Fitch Affirms Watson Pharmaceuticals's IDR at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch has affirmed Watson Pharmaceuticals Inc.'s (Watson) (NYSE:WPI) ratings as follows:

--Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured debt at 'BBB-';

--Bank loan debt at 'BBB-'.

The Rating Outlook is Stable. The ratings apply to approximately $980 million of long-term debt.

Watson's ratings are supported by the reduction of incremental debt during the year that was required to complete the acquisition of the Andrx Group. (Andrx) in November 2006. The company prepaid $250 million of the $650 million of 5-year term loan borrowings in the first six months of the year, reducing leverage a level more appropriate for the rating category. Leverage, total debt to EBITDA, rose to 3.4 times (x) at the end of 2006, but has subsequently fallen to 2.2x for the latest 12-month (LTM) period ending June 30, 2007. Fitch expects leverage to decline to below 2.0x by the end of 2008 due to additional amortization of the term loan. In the intermediate-term, further reduction of leverage is expected given solid free cash flow generation and significant amortization of the term loan.

Watson continues to improve operating cash flow and maintains solid free cash flow. Free cash flow for the LTM period ending June 30, 2007 was $412.8 million (cash flow from operations of $474.3 million less capital spending of $61.5 million), consistent with 2006, had improved from $246.7 million (cash flow from operations of $325.5 million less capital spending of $78.8 million) in 2005. Fitch anticipates solid free cash flow through the long-term supported by strengthening cash flow from operations.

Watson had 70 abbreviated new drug applications (ANDAs) filed with the FDA by the end of June 2007. Of these ANDAs, 15 had received tentative approvals and 11 are exclusive or semi-exclusive filings. The generic pipeline includes copies of Concerta; Toprol-XL (50mg); Cardizem LA; Lovenox (with Amphastar), and Prilosec delayed-release. Watson initiated shipments of generic Duragesic, a transdermal patch for the treatment of chronic pain in late August, joining four other generic companies. The company also launched generic Wellbutrin-XL (300mg) in June, which competes only with Teva Pharmaceutical Industries, LTD, and Anchen Pharmaceuticals, Inc. Additionally, the company was one of 14 manufacturers to launch a generic version of Lamisil in early July, and one of 15 firms to launch a generic version of Coreg in September. The majority of the R&D investment will be directed toward generic products; however, the R&D program includes promising branded pharmaceuticals, such as silodosin (with Kissei Pharmaceutical Co., Ltd.), a gel formulation of Oxytrol, and ActosPlus (with Takeda Pharmaceutical Co., Ltd.), a fixed dose combination of Actos and extended-release metformin.

Watson is working towards lifting the Official Action Indicated (OAI) status placed on its Davie, FL manufacturing plant, acquired with Andrx. The full approvals of the branded pharmaceutical, ActosPlus, and various important generic drugs are awaiting clearance by the U.S. regulatory body, following a yet to be scheduled re-inspection. Uncertainty exists regarding the timing of the re-inspection and final clearance of the facility. Fitch will monitor the company's efforts to restore FDA compliance at the production facility.

Pricing pressure is a key industry challenge the company faces, as low-cost producers in India earn legitimacy in the U.S. and as third party payers continue to extract pricing concessions to control client costs. Despite Watson's projection of annual price erosion of its base generic business of 10%, overall revenue growth is anticipated in the long-term. The negative affect is offset by achieving 180-day market exclusivity for blockbuster originator drugs, consummating authorized generic agreements with brand name manufacturers, and broadening the brand name drug portfolio. On the other hand, the overall industry is favored by an unprecedented amount of U.S. drug patent expirations in the long-term. An upcoming wave of originator drug patent expiries may occur in 2010-2012, with nearly $25 billion of U.S. revenues in jeopardy. Third party payers overwhelmingly favor generic drugs as a means to reduce overall prescription drug spending.

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