##### 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 MARCH 31, 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
    
    95-3872914(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 311 Bonnie Circle
Corona, CA 92880-2882
 (951) 493-5300
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



WATSON PHARMACEUTICALS, INC.
 TABLE OF CONTENTS
 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
 PAGEPart I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    31Item 4.
    
    Controls and Procedures
    
    33Part II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    34Item 1A.
    
    Risk Factors
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    34Item 6.
    
    Exhibits
    
    34Signatures
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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WATSON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    173,998
    
    
    $
    204,554Marketable securities
    
    
    12,711
    
    
    
    11,799Accounts receivable, net
    
    
    273,305
    
    
    
    267,117Inventories
    
    
    521,322
    
    
    
    490,601Prepaid expenses and other current assets
    
    
    69,039
    
    
    
    86,072Deferred tax assets
    
    
    113,252
    
    
    
    113,633Total current assets
    
    
    1,163,627
    
    
    
    1,173,776Property and equipment, net
    
    
    684,507
    
    
    
    688,185Investments and other assets
    
    
    70,512
    
    
    
    68,034Deferred tax assets
    
    
    60,773
    
    
    
    61,886Product rights and other intangibles, net
    
    
    583,776
    
    
    
    603,697Goodwill
    
    
    876,449
    
    
    
    876,449Total assets
    
    $
    3,439,644
    
    
    $
    3,472,027LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    376,545
    
    
    $
    398,154Income taxes payable
    
    
    20,006
    
    
    
    Short-term debt and current portion of long-term debt
    
    
    2,851
    
    
    
    6,241Current deferred tax liabilities
    
    
    18,709
    
    
    
    18,778Deferred revenue
    
    
    17,610
    
    
    
    21,754Total current liabilities
    
    
    435,721
    
    
    
    444,927Long-term debt
    
    
    824,473
    
    
    
    899,408Deferred revenue
    
    
    35,117
    
    
    
    39,535Other long-term liabilities
    
    
    5,442
    
    
    
    7,333Other taxes payable
    
    
    55,050
    
    
    
    52,619Deferred tax liabilities
    
    
    180,474
    
    
    
    178,740Total liabilities
    
    
    1,536,277
    
    
    
    1,622,562Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    375
    
    
    
    373Additional paid-in capital
    
    
    973,134
    
    
    
    968,739Retained earnings
    
    
    1,230,366
    
    
    
    1,179,737Accumulated other comprehensive income
    
    
    1,352
    
    
    
    2,392Treasury stock, at cost
    
    
    (301,860
    )
    
    
    (301,776
    )Total stockholders equity
    
    
    1,903,367
    
    
    
    1,849,465Total liabilities and stockholders equity
    
    $
    3,439,644
    
    
    $
    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 EndedMarch 31,2008
    
    
    2007Net revenues
    
    $
    626,949
    
    
    $
    671,605Cost of sales (excludes amortization, presented below)
    
    
    380,102
    
    
    
    424,720Gross profit
    
    
    246,847
    
    
    
    246,885Operating expenses:Research and development
    
    
    38,015
    
    
    
    37,808Selling and marketing
    
    
    56,080
    
    
    
    55,163General and administrative
    
    
    50,553
    
    
    
    48,055Amortization
    
    
    20,179
    
    
    
    43,933Total operating expenses
    
    
    164,827
    
    
    
    184,959Operating income
    
    
    82,020
    
    
    
    61,926Other income (expense):Loss on early extinguishment of debt
    
    
    (1,095
    )
    
    
    (2,729
    )Interest income
    
    
    2,309
    
    
    
    2,929Interest expense
    
    
    (6,796
    )
    
    
    (13,876
    )Other income
    
    
    5,353
    
    
    
    3,403Total other (expense) income, net
    
    
    (229
    )
    
    
    (10,273
    )Income before income taxes
    
    
    81,791
    
    
    
    51,653Provision for income taxes
    
    
    31,162
    
    
    
    20,041Net income
    
    $
    50,629
    
    
    $
    31,612Earnings per share:Basic
    
    $
    0.49
    
    
    $
    0.31Diluted
    
    $
    0.45
    
    
    $
    0.29Weighted average shares outstanding:Basic
    
    
    102,625
    
    
    
    101,927Diluted
    
    
    117,380
    
    
    
    116,612
 See accompanying Notes to Condensed Consolidated Financial Statements.
 -2-




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WATSON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    50,629
    
    
    $
    31,612Reconciliation to net cash provided by operating activities:Depreciation
    
    
    21,805
    
    
    
    18,029Amortization
    
    
    20,179
    
    
    
    43,933Deferred income tax provision
    
    
    6,443
    
    
    
    250Provision for inventory reserve
    
    
    9,082
    
    
    
    11,427Restricted stock and stock option compensation
    
    
    4,322
    
    
    
    3,402Earnings on equity method investments
    
    
    (3,983
    )
    
    
    (1,439
    )Gain on sale of securities
    
    
    (1,355
    )
    
    
    (1,789
    )Loss on early extinguishment of debt
    
    
    1,095
    
    
    
    2,729Other
    
    
    1,567
    
    
    
    458Changes in assets and liabilities (net of acquisition of business):Accounts receivable, net
    
    
    (6,188
    )
    
    
    12,083Inventories
    
    
    (39,803
    )
    
    
    9,063Prepaid expenses and other current assets
    
    
    12,786
    
    
    
    32,222Accounts payable and accrued expenses
    
    
    (26,151
    )
    
    
    (83,596
    )Deferred revenue
    
    
    (8,562
    )
    
    
    (1,792
    )Income taxes payable
    
    
    24,253
    
    
    
    10,319Other assets
    
    
    513
    
    
    
    1,328Total adjustments
    
    
    16,003
    
    
    
    56,627Net cash provided by operating activities
    
    
    66,632
    
    
    
    88,239CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (18,277
    )
    
    
    (16,744
    )Acquisition of product rights
    
    
    (258
    )
    
    
    (153
    )Proceeds from sale of marketable equity securities
    
    
    1,628
    
    
    
    699Additions to marketable securities
    
    
    (1,288
    )
    
    
    (1,099
    )Additions to long-term investments
    
    
    
    
    
    
    (1,144
    )Other investing activities, net
    
    
    
    
    
    
    115Net cash used in investing activities
    
    
    (18,195
    )
    
    
    (18,326
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt and other long-term liabilities
    
    
    (88,058
    )
    
    
    (151,661
    )Proceeds from issuance of short-term debt and other long-term liabilities
    
    
    9,076
    
    
    
    Repurchase of common stock
    
    
    (84
    )
    
    
    Proceeds from stock plans
    
    
    73
    
    
    
    1,127Net cash provided by (used in) financing activities
    
    
    (78,993
    )
    
    
    (150,534
    )Net decrease in cash and cash equivalents
    
    
    (30,556
    )
    
    
    (80,621
    )Cash and cash equivalents at beginning of period
    
    
    204,554
    
    
    
    154,171Cash and cash equivalents at end of period
    
    $
    173,998
    
    
    $
    73,550
 See accompanying Notes to Condensed Consolidated Financial Statements.
 -3-




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WATSON PHARMACEUTICALS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  GENERAL
   Comprehensive Income
  Three Months Ended March 31,2008
    
    
    2007Net income
    
    $
    50,629
    
    
    $
    31,612Other comprehensive (loss) income:Translation gains
    
    
    320
    
    
    
    218Unrealized loss on securities, net of tax
    
    
    (48
    )
    
    
    (6
    )Unrealized loss on cash flow hedge, net of tax
    
    
    (1,312
    )
    
    
    Total other comprehensive (loss) income
    
    
    (1,040
    )
    
    
    212Total comprehensive income
    
    $
    49,589
    
    
    $
    31,824
 -4-




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Preferred and Common Stock
  Provisions for Sales Returns and Allowances
    -5-




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Returns andOtherChargebacks
    
    
    Rebates
    
    
    Allowances
    
    
    Cash Discounts
    
    
    TotalBalance at December 31, 2006
    
    $
    164,480
    
    
    $
    180,538
    
    
    $
    42,489
    
    
    $
    14,072
    
    
    $
    401,579Provision related to sales in three months
ended March 31, 2007
    
    
    291,831
    
    
    
    122,766
    
    
    
    56,133
    
    
    
    18,436
    
    
    
    489,166Credits and payments
    
    
    (321,751
    )
    
    
    (124,215
    )
    
    
    (33,960
    )
    
    
    (16,894
    )
    
    
    (496,820
    )Balance at March 31, 2007
    
    
    134,560
    
    
    
    179,089
    
    
    
    64,662
    
    
    
    15,614
    
    
    
    393,925Provision related to sales in three quarters
ended December 31, 2007
    
    
    943,066
    
    
    
    253,732
    
    
    
    111,290
    
    
    
    49,625
    
    
    
    1,357,713Credits and payments
    
    
    (913,183
    )
    
    
    (278,504
    )
    
    
    (119,908
    )
    
    
    (52,327
    )
    
    
    (1,363,922
    )Balance at December 31, 2007
    
    
    164,443
    
    
    
    154,317
    
    
    
    56,044
    
    
    
    12,912
    
    
    
    387,716Provision related to sales in three months
ended March 31, 2008
    
    
    313,888
    
    
    
    78,454
    
    
    
    45,136
    
    
    
    16,640
    
    
    
    454,118Credits and payments
    
    
    (323,196
    )
    
    
    (85,978
    )
    
    
    (38,409
    )
    
    
    (14,295
    )
    
    
    (461,878
    )Balance at March 31, 2008
    
    $
    155,135
    
    
    $
    146,793
    
    
    $
    62,771
    
    
    $
    15,257
    
    
    $
    379,956
 Earnings Per Share (EPS)
  Three months endedMarch 31,2008
    
    
    2007EPS  basicNet income
    
    $
    50,629
    
    
    $
    31,612Basic weighted average common shares outstanding
    
    
    102,625
    
    
    
    101,928EPS  basic
    
    $
    0.49
    
    
    $
    0.31EPS  dilutedNet income
    
    $
    50,629
    
    
    $
    31,612Add: Interest expense on CODES, net of tax
    
    
    1,986
    
    
    
    1,943Net income, adjusted
    
    $
    52,615
    
    
    $
    33,555Basic weighted average common shares outstanding
    
    
    102,625
    
    
    
    101,928Effect of dilutive securities:Conversion of CODES
    
    
    14,357
    
    
    
    14,357Dilutive stock options
    
    
    398
    
    
    
    327Diluted weighted average common shares outstanding
    
    
    117,380
    
    
    
    116,612EPS  diluted
    
    $
    0.45
    
    
    $
    0.29
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Derivatives
   Share-Based Compensation
   Recent Accounting Pronouncements
   -7-




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##### Table of Contents



NOTE 2  OTHER INCOME
  Three Months Ended March 31,2008
    
    
    2007Earnings on equity method investments
    
    $
    3,983
    
    
    $
    1,439Gain on sale of securities
    
    
    1,355
    
    
    
    1,789Other income
    
    
    15
    
    
    
    175$
    5,353
    
    
    $
    3,403
 NOTE 3  OPERATING SEGMENTS
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Three Months Ended March 31, 2008
    
    
    Three Months Ended March 31, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    342,459
    
    
    $
    98,992
    
    
    $
    144,902
    
    
    $
    586,353
    
    
    $
    411,475
    
    
    $
    90,638
    
    
    $
    145,440
    
    
    $
    647,553Other
    
    
    24,297
    
    
    
    16,299
    
    
    
    
    
    
    
    40,596
    
    
    
    13,150
    
    
    
    10,902
    
    
    
    
    
    
    
    24,052Net revenues
    
    
    366,756
    
    
    
    115,291
    
    
    
    144,902
    
    
    
    626,949
    
    
    
    424,625
    
    
    
    101,540
    
    
    
    145,440
    
    
    
    671,605Cost of sales(1)
    
    
    229,723
    
    
    
    27,526
    
    
    
    122,853
    
    
    
    380,102
    
    
    
    272,623
    
    
    
    25,215
    
    
    
    126,882
    
    
    
    424,720Gross profit(1)
    
    
    137,033
    
    
    
    87,765
    
    
    
    22,049
    
    
    
    246,847
    
    
    
    152,002
    
    
    
    76,325
    
    
    
    18,558
    
    
    
    246,885Gross margin(1)
    
    
    37.4
    %
    
    
    76.1
    %
    
    
    15.2
    %
    
    
    39.4
    %
    
    
    35.8
    %
    
    
    75.2
    %
    
    
    12.8
    %
    
    
    36.8
    %Research and
development
    
    
    22,597
    
    
    
    15,418
    
    
    
    
    
    
    
    38,015
    
    
    
    26,513
    
    
    
    11,295
    
    
    
    
    
    
    
    37,808Selling and
marketing
    
    
    14,053
    
    
    
    27,995
    
    
    
    14,032
    
    
    
    56,080
    
    
    
    14,549
    
    
    
    26,411
    
    
    
    14,203
    
    
    
    55,163Contribution
    
    $
    100,383
    
    
    $
    44,352
    
    
    $
    8,017
    
    
    
    152,752
    
    
    $
    110,940
    
    
    $
    38,619
    
    
    $
    4,355
    
    
    
    153,914Contibution margin
    
    
    27.4
    %
    
    
    38.5
    %
    
    
    5.5
    %
    
    
    24.4
    %
    
    
    26.1
    %
    
    
    38.0
    %
    
    
    3.0
    %
    
    
    22.9
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,055Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,933Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    82,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    61,926Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.2
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. NOTE 4  INVENTORIES
   March 31,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    113,219
    
    
    $
    102,607Work-in-process
    
    
    43,014
    
    
    
    45,851Finished goods
    
    
    365,089
    
    
    
    342,143Total inventories
    
    $
    521,322
    
    
    $
    490,601
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NOTE 5  LONG-TERM DEBT
  March 31,
    
    
    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
    
    
    574,471
    
    
    
    574,402Other notes payable
    
    
    2,853
    
    
    
    6,247827,324
    
    
    
    905,649Less: Current portion
    
    
    2,851
    
    
    
    6,241Total long-term debt
    
    $
    824,473
    
    
    $
    899,408
 Senior Credit Facility
  NOTE 6  BUSINESS RESTRUCTURING CHARGES
  Balance atCosts
    
    
    Cash
    
    
    Non-cash
    
    
    March 31,(in thousands)
    
    Incurred
    
    
    Payments
    
    
    Adjustments
    
    
    2008Cost of salesSeverence and retention
    
    $
    11,235
    
    
    $
    (718
    )
    
    $
    
    
    
    $
    10,517Product transfer costs
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    104Accelerated depreciation
    
    
    1,757
    
    
    
    
    
    
    
    (1,757
    )
    
    
    13,096
    
    
    
    (718
    )
    
    
    (1,757
    )
    
    
    10,621Operating expensesResearch and development
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38Selling and marketing
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    606644
    
    
    
    
    
    
    
    
    
    
    
    644Total restructuring charges
    
    $
    13,740
    
    
    $
    (718
    )
    
    $
    (1,757
    )
    
    $
    11,265
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NOTE 7  INCOME TAXES
    NOTE 8  STOCKHOLDERS EQUITY
  Stockholders equity, December 31, 2007
    
    $
    1,849,465Common stock issued under employee plans
    
    
    73Increase in additional paid-in capital for restricted stock and stock option compensation
    
    
    4,322Net income
    
    
    50,629Other comprehensive loss
    
    
    (1,040
    )Tax benefit from employee stock plans
    
    
    2Repurchase of common stock
    
    
    (84
    )Stockholders equity, March 31, 2008
    
    $
    1,903,367
 NOTE 9  FAIR VALUE MEASUREMENT
   -11-




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##### Table of Contents



Fair Value Measurements as at March 31, 2008 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Marketable securities
    
    $
    12,711
    
    
    $
    12,711
    
    
    $
    
    
    
    $
    Investments
    
    
    222
    
    
    
    222
    
    
    
    
    
    
    
    Derivative liabilities
    
    
    3,815
    
    
    
    
    
    
    
    3,815
    
    
    
    
  NOTE 10  CONTINGENCIES
 Legal Matters
  Cipro® Litigation. In re: Ciprofloxacin Hydrochloride
Antitrust Litigation, MDL Docket No. 001383
 -12-




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##### Table of Contents



® In re: Cipro
Cases I & II, JCCP Proceeding Nos. 4154 & 4220
 Governmental Reimbursement Investigations and Drug Pricing Litigation qui tam qui tam qui tam qui tam qui tam qui tam
  -13-




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##### Table of Contents



In re: Pharmaceutical
Industry Average Wholesale Price Litigation, MDL Docket No. 1456
 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; and 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 .
  -14-




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City
of New York v. Abbott Laboratories, Inc., et al., Civil Action No. 01-CV-12257-PBS, United States
District Court for the District of Massachusetts County of Orange v. Abbott
Laboratories, Inc., et al.
  FDA Matters. United States of America v. Watson Laboratories, Inc., and Allen Y.
Chao
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##### Table of Contents



Securities Litigation Against Andrx Corporation. Jerry Lowry v.
Andrx Corporation, et al., Case No. 05-61640
 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
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##### Table of Contents



Federal Trade Commission Investigations
 Department of Health and Human Services Subpoena.
 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®.
 -17-




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®
   NOTE 11  SUBSEQUENT EVENT
  -18-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Acquisition of Andrx Corporation
    Actos® and Extended-Release Metformin Combination Product
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##### Table of Contents



Enoxaparin Sodium (generic version of Lovenox®)
   Metoprolol Succinate (generic version of Toprol-XL®)
    Methylphenidate Hydrochloride (generic version of Concerta®)
    -20-




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##### Table of Contents



Omeprazole (generic version of Prilosec®)
    Diltiazem HCl ER (Cardizem® LA)
    Results of Operations
    -21-




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##### Table of Contents



Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Three Months Ended March 31, 2008
    
    
    Three Months Ended March 31, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    342,459
    
    
    $
    98,992
    
    
    $
    144,902
    
    
    $
    586,353
    
    
    $
    411,475
    
    
    $
    90,638
    
    
    $
    145,440
    
    
    $
    647,553Other
    
    
    24,297
    
    
    
    16,299
    
    
    
    
    
    
    
    40,596
    
    
    
    13,150
    
    
    
    10,902
    
    
    
    
    
    
    
    24,052Net revenues
    
    
    366,756
    
    
    
    115,291
    
    
    
    144,902
    
    
    
    626,949
    
    
    
    424,625
    
    
    
    101,540
    
    
    
    145,440
    
    
    
    671,605Cost of sales(1)
    
    
    229,723
    
    
    
    27,526
    
    
    
    122,853
    
    
    
    380,102
    
    
    
    272,623
    
    
    
    25,215
    
    
    
    126,882
    
    
    
    424,720Gross profit(1)
    
    
    137,033
    
    
    
    87,765
    
    
    
    22,049
    
    
    
    246,847
    
    
    
    152,002
    
    
    
    76,325
    
    
    
    18,558
    
    
    
    246,885Gross margin(1)
    
    
    37.4
    %
    
    
    76.1
    %
    
    
    15.2
    %
    
    
    39.4
    %
    
    
    35.8
    %
    
    
    75.2
    %
    
    
    12.8
    %
    
    
    36.8
    %Research and
development
    
    
    22,597
    
    
    
    15,418
    
    
    
    
    
    
    
    38,015
    
    
    
    26,513
    
    
    
    11,295
    
    
    
    
    
    
    
    37,808Selling and
marketing
    
    
    14,053
    
    
    
    27,995
    
    
    
    14,032
    
    
    
    56,080
    
    
    
    14,549
    
    
    
    26,411
    
    
    
    14,203
    
    
    
    55,163Contribution
    
    $
    100,383
    
    
    $
    44,352
    
    
    $
    8,017
    
    
    
    152,752
    
    
    $
    110,940
    
    
    $
    38,619
    
    
    $
    4,355
    
    
    
    153,914Contibution margin
    
    
    27.4
    %
    
    
    38.5
    %
    
    
    5.5
    %
    
    
    24.4
    %
    
    
    26.1
    %
    
    
    38.0
    %
    
    
    3.0
    %
    
    
    22.9
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,055Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,933Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    82,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    61,926Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.2
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. Generic Segment
 Net Revenues
     -22-




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Gross Profit (Gross Margin)
    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
   Selling and Marketing Expenses
   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 March 31,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    100,383
    
    
    $
    110,940
    
    
    $
    (10,557
    )
    
    
    (9.5
    )%Brand
    
    
    44,352
    
    
    
    38,619
    
    
    
    5,733
    
    
    
    14.8
    %Distribution
    
    
    8,017
    
    
    
    4,355
    
    
    
    3,662
    
    
    
    84.1
    %$
    152,752
    
    
    $
    153,914
    
    
    $
    (1,162
    )
    
    
    (0.8
    )%as % of net revenues
    
    
    24.4
    %
    
    
    22.9
    %
  Corporate General and Administrative Expenses
 Three Months Ended March 31,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Corporate general and
administrative expenses
    
    $
    50,553
    
    
    $
    48,055
    
    
    $
    2,498
    
    
    
    5.2
    %as a % of net revenues
    
    
    8.1
    %
    
    
    7.2
    %
   -25-




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##### Table of Contents



Amortization
 Three Months Ended March 31,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Amortization
    
    $
    20,179
    
    
    $
    43,933
    
    
    $
    (23,754
    )
    
    
    (54.1
    )%as a % of net revenues
    
    
    3.2
    %
    
    
    6.5
    %
 ®
 Loss on Early Extinguishment of Debt
 Three Months Ended March 31,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Loss on early extinguishment
of debt
    
    $
    1,095
    
    
    $
    2,729
    
    
    $
    (1,634
    )
    
    
    (59.9
    )%as a % of net revenues
    
    
    0.2
    %
    
    
    0.4
    %
    Interest Income
 Three Months Ended March 31,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Interest income
    
    $
    2,309
    
    
    $
    2,929
    
    
    $
    (620
    )
    
    
    (21.2
    )%as a % of net revenues
    
    
    0.4
    %
    
    
    0.4
    %
  -26-




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##### Table of Contents



Interest Expense
 Three Months Ended March 31,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Interest expense  2006 Credit Facility
    
    $
    3,912
    
    
    $
    10,374
    
    
    $
    (6,462
    )Interest expense  convertible contingent
senior debentures due 2023 (CODES)
    
    
    3,151
    
    
    
    3,151
    
    
    
    Change in derivative value
    
    
    57
    
    
    
    24
    
    
    
    33Interest expense  other
    
    
    (324
    )
    
    
    327
    
    
    
    (651
    )Interest expense
    
    $
    6,796
    
    
    $
    13,876
    
    
    $
    (7,080
    )
    
    
    (51.0
    )%as a % of net revenues
    
    
    1.1
    %
    
    
    2.1
    %
  Other Income
 Three Months Ended March 31,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Earnings on equity method investments
    
    $
    3,983
    
    
    $
    1,439
    
    
    $
    2,544
    
    
    
    176.8
    %Gain on sale of securities
    
    
    1,355
    
    
    
    1,789
    
    
    
    (434
    )
    
    
    (24.3
    )%Other income
    
    
    15
    
    
    
    175
    
    
    
    (160
    )
    
    
    (91.4
    )%$
    5,353
    
    
    $
    3,403
    
    
    $
    1,950
    
    
    
    57.3
    %as a % of net revenues
    
    
    0.9
    %
    
    
    0.5
    %
 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 March 31,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Provision for income taxes
    
    $
    31,162
    
    
    $
    20,041
    
    
    $
    11,121
    
    
    
    55.5
    %as a % of net revenues
    
    
    5.0
    %
    
    
    3.0
    %Effective tax rate
    
    
    38.1
    %
    
    
    38.8
    %
   Liquidity and Capital Resources
 Working Capital Position
  March 31,
    
    
    December 31,
    
    
    Increase($ in thousands):
    
    2008
    
    
    2007
    
    
    (Decrease)Current Assets:Cash and cash equivalents
    
    $
    173,998
    
    
    $
    204,554
    
    
    $
    (30,556
    )Marketable securities
    
    
    12,711
    
    
    
    11,799
    
    
    
    912Accounts receivable, net of allowances
    
    
    273,305
    
    
    
    267,117
    
    
    
    6,188Inventories
    
    
    521,322
    
    
    
    490,601
    
    
    
    30,721Other
    
    
    182,291
    
    
    
    199,705
    
    
    
    (17,414
    )Total current assets
    
    
    1,163,627
    
    
    
    1,173,776
    
    
    
    (10,149
    )Current liabilities:Accounts payable and accrued expenses
    
    
    376,545
    
    
    
    398,154
    
    
    
    (21,609
    )Income taxes payable
    
    
    20,006
    
    
    
    
    
    
    
    20,006Current portion of long-term debt
    
    
    2,851
    
    
    
    6,241
    
    
    
    (3,390
    )Other
    
    
    36,319
    
    
    
    40,532
    
    
    
    (4,213
    )Total current liabilities
    
    
    435,721
    
    
    
    444,927
    
    
    
    (9,206
    )Working Capital
    
    $
    727,906
    
    
    $
    728,849
    
    
    $
    (943
    )Current Ratio
    
    
    2.67
    
    
    
    2.64
   -28-




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##### Table of Contents



Cash Flows from Operations
  Three months ended March 31,($ in thousands):
    
    2008
    
    2007Net cash provided by operating activities
    
    $
    66,632
    
    
    $
    88,239
  Investing Cash Flows
  Three months ended March 31,($ in thousands):
    
    2008
    
    2007Net cash used in investing activities
    
    $
    18,195
    
    
    $
    18,326
  Financing Cash Flows
  Three months ended March 31,($ in thousands):
    
    2008
    
    2007Net cash used in financing activities
    
    $
    78,993
    
    
    $
    150,534
  -29-




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##### Table of Contents



Debt and Borrowing Capacity
  March 31,
    
    
    December 31,
    
    
    Increase($ in thousands):
    
    2008
    
    
    2007
    
    
    (Decrease)Current portion of long-term debt
    
    $
    2,851
    
    
    $
    6,241
    
    
    $
    (3,390
    )Long-term debt
    
    
    824,473
    
    
    
    899,408
    
    
    
    (74,935
    )Total debt
    
    $
    827,324
    
    
    $
    905,649
    
    
    $
    (78,325
    )Debt to capital ratio
    
    
    30.3
    %
    
    
    32.9
    %
   
    
    maintenance of a minimum net worth of at least $1.41 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
  Recent accounting pronouncements
  -30-




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Investment Risk
  -31-




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##### Table of Contents



Interest Rate Risk
       -32-




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ITEM 4. CONTROLS AND PROCEDURES
    -33-




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##### Table of Contents



PART II. OTHER INFORMATION AND SIGNATURES
 
 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
   -34-




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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)  -35-




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##### Table of Contents



WATSON PHARMACEUTICALS, INC.
 EXHIBIT INDEX TO FORM 10-Q
For the Quarterly Period Ended March 31, 2008
 ExhibitNo.
    
    Description31.1
    
    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.
 -36-