##### 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 JUNE 30, 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
    
    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
 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 JUNE 30, 2009
 PAGEPart I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    1Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
    
    
    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
    
    
    57Item 4. Submission of Matters to a Vote of Security Holders
    
    
    58Item 6. Exhibits
    
    
    58Signatures
    
    
    59EX-10.1EX-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)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    637.5
    
    
    $
    507.6Marketable securities
    
    
    13.4
    
    
    
    13.2Accounts receivable, net
    
    
    356.6
    
    
    
    305.0Inventories, net
    
    
    499.3
    
    
    
    473.1Prepaid expenses and other current assets
    
    
    60.7
    
    
    
    48.5Deferred tax assets
    
    
    121.0
    
    
    
    111.0Total current assets
    
    
    1,688.5
    
    
    
    1,458.4Property and equipment, net
    
    
    635.4
    
    
    
    658.5Investments and other assets
    
    
    86.0
    
    
    
    80.6Deferred tax assets
    
    
    40.7
    
    
    
    52.3Product rights and other intangibles, net
    
    
    531.7
    
    
    
    560.0Goodwill
    
    
    868.1
    
    
    
    868.1Total assets
    
    $
    3,850.4
    
    
    $
    3,677.9LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    427.1
    
    
    $
    381.3Income taxes payable
    
    
    
    
    
    
    15.5Short-term debt and current portion of long-term debt
    
    
    726.4
    
    
    
    53.2Deferred revenue
    
    
    22.5
    
    
    
    16.1Deferred tax liabilities
    
    
    14.6
    
    
    
    15.9Total current liabilities
    
    
    1,190.6
    
    
    
    482.0Long-term debt
    
    
    150.0
    
    
    
    824.7Deferred revenue
    
    
    37.2
    
    
    
    30.1Other long-term liabilities
    
    
    5.2
    
    
    
    4.9Other taxes payable
    
    
    58.1
    
    
    
    53.3Deferred tax liabilities
    
    
    177.2
    
    
    
    174.3Total liabilities
    
    
    1,618.3
    
    
    
    1,569.3Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    0.4
    
    
    
    0.4Additional paid-in capital
    
    
    1,016.0
    
    
    
    995.9Retained earnings
    
    
    1,520.2
    
    
    
    1,418.1Accumulated
other comprehensive income (loss)
    
    
    0.3
    
    
    
    (3.2
    )Treasury stock, at cost
    
    
    (304.8
    )
    
    
    (302.6
    )Total stockholders equity
    
    
    2,232.1
    
    
    
    2,108.6Total liabilities and stockholders equity
    
    $
    3,850.4
    
    
    $
    3,677.9
 See accompanying Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



WATSON PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    677.8
    
    
    $
    622.7
    
    
    $
    1,345.2
    
    
    $
    1,249.6Operating expenses:Cost of sales
    
    
    393.1
    
    
    
    359.9
    
    
    
    781.8
    
    
    
    740.0Research and development
    
    
    42.6
    
    
    
    39.2
    
    
    
    84.9
    
    
    
    77.2Selling and marketing
    
    
    66.2
    
    
    
    57.5
    
    
    
    131.9
    
    
    
    113.6General and administrative
    
    
    62.1
    
    
    
    46.9
    
    
    
    131.0
    
    
    
    97.4Amortization
    
    
    22.1
    
    
    
    20.2
    
    
    
    43.9
    
    
    
    40.4Loss (gain) on asset sales
    
    
    0.2
    
    
    
    
    
    
    
    (1.3
    )
    
    
    Total operating expenses
    
    
    586.3
    
    
    
    523.7
    
    
    
    1,172.2
    
    
    
    1,068.6Operating income
    
    
    91.5
    
    
    
    99.0
    
    
    
    173.0
    
    
    
    181.0Non-operating (expense) income:Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.1
    )Interest income
    
    
    1.3
    
    
    
    1.7
    
    
    
    3.3
    
    
    
    4.0Interest expense
    
    
    (4.6
    )
    
    
    (6.9
    )
    
    
    (9.3
    )
    
    
    (13.7
    )Other income
    
    
    2.4
    
    
    
    2.0
    
    
    
    3.6
    
    
    
    7.4Total other expense, net
    
    
    (0.9
    )
    
    
    (3.2
    )
    
    
    (2.4
    )
    
    
    (3.4
    )Income before income taxes
    
    
    90.6
    
    
    
    95.8
    
    
    
    170.6
    
    
    
    177.6Provision for income taxes
    
    
    37.6
    
    
    
    35.5
    
    
    
    68.5
    
    
    
    66.7Net income
    
    $
    53.0
    
    
    $
    60.3
    
    
    $
    102.1
    
    
    $
    110.9Earnings per share:Basic
    
    $
    0.51
    
    
    $
    0.59
    
    
    $
    0.99
    
    
    $
    1.08Diluted
    
    $
    0.46
    
    
    $
    0.53
    
    
    $
    0.89
    
    
    $
    0.98Weighted average shares outstanding:Basic
    
    
    103.4
    
    
    
    102.7
    
    
    
    103.2
    
    
    
    102.7Diluted
    
    
    118.8
    
    
    
    117.7
    
    
    
    118.5
    
    
    
    117.5
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 Six Months EndedJune 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    102.1
    
    
    $
    110.9Reconciliation to net cash provided by operating activities:Depreciation
    
    
    47.3
    
    
    
    44.1Amortization
    
    
    43.9
    
    
    
    40.4Deferred income tax provision
    
    
    2.3
    
    
    
    17.4Provision for inventory reserve
    
    
    25.2
    
    
    
    22.2Restricted stock and stock option compensation
    
    
    9.6
    
    
    
    9.3Earnings on equity method investments
    
    
    (4.7
    )
    
    
    (5.8
    )Loss (gain) on securities
    
    
    1.1
    
    
    
    (1.4
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    1.1(Gain) loss on asset sales
    
    
    (1.3
    )
    
    
    0.3Other
    
    
    0.6
    
    
    
    (1.4
    )Changes in assets and liabilities:Accounts receivable, net
    
    
    (51.6
    )
    
    
    (30.1
    )Inventories
    
    
    (51.4
    )
    
    
    (22.3
    )Prepaid expenses and other current assets
    
    
    (12.2
    )
    
    
    7.7Accounts payable and accrued expenses
    
    
    45.8
    
    
    
    (18.9
    )Deferred revenue
    
    
    13.5
    
    
    
    (13.0
    )Income taxes payable
    
    
    (11.0
    )
    
    
    5.1Other assets
    
    
    2.0
    
    
    
    0.6Total adjustments
    
    
    59.1
    
    
    
    55.3Net cash provided by operating activities
    
    
    161.2
    
    
    
    166.2CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (26.0
    )
    
    
    (28.9
    )Acquisition of product rights
    
    
    (15.5
    )
    
    
    (0.6
    )Proceeds from sale of fixed assets
    
    
    3.0
    
    
    
    Proceeds from sale of marketable securities
    
    
    3.9
    
    
    
    3.8Additions to marketable securities
    
    
    (3.0
    )
    
    
    (3.7
    )Net cash used in investing activities
    
    
    (37.6
    )
    
    
    (29.4
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt and other long-term liabilities
    
    
    (1.6
    )
    
    
    (95.0
    )Proceeds from issuance of short-term debt and other long-term liabilities
    
    
    
    
    
    
    17.0Repurchase of common stock
    
    
    (2.2
    )
    
    
    (0.1
    )Proceeds from stock plans
    
    
    10.1
    
    
    
    2.2Net cash provided by (used in) financing activities
    
    
    6.3
    
    
    
    (75.9
    )Net increase in cash and cash equivalents
    
    
    129.9
    
    
    
    60.9Cash and cash equivalents at beginning of period
    
    
    507.6
    
    
    
    204.6Cash and cash equivalents at end of period
    
    $
    637.5
    
    
    $
    265.5
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  GENERAL
   Merger Agreement with Arrow Group
  
    
    A cash payment of U.S. $1.05 billion at closing of the share purchase (the Closing);
    
    Approximately 16.9 million restricted shares of Common Stock of Watson issued at the
Closing;
    
    $200.0 million face amount of newly-designated non-voting Series A Preferred Stock of
Watson issued at the Closing; and
    
    Certain contingent payments made after the Closing based on the after-tax gross profits
on sales of Atorvastatin in the United States as described in the Acquisition Agreement.
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Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    

June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    53.0
    
    
    $
    60.3
    
    
    $
    102.1
    
    
    $
    110.9Other comprehensive income (loss):Translation gains (losses)
    
    
    3.3
    
    
    
    (1.3
    )
    
    
    2.0
    
    
    
    (0.9
    )Unrealized gain (loss) on securities, net of tax
    
    
    0.3
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.2
    )Reclassification for losses included in net
income, net of tax
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    Unrealized gain (loss) on cash flow hedge, net
of tax
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    (0.3
    )Total other comprehensive income (loss)
    
    
    3.6
    
    
    
    (0.3
    )
    
    
    3.5
    
    
    
    (1.4
    )Total comprehensive income
    
    $
    56.6
    
    
    $
    60.0
    
    
    $
    105.6
    
    
    $
    109.5
 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 six monthsended June 30, 2008
    
    
    614.9
    
    
    
    150.8
    
    
    
    83.3
    
    
    
    32.9
    
    
    
    881.9Credits and payments
    
    
    (643.5
    )
    
    
    (167.3
    )
    
    
    (82.6
    )
    
    
    (33.4
    )
    
    
    (926.8
    )Balance at June 30, 2008
    
    
    135.8
    
    
    
    137.8
    
    
    
    56.8
    
    
    
    12.4
    
    
    
    342.8Provision related to sales in six monthsended December 31, 2008
    
    
    609.1
    
    
    
    158.3
    
    
    
    96.5
    
    
    
    34.3
    
    
    
    898.2Credits and payments
    
    
    (624.3
    )
    
    
    (170.3
    )
    
    
    (83.8
    )
    
    
    (34.4
    )
    
    
    (912.8
    )Balance at December 31, 2008
    
    
    120.6
    
    
    
    125.8
    
    
    
    69.5
    
    
    
    12.3
    
    
    
    328.2Provision related to sales in six monthsended June 30, 2009
    
    
    591.2
    
    
    
    183.7
    
    
    
    91.2
    
    
    
    35.5
    
    
    
    901.6Credits and payments
    
    
    (586.7
    )
    
    
    (180.6
    )
    
    
    (77.6
    )
    
    
    (34.5
    )
    
    
    (879.4
    )Balance at June 30, 2009
    
    $
    125.1
    
    
    $
    128.9
    
    
    $
    83.1
    
    
    $
    13.3
    
    
    $
    350.4
 Earnings Per Share (EPS)
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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008EPS  basicNet income
    
    $
    53.0
    
    
    $
    60.3
    
    
    $
    102.1
    
    
    $
    110.9Basic weighted average common shares
outstanding
    
    
    103.4
    
    
    
    102.7
    
    
    
    103.2
    
    
    
    102.7EPS  basic
    
    $
    0.51
    
    
    $
    0.59
    
    
    $
    0.99
    
    
    $
    1.08EPS  dilutedNet income
    
    $
    53.0
    
    
    $
    60.3
    
    
    $
    102.1
    
    
    $
    110.9Add: Interest expense on CODES, net of tax
    
    
    1.9
    
    
    
    1.9
    
    
    
    3.9
    
    
    
    3.9Net income, adjusted
    
    $
    54.9
    
    
    $
    62.2
    
    
    $
    106.0
    
    
    $
    114.8Basic weighted average common shares
outstanding
    
    
    103.4
    
    
    
    102.7
    
    
    
    103.2
    
    
    
    102.7Effect of dilutive securities:Conversion of CODES
    
    
    14.4
    
    
    
    14.4
    
    
    
    14.4
    
    
    
    14.4Dilutive stock awards
    
    
    1.0
    
    
    
    0.6
    
    
    
    0.9
    
    
    
    0.5Diluted weighted average common shares
outstanding
    
    
    118.8
    
    
    
    117.7
    
    
    
    118.5
    
    
    
    117.5EPS  diluted
    
    $
    0.46
    
    
    $
    0.53
    
    
    $
    0.89
    
    
    $
    0.98
  Share-Based Compensation
   Recent Accounting Pronouncements
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NOTE 2  OTHER INCOME
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Earnings on equity method investments
    
    $
    2.4
    
    
    $
    1.8
    
    
    $
    4.7
    
    
    $
    5.8(Loss) gain on securities
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    1.4Other income
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2$
    2.4
    
    
    $
    2.0
    
    
    $
    3.6
    
    
    $
    7.4
 NOTE 3  OPERATING SEGMENTS
   Three Months Ended June 30, 2009
    
    
    Three Months Ended June 30, 2008Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    393.8
    
    
    $
    97.6
    
    
    $
    161.3
    
    
    $
    652.7
    
    
    $
    344.3
    
    
    $
    101.5
    
    
    $
    128.0
    
    
    $
    573.8Other
    
    
    7.4
    
    
    
    17.7
    
    
    
    
    
    
    
    25.1
    
    
    
    32.4
    
    
    
    16.5
    
    
    
    
    
    
    
    48.9Net revenues
    
    
    401.2
    
    
    
    115.3
    
    
    
    161.3
    
    
    
    677.8
    
    
    
    376.7
    
    
    
    118.0
    
    
    
    128.0
    
    
    
    622.7Operating expenses:Cost of sales(1)
    
    
    234.1
    
    
    
    22.0
    
    
    
    137.0
    
    
    
    393.1
    
    
    
    227.6
    
    
    
    24.4
    
    
    
    107.9
    
    
    
    359.9Research and
development
    
    
    29.9
    
    
    
    12.7
    
    
    
    
    
    
    
    42.6
    
    
    
    29.1
    
    
    
    10.1
    
    
    
    
    
    
    
    39.2Selling and
marketing
    
    
    11.4
    
    
    
    39.1
    
    
    
    15.7
    
    
    
    66.2
    
    
    
    13.8
    
    
    
    29.6
    
    
    
    14.1
    
    
    
    57.5Contribution
    
    $
    125.8
    
    
    $
    41.5
    
    
    $
    8.6
    
    
    
    175.9
    
    
    $
    106.2
    
    
    $
    53.9
    
    
    $
    6.0
    
    
    
    166.1Contibution margin
    
    
    31.4
    %
    
    
    36.0
    %
    
    
    5.3
    %
    
    
    26.0
    %
    
    
    28.2
    %
    
    
    45.7
    %
    
    
    4.7
    %
    
    
    26.7
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46.9Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20.2Loss on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    91.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99.0Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.5
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.9
    %
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Six Months Ended June 30, 2009
    
    
    Six Months Ended June 30, 2008Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    789.0
    
    
    $
    195.8
    
    
    $
    315.0
    
    
    $
    1,299.8
    
    
    $
    686.7
    
    
    $
    200.5
    
    
    $
    272.9
    
    
    $
    1,160.1Other
    
    
    13.9
    
    
    
    31.5
    
    
    
    
    
    
    
    45.4
    
    
    
    56.7
    
    
    
    32.8
    
    
    
    
    
    
    
    89.5Net revenues
    
    
    802.9
    
    
    
    227.3
    
    
    
    315.0
    
    
    
    1,345.2
    
    
    
    743.4
    
    
    
    233.3
    
    
    
    272.9
    
    
    
    1,249.6Operating expenses:Cost of sales(1)
    
    
    472.6
    
    
    
    46.2
    
    
    
    263.0
    
    
    
    781.8
    
    
    
    457.3
    
    
    
    51.9
    
    
    
    230.8
    
    
    
    740.0Research and development
    
    
    60.0
    
    
    
    24.9
    
    
    
    
    
    
    
    84.9
    
    
    
    51.7
    
    
    
    25.5
    
    
    
    
    
    
    
    77.2Selling and marketing
    
    
    24.1
    
    
    
    76.0
    
    
    
    31.8
    
    
    
    131.9
    
    
    
    27.9
    
    
    
    57.6
    
    
    
    28.1
    
    
    
    113.6Contribution
    
    $
    246.2
    
    
    $
    80.2
    
    
    $
    20.2
    
    
    
    346.6
    
    
    $
    206.5
    
    
    $
    98.3
    
    
    $
    14.0
    
    
    
    318.8Contibution margin
    
    
    30.7
    %
    
    
    35.3
    %
    
    
    6.4
    %
    
    
    25.8
    %
    
    
    27.8
    %
    
    
    42.1
    %
    
    
    5.1
    %
    
    
    25.5
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97.4Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40.4Gain on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    173.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    181.0Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.5
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. NOTE 4  INVENTORIES
   June 30,
    
    
    December 31,2009
    
    
    2008Inventories:Raw materials
    
    $
    150.8
    
    
    $
    109.1Work-in-process
    
    
    69.2
    
    
    
    44.2Finished goods
    
    
    333.9
    
    
    
    354.5553.9
    
    
    
    507.8Less: Inventory reserves
    
    
    54.6
    
    
    
    34.7Inventories, net
    
    $
    499.3
    
    
    $
    473.1
 - 10 -




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##### Table of Contents



NOTE 5  DEBT
  June 30,
    
    
    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
    
    
    726.4
    
    
    
    53.2Total long-term debt
    
    $
    150.0
    
    
    $
    824.7
 Senior Credit Facility
   - 11 -




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##### Table of Contents



NOTE 6  BUSINESS RESTRUCTURING CHARGES
  AccrualBalance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Charged
    
    
    Cash
    
    
    Non-cash
    
    
    June 30,(in millions)
    
    2008
    
    
    to Expense
    
    
    Payments
    
    
    Adjustments
    
    
    2009Cost of salesSeverance and retention
    
    $
    13.7
    
    
    $
    5.4
    
    
    $
    (1.9
    )
    
    $
    
    
    
    $
    17.2Product transfer costs
    
    
    0.7
    
    
    
    6.0
    
    
    
    (4.1
    )
    
    
    
    
    
    
    2.6Facility decommission costs
    
    
    0.2
    
    
    
    0.4
    
    
    
    (0.2
    )
    
    
    
    
    
    
    0.4Accelerated depreciation
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    (3.6
    )
    
    
    14.6
    
    
    
    15.4
    
    
    
    (6.2
    )
    
    
    (3.6
    )
    
    
    20.2Operating expensesResearch and development
    
    
    0.7
    
    
    
    1.8
    
    
    
    (1.6
    )
    
    
    
    
    
    
    0.9Selling, general and administrative
    
    
    0.8
    
    
    
    0.6
    
    
    
    (0.4
    )
    
    
    
    
    
    
    1.01.5
    
    
    
    2.4
    
    
    
    (2.0
    )
    
    
    
    
    
    
    1.9Total restructuring charges
    
    $
    16.1
    
    
    $
    17.8
    
    
    $
    (8.2
    )
    
    $
    (3.6
    )
    
    $
    22.1
   NOTE 7  INCOME TAXES
   - 12 -




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##### Table of Contents



NOTE 8  STOCKHOLDERS EQUITY
  Stockholders equity, December 31, 2008
    
    $
    2,108.6Common stock issued under employee plans
    
    
    10.1Increase in additional paid-in capital for share-based compensation plans
    
    
    9.6Net income
    
    
    102.1Other comprehensive loss
    
    
    3.5Tax benefit from employee stock plans
    
    
    0.4Repurchase of common stock
    
    
    (2.2
    )Stockholders equity, June 30, 2009
    
    $
    2,232.1
 NOTE 9  FAIR VALUE MEASUREMENT
   - 13 -




---



##### Table of Contents



Fair Value Measurements as at June 30, 2009 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Marketable securities
    
    $
    13.4
    
    
    $
    13.4
    
    
    $
    
    
    
    $
    Investments
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    
 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
 - 14 -




---



##### 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
 In re: Pharmaceutical
Industry Average Wholesale Price Litigation, MDL Docket No. 1456
 - 15 -




---



##### 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 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.
 - 16 -




---



##### 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
  - 17 -




---



##### 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.
 - 18 -




---



##### Table of Contents



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 L. LaFrance Stephen L. LaFrance Stephen L. LaFrance United Food and Commercial Workers Unions and Employers Midwest
Health Benefits Fund v. Unimed Pharms., Inc., et al., Civ. No. 09-1168 ® United
Food and Commercial Workers United Food and Commercial Workers Rite Aid Corp. et al. v. Unimed Pharms., Inc. et al., Civ. No. 09-1153, Walgreen Co., et al. v. Unimed Pharms., Inc., et al., Civ. No. 09-1240 ® Rite Aid Rite Aid Walgreen
 Department of Health and Human Services Subpoena. ®
 - 19 -




---



##### 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
 - 20 -




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   
    
    A cash payment of U.S. $1.05 billion at closing of the share purchase (the Closing);
    
    Approximately 16.9 million restricted shares of Common Stock of Watson issued at the
Closing;
    
    $200.0 million face amount of newly-designated non-voting Series A Preferred Stock of
Watson issued at the Closing; and
    
    Certain contingent payments made after the Closing based on the after-tax gross profits
on sales of Atorvastatin in the United States as described in the Acquisition Agreement.
  Results of Operations
  - 21 -




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##### Table of Contents



Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
 Three Months Ended June 30, 2009
    
    
    Three Months Ended June 30, 2008Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    393.8
    
    
    $
    97.6
    
    
    $
    161.3
    
    
    $
    652.7
    
    
    $
    344.3
    
    
    $
    101.5
    
    
    $
    128.0
    
    
    $
    573.8Other
    
    
    7.4
    
    
    
    17.7
    
    
    
    
    
    
    
    25.1
    
    
    
    32.4
    
    
    
    16.5
    
    
    
    
    
    
    
    48.9Net revenues
    
    
    401.2
    
    
    
    115.3
    
    
    
    161.3
    
    
    
    677.8
    
    
    
    376.7
    
    
    
    118.0
    
    
    
    128.0
    
    
    
    622.7Operating expenses:Cost of sales(1)
    
    
    234.1
    
    
    
    22.0
    
    
    
    137.0
    
    
    
    393.1
    
    
    
    227.6
    
    
    
    24.4
    
    
    
    107.9
    
    
    
    359.9Research and
development
    
    
    29.9
    
    
    
    12.7
    
    
    
    
    
    
    
    42.6
    
    
    
    29.1
    
    
    
    10.1
    
    
    
    
    
    
    
    39.2Selling and
marketing
    
    
    11.4
    
    
    
    39.1
    
    
    
    15.7
    
    
    
    66.2
    
    
    
    13.8
    
    
    
    29.6
    
    
    
    14.1
    
    
    
    57.5Contribution
    
    $
    125.8
    
    
    $
    41.5
    
    
    $
    8.6
    
    
    
    175.9
    
    
    $
    106.2
    
    
    $
    53.9
    
    
    $
    6.0
    
    
    
    166.1Contibution margin
    
    
    31.4
    %
    
    
    36.0
    %
    
    
    5.3
    %
    
    
    26.0
    %
    
    
    28.2
    %
    
    
    45.7
    %
    
    
    4.7
    %
    
    
    26.7
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46.9Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20.2Loss on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    91.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99.0Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.5
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.9
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. - 22 -




---



##### Table of Contents



Generic Segment
 Net Revenues
     ® ®
 Cost of Sales
   - 23 -




---



##### Table of Contents



Research and Development Expenses
   Selling and Marketing Expenses
   Brand Segment
 Net Revenues
  TM TM
    TM TM
 - 24 -




---



##### Table of Contents



Cost of Sales
   Research and Development Expenses
   Selling and Marketing Expenses
  TM TM
 Distribution Segment
 Net Revenues
   Cost of Sales
  - 25 -




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##### Table of Contents



Selling and Marketing Expenses
   Segment Contribution
 Three Months Ended June 30,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    125.8
    
    
    $
    106.2
    
    
    $
    19.6
    
    
    
    18.5
    %Brand
    
    
    41.5
    
    
    
    53.9
    
    
    
    (12.4
    )
    
    
    (23.0
    )%Distribution
    
    
    8.6
    
    
    
    6.0
    
    
    
    2.6
    
    
    
    43.3
    %$
    175.9
    
    
    $
    166.1
    
    
    $
    9.8
    
    
    
    5.9
    %as % of net revenues
    
    
    26.0
    %
    
    
    26.7
    %
  Corporate General and Administrative Expenses
 Three Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Corporate general and administrative expenses
    
    $
    62.1
    
    
    $
    46.9
    
    
    $
    15.2
    
    
    
    32.4
    %as a % of net revenues
    
    
    9.2
    %
    
    
    7.5
    %
   Amortization
 Three Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Amortization
    
    $
    22.1
    
    
    $
    20.2
    
    
    $
    1.9
    
    
    
    9.4
    %as a % of net revenues
    
    
    3.3
    %
    
    
    3.2
    %
  - 26 -




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##### Table of Contents



Loss on Asset Sales
 Three Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Loss on asset sales
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.2
    
    
    
    100.0
    %as a % of net revenues
    
    
    0.0
    %
    
    
    0.0
    %
  Interest Income
 Three Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Interest income
    
    $
    1.3
    
    
    $
    1.7
    
    
    $
    (0.4
    )
    
    
    (23.5
    )%as a % of net revenues
    
    
    0.2
    %
    
    
    0.3
    %
  Interest Expense
 Three Months Ended June 30,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Interest expense  Senior Credit Facility
due 2011 (2006 Credit Facility)
    
    $
    1.3
    
    
    $
    3.7
    
    
    $
    (2.4
    )Interest expense  convertible contingent
senior debentures due 2023 (CODES)
    
    
    3.2
    
    
    
    3.2
    
    
    
    Interest expense  other
    
    
    0.1
    
    
    
    
    
    
    
    0.1Interest expense
    
    $
    4.6
    
    
    $
    6.9
    
    
    $
    (2.3
    )
    
    
    (33.3
    )%as a % of net revenues
    
    
    0.7
    %
    
    
    1.1
    %
  - 27 -




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##### Table of Contents



Other Income
 Three Months Ended June 30,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Earnings on equity method investments
    
    $
    2.4
    
    
    $
    1.8
    
    
    $
    0.6Other income
    
    
    
    
    
    
    0.2
    
    
    
    (0.2
    )$
    2.4
    
    
    $
    2.0
    
    
    $
    0.4
    
    
    
    20.0
    %as a % of net revenues
    
    
    0.4
    %
    
    
    0.3
    %
 Earnings on Equity Method Investments
   Provision for Income Taxes
 Three Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Provision for income taxes
    
    $
    37.6
    
    
    $
    35.5
    
    
    $
    2.1
    
    
    
    5.9
    %Effective tax rate
    
    
    41.5
    %
    
    
    37.1
    %
   - 28 -




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##### Table of Contents



Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
 Six Months Ended June 30, 2009
    
    
    Six Months Ended June 30, 2008Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    789.0
    
    
    $
    195.8
    
    
    $
    315.0
    
    
    $
    1,299.8
    
    
    $
    686.7
    
    
    $
    200.5
    
    
    $
    272.9
    
    
    $
    1,160.1Other
    
    
    13.9
    
    
    
    31.5
    
    
    
    
    
    
    
    45.4
    
    
    
    56.7
    
    
    
    32.8
    
    
    
    
    
    
    
    89.5Net revenues
    
    
    802.9
    
    
    
    227.3
    
    
    
    315.0
    
    
    
    1,345.2
    
    
    
    743.4
    
    
    
    233.3
    
    
    
    272.9
    
    
    
    1,249.6Operating expenses:Cost of sales(1)
    
    
    472.6
    
    
    
    46.2
    
    
    
    263.0
    
    
    
    781.8
    
    
    
    457.3
    
    
    
    51.9
    
    
    
    230.8
    
    
    
    740.0Research and
development
    
    
    60.0
    
    
    
    24.9
    
    
    
    
    
    
    
    84.9
    
    
    
    51.7
    
    
    
    25.5
    
    
    
    
    
    
    
    77.2Selling and
marketing
    
    
    24.1
    
    
    
    76.0
    
    
    
    31.8
    
    
    
    131.9
    
    
    
    27.9
    
    
    
    57.6
    
    
    
    28.1
    
    
    
    113.6Contribution
    
    $
    246.2
    
    
    $
    80.2
    
    
    $
    20.2
    
    
    
    346.6
    
    
    $
    206.5
    
    
    $
    98.3
    
    
    $
    14.0
    
    
    
    318.8Contibution margin
    
    
    30.7
    %
    
    
    35.3
    %
    
    
    6.4
    %
    
    
    25.8
    %
    
    
    27.8
    %
    
    
    42.1
    %
    
    
    5.1
    %
    
    
    25.5
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97.4Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40.4Gain on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    173.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    181.0Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.5
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. Generic Segment
 Net Revenues
   Cost of Sales
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Research and Development Expenses
  Selling and Marketing Expenses
  Brand Segment
 Net Revenues
  TM TM
 Cost of Sales
  Research and Development Expenses
  Selling and Marketing Expenses
 TM TM
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Distribution Segment
 Net Revenues
  Cost of Sales
  Selling and Marketing Expenses
  Segment Contribution
 Six Months Ended June 30,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    246.2
    
    
    $
    206.5
    
    
    $
    39.7
    
    
    
    19.2
    %Brand
    
    
    80.2
    
    
    
    98.3
    
    
    
    (18.1
    )
    
    
    (18.4
    )%Distribution
    
    
    20.2
    
    
    
    14.0
    
    
    
    6.2
    
    
    
    44.3
    %$
    346.6
    
    
    $
    318.8
    
    
    $
    27.8
    
    
    
    8.7
    %as % of net revenues
    
    
    25.8
    %
    
    
    25.5
    %
  Corporate General and Administrative Expenses
 Six Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Corporate general and
administrative expenses
    
    $
    131.0
    
    
    $
    97.4
    
    
    $
    33.6
    
    
    
    34.5
    %as a % of net revenues
    
    
    9.7
    %
    
    
    7.8
    %
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Amortization
 Six Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Amortization
    
    $
    43.9
    
    
    $
    40.4
    
    
    $
    3.5
    
    
    
    8.7
    %as a % of net revenues
    
    
    3.3
    %
    
    
    3.2
    %
  Gain on Asset Sales
 Six Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Gain on asset sales
    
    $
    1.3
    
    
    $
    
    
    
    $
    1.3
    
    
    
    100.0
    %as a % of net revenues
    
    
    0.1
    %
    
    
    0.0
    %
  Loss on Early Extinguishment of Debt
 Six Months Ended June 30,
    
    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
    %
    
    
    0.1
    %
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Interest Income
 Six Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Interest income
    
    $
    3.3
    
    
    $
    4.0
    
    
    $
    (0.7
    )
    
    
    (17.5
    )%as a % of net revenues
    
    
    0.2
    %
    
    
    0.3
    %
  Interest Expense
 Six Months Ended June 30,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Interest expense  2006 Credit Facility
    
    $
    2.8
    
    
    $
    7.6
    
    
    $
    (4.8
    )Interest expense  CODES
    
    
    6.4
    
    
    
    6.3
    
    
    
    0.1Interest expense  other
    
    
    0.1
    
    
    
    (0.2
    )
    
    
    0.3Interest expense
    
    $
    9.3
    
    
    $
    13.7
    
    
    $
    (4.4
    )
    
    
    (32.1
    )%as a % of net revenues
    
    
    0.7
    %
    
    
    1.1
    %
  Other Income
 Six Months Ended June 30,
    
    
    Change($ in millions):
    
    2009
    
    
    2008
    
    
    Dollars
    
    
    %Earnings on equity method investments
    
    $
    4.7
    
    
    $
    5.8
    
    
    $
    (1.1
    )(Loss) gain on securities
    
    
    (1.1
    )
    
    
    1.4
    
    
    
    (2.5
    )Other income
    
    
    
    
    
    
    0.2
    
    
    
    (0.2
    )$
    3.6
    
    
    $
    7.4
    
    
    $
    (3.8
    )
    
    
    (51.4
    )%as a % of net revenues
    
    
    0.3
    %
    
    
    0.6
    %
 Earnings on Equity Method Investments
  (Loss) Gain on Securities
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Provision for Income Taxes
 Six Months Ended June 30,
    
    Change($ in millions):
    
    2009
    
    2008
    
    Dollars
    
    %Provision for income taxes
    
    $
    68.5
    
    
    $
    66.7
    
    
    $
    1.8
    
    
    
    2.7
    %Effective tax rate
    
    
    40.1
    %
    
    
    37.6
    %
  Liquidity and Capital Resources
 Working Capital Position
  June 30,
    
    
    December 31,
    
    
    Increase($ in millions):
    
    2009
    
    
    2008
    
    
    (Decrease)Current Assets:Cash and cash equivalents
    
    $
    637.5
    
    
    $
    507.6
    
    
    $
    129.9Marketable securities
    
    
    13.4
    
    
    
    13.2
    
    
    
    0.2Accounts receivable, net of allowances
    
    
    356.6
    
    
    
    305.0
    
    
    
    51.6Inventories
    
    
    499.3
    
    
    
    473.1
    
    
    
    26.2Other
    
    
    181.7
    
    
    
    159.5
    
    
    
    22.2Total current assets
    
    
    1,688.5
    
    
    
    1,458.4
    
    
    
    230.1Current liabilities:Accounts payable and accrued expenses
    
    
    427.1
    
    
    
    381.3
    
    
    
    45.8Short-term debt and current portion of long-term debt
    
    
    726.4
    
    
    
    53.2
    
    
    
    673.2Other
    
    
    37.1
    
    
    
    47.5
    
    
    
    (10.4
    )Total current liabilities
    
    
    1,190.6
    
    
    
    482.0
    
    
    
    708.6Working Capital
    
    $
    497.9
    
    
    $
    976.4
    
    
    $
    (478.5
    )Current Ratio
    
    
    1.42
    
    
    
    3.03
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Cash Flows from Operations
  Six months ended June 30,($ in millions):
    
    2009
    
    2008Net cash provided by operating activities
    
    $
    161.2
    
    
    $
    166.2
  Investing Cash Flows
  Six months ended June 30,($ in millions):
    
    2009
    
    2008Net cash used in investing activities
    
    $
    37.6
    
    
    $
    29.4
  Financing Cash Flows
  Six months ended June 30,($ in millions):
    
    2009
    
    2008Net cash provided by (used in) financing activities
    
    $
    6.3
    
    
    $
    (75.9
    )
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Debt and Borrowing Capacity
  June 30,
    
    
    December 31,
    
    
    Increase($ in millions):
    
    2009
    
    
    2008
    
    
    (Decrease)Short-term debt and current portion of long-term debt
    
    $
    726.4
    
    
    $
    53.2
    
    
    $
    673.2Long-term debt
    
    
    150.0
    
    
    
    824.7
    
    
    
    (674.7
    )Total debt
    
    $
    876.4
    
    
    $
    877.9
    
    
    $
    (1.5
    )Debt to capital ratio
    
    
    28.2
    %
    
    
    29.4
    %
    
    
    maintenance of a minimum net worth of at least $1.56 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.
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Long-term Obligations
  Recent accounting pronouncements
     - 37 -




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




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ITEM 4. CONTROLS AND PROCEDURES
    - 39 -




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Legal
Matters
 
 ITEM 1A. RISK FACTORS
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 may,
will, expect, believe, anticipate, intend, could, would, estimate, continue, or
pursue,
  Risks Related to Our Business
  Risks Associated With Investing In the Business of Watson
 Our operating results and financial condition may fluctuate.
  - 40 -




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
    
    development of new competitive products or generics by others;
    
    the timing and receipt of  approvals by U.S. Food and Drug
Administration (FDA) and other regulatory authorities;
    
    the failure to obtain, delay in obtaining or restrictions or
limitation on approvals from the FDA or other foreign regulatory
authorities;
    
    difficulties or delays in resolving FDA-observed deficiencies at our manufacturing
facilities, which could delay our ability to obtain approvals of pending FDA product
applications;
    
    delays or failures in clinical trials that affect our ability
to achieve FDA approvals or approvals from other foreign regulatory
authorities;
    
    serious or unexpected health or safety concerns with our
products or product candidates;
    
    changes in the amount we spend to develop, acquire or license new products, technologies
or businesses;
    
    changes in the amount we spend to promote our products;
    
    delays between our expenditures to acquire new products, technologies or businesses and
the generation of revenues from those acquired products, technologies or businesses;
    
    changes in treatment practices of physicians that currently prescribe our products;
    
    changes in coverage and reimbursement policies of health plans and other  health insurers,
including changes that affect newly developed or newly acquired products;
    
    changes in laws and regulations concerning coverage and reimbursement of pharmaceutical products,
including changes to Medicare, Medicaid, and other healthcare similar state programs;
    
    increases in the cost of raw materials used to manufacture our products;
    
    manufacturing and supply interruptions, including failure to comply with manufacturing
specifications;
    
    the effect of economic changes in hurricane and other natural disaster-affected areas;
    
    the impact of third party patents and other intellectual property rights which we may be
found to infringe, or may be required to license, and the potential damages or other costs
we may be required to pay as a result of a finding that we infringe such intellectual
property rights or a decision that we are required to obtain a license to such intellectual
property rights;
    
    the mix of products that we sell during any time period;
    
    lower than expected demand for our products;
    
    our responses to price competition;
    
    our ability to successfully integrate and commercialize the products, technologies and
businesses we acquire or license, as applicable;
    
    expenditures as a result of legal actions;
    
    market acceptance of our products;
    
    the impairment and write-down of goodwill or other intangible assets;
    
    disposition of our primary products, technologies and other rights;
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
    
    termination or expiration of, or the outcome of disputes relating to, trademarks,
patents, license agreements and other rights;
    
    changes in insurance rates for existing products and the cost of insurance for new
products;
    
    general economic and industry conditions, including changes in interest rates affecting
returns on cash balances and investments that affect customer demand;
    
    our level of R&D activities;
    
    impairment or write-down of investments;
    
    costs and outcomes of any tax audits or any litigation involving intellectual property,
customers or other issues; and
    
    timing of revenue recognition related to licensing agreements and/or strategic
collaborations.
  If we are unable to successfully develop or commercialize new products, our operating results will
suffer.
  
    
    developing, testing and manufacturing products in compliance with regulatory standards
in a timely manner;
    
    failure to receive requisite regulatory approvals for such
products in a timely manner or at all;
    
    the availability, on commercially reasonable terms, of raw materials, including API and
other key ingredients;
    
    developing and commercializing a new product is time consuming, costly and subject to
numerous factors, including legal actions brought by our competitors, that may delay or
prevent the development and commercialization of new products;
    
    experiencing delays or unanticipated costs; and
    
    commercializing generic products may be substantially delayed by the listing with the
FDA of patents that have the effect of potentially delaying approval of the off-patent
product by up to 30 months.
  - 42 -




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Our brand pharmaceutical expenditures may not result in commercially successful products.
 ®
 Loss of revenues from Ferrlecit ® , a significant product, could have a material adverse
effect on our results of operations, financial condition and cash flows.
 ® ® ® ® ® ® ® ®
 ® ® ® ®
 ® ®
 ®
 ® ®
 - 43 -




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® ® ® ®
 Any acquisitions of technologies, products and businesses, may be difficult to integrate, could
adversely affect our relationships with key customers, and/or could result in significant charges
to earnings.
   If we are unsuccessful in our joint ventures and other collaborations, our operating results could
suffer.
  - 44 -




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If we are unable to adequately protect our technology or enforce our patents, our business could
suffer.
 ,
   If pharmaceutical companies are successful in limiting the use of generics through their
legislative, regulatory and other efforts, our sales of generic products may suffer.
  
    
    pursuing new patents for existing products which may be granted just before the
expiration of one patent, which could extend patent protection for additional years or
otherwise delay the launch of generics;
 
    
    selling the brand product as an Authorized Generic, either by the brand company
directly, through an affiliate or by a marketing partner;
 
    
    using the Citizen Petition process to request amendments to FDA standards;
 
    
    seeking changes to U.S. Pharmacopeia, an organization which publishes industry
recognized compendia of drug standards;
 
    
    attaching patent extension amendments to non-related federal legislation;
 
    
    engaging in state-by-state initiatives to enact legislation that restricts the
substitution of some generic drugs, which could have an impact on products that we are
developing; and
 
    
    seeking patents on methods of manufacturing certain API.
  - 45 -




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If competitors are successful in limiting competition for certain generic products through their
legislative, regulatory and litigation efforts, our sales of certain generic products may suffer.
  From time to time we may need to rely on licenses to proprietary technologies, which may be
difficult or expensive to obtain.
  Third parties may claim that we infringe their proprietary rights and may prevent us from
manufacturing and selling some of our products.
  - 46 -




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Our distribution operations are highly dependent upon a primary courier service.
  Our distribution operations concentrate on generic products and therefore are subject to the risks
of the generic industry.
  If we are unable to obtain sufficient supplies from key manufacturing sites or suppliers that in
some cases may be the only source of finished products or raw materials, our ability to deliver
our products to the market may be impeded.
 ® ®
  - 47 -




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Our policies regarding returns, allowances and chargebacks, and marketing programs adopted by
wholesalers, may reduce our revenues in future fiscal periods.
  Investigations of the calculation of average wholesale prices may adversely affect our business.
 Legal Matters
 The design, development, manufacture and sale of our products involves the risk of product
liability claims by consumers and other third parties, and insurance against such potential claims
is expensive and may be difficult to obtain.
  - 48 -




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The loss of our key personnel could cause our business to suffer.
  Rising insurance costs could negatively impact profitability.
  Significant balances of intangible assets, including product rights and goodwill acquired, are
subject to impairment testing and may result in impairment charges, which will adversely affect
our results of operations and financial condition.
     - 49 -




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We may need to raise additional funds in the future which may not be available on acceptable terms
or at all.
  Our business could suffer as a result of manufacturing difficulties or delays.
   Our business will continue to expose us to risks of environmental liabilities.
  - 50 -




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Global Economic Conditions Could Harm Us.
   Risks Relating To Investing In the Pharmaceutical Industry
 Extensive industry regulation has had, and will continue to have, a significant impact on our
business, especially our product development, manufacturing and distribution capabilities.
   - 51 -




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- 52 -




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Federal regulation of arrangements between manufacturers of brand and generic products could
adversely affect our business.
 ® ® ®
 We are subject to federal and state healthcare fraud and abuse laws which may adversely affect our business.
  Healthcare reform and a reduction in the coverage and reimbursement levels by governmental authorities, HMOs,
MCOs or other third-party payers may adversely affect our business.
   The pharmaceutical industry is highly competitive.
  - 53 -




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- 54 -




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Risks Relating To Our Acquisition of Arrow Group
 If we do not successfully integrate Arrow Group into our business operations, our business will be
adversely affected.
  
    
    distracting management from day-to-day operations;
    
    potential incompatibility of corporate cultures;
    
    an inability to achieve synergies as planned;
    
    costs and delays in implementing common systems and procedures; and
    
    increased difficulties in managing our business due to the addition of international
locations.
  The Arrow Acquisition may not close as anticipated.
  Upon
the consummation of the Arrow Acquisition, we will be subject to a variety of additional risks that
may negatively impact our operations.
  
    
    tariffs and trade barriers;
 
    
    regulations related to customs and import/export matters;
 
    
    longer payment cycles;
    
    tax issues, such as tax law changes and variations in tax laws as compared to the United
States;
    
    challenges in collecting accounts receivable;
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
    
    cultural and language differences;
 
    
    employment regulations; and
 
    
    crimes, strikes, riots, civil disturbances, terrorist attacks and wars.
  Arrow Groups operations may become less attractive if political and diplomatic relations between
the United States and any country where Arrow Group conducts business operations deteriorates.
  Arrow Groups global operations will expose us to additional risks and challenges associated with
conducting business internationally.
  Upon
the close of the Arrow Acquisition  we may have exposure to additional tax liabilities.
  - 56 -




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Foreign currency fluctuations could adversely affect our business and financial results.
  
 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
  Average
    
    Total Number of
    
    Approximate DollarTotal Number
    
    Price
    
    Shares Purchased as
    
    Value of Shares thatof Shares
    
    Paid per
    
    Part of Publicaly
    
    May Yet Be PurchasedPeriod
    
    Purchased
    
    Share
    
    Announced Program
    
    Under the ProgramApril 1 - 30, 2009
    
    
    
    
    $
    
    
    
    
    
    
    May 1 - 31, 2009
    
    
    
    
    $
    
    
    
    
    
    
    June 1 - 30, 2009
    
    
    1,977
    
    $
    33.87
    
    
    
    
    
    
 - 57 -




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ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Proposal 1.
    
    To elect three persons as Class II directors to a three-year term and until their
successors are duly elected and qualified.
 Jack
    
    Ronald R.
    
    Andrew L.Michelson
    
    Taylor
    
    TurnerVotes For
    
    
    88,734,397
    
    
    
    87,771,613
    
    
    
    88,503,714Votes to Withhold Authority
    
    
    1,043,331
    
    
    
    2,006,115
    
    
    
    1,274,014
  ExpirationClass III
    
    of TermPaul M. Bisaro
    
    
    2010Michel J. Feldman
    
    
    2010Fred G. Weiss
    
    
    2010
 Class IMichael J. Fedida
    
    
    2011Albert F. Hummel
    
    
    2011Catherine M. Klema
    
    
    2011
 Proposal 2.
    
    To ratify of the appointment of PricewaterhouseCoopers LLP as the Companys independent auditor for the year ending
December 31, 2009:
 For  Against  Abstained
 
 ITEM 6.
    
    EXHIBITS
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SIGNATURES
  WATSON PHARMACEUTICALS, INC.
(Registrant)By:
    /s/ R. Todd JoyceR. Todd JoyceVice President  Corporate Controller and Treasurer
(Principal Accounting Officer and Acting Principal Financial Officer)  - 59 -




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WATSON PHARMACEUTICALS, INC.
 EXHIBIT INDEX TO FORM 10-Q
For the Quarterly Period Ended June 30, 2009
 ExhibitNo.
    
    Description10.1
    
    Amendment No. 1, dated
July 1, 2009, to the Credit Agreement dated November 3, 2006, by
and among Watson Pharmaceuticals, Inc., Canadian Imperial Bank of
Commerce, acting through its New York agency, as administrative
agent, Wachovia Capital Markets, LLC, as syndication agent, a
syndicate of lenders, and Wells Fargo Bank, National Association,
Union Bank of California, N.A., Sumitomo Mitsui Banking
Corporation, as documentation agents and the financial
institutions from time to time party thereto.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 Acting Principal 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 Acting Principal Financial Officer pursuant to
Rule 13a-14(d) of the Securities Exchange Act of 1934.
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