Fitch Affirms Watson Pharmaceuticals' 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. Watson's ratings reflect the company's declining debt levels, new product opportunities and favorable resolution of the Davie, Fl., regulatory situation, offset by an increasingly competitive industry environment and expected declines in the key product, Ferrlecit.

Watson's credit metrics have improved over the past year. At June 30, 2008, Watson had approximately $827 million in debt outstanding, a decline from Dec. 31, 2007, when $906 million was outstanding and Dec. 31, 2006, when debt totaled $1.23 billion. Watson prepaid $325 million on the term loan in 2007 and an additional $75 million in 2008, such that no mandatory principal payments are due on the credit facility until it matures in 2011. Leverage (total debt/EBITDA) has declined to 1.5 times(x) for the last 12-months (LTM) ended June 30, 2008, from 1.8x at the end of 2007 and 3.1x at the end of 2006, as a result of both debt reduction and EBITDA expansion. Liquidity remains strong, with approximately $266 million in cash on hand, an undrawn $500 million revolving credit facility, and LTM free cash flow of $326 million at June 30, 2008.

In addition to improving credit metrics, Watson has benefited from the favorable resolution of the Davie, FL, regulatory situation. In 2008, the Davie, FL facility was removed from Official Action Indicated (OAI) status, which had been in place since 2005. As a result, Watson is now eligible for approvals of key generic and branded drugs which had been on regulatory hold, including generic Toprol XL, Concerta and Cardizem LA as well as the Actos plus metformin extended release branded pharmaceutical. Watson has already launched omeprazole, the generic version of Prilosec, from this facility.

Fitch believes the resolution of the OAI status will increase revenue growth over the next year, as will launches from the company's research and development pipeline. Of particular importance are the expected launches of silodosin (trademarked Rapaflo) and oxybutynin topical gel. Rapaflo, which was approved in October 2008, is poised to capture a portion of the market for the treatment of benign prostatic hyperplasia (also known as enlarged prostrate). It appears to have a favorable profile, including the ability to relieve symptoms faster than the current market leader, Flomax, a blockbuster drug with more than $1 billion in annual sales. Watson also recently submitted a new drug application (NDA) for oxybutynin topical gel, which could be approved in early 2009. Other branded product opportunities include the Actos-metformin combination product and a 6 month formulation of the company's Trelstar product. Generic segment growth will be driven by potential approvals of the 60 ANDAs on file with the FDA at June 30, including several first-to-file opportunities such as Seasonique, Lybrel and Loestrin 24. Furthermore, generic segment growth will be aided by the unprecedented number of branded drugs facing patent expiration over the next few years.

Offsetting part of this growth will be expected declines in Watson's key product, Ferrlecit. In 2007, Watson's treatment for iron deficiency anemia represented approximately 5% of total company sales and 12% of gross profits. Fitch believes Ferrlecit's contribution to profits will decline materially in the next few years as a result of new competition and potential changes to its supply and licensing agreement. New branded competition is expected to enter the market in 2009; in addition, Ferrlecit's market exclusivity expired several years ago, which means generic competition is also possible in the future. Finally, Watson is currently in dispute with Sanofi-Aventis over the terms and expiration date of the supply and licensing agreement for the drug, which expires in 2009.

Watson also faces an uncertain industry environment. Pricing pressures are expected to continue, as competition intensifies and third party payers continue to extract pricing concessions to control client costs. Fitch believes pricing pressures in the near term may accelerate due to the entry of new competitors, such as Mylan Inc. and Sandoz, in the generic oral contraceptives market. In addition, further consolidation in the generics industry is likely and may involve Watson as either a target or an acquirer, which could materially affect Watson's credit profile.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.