##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-13305
 
 WATSON PHARMACEUTICALS, INC.
  
 Nevada
(State or other jurisdiction of 
incorporation or organization)
    
    95-3872914
(I.R.S. Employer Identification No.)
 311 Bonnie Circle
Corona, CA 92880-2882
 (951) 493-5300
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



WATSON PHARMACEUTICALS, INC.
 TABLE
OF CONTENTS
 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 PAGEPart I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    1Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    39Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    41EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2




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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    339,354
    
    
    $
    204,554Marketable securities
    
    
    12,683
    
    
    
    11,799Accounts receivable, net
    
    
    314,475
    
    
    
    267,117Inventories
    
    
    481,559
    
    
    
    490,601Prepaid expenses and other current assets
    
    
    68,883
    
    
    
    86,072Deferred tax assets
    
    
    106,311
    
    
    
    113,633Total current assets
    
    
    1,323,265
    
    
    
    1,173,776Property and equipment, net
    
    
    660,549
    
    
    
    688,185Investments and other assets
    
    
    73,204
    
    
    
    68,034Deferred tax assets
    
    
    76,360
    
    
    
    61,886Product rights and other intangibles, net
    
    
    543,891
    
    
    
    603,697Goodwill
    
    
    868,085
    
    
    
    876,449Total assets
    
    $
    3,545,354
    
    
    $
    3,472,027LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    353,745
    
    
    $
    398,154Income taxes payable
    
    
    777
    
    
    
    Short-term debt and current portion of long-term debt
    
    
    3,217
    
    
    
    6,241Deferred revenue
    
    
    16,281
    
    
    
    21,754Deferred tax liabilities
    
    
    24,080
    
    
    
    18,778Total current liabilities
    
    
    398,100
    
    
    
    444,927Long-term debt
    
    
    824,609
    
    
    
    899,408Deferred revenue
    
    
    33,786
    
    
    
    39,535Other long-term liabilities
    
    
    4,848
    
    
    
    7,333Other taxes payable
    
    
    51,983
    
    
    
    52,619Deferred tax liabilities
    
    
    181,745
    
    
    
    178,740Total liabilities
    
    
    1,495,071
    
    
    
    1,622,562Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    376
    
    
    
    373Additional paid-in capital
    
    
    991,409
    
    
    
    968,739Retained earnings
    
    
    1,361,730
    
    
    
    1,179,737Accumulated other comprehensive (loss) income
    
    
    (619
    )
    
    
    2,392Treasury stock, at cost
    
    
    (302,613
    )
    
    
    (301,776
    )Total stockholders equity
    
    
    2,050,283
    
    
    
    1,849,465Total liabilities and stockholders equity
    
    $
    3,545,354
    
    
    $
    3,472,027
 See accompanying Notes to Condensed Consolidated Financial Statements.
 - 1 -




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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    640,691
    
    
    $
    594,706
    
    
    $
    1,890,276
    
    
    $
    1,869,316Cost of sales (excludes amortization, presented below)
    
    
    386,655
    
    
    
    346,420
    
    
    
    1,126,655
    
    
    
    1,131,578Gross profit
    
    
    254,036
    
    
    
    248,286
    
    
    
    763,621
    
    
    
    737,738Operating expenses:Research and development
    
    
    45,322
    
    
    
    35,657
    
    
    
    122,553
    
    
    
    108,968Selling and marketing
    
    
    58,572
    
    
    
    53,347
    
    
    
    172,156
    
    
    
    160,407General and administrative
    
    
    42,697
    
    
    
    59,144
    
    
    
    140,041
    
    
    
    152,460Amortization
    
    
    20,200
    
    
    
    44,159
    
    
    
    60,569
    
    
    
    132,251Loss (gain)
on asset sales and impairments
    
    
    303
    
    
    
    (6,118
    )
    
    
    303
    
    
    
    (6,118
    )Total
operating expenses
    
    
    167,094
    
    
    
    186,189
    
    
    
    495,622
    
    
    
    547,968Operating income
    
    
    86,942
    
    
    
    62,097
    
    
    
    267,999
    
    
    
    189,770Other income (expense):Loss on
early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (1,095
    )
    
    
    (4,410
    )Interest income
    
    
    2,157
    
    
    
    1,964
    
    
    
    6,151
    
    
    
    6,696Interest expense
    
    
    (7,005
    )
    
    
    (10,125
    )
    
    
    (20,732
    )
    
    
    (35,476
    )Other income
    
    
    11,942
    
    
    
    1,449
    
    
    
    19,375
    
    
    
    7,886Total other
income (expense), net
    
    
    7,094
    
    
    
    (6,712
    )
    
    
    3,699
    
    
    
    (25,304
    )Income before income taxes
    
    
    94,036
    
    
    
    55,385
    
    
    
    271,698
    
    
    
    164,466Provision for income taxes
    
    
    22,975
    
    
    
    20,779
    
    
    
    89,705
    
    
    
    61,839Net income
    
    $
    71,061
    
    
    $
    34,606
    
    
    $
    181,993
    
    
    $
    102,627Earnings per share:Basic
    
    $
    0.69
    
    
    $
    0.34
    
    
    $
    1.77
    
    
    $
    1.00Diluted
    
    $
    0.62
    
    
    $
    0.31
    
    
    $
    1.60
    
    
    $
    0.93Weighted average shares outstanding:Basic
    
    
    102,893
    
    
    
    102,453
    
    
    
    102,749
    
    
    
    102,266Diluted
    
    
    117,995
    
    
    
    117,421
    
    
    
    117,661
    
    
    
    117,042
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    181,993
    
    
    $
    102,627Reconciliation to net cash provided by operating activities:Depreciation
    
    
    67,392
    
    
    
    56,935Amortization
    
    
    60,569
    
    
    
    132,250Charge for asset impairment
    
    
    303
    
    
    
    4,499Deferred income tax provision (benefit)
    
    
    16,980
    
    
    
    (15,509
    )Provision for inventory reserve
    
    
    35,940
    
    
    
    36,908Restricted stock and stock option compensation
    
    
    14,055
    
    
    
    10,337Earnings on equity method investments
    
    
    (9,561
    )
    
    
    (5,409
    )Gain on sale of securities
    
    
    (9,605
    )
    
    
    (2,131
    )Loss on early extinguishment of debt
    
    
    1,095
    
    
    
    4,410Loss (gain) on sale of fixed assets
    
    
    1,697
    
    
    
    (10,221
    )Other
    
    
    (4,344
    )
    
    
    4,541Changes in assets and liabilities:Accounts receivable, net
    
    
    (47,358
    )
    
    
    111,852Inventories
    
    
    (26,898
    )
    
    
    (48,654
    )Prepaid expenses and other current assets
    
    
    12,942
    
    
    
    20,945Accounts payable and accrued expenses
    
    
    (45,789
    )
    
    
    (142,957
    )Deferred revenue
    
    
    (10,703
    )
    
    
    (10,712
    )Income taxes payable
    
    
    9,933
    
    
    
    2,967Other assets
    
    
    (8,419
    )
    
    
    3,047Total adjustments
    
    
    58,229
    
    
    
    153,098Net cash provided by operating activities
    
    
    240,222
    
    
    
    255,725CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (42,545
    )
    
    
    (49,812
    )Acquisition of product rights and other intangibles
    
    
    (763
    )
    
    
    (492
    )Additions to goodwill
    
    
    (1,441
    )
    
    
    Proceeds from sale of marketable equity securities
    
    
    4,793
    
    
    
    3,223Proceeds from sale of investments
    
    
    8,250
    
    
    
    Additions to marketable securities
    
    
    (5,407
    )
    
    
    (5,624
    )Additions to long-term investments
    
    
    
    
    
    
    (1,152
    )Distribution from joint venture
    
    
    1,052
    
    
    
    715Proceeds from sale of property, plant and equipment
    
    
    789
    
    
    
    14,385Net cash used in investing activities
    
    
    (35,272
    )
    
    
    (38,757
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt
    
    
    (95,633
    )
    
    
    (252,910
    )Repurchase of common stock
    
    
    (837
    )
    
    
    (1,731
    )Borrowings on short-term debt and other long-term liabilities
    
    
    17,909
    
    
    
    1,655Proceeds from stock plans
    
    
    8,411
    
    
    
    15,195Net cash used in financing activities
    
    
    (70,150
    )
    
    
    (237,791
    )Net increase (decrease) in cash and cash equivalents
    
    
    134,800
    
    
    
    (20,823
    )Cash and cash equivalents at beginning of period
    
    
    204,554
    
    
    
    154,171Cash and cash equivalents at end of period
    
    $
    339,354
    
    
    $
    133,348
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  GENERAL
   Comprehensive Income
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    71,061
    
    
    $
    34,606
    
    
    $
    181,993
    
    
    $
    102,627Other
comprehensive (loss) income:Translation (loss) gain
    
    
    (1,964
    )
    
    
    1,676
    
    
    
    (2,899
    )
    
    
    2,761Unrealized (loss) gain on securities, net of tax
    
    
    (543
    )
    
    
    122
    
    
    
    (745
    )
    
    
    (395
    )Unrealized gain (loss) on cash flow hedge, net
of tax
    
    
    878
    
    
    
    (249
    )
    
    
    633
    
    
    
    (249
    )Total other comprehensive (loss) income
    
    
    (1,629
    )
    
    
    1,549
    
    
    
    (3,011
    )
    
    
    2,117Total comprehensive income
    
    $
    69,432
    
    
    $
    36,155
    
    
    $
    178,982
    
    
    $
    104,744
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Preferred and Common Stock
  Provisions for Sales Returns and Allowances
    - 5 -




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Returns andOther
    
    
    CashChargebacks
    
    
    Rebates
    
    
    Allowances
    
    
    Discounts
    
    
    TotalBalance at December 31, 2006
    
    $
    164,480
    
    
    $
    180,538
    
    
    $
    42,489
    
    
    $
    14,072
    
    
    $
    401,579Provision related to sales in nine months
ended September 30, 2007
    
    
    909,497
    
    
    
    296,333
    
    
    
    122,717
    
    
    
    51,001
    
    
    
    1,379,548Credits and payments
    
    
    (925,744
    )
    
    
    (323,243
    )
    
    
    (114,244
    )
    
    
    (51,968
    )
    
    
    (1,415,199
    )Balance at September 30, 2007
    
    
    148,233
    
    
    
    153,628
    
    
    
    50,962
    
    
    
    13,105
    
    
    
    365,928Provision related to sales in three months
ended December 31, 2007
    
    
    325,400
    
    
    
    80,165
    
    
    
    44,706
    
    
    
    17,060
    
    
    
    467,331Credits and payments
    
    
    (309,190
    )
    
    
    (79,476
    )
    
    
    (39,624
    )
    
    
    (17,253
    )
    
    
    (445,543
    )Balance at December 31, 2007
    
    
    164,443
    
    
    
    154,317
    
    
    
    56,044
    
    
    
    12,912
    
    
    
    387,716Provision related to sales in nine months
ended September 30, 2008
    
    
    919,990
    
    
    
    228,722
    
    
    
    133,362
    
    
    
    49,860
    
    
    
    1,331,934Credits and payments
    
    
    (967,379
    )
    
    
    (250,595
    )
    
    
    (123,460
    )
    
    
    (49,954
    )
    
    
    (1,391,388
    )Balance at September 30, 2008
    
    $
    117,054
    
    
    $
    132,444
    
    
    $
    65,946
    
    
    $
    12,818
    
    
    $
    328,262
 Earnings Per Share (EPS)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007EPS  basicNet income
    
    $
    71,061
    
    
    $
    34,606
    
    
    $
    181,993
    
    
    $
    102,627Basic weighted average common shares
outstanding
    
    
    102,893
    
    
    
    102,453
    
    
    
    102,749
    
    
    
    102,266EPS  basic
    
    $
    0.69
    
    
    $
    0.34
    
    
    $
    1.77
    
    
    $
    1.00EPS  dilutedNet income
    
    $
    71,061
    
    
    $
    34,606
    
    
    $
    181,993
    
    
    $
    102,627Add: Interest expense on CODES, net of tax
    
    
    1,988
    
    
    
    1,905
    
    
    
    5,919
    
    
    
    5,906Net income, adjusted
    
    $
    73,049
    
    
    $
    36,511
    
    
    $
    187,912
    
    
    $
    108,533Basic weighted average common shares
outstanding
    
    
    102,893
    
    
    
    102,453
    
    
    
    102,749
    
    
    
    102,266Effect of dilutive securities:Conversion of CODES
    
    
    14,357
    
    
    
    14,357
    
    
    
    14,357
    
    
    
    14,357Dilutive share-based compensation
arrangements
    
    
    745
    
    
    
    611
    
    
    
    555
    
    
    
    419Diluted weighted average common shares
outstanding
    
    
    117,995
    
    
    
    117,421
    
    
    
    117,661
    
    
    
    117,042EPS  diluted
    
    $
    0.62
    
    
    $
    0.31
    
    
    $
    1.60
    
    
    $
    0.93
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Derivatives
   Share-Based Compensation
   Recent Accounting Pronouncements
   - 7 -




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- 8 -




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NOTE 2  OTHER INCOME
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Earnings on equity method investments
    
    $
    3,733
    
    
    $
    1,686
    
    
    $
    9,561
    
    
    $
    5,409Gain on sale of securities
    
    
    8,250
    
    
    
    
    
    
    
    9,605
    
    
    
    2,472Other (expense) income
    
    
    (41
    )
    
    
    (237
    )
    
    
    209
    
    
    
    5$
    11,942
    
    
    $
    1,449
    
    
    $
    19,375
    
    
    $
    7,886
 NOTE 3  OPERATING SEGMENTS
   Three Months Ended September 30, 2008
    
    
    Three Months Ended September 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    352,190
    
    
    $
    94,298
    
    
    $
    170,933
    
    
    $
    617,421
    
    
    $
    326,231
    
    
    $
    93,534
    
    
    $
    129,875
    
    
    $
    549,640Other
    
    
    11,593
    
    
    
    11,677
    
    
    
    
    
    
    
    23,270
    
    
    
    31,489
    
    
    
    13,577
    
    
    
    
    
    
    
    45,066Net revenues
    
    
    363,783
    
    
    
    105,975
    
    
    
    170,933
    
    
    
    640,691
    
    
    
    357,720
    
    
    
    107,111
    
    
    
    129,875
    
    
    
    594,706Cost of sales(1)
    
    
    212,367
    
    
    
    30,224
    
    
    
    144,064
    
    
    
    386,655
    
    
    
    210,931
    
    
    
    22,089
    
    
    
    113,400
    
    
    
    346,420Gross profit(1)
    
    
    151,416
    
    
    
    75,751
    
    
    
    26,869
    
    
    
    254,036
    
    
    
    146,789
    
    
    
    85,022
    
    
    
    16,475
    
    
    
    248,286Gross margin(1)
    
    
    41.6
    %
    
    
    71.5
    %
    
    
    15.7
    %
    
    
    39.7
    %
    
    
    41.0
    %
    
    
    79.4
    %
    
    
    12.7
    %
    
    
    41.7
    %Research and
development
    
    
    31,736
    
    
    
    13,586
    
    
    
    
    
    
    
    45,322
    
    
    
    26,555
    
    
    
    9,102
    
    
    
    
    
    
    
    35,657Selling and
marketing
    
    
    13,990
    
    
    
    29,024
    
    
    
    15,558
    
    
    
    58,572
    
    
    
    14,018
    
    
    
    26,613
    
    
    
    12,716
    
    
    
    53,347Contribution
    
    $
    105,690
    
    
    $
    33,141
    
    
    $
    11,311
    
    
    
    150,142
    
    
    $
    106,216
    
    
    $
    49,307
    
    
    $
    3,759
    
    
    
    159,282Contibution margin
    
    
    29.1
    %
    
    
    31.3
    %
    
    
    6.6
    %
    
    
    23.4
    %
    
    
    29.7
    %
    
    
    46.0
    %
    
    
    2.9
    %
    
    
    26.8
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,144Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,159Loss (gain) on asset sales and impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,118
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    86,942
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    62,097Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.6
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.4
    %
 - 9 -




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##### Table of Contents



Nine Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    1,038,938
    
    
    $
    294,756
    
    
    $
    443,822
    
    
    $
    1,777,516
    
    
    $
    1,065,152
    
    
    $
    281,096
    
    
    $
    421,946
    
    
    $
    1,768,194Other
    
    
    68,249
    
    
    
    44,511
    
    
    
    
    
    
    
    112,760
    
    
    
    62,834
    
    
    
    38,288
    
    
    
    
    
    
    
    101,122Net revenues
    
    
    1,107,187
    
    
    
    339,267
    
    
    
    443,822
    
    
    
    1,890,276
    
    
    
    1,127,986
    
    
    
    319,384
    
    
    
    421,946
    
    
    
    1,869,316Cost of sales(1)
    
    
    669,676
    
    
    
    82,167
    
    
    
    374,812
    
    
    
    1,126,655
    
    
    
    693,896
    
    
    
    74,099
    
    
    
    363,583
    
    
    
    1,131,578Gross profit(1)
    
    
    437,511
    
    
    
    257,100
    
    
    
    69,010
    
    
    
    763,621
    
    
    
    434,090
    
    
    
    245,285
    
    
    
    58,363
    
    
    
    737,738Gross margin(1)
    
    
    39.5
    %
    
    
    75.8
    %
    
    
    15.5
    %
    
    
    40.4
    %
    
    
    38.5
    %
    
    
    76.8
    %
    
    
    13.8
    %
    
    
    39.5
    %Research and
development
    
    
    83,458
    
    
    
    39,095
    
    
    
    
    
    
    
    122,553
    
    
    
    77,036
    
    
    
    31,932
    
    
    
    
    
    
    
    108,968Selling and
marketing
    
    
    41,868
    
    
    
    86,593
    
    
    
    43,695
    
    
    
    172,156
    
    
    
    41,764
    
    
    
    79,397
    
    
    
    39,246
    
    
    
    160,407Contribution
    
    $
    312,185
    
    
    $
    131,412
    
    
    $
    25,315
    
    
    
    468,912
    
    
    $
    315,290
    
    
    $
    133,956
    
    
    $
    19,117
    
    
    
    468,363Contibution margin
    
    
    28.2
    %
    
    
    38.7
    %
    
    
    5.7
    %
    
    
    24.8
    %
    
    
    28.0
    %
    
    
    41.9
    %
    
    
    4.5
    %
    
    
    25.1
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,041
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152,460Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,251Loss (gain) on asset sales and impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,118
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    267,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    189,770Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.2
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.2
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. NOTE 4  INVENTORIES
   September 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    102,958
    
    
    $
    102,607Work-in-process
    
    
    48,073
    
    
    
    45,851Finished goods
    
    
    330,528
    
    
    
    342,143Total inventories
    
    $
    481,559
    
    
    $
    490,601
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##### Table of Contents



NOTE 5  LONG-TERM DEBT
  September 30,
    
    
    December 31,2008
    
    
    2007Senior Credit Facility, due 2011, bearing interest
at LIBOR plus 0.75% (2006 Credit Facility)
    
    $
    250,000
    
    
    $
    325,000CODES, face amount of $575 million,
due 2023, net of unamortized discount
    
    
    574,609
    
    
    
    574,402Other notes payable
    
    
    3,217
    
    
    
    6,247827,826
    
    
    
    905,649Less: Current portion
    
    
    3,217
    
    
    
    6,241Total long-term debt
    
    $
    824,609
    
    
    $
    899,408
 Senior Credit Facility
  NOTE 6
 BUSINESS RESTRUCTURING CHARGES
  AccrualBalance atCharged
    
    
    Cash
    
    
    Non-cash
    
    
    September 30,(in thousands)
    
    to Expense
    
    
    Payments
    
    
    Adjustments
    
    
    2008Cost of salesSeverance and retention
    
    $
    13,909
    
    
    $
    (1,570
    )
    
    $
    
    
    
    $
    12,339Product transfer costs
    
    
    1,907
    
    
    
    (1,393
    )
    
    
    
    
    
    
    514Facility decommission costs
    
    
    588
    
    
    
    (409
    )
    
    
    
    
    
    
    179Accelerated depreciation
    
    
    5,600
    
    
    
    
    
    
    
    (5,600
    )
    
    
    22,004
    
    
    
    (3,372
    )
    
    
    (5,600
    )
    
    
    13,032Operating expensesResearch and development
    
    
    1,019
    
    
    
    (752
    )
    
    
    
    
    
    
    267Selling, general and
administrative
    
    
    880
    
    
    
    (28
    )
    
    
    
    
    
    
    8521,899
    
    
    
    (780
    )
    
    
    
    
    
    
    1,119Total restructuring charges
    
    $
    23,903
    
    
    $
    (4,152
    )
    
    $
    (5,600
    )
    
    $
    14,151
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##### Table of Contents



NOTE 7  INCOME TAXES
      NOTE 8  GOODWILL
  December 31,
    
    
    Goodwill
    
    
    September 30,2007
    
    
    Adjustment
    
    
    2008Brand segment
    
    $
    356,998
    
    
    $
    (8,825
    )
    
    $
    348,173Generic segment
    
    
    433,451
    
    
    
    149
    
    
    
    433,600Distribution segment
    
    
    86,000
    
    
    
    312
    
    
    
    86,312Total goodwill
    
    $
    876,449
    
    
    $
    (8,364
    )
    
    $
    868,085
  - 12 -




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##### Table of Contents



NOTE 9  STOCKHOLDERS EQUITY
  Stockholders equity, December 31, 2007
    
    $
    1,849,465Common stock issued under employee plans
    
    
    8,411Increase in additional paid-in capital for share-based compensation plans
    
    
    14,055Net income
    
    
    181,993Other comprehensive loss
    
    
    (3,011
    )Tax benefit from employee stock plans
    
    
    207Repurchase of common stock
    
    
    (837
    )Stockholders equity, September 30, 2008
    
    $
    2,050,283
 NOTE 10  FAIR VALUE MEASUREMENT
    Fair Value Measurements as at September 30, 2008 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Marketable securities
    
    $
    12,683
    
    
    $
    12,683
    
    
    $
    
    
    
    $
    Investments
    
    
    106
    
    
    
    106
    
    
    
    
    
    
    
    Derivative liabilities
    
    
    594
    
    
    
    
    
    
    
    594
    
    
    
    
  - 13 -




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##### Table of Contents



NOTE 11  CONTINGENCIES
 Legal Matters
  Cipro Litigation. In re:
Ciprofloxacin Hydrochloride Antitrust Litigation, MDL Docket No. 001383 ® In re: Cipro Cases I & II, JCCP Proceeding Nos.
4154 & 4220
 - 14 -




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##### Table of Contents



Governmental Reimbursement Investigations and Drug Pricing Litigation qui tam qui tam qui tam qui tam qui tam qui tam
 In re: Pharmaceutical
Industry Average Wholesale Price Litigation, MDL Docket No. 1456
 - 15 -




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##### Table of Contents



State of Nevada v. American Home Products, et al., Civil
Action No. 02-CV-12086-PBS, United States District Court for the District of Massachusetts; State
of Montana v. Abbott Laboratories, et al., Civil Action No. 02-CV-12084-PBS, United States District
Court for the District of Massachusetts; Commonwealth of Massachusetts v. Mylan Laboratories, et
al., Civil Action No. 03-CV-11865-PBS, United States District Court for the District of
Massachusetts; State of Wisconsin v. Abbott Laboratories, et al., Case No. 04-cv-1709, Wisconsin
Circuit Court for Dane County; Commonwealth of Kentucky v. Alpharma, Inc., et al., Case Number
04-CI-1487, Kentucky Circuit Court for Franklin County; State of Alabama v. Abbott Laboratories,
Inc. et al., Civil Action No. CV05-219, Alabama Circuit Court for Montgomery County; State of
Illinois v. Abbott Laboratories, Inc. et al., Civil Action No. 05-CH-02474, Illinois Circuit Court
for Cook County; State of Mississippi v. Abbott Laboratories, Inc. et al., Civil Action No.
G2005-2021 S/2, Mississippi Chancery Court of Hinds County; State of Florida ex rel. Ven-A-Care,
Civil Action No 98-3032G, Florida Circuit Court in Leon County; State of Arizona ex rel. Terry
Goddard, No. CV 2005-18711, Arizona Superior Court for Maricopa County; State of Missouri ex rel.
Jeremiah W. (Jay) Nixon v. Mylan Laboratories, et al, Case No. 054-2486, Missouri Circuit Court of
St. Louis; State of Alaska v. Alpharma Branded Products Division Inc., et al., In the Superior
Court for the State of Alaska Third Judicial District at Anchorage, C.A. No. 3AN-06-12026 CI; State
of Idaho v. Alpharma USPD Inc. et al., In the District Court of the Fourth Judicial District of the
State of Idaho, in and for the County of Ada, C.A. No. CV0C-0701847; State of South Carolina and
Henry D. McMaster v. Watson Pharmaceuticals (New Jersey), Inc., In the Court of Common Pleas for
the Fifth Judicial Circuit, State of South Carolina, County of Richland, C.A. No. 2006-CP-40-7152;
State of South Carolina and Henry D. McMaster v. Watson Pharmaceuticals (New Jersey), Inc., In the
Court of Common Pleas for the Fifth Judicial Circuit, State of South Carolina, County of Richland,
C.A. No. 2006-CP-40-7155; State of Hawaii v. Abbott Laboratories, Inc. et al., In the Circuit Court
of the First Circuit, State of Hawaii, C.A. No. 06-1-0720-04 EEH; State of Utah v. Actavis U.S.,
Inc., et al., In the Third Judicial District Court of Salt Lake County, Civil No. 07-0913719; State
of Iowa v. Abbott Laboratories, Inc., et al., In the U.S. District Court for the Southern District
of Iowa, Central Division, Case No. 07-CV-00461; State of Texas ex rel. Ven-A-Care of the Florida
Keys, Inc. v. Alpharma Inc., et al, Case No. 08-001565, in the District Court of Travis County,
Texas; and United States of America ex rel. Ven-A-Care of the Florida Keys, Inc., Civil Action No.
08-10852, in the U.S. District Court for the District of Massachussetts .
  City
of New York v. Abbott Laboratories, Inc., et al., Civil Action No. 01-
 - 16 -




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##### Table of Contents



CV-12257-PBS, United States
District Court for the District of Massachusetts County of Orange v. Abbott
Laboratories, Inc., et al. United States District Court for the Southern District of New York,
Case No. 07-CV-2777
  FDA Matters. United States of America v. Watson Laboratories, Inc., and Allen Y.
Chao
  - 17 -




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##### Table of Contents



Naproxen Sodium (Naprelan). ® Elan Corporation PLC v. Andrx Pharmaceuticals, Inc., Case No. 98-7164 ® Elan Corporation PLC v. Andrx Pharmaceuticals, Inc.,
Case No. 03-1354
 ® Elan Corporation PLC v. Andrx Pharmaceuticals, Inc., Case No. 058-60158
 Federal Trade Commission Investigations ® ® ®
 Department of Health and Human Services Subpoena.
 - 18 -




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##### Table of Contents



®
 Hormone Replacement Therapy Litigation. In re: Prempro Products Liability
Litigation, MDL Docket No. 1507
 Levonorgestrel/Ethinyl Estradiol Tablets (Seasonale ® ) TM ® Duramed
Pharmaceuticals, Inc. v. Watson Pharmaceuticals, Inc., et. al., Case No. 07cv05941 ®
 Ferrlecit ® . ® ®
 Oxytrol ®
Litigation. Watson Laboratories, Inc. v. Barr Laboratories,
Inc., et al. Case No. 08-793
 - 19 -




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##### Table of Contents



- 20 -




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Results of Operations
    - 21 -




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##### Table of Contents



Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Three Months Ended September 30, 2008
    
    
    Three Months Ended September 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    352,190
    
    
    $
    94,298
    
    
    $
    170,933
    
    
    $
    617,421
    
    
    $
    326,231
    
    
    $
    93,534
    
    
    $
    129,875
    
    
    $
    549,640Other
    
    
    11,593
    
    
    
    11,677
    
    
    
    
    
    
    
    23,270
    
    
    
    31,489
    
    
    
    13,577
    
    
    
    
    
    
    
    45,066Net revenues
    
    
    363,783
    
    
    
    105,975
    
    
    
    170,933
    
    
    
    640,691
    
    
    
    357,720
    
    
    
    107,111
    
    
    
    129,875
    
    
    
    594,706Cost of sales(1)
    
    
    212,367
    
    
    
    30,224
    
    
    
    144,064
    
    
    
    386,655
    
    
    
    210,931
    
    
    
    22,089
    
    
    
    113,400
    
    
    
    346,420Gross profit(1)
    
    
    151,416
    
    
    
    75,751
    
    
    
    26,869
    
    
    
    254,036
    
    
    
    146,789
    
    
    
    85,022
    
    
    
    16,475
    
    
    
    248,286Gross margin(1)
    
    
    41.6
    %
    
    
    71.5
    %
    
    
    15.7
    %
    
    
    39.7
    %
    
    
    41.0
    %
    
    
    79.4
    %
    
    
    12.7
    %
    
    
    41.7
    %Research and
development
    
    
    31,736
    
    
    
    13,586
    
    
    
    
    
    
    
    45,322
    
    
    
    26,555
    
    
    
    9,102
    
    
    
    
    
    
    
    35,657Selling and
marketing
    
    
    13,990
    
    
    
    29,024
    
    
    
    15,558
    
    
    
    58,572
    
    
    
    14,018
    
    
    
    26,613
    
    
    
    12,716
    
    
    
    53,347Contribution
    
    $
    105,690
    
    
    $
    33,141
    
    
    $
    11,311
    
    
    
    150,142
    
    
    $
    106,216
    
    
    $
    49,307
    
    
    $
    3,759
    
    
    
    159,282Contibution margin
    
    
    29.1
    %
    
    
    31.3
    %
    
    
    6.6
    %
    
    
    23.4
    %
    
    
    29.7
    %
    
    
    46.0
    %
    
    
    2.9
    %
    
    
    26.8
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,144Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,159Loss (gain) on asset sales and impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,118
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    86,942
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    62,097Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.6
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.4
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. Generic Segment
 Net Revenues
    TM
 - 22 -




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##### Table of Contents



®
 Gross Profit
   Research and Development Expenses
   Selling and Marketing Expenses
   Brand Segment
 Net Revenues
  ® ®
 ® ®
 - 23 -




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##### Table of Contents



Gross Profit (Gross Margin)
  Research and Development Expenses
  TM
 Selling and Marketing Expenses
  TM
 Distribution Segment
 Net Revenues
   - 24 -




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##### Table of Contents



Gross Profit (Gross Margin)
  Selling and Marketing Expenses
   Segment Contribution
 Three Months Ended September 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    105,690
    
    
    $
    106,216
    
    
    $
    (526
    )
    
    
    (0.5
    )%Brand
    
    
    33,141
    
    
    
    49,307
    
    
    
    (16,166
    )
    
    
    (32.8
    )%Distribution
    
    
    11,311
    
    
    
    3,759
    
    
    
    7,552
    
    
    
    200.9
    %$
    150,142
    
    
    $
    159,282
    
    
    $
    (9,140
    )
    
    
    (5.7
    )%as a % of net revenues
    
    
    23.4
    %
    
    
    26.8
    %
  Corporate General and Administrative Expenses
 Three Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Corporate general and
administrative expenses
    
    $
    42,697
    
    
    $
    59,144
    
    
    $
    (16,447
    )
    
    
    (27.8
    )%as a % of net revenues
    
    
    6.7
    %
    
    
    9.9
    %
   - 25 -




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##### Table of Contents



Amortization
 Three Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Amortization
    
    $
    20,200
    
    
    $
    44,159
    
    
    $
    (23,959
    )
    
    
    (54.3
    )%as a % of net revenues
    
    
    3.2
    %
    
    
    7.4
    %
  Loss (Gain) on Asset Sales and Impairments
 Three Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Loss (gain) on asset sales and
impairments
    
    $
    303
    
    
    $
    (6,118
    )
    
    $
    6,421
    
    
    
    (105.0
    )%as a % of net revenues
    
    
    0.0
    %
    
    
    (1.0
    )%
  Interest Income
 Three Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Interest income
    
    $
    2,157
    
    
    $
    1,964
    
    
    $
    193
    
    
    
    9.8
    %as a % of net revenues
    
    
    0.3
    %
    
    
    0.3
    %
  - 26 -




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##### Table of Contents



Interest Expense
 Three Months Ended September 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Interest expense  2006 Credit Facility
    
    $
    3,709
    
    
    $
    6,889
    
    
    $
    (3,180
    )Interest expense  convertible contingent
senior debentures due 2023 (CODES)
    
    
    3,151
    
    
    
    3,151
    
    
    
    Change in derivative value
    
    
    
    
    
    
    (103
    )
    
    
    103Interest expense  other
    
    
    145
    
    
    
    188
    
    
    
    (43
    )$
    7,005
    
    
    $
    10,125
    
    
    $
    (3,120
    )
    
    
    (30.8
    )%as a % of net revenues
    
    
    1.1
    %
    
    
    1.7
    %
  Other Income
 Three Months Ended September 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Earnings on equity method investments
    
    $
    3,733
    
    
    $
    1,686
    
    
    $
    2,047
    
    
    
    121.4
    %Gain on sale of securities
    
    
    8,250
    
    
    
    
    
    
    
    8,250
    
    
    
    N/AOther expense
    
    
    (41
    )
    
    
    (237
    )
    
    
    196
    
    
    
    (82.7
    )%$
    11,942
    
    
    $
    1,449
    
    
    $
    10,493
    
    
    
    724.2
    %as a % of net revenues
    
    
    1.9
    %
    
    
    0.2
    %
 Earnings on Equity Method Investments
   Gain on Sale of Securities
  - 27 -




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##### Table of Contents



Provision for Income Taxes
 Three Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Provision for income taxes
    
    $
    22,975
    
    
    $
    20,779
    
    
    $
    2,196
    
    
    
    10.6
    %Effective tax rate
    
    
    24.4
    %
    
    
    37.5
    %
  Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Nine Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    1,038,938
    
    
    $
    294,756
    
    
    $
    443,822
    
    
    $
    1,777,516
    
    
    $
    1,065,152
    
    
    $
    281,096
    
    
    $
    421,946
    
    
    $
    1,768,194Other
    
    
    68,249
    
    
    
    44,511
    
    
    
    
    
    
    
    112,760
    
    
    
    62,834
    
    
    
    38,288
    
    
    
    
    
    
    
    101,122Net revenues
    
    
    1,107,187
    
    
    
    339,267
    
    
    
    443,822
    
    
    
    1,890,276
    
    
    
    1,127,986
    
    
    
    319,384
    
    
    
    421,946
    
    
    
    1,869,316Cost of sales(1)
    
    
    669,676
    
    
    
    82,167
    
    
    
    374,812
    
    
    
    1,126,655
    
    
    
    693,896
    
    
    
    74,099
    
    
    
    363,583
    
    
    
    1,131,578Gross profit(1)
    
    
    437,511
    
    
    
    257,100
    
    
    
    69,010
    
    
    
    763,621
    
    
    
    434,090
    
    
    
    245,285
    
    
    
    58,363
    
    
    
    737,738Gross margin(1)
    
    
    39.5
    %
    
    
    75.8
    %
    
    
    15.5
    %
    
    
    40.4
    %
    
    
    38.5
    %
    
    
    76.8
    %
    
    
    13.8
    %
    
    
    39.5
    %Research and
development
    
    
    83,458
    
    
    
    39,095
    
    
    
    
    
    
    
    122,553
    
    
    
    77,036
    
    
    
    31,932
    
    
    
    
    
    
    
    108,968Selling and
marketing
    
    
    41,868
    
    
    
    86,593
    
    
    
    43,695
    
    
    
    172,156
    
    
    
    41,764
    
    
    
    79,397
    
    
    
    39,246
    
    
    
    160,407Contribution
    
    $
    312,185
    
    
    $
    131,412
    
    
    $
    25,315
    
    
    
    468,912
    
    
    $
    315,290
    
    
    $
    133,956
    
    
    $
    19,117
    
    
    
    468,363Contibution margin
    
    
    28.2
    %
    
    
    38.7
    %
    
    
    5.7
    %
    
    
    24.8
    %
    
    
    28.0
    %
    
    
    41.9
    %
    
    
    4.5
    %
    
    
    25.1
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,041
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152,460Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,251Loss (gain) on asset sales and impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,118
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    267,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    189,770Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.2
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.2
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. Generic Segment
 Net Revenues
  - 28 -




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##### Table of Contents



TM TM
 Gross Profit
 TM
 Research and Development Expenses
  Selling and Marketing Expenses
  Brand Segment
 Net Revenues
 ® TM
 - 29 -




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##### Table of Contents



Gross Profit (Gross Margin)
 ®
  Research and Development Expenses
 TM
 Selling and Marketing Expenses
 TM
 Distribution Segment
 Net Revenues
  Gross Profit (Gross Margin)
   - 30 -




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##### Table of Contents



Selling and Marketing Expenses
  Segment Contribution
 Nine Months Ended September 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    312,185
    
    
    $
    315,290
    
    
    $
    (3,105
    )
    
    
    (1.0
    )%Brand
    
    
    131,412
    
    
    
    133,956
    
    
    
    (2,544
    )
    
    
    (1.9
    )%Distribution
    
    
    25,315
    
    
    
    19,117
    
    
    
    6,198
    
    
    
    32.4
    %$
    468,912
    
    
    $
    468,363
    
    
    $
    549
    
    
    
    0.1
    %as a % of net revenues
    
    
    24.8
    %
    
    
    25.1
    %
  Corporate General and Administrative Expenses
 Nine Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Corporate general and administrative expenses
    
    $
    140,041
    
    
    $
    152,460
    
    
    $
    (12,419
    )
    
    
    (8.1
    )%as a % of net revenues
    
    
    7.4
    %
    
    
    8.2
    %
  Amortization
 Nine Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Amortization
    
    $
    60,569
    
    
    $
    132,251
    
    
    $
    (71,682
    )
    
    
    (54.2
    )%as a % of net revenues
    
    
    3.2
    %
    
    
    7.1
    %
 ®
 - 31 -




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##### Table of Contents



Loss (Gain) on Asset Sales and Impairments
 Nine Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Loss (gain) on asset sales and
impairments
    
    $
    303
    
    
    $
    (6,118
    )
    
    $
    6,421
    
    
    
    (105.0
    )%as a % of net revenues
    
    
    0.0
    %
    
    
    (1.0
    )%
  Loss on Early Extinguishment of Debt
 Nine Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Loss on early extinguishment
of debt
    
    $
    1,095
    
    
    $
    4,410
    
    
    $
    (3,315
    )
    
    
    (75.2
    )%as a % of net revenues
    
    
    0.1
    %
    
    
    0.2
    %
   Interest Income
 Nine Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Interest income
    
    $
    6,151
    
    
    $
    6,696
    
    
    $
    (545
    )
    
    
    (8.1
    )%as a % of net revenues
    
    
    0.3
    %
    
    
    0.4
    %
  - 32 -




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##### Table of Contents



Interest Expense
 Nine Months Ended September 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Interest expense  2006 Credit Facility
    
    $
    11,319
    
    
    $
    25,339
    
    
    $
    (14,020
    )Interest expense  CODES
    
    
    9,453
    
    
    
    9,453
    
    
    
    Change in derivative value
    
    
    (3
    )
    
    
    15
    
    
    
    (18
    )Interest expense  other
    
    
    (37
    )
    
    
    669
    
    
    
    (706
    )$
    20,732
    
    
    $
    35,476
    
    
    $
    (14,744
    )
    
    
    (41.6
    )%as a % of net revenues
    
    
    1.1
    %
    
    
    1.9
    %
  Other Income
 Nine Months Ended September 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Earnings on equity method investments
    
    $
    9,561
    
    
    $
    5,409
    
    
    $
    4,152
    
    
    
    76.8
    %Gain on sale of securities
    
    
    9,605
    
    
    
    2,472
    
    
    
    7,133
    
    
    
    288.6
    %Other income
    
    
    209
    
    
    
    5
    
    
    
    204
    
    
    
    4080.0
    %$
    19,375
    
    
    $
    7,886
    
    
    $
    11,489
    
    
    
    145.7
    %as a % of net revenues
    
    
    1.0
    %
    
    
    0.4
    %
 Earnings on Equity Method Investments
  Gain on Sale of Securities
  - 33 -




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##### Table of Contents



Provision for Income Taxes
 Nine Months Ended September 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Provision for income taxes
    
    $
    89,705
    
    
    $
    61,839
    
    
    $
    27,866
    
    
    
    45.1
    %Effective tax rate
    
    
    33.0
    %
    
    
    37.6
    %
  Liquidity and Capital Resources
 Working Capital Position
  September 30,
    
    
    December 31,
    
    
    Increase($ in thousands):
    
    2008
    
    
    2007
    
    
    (Decrease)Current assets:Cash and cash equivalents
    
    $
    339,354
    
    
    $
    204,554
    
    
    $
    134,800Marketable securities
    
    
    12,683
    
    
    
    11,799
    
    
    
    884Accounts receivable, net of allowances
    
    
    314,475
    
    
    
    267,117
    
    
    
    47,358Inventories
    
    
    481,559
    
    
    
    490,601
    
    
    
    (9,042
    )Other
    
    
    175,194
    
    
    
    199,705
    
    
    
    (24,511
    )Total current assets
    
    
    1,323,265
    
    
    
    1,173,776
    
    
    
    149,489Current liabilities:Accounts payable and accrued expenses
    
    
    353,745
    
    
    
    398,154
    
    
    
    (44,409
    )Income taxes payable
    
    
    777
    
    
    
    
    
    
    
    777Current portion of long-term debt
    
    
    3,217
    
    
    
    6,241
    
    
    
    (3,024
    )Other
    
    
    40,361
    
    
    
    40,532
    
    
    
    (171
    )Total
current liabilities
    
    
    398,100
    
    
    
    444,927
    
    
    
    (46,827
    )Working Capital
    
    $
    925,165
    
    
    $
    728,849
    
    
    $
    196,316Current Ratio
    
    
    3.32
    
    
    
    2.64
   - 34 -




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##### Table of Contents



Cash Flows from Operations
  Nine months ended September 30,($ in thousands):
    
    2008
    
    2007Net cash provided by operating activities
    
    $
    240,222
    
    
    $
    255,725
  Investing Cash Flows
  Nine months ended September 30,($ in thousands):
    
    2008
    
    2007Net cash used in investing activities
    
    $
    35,272
    
    
    $
    38,757
  Financing Cash Flows
  Nine months ended September 30,($ in thousands):
    
    2008
    
    2007Net cash used in financing activities
    
    $
    70,150
    
    
    $
    237,791
  - 35 -




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##### Table of Contents



Debt and Borrowing Capacity
  September 30,
    
    
    December 31,
    
    
    Increase($ in thousands):
    
    2008
    
    
    2007
    
    
    (Decrease)Current portion of long-term debt
    
    $
    3,217
    
    
    $
    6,241
    
    
    $
    (3,024
    )Long-term debt
    
    
    824,609
    
    
    
    899,408
    
    
    
    (74,799
    )Total debt
    
    $
    827,826
    
    
    $
    905,649
    
    
    $
    (77,823
    )Debt to capital ratio
    
    
    28.8
    %
    
    
    32.9
    %
   
    
    maintenance of a minimum net worth of at least $1.48 billion;
    
    maintenance of a maximum leverage ratio not greater than 3.0 to 1.0; and
    
    maintenance of a minimum interest coverage ratio of at least 5.0 to 1.0.
   Long-term Obligations
  - 36 -




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##### Table of Contents



Recent accounting pronouncements
       - 37 -




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Investment Risk
   Interest Rate Risk
      - 38 -




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
    - 39 -




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Legal Matters
 
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a) Recent Sales of Unregistered Securities
  (b) Use of Proceeds
  (c) Issuer Purchases of Equity Securities
  
 ITEM 6. EXHIBITS
   - 40 -




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##### Table of Contents



SIGNATURES
  WATSON PHARMACEUTICALS, INC.(Registrant)By:
    
    /s/ Mark W. DurandMark W. DurandSenior Vice President  Chief Financial Officer(Principal Financial Officer)By:
    
    /s/ R. Todd JoyceR. Todd JoyceVice President  Corporate Controller and Treasurer(Principal Accounting Officer)
  - 41 -




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##### Table of Contents



WATSON PHARMACEUTICALS, INC.
 EXHIBIT INDEX TO FORM 10-Q
For the Quarterly Period Ended September 30, 2008
 ExhibitNo.
    
    Description10.1
    
    First Amendment to Distribution Agreement between Amphastar
Pharmaceuticals, Inc. and Andrx Pharmaceuticals, Inc. d/b/a Watson
Laboratories  Florida dated August 15, 2008.10.2
    
    Amendment to the Arbitration Provisions of the Ferrlecit
Agreements between R&D Ferrlecit Capital Resources, Inc., A.
Nattermann & CIE. GmbH and May & Baker Limited, trading as
sanofi-aventis dated August 25, 2008.31.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14a of the Securities Exchange Act of 1934.31.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to Rule 13a-14a of the Securities Exchange Act of 1934.32.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14(d) of the Securities Exchange Act of 1934.32.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to Rule 13a-14(d) of the Securities Exchange Act of 1934.
 
 
  
  Confidential treatment has been requested for portions of this exhibit.
The confidential portions have been separately filed with the Securities and Exchange Commission. - 42 -