted internal
compliance programs, if these programs do not meet regulatory
agency standards or if compliance is deemed deficient in any
significant way, it could materially harm our business. Certain
of our vendors are subject to similar regulation and periodic
inspections.
The process for obtaining governmental approval to manufacture
and market pharmaceutical products is rigorous, time-consuming
and costly, and we cannot predict the extent to which we may be
affected by legislative and regulatory developments. We are
dependent on receiving FDA and other governmental or third-party
approvals prior to manufacturing, marketing and shipping our
products. Consequently, there is always the chance that we will
not obtain FDA or other necessary approvals, or that the rate,
timing and cost of obtaining such approvals, will adversely
affect our product introduction plans or results of operations.
We carry inventories of certain product(s) in anticipation of
launch, and if such product(s) are not subsequently launched, we
may be required to write-off the related inventory.
Our Distribution operations and our customers are subject to
various regulatory requirements, including requirements from the
DEA, FDA, state boards of pharmacy and city and county health
regulators, among others. These include licensing, registration,
recordkeeping, security and reporting requirements. Although
physicians may prescribe FDA approved products for an off
label indication, we are permitted to market our products
only for the indications for which they have been approved. Some
of our products are prescribed off label and FDA or other
regulatory authorities could take enforcement actions if they
conclude that we or our distributors have engaged in off label
marketing. In addition, several states and the federal
government have begun to enforce anti-counterfeit drug pedigree
laws which require the tracking of all transactions involving
prescription drugs beginning with the manufacturer, through the
supply chain, and down to the pharmacy or other health care
provider dispensing or administering prescription drug products.
For example, effective July 1, 2006, the Florida Department
of Health began enforcement of the drug pedigree requirements
for distribution of prescription drugs in the State of Florida.
Pursuant to Florida law and regulations, wholesalers and
distributors, including our subsidiary, Anda Pharmaceuticals,
are required to maintain records documenting the chain of
custody of prescription drug products they distribute beginning
with the purchase of products from the manufacturer. These
entities are required to provide documentation of the prior
transaction(s) to their customers in Florida, including
pharmacies and other health care entities. Several other states
have proposed or enacted legislation to implement similar or
more stringent drug pedigree requirements. In addition, federal
law requires that a non-authorized distributor of
record must provide a drug pedigree documenting the prior
purchase of a prescription drug from the manufacturer or from an
authorized distributor of record. In cases where the
wholesaler or distributor selling the drug product is not deemed
an authorized distributor of record it would need to
maintain such records. FDA had announced its intent to impose
additional drug pedigree requirements (e.g., tracking of lot
numbers and documentation of all transactions) through
implementation of drug pedigree regulations which were to have
taken effect on December 1, 2006. However, a federal
appeals court has issued a preliminary injunction to several
wholesale distributors granting an indefinite stay of these
regulations pending a challenge to the regulations by these
wholesale distributors.
34
Federal
regulation of arrangements between manufacturers of brand and
generic products could adversely affect our
business.
As part of the MMA, companies are required to file with the FTC
and the Department of Justice certain types of agreements
entered into between brand and generic pharmaceutical companies
related to the manufacture, marketing and sale of generic
versions of brand drugs. This requirement, as well as new
legislation pending in U.S. Congress related to settlement
between brand and generic drug manufacturers, could affect the
manner in which generic drug manufacturers resolve intellectual
property litigation and other disputes with brand pharmaceutical
companies and could result generally in an increase in
private-party litigation against pharmaceutical companies or
additional investigations or proceedings by the FTC or other
governmental authorities. The impact of this requirement, the
pending legislation and the potential private-party lawsuits
associated with arrangements between brand name and generic drug
manufacturers, is uncertain and could adversely affect our
business. For example, in January 2009, the FTC and the State of
California filed a lawsuit against us alleging that our
settlement with Solvay related to our ANDA for a generic version
of
Androgel®
is unlawful. From February 2009 through September 2010, numerous
private parties purporting to represent various classes of
plaintiffs filed similar lawsuits. Additionally, we have
received requests for information, in the form of civil
investigative demands or subpoenas, from the FTC, and are
subject to ongoing FTC investigations, concerning our settlement
with Cephalon related to our ANDA for a generic version of
Provigil®.
We have also received requests for information in connection
with similar investigations into settlements and other
arrangements between competing pharmaceutical companies by the
European Competition Commission. Any adverse outcome of these
actions or investigations, or actions or investigations related
to other settlements we have entered into, could have a material
adverse effect on our business, results of operations, financial
condition and cash flows. See Legal Matters in
NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
We are
subject to federal and state healthcare fraud and abuse laws
which may adversely affect our business.
In the United States, most of our products are reimbursed under
federal and state health care programs such as Medicaid,
Medicare, TriCare, and or state pharmaceutical assistance
programs. Many foreign countries have similar laws. Federal and
state laws designed to prevent fraud and abuse under these
programs prohibit pharmaceutical companies from offering
valuable items or services to customers or potential customers
to induce them to buy, prescribe, or recommend Watsons
product (the so-called antikickback laws).
Exceptions are provided for discounts and certain other
arrangements if specified requirements are met. Other federal
and state laws, and similar foreign laws, not only prohibit us
from submitting any false information to government
reimbursement programs but also prohibit us and our employees
from doing anything to cause, assist, or encourage our customers
to submit false claims for payment to these programs. Violations
of the fraud and abuse laws may result in severe penalties
against the responsible employees and Watson, including jail
sentences, large fines, and the exclusion of Watson products
from reimbursement under federal and state programs. Watson is
committed to conducting the sales and marketing of its products
in compliance with the healthcare fraud and abuse laws, but
certain applicable laws may impose liability even in the absence
of specific intent to defraud. Furthermore, should there be
ambiguity, a governmental authority may take a position contrary
to a position we have taken, or should an employee violate these
laws without our knowledge, a governmental authority may impose
civil and/or
criminal sanctions. For example, in December 2009, we learned
that numerous pharmaceutical companies, including certain
subsidiaries of the Company, have been named as defendants in a
qui tam action pending in the United States District Court for
the District of Massachusetts alleging that the defendants
falsely reported to the United States that certain
pharmaceutical products were eligible for Medicaid reimbursement
and thereby allegedly caused false claims for payment to be made
through the Medicaid program. Any adverse outcome of this
action, or the imposition of penalties or sanctions for failing
to comply with the fraud and abuse laws, could adversely affect
us and may have a material adverse effect on our business,
results of operations, financial condition and cash flows. See
Legal Matters in NOTE 16
Commitments and Contingencies in the accompanying
Notes to Consolidated Financial Statements in this
Annual Report.
35
Healthcare
reform and a reduction in the coverage and reimbursement levels
by governmental authorities, HMOs, MCOs or other third-party
payers may adversely affect our business.
Demand for our products depends in part on the extent to which
coverage and reimbursement is available from third-party payers,
such as the Medicare and Medicaid programs and private payors.
In order to commercialize our products, we have obtained from
government authorities and private health insurers and other
organizations, such as HMOs and MCOs, recognition for coverage
and reimbursement at varying levels for the cost of certain of
our products and related treatments. Third-party payers
increasingly challenge pricing of pharmaceutical products.
Further, the trend toward managed healthcare in the U.S., the
growth of organizations such as HMOs and MCOs and legislative
proposals to reform healthcare and government insurance programs
create uncertainties regarding the future levels of coverage and
reimbursement for pharmaceutical products. Such cost containment
measures and healthcare reform could reduce reimbursement of our
pharmaceutical products, resulting in lower prices and a
reduction in the product demand. This could affect our ability
to sell our products and could have a material adverse effect on
our business, results of operations, financial condition and
cash flows.
There is uncertainty surrounding implementation of legislation
involving payments for pharmaceuticals under government programs
such as Medicare, Medicaid and Tricare. Depending on how
existing provisions are implemented, the methodology for certain
payment rates and other computations under the Medicaid Drug
Rebate program reimbursements may be reduced or not be available
for some of Watsons products. Additionally, any
reimbursement granted may not be maintained or limits on
reimbursement available from third-party payers may reduce
demand for, or negatively affect the price of those products.
Ongoing uncertainty and legal challenges to the PPACA, including
but not limited to, modification in calculation of rebates,
mandated financial or other contributions to close the Medicare
Part D coverage gap donut hole, calculation of
AMP, and other provisions could have a material adverse effect
on our business. In addition, various legislative and regulatory
initiatives in states, including proposed modifications to
reimbursements and rebates, product pedigree and tracking,
pharmaceutical waste take-back initiatives, and
therapeutic category generic substitution carve-out legislation
may also have a negative impact on the Company. Watson maintains
a full-time government affairs department in Washington, DC,
which is responsible for coordinating state and federal
legislative activities, and place a major emphasis in terms of
management time and resources to ensure a fair and balance
legislative and regulatory arena.
PPACA also extended Medicaid rebates to Medicaid MCOs. MCO
rebates may have a significant impact on our brand portfolio.
Medicaid Managed care enrollment is over 70% of total Medicaid
enrollment. This provision is likely to increase
manufacturers Medicaid Rebate liability substantially,
particularly in states with large Medicaid managed care
enrollment (e.g., Michigan, Kentucky, Colorado, Arizona). The
effective date of this was January 1, 2010.
The
pharmaceutical industry is highly competitive and our future
revenue growth and profitability are dependent on our timely
development and launches of new products ahead of our
competitors.
We face strong competition in our Global Generics, Global Brands
and Distribution businesses. The intensely competitive
environment requires an ongoing, extensive search for
technological innovations and the ability to market products
effectively, including the ability to communicate the
effectiveness, safety and value of brand products to healthcare
professionals in private practice, group practices and MCOs. Our
competitors vary depending upon product categories, and within
each product category, upon dosage strengths and drug-delivery
systems. Based on total assets, annual revenues, and market
capitalization, we are smaller than certain of our national and
international competitors in the brand and distribution product
arenas. Most of our competitors have been in business for a
longer period of time than us, have a greater number of products
on the market and have greater financial and other resources
than we do. Furthermore, recent trends in this industry are
toward further market consolidation of large drug companies into
a smaller number of very large entities, further concentrating
financial, technical and market strength and increasing
competitive pressure in the industry. If we directly compete
with them for the same markets
and/or
products, their financial strength could prevent us from
capturing a profitable share of those markets. It is possible
that developments by our competitors will make our products or
technologies noncompetitive or obsolete.
36
Revenues and gross profit derived from the sales of generic
pharmaceutical products tend to follow a pattern based on
certain regulatory and competitive factors. As patents for brand
name products and related exclusivity periods expire, the first
generic manufacturer to receive regulatory approval for generic
equivalents of such products is generally able to achieve
significant market penetration. Therefore, our ability to
increase or maintain revenues and profitability in our generics
business is largely dependent on our success in challenging
patents and developing non-infringing formulations of
proprietary products. As competing manufacturers receive
regulatory approvals on similar products or as brand
manufacturers launch generic versions of such products (for
which no separate regulatory approval is required), market
share, revenues and gross profit typically decline, in some
cases dramatically. Accordingly, the level of market share,
revenue and gross profit attributable to a particular generic
product normally is related to the number of competitors in that
products market and the timing of that products
regulatory approval and launch, in relation to competing
approvals and launches. Consequently, we must continue to
develop and introduce new products in a timely and
cost-effective manner to maintain our revenues and gross
margins. We may have fewer opportunities to launch significant
generic products in the future, as the number and size of
proprietary products that are subject to patent challenges is
expected to decrease in the next several years compared to
historical levels. Additionally, as new competitors enter the
market, there may be increased pricing pressure on certain
products, which would result in lower gross margins. This is
particularly true in the case of certain Asian and other
overseas generic competitors, who may be able to produce
products at costs lower than the costs of domestic
manufacturers. If we experience substantial competition from
Asian or other overseas generic competitors with lower
production costs, our profit margins will suffer.
We also face strong competition in our Distribution business,
where we compete with a number of large wholesalers and other
distributors of pharmaceuticals, including McKesson Corporation,
AmerisourceBergen Corporation and Cardinal Health, Inc., which
market both brand and generic pharmaceutical products to their
customers. These companies are significant customers of our
Global Brands and Global Generics businesses. As generic
products generally have higher gross margins for distributors,
each of the large wholesalers, on an increasing basis, are
offering pricing incentives on brand products if the customers
purchase a large portion of their generic pharmaceutical
products from the primary wholesaler. As we do not offer a full
line of brand products to our customers, we are at times
competitively disadvantaged and must compete with these
wholesalers based upon our very competitive pricing for generic
products, greater service levels and our well-established
telemarketing relationships with our customers, supplemented by
our electronic ordering capabilities. The large wholesalers have
historically not used telemarketers to sell to their customers,
but recently have begun to do so. Additionally, generic
manufacturers are increasingly marketing their products directly
to smaller chains and thus increasingly bypassing wholesalers
and distributors. Increased competition in the generic industry
as a whole may result in increased price erosion in the pursuit
of market share.
Sales
of our products may continue to be adversely affected by the
continuing consolidation of our distribution network and the
concentration of our customer base.
Our principal customers in our brand and generic pharmaceutical
operations are wholesale drug distributors and major retail drug
store chains. These customers comprise a significant part of the
distribution network for pharmaceutical products in the
U.S. This distribution network is continuing to undergo
significant consolidation marked by mergers and acquisitions
among wholesale distributors and the growth of large retail drug
store chains. As a result, a small number of large wholesale
distributors and large chain drug stores control a significant
share of the market. We expect that consolidation of drug
wholesalers and retailers will increase pricing and other
competitive pressures on drug manufacturers, including Watson.
For the year ended December 31, 2010, our three largest
customers accounted for 14%, 11% and 6% respectively, of our net
revenues. The loss of any of these customers could have a
material adverse effect on our business, results of operations,
financial condition and cash flows. In addition, none of our
customers are party to any long-term supply agreements with us,
and thus are able to change suppliers freely should they wish to
do so.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
37
We conduct our operations using a combination of owned and
leased properties.
Our owned properties consist of facilities used for R&D,
manufacturing, distribution (including warehousing and storage),
sales and marketing and administrative functions. The following
table provides a summary of locations of our significant owned
properties:
|
|
|
|
|
Location
|
|
Primary Use
|
|
Segment
|
|
Ambernath, India
|
|
Manufacturing, R&D
|
|
Global Generics
|
Carmel, New York
|
|
Manufacturing
|
|
Global Generics
|
Changzhou City, Peoples Republic of China
|
|
Manufacturing
|
|
Global Generics
|
Coleraine, United Kingdom
|
|
Manufacturing
|
|
Global Generics
|
Copiague, New York
|
|
Manufacturing, R&D
|
|
Global Generics
|
Corona, California
|
|
Manufacturing, R&D, Administration
|
|
Global Generics/Global Brands
|
Davie, Florida
|
|
Manufacturing, R&D, Administration
|
|
Global Generics/Global Brands
|
Grand Island, New York
|
|
Sales and Marketing, Administration
|
|
Distribution
|
Goa, India
|
|
Manufacturing
|
|
Global Generics
|
Gurnee, Illinois
|
|
Distribution
|
|
Global Generics/Global Brands
|
Melbourne, Australia
|
|
R&D, Administration
|
|
Global Generics
|
Mississauga, Canada
|
|
Manufacturing, R&D, Administration
|
|
Global Generics
|
Rio de Janeiro, Brazil
|
|
Manufacturing, Distribution, Sales and Marketing, Administration
|
|
Global Generics
|
Salt Lake City, Utah
|
|
Manufacturing, R&D
|
|
Global Generics/Global Brands
|
Shanghai, Peoples Republic of China
|
|
Sales and Marketing, Administration
|
|
Global Generics
|
38
Properties that we lease include R&D, manufacturing,
distribution (including warehousing and storage), sales and
marketing, and administrative facilities. The following table
provides a summary of locations of our significant leased
properties:
|
|
|
|
|
Location
|
|
Primary Use
|
|
Segment
|
|
Birzebbuga, Malta
|
|
Manufacturing, Sales and Marketing Distribution, Administration
|
|
Global Generics
|
Davie, Florida
|
|
Manufacturing, Administration
|
|
Global Generics/Global Brands
|
Groveport, Ohio
|
|
Distribution, Administration
|
|
Distribution
|
Liverpool, United Kingdom
|
|
Administration, R&D
|
|
Global Brands
|
London, United Kingdom
|
|
Sales and Marketing, Administration
|
|
Global Generics
|
Lyon, France
|
|
Sales and Marketing, Administration
|
|
Global Generics
|
Mississauga, Canada
|
|
Distribution, Administration
|
|
Global Generics
|
Morristown, New Jersey
|
|
Sales and Marketing, Administration
|
|
Global Generics/Global Brands
|
Mumbai, India
|
|
Administration, R&D
|
|
Global Generics
|
Parsippany, New Jersey
|
|
Sales and Marketing, Administration
|
|
Global Generics/Global Brands
|
Stevenage, United Kingdom
|
|
Sales and Marketing, Administration
|
|
Global Generics
|
Sunrise, Florida
|
|
Distribution, Administration
|
|
Global Generics
|
Sydney, Australia
|
|
Sales and Marketing, Administration
|
|
Global Generics
|
Weston, Florida
|
|
R&D, Administration
|
|
Global Generics
|
Weston, Florida
|
|
Distribution, Sales and Marketing, Administration
|
|
Distribution
|
Our leased properties are subject to various lease terms and
expirations.
We believe that we have sufficient facilities to conduct our
operations during 2011. However, we continue to evaluate the
purchase or lease of additional properties, or the consolidation
of existing properties as our business requires.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
For information regarding legal proceedings, refer to Legal
Matters in NOTE 16 Commitments and
Contingencies in the accompanying Notes to
Consolidated Financial Statements in this Annual Report.
|
|
ITEM 4.
|
REMOVED
AND RESERVED
|
39
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
for Registrants Common Equity
Our common stock is traded on the New York Stock Exchange under
the symbol WPI. The following table sets forth the
quarterly high and low share trading price information for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
First
|
|
$
|
42.50
|
|
|
$
|
37.26
|
|
Second
|
|
$
|
44.97
|
|
|
$
|
40.50
|
|
Third
|
|
$
|
45.15
|
|
|
$
|
39.34
|
|
Fourth
|
|
$
|
52.20
|
|
|
$
|
42.17
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
First
|
|
$
|
32.95
|
|
|
$
|
23.05
|
|
Second
|
|
$
|
33.97
|
|
|
$
|
28.06
|
|
Third
|
|
$
|
37.20
|
|
|
$
|
32.61
|
|
Fourth
|
|
$
|
40.25
|
|
|
$
|
33.88
|
|
As of February 8, 2011, there were approximately 2,700
registered holders of our common stock.
We have not paid any cash dividends since our initial public
offering in February 1993, and do not anticipate paying any cash
dividends in the foreseeable future.
Issuer
Purchases of Equity Securities
During the quarter ended December 31, 2010, we repurchased
11,441 shares of our common stock surrendered to the
Company to satisfy tax withholding obligations in connection
with the vesting of restricted stock issued to employees as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Approximate Dollar
|
|
|
Total Number
|
|
Average
|
|
Shares Purchased as
|
|
Value of Shares that
|
|
|
of Shares
|
|
Price Paid
|
|
Part of Publicaly
|
|
May Yet Be Purchased
|
Period
|
|
Purchased
|
|
per Share
|
|
Announced Program
|
|
Under the Program
|
|
October 1 - 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
November 1 - 30, 2010
|
|
|
4,948
|
|
|
$
|
49.10
|
|
|
|
|
|
|
|
|
|
December 1 - 31, 2010
|
|
|
6,493
|
|
|
$
|
51.31
|
|
|
|
|
|
|
|
|
|
Recent
Sale of Unregistered Securities; Uses of Proceeds from
Registered Securities
None.
Securities
Authorized for Issuance Under Equity Compensation
Plans
For information regarding securities authorized for issuance
under equity compensation plans, refer to ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS and
NOTE 12 Stockholders Equity
in the accompanying Notes to Consolidated Financial
Statements in this Annual Report.
40
Performance
Graph
The information in this section of the Annual Report
pertaining to our performance relative to our peers is being
furnished but not filed with the SEC, and as such, the
information is neither subject to Regulation 14A or 14C or
to the liabilities of Section 18 of the Securities Exchange
Act of 1934.
The following graph compares the cumulative
5-year total
return of holders of Watsons common stock with the
cumulative total returns of the S&P 500 index and the Dow
Jones US Pharmaceuticals index. The graph tracks the performance
of a $100 investment in our common stock and in each of the
indexes (with reinvestment of all dividends, if any) on
December 31, 2005 with relative performance tracked through
December 31, 2010.
Notwithstanding anything to the contrary set forth in our
previous filings under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, which might
incorporate future filings made by us under those statutes, the
following graph will not be deemed incorporated by reference
into any future filings made by us under those statutes.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Watson Pharmaceuticals, The S&P 500 Index
And The Dow Jones US Pharmaceuticals Index
* $100 invested on
December 31, 2005 in stock or index, including reinvestment
of dividends.
Fiscal year ending December 31.
Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
Copyright©
2010 Dow Jones & Co. All rights reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/05
|
|
|
|
12/06
|
|
|
|
12/07
|
|
|
|
12/08
|
|
|
|
12/09
|
|
|
|
12/10
|
|
Watson Pharmaceuticals
|
|
|
|
100.00
|
|
|
|
|
80.07
|
|
|
|
|
83.48
|
|
|
|
|
81.73
|
|
|
|
|
121.84
|
|
|
|
|
158.87
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
115.80
|
|
|
|
|
122.16
|
|
|
|
|
76.96
|
|
|
|
|
97.33
|
|
|
|
|
111.99
|
|
Dow Jones US Pharmaceuticals
|
|
|
|
100.00
|
|
|
|
|
114.39
|
|
|
|
|
119.50
|
|
|
|
|
97.81
|
|
|
|
|
116.48
|
|
|
|
|
118.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock price performance included in this graph is not
necessarily indicative of future stock price performance.
41
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
WATSON
PHARMACEUTICALS, INC.
FINANCIAL HIGHLIGHTS(1)
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009(2)
|
|
2008
|
|
2007
|
|
2006(3)
|
|
Operating Highlights:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,566.9
|
|
|
$
|
2,793.0
|
|
|
$
|
2,535.5
|
|
|
$
|
2,496.7
|
|
|
$
|
1,979.2
|
|
Operating income (loss)(1)
|
|
$
|
305.4
|
|
|
$
|
383.9
|
|
|
$
|
358.2
|
|
|
$
|
255.7
|
|
|
$
|
(422.1
|
)
|
Net income (loss)(1)
attributable to common shareholders
|
|
$
|
184.4
|
|
|
$
|
222.0
|
|
|
$
|
238.4
|
|
|
$
|
141.0
|
|
|
$
|
(445.0
|
)
|
Basic earnings (loss) per share
|
|
$
|
1.51
|
|
|
$
|
2.11
|
|
|
$
|
2.32
|
|
|
$
|
1.38
|
|
|
$
|
(4.37
|
)
|
Diluted earnings (loss) per share
|
|
$
|
1.48
|
|
|
$
|
1.96
|
|
|
$
|
2.09
|
|
|
$
|
1.27
|
|
|
$
|
(4.37
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
122.4
|
|
|
|
105.0
|
|
|
|
102.8
|
|
|
|
102.3
|
|
|
|
101.8
|
|
Diluted
|
|
|
124.2
|
|
|
|
116.4
|
|
|
|
117.7
|
|
|
|
117.0
|
|
|
|
101.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2010
|
|
2009(2)
|
|
2008
|
|
2007
|
|
2006(3)
|
|
Balance Sheet Highlights:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,799.4
|
|
|
$
|
1,769.5
|
|
|
$
|
1,458.4
|
|
|
$
|
1,173.8
|
|
|
$
|
1,261.7
|
|
Working capital
|
|
$
|
978.7
|
|
|
$
|
721.6
|
|
|
$
|
976.4
|
|
|
$
|
728.8
|
|
|
$
|
571.7
|
|
Total assets
|
|
$
|
5,827.3
|
|
|
$
|
5,903.5
|
|
|
$
|
3,677.9
|
|
|
$
|
3,472.0
|
|
|
$
|
3,760.6
|
|
Total debt
|
|
$
|
1,016.1
|
|
|
$
|
1,457.8
|
|
|
$
|
877.9
|
|
|
$
|
905.6
|
|
|
$
|
1,231.2
|
|
Total equity
|
|
$
|
3,282.6
|
|
|
$
|
3,023.1
|
|
|
$
|
2,108.6
|
|
|
$
|
1,849.5
|
|
|
$
|
1,680.4
|
|
|
|
|
(1) |
|
For discussion on comparability of operating income and net
income, please refer to financial line item discussion in our
Managements Discussion and Analysis of Financial
Condition and Results of Operations in this Annual Report. |
|
(2) |
|
On December 2, 2009, the Company acquired all the
outstanding equity of the Arrow Group in exchange for cash
consideration of $1.05 billion, approximately
16.9 million shares of Restricted Common Stock of Watson,
200,000 shares of Mandatorily Redeemable Preferred Stock of
Watson and certain contingent consideration. The fair value of
the total consideration was approximately $1.95 billion.
Certain balance sheet amounts were revised in accordance with
the completion of our purchase accounting. Refer to
NOTE 4 Acquisitions and Divestitures in
the accompanying Notes to Consolidated Financial
Statements in this Annual Report. |
|
(3) |
|
On November 3, 2006, the Company acquired all the
outstanding shares of common stock of Andrx Corporation in an
all-cash transaction for $25 per share, or total consideration
of approximately $1.9 billion. |
42
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Except for the historical information contained herein, the
following discussion contains forward-looking statements that
are subject to known and unknown risks, uncertainties and other
factors that may cause actual results to differ materially from
those expressed or implied by such forward-looking statements.
We discuss such risks, uncertainties and other factors
throughout this report and specifically under the caption
Cautionary Note Regarding Forward-Looking Statements
under ITEM 1A. RISK FACTORS in this annual
report on
Form 10-K
(Annual Report). In addition, the following
discussion of financial condition and results of operations
should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual
Report.
EXECUTIVE
SUMMARY
Overview
of Watson
Watson Pharmaceuticals, Inc. (Watson, the
Company, we, us or
our) was incorporated in 1985 and is engaged in the
development, manufacturing, marketing, sale and distribution of
brand and generic pharmaceutical products. Watson operates
manufacturing, distribution, research and development
(R&D), and administrative facilities in the
United States of America (U.S.) and, beginning in
2009, in key international markets including Western Europe,
Canada, Australasia, South America and South Africa.
As of December 31, 2010, we marketed approximately 160
generic pharmaceutical product families and approximately 30
brand pharmaceutical product families in the U.S. and a
significant number of product families internationally through
our Global Generics and Global Brands Divisions and distributed
approximately 8,500 stock-keeping units (SKUs)
through our Distribution business (also known as
Anda) in the U.S. 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. Our Distribution business primarily
distributes generic pharmaceutical products to independent
pharmacies, alternate care providers (hospitals, nursing homes
and mail order pharmacies) and pharmacy chains, and generic
products and certain selective brand products to
physicians offices.
Acquisition
of Arrow Group
On December 2, 2009, Watson completed its acquisition of
all the outstanding equity of Robin Hood Holdings Limited, a
Malta private limited liability company, and Cobalt
Laboratories, Inc., a Delaware corporation (together the
Arrow Group) for cash, stock and certain contingent
consideration (the Arrow Acquisition). In accordance
with the terms of the share purchase agreement dated
June 16, 2009, as amended on November 26, 2009
(together the Acquisition Agreement), the Company
acquired all the outstanding equity of the Arrow Group for the
following consideration:
|
|
|
|
|
The payment of cash and the assumption of certain liabilities
totaling $1.05 billion;
|
|
|
|
Approximately 16.9 million restricted shares of Common
Stock of Watson (the Restricted Common Stock);
|
|
|
|
200,000 shares of newly designated mandatorily redeemable,
non-voting Series A Preferred Stock of Watson (the
Mandatorily Redeemable Preferred Stock) placed in an
indemnity escrow account for the benefit of the former
shareholders of the Arrow Group (the Arrow Selling
Shareholders);
|
|
|
|
The Arrow Selling Shareholders will be entitled to the proceeds
of the Mandatorily Redeemable Preferred Stock in 2012, less the
amount of any indemnity payments; and
|
|
|
|
Certain contingent consideration based on the after-tax gross
profits on sales of the authorized generic version of
Lipitor®
(atorvastatin) in the U.S. calculated and payable as
described in the Acquisition Agreement.
|
43
As a result of the Arrow Acquisition, Watson also acquired a 36%
ownership interest in Eden Biopharm Group Limited
(Eden), a company which provides development and
manufacturing services for early-stage biotech companies, which
will provide a long-term foundation for generic biologics. In
January 2010, we purchased the remaining interest in Eden for
$15.0 million. Eden results are included in our Global
Brands division and will maintain its established contract
services model, while providing the Company with
biopharmaceutical development and manufacturing capabilities.
2010
Financial Highlights
Among the significant consolidated financial highlights for 2010
were the following:
|
|
|
|
|
Net revenues grew to $3,566.9 million from
$2,793.0 million in 2009, an increase of
$773.9 million or 28%;
|
|
|
|
R&D investment increased $98.8 million or 50% to
$296.1 million from $197.3 million in 2009;
|
|
|
|
Operating income decreased by $78.5 million or 20% to
$305.4 million from $383.9 million in 2009; and
|
|
|
|
Net income for 2010 was $184.4 million ($1.48 per diluted
share) compared to $222.0 million ($1.96 per diluted
share) in 2009.
|
Segments
Watson has three reportable segments: Global Generics, Global
Brands and Distribution. The Global Generics segment includes
off-patent pharmaceutical products that are therapeutically
equivalent to proprietary products. The Global Brands segment
includes patent-protected products and certain trademarked
off-patent products that Watson sells and markets as brand
pharmaceutical products. 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 products
developed, acquired, or licensed by Watsons Global
Generics and Global Brands segments. Our international operating
results are included in the Global Generics segment subsequent
to the Arrow Acquisition except for operating results from Eden
which are included in the Global Brands segment.
The Company evaluates segment performance based on segment net
revenues, gross profit and contribution. Segment contribution
represents segment net revenues less cost of sales (excludes
amortization), direct R&D expenses and selling and
marketing expenses. The Company does not report total assets,
capital expenditures, corporate general and administrative
expenses, amortization, gains on disposal or impairment losses
by segment as such information has not been used by management,
or has not been accounted for at the segment level.
Global
Supply Chain Initiative
During the first quarter of 2008, we announced steps to improve
our operating cost structure and achieve operating efficiencies
through our Global Supply Chain Initiative (GSCI).
These 2008 GSCIs included the planned closure of
manufacturing facilities in Carmel, New York, our distribution
center in Brewster, New York and the transition of
manufacturing to our other manufacturing locations within the
U.S. and India. Distribution activities at our distribution
center in Brewster, New York ceased in July 2009. Product
manufacturing ceased in Carmel, New York by December 31,
2010 and we expect a closure of the facility by early 2011.
During the second quarter of 2010, the Company announced
additional measures to reduce its cost structure involving a
manufacturing facility in Canada, certain R&D activities in
Canada and certain R&D activities in Australia. In
January 2011, the Company announced the closure of R&D
activities in Corona, California. These additional restructuring
activities, and the transfer of development activities to
existing R&D sites, are expected to be completed in
Australia by early 2011, in Corona by the end of 2011 and in
Canada by late 2012. The Company expects to incur additional
pre-tax costs associated with the
44
planned closures during 2011 and 2012 of approximately $20.0 to
$25.0 million which includes accelerated depreciation
expense of $7.0 to $8.5 million, severance, retention,
relocation and other employee related costs of approximately
$5.0 to $8.0 million and product transfer costs of
approximately $8.0 to $8.5 million.
YEAR
ENDED DECEMBER 31, 2010 COMPARED TO 2009
Results of operations, including segment net revenues, segment
operating expenses and segment contribution information for the
Companys Global Generics, Global Brands and Distribution
segments, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Global
|
|
|
Global
|
|
|
|
|
|
|
|
|
Global
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
Generics
|
|
|
Brands
|
|
|
Distribution
|
|
|
Total
|
|
|
Generics
|
|
|
Brands
|
|
|
Distribution
|
|
|
Total
|
|
|
Product sales
|
|
$
|
2,268.9
|
|
|
$
|
316.3
|
|
|
$
|
830.7
|
|
|
$
|
3,415.9
|
|
|
$
|
1,641.8
|
|
|
$
|
393.7
|
|
|
$
|
663.8
|
|
|
$
|
2,699.3
|
|
Other revenue
|
|
|
69.5
|
|
|
|
81.5
|
|
|
|
|
|
|
|
151.0
|
|
|
|
26.4
|
|
|
|
67.3
|
|
|
|
|
|
|
|
93.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,338.4
|
|
|
|
397.8
|
|
|
|
830.7
|
|
|
|
3,566.9
|
|
|
|
1,668.2
|
|
|
|
461.0
|
|
|
|
663.8
|
|
|
|
2,793.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales(1)
|
|
|
1,198.9
|
|
|
|
88.4
|
|
|
|
711.2
|
|
|
|
1,998.5
|
|
|
|
947.1
|
|
|
|
89.3
|
|
|
|
560.4
|
|
|
|
1,596.8
|
|
Research and development
|
|
|
194.6
|
|
|
|
101.5
|
|
|
|
|
|
|
|
296.1
|
|
|
|
140.4
|
|
|
|
56.9
|
|
|
|
|
|
|
|
197.3
|
|
Selling and marketing
|
|
|
111.9
|
|
|
|
137.8
|
|
|
|
70.3
|
|
|
|
320.0
|
|
|
|
53.8
|
|
|
|
144.5
|
|
|
|
64.8
|
|
|
|
263.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
|
|
$
|
833.0
|
|
|
$
|
70.1
|
|
|
$
|
49.2
|
|
|
|
952.3
|
|
|
$
|
526.9
|
|
|
$
|
170.3
|
|
|
$
|
38.6
|
|
|
|
735.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contibution margin
|
|
|
35.6
|
%
|
|
|
17.6
|
%
|
|
|
5.9
|
%
|
|
|
26.7
|
%
|
|
|
31.6
|
%
|
|
|
36.9
|
%
|
|
|
5.8
|
%
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
436.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257.1
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92.6
|
|
Loss on asset sales and impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
305.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
383.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.7
|
%
|
|
|
|
(1) |
|
Excludes amortization of acquired intangibles including product
rights. |
Global
Generics Segment
Net
Revenues
Our Global Generics 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, or if we are
successful in developing a bioequivalent, non-infringing version
of 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 Global Generics segment include product
sales and other revenue. Our Global Generics 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,
inhalation products and transmucosals.
Other revenues consist primarily of royalties, milestone
receipts and commission revenue.
Net revenues from our Global Generics segment during the year
ended December 31, 2010 increased 40.2% or
$670.2 million to $2,338.4 million compared to net
revenues of $1,668.2 million from the prior year. The
increase in net revenues was mainly attributable to increased
international revenues due to the Arrow
45
Acquisition in 2009 ($367.8 million), higher sales of
extended release products ($225.3 million) and an increase
in other revenue ($43.1 million).
The 2010 increase in other revenue ($43.1 million)
primarily related to milestone receipts ($27.5 million) and
other revenues from the Arrow Group.
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 Global Generics segment increased 26.6% or
$251.8 million to $1,198.9 million in the year ended
December 31, 2010 compared to $947.1 million in the
prior year. This increase in cost of sales was mainly
attributable to the inclusion of Arrow Group during the period
($242.5 million) and higher sales of extended release
products ($13.5 million). The increase in cost of sales was
partially offset by cost savings from the implementation of our
GSCI.
Research
and Development Expenses
R&D expenses consist mainly of personnel-related costs,
active pharmaceutical ingredient (API) costs,
contract research, biostudy and facilities costs associated with
the development of our products.
R&D expenses within our Global Generics segment increased
38.6% or $54.2 million to $194.6 million for the year
ended December 31, 2010 compared to $140.4 million
from the prior year. This increase in R&D expenses was
due primarily to the inclusion of Arrow Group
($51.2 million).
Selling
and Marketing Expenses
Selling and marketing expenses consist mainly of
personnel-related costs, distribution costs, professional
services costs, insurance, depreciation and travel costs.
Selling and marketing expenses increased 108.1% or
$58.1 million to $111.9 million for the year ended
December 31, 2010 compared to $53.8 million from the
prior year due primarily to the inclusion of Arrow Group selling
and marketing expenses in the current period
($61.1 million) which was partially offset by cost savings
as a result of the implementation of our Global Supply Chain
Initiative.
Global
Brands Segment
Net
Revenues
Our Global Brands segment includes our promoted products such as
Rapaflo®,
Gelnique®,
Crinone®,
Trelstar®,
ella®
and
INFeD®
and a number of non-promoted products.
Other revenues in the Global Brands 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 Global Brands segment for the year ended
December 31, 2010 decreased 13.7% or $63.2 million to
$397.8 million compared to net revenues of
$461.0 million from the prior year. The decrease in net
revenues was primarily attributable to the loss of
Ferrlecit®
($113.8 million), as our distribution rights for
Ferrlecit®
terminated on December 31, 2009. The decline in revenues
from the loss of
Ferrlecit®
was partially offset by sales of new products, including
Rapaflo®,
Gelnique®
and
Crinone®,
higher sales of
INFeD®
(as sales during 2009 were negatively impacted by a supply
interruption) and higher sales of
Androderm®.
Combined these products resulted in an increase in product sales
of $55.2 million. Other revenues also increased by
$14.2 million.
46
The increase in other revenue was primarily due to the
out-licensing of a number of legacy brand products including
Monodox®
and certain forms of
Cordran®
($8.0 million), higher co-promotion revenues
($2.8 million) and an increase in international other
revenues related to our acquisition of Eden.
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 Global Brands segment decreased 0.9% or
$0.9 million to $88.4 million in the year ended
December 31, 2010 compared to $89.3 million in the
prior year. This decrease in cost of sales was attributable to
the loss in sales of
Ferrlecit®
offset by increases in cost of sales due to new products and
overall product mix.
Research
and Development Expenses
R&D expenses consist mainly of personnel-related costs,
contract research costs, clinical costs and facilities costs
associated with the development of our products.
R&D expenses within our Global Brands segment increased
78.3% or $44.6 million to $101.5 million compared to
$56.9 million from the prior year primarily due to an
increase in milestone payments in the current year
($22.8 million), a fair value adjustment related to a
product in development acquired from Columbia Laboratories, Inc.
(Columbia) ($7.7 million), the inclusion of
R&D expenditures from recently acquired Eden
($6.8 million) and higher clinical spending.
Selling
and Marketing Expenses
Selling and marketing expenses consist mainly of
personnel-related costs, product promotion costs, distribution
costs, professional services costs, insurance and depreciation.
Selling and marketing expenses within our Global Brands segment
decreased 4.6% or $6.7 million to $137.8 million
compared to $144.5 million from the prior year primarily
due to lower field force, marketing and support costs
($5.4 million) and lower promotional costs
($2.0 million) due mainly to the loss of
Ferrlecit®.
Distribution
Segment
Net
Revenues
Our Distribution business distributes generic and certain select
brand 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
sales by Anda of products developed, acquired, or licensed by
Watsons Global Generics and Global Brands segments.
Net revenues from our Distribution segment for the year ended
December 31, 2010 increased 25.1% or $166.9 million to
$830.7 million compared to net revenues of
$663.8 million in the prior year primarily due to an
increase in net revenues from new product launches
($175.9 million) and higher third party brand product sales
($14.1 million) which were partially offset by a decline in
the base business ($23.1 million).
Cost of
Sales
Cost of sales for our Distribution segment includes third party
acquisition costs for products manufactured by others,
profit-sharing or royalty payments for products sold pursuant to
licensing agreements and inventory
47
reserve charges, where applicable. Cost of sales does not
include amortization costs for acquired product rights or other
acquired intangibles.
Cost of sales for our Distribution segment increased 26.9% or
$150.8 million to $711.2 million in the year ended
December 31, 2010 compared to $560.4 million in the
prior year due to higher product sales.
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
8.3% or $5.5 million to $70.3 million in the year
ended December 31, 2010 as compared to $64.8 million
in the prior year primarily due to higher variable costs related
to increased sales.
Corporate
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2010
|
|
2009
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Corporate general and administrative expenses
|
|
$
|
436.1
|
|
|
$
|
257.1
|
|
|
$
|
179.0
|
|
|
|
69.6
|
%
|
as % of net revenues
|
|
|
12.2
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
Corporate general and administrative expenses consist mainly of
personnel-related costs, facilities costs, insurance,
depreciation, litigation and settlement costs and professional
services costs which are general in nature and not directly
related to specific segment operations.
Corporate general and administrative expenses increased 69.6% or
$179.0 million to $436.1 million compared to
$257.1 million from the prior year due to an increase in
accrued legal contingencies and legal costs over the prior year
period ($123.0 million), inclusion of Arrow administrative
expenses for the period ($50.9 million) and higher Anda bad
debt expense ($4.3 million).
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2010
|
|
2009
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Amortization
|
|
$
|
180.0
|
|
|
$
|
92.6
|
|
|
$
|
87.4
|
|
|
|
94.4
|
%
|
as % of net revenues
|
|
|
5.0
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
The Companys amortizable assets consist primarily of
acquired product rights. Amortization in 2010 increased
primarily as a result of the amortization of product rights the
Company acquired in the Arrow Acquisition.
Loss
on Asset Sales and Impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2010
|
|
2009
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Loss on asset sales and impairments
|
|
$
|
30.8
|
|
|
$
|
2.2
|
|
|
$
|
28.6
|
|
|
|
1300.0
|
%
|
Due to changes in market conditions in certain international
locations, the Company performed an off-cycle impairment review
in the fourth quarter of 2010. As a result of this review, the
Company recorded an impairment charge for certain acquired
in-process research and development (IPR&D)
intangibles acquired in the Arrow Acquisition of
$28.6 million. Additionally, we recognized a loss on the
sale of stock in our Sweden subsidiary during the year ended
December 31, 2010.
48
In January 2009, we recognized a $1.5 million gain on the
sale of certain property and equipment in Dombivli, India for
cash consideration of $3.0 million. In September 2009, we
recognized a $3.5 million impairment on an API
manufacturing facility in China.
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2010
|
|
2009
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Interest income
|
|
$
|
1.6
|
|
|
$
|
5.0
|
|
|
$
|
(3.4
|
)
|
|
|
(68.0
|
)%
|
Interest income decreased during the year ended
December 31, 2010 primarily due to the decrease in interest
rates and invested balances over the prior year period.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollars
|
|
|
%
|
|
|
|
($ in millions):
|
|
|
Interest expense $850.0 million Senior Notes
due 2014 (the 2014 Notes) and due 2019 (the
2019 Notes), together the Senior Notes
|
|
$
|
48.8
|
|
|
$
|
17.5
|
|
|
$
|
31.3
|
|
|
|
|
|
Interest expense Preferred accretion
|
|
|
15.2
|
|
|
|
1.2
|
|
|
|
14.0
|
|
|
|
|
|
Interest expense Atorvastatin accretion
|
|
|
12.1
|
|
|
|
1.0
|
|
|
|
11.1
|
|
|
|
|
|
Interest expense Columbia accretion
|
|
|
3.3
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
Interest expense Senior Credit Facility with
Canadian Imperial Bank of Commerce, Wachovia Capital Markets,
LLC and a syndicate of banks (2006 Credit Facility),
due 2011
|
|
|
3.7
|
|
|
|
4.9
|
|
|
|
(1.2
|
)
|
|
|
|
|
Interest expense Convertible contingent senior
debentures (CODES)
|
|
|
|
|
|
|
8.9
|
|
|
|
(8.9
|
)
|
|
|
|
|
Interest expense other
|
|
|
1.0
|
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
84.1
|
|
|
$
|
34.2
|
|
|
$
|
49.9
|
|
|
|
145.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense increased for the year ended December 31,
2010 over the prior year primarily due to interest on the Senior
Notes issued in 2009, interest accretion charges on the
Mandatorily Redeemable Preferred Stock issued in the Arrow
Acquisition, accretion of interest on the atorvastatin
contingent consideration obligation and accretion of interest on
the Columbia contingent consideration obligation, which was
partially offset by interest on the CODES which were redeemed
during 2009.
Other
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollars
|
|
|
%
|
|
|
|
($ in millions):
|
|
|
Gain (loss) on sale of securities
|
|
$
|
25.6
|
|
|
$
|
(1.1
|
)
|
|
$
|
26.7
|
|
|
|
|
|
Earnings on equity method investments
|
|
|
1.6
|
|
|
|
10.8
|
|
|
|
(9.2
|
)
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
(0.5
|
)
|
|
|
(2.0
|
)
|
|
|
1.5
|
|
|
|
|
|
Other income
|
|
|
1.0
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27.7
|
|
|
$
|
7.9
|
|
|
$
|
19.8
|
|
|
|
250.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Gain
(loss) on Sale of Securities
During 2010, we completed the sale of our outstanding shares of
Scinopharm Taiwan Ltd. (Scinopharm) for net proceeds
of approximately $94.0 million and recorded a gain of
$23.3 million.
In the year ended December 31, 2009, the Company recorded
an
other-than-temporary
impairment charge of $2.2 million related to our investment
in common shares of inVentiv Health, Inc. as the fair value of
our investment fell below our carrying value. This loss was
partially offset by the receipt of cash proceeds of
$1.1 million as additional consideration on the sale of our
investment in Adheris, Inc.
Earnings
on Equity Method Investments
The Companys equity investments are accounted for under
the equity method when the Companys ownership does not
exceed 50% and when the Company can exert significant influence
over the management of the investee.
The earnings on equity investments for the year ended
December 31, 2009 were higher than the current year due to
the sale of our outstanding shares of Scinopharm during the
first quarter of 2010.
Loss on
Early Extinguishment of Debt
In November 2006, we entered into the 2006 Credit Facility in
connection with the acquisition of Andrx Corporation
(Andrx) on November 3, 2006 (the Andrx
Acquisition). The 2006 Credit Facility provides an
aggregate of $1.15 billion of senior financing to Watson,
consisting of a $500.0 million revolving credit facility
(Revolving Facility) and a $650.0 million
senior term loan facility (Term Facility) and is due
to expire in November 2011.
For the year ended December 31, 2010, we recognized a
$0.5 million loss on early extinguishment of debt due to
the early repayment of the remaining amount owing under the Term
Facility of the 2006 Credit Facility.
On July 1, 2009, the Company entered into an amendment to
the 2006 Credit Facility. The terms of the amendment included
the repayment of $100.0 million on the Term Facility under
the 2006 Credit Agreement not later than December 16, 2009.
As a result of the $100.0 million repayment in 2009 under
the Term Facility, the Companys 2009 results reflect a
$0.8 million charge for a loss on the early extinguishment
of debt in respect of the 2006 Credit Facility.
On September 14, 2009, the CODES were redeemed in
accordance with the terms of the CODES. As a result of the
redemption of the CODES, the Companys results for 2009
reflect a $1.2 million loss on the early extinguishment of
the CODES.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2010
|
|
2009
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Provision for income taxes
|
|
$
|
67.3
|
|
|
$
|
140.6
|
|
|
$
|
(73.3
|
)
|
|
|
(52.1
|
)%
|
Effective tax rate
|
|
|
26.9
|
%
|
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
The lower effective tax rate for the year ended
December 31, 2010 compared to the prior year, is primarily
due to non-recurring tax benefits associated with the closure of
the IRS audit for the
2004-2006
tax years, reduction in the statutory tax rates in foreign
jurisdictions, tax benefits associated with the Arrow
Acquisition and the disposition and write-off of foreign
subsidiaries.
50
YEAR
ENDED DECEMBER 31, 2009 COMPARED TO 2008
Results of operations, including segment net revenues, segment
operating expenses and segment contribution information for the
Companys Global Generics, Global Brands and Distribution
segments, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Global
|
|
|
Global
|
|
|
|
|
|
|
|
|
Global
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
Generics
|
|
|
Brands
|
|
|
Distribution
|
|
|
Total
|
|
|
Generics
|
|
|
Brands
|
|
|
Distribution
|
|
|
Total
|
|
|
Product sales
|
|
$
|
1,641.8
|
|
|
$
|
393.7
|
|
|
$
|
663.8
|
|
|
$
|
2,699.3
|
|
|
$
|
1,404.0
|
|
|
$
|
397.0
|
|
|
$
|
606.2
|
|
|
$
|
2,407.2
|
|
Other revenue
|
|
|
26.4
|
|
|
|
67.3
|
|
|
|
|
|
|
|
93.7
|
|
|
|
70.3
|
|
|
|
58.0
|
|
|
|
|
|
|
|
128.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,668.2
|
|
|
|
461.0
|
|
|
|
663.8
|
|
|
|
2,793.0
|
|
|
|
1,474.3
|
|
|
|
455.0
|
|
|
|
606.2
|
|
|
|
2,535.5
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales(1)
|
|
|
947.1
|
|
|
|
89.3
|
|
|
|
560.4
|
|
|
|
1,596.8
|
|
|
|
883.8
|
|
|
|
107.1
|
|
|
|
511.9
|
|
|
|
1,502.8
|
|
Research and development
|
|
|
140.4
|
|
|
|
56.9
|
|
|
|
|
|
|
|
197.3
|
|
|
|
119.2
|
|
|
|
50.9
|
|
|
|
|
|
|
|
170.1
|
|
Selling and marketing
|
|
|
53.8
|
|
|
|
144.5
|
|
|
|
64.8
|
|
|
|
263.1
|
|
|
|
55.2
|
|
|
|
118.2
|
|
|
|
59.5
|
|
|
|
232.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
|
|
$
|
526.9
|
|
|
$
|
170.3
|
|
|
$
|
38.6
|
|
|
|
735.8
|
|
|
$
|
416.1
|
|
|
$
|
178.8
|
|
|
$
|
34.8
|
|
|
|
629.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
31.6
|
%
|
|
|
36.9
|
%
|
|
|
5.8
|
%
|
|
|
26.3
|
%
|
|
|
28.2
|
%
|
|
|
39.3
|
%
|
|
|
5.7
|
%
|
|
|
24.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190.5
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80.7
|
|
Loss on asset sales and impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
383.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
358.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1
|
%
|
|
|
|
(1) |
|
Excludes amortization of acquired intangibles including product
rights. |
Global
Generics Segment
Net
Revenues
Net revenues from our Global Generics segment during the year
ended December 31, 2009 increased 13.2% or
$193.9 million to $1,668.2 million compared to net
revenues of $1,474.3 million from the prior year.
The increase in net revenues was mainly attributable to new
product launches in 2009 and in late 2008 ($244.9 million)
as well as revenue from the inclusion of Arrow Group results for
the month of December ($46.4 million) offset in part by a
decrease in other revenue ($43.9 million) and a decrease in
sales of alendronate sodium tablets and omeprazole due to
increased competition ($66.9 million).
Of the $43.9 million decrease in other revenue, there was a
$20.2 million decline in 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. Sales of Wellbutrin
XL®
150 mg declined due to increased competition. Other revenue
also declined as the prior year period included a
$15.0 million milestone payment.
Cost of
Sales
Cost of sales for our Global Generics segment increased 7.2% or
$63.3 million to $947.1 million in the year ended
December 31, 2009 compared to $883.8 million in the
prior year. This increase in cost of sales was mainly
attributable to the inclusion of Arrow Group results for the
month of December ($43.5 million) and higher product sales
in the current year partially offset by manufacturing
efficiencies as a result of the implementation of our Global
Supply Chain Initiative. Arrow Groups cost of sales for
the month of December include $14.2 million of additional
inventory costs associated with the fair value
step-up in
acquired inventory.
51
Research
and Development Expenses
R&D expenses within our Global Generics segment increased
17.8% or $21.2 million to $140.4 million for the year
ended December 31, 2009 compared to $119.2 million
from the prior year. This increase in R&D expenses was
mainly due to higher test chemical and biostudy costs
($14.8 million) and increased international R&D
expenditures ($11.4 million), (including those of the
recently acquired Arrow Group), partially offset by lower
consulting costs ($3.5 million).
Selling
and Marketing Expenses
Global Generics selling and marketing expenses decreased 2.5% or
$1.4 million to $53.8 million for the year ended
December 31, 2009 compared to $55.2 million from the
prior year due primarily to cost savings as a result of the
implementation of our GSCI.
Global
Brands Segment
Net
Revenues
Net revenues from our Global Brands segment for the year ended
December 31, 2009 increased 1.3% or $6.0 million to
$461.0 million compared to net revenues of
$455.0 million from the prior year. The increase in net
revenues was primarily attributable to higher other revenues
($9.3 million) which was partially offset by lower net
product sales ($3.3 million).
The increase in other revenue was primarily due to increased
revenues from the Companys promotion of
AndroGel®
and
Femring®
which was partially offset by a decrease in the amount of
deferred revenues recognized in 2009.
During 2009, the Global Brands segment launched
Rapaflo®
and
Gelnique®
and experienced higher sales of certain non-promoted products in
the year. The increase in sales from product launches and sales
of certain non-promoted products was offset by declines in sales
of both
INFeD®
and
Ferrlecit®
during 2009. 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®
primarily resulted from a customer transitioning to a competing
product during the current year period. Our distribution rights
for
Ferrlecit®
terminated on December 31, 2009.
Cost of
Sales
Cost of sales for our Global Brands segment decreased 16.6% or
$17.8 million to $89.3 million in the year ended
December 31, 2009 compared to $107.1 million in the
prior year. This decrease in cost of sales was attributable to a
$7.7 million inventory reserve charge to cost of sales in
2008 related to our
INFeD®
product, lower product sales in 2009 and lower unit
manufacturing costs for products we manufacture due to higher
manufacturing volumes at certain manufacturing sites.
Research
and Development Expenses
R&D expenses within our Global Brands segment increased
11.8% or $6.0 million to $56.9 million in the year
ended December 31, 2009 compared to $50.9 million from
the prior year primarily due to a higher clinical spending
($4.4 million) and higher labor costs ($2.7 million)
which were partially offset by lower milestone payments in 2009.
Selling
and Marketing Expenses
Selling and marketing expenses within our Global Brands segment
increased 22.3% or $26.3 million to $144.5 million in
the year ended December 31, 2009 compared to
$118.2 million from the prior year primarily due to higher
expenditures in 2009 to support launch activities related to
Rapaflo®
and
Gelnique®.
52
Distribution
Segment
Net
Revenues
Net revenues from our Distribution segment for the year ended
December 31, 2009 increased 9.5% or $57.6 million to
$663.8 million compared to net revenues of
$606.2 million in the prior year primarily due to an
increase in net revenues from new products launched in late 2008
and in 2009 ($166.6 million) which was partially offset by
lower levels of sales in the current year from prior period
product launches and declines in the base business
($108.9 million).
Cost of
Sales
Cost of sales for our Distribution segment increased 9.5% or
$48.5 million to $560.4 million in the year ended
December 31, 2009 compared to $511.9 million in the
prior year due to higher product sales.
Selling
and Marketing Expenses
Distribution segment selling and marketing expenses increased
8.9% or $5.3 million to $64.8 million in the year
ended December 31, 2009 as compared to $59.5 million
in the prior year primarily due to an increase in payroll costs
($5.0 million).
Corporate
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Corporate general and administrative expenses
|
|
$
|
257.1
|
|
|
$
|
190.5
|
|
|
$
|
66.6
|
|
|
|
35.0
|
%
|
as % of net revenues
|
|
|
9.2
|
%
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
Corporate general and administrative expenses increased 35.0% or
$66.6 million to $257.1 million in the year ended
December 31, 2009 compared to $190.5 million from the
prior year due to an increase in legal settlements
($24.7 million), acquisition and integration costs
($16.6 million), higher litigation and legal costs
($13.5 million) and as well as general and administrative
costs from the inclusion of Arrow Group results for the month of
December ($6.2 million). In addition, 2008 was favorably
impacted by the settlement of a tax-related liability
($5.9 million) as a result of the resolution of the
Internal Revenue Service (IRS) federal income tax
return examination.
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Amortization
|
|
$
|
92.6
|
|
|
$
|
80.7
|
|
|
$
|
11.9
|
|
|
|
14.7
|
%
|
as % of net revenues
|
|
|
3.3
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
The Companys amortizable assets consist primarily of
acquired product rights. Amortization in 2009 increased
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 Pharmaceuticals, Inc.
(Barr) and from one month of amortization expense
related to currently marketed product intangibles acquired in
the Arrow Acquisition.
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Interest income
|
|
$
|
5.0
|
|
|
$
|
9.0
|
|
|
$
|
(4.0
|
)
|
|
|
(44.4
|
)%
|
53
Interest income decreased during the year ended
December 31, 2009 primarily due to the decrease in interest
rates over the prior year period.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
%
|
|
|
|
($ in millions):
|
|
|
Interest expense Senior Notes
|
|
$
|
17.5
|
|
|
$
|
|
|
|
$
|
17.5
|
|
|
|
|
|
Interest expense CODES
|
|
|
8.9
|
|
|
|
12.6
|
|
|
|
(3.7
|
)
|
|
|
|
|
Interest expense 2006 Credit Facility due 2011
|
|
|
4.9
|
|
|
|
15.4
|
|
|
|
(10.5
|
)
|
|
|
|
|
Interest expense Preferred accretion
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
Interest expense Atorvastatin accretion
|
|
|
1.0
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
Interest expense other
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
34.2
|
|
|
$
|
28.2
|
|
|
$
|
6.0
|
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense increased for the year ended December 31,
2009 over the prior year primarily due to interest on the Senior
Notes issued during the year and interest accretion charges on
the Preferred Shares issued in the Arrow Acquisition and
accretion of interest on the atorvastatin obligation which was
partially offset by reduced interest on the CODES which were
redeemed during the year and due to reduced LIBOR rates of
interest on the 2006 Credit Facility.
Other
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
%
|
|
|
|
($ in millions):
|
|
|
Earnings on equity method investments
|
|
$
|
10.8
|
|
|
$
|
10.6
|
|
|
$
|
0.2
|
|
|
|
|
|
(Loss) gain on sale of securities
|
|
|
(1.1
|
)
|
|
|
9.6
|
|
|
|
(10.7
|
)
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
(2.0
|
)
|
|
|
(1.1
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
Other income
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7.9
|
|
|
$
|
19.3
|
|
|
$
|
(11.4
|
)
|
|
|
(59.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on Equity Method Investments
The earnings on equity investments for the year ended
December 31, 2009 and 2008 primarily represent our share of
equity earnings in Scinopharm. As discussed in
NOTE 4 Acquisitions and
Divestitures in the accompanying Notes to
Consolidated Financial Statements in this Annual Report,
the Company sold its shares in Scinopharm in 2010.
(Loss)
Gain on Sale of Securities
The 2008 gain on sale of securities primarily related to the
Companys sale of our fifty percent interest in Somerset
Pharmaceuticals, Inc. (Somerset), our joint venture
with Mylan Inc.
Loss on
Early Extinguishment of Debt
On July 1, 2009, the Company entered into an amendment to
the 2006 Credit Facility. The terms of the amendment included
the repayment of $100.0 million on the term facility under
the 2006 Credit Agreement not later than December 16, 2009.
As a result of the $100.0 million repayment in 2009 under
the term facility, the Companys results reflect a
$0.8 million charge for losses on the early extinguishment
of debt in respect of the 2006 Credit Facility.
54
As a result of the redemption of the CODES on September 14,
2009, the Companys results for 2009 reflect a
$1.2 million loss on the early extinguishment of the CODES.
For the year ended December 31, 2008, the Company prepaid
$75.0 million of outstanding debt on the 2006 Credit
Facility. As a result of this prepayment, our results for the
year ended December 31, 2008 reflect debt repurchase
charges of $1.1 million which consist of unamortized debt
issue costs associated with the repurchased amount.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Dollars
|
|
%
|
|
|
($ in millions):
|
|
Provision for income taxes
|
|
$
|
140.6
|
|
|
$
|
119.9
|
|
|
$
|
20.7
|
|
|
|
17.2
|
%
|
Effective tax rate
|
|
|
38.8
|
%
|
|
|
33.5
|
%
|
|
|
|
|
|
|
|
|
The higher effective tax rate for the year ended
December 31, 2009, compared to the prior year, primarily
reflects the impact of non-recurring tax benefits which occurred
in 2008 related to the resolution of the Companys IRS exam
for the years ended December 31, 2000 to 2003 (2.2%) and
the sale of Somerset (1.2%). The 2009 effective tax rate is also
higher than the 2008 effective tax rate due to the 2009 impact
of non-deductible items, including transaction costs related to
the Arrow Acquisition (1.6%) and certain permanent differences.
LIQUIDITY
AND CAPITAL RESOURCES
Working
Capital Position
Working capital at December 31, 2010 and 2009 is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
|
|
|
|
Revised
|
|
|
|
|
|
|
($ in millions):
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
282.8
|
|
|
$
|
201.4
|
|
|
$
|
81.4
|
|
Marketable securities
|
|
|
11.1
|
|
|
|
13.6
|
|
|
|
(2.5
|
)
|
Accounts receivable, net of allowances
|
|
|
560.9
|
|
|
|
517.4
|
|
|
|
43.5
|
|
Inventories, net
|
|
|
631.0
|
|
|
|
692.3
|
|
|
|
(61.3
|
)
|
Prepaid expenses and other current assets
|
|
|
134.2
|
|
|
|
213.9
|
|
|
|
(79.7
|
)
|
Deferred tax assets
|
|
|
179.4
|
|
|
|
130.9
|
|
|
|
48.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,799.4
|
|
|
|
1,769.5
|
|
|
|
29.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
741.1
|
|
|
|
614.3
|
|
|
|
126.8
|
|
Short-term debt and current portion of long-term debt
|
|
|
|
|
|
|
307.6
|
|
|
|
(307.6
|
)
|
Income taxes payable
|
|
|
39.9
|
|
|
|
78.4
|
|
|
|
(38.5
|
)
|
Other
|
|
|
39.7
|
|
|
|
47.6
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
820.7
|
|
|
|
1,047.9
|
|
|
|
(227.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital
|
|
$
|
978.7
|
|
|
$
|
721.6
|
|
|
$
|
257.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Ratio
|
|
|
2.19
|
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2010, our working capital increased by $257.1 million to
$978.7 million from $721.6 million in 2009 primarily
related to cash provided by operating activities and cash
received from the sale of Scinopharm, partially offset by
expenditures on business acquisitions, investments, property and
equipment and debt repayments.
55
Cash
Flows from Operations
Summarized cash flow from operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
($ in millions):
|
|
Net cash provided by operating activities
|
|
$
|
571.0
|
|
|
$
|
376.8
|
|
|
$
|
416.6
|
|
Cash flows from operations represents net income adjusted for
certain non-cash items and changes in assets and liabilities.
The Company has generated cash flows from operating activities
primarily driven by net income adjusted for amortization of our
acquired product rights and depreciation. Cash provided by
operating activities was $571.0 million in 2010, compared
to $376.8 million in 2009 and $416.6 million in 2008.
Net cash provided by operations was higher in 2010 compared to
2009, as accounts payable and accrued expenses increased in
2010, inventory decreased in 2010, $55.0 million was
collected on an acquisition-related receivable during 2010 and
net income adjusted for amortization charges was higher in 2010.
Net cash provided by operations was lower in 2009 compared to
2008 primarily due to comparatively higher levels of inventory
and accounts receivables partially offset by decreased levels of
accounts payable and accrued expenses.
Management expects that available cash balances and 2011 cash
flows from operating activities will provide sufficient
resources to fund our operating liquidity needs and expected
2011 capital expenditure funding requirements.
Investing
Cash Flows
Our cash flows from investing activities are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
($ in millions):
|
|
Net cash used in investing activities
|
|
$
|
74.1
|
|
|
$
|
1,036.1
|
|
|
$
|
93.4
|
|
Investing cash flows consist primarily of expenditures related
to acquisitions, capital expenditures, investment and marketable
security additions, as well as proceeds from investment and
marketable security sales. We used $74.1 million in net
cash for investing activities during 2010 compared to
$1,036.1 million in 2009 and $93.4 million in 2008.
Net cash used in investing activities was lower in 2010 compared
to 2009 due primarily to the Arrow Acquisition in 2009. Net cash
used in investing activities was higher in 2009 compared to 2008
primarily due to the Arrow Acquisition.
Financing
Cash Flows
Our cash flows from financing activities are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
($ in millions):
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(411.3
|
)
|
|
$
|
353.1
|
|
|
$
|
(20.2
|
)
|
Financing cash flows consist primarily of borrowings and
repayments of debt, repurchases of common stock and proceeds
from exercising of stock options. For 2010, net cash used in
financing activities was $411.3 million compared to
$353.1 million provided by financing activities during 2009
and $20.2 million used in financing activities during 2008.
Cash used in financing activities in 2010 primarily related to
the repayment of $400.0 million on the 2006 Credit
Facility. Cash provided by financing activities in 2009
primarily related to net proceeds received from the issue of
$850.0 million under the Senior Notes and net borrowings of
$100.0 million under the 2006 Credit Facility which was
partially offset by the redemption of the CODES. During 2008, we
prepaid $75.0 million and borrowed $50.0 million under
our 2006 Credit Facility.
56
Debt
and Borrowing Capacity
Our outstanding debt obligations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
|
($ in millions):
|
|
|
Short-term debt and current portion of long-term debt
|
|
$
|
|
|
|
$
|
307.6
|
|
|
$
|
(307.6
|
)
|
Long-term debt
|
|
|
1,016.2
|
|
|
|
1,150.2
|
|
|
|
(134.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding
|
|
$
|
1,016.2
|
|
|
$
|
1,457.8
|
|
|
$
|
(441.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to capital ratio
|
|
|
23.5
|
%
|
|
|
32.5
|
%
|
|
|
|
|
On August 24, 2009, the Company gave notice to Wells Fargo
Bank, National Association, as trustee of the CODES (the
Trustee), and the Trustee delivered an irrevocable
notice of redemption to the holders of the CODES that the
Company elected to redeem the CODES for cash at a price equal to
100% of the principal amount of the CODES, plus interest accrued
and unpaid to, but excluding, the redemption date. On
September 14, 2009 the CODES were redeemed in accordance
with the terms of the CODES. As a result of the redemption of
the CODES, the Companys results for the year ended
December 31, 2009 reflect a $1.2 million charge for
losses on the early extinguishment of debt in respect of the
CODES.
In November 2006, we entered into the 2006 Credit Facility. The
2006 Credit Facility provides an aggregate of $1.15 billion
of senior financing to Watson, consisting of a
$500.0 million Revolving Facility and a $650.0 million
Term Facility and an initial interest rate equal to LIBOR plus
0.75% (subject to certain adjustments). In July 2010, the
interest rate on the 2006 Credit Facility was reduced to LIBOR
plus 0.625%.
The 2006 Credit Facility has a five-year term and matures in
November 2011. Indebtedness under the 2006 Credit Facility is
guaranteed by Watsons material domestic subsidiaries. The
Revolving Facility is available for working capital and other
general corporate requirements subject to the satisfaction of
certain conditions.
On July 1, 2009, the Company entered into an amendment to
the 2006 Credit Facility which, among other things, provided
certain modifications and clarifications with respect to
refinancing of the Companys outstanding indebtedness,
allowed an increase in the Companys ability to incur
general unsecured indebtedness from $100.0 million to
$500.0 million and provides an exclusion from certain
restrictions under the 2006 Credit Facility on up to
$151.4 million of certain anticipated acquired indebtedness
under the Arrow Acquisition. The terms of the amendment also
required the repayment of $100.0 million on the Term
Facility under the 2006 Credit Agreement. As a result of this
$100.0 million repayment, the Companys results for
the year ended December 31, 2009 reflect a
$0.8 million charge for losses on the early extinguishment
of debt in respect of the 2006 Credit Facility. In addition to
the above repayment on the Term Facility of the 2006 Credit
Facility, the Company also made a $75.0 million repayment
on the Revolving Facility of the 2006 Credit Facility in the
year ended December 31, 2009. The Company borrowed
$275.0 million under the Revolving Facility in 2009 to fund
a portion of the cash consideration for the Arrow Acquisition.
During the year ended December 31, 2010, we incurred
$0.5 million charge for losses on the early extinguishment
of debt in respect of the 2006 Credit Facility matures in
November 2011. As of December 31, 2010, no amounts were
outstanding on either the Revolving Facility or the Term
Facility of the 2006 Credit Facility.
Under the terms of the 2006 Credit Facility, each of our
subsidiaries, other than minor subsidiaries, entered into a full
and unconditional guarantee on a joint and several basis. We are
subject to, and, as of December 31, 2010, were in
compliance with financial and operation covenants under the
terms of the 2006 Credit Facility. The agreement currently
contains the following financial covenants:
|
|
|
|
|
maintenance of a minimum net worth of at least $1.7 billion;
|
|
|
|
maintenance of a maximum leverage ratio not greater than 2.50 to
1.0; and
|
|
|
|
maintenance of a minimum interest coverage ratio of at least 5.0
to 1.0.
|
57
At December 31, 2010, our net worth was $3.3 billion,
and our leverage ratio was 1.01 to 1.0. Our interest coverage
ratio for the period ended December 31, 2010 was 15.7 to
1.0.
Under the 2006 Credit Facility, interest coverage ratio, with
respect to any financial covenant period, is defined as the
ratio of EBITDA for such period to interest expense for such
period. The leverage ratio, for any financial covenant period,
is defined as the ratio of the outstanding principal amount of
funded debt for the borrower and its subsidiaries at the end of
such period, to EBITDA for such period. EBITDA under the Credit
Facility, for any covenant period, is defined as net income plus
(1) depreciation and amortization, (2) interest
expense, (3) provision for income taxes,
(4) extraordinary or unusual losses, (5) non-cash
portion of nonrecurring losses and charges, (6) other
non-operating, non-cash losses, (7) minority interest
expense in respect of equity holdings in affiliates,
(8) non-cash expenses relating to stock-based compensation
expense and (9) any one-time charges related to the Andrx
Acquisition; minus (1) extraordinary gains,
(2) interest income and (3) other non-operating,
non-cash income.
Long-term
Obligations
The following table lists our enforceable and legally binding
obligations as of December 31, 2010. Some of the amounts
included herein are based on managements estimates and
assumptions about these obligations, including their duration,
the possibility of renewal, anticipated actions by third
parties, and other factors. Because these estimates and
assumptions are necessarily subjective, the enforceable and
legally binding obligation we will actually pay in future
periods may vary from those reflected in the table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (Including Interest on Debt)
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
4-5
|
|
|
After 5
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(In millions):
|
|
|
Long-term debt and other debt(1)
|
|
$
|
1,345.2
|
|
|
$
|
47.2
|
|
|
$
|
783.2
|
|
|
$
|
50.5
|
|
|
$
|
464.3
|
|
Contingent consideration liabilities(2)
|
|
|
264.6
|
|
|
|
46.5
|
|
|
|
211.3
|
|
|
|
6.0
|
|
|
|
0.8
|
|
Operating lease obligations
|
|
|
135.9
|
|
|
|
24.4
|
|
|
|
45.7
|
|
|
|
22.8
|
|
|
|
43.0
|
|
Milestone obligations(3)
|
|
|
48.2
|
|
|
|
11.0
|
|
|
|
26.0
|
|
|
|
11.2
|
|
|
|
|
|
Other obligations and commitments(4)
|
|
|
99.8
|
|
|
|
19.0
|
|
|
|
14.8
|
|
|
|
5.4
|
|
|
|
60.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(5)
|
|
$
|
1,893.7
|
|
|
$
|
148.1
|
|
|
$
|
1,081.0
|
|
|
$
|
95.9
|
|
|
$
|
568.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts represent total anticipated cash payments and
anticipated interest payments, as applicable, on the Senior
Notes, the Mandatorily Redeemable Preferred Stock and amounts
outstanding on our long term-debt obligations assuming existing
debt maturity or redemption schedules. The maturity schedule in
the above table in respect of the Mandatorily Redeemable
Preferred Stock assumes redemption in cash on December 2,
2012, the third anniversary of issuance, in accordance with the
terms of the Share Purchase Agreement. Amounts exclude fair
value adjustments, discounts or premiums on outstanding debt
obligations. |
|
(2) |
|
Amount represents contingent payment obligations resulting from
the Arrow Acquisition and the Columbia acquisition. Arrow
Acquisition contingent obligations include amounts due to Arrow
Selling Shareholders on the after-tax gross profits on sales of
atorvastatin in the U.S. as described in the Acquisition
Agreement. Columbia acquisition contingent obligations include
amounts due to Columbia primarily related to anticipated future
milestone payments and royalty payments. For a more detailed
description of the terms of the contingent consideration
liabilities, refer to NOTE 10 Other
Long-Term Liabilities in the accompanying Notes to
Consolidated Financial Statements in this Annual Report. |
|
(3) |
|
We have future potential milestone payments payable to third
parties as part of our licensing and development programs.
Payments under these agreements generally become due and payable
upon the satisfaction or achievement of certain developmental,
regulatory or commercial milestones. Amounts represent
contractual payment obligations due on achievement of
developmental, regulatory or commercial milestones based on
anticipated approval dates assuming all milestone approval
events are met. Milestone payment obligations are uncertain,
including the prediction of timing and the occurrence of events
triggering a future |
58
|
|
|
|
|
obligation and are not reflected as liabilities in our
consolidated balance sheet. Amounts in the table above do not
include royalty obligations on future sales of product as the
timing and amount of future sales levels and costs to produce
products subject to milestone obligations is not reasonably
estimable. |
|
(4) |
|
Other obligations and commitments include agreements to purchase
third-party manufactured products, capital purchase obligations
for the construction or purchase of property, plant and
equipment and the liability for income tax associated with
uncertain tax positions. |
|
(5) |
|
Total does not include contractual obligations already included
in current liabilities on our Consolidated Balance Sheet (except
for short-term debt and the current portion of long-term debt)
or certain purchase obligations, which are discussed below. |
For purposes of the table above, obligations for the purchase of
goods or services are included only for purchase orders that are
enforceable, legally binding and specify all significant terms
including fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the timing of the
obligation. Our purchase orders are based on our current
manufacturing needs and are typically fulfilled by our suppliers
within a relatively short period. At December 31, 2010, we
have open purchase orders that represent authorizations to
purchase rather than binding agreements that are not included in
the table above.
We are involved in certain joint venture arrangements that are
intended to complement our core business and markets. We have
the discretion to provide funding on occasion for working
capital or capital expenditures. We make an evaluation of
additional funding based on an assessment of the ventures
business opportunities. We believe that any possible commitments
arising from the current arrangements will not be significant to
our financial condition, results of operations or liquidity.
Off-Balance
Sheet Arrangements
We do not have any material off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future
effect on our financial condition, changes in financial
condition, net revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
CRITICAL
ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (GAAP). These accounting principles require
us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions are
reasonable based upon information available to us at the time
that these estimates, judgments and assumptions are made. These
estimates, judgments and assumptions can affect the reported
amounts of assets and liabilities as of the date of the
financial statements, as well as the reported amounts of
revenues and expenses during the periods presented. To the
extent there are material differences between these estimates,
judgments or assumptions and actual results, our financial
statements will be affected. The significant accounting
estimates that we believe are important to aid in fully
understanding and evaluating our reported financial results
include the following:
|
|
|
|
|
Revenue and Provision for Sales Returns and Allowances
|
|
|
|
Revenue Recognition
|
|
|
|
Inventory Valuation
|
|
|
|
Investments
|
|
|
|
Product Rights and other Definite-Lived Intangible Assets
|
|
|
|
Goodwill and Intangible Assets with Indefinite-Lives
|
|
|
|
Allocation of Acquisition Fair Values to Assets Acquired and
Liabilities Assumed
|
In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not
require managements judgment in its application. There are
also areas in which managements judgment in selecting
among available GAAP alternatives would not produce a materially
different result.
59
Revenue
and Provision for Sales Returns and Allowances
As is customary in the pharmaceutical industry, our gross
product sales are subject to a variety of deductions in arriving
at reported net product sales. When we recognize revenue from
the sale of our products, an estimate of sales returns and
allowances (SRA) is recorded which reduces product
sales. Accounts receivable
and/or
accrued liabilities are also reduced
and/or
increased by the SRA amount. These adjustments include estimates
for chargebacks, rebates, cash discounts and returns and other
allowances. These provisions are estimated based on historical
payment experience, historical relationship to revenues,
estimated customer inventory levels and current contract sales
terms with direct and indirect customers. The estimation process
used to determine our SRA provision has been applied on a
consistent basis and no material adjustments have been necessary
to increase or decrease our reserves for SRA as a result of a
significant change in underlying estimates. We use a variety of
methods to assess the adequacy of our SRA reserves to ensure
that our financial statements are fairly stated. This includes
periodic reviews of customer inventory data, customer contract
programs and product pricing trends to analyze and validate the
SRA reserves.
Chargebacks The provision for chargebacks is
our most significant sales allowance. A chargeback represents an
amount payable in the future to a wholesaler for the difference
between the invoice price paid to the Company by our wholesale
customer for a particular product and the negotiated contract
price that the wholesalers customer pays for that product.
Our chargeback provision and related reserve varies with changes
in product mix, changes in customer pricing and changes to
estimated wholesaler inventories. The provision for chargebacks
also takes into account an estimate of the expected wholesaler
sell-through levels to indirect customers at contract prices. We
validate the chargeback accrual quarterly through a review of
the inventory reports obtained from our largest wholesale
customers. This customer inventory information is used to verify
the estimated liability for future chargeback claims based on
historical chargeback and contract rates. These large
wholesalers represent 85% 90% of our chargeback
payments. We continually monitor current pricing trends and
wholesaler inventory levels to ensure the liability for future
chargebacks is fairly stated.
Rebates Rebates include volume related
incentives to direct and indirect customers and Medicaid rebates
based on claims from Medicaid benefit providers.
Volume rebates are generally offered to customers as an
incentive to continue to carry our products and to encourage
greater product sales. These rebate programs include contracted
rebates based on customers purchases made during an
applicable monthly, quarterly or annual period. The provision
for rebates is estimated based on our customers contracted
rebate programs and our historical experience of rebates paid.
Any significant changes to our customer rebate programs are
considered in establishing our provision for rebates. We
continually monitor our customer rebate programs to ensure that
the liability for accrued rebates is fairly stated.
The provision for Medicaid rebates is based upon historical
experience of claims submitted by the various states. We monitor
Medicaid legislative changes to determine what impact such
legislation may have on our provision for Medicaid rebates. Our
accrual of Medicaid rebates is based on historical payment rates
and is reviewed on a quarterly basis against actual claim data
to ensure the liability is fairly stated.
Returns and Other Allowances Our provision
for returns and other allowances include returns, pricing
adjustments, promotional allowances and billback adjustments.
Consistent with industry practice, we maintain a return policy
that allows our customers to return product for credit. In
accordance with our return goods policy, credit for customer
returns of product is applied against outstanding account
activity or by check. Product exchanges are not permitted.
Customer returns of product are not resalable unless the return
is due to a shipping error. Our estimate of the provision for
returns is based upon historical experience and current trends
of actual customer returns. Additionally, we consider other
factors when estimating our current period return provision,
including levels of inventory in our distribution channel as
well as significant market changes which may impact future
expected returns, and make adjustments to our current period
provision for returns when it appears product returns may differ
from our original estimates.
60
Pricing adjustments, which include shelf stock adjustments, are
credits issued to reflect price decreases in selling prices
charged to our direct customers. Shelf stock adjustments are
based upon the amount of product our customers have in their
inventory at the time of an
agreed-upon
price reduction. The provision for shelf stock adjustments is
based upon specific terms with our direct customers and includes
estimates of existing customer inventory levels based upon their
historical purchasing patterns. We regularly monitor all price
changes to help evaluate our reserve balances. The adequacy of
these reserves is readily determinable as pricing adjustments
and shelf stock adjustments are negotiated and settled on a
customer-by-customer
basis.
Promotional allowances are credits that are issued in connection
with a product launch or as an incentive for customers to begin
carrying our product. We establish a reserve for promotional
allowances based upon these contractual terms.
Billback adjustments are credits that are issued to certain
customers who purchase directly from us as well as indirectly
through a wholesaler. These credits are issued in the event
there is a difference between the customers direct and
indirect contract price. The provision for billbacks is
estimated based upon historical purchasing patterns of qualified
customers who purchase product directly from us and supplement
their purchases indirectly through our wholesale customers.
Cash Discounts Cash discounts are provided to
customers that pay within a specific period. The provision for
cash discounts are estimated based upon invoice billings,
utilizing historical customer payment experience. Our
customers payment experience is fairly consistent and most
customer payments qualify for the cash discount. Accordingly,
our reserve for cash discounts is readily determinable.
The estimation process used to determine our SRA provision has
been applied on a consistent basis and there have been no
significant changes in underlying estimates that have resulted
in a material adjustment to our SRA reserves. The Company does
not expect future payments of SRA to materially exceed our
current estimates. However, if future SRA payments were to
materially exceed our estimates, such adjustments may have a
material adverse impact on our financial position, results of
operations and cash flows. For additional information on our
reserves for SRA refer to NOTE 2 Summary
of Significant Accounting Policies in the accompanying
Notes to Consolidated Financial Statements in this
Annual Report.
Revenue
Recognition
Revenue is generally realized or realizable and earned when
persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the sellers price
to the buyer is fixed or determinable, and collectability is
reasonably assured. The Company records revenue from product
sales when title and risk of ownership have been transferred to
the customer, which is typically upon delivery to the customer.
Revenues recognized from research, development and licensing
agreements (including milestone payments) are recorded on the
contingency-adjusted performance model which
requires deferral of revenue until such time as contract
milestone requirements, as specified in the individual
agreements, have been met. Under this model, revenue related to
each payment is recognized over the entire contract performance
period, starting with the contracts commencement, but not
prior to earning
and/or
receiving the milestone payment (i.e., removal of any
contingency). The amount of revenue recognized is based on the
ratio of costs incurred to date to total estimated cost to be
incurred. Royalty and commission revenue is recognized in
accordance with the terms of their respective contractual
agreements when collectability is reasonably assured and revenue
can be reasonably measured.
Inventory
Valuation
Inventories consist of finished goods held for distribution, raw
materials and work in process. Included in inventory are generic
pharmaceutical products that are capitalized only when the
bioequivalence of the product is demonstrated or the product is
already U.S. Food and Drug Administration approved and is
awaiting a contractual triggering event to enter the
marketplace. Inventory valuation reserves are established based
on a number of factors/situations including, but not limited to,
raw materials, work in process, or finished goods not meeting
product specifications, product obsolescence, or lower of cost
(first-in,
first-out method) or market (net realizable value). The
determination of events requiring the establishment of inventory
valuation reserves,
61
together with the calculation of the amount of such reserves may
require judgment. Assumptions utilized in our quantification of
inventory reserves include, but are not limited to, estimates of
future product demand, consideration of current and future
market conditions, product net selling price, anticipated
product launch dates, potential product obsolescence and other
events relating to special circumstances surrounding certain
products. No material adjustments have been required to our
inventory reserve estimates for the periods presented. Adverse
changes in assumptions utilized in our inventory reserve
calculations could result in an increase to our inventory
valuation reserves and higher cost of sales.
Investments
We employ a systematic methodology that considers all available
evidence in evaluating potential impairment of our investments.
In the event that the cost of an investment exceeds its fair
value, we evaluate, among other factors, general market
conditions, the duration and extent to which the fair value is
less than cost, as well as our intent and ability to hold the
investment. We also consider specific adverse conditions related
to the financial health of and business outlook for the
investee, including industry and sector performance, changes in
technology, operational and financing cash flow factors, and
rating agency actions. However, when a decline in the fair value
of an investment falls below the carrying value for a six-month
period, unless sufficient positive, objective evidence exists to
support such an extended period, the decline will be considered
other-than-temporary.
Any decline in the market prices of our equity investments that
are deemed to be
other-than-temporary
may require us to incur additional impairment charges.
Our equity investments are accounted for under the equity method
when the Company can exert significant influence and ownership
does not exceed 50%. We account for joint ventures using the
equity method. We record equity method investments at cost and
adjust for the appropriate share of investee net earnings or
losses. Investments in which the Company owns less than a 20%
interest and cannot exert significant influence are accounted
for using the cost method if the fair value of such investments
is not readily determinable.
All of our marketable securities are classified as
available-for-sale
and are reported at fair value, based on quoted market prices.
Unrealized temporary adjustments to fair value are included on
the balance sheet in a separate component of stockholders
equity as unrealized gains and losses and reported as a
component of other comprehensive income. No gains or losses on
marketable securities are realized until shares are sold or a
decline in fair value is determined to be
other-than-temporary.
If a decline in fair value is determined to be
other-than-temporary,
an impairment charge is recorded and a new cost basis in the
investment is established.
Product
Rights and Other Definite-Lived Intangible Assets
Our product rights and other definite-lived intangible assets
are stated at cost, less accumulated amortization, and are
amortized using the straight-line method over their estimated
useful lives. We determine amortization periods for product
rights and other definite-lived intangible assets based on our
assessment of various factors impacting estimated useful lives
and cash flows. Such factors include the products position
in its life cycle, the existence or absence of like products in
the market, various other competitive and regulatory issues, and
contractual terms. Significant changes to any of these factors
may result in a reduction in the intangibles useful life and an
acceleration of related amortization expense, which could cause
our operating income, net income and earnings per share to
decline.
Product rights and other definite-lived intangible assets are
tested periodically for impairment when events or changes in
circumstances indicate that an assets carrying value may
not be recoverable. The impairment testing involves comparing
the carrying amount of the asset to the forecasted undiscounted
future cash flows. In the event the carrying value of the asset
exceeds the undiscounted future cash flows, the carrying value
is considered not recoverable and impairment exists. An
impairment loss is measured as the excess of the assets
carrying value over its fair value, calculated using a
discounted future cash flow method. The computed impairment loss
is recognized in net income in the period that the impairment
occurs. Our projections of discounted cash flows using a
discount rate determined by our management to be commensurate
with the risk inherent in our business model. Our estimates of
future cash flows attributable to our other definite-lived
62
intangible assets require significant judgment based on our
historical and anticipated results and are subject to many
factors. Different assumptions and judgments could materially
affect the calculation of the fair value of the other
definite-lived intangible assets which could trigger impairment.
Goodwill
and Intangible Assets with Indefinite-Lives
We test goodwill and intangible assets with indefinite-lives for
impairment annually at the end of the second quarter by
comparing the fair value of each of the Companys reporting
units to the respective carrying value of the reporting units.
Additionally, we may perform tests between annual tests if an
event occurs or circumstances change that could potentially
reduce the fair value of a reporting unit below its carrying
amount. The Companys reporting units have been identified
by Watson as Global Generics, Global Brands and Distribution.
The carrying value of each reporting unit is determined by
assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units.
Goodwill is considered impaired if the carrying amount of the
net assets exceeds the fair value of the reporting unit.
Impairment, if any, would be recorded in operating income and
this could result in a material reduction in net income and
earnings per share. During the second quarter of 2010, the
Company performed its annual impairment assessment of goodwill,
IPR&D and trade name intangible assets with
indefinite-lives and determined there was no impairment. Due to
changes in market conditions in certain international locations,
the Company performed an off-cycle impairment review in the
fourth quarter of 2010 and recorded a $28.6 million
impairment charge related to certain IPR&D assets acquired
in the Arrow Acquisition.
Included in intangible assets with indefinite-lives are trade
name intangible assets acquired prior to January 1, 2009
and IPR&D intangibles acquired after January 1, 2009.
Upon adoption of FASB issued authoritative guidance on
January 1, 2009, using the purchase method of accounting,
IPR&D intangible assets are recognized at their fair value
on the balance sheet regardless of the likelihood of success of
the related product or technology. Prior to January 1,
2009, amounts allocated to IPR&D intangible assets were
expensed at the date of acquisition.
IPR&D intangible assets represent the value assigned to
acquired research and development projects that, as of the date
acquired, represent the right to develop, use, sell
and/or offer
for sale a product or other intellectual property that we have
acquired with respect to products
and/or
processes that have not been completed or approved. The
IPR&D intangible assets will be subject to impairment
testing until completion or abandonment of each project.
Impairment testing will require the development of significant
estimates and assumptions involving the determination of
estimated net cash flows for each year for each project or
product (including net revenues, cost of sales, research and
development costs, selling and marketing costs), the appropriate
discount rate to select in order to measure the risk inherent in
each future cash flow stream, the assessment of each
assets life cycle, competitive trends impacting the asset
and each cash flow stream as well as other factors. The major
risks and uncertainties associated with the timely and
successful completion of the IPR&D projects include legal
risk and regulatory risk. Changes in these assumptions or
uncertainties could result in future impairment charges. No
assurances can be given that the underlying assumptions used to
prepare the discounted cash flow analysis will not change or the
timely completion of each project to commercial success will
occur. For these and other reasons, actual results may vary
significantly from estimated results.
Upon successful completion of each project and launch of the
product, Watson will make a separate determination of useful
life of the intangible, transfer the amount to currently
marketed products and amortization expense will be recorded over
the estimated useful life.
Allocation
of Acquisition Fair Values to Assets Acquired and Liabilities
Assumed
We account for acquired businesses using the purchase method of
accounting, which requires that assets acquired and liabilities
assumed be recorded at date of acquisition at their respective
fair values. The consolidated financial statements and results
of operations reflect an acquired business after the completion
of the acquisition. The fair value of the consideration paid,
including contingent consideration, is allocated to the
underlying net assets of the acquired business based on their
respective fair values. Any excess of the purchase price over
the estimated fair values of the net assets acquired is recorded
as goodwill. Beginning in 2009,
63
amounts allocated to IPR&D are included on the balance
sheet (refer to discussion above in Goodwill and
Intangible Assets with Indefinite Lives). Intangible
assets, including IPR&D assets upon successful completion
of the project and launch of the product, are amortized on a
straight-line basis to amortization expense over the expected
life of the asset. Significant judgments are used in determining
the estimated fair values assigned to the assets acquired and
liabilities assumed and in determining estimates of useful lives
of long-lived assets. Fair value determinations and useful life
estimates are based on, among other factors, estimates of
expected future net cash flows, estimates of appropriate
discount rates used to present value expected future net cash
flow streams, the timing of approvals for IPR&D projects
and the timing of related product launch dates, the assessment
of each assets life cycle, the impact of competitive
trends on each assets life cycle and other factors. These
judgments can materially impact the estimates used to allocate
acquisition date fair values to assets acquired and liabilities
assumed and the resulting timing and amount of amounts charged
to, or recognized in current and future operating results. For
these and other reasons, actual results may vary significantly
from estimated results.
The Company determines the acquisition date fair value of
contingent consideration obligations based on a
probability-weighted income approach derived from revenue
estimates, post-tax gross profit levels and a probability
assessment with respect to the likelihood of achieving
contingent obligations including contingent payments such as
milestone obligations, royalty obligations and contract earn-out
criteria, where applicable. The fair value measurement is based
on significant inputs not observable in the market and thus
represents a Level 3 measurement as defined in fair value
measurement accounting. The resultant probability-weighted cash
flows are discounted using an appropriate effective annual
interest rate. At each reporting date, the contingent
consideration obligation will be revalued to estimated fair
value and changes in fair value will be reflected as income or
expense in our consolidated statement of operations. Changes in
the fair value of the contingent consideration obligations may
result from changes in discount periods and rates, changes in
the timing and amount of revenue estimates and changes in
probability assumptions with respect to the likelihood of
achieving the various contingent payment obligations. Adverse
changes in assumptions utilized in our contingent consideration
fair value estimates could result in an increase in our
contingent consideration obligation and a corresponding charge
to operating income.
RECENT
ACCOUNTING PRONOUNCEMENTS
In October 2009, the FASB issued an amendment to its accounting
guidance on revenue arrangements with multiple deliverables,
which addresses the unit of accounting for arrangements
involving multiple deliverables and how consideration should be
allocated to separate units of accounting, when applicable. The
amendment requires that arrangement considerations be allocated
at the inception of the arrangement to all deliverables using
the relative selling price method and provides for expanded
disclosures related to such arrangements. The amendment is
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010. Early adoption is allowed. The adoption of the statement
will not have a material impact on the Companys
consolidated financial statements.
In January 2010, the FASB issued an amendment to the disclosure
requirements for fair value measurements. The amendment requires
an entity to: (i) disclose separately the amounts of
significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons
for the transfers, and (ii) present separate information
for Level 3 activity pertaining to gross purchases, sales,
issuances and settlements. The new disclosures are effective for
interim and annual reporting periods beginning after
December 15, 2009, except for the Level 3 disclosures,
which are effective for fiscal years beginning after
December 15, 2010. The adoption of the statement will not
have a material impact on the Companys consolidated
financial statements.
In March 2010, the FASB ratified accounting guidance on defining
a milestone and determining when it may be appropriate to apply
the milestone method of revenue recognition for research or
development transactions. This guidance provides criteria that
must be met to recognize consideration that is contingent upon
achievement of a substantive milestone in its entirety in the
period in which the milestone is achieved. The amendment is
effective for milestones achieved in fiscal years beginning on
or after June 15, 2010. Early adoption is allowed. The
adoption of the statement will not have a material impact on the
Companys consolidated financial statements.
64
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ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are exposed to market risk for changes in the market values
of our investments (Investment Risk) and the impact of interest
rate changes (Interest Rate Risk). We have not used derivative
financial instruments in our investment portfolio.
We maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including both
government and government agency obligations with ratings of AA
or better, money market funds with ratings of AAm or better, and
time deposits with financial institutions with short-term
ratings of
A-1/P-1 or
higher by S&P and Moodys, respectively. Our
investments in marketable securities are governed by our
investment policy which seeks to preserve the value of our
principal, provide liquidity and maximize return on the
Companys investments. Additionally, our investment policy
limits the amount invested with any one counterparty and places
limits on an investments maximum maturity. Consequently, our
interest rate and principal risk are minimal on our non-equity
investment portfolio. The quantitative and qualitative
disclosures about market risk are set forth below.
Investment
Risk
As of December 31, 2010, our total holdings in equity
securities of other companies, including equity method
investments and
available-for-sale
securities, were $64.3 million. Of this amount, we had
equity method investments of $40.2 million and publicly
traded equity securities
(available-for-sale
securities) at fair value totaling $23.9 million (included
in marketable securities and investments and other assets). The
fair values of these investments are subject to significant
fluctuations due to volatility of the stock market and changes
in general economic conditions.
We regularly review the carrying value of our investments and
identify and recognize losses, for income statement purposes,
when events and circumstances indicate that any declines in the
fair values of such investments below our accounting basis are
other than temporary.
Interest
Rate Risk
Our exposure to interest rate risk relates primarily to our
non-equity investment. Our cash is invested in bank deposits and
AAm-rated money market mutual funds.
Our portfolio of marketable securities includes
U.S. Treasury and agency securities classified as
available-for-sale
securities, with no security having a maturity in excess of two
years. These securities are exposed to interest rate
fluctuations. Because of the short-term nature of these
investments, we are subject to minimal interest rate risk and do
not believe that an increase in market rates would have a
significant negative impact on the realized value of our
portfolio.
Based on the quoted market value of our Senior Notes as of
December 31, 2010, the fair value was $71.0 million
greater than the carrying value. While changes in market
interest rates may affect the fair value of our fixed-rate debt,
we believe the effect, if any, of reasonably possible near-term
changes in the fair value of such debt on our financial
condition, results of operations or cash flows will not be
material.
We operate and transact business in various foreign countries
and are, therefore, subject to the risk of foreign currency
exchange rate fluctuations. Net foreign currency gains and
losses did not have a material effect on the Companys
results of operations for 2010, 2009 or 2008.
At this time, we have no material commodity price risks.
We do not believe that inflation has had a significant impact on
our revenues or operations.
65
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ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information required by this Item is contained in the
financial statements set forth in Item 15 (a) under
the caption Consolidated Financial Statements and
Supplementary Data as a part of this Annual Report on
Form 10-K.
|
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ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There have been no changes in or disagreements with accountants
on accounting or financial disclosure matters.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The Company maintains disclosure controls and
procedures, as such term is defined under
Rule 13a-15(e)
of the Exchange Act, that are designed to ensure that
information required to be disclosed in the Companys
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the
U.S. Securities and Exchange Commissions
(SECs) rules and forms, and that such
information is accumulated and communicated to the
Companys management, including its Principal Executive
Officer and Principal Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Also, the Company has investments in
certain unconsolidated entities. However, our assessment of the
disclosure controls and procedures with respect to the
Companys equity method investees did include an assessment
of the controls over the recording of amounts related to our
investments that are recorded in our consolidated financial
statements, including controls over the selection of accounting
methods for our investments, the recognition of equity method
earnings and losses and the determination, valuation and
recording of our investment account balances.
As required by SEC
Rule 13a-15(b),
the Company carried out an evaluation, under the supervision and
with the participation of the Companys management,
including the Companys Principal Executive Officer and
Principal Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and
procedures as of December 31, 2010. Based on this
evaluation, the Companys Principal Executive Officer and
Principal Financial Officer concluded that the Companys
disclosure controls and procedures were effective at a
reasonable assurance level as of December 31, 2010.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting,
as such term is defined under
Rule 13a-15(f)
of the Exchange Act. We maintain internal control over financial
reporting designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Therefore, internal control over financial reporting determined
to be effective provides only reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
Under the supervision and with the participation of management,
including the Companys Principal Executive Officer and
Principal Financial Officer, the Company conducted an evaluation
of the effectiveness
66
of its internal control over financial reporting based on the
framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. This evaluation included an assessment of
the design of the Companys internal control over financial
reporting and testing of the operational effectiveness of its
internal control over financial reporting. Based on this
evaluation, management has concluded that the Companys
internal control over financial reporting was effective as of
December 31, 2010.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2010 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
under Item 15(a)(1) of this
Form 10-K.
Changes
in Internal Control Over Financial Reporting
There have been no changes in the Companys internal
control over financial reporting, during the fiscal quarter
ended December 31, 2010, that has materially affected, or
are reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
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ITEM 9B.
|
OTHER
INFORMATION
|
We have filed with the New York Stock Exchange the most recent
annual Chief Executive Officer Certification as required by
Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Directors
The information concerning directors of Watson required under
this Item is incorporated herein by reference from our
definitive proxy statement, to be filed pursuant to
Regulation 14A, related to our 2011 Annual Meeting of
Stockholders to be held on May 13, 2011 (our 2011
Proxy Statement).
Information concerning our Audit Committee and the independence
of its members, along with information about the financial
expert(s) serving on the Audit Committee, is set forth in the
Audit Committee section of our 2011 Proxy Statement and is
incorporated herein by reference.
Executive
Officers of the Registrant
Below are our executive officers as of February 21, 2011:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Principal Position with Registrant
|
|
Paul M. Bisaro
|
|
|
50
|
|
|
President and Chief Executive Officer
|
Sigurdur O. Olafsson
|
|
|
42
|
|
|
Executive Vice President, Global Generics
|
G. Frederick Wilkinson
|
|
|
54
|
|
|
Executive Vice President, Global Brands
|
Albert Paonessa, III
|
|
|
50
|
|
|
Executive Vice President, Chief Operating Officer, Distribution
Division
|
Robert A. Stewart
|
|
|
43
|
|
|
Executive Vice President, Global Operations
|
R. Todd Joyce
|
|
|
53
|
|
|
Senior Vice President, Chief Financial Officer
|
David A. Buchen
|
|
|
46
|
|
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Senior Vice President, General Counsel, and Secretary
|
Clare Carmichael
|
|
|
51
|
|
|
Senior Vice President, Human Resources
|
Charles M. Mayr
|
|
|
54
|
|
|
Senior Vice President, Corporate Affairs
|
67
Paul M.
Bisaro
Paul M. Bisaro, age 50, has served as President and Chief
Executive Officer since September 2007. Prior to joining Watson,
Mr. Bisaro was President and Chief Operating Officer of
Barr Pharmaceuticals, Inc. (Barr) from 1999 to 2007.
Between 1992 and 1999, Mr. Bisaro served as General Counsel
and from 1997 to 1999 served in various additional capacities
including Senior Vice President Strategic Business
Development. Prior to joining Barr, he was associated with the
law firm Winston & Strawn and a predecessor firm,
Bishop, Cook, Purcell and Reynolds from 1989 to 1992.
Mr. Bisaro also served as a Senior Consultant with Arthur
Andersen & Co. Mr. Bisaro received his
undergraduate degree in General Studies from the University of
Michigan in 1983 and a Juris Doctor from Catholic University of
America in Washington, D.C. in 1989.
Sigurdur
O. Olafsson
Sigurdur O. Olafsson, age 42, was appointed Executive Vice
President, Global Generics Division on September 1, 2010.
Prior to joining Watson, Mr. Olafsson served as Chief
Executive Officer of the Actavis Group from 2008 to 2010. From
2006 until 2008 Mr. Olafsson served as Deputy CEO of the
Actavis Group and was CEO, Actavis Inc. U.S. and Chief
Executive Corporate Development from 2003 to 2006, where he led
Actavis sales and marketing organization. Prior to joining
Actavis, he held a number of senior positions with Pfizers
Global Research and Development organization in both the
U.S. and the U.K. from 1998 to 2003. Prior to joining
Pfizer, he served as Head of Drug Development for Omega Farma in
Iceland for four years. Mr. Olafsson has a M.S. in Pharmacy
(Cand Pharm) from the University of Reykjavik.
G.
Frederick Wilkinson
G. Frederick Wilkinson, age 54, was appointed Executive
Vice President, Global Brands on September 21, 2009. Prior
to joining Watson, Mr. Wilkinson was President and Chief
Operating Officer of Duramed Pharmaceuticals, Inc. the
proprietary products subsidiary of Barr from 2006 to 2009. Prior
to joining Duramed Pharmaceuticals, Inc., he was President
and Chief Executive Officer of Columbia Laboratories, Inc. from
2001 to 2006. From 1996 to 2001, Mr. Wilkinson was Senior
Vice President and Chief Operating Officer of
Watson Pharmaceuticals, Inc. Prior to joining Watson, he
spent sixteen years at Sandoz in numerous senior management
positions of increasing responsibility. Mr. Wilkinson
received his M.B.A. from Capital University in 1984 and his B.S.
in Pharmacy from Ohio Northern University in 1979.
Albert
Paonessa III
Albert Paonessa, age 50, has served as our Executive Vice
President, Chief Operating Officer of Anda, our Distribution
company following our acquisition of Andrx. Mr. Paonessa
was appointed Anda Executive Vice President and Chief Operating
Officer in August 2005 and had been with Anda since Andrx
acquired VIP in March 2000. From March 2000 through January
2002, Mr. Paonessa was Vice President, Operations of VIP.
In January 2002, he became Vice President, Information Systems
at Anda and in January 2004 was appointed Senior Vice President,
Sales at Anda. Mr. Paonessa received a B.A. and a B.S. from
Bowling Green State University in 1983.
Robert A.
Stewart
Robert A. Stewart, age 43, was appointed Executive Vice
President, Global Operations on August 3, 2010.
Mr. Stewart joined Watson in November 2009 as Senior Vice
President, Global Operations. Prior to joining Watson,
Mr. Stewart held various positions with Abbott
Laboratories, Inc. from 2002 until 2009 where he most recently
served as Vice President, Global Supply Chain. From 2005 until
2008, he served as Divisional Vice President, Quality Assurance
and prior to this position served as Divisional Vice President
for U.S./Puerto Rico and Latin America Plant Operations as well
as Director of Operations for Abbotts Whippany plant.
Prior to joining Abbott Laboratories, Inc., he worked for Knoll
Pharmaceutical Company from 1995 to 2001 and Hoffman La-Roche
Inc. Mr. Stewart received B.S. degrees in Business
Management / Finance in 1994 from Fairleigh Dickinson
University.
68
R. Todd
Joyce
R. Todd Joyce, age 53, was appointed Senior Vice
President, Chief Financial Officer of Watson on October 30,
2009. Mr. Joyce joined Watson in 1997 as Corporate
Controller, and was named Vice President, Corporate Controller
and Treasurer in 2001. During the periods October 2006 to
November 2007 and from July 2009 until his appointment as Chief
Financial Officer, Mr. Joyce served as interim Principal
Financial Officer. Prior to joining Watson, Mr. Joyce
served as Vice President of Tax from 1992 to 1996 and as Vice
President of Tax and Finance from 1996 until 1997 at ICN
Pharmaceuticals. Prior to ICN Pharmaceuticals, Mr. Joyce
served as a Certified Public Accountant with Coopers &
Lybrand and Price Waterhouse. Mr. Joyce received a B.S. in
Business Administration from the University of North Carolina at
Chapel Hill in 1983 and a M.S. in Taxation from Golden State
University in 1992.
David A.
Buchen
David A. Buchen, age 46, has served as Senior Vice
President, General Counsel and Secretary since November 2002.
From November 2000 to November 2002, Mr. Buchen served as
Vice President and Associate General Counsel. From February 2000
to November 2000, he served as Vice President and Senior
Corporate Counsel. From November 1998 to February 2000, he
served as Senior Corporate Counsel and as Corporate Counsel. He
also served as Assistant Secretary from February 1999 to
November 2002. Prior to joining Watson, Mr. Buchen was
Corporate Counsel at Bausch & Lomb Surgical (formerly
Chiron Vision Corporation) from November 1995 until November
1998 and was an attorney with the law firm of
Fulbright & Jaworski, LLP. Mr. Buchen received a
B.A. in Philosophy from the University of California, Berkeley
in 1985, and a Juris Doctor with honors from George Washington
University Law School in 1989.
Clare
Carmichael
Clare Carmichael, age 51, was appointed Senior Vice
President, Human Resources of Watson effective August 12,
2008. Prior to joining Watson, Ms. Carmichael was Vice
President, Human Resources for Schering-Plough Research
Institute. Ms Carmichael was Vice President, Human Resources for
Eyetech Pharmaceuticals Inc. from 2003 to 2005. She also held
positions of increasing responsibility at Pharmacia Corporation
until 2003. Ms. Carmichael received a B.A. in Psychology
from Rider University in 1981.
Charles
M. Mayr
Charles M. Mayr, age 54, was appointed Senior Vice
President, Corporate Affairs of Watson effective September 2009.
Prior to joining Watson, Mr. Mayr operated an advertising
and public relations consulting company, serving such clients as
Watson, the Generic Pharmaceuticals Association, Barr and a
variety of professional associations and consumer products and
service companies. Prior to starting his consultancy business,
he served as director of corporate communications for Barr.
Prior to joining Barr, he served as director of global
communications for Sterling Drug Inc., the global brand and
consumer health products pharmaceutical subsidiary of Kodak.
Mr. Mayr began his career as a broadcast and print
journalist and has a B.A. in journalism from New York University.
Our executive officers are appointed annually by the Board of
Directors, hold office until their successors are chosen and
qualified, and may be removed at any time by the affirmative
vote of a majority of the Board of Directors. We have employment
agreements with most of our executive officers. There are no
family relationships between any director and executive officer
of Watson.
Section 16(a)
Compliance
Information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 will be set forth in the
Section 16(a) Beneficial Ownership Reporting Compliance
section of our 2011 Proxy Statement and is incorporated herein
by reference.
69
Code
of Ethics
Watson has adopted a Code of Conduct that applies to our
employees, including our principal executive officer, principal
financial officer and principal accounting officer. The Code of
Conduct is posted on our Internet website at www.watson.com. Any
person may request a copy of our Code of Conduct by contacting
us at 311 Bonnie Circle, Corona, California, 92880, Attn:
Secretary. Any amendments to or waivers from the Code of Conduct
will be posted on our website at www.watson.com under the
caption Corporate Governance within the Investors
section of our website.
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ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information concerning executive and director compensation,
and concerning our compensation committee and the compensation
committee report for Watson required under this Item is
incorporated herein by reference to the Compensation
Discussion and Analysis section of our 2011 Proxy
Statement.
|
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ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information concerning security ownership of certain
beneficial owners and management and related stockholder matters
and the equity compensation plan information required under this
Item is incorporated herein by reference to the Beneficial
Ownership of Stockholders, Directors and Executive
Officers and Equity Compensation Plan Information as
of December 31, 2010 sections of our 2011 Proxy
Statement.
|
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ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information concerning certain relationships and related
transactions, and director independence required under this Item
is incorporated herein by reference to the Certain
Relationships and Related Transactions and Director
Independence sections of our 2011 Proxy Statement.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information concerning principal accountant fees and
services required under this Item is incorporated herein by
reference to the Audit Fees section of our 2011
Proxy Statement.
70
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
1. Consolidated Financial Statements and Supplementary
Data
|
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Page
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|
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F-2
|
|
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F-3
|
|
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|
|
F-4
|
|
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|
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F-5
|
|
|
|
|
|
|
December 31, 2010, 2009 and 2008
|
|
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F-6
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F-7
|
|
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F-49
|
|
2. Financial Statement Schedule
All other financial statement schedules have been omitted
because they are not applicable or the required information is
included in the Consolidated Financial Statements or notes
thereto.
3. Exhibits
Reference is hereby made to the Exhibit Index immediately
following
page F-49
Supplementary Data (Unaudited) of this Annual Report on
Form 10-K.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Watson Pharmaceuticals,
Inc.
(Registrant)
Paul M. Bisaro
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 21, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Paul
M. Bisaro
Paul
M. Bisaro
|
|
President, Chief Executive Officer and Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ R.
Todd Joyce
R.
Todd Joyce
|
|
Senior Vice President Chief Financial Officer
(Principal Financial Officer)
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Andrew
L. Turner
Andrew
L. Turner
|
|
Chairman
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Christopher
W. Bodine
Christopher
W. Bodine
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Michael
J. Fedida
Michael
J. Fedida
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Michel
J. Feldman
Michel
J. Feldman
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Albert
F. Hummel
Albert
F. Hummel
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Catherine
M. Klema
Catherine
M. Klema
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Jack
Michelson
Jack
Michelson
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Tony
S. Tabatznik
Tony
S. Tabatznik
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Ronald
R. Taylor
Ronald
R. Taylor
|
|
Director
|
|
February 21, 2011
|
|
|
|
|
|
/s/ Fred
G. Weiss
Fred
G. Weiss
|
|
Director
|
|
February 21, 2011
|
72
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-49
|
|
Financial Statement Schedule
|
|
|
|
|
|
|
|
F-48
|
|
All other financial statement schedules have been omitted
because they are not applicable or the required information is
included in the Consolidated Financial Statements or notes
thereto.
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Watson Pharmaceuticals, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of cash
flows, of stockholders equity and of comprehensive income
present fairly, in all material respects, the financial position
of Watson Pharmaceuticals, Inc. and its subsidiaries at
December 31, 2010 and December 31, 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedules, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Annual Report
on Internal Control over Financial Reporting under Item 9A.
Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the
Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Orange County, CA
February 21, 2011
F-2
WATSON
PHARMACEUTICALS, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Revised)
|
|
|
|
(In millions,
|
|
|
|
except par value)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
282.8
|
|
|
$
|
201.4
|
|
Marketable securities
|
|
|
11.1
|
|
|
|
13.6
|
|
Accounts receivable, net of allowances for doubtful accounts of
$12.5 and $5.4
|
|
|
560.9
|
|
|
|
517.4
|
|
Inventories, net
|
|
|
631.0
|
|
|
|
692.3
|
|
Prepaid expenses and other current assets
|
|
|
134.2
|
|
|
|
213.9
|
|
Deferred tax assets
|
|
|
179.4
|
|
|
|
130.9
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,799.4
|
|
|
|
1,769.5
|
|
Property and equipment, net
|
|
|
642.3
|
|
|
|
694.2
|
|
Investments and other assets
|
|
|
84.5
|
|
|
|
114.5
|
|
Deferred tax assets
|
|
|
141.0
|
|
|
|
110.8
|
|
Product rights and other intangibles, net
|
|
|
1,632.0
|
|
|
|
1,713.5
|
|
Goodwill
|
|
|
1,528.1
|
|
|
|
1,501.0
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,827.3
|
|
|
$
|
5,903.5
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
741.1
|
|
|
$
|
614.3
|
|
Income taxes payable
|
|
|
39.9
|
|
|
|
78.4
|
|
Short-term debt and current portion of long-term debt
|
|
|
|
|
|
|
307.6
|
|
Deferred tax liabilities
|
|
|
20.8
|
|
|
|
31.3
|
|
Deferred revenue
|
|
|
18.9
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
820.7
|
|
|
|
1,047.9
|
|
Long-term debt
|
|
|
1,016.1
|
|
|
|
1,150.2
|
|
Deferred revenue
|
|
|
18.2
|
|
|
|
31.9
|
|
Other long-term liabilities
|
|
|
183.1
|
|
|
|
118.7
|
|
Other taxes payable
|
|
|
65.1
|
|
|
|
76.0
|
|
Deferred tax liabilities
|
|
|
441.5
|
|
|
|
455.7
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,544.7
|
|
|
|
2,880.4
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock; no par value per share; 2.5 shares
authorized
|
|
|
|
|
|
|
|
|
Common stock; $0.0033 par value per share;
500.0 shares authorized 135.5 and 133.0 shares issued
and 125.8 and 123.4 shares outstanding, respectively
|
|
|
0.4
|
|
|
|
0.4
|
|
Additional paid-in capital
|
|
|
1,771.8
|
|
|
|
1,686.9
|
|
Retained earnings
|
|
|
1,824.5
|
|
|
|
1,640.1
|
|
Accumulated other comprehensive (loss) income
|
|
|
(2.5
|
)
|
|
|
1.9
|
|
Treasury stock, at cost; 9.7 and 9.6 shares held,
respectively
|
|
|
(312.5
|
)
|
|
|
(306.2
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,281.7
|
|
|
|
3,023.1
|
|
Noncontrolling interest
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
3,282.6
|
|
|
|
3,023.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
5,827.3
|
|
|
$
|
5,903.5
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-3
WATSON
PHARMACEUTICALS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except per share amounts)
|
|
|
Net revenues
|
|
$
|
3,566.9
|
|
|
$
|
2,793.0
|
|
|
$
|
2,535.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excludes amortization, presented below)
|
|
|
1,998.5
|
|
|
|
1,596.8
|
|
|
|
1,502.8
|
|
Research and development
|
|
|
296.1
|
|
|
|
197.3
|
|
|
|
170.1
|
|
Selling and marketing
|
|
|
320.0
|
|
|
|
263.1
|
|
|
|
232.9
|
|
General and administrative
|
|
|
436.1
|
|
|
|
257.1
|
|
|
|
190.5
|
|
Amortization
|
|
|
180.0
|
|
|
|
92.6
|
|
|
|
80.7
|
|
Loss on asset sales and impairments
|
|
|
30.8
|
|
|
|
2.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,261.5
|
|
|
|
2,409.1
|
|
|
|
2,177.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
305.4
|
|
|
|
383.9
|
|
|
|
358.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1.6
|
|
|
|
5.0
|
|
|
|
9.0
|
|
Interest expense
|
|
|
(84.1
|
)
|
|
|
(34.2
|
)
|
|
|
(28.2
|
)
|
Other income
|
|
|
27.7
|
|
|
|
7.9
|
|
|
|
19.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income, net
|
|
|
(54.8
|
)
|
|
|
(21.3
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interest
|
|
|
250.6
|
|
|
|
362.6
|
|
|
|
358.3
|
|
Provision for income taxes
|
|
|
67.3
|
|
|
|
140.6
|
|
|
|
119.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
183.3
|
|
|
|
222.0
|
|
|
|
238.4
|
|
Loss attributable to noncontrolling interest
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
184.4
|
|
|
$
|
222.0
|
|
|
$
|
238.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.51
|
|
|
$
|
2.11
|
|
|
$
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.48
|
|
|
$
|
1.96
|
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
122.4
|
|
|
|
105.0
|
|
|
|
102.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
124.2
|
|
|
|
116.4
|
|
|
|
117.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-4
WATSON
PHARMACEUTICALS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
183.3
|
|
|
$
|
222.0
|
|
|
$
|
238.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
101.9
|
|
|
|
96.4
|
|
|
|
90.0
|
|
Amortization
|
|
|
180.0
|
|
|
|
92.6
|
|
|
|
80.7
|
|
Provision for inventory reserve
|
|
|
50.0
|
|
|
|
51.0
|
|
|
|
45.7
|
|
Share-based compensation
|
|
|
23.5
|
|
|
|
19.1
|
|
|
|
18.5
|
|
Deferred income tax (benefit) provision
|
|
|
(118.3
|
)
|
|
|
(19.0
|
)
|
|
|
3.5
|
|
(Gain) loss on sale of securities
|
|
|
(27.3
|
)
|
|
|
1.1
|
|
|
|
(9.6
|
)
|
Loss on asset sales and impairment
|
|
|
29.8
|
|
|
|
2.6
|
|
|
|
0.3
|
|
Increase in allowance for doubtful accounts
|
|
|
9.5
|
|
|
|
3.4
|
|
|
|
1.2
|
|
Accretion of preferred stock and contingent payment consideration
|
|
|
38.4
|
|
|
|
2.2
|
|
|
|
|
|
Other, net
|
|
|
11.3
|
|
|
|
(7.6
|
)
|
|
|
(13.9
|
)
|
Changes in assets and liabilities (net of effects of
acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(57.1
|
)
|
|
|
(108.2
|
)
|
|
|
(39.1
|
)
|
Inventories
|
|
|
10.5
|
|
|
|
(82.2
|
)
|
|
|
(28.2
|
)
|
Prepaid expenses and other current assets
|
|
|
55.4
|
|
|
|
9.1
|
|
|
|
33.3
|
|
Accounts payable and accrued expenses
|
|
|
96.5
|
|
|
|
72.0
|
|
|
|
(17.6
|
)
|
Deferred revenue
|
|
|
(10.6
|
)
|
|
|
2.0
|
|
|
|
(14.5
|
)
|
Income taxes payable
|
|
|
(20.8
|
)
|
|
|
16.9
|
|
|
|
24.6
|
|
Other assets
|
|
|
15.0
|
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
387.7
|
|
|
|
154.8
|
|
|
|
178.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
571.0
|
|
|
|
376.8
|
|
|
|
416.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(56.6
|
)
|
|
|
(55.4
|
)
|
|
|
(63.5
|
)
|
Additions to product rights and other intangibles
|
|
|
(10.9
|
)
|
|
|
(16.5
|
)
|
|
|
(37.0
|
)
|
Additions to marketable securities
|
|
|
(5.5
|
)
|
|
|
(8.0
|
)
|
|
|
(8.2
|
)
|
Additions to long-term investments
|
|
|
(43.7
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
2.7
|
|
|
|
3.0
|
|
|
|
|
|
Proceeds from sales of marketable securities
|
|
|
9.5
|
|
|
|
9.0
|
|
|
|
6.7
|
|
Proceeds from sale of investments
|
|
|
95.4
|
|
|
|
|
|
|
|
8.2
|
|
Acquisition of business, net of cash acquired
|
|
|
(67.5
|
)
|
|
|
(968.2
|
)
|
|
|
|
|
Other investing activities, net
|
|
|
2.5
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(74.1
|
)
|
|
|
(1,036.1
|
)
|
|
|
(93.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
1,109.9
|
|
|
|
|
|
Principal payments on debt
|
|
|
(459.7
|
)
|
|
|
(786.6
|
)
|
|
|
(95.6
|
)
|
Proceeds from borrowings on short-term debt
|
|
|
|
|
|
|
|
|
|
|
67.9
|
|
Proceeds from stock plans
|
|
|
54.7
|
|
|
|
33.4
|
|
|
|
8.4
|
|
Repurchase of common stock
|
|
|
(6.3
|
)
|
|
|
(3.6
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(411.3
|
)
|
|
|
353.1
|
|
|
|
(20.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of currency exchange rate changes on cash and cash
equivalents
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
81.4
|
|
|
|
(306.2
|
)
|
|
|
303.0
|
|
Cash and cash equivalents at beginning of period
|
|
|
201.4
|
|
|
|
507.6
|
|
|
|
204.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
282.8
|
|
|
$
|
201.4
|
|
|
$
|
507.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
49.4
|
|
|
$
|
17.3
|
|
|
$
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$
|
193.9
|
|
|
$
|
142.7
|
|
|
$
|
91.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
BALANCE, January 1, 2008
|
|
|
113.1
|
|
|
$
|
0.4
|
|
|
$
|
968.8
|
|
|
$
|
1,179.7
|
|
|
$
|
2.4
|
|
|
|
(9.5
|
)
|
|
$
|
(301.7
|
)
|
|
$
|
1,849.6
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238.4
|
|
Unrealized losses on securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
Unrealized loss on cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232.8
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.5
|
|
Common stock issued under employee stock plans
|
|
|
1.0
|
|
|
|
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.4
|
|
Tax benefits from exercise of options
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008
|
|
|
114.1
|
|
|
$
|
0.4
|
|
|
$
|
995.9
|
|
|
$
|
1,418.1
|
|
|
$
|
(3.2
|
)
|
|
|
(9.5
|
)
|
|
$
|
(302.6
|
)
|
|
$
|
2,108.6
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222.0
|
|
Unrealized gains on securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227.1
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
Common stock issued under employee stock plans
|
|
|
2.0
|
|
|
|
|
|
|
|
33.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.4
|
|
Common stock issued on acquisition
|
|
|
16.9
|
|
|
|
|
|
|
|
636.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636.2
|
|
Tax benefits from exercise of options
|
|
|
|
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(3.6
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009
|
|
|
133.0
|
|
|
$
|
0.4
|
|
|
$
|
1,686.9
|
|
|
$
|
1,640.1
|
|
|
$
|
1.9
|
|
|
|
(9.6
|
)
|
|
$
|
(306.2
|
)
|
|
$
|
3,023.1
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184.4
|
|
Unrealized gains on securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
7.1
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180.0
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
Common stock issued under employee stock plans
|
|
|
2.5
|
|
|
|
|
|
|
|
54.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.7
|
|
Tax benefits from exercise of options
|
|
|
|
|
|
|
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.7
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(6.3
|
)
|
|
|
(6.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2010
|
|
|
135.5
|
|
|
$
|
0.4
|
|
|
$
|
1,771.8
|
|
|
$
|
1,824.5
|
|
|
$
|
(2.5
|
)
|
|
|
(9.7
|
)
|
|
$
|
(312.5
|
)
|
|
$
|
3,281.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
WATSON
PHARMACEUTICALS, INC.
NOTE 1
Description of Business
Watson Pharmaceuticals, Inc. (Watson or the
Company) is primarily engaged in the development,
manufacturing, marketing, sale and distribution of brand and
generic pharmaceutical products. Watson was incorporated in 1985
and began operations as a manufacturer and marketer of
off-patent pharmaceuticals. Through internal product development
and synergistic acquisitions of products and businesses, the
Company has grown into a diversified specialty pharmaceutical
company. Watson operates manufacturing, distribution, research
and development (R&D) and administrative
facilities in the United States of America (U.S.)
and, beginning in 2009, in key international markets including
Western Europe, Canada, Australasia, South America and South
Africa.
Acquisition
of Arrow Group
On December 2, 2009 (the Acquisition Date),
Watson completed its acquisition of all the outstanding equity
of Robin Hood Holdings Limited, a Malta private limited
liability company, and Cobalt Laboratories, Inc., a Delaware
corporation (together the Arrow Group). The Arrow
Group is principally engaged in the manufacture and distribution
of generic pharmaceuticals and operates in the U.S. and
international markets including Western Europe, Canada,
Australasia, South America and South Africa.
As a result of the acquisition of the Arrow Group, Watson also
acquired a 36% ownership interest in Eden Biopharm Group Limited
(Eden), a company which provides development and
manufacturing services for early-stage biotech companies. In
January 2010, we repurchased the remaining interest in Eden for
$15.0 million. Edens results are included in the
Global Brands segment. For additional information on the
acquisition of the Arrow Group, refer to
NOTE 4 Acquisitions and
Divestitures.
NOTE 2
Summary of Significant Accounting Policies
Basis
of Presentation
The Companys consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the U.S. (GAAP). The consolidated
financial statements include the accounts of wholly-owned
subsidiaries, after elimination of intercompany accounts and
transactions. Certain prior year amounts have been reclassified
to conform to the current-year presentation.
Our consolidated financial statements include the financial
results of the Arrow Group subsequent to the Acquisition Date.
Use of
Estimates
Management is required to make certain estimates and assumptions
in order to prepare consolidated financial statements in
conformity with GAAP. Such estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses
and disclosure of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The
Companys most significant estimates relate to the
determination of sales returns and allowances (SRA)
for accounts receivable and accrued liabilities, valuation of
inventory balances, the determination of useful lives for
intangible assets and the assessment of expected cash flows used
in evaluating goodwill and other long-lived assets for
impairment. The estimation process required to prepare the
Companys consolidated financial statements requires
assumptions to be made about future events and conditions, and
as such, is inherently subjective and uncertain. Watsons
actual results could differ materially from those estimates.
F-7
WATSON
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency Translation