##### 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, 2009
 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
 o 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 MARCH 31, 2009
  
 PAGEPart I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
    
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



WATSON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions)
 March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    559.0
    
    
    $
    507.6Marketable securities
    
    
    11.8
    
    
    
    13.2Accounts receivable, net
    
    
    353.6
    
    
    
    305.0Inventories, net
    
    
    476.2
    
    
    
    473.1Prepaid expenses and other current assets
    
    
    49.3
    
    
    
    48.5Deferred tax assets
    
    
    113.9
    
    
    
    111.0Total current assets
    
    
    1,563.8
    
    
    
    1,458.4Property and equipment, net
    
    
    649.0
    
    
    
    658.5Investments and other assets
    
    
    81.2
    
    
    
    80.6Deferred tax assets
    
    
    42.8
    
    
    
    52.3Product rights and other intangibles, net
    
    
    546.0
    
    
    
    560.0Goodwill
    
    
    868.1
    
    
    
    868.1Total assets
    
    $
    3,750.9
    
    
    $
    3,677.9LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    382.8
    
    
    $
    381.3Income taxes payable
    
    
    22.2
    
    
    
    15.5Short-term debt and current portion of long-term debt
    
    
    626.4
    
    
    
    53.2Deferred revenue
    
    
    22.0
    
    
    
    16.1Deferred tax liabilities
    
    
    89.2
    
    
    
    15.9Total current liabilities
    
    
    1,142.6
    
    
    
    482.0Long-term debt
    
    
    250.0
    
    
    
    824.7Deferred revenue
    
    
    31.1
    
    
    
    30.1Other long-term liabilities
    
    
    5.0
    
    
    
    4.9Other taxes payable
    
    
    58.1
    
    
    
    53.3Deferred tax liabilities
    
    
    100.5
    
    
    
    174.3Total liabilities
    
    
    1,587.3
    
    
    
    1,569.3Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    0.4
    
    
    
    0.4Additional paid-in capital
    
    
    1,004.1
    
    
    
    995.9Retained earnings
    
    
    1,467.2
    
    
    
    1,418.1Accumulated other comprehensive loss
    
    
    (3.3
    )
    
    
    (3.2
    )Treasury stock, at cost
    
    
    (304.8
    )
    
    
    (302.6
    )Total stockholders equity
    
    
    2,163.6
    
    
    
    2,108.6Total liabilities and stockholders equity
    
    $
    3,750.9
    
    
    $
    3,677.9
 See accompanying Notes to Condensed Consolidated Financial Statements.
 -1-




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WATSON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
 Three Months EndedMarch 31,2009
    
    
    2008Net revenues
    
    $
    667.4
    
    
    $
    626.9Cost of sales (excludes amortization, presented below)
    
    
    388.7
    
    
    
    380.1Gross profit
    
    
    278.7
    
    
    
    246.8Operating expenses:Research and development
    
    
    42.3
    
    
    
    38.0Selling and marketing
    
    
    65.7
    
    
    
    56.1General and administrative
    
    
    68.9
    
    
    
    50.5Amortization
    
    
    21.8
    
    
    
    20.2Gain on asset sales
    
    
    (1.5
    )
    
    
    Total operating expenses
    
    
    197.2
    
    
    
    164.8Operating income
    
    
    81.5
    
    
    
    82.0Non-operating (expense) income:Loss on early extinguishment of debt
    
    
    
    
    
    
    (1.1
    )Interest income
    
    
    2.0
    
    
    
    2.3Interest expense
    
    
    (4.7
    )
    
    
    (6.8
    )Other income
    
    
    1.2
    
    
    
    5.4Total other expense, net
    
    
    (1.5
    )
    
    
    (0.2
    )Income before income taxes
    
    
    80.0
    
    
    
    81.8Provision for income taxes
    
    
    30.9
    
    
    
    31.2Net income
    
    $
    49.1
    
    
    $
    50.6Earnings per share:Basic
    
    $
    0.48
    
    
    $
    0.49Diluted
    
    $
    0.43
    
    
    $
    0.45Weighted average shares outstanding:Basic
    
    
    103.1
    
    
    
    102.6Diluted
    
    
    118.2
    
    
    
    117.4
 See accompanying Notes to Condensed Consolidated Financial Statements.
 -2-




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WATSON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 Three Months EndedMarch 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    49.1
    
    
    $
    50.6Reconciliation to net cash provided by operating activities:Depreciation
    
    
    23.2
    
    
    
    21.8Amortization
    
    
    21.8
    
    
    
    20.2Deferred income tax provision
    
    
    5.7
    
    
    
    6.4Provision for inventory reserve
    
    
    12.3
    
    
    
    9.1Restricted stock and stock option compensation
    
    
    4.5
    
    
    
    4.3Earnings on equity method investments
    
    
    (2.2
    )
    
    
    (4.0
    )Loss (gain) on securities
    
    
    1.1
    
    
    
    (1.4
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    1.1Gain on asset sales
    
    
    (1.5
    )
    
    
    Other
    
    
    (0.1
    )
    
    
    1.6Changes in assets and liabilities:Accounts receivable, net
    
    
    (48.6
    )
    
    
    (6.2
    )Inventories
    
    
    (15.3
    )
    
    
    (39.8
    )Prepaid expenses and other current assets
    
    
    (0.8
    )
    
    
    12.8Accounts payable and accrued expenses
    
    
    1.5
    
    
    
    (26.1
    )Deferred revenue
    
    
    6.8
    
    
    
    (8.6
    )Income taxes payable
    
    
    10.8
    
    
    
    24.3Other assets
    
    
    1.2
    
    
    
    0.5Total adjustments
    
    
    20.4
    
    
    
    16.0Net cash provided by operating activities
    
    
    69.5
    
    
    
    66.6CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (15.3
    )
    
    
    (18.3
    )Acquisition of product rights
    
    
    (7.8
    )
    
    
    (0.2
    )Proceeds from sale of fixed assets
    
    
    3.0
    
    
    
    Proceeds from sale of marketable securities
    
    
    2.2
    
    
    
    1.6Additions to marketable securities
    
    
    
    
    
    
    (1.3
    )Net cash used in investing activities
    
    
    (17.9
    )
    
    
    (18.2
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt and other long-term liabilities
    
    
    (1.6
    )
    
    
    (88.1
    )Proceeds from issuance of short-term debt and other long-term liabilities
    
    
    
    
    
    
    9.1Repurchase of common stock
    
    
    (2.2
    )
    
    
    (0.1
    )Proceeds from stock plans
    
    
    3.6
    
    
    
    0.1Net cash used in financing activities
    
    
    (0.2
    )
    
    
    (79.0
    )Net increase (decrease) in cash and cash equivalents
    
    
    51.4
    
    
    
    (30.6
    )Cash and cash equivalents at beginning of period
    
    
    507.6
    
    
    
    204.6Cash and cash equivalents at end of period
    
    $
    559.0
    
    
    $
    174.0
 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 31,2009
    
    
    2008Net income
    
    $
    49.1
    
    
    $
    50.6Other comprehensive loss:Translation (losses) gains
    
    
    (1.3
    )
    
    
    0.3Unrealized loss on securities, net of tax
    
    
    (0.2
    )
    
    
    Reclassification for losses included in net
income, net of tax
    
    
    1.4
    
    
    
    Unrealized loss on cash flow hedge, net of tax
    
    
    
    
    
    
    (1.3
    )Total other comprehensive loss
    
    
    (0.1
    )
    
    
    (1.0
    )Total comprehensive income
    
    $
    49.0
    
    
    $
    49.6
 -4-




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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, 2007
    
    $
    164.4
    
    
    $
    154.3
    
    
    $
    56.1
    
    
    $
    12.9
    
    
    $
    387.7Provision related to sales in three months
ended March 31, 2008
    
    
    313.9
    
    
    
    78.5
    
    
    
    45.1
    
    
    
    16.6
    
    
    
    454.1Credits and payments
    
    
    (323.2
    )
    
    
    (86.0
    )
    
    
    (38.4
    )
    
    
    (14.3
    )
    
    
    (461.9
    )Balance at March 31, 2008
    
    
    155.1
    
    
    
    146.8
    
    
    
    62.8
    
    
    
    15.2
    
    
    
    379.9Provision related to sales in three quarters
ended December 31, 2008
    
    
    910.1
    
    
    
    230.6
    
    
    
    134.7
    
    
    
    50.6
    
    
    
    1,326.0Credits and payments
    
    
    (944.6
    )
    
    
    (251.6
    )
    
    
    (128.0
    )
    
    
    (53.5
    )
    
    
    (1,377.7
    )Balance at December 31, 2008
    
    
    120.6
    
    
    
    125.8
    
    
    
    69.5
    
    
    
    12.3
    
    
    
    328.2Provision related to sales in three months
ended March 31, 2009
    
    
    275.2
    
    
    
    88.3
    
    
    
    47.3
    
    
    
    17.3
    
    
    
    428.1Credits and payments
    
    
    (289.2
    )
    
    
    (96.2
    )
    
    
    (39.8
    )
    
    
    (15.3
    )
    
    
    (440.5
    )Balance at March 31, 2009
    
    $
    106.6
    
    
    $
    117.9
    
    
    $
    77.0
    
    
    $
    14.3
    
    
    $
    315.8
 Earnings Per Share (EPS)
  Three months endedMarch 31,2009
    
    
    2008EPS  basicNet income
    
    $
    49.1
    
    
    $
    50.6Basic weighted average common shares outstanding
    
    
    103.1
    
    
    
    102.6EPS  basic
    
    $
    0.48
    
    
    $
    0.49EPS  dilutedNet income
    
    $
    49.1
    
    
    $
    50.6Add: Interest expense on CODES, net of tax
    
    
    1.9
    
    
    
    2.0Net income, adjusted
    
    $
    51.0
    
    
    $
    52.6Basic weighted average common shares outstanding
    
    
    103.1
    
    
    
    102.6Effect of dilutive securities:Conversion of CODES
    
    
    14.4
    
    
    
    14.4Dilutive stock options
    
    
    0.7
    
    
    
    0.4Diluted weighted average common shares outstanding
    
    
    118.2
    
    
    
    117.4EPS  diluted
    
    $
    0.43
    
    
    $
    0.45
 -6-




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Share-Based Compensation
   Recent Accounting Pronouncements
    -7-




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##### Table of Contents



NOTE 2  OTHER INCOME
  Three Months Ended March 31,2009
    
    
    2008Earnings on equity
method investments
    
    $
    2.2
    
    
    $
    4.0(Loss) gain on securities
    
    
    (1.1
    )
    
    
    1.4Other income
    
    
    0.1
    
    
    
    $
    1.2
    
    
    $
    5.4
 NOTE 3  OPERATING SEGMENTS
  -8-




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Three Months Ended March 31, 2009
    
    
    Three Months Ended March 31, 2008Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    395.2
    
    
    $
    98.2
    
    
    $
    153.7
    
    
    $
    647.1
    
    
    $
    342.4
    
    
    $
    99.0
    
    
    $
    144.9
    
    
    $
    586.3Other
    
    
    6.5
    
    
    
    13.8
    
    
    
    
    
    
    
    20.3
    
    
    
    24.3
    
    
    
    16.3
    
    
    
    
    
    
    
    40.6Net revenues
    
    
    401.7
    
    
    
    112.0
    
    
    
    153.7
    
    
    
    667.4
    
    
    
    366.7
    
    
    
    115.3
    
    
    
    144.9
    
    
    
    626.9Cost of sales(1)
    
    
    238.5
    
    
    
    24.2
    
    
    
    126.0
    
    
    
    388.7
    
    
    
    229.7
    
    
    
    27.5
    
    
    
    122.9
    
    
    
    380.1Gross profit(1)
    
    
    163.2
    
    
    
    87.8
    
    
    
    27.7
    
    
    
    278.7
    
    
    
    137.0
    
    
    
    87.8
    
    
    
    22.0
    
    
    
    246.8Gross margin(1)
    
    
    40.6
    %
    
    
    78.4
    %
    
    
    18.0
    %
    
    
    41.8
    %
    
    
    37.4
    %
    
    
    76.1
    %
    
    
    15.2
    %
    
    
    39.4
    %Research and
development
    
    
    30.1
    
    
    
    12.2
    
    
    
    
    
    
    
    42.3
    
    
    
    22.6
    
    
    
    15.4
    
    
    
    
    
    
    
    38.0Selling and
marketing
    
    
    12.7
    
    
    
    36.9
    
    
    
    16.1
    
    
    
    65.7
    
    
    
    14.1
    
    
    
    28.0
    
    
    
    14.0
    
    
    
    56.1Contribution
    
    $
    120.4
    
    
    $
    38.7
    
    
    $
    11.6
    
    
    
    170.7
    
    
    $
    100.3
    
    
    $
    44.4
    
    
    $
    8.0
    
    
    
    152.7Contibution margin
    
    
    30.0
    %
    
    
    34.6
    %
    
    
    7.5
    %
    
    
    25.6
    %
    
    
    27.4
    %
    
    
    38.5
    %
    
    
    5.5
    %
    
    
    24.4
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50.5Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20.2Gain on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    81.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    82.0Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.2
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.1
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. NOTE 4  INVENTORIES
   March 31,
    
    
    December 31,2009
    
    
    2008Inventories:Raw materials
    
    $
    131.5
    
    
    $
    109.1Work-in-process
    
    
    61.2
    
    
    
    44.2Finished goods
    
    
    328.8
    
    
    
    354.5521.5
    
    
    
    507.8Less: Inventory reserves
    
    
    45.3
    
    
    
    34.7Inventories, net
    
    $
    476.2
    
    
    $
    473.1
 -9-




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NOTE 5  DEBT
  March 31,
    
    
    December 31,2009
    
    
    2008Senior Credit Facility, due 2011, bearing interest
at LIBOR plus 0.75% (2006 Credit Facility)
    
    $
    300.0
    
    
    $
    300.0CODES, face amount of $575 million,
due 2023, net of unamortized discount
    
    
    574.8
    
    
    
    574.7Other notes payable
    
    
    1.6
    
    
    
    3.2876.4
    
    
    
    877.9Less: Current portion
    
    
    626.4
    
    
    
    53.2Total long-term debt
    
    $
    250.0
    
    
    $
    824.7
 Senior Credit Facility
   -10-




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NOTE 6  BUSINESS RESTRUCTURING CHARGES
  AccrualBalance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Charged
    
    
    Cash
    
    
    Non-cash
    
    
    March 31,(in millions)
    
    2008
    
    
    to Expense
    
    
    Payments
    
    
    Adjustments
    
    
    2009Cost of salesSeverance and retention
    
    $
    13.7
    
    
    $
    3.2
    
    
    $
    (0.3
    )
    
    $
    
    
    
    $
    16.6Product transfer costs
    
    
    0.7
    
    
    
    2.2
    
    
    
    (1.3
    )
    
    
    
    
    
    
    1.6Facility decommission costs
    
    
    0.2
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    
    
    
    
    0.2Accelerated depreciation
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    (1.8
    )
    
    
    14.6
    
    
    
    7.3
    
    
    
    (1.7
    )
    
    
    (1.8
    )
    
    
    18.4Operating expensesResearch and development
    
    
    0.7
    
    
    
    1.5
    
    
    
    (0.7
    )
    
    
    
    
    
    
    1.5Selling, general and administrative
    
    
    0.8
    
    
    
    0.5
    
    
    
    (0.1
    )
    
    
    
    
    
    
    1.21.5
    
    
    
    2.0
    
    
    
    (0.8
    )
    
    
    
    
    
    
    2.7Total restructuring charges
    
    $
    16.1
    
    
    $
    9.3
    
    
    $
    (2.5
    )
    
    $
    (1.8
    )
    
    $
    21.1
   NOTE 7  INCOME TAXES
    -11-




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NOTE 8  STOCKHOLDERS EQUITY
  Stockholders equity, December 31, 2008
    
    $
    2,108.6Common stock issued under employee plans
    
    
    3.6Increase in additional paid-in capital for share-based compensation plans
    
    
    4.5Net income
    
    
    49.1Other comprehensive loss
    
    
    (0.1
    )Tax benefit from employee stock plans
    
    
    0.1Repurchase of common stock
    
    
    (2.2
    )Stockholders equity, March 31, 2009
    
    $
    2,163.6
 NOTE 9  FAIR VALUE MEASUREMENT
   -12-




---



##### Table of Contents



Fair Value Measurements as at March 31, 2009 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Marketable securities
    
    $
    11.8
    
    
    $
    11.8
    
    
    $
    
    
    
    $
    Investments
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    
 Fair Value Measurements as at December 31, 2008 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Marketable securities
    
    $
    13.2
    
    
    $
    13.2
    
    
    $
    
    
    
    $
    Investments
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    
  NOTE 10  CONTINGENCIES
 Legal Matters
  Cipro Litigation. In re:
Ciprofloxacin Hydrochloride Antitrust Litigation, MDL Docket No. 001383
 -13-




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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
  -14-




---



##### 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; 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 and State of Kansas ex rel. Steve Six
v. Watson Pharmaceuticals, Inc. and Watson Pharma, Inc., Case Number: 08CV2228, District Court of
Wyandotte County, Kansas, Civil Court Department.
 -15-




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##### Table of Contents



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. 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
  -16-




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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
 -17-




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##### Table of Contents



Federal Trade Commission Investigations
 Androgel Antitrust Litigation. Federal Trade Commission, et. al. v. Watson Pharmaceuticals, Inc.,
et. al., USDC Case No. CV 09-00598) (Meijer, Inc., et. al., v. Unimed Pharmaceuticals,
Inc., et. al., USDC Case No. EDCV 09-0215); (Rochester Drug Co-Operative, Inc. v. Unimed
Pharmaceuticals Inc., et. al., Case No. EDCV 09-0226); (Louisiana Wholesale Drug Co. Inc. v. Unimed
Pharmaceuticals Inc., et. al, Case No. EDCV 09-0228). Stephen L. LaFrance Pharm., Inc.
d/b/a SAJ Dist. v. Unimed Pharms., Inc., et al., Civ. No. 09-1507 Fraternal Order of Police,
Fort Lauderdale Lodge 31, Insurance Trust Fund v. Unimed Pharms. Inc., et al., Civ. No. 09-1856 Scurto v. Unimed Pharms., Inc., et al., Civ. No. 09-1900 Stephen J.
LaFrance Stephen J. LaFrance
 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



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Results of Operations
    -20-




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##### Table of Contents



Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
 Three Months Ended March 31, 2009
    
    
    Three Months Ended March 31, 2008($ in millions):
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    395.2
    
    
    $
    98.2
    
    
    $
    153.7
    
    
    $
    647.1
    
    
    $
    342.4
    
    
    $
    99.0
    
    
    $
    144.9
    
    
    $
    586.3Other
    
    
    6.5
    
    
    
    13.8
    
    
    
    
    
    
    
    20.3
    
    
    
    24.3
    
    
    
    16.3
    
    
    
    
    
    
    
    40.6Net revenues
    
    
    401.7
    
    
    
    112.0
    
    
    
    153.7
    
    
    
    667.4
    
    
    
    366.7
    
    
    
    115.3
    
    
    
    144.9
    
    
    
    626.9Cost of sales(1)
    
    
    238.5
    
    
    
    24.2
    
    
    
    126.0
    
    
    
    388.7
    
    
    
    229.7
    
    
    
    27.5
    
    
    
    122.9
    
    
    
    380.1Gross profit(1)
    
    
    163.2
    
    
    
    87.8
    
    
    
    27.7
    
    
    
    278.7
    
    
    
    137.0
    
    
    
    87.8
    
    
    
    22.0
    
    
    
    246.8Gross margin(1)
    
    
    40.6
    %
    
    
    78.4
    %
    
    
    18.0
    %
    
    
    41.8
    %
    
    
    37.4
    %
    
    
    76.1
    %
    
    
    15.2
    %
    
    
    39.4
    %Research and development
    
    
    30.1
    
    
    
    12.2
    
    
    
    
    
    
    
    42.3
    
    
    
    22.6
    
    
    
    15.4
    
    
    
    
    
    
    
    38.0Selling and marketing
    
    
    12.7
    
    
    
    36.9
    
    
    
    16.1
    
    
    
    65.7
    
    
    
    14.1
    
    
    
    28.0
    
    
    
    14.0
    
    
    
    56.1Contribution
    
    $
    120.4
    
    
    $
    38.7
    
    
    $
    11.6
    
    
    
    170.7
    
    
    $
    100.3
    
    
    $
    44.4
    
    
    $
    8.0
    
    
    
    152.7Contibution margin
    
    
    30.0
    %
    
    
    34.6
    %
    
    
    7.5
    %
    
    
    25.6
    %
    
    
    27.4
    %
    
    
    38.5
    %
    
    
    5.5
    %
    
    
    24.4
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50.5Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20.2Gain on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    81.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    82.0Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.2
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.1
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. Generic Segment
 Net Revenues
      -21-




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Gross Profit (Gross Margin)
    Research and Development Expenses
   Selling and Marketing Expenses
   -22-




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##### Table of Contents



Brand Segment
 Net Revenues
      Gross Profit (Gross Margin)
    Research and Development Expenses
  TM
 Selling and Marketing Expenses
  TM TM
 -23-




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##### Table of Contents



Distribution Segment
 Net Revenues
   Gross Profit (Gross Margin)
  Selling and Marketing Expenses
   Segment Contribution
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    120.4
    
    
    $
    100.3
    
    
    $
    20.1
    
    
    
    20.0
    %Brand
    
    
    38.7
    
    
    
    44.4
    
    
    
    (5.7
    )
    
    
    (12.8
    )%Distribution
    
    
    11.6
    
    
    
    8.0
    
    
    
    3.6
    
    
    
    45.0
    %$
    170.7
    
    
    $
    152.7
    
    
    $
    18.0
    
    
    
    11.8
    %as % of net revenues
    
    
    25.6
    %
    
    
    24.4
    %
  -24-




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##### Table of Contents



Corporate General and Administrative Expenses
 Three Months Ended March 31,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Corporate general and
administrative expenses
    
    $
    68.9
    
    
    $
    50.5
    
    
    $
    18.4
    
    
    
    36.4
    %as a % of net revenues
    
    
    10.3
    %
    
    
    8.1
    %
   Amortization
 Three Months Ended March 31,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Amortization
    
    $
    21.8
    
    
    $
    20.2
    
    
    $
    1.6
    
    
    
    7.9
    %as a % of net revenues
    
    
    3.3
    %
    
    
    3.2
    %
  Gain on Asset Sales
 Three Months Ended March 31,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Gain on asset sales
    
    $
    (1.5
    )
    
    $
    
    
    
    $
    (1.5
    )
    
    
    100.0
    %as a % of net revenues
    
    
    (0.2
    )%
    
    
    0.0
    %
  -25-




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##### Table of Contents



Loss on Early Extinguishment of Debt
 Three Months Ended March 31,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Loss on early extinguishment
of debt
    
    $
    
    
    
    $
    1.1
    
    
    $
    (1.1
    )
    
    
    (100.0
    )%as a % of net revenues
    
    
    0.0
    %
    
    
    0.2
    %
   Interest Income
 Three Months Ended March 31,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Interest income
    
    $
    2.0
    
    
    $
    2.3
    
    
    $
    (0.3
    )
    
    
    (13.0
    )%as a % of net revenues
    
    
    0.3
    %
    
    
    0.4
    %
  Interest Expense
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Interest expense  2006
Credit Facility
    
    $
    1.5
    
    
    $
    3.9
    
    
    $
    (2.4
    )Interest expense 
convertible contingent
senior debentures due
2023 (CODES)
    
    
    3.2
    
    
    
    3.2
    
    
    
    Interest expense  other
    
    
    
    
    
    
    (0.3
    )
    
    
    0.3Interest expense
    
    $
    4.7
    
    
    $
    6.8
    
    
    $
    (2.1
    )
    
    
    (30.9
    )%as a % of net revenues
    
    
    0.7
    %
    
    
    1.1
    %
  -26-




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##### Table of Contents



Other Income
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Earnings on equity
method investments
    
    $
    2.2
    
    
    $
    4.0
    
    
    $
    (1.8
    )(Loss) gain on securities
    
    
    (1.1
    )
    
    
    1.4
    
    
    
    (2.5
    )Other income
    
    
    0.1
    
    
    
    
    
    
    
    0.1$
    1.2
    
    
    $
    5.4
    
    
    $
    (4.2
    )
    
    
    (77.8
    )%as a % of net revenues
    
    
    0.2
    %
    
    
    0.9
    %
 Earnings on Equity Method Investments
   (Loss) Gain on Securities
    Provision for Income Taxes
 Three Months Ended March 31,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Provision for income taxes
    
    $
    30.9
    
    
    $
    31.2
    
    
    $
    (0.3
    )
    
    
    (1.0
    )%Effective tax rate
    
    
    38.6
    %
    
    
    38.1
    %
   -27-




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##### Table of Contents



Liquidity and Capital Resources
 Working Capital Position
  March 31,
    
    
    December 31,
    
    
    Increase($ in millions):
    
    2009
    
    
    2008
    
    
    (Decrease)Current Assets:Cash and cash equivalents
    
    $
    559.0
    
    
    $
    507.6
    
    
    $
    51.4Marketable securities
    
    
    11.8
    
    
    
    13.2
    
    
    
    (1.4
    )Accounts receivable, net of allowances
    
    
    353.6
    
    
    
    305.0
    
    
    
    48.6Inventories
    
    
    476.2
    
    
    
    473.1
    
    
    
    3.1Other
    
    
    163.2
    
    
    
    159.5
    
    
    
    3.7Total current assets
    
    
    1,563.8
    
    
    
    1,458.4
    
    
    
    105.4Current liabilities:Accounts payable and accrued expenses
    
    
    382.8
    
    
    
    381.3
    
    
    
    1.5Short-term debt and current portion of long-term
debt
    
    
    626.4
    
    
    
    53.2
    
    
    
    573.2Other
    
    
    133.4
    
    
    
    47.5
    
    
    
    85.9Total current liabilities
    
    
    1,142.6
    
    
    
    482.0
    
    
    
    660.6Working Capital
    
    $
    421.2
    
    
    $
    976.4
    
    
    $
    (555.2
    )Current Ratio
    
    
    1.37
    
    
    
    3.03
   Cash Flows from Operations
  Three months ended March 31,($ in millions):
    
    2009
    
    2008Net cash provided by operating activities
    
    $
    69.5
    
    
    $
    66.6
  -28-




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##### Table of Contents



Investing Cash Flows
  Three months ended March 31,($ in millions):
    
    2009
    
    2008Net cash used in investing activities
    
    $
    17.9
    
    
    $
    18.2
  Financing Cash Flows
  Three months ended March 31,($ in millions):
    
    2009
    
    2008Net cash used in financing activities
    
    $
    0.2
    
    
    $
    79.0
  Debt and Borrowing Capacity
  March 31,
    
    
    December 31,
    
    
    Increase($ in millions):
    
    2009
    
    
    2008
    
    
    (Decrease)Short-term debt and current portion of long-term debt
    
    $
    626.4
    
    
    $
    53.2
    
    
    $
    573.2Long-term debt
    
    
    250.0
    
    
    
    824.7
    
    
    
    (574.7
    )Total debt
    
    $
    876.4
    
    
    $
    877.9
    
    
    $
    (1.5
    )Debt to capital ratio
    
    
    28.8
    %
    
    
    29.4
    %
   -29-




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##### Table of Contents




    
    maintenance of a minimum net worth of at least $1.53 billion;
    
    maintenance of a maximum leverage ratio not greater than 2.75 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
      
 ITEM 4. CONTROLS AND PROCEDURES
    -32-




---



##### 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
  Total Number of
    
    Approximate DollarTotal Number
    
    Average
    
    Shares Purchased as
    
    Value of Shares thatof Shares
    
    Price Paid
    
    Part of Publicaly
    
    May Yet Be PurchasedPeriod
    
    Purchased
    
    per Share
    
    Announced Program
    
    Under the ProgramJanuary 1 - 31, 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    February 1 - 28, 2009
    
    
    2,171
    
    
    $
    28.27
    
    
    
    
    
    
    
    March 1 - 31, 2009
    
    
    76,220
    
    
    $
    27.34
    
    
    
    
    
    
    
    
 
 ITEM 6. EXHIBITS
   -33-




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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)  -34-




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##### Table of Contents



WATSON PHARMACEUTICALS, INC.
 EXHIBIT INDEX TO FORM 10-Q
For the Quarterly Period Ended March 31, 2009
 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.
 -35-