##### 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, 2010
 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, 2010
 PAGEPart I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2010 and
December 31, 2009
    
    
    1Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2010 and 2009
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2010 and 2009
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2




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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    169.2
    
    
    $
    201.4Marketable securities
    
    
    13.1
    
    
    
    13.6Accounts receivable, net
    
    
    543.8
    
    
    
    519.5Inventories, net
    
    
    710.7
    
    
    
    692.3Prepaid expenses and other current assets
    
    
    204.4
    
    
    
    213.3Deferred tax assets
    
    
    128.5
    
    
    
    130.9Total current assets
    
    
    1,769.7
    
    
    
    1,771.0Property and equipment, net
    
    
    678.1
    
    
    
    695.5Investments and other assets
    
    
    36.1
    
    
    
    114.5Deferred tax assets
    
    
    50.9
    
    
    
    41.2Product rights and other intangibles, net
    
    
    1,684.5
    
    
    
    1,721.9Goodwill
    
    
    1,670.9
    
    
    
    1,648.1Total assets
    
    $
    5,890.2
    
    
    $
    5,992.2LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    621.1
    
    
    $
    615.2Income taxes payable
    
    
    110.0
    
    
    
    78.4Short-term debt and current portion of long-term debt
    
    
    85.0
    
    
    
    307.6Deferred revenue
    
    
    24.9
    
    
    
    16.3Deferred tax liabilities
    
    
    39.5
    
    
    
    34.9Total current liabilities
    
    
    880.5
    
    
    
    1,052.4Long-term debt
    
    
    1,155.5
    
    
    
    1,150.2Deferred revenue
    
    
    28.1
    
    
    
    31.9Other long-term liabilities
    
    
    119.2
    
    
    
    118.7Other taxes payable
    
    
    71.4
    
    
    
    61.7Deferred tax liabilities
    
    
    542.1
    
    
    
    554.2Total liabilities
    
    
    2,796.8
    
    
    
    2,969.1Commitments and contingenciesStockholders equity:Common stock
    
    
    0.4
    
    
    
    0.4Additional paid-in capital
    
    
    1,707.2
    
    
    
    1,686.9Retained earnings
    
    
    1,709.9
    
    
    
    1,640.1Accumulated other comprehensive (loss) income
    
    
    (13.5
    )
    
    
    1.9Treasury stock, at cost
    
    
    (310.6
    )
    
    
    (306.2
    )Total stockholders equity
    
    
    3,093.4
    
    
    
    3,023.1Total liabilities and stockholders equity
    
    $
    5,890.2
    
    
    $
    5,992.2
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
 Three Months EndedMarch 31,2010
    
    
    2009Net revenues
    
    $
    856.5
    
    
    $
    667.4Operating expenses:Cost of sales (excludeds amortization, presented below)
    
    
    504.7
    
    
    
    388.7Research and development
    
    
    59.5
    
    
    
    42.3Selling and marketing
    
    
    77.6
    
    
    
    65.7General and administrative
    
    
    74.4
    
    
    
    68.9Amortization
    
    
    39.0
    
    
    
    21.8Loss (gain) on asset sales and impairments
    
    
    1.0
    
    
    
    (1.5
    )Total operating expenses
    
    
    756.2
    
    
    
    585.9Operating income
    
    
    100.3
    
    
    
    81.5Non-operating income (expense):Interest income
    
    
    0.4
    
    
    
    2.0Interest expense
    
    
    (20.3
    )
    
    
    (4.7
    )Other income
    
    
    26.1
    
    
    
    1.2Total other income (expense), net
    
    
    6.2
    
    
    
    (1.5
    )Income before income taxes and noncontrolling interest
    
    
    106.5
    
    
    
    80.0Provision for income taxes
    
    
    36.7
    
    
    
    30.9Income before noncontrolling interest
    
    
    69.8
    
    
    
    49.1Income (loss) attributable to noncontrolling interest
    
    
    
    
    
    
    Net income attributable to common shareholders
    
    $
    69.8
    
    
    $
    49.1Earnings per share:Basic
    
    $
    0.57
    
    
    $
    0.48Diluted
    
    $
    0.57
    
    
    $
    0.43Weighted average shares outstanding:Basic
    
    
    121.7
    
    
    
    103.1Diluted
    
    
    123.4
    
    
    
    118.2
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 Three Months EndedMarch 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    69.8
    
    
    $
    49.1Reconciliation to net cash provided by operating activities:Depreciation
    
    
    24.7
    
    
    
    23.2Amortization
    
    
    39.0
    
    
    
    21.8Deferred income tax (benefit) provision
    
    
    (14.8
    )
    
    
    5.7Provision for inventory reserve
    
    
    11.9
    
    
    
    12.3Restricted stock and stock option compensation
    
    
    4.9
    
    
    
    4.5Earnings on equity method investments
    
    
    (2.5
    )
    
    
    (2.2
    )(Gain) loss on securities
    
    
    (23.4
    )
    
    
    1.1Gain on asset sales
    
    
    0.1
    
    
    
    (1.5
    )Accretion of discount on preferred stock
    
    
    6.6
    
    
    
    Other
    
    
    (0.6
    )
    
    
    (0.1
    )Changes in assets and liabilities:Accounts receivable, net
    
    
    (32.3
    )
    
    
    (48.6
    )Inventories
    
    
    (44.1
    )
    
    
    (15.3
    )Prepaid expenses and other current assets
    
    
    4.8
    
    
    
    (0.8
    )Accounts payable and accrued expenses
    
    
    11.7
    
    
    
    1.5Deferred revenue
    
    
    4.8
    
    
    
    6.8Income and other taxes payable
    
    
    46.5
    
    
    
    10.8Other assets
    
    
    5.2
    
    
    
    1.2Total adjustments
    
    
    42.5
    
    
    
    20.4Net cash provided by operating activities
    
    
    112.3
    
    
    
    69.5CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (7.3
    )
    
    
    (15.3
    )Acquisition of product rights
    
    
    (0.6
    )
    
    
    (7.8
    )Acquisition of business, net of cash acquired
    
    
    (16.8
    )
    
    
    Proceeds from sale of fixed assets
    
    
    
    
    
    
    3.0Proceeds from sale of cost/equity investments
    
    
    94.1
    
    
    
    Proceeds from sale of marketable securities
    
    
    3.8
    
    
    
    2.2Additions to marketable securities
    
    
    (2.8
    )
    
    
    Other
    
    
    (2.0
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    68.4
    
    
    
    (17.9
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt and other long-term liabilities
    
    
    (3.4
    )
    
    
    (1.6
    )Principal payments on term loan, revolving loan and Lombard loan
    
    
    (220.0
    )
    
    
    Repurchase of common stock
    
    
    (4.4
    )
    
    
    (2.2
    )Proceeds from stock plans
    
    
    14.9
    
    
    
    3.6Net cash used in financing activities
    
    
    (212.9
    )
    
    
    (0.2
    )Net (decrease) increase in cash and cash equivalents
    
    
    (32.2
    )
    
    
    51.4Cash and cash equivalents at beginning of period
    
    
    201.4
    
    
    
    507.6Cash and cash equivalents at end of period
    
    $
    169.2
    
    
    $
    559.0
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  GENERAL
   Comprehensive Income
  Three Months Ended March 31,2010
    
    
    2009Net income
    
    $
    69.8
    
    
    $
    49.1Other comprehensive loss:Translation losses
    
    
    (15.8
    )
    
    
    (1.3
    )Unrealized gains (losses) on securities, net of tax
    
    
    0.4
    
    
    
    (0.2
    )Reclassification
for losses included in net income,
net of tax
    
    
    
    
    
    
    1.4Total other comprehensive loss
    
    
    (15.4
    )
    
    
    (0.1
    )Total comprehensive income
    
    $
    54.4
    
    
    $
    49.0
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Preferred and Common Stock
  Revenue Recognition
  Revenue and Provision for Sales Returns and Allowances
   - 5 -




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Earnings Per Share (EPS)
  Three months endedMarch 31,2010
    
    
    2009EPS  basicNet income
    
    $
    69.8
    
    
    $
    49.1Basic weighted average common shares outstanding
    
    
    121.7
    
    
    
    103.1EPS  basic
    
    $
    0.57
    
    
    $
    0.48EPS  dilutedNet income
    
    $
    69.8
    
    
    $
    49.1Add: Interest expense on CODES, net of tax
    
    
    
    
    
    
    1.9Net income, adjusted
    
    $
    69.8
    
    
    $
    51.0Basic weighted average common shares outstanding
    
    
    121.7
    
    
    
    103.1Effect of dilutive securities:Conversion of CODES
    
    
    
    
    
    
    14.4Dilutive stock awards
    
    
    1.7
    
    
    
    0.7Diluted weighted average common shares outstanding
    
    
    123.4
    
    
    
    118.2EPS  diluted
    
    $
    0.57
    
    
    $
    0.43
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Share-Based Compensation
   Recent Accounting Pronouncements
    - 7 -




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NOTE 2  OTHER INCOME
  Three Months Ended March 31,2010
    
    
    2009Earnings on
equity method investments
    
    $
    2.5
    
    
    $
    2.2Gain (loss) on securities
    
    
    23.4
    
    
    
    (1.1
    )Other income
    
    
    0.2
    
    
    
    0.1$
    26.1
    
    
    $
    1.2
  NOTE 3  ACQUISITIONS AND DIVESTITURES
 Acquisition of Arrow Group
    Sale of Scinopharm Taiwan Ltd. (Scinopharm)
  NOTE 4  REPORTABLE SEGMENTS
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Three Months Ended March 31, 2010
    
    
    Three Months Ended March 31, 2009Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    534.1
    
    
    $
    72.4
    
    
    $
    221.4
    
    
    $
    827.9
    
    
    $
    395.2
    
    
    $
    98.2
    
    
    $
    153.7
    
    
    $
    647.1Other
    
    
    9.7
    
    
    
    18.9
    
    
    
    
    
    
    
    28.6
    
    
    
    6.5
    
    
    
    13.8
    
    
    
    
    
    
    
    20.3Net revenues
    
    
    543.8
    
    
    
    91.3
    
    
    
    221.4
    
    
    
    856.5
    
    
    
    401.7
    
    
    
    112.0
    
    
    
    153.7
    
    
    
    667.4Cost of sales(1)
    
    
    287.5
    
    
    
    24.7
    
    
    
    192.5
    
    
    
    504.7
    
    
    
    238.5
    
    
    
    24.2
    
    
    
    126.0
    
    
    
    388.7Gross profit(1)
    
    
    256.3
    
    
    
    66.6
    
    
    
    28.9
    
    
    
    351.8
    
    
    
    163.2
    
    
    
    87.8
    
    
    
    27.7
    
    
    
    278.7Gross margin(1)
    
    
    47.1
    %
    
    
    72.9
    %
    
    
    13.1
    %
    
    
    41.1
    %
    
    
    40.6
    %
    
    
    78.4
    %
    
    
    18.0
    %
    
    
    41.8
    %Research and
development
    
    
    42.2
    
    
    
    17.3
    
    
    
    
    
    
    
    59.5
    
    
    
    30.1
    
    
    
    12.2
    
    
    
    
    
    
    
    42.3Selling and
marketing
    
    
    26.9
    
    
    
    32.5
    
    
    
    18.2
    
    
    
    77.6
    
    
    
    12.7
    
    
    
    36.9
    
    
    
    16.1
    
    
    
    65.7Contribution
    
    $
    187.2
    
    
    $
    16.8
    
    
    $
    10.7
    
    
    
    214.7
    
    
    $
    120.4
    
    
    $
    38.7
    
    
    $
    11.6
    
    
    
    170.7Contibution margin
    
    
    34.4
    %
    
    
    18.4
    %
    
    
    4.8
    %
    
    
    25.1
    %
    
    
    30.0
    %
    
    
    34.6
    %
    
    
    7.5
    %
    
    
    25.6
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.9Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.8Gain on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    100.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    81.5Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.2
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. NOTE 5  INVENTORIES
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March 31,
    
    
    December 31,2010
    
    
    2009Inventories:Raw materials
    
    $
    175.4
    
    
    $
    194.5Work-in-process
    
    
    42.3
    
    
    
    44.1Finished goods
    
    
    493.0
    
    
    
    453.7Inventories, net
    
    $
    710.7
    
    
    $
    692.3
 NOTE 6  GOODWILL
  March 31,
    
    
    December 31,2010
    
    
    2009Global Brand segment
    
    $
    371.6
    
    
    $
    348.2Global Generic segment
    
    
    1,213.0
    
    
    
    1,213.6Distribution segment
    
    
    86.3
    
    
    
    86.3Total goodwill
    
    $
    1,670.9
    
    
    $
    1,648.1
  NOTE 7  DEBT
  March 31,
    
    
    December 31,2010
    
    
    2009Senior Notes,$450.0
million 5.000% notes due August 14, 2014 (the
2014 Notes)
    
    $
    450.0
    
    
    $
    450.0$400.0
million 6.125% notes due August 14, 2019 (the
2019 Notes) together the Senior Notes
    
    
    400.0
    
    
    
    400.0850.0
    
    
    
    850.0Less: Unamortized discount
    
    
    (2.4
    )
    
    
    (2.5
    )Senior Notes, net
    
    
    847.6
    
    
    
    847.5Senior Credit Facility with Canadian Imperial Bank of
Commerce, Wachovia Capital Markets, LLC and a syndicate of banks
(2006 Credit Facility), due 2011
    
    
    200.0
    
    
    
    400.0Mandatorily Redeemable Preferred Stock
    
    
    154.9
    
    
    
    151.2Loan with
Lombard Odier Darier Hentsch & Cie (Lombard Loan)
    
    
    35.0
    
    
    
    55.0Other notes payable
    
    
    3.0
    
    
    
    4.11,240.5
    
    
    
    1,457.8Less: Current portion
    
    
    85.0
    
    
    
    307.6Total long-term debt
    
    $
    1,155.5
    
    
    $
    1,150.2
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Senior Notes
   2006 Credit Facility
   Mandatorily Redeemable Preferred Stock
   Lombard Loan
  - 11 -




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Fair Value of Debt Instruments
  NOTE 8  BUSINESS RESTRUCTURING CHARGES
  Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Charged
    
    
    Cash
    
    
    Non-cash
    
    
    March 31,2009
    
    
    to Expense
    
    
    Payments
    
    
    Adjustments
    
    
    2010Cost of salesSeverance and retention
    
    $
    13.1
    
    
    $
    1.1
    
    
    $
    (2.0
    )
    
    $
    
    
    
    $
    12.2Product transfer costs
    
    
    1.0
    
    
    
    0.3
    
    
    
    (0.8
    )
    
    
    
    
    
    
    0.5Facility decommission costs
    
    
    0.2
    
    
    
    2.2
    
    
    
    (1.4
    )
    
    
    
    
    
    
    1.0Accelerated depreciation
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    (1.4
    )
    
    
    14.3
    
    
    
    5.0
    
    
    
    (4.2
    )
    
    
    (1.4
    )
    
    
    13.7Operating expensesResearch and development
    
    
    0.8
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    0.4Selling, general and administrative
    
    
    0.8
    
    
    
    0.2
    
    
    
    (0.4
    )
    
    
    
    
    
    
    0.61.6
    
    
    
    0.2
    
    
    
    (0.8
    )
    
    
    
    
    
    
    1.0Total restructuring charges
    
    $
    15.9
    
    
    $
    5.2
    
    
    $
    (5.0
    )
    
    $
    (1.4
    )
    
    $
    14.7
  NOTE 9  INCOME TAXES
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NOTE 10  STOCKHOLDERS EQUITY
  Stockholders equity, December 31, 2009
    
    $
    3,023.1Common stock issued under employee plans
    
    
    14.9Increase in additional paid-in capital for share-based compensation plans
    
    
    4.9Net income
    
    
    69.8Other comprehensive loss
    
    
    (15.4
    )Tax benefit from employee stock plans
    
    
    0.5Repurchase of common stock
    
    
    (4.4
    )Stockholders equity, March 31, 2010
    
    $
    3,093.4
 NOTE 11  FAIR VALUE MEASUREMENT
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Fair Value Measurements as at March 31, 2010 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Assets:Marketable securities
    
    $
    13.1
    
    
    $
    13.1
    
    
    $
    
    
    
    $
    Investments
    
    
    3.0
    
    
    
    3.0
    
    
    
    
    
    
    
    Liabilities:Contingent consideration
    
    
    113.9
    
    
    
    
    
    
    
    
    
    
    
    113.9
 Fair Value Measurements as at December 31, 2009 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Assets:Marketable securities
    
    $
    13.6
    
    
    $
    13.6
    
    
    $
    
    
    
    $
    Investments
    
    
    3.0
    
    
    
    3.0
    
    
    
    
    
    
    
    Liabilities:Contingent consideration
    
    
    111.0
    
    
    
    
    
    
    
    
    
    
    
    111.0
   NOTE 12  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 ProceedingNos. 4154 & 4220
 Governmental Reimbursement Investigations and Drug Pricing Litigation. qui tam qui tam qui tam
 - 15 -




---



##### Table of Contents



qui tam qui tam qui tam
 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
 - 16 -




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##### Table of Contents



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.,v. Actavis Mid-Atlantic LLC, 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.
  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
 - 17 -




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##### Table of Contents



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
 United States of America ex
rel. Constance A. Conrad v. Actavis Mid-Atlantic, LLC, f/k/a Biovail Pharmaceuticals, LLC, et.
al.,USDC Case No. 02-CV-11738-NG).
  FDA Matters. United States of America v. Watson Laboratories, Inc., and Allen
Y. Chao
  - 18 -




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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)
 - 19 -




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##### Table of Contents



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 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 In re:
AndroGel ® Antitrust Litigation (No. II), MDL Docket No. 2084 Meijer Inc., Rochester Drug Co-Operative, Inc., Louisiana Wholesale Drug Co. Inc., Rite Aid Corp.,
Walgreen Co., and Stephen L. LaFrance Pharm., Inc. ® Fraternal Order of Police Supervalu,
Inc. v. Unimed Pharms., LLC, et al, ®  Supervalu
 Jabos Pharmacy Inc. v.
Solvay Pharmaceuticals, Inc., et al ®
 - 20 -




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##### Table of Contents



Jabos
  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
 Medical West Ballas Pharmacy, LTD, et al. v. Anda, Inc.,
 - 21 -




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##### Table of Contents



NOTE 13  SUBSEQUENT EVENT
   
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview of Watson
  Merger Agreement with Arrow Group
  
    
    The payment of cash and the assumption of certain liabilities totaling
$1.05 billion;
 
    
    Approximately 16.9 million restricted shares of Common Stock of Watson (the Restricted
Common Stock);
 
    
    200,000 shares of newly designated mandatorily redeemable, non-voting Series A
Preferred Stock of Watson (the Mandatorily Redeemable Preferred
Stock) placed in an indemnity escrow account
for the benefit of the former shareholders of the Arrow Group (the Arrow Selling
Shareholders); and
 
    
    Certain contingent consideration based on the after-tax gross profits on sales of the
authorized generic version of
Lipitor®
(atorvastatin) in the U. S. calculated and payable as
described in the Acquisition Agreement.
 - 22 -




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##### Table of Contents



Segments
   Global Supply Chain Initiative
   - 23 -




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##### Table of Contents



Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
  Three Months Ended March 31, 2010
    
    
    Three Months Ended March 31, 2009Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    534.1
    
    
    $
    72.4
    
    
    $
    221.4
    
    
    $
    827.9
    
    
    $
    395.2
    
    
    $
    98.2
    
    
    $
    153.7
    
    
    $
    647.1Other
    
    
    9.7
    
    
    
    18.9
    
    
    
    
    
    
    
    28.6
    
    
    
    6.5
    
    
    
    13.8
    
    
    
    
    
    
    
    20.3Net revenues
    
    
    543.8
    
    
    
    91.3
    
    
    
    221.4
    
    
    
    856.5
    
    
    
    401.7
    
    
    
    112.0
    
    
    
    153.7
    
    
    
    667.4Operating expenses:Cost of sales(1)
    
    
    287.5
    
    
    
    24.7
    
    
    
    192.5
    
    
    
    504.7
    
    
    
    238.5
    
    
    
    24.2
    
    
    
    126.0
    
    
    
    388.7Research and
development
    
    
    42.2
    
    
    
    17.3
    
    
    
    
    
    
    
    59.5
    
    
    
    30.1
    
    
    
    12.2
    
    
    
    
    
    
    
    42.3Selling and
marketing
    
    
    26.9
    
    
    
    32.5
    
    
    
    18.2
    
    
    
    77.6
    
    
    
    12.7
    
    
    
    36.9
    
    
    
    16.1
    
    
    
    65.7Contribution
    
    $
    187.2
    
    
    $
    16.8
    
    
    $
    10.7
    
    
    $
    214.7
    
    
    $
    120.4
    
    
    $
    38.7
    
    
    $
    11.6
    
    
    $
    170.7Contibution margin
    
    
    34.4
    %
    
    
    18.4
    %
    
    
    4.8
    %
    
    
    25.1
    %
    
    
    30.0
    %
    
    
    34.6
    %
    
    
    7.5
    %
    
    
    25.6
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.9Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.8Loss (gain) on asset sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    100.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    81.5Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.2
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. Global Generic Segment
 Net Revenues
     - 24 -




---



##### Table of Contents



Cost of Sales
   Research and Development Expenses
   Selling and Marketing Expenses
    Global Brand Segment
 Net Revenues
 ® ® ®
  - 25 -




---



##### Table of Contents



® ® ® ® ®
 ® ®
 Cost of Sales
   Research Development Expenses
   Selling Marketing Expenses
  ®
 Distribution Segment
 Net Revenues
   - 26 -




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##### Table of Contents



Cost of Sales
   Selling and Marketing Expenses
   Corporate General and Administrative Expenses
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2010
    
    
    2009
    
    
    Dollars
    
    
    %Corporate general and administrative expenses
    
    $
    74.4
    
    
    $
    68.9
    
    
    $
    5.5
    
    
    
    8.0
    %as a % of net revenues
    
    
    8.7
    %
    
    
    10.3
    %
   - 27 -




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##### Table of Contents



Amortization
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2010
    
    
    2009
    
    
    Dollars
    
    
    %Amortization
    
    $
    39.0
    
    
    $
    21.8
    
    
    $
    17.2
    
    
    
    78.9
    %as a % of net revenues
    
    
    4.6
    %
    
    
    3.3
    %
  Loss (Gain) on Asset Sales
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2010
    
    
    2009
    
    
    Dollars
    
    
    %Loss (gain) on asset sales
    
    $
    1.0
    
    
    $
    (1.5
    )
    
    $
    2.5
    
    
    
    100.0
    %
  Interest Income
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2010
    
    
    2009
    
    
    Dollars
    
    
    %Interest income
    
    $
    0.4
    
    
    $
    2.0
    
    
    $
    (1.6
    )
    
    
    (80.0
    )%
  - 28 -




---



##### Table of Contents



Interest Expense
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2010
    
    
    2009
    
    
    Dollars
    
    
    %Interest expense  $850 million Senior
Notes due 2014 (the 2014 Notes) and
due 2019 (the 2019 Notes) together
the Senior Notes
    
    $
    12.1
    
    
    $
    
    
    
    $
    12.1Interest
expense  Senior Credit Facility with Canadian Imperial Bank of
Commerce, Wachovia Capital Markets, LLC and a syndicate of banks
(2006 Credit Facility), due 2011
    
    
    1.2
    
    
    
    1.5
    
    
    
    (0.3
    )Interest
expense  Manditorily Redeemable Preferred Stock
    
    
    3.7
    
    
    
    
    
    
    
    3.7Interest expense  Atorvastatin accretion
    
    
    2.9
    
    
    
    
    
    
    
    2.9Interest
expense  Convertible contingent senior debentures (CODES)
    
    
    
    
    
    
    3.2
    
    
    
    (3.2
    )Interest expense  other
    
    
    0.4
    
    
    
    
    
    
    
    0.4Interest expense
    
    $
    20.3
    
    
    $
    4.7
    
    
    $
    15.6
    
    
    
    326.8
    %
  Other Income
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2010
    
    
    2009
    
    
    Dollars
    
    
    %Earnings on equity method investments
    
    $
    2.5
    
    
    $
    2.2
    
    
    $
    0.3Gain (loss) on securities
    
    
    23.4
    
    
    
    (1.1
    )
    
    
    24.5Other income
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1$
    26.1
    
    
    $
    1.2
    
    
    $
    24.9
    
    
    
    2075.0
    %
 Earnings on Equity Method Investments
   Gain (Loss) on Securities
   - 29 -




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##### Table of Contents



Provision for Income Taxes
 Three Months Ended March 31,
    
    
    Change($ in millions):
    
    2010
    
    
    2009
    
    
    Dollars
    
    
    %Provision for income taxes
    
    $
    36.7
    
    
    $
    30.9
    
    
    $
    5.8
    
    
    
    18.8
    %Effective tax rate
    
    
    34.5
    %
    
    
    38.6
    %
   Liquidity and Capital Resources
 Working Capital Position
  March 31,
    
    
    December 31,
    
    
    Increase2010
    
    
    2009
    
    
    (Decrease)Current Assets:Cash and cash equivalents
    
    $
    169.2
    
    
    $
    201.4
    
    
    $
    (32.2
    )Marketable securities
    
    
    13.1
    
    
    
    13.6
    
    
    
    (0.5
    )Accounts receivable, net of allowances
    
    
    543.8
    
    
    
    519.5
    
    
    
    24.3Inventories, net
    
    
    710.7
    
    
    
    692.3
    
    
    
    18.4Prepaid expenses and other current assets
    
    
    204.4
    
    
    
    213.3
    
    
    
    (8.9
    )Deferred tax assets
    
    
    128.5
    
    
    
    130.9
    
    
    
    (2.4
    )Total current assets
    
    
    1,769.7
    
    
    
    1,771.0
    
    
    
    (1.3
    )Current liabilities:Accounts payable and accrued expenses
    
    
    621.1
    
    
    
    615.2
    
    
    
    5.9Short-term debt and current portion of long-term debt
    
    
    85.0
    
    
    
    307.6
    
    
    
    (222.6
    )Income taxes payable
    
    
    110.0
    
    
    
    78.4
    
    
    
    31.6Other
    
    
    64.4
    
    
    
    51.2
    
    
    
    13.2Total current liabilities
    
    
    880.5
    
    
    
    1,052.4
    
    
    
    (171.9
    )Working Capital
    
    $
    889.2
    
    
    $
    718.6
    
    
    $
    170.6Current Ratio
    
    
    2.01
    
    
    
    1.68
  - 30 -




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##### Table of Contents



Cash Flows from Operations
  Three months ended 
March 31,2010
    
    
    2009Net cash provided by operating
activities
    
    $
    112.3
    
    
    $
    69.5
   Investing Cash Flows
  Three months endedMarch 31,2010
    
    
    2009Net cash provided by (used in) investing
activities
    
    $
    68.4
    
    
    $
    (17.9
    )
  Financing Cash Flows
  Three months endedMarch 31,2010
    
    
    2009Net cash used in financing activities
    
    $
    212.9
    
    
    $
    0.2
  - 31 -




---



##### Table of Contents



Debt and Borrowing Capacity
  March 31,
    
    
    December 31,
    
    
    Increase2010
    
    
    2009
    
    
    (Decrease)Short-term debt and current portion of
long-term debt
    
    $
    85.0
    
    
    $
    307.6
    
    
    $
    (222.6
    )Long-term debt
    
    
    1,155.5
    
    
    
    1,150.2
    
    
    
    5.3Total debt
    
    $
    1,240.5
    
    
    $
    1,457.8
    
    
    $
    (217.3
    )Debt to capital ratio
    
    
    28.6
    %
    
    
    32.5
    %
     
    
    maintenance of a minimum net worth of at least $1.65 billion;
    
    maintenance of a maximum leverage ratio not greater than 2.5 to 1.0; and
    
    maintenance of a minimum interest coverage ratio of at least 5.0 to 1.0.
   - 32 -




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##### Table of Contents



Long-term Obligations
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
    - 33 -




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
   Investment Risk
   Interest Rate Risk
    Foreign Currency Exchange Risk
  - 34 -




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
    - 35 -




---



##### 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, 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    February 1 - 28, 2010
    
    
    6,391
    
    
    $
    39.66
    
    
    
    
    
    
    
    March 1 - 31, 2010
    
    
    100,166
    
    
    $
    41.17
    
    
    
    
    
    
    
    
 
 ITEM 6. EXHIBITS
   - 36 -




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##### Table of Contents



SIGNATURES
  WATSON PHARMACEUTICALS, INC.(Registrant)By:
    /s/ R. Todd JoyceR. Todd JoyceSenior Vice President  Chief Financial Officer  - 37 -




---



##### Table of Contents



WATSON PHARMACEUTICALS, INC.
EXHIBIT INDEX TO FORM 10-Q
For the Quarterly Period Ended March 31, 2010
 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 1934.10.1
    
    
    Consulting
agreement between Arrow No. 7 Ltd., and Anthony Selwyn
Tabatznik as of May 10, 2010.10.2
    
    
    Second Supplemental Indenture between the Company and Wells Fargo
Bank, N.A., as trustee, dated as of May 7, 2010.
 - 38 -