UNIVERSITY OF OREGON
INVESTMENT GROUP
November 5, 2010
Healthcare Sector
Watson Pharmaceuticals Inc.
RECOMMENDATION: BUY
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
Valuation (per share)
DCF Analysis
Comparables Analysis
Target Price
Current Price
34.10 – 47.53
WPI / NYSE
.75
124 (M)
1,330,050
5,763 (B)
46.59
N/A
N/A
57.13
50.66
53.90
46.65 (10-29-2010)
Summary Financials
2009A
Revenue
Net Income
EBIT
2,793 (M)
222 (M)
383.9 (M)
BUSINESS OVERVIEW
Watson Pharmaceuticals, Inc. was founded in 1984 and has been the forefront of innovation and leadership. The
goal of Allen Chao and David Hsia when they founded the company was to build a new kind of pharmaceutical
company, combining the best of innovative science with creative business acumen. Their principal executive offices
are located in Corona, California where they carry on most of their operations.
Covering Analyst: Joel Minugh
Email: minugh@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG’s portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
Watson Pharmaceuticals Inc.
University of Oregon investment group
http://uoig.uoregon.edu
Watson engages in the development, manufacturing, sale, along with the distribution of generic and brand
pharmaceuticals products. Watson’s pharmaceutical products in the U.S are generally marketed as either generic or
brand pharmaceuticals. Generic pharmaceutical products offer a cost-efficient alternative to brand products which can
often be very expensive. Through their distribution segment, they distribute pharmaceutical products, which have
been commercialized by either Watson or other companies, to independent and chain pharmacies and physicians.
Their Global Generics mainly operates in the U.K. and Western Europe. In these segments there is often limited
generic substitution by pharmacist and because of this products are often promoted by the pharmacies. In the fiscal
year of 2009 their revenues were broken down into four segments Generic, Brand, Distribution, and Other with the
following percentages respectively: 59%, 14%, 24%, and 3%.
An important event to recognize was their recent acquisition of Arrow on December 2nd, 2009. This consisted of
Robin Hood Holdings Limited, a Malta private limited liability company, and Cobalt Laboratories. Arrow group was
founded in 2000 and has been one of the fastest growing pharmaceutical companies in the world. Over the past 7
years they have invested more than 320 mil in research and development and seen revenues growing from, 18 mil in
2001, to 647 mil in 2008. Along with the acquisition they also gained a 36% ownership interest in Eden Biopharm
Group, a company involved in manufacturing early-stage biotech companies.
BUSINESS AND GROWTH STRATEGIES
Watson has three key strategies to grow their three segments, internal development of differentiated and high
demand products, establishment of strategic alliance, and collaborations and acquisition of products and companies
that complement their existing portfolio. With their new acquisition of Arrow, they now have commercial operations
in locations that were untouched before. This will allow for rapid growth in emerging markets around the world. With
their global presence they will be able to diversify their revenues and limit their risk through diversification.
In their Global Generic segment they plan on expanding their position in the U.S generics market and
strengthening their global position. The Arrow Acquisition is a good example of how they are going to imply this
strategy. With this new acquisition they now have established international markets. With these acquisitions of
companies that already have a positive image in a certain region, allows them to speed up the process of getting their
brands known. Watson will make intelligent acquisitions in order to gain market growth throughout the worldwide
segment. Along these lines with their core brand products they also may see a slight decline to generic products as
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patents run out, Watson plans to also distribute generic products of third party companies to complement their core
business. Also with continuous application for new patents along with patents of brand drugs coming to an end this
will allow Watson penetrate markets unseen before. In 2009 they expanded their generic products with the launch of 8
generic products.
In their Global Brand Segment which includes many pharmaceutical products in which the top 30 represent
60% of the total Global Brand segment revenues. With their brand segment they have to worry very little about
market penetration as the first to introduce a product is usually the single provider within the market. To grow in this
market they will continue to market their brand products in which they already have 350 sales professionals working.
In their Distribution segment which primarily distributes generic and selected brand pharmaceutical products
to independent pharmacies along with other chains. They plan to grow through three main components, competitive
pricing, responsive customer service, and well established telemarketing relationships with their customers. Their
responsive customer care will allow people to gain access to healthcare products via next day delivery to the entire
U.S.
Projected R&D Submissions
MANAGEMENT AND EMPLOYEE RELATIONS
Paul M. Bisaro at age 49 is the President and Chief Executive officer since
September 2007. Prior to joining Watson, Mr. Bisaro was President and Chief Operating
Officer of Barr Pharmaceuticals, Inc. His total annual compensation is $1,288,462, with
salary consisted of $1,038,462 and bonus being $250,000.
G. Frederick Wilkinson at age 53 is the Executive Vice President. Prior to joining
Watson, Wilkinson was the President and Chief Operation Officer of Duramed
Pharmaceuticals, Inc. Mr. Wilkinson has an extensive list of previous positions that makes
him a core part to the Watson family, and an important leader going forward.
Relations with employees are good; currently they have 6,000 members which
provide 350 generic products to emerging markets.
3
Watson Pharmaceuticals Inc.
University of Oregon investment group
http://uoig.uoregon.edu
RECENT NEWS

MORRISTOWN, N.J., Oct 27, 2010 /PRNewswire via COMTEX
Watson Pharmaceuticals, Inc. (NYSE: WPI) today confirmed that its subsidiary, Watson Laboratories, Inc.,
filed a new drug application under Section 505(b)(2) of the Federal Food and Drug Cosmetic Act (FFDCA)
with the U.S. Food and Drug Administration (FDA) seeking approval to market rosuvastatin zinc 5, 10, 20
and 40 mg tablets. Watson's rosuvastatin zinc tablets are a new salt version of AstraZeneca's Crestor (R)
tablets. Crestor(R) is indicated, as an adjunct to diet, to lower LDL cholesterol, raise HDL cholesterol, and
slow the progression of atherosclerosis.

MORRISTOWN, N.J., Aug 05, 2010 /PRNewswire via COMTEX
Watson Pharmaceuticals, Inc. (NYSE: WPI) today reported net revenue grew 29 percent for the second
quarter ended June 30, 2010 to $875.3 million, compared to $677.8 million in the second quarter 2009. On an
adjusted cash basis, net income increased 22 percent to $102.8 million or $0.83 per share, compared to $84.2
million or $0.73 per share in the second quarter 2009. GAAP earnings for the second quarter 2010 were $0.57
per share, compared to $0.46 per share in the prior year period.
Adjusted EBITDA increased 26 percent to $207.4 million for the second quarter 2010, versus $164.1 million
for the second quarter 2009. Cash and marketable securities were $236.1 million as of June 30, 2010. Please
refer to the attached reconciliation tables for adjustments to GAAP earnings.

MORRISTOWN, N.J., March 4, 2010 /PRNewswire via COMTEX/ -- Watson Pharmaceuticals, Inc.
(NYSE: WPI) today announced an agreement to expand their Women's Health brand product portfolio with
the acquisition of the exclusive U.S. rights to Columbia Laboratories, Inc.'s bioadhesive progesterone gel
products currently marketed under the trade names CRINONE(R) and PROCHIEVE(R) for the indications
of infertility and secondary amenorrhea. The two companies will collaborate in the ongoing Phase 3
development program toward a new indication for these products for the prevention of preterm birth in
women with a short cervix, as well as a global development program for second-generation products for this
indication and infertility. Watson will also acquire 11.2 million shares of Columbia common stock.
INDUSTRY
Growth
The 45.84 billion Generic Pharmaceutical and Medicine
Manufacturing industry continues to outpace growth in
the Brand Name Pharmaceutical and Medicine
manufacturing industry. During the next 5 years the
average annual rate is expected to grow at 6.1% and
revenue growth is expected to grow at 7.5%. Growth
overseas is rising, and with new emerging markets
popping up we can expect the use of generic drugs to
increase as new regions gain access to cheaper drugs.
4
Watson Pharmaceuticals Inc.
University of Oregon investment group
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Federal Funding / Legislative Compliance Requirements
Medicare is a program that provides free or subsidized
medical and health-related services. Medicare covers
almost everyone 65 or older as well as people on Social
Security disability. The Congressional Budget Office
projects that the funding for Medicare and Medicaid will
rise 5.37% per year to surpass a trillion dollars by 2015.
From the most recent census projections we can expect
that the Medicare program is supposed to grow from 40.1
million to 46.6 million in 2015. As of right now more than
90% of seniors and 58% of nonelderly adults rely on a
prescription on a regular basis. From these numbers we can expect that more consumers would gain prescription drug
coverage and while the margins might be cut down from the new healthcare reform, the increase in demand for
prescription drugs will offset the negative change in margins.
New Opportunities
There are many new opportunities that are available to companies in the generic drug segment, one opportunity come
from penetrating emerging markets. Along with this are the new changes in biosimilars (generic versions of biologic
drugs which are drugs produced with a living organism) we can expect the generic drug market to enter into this
market. In emerging markets, such as Eastern Europe, Asia and Latin America where consumers pay out of pocket
leaves a great opportunity for generic drugs. Since they pay out of pocket they are constantly looking for high-quality
prescriptions with a low cost, which is something Watson will be able to provide for the future. Mylan a comparable
company has in Asia increased from less than .5% of total sales in 2006 to about 13.0% in 2010. As you can see there
is room for tremendous growth and with the recent acquisition of Arrow, Watson will be able to achieve this.
Including these new opportunities we can expect great things coming from the new patent cliff in 2010-2011. Lipitor
and Plavix are both expected to lose patent protection in 2011 as the Brand Name.
S.W.O.T. ANALYSIS
Strengths

With high cash positions, barriers of entry will become lower as Watson will be able to acquire smaller
companies allowing Watson to grow.

In 2011 and beyond, the generic wave will continue. Lipitor and Plavix are both expected to lose patent
protection.

An estimated of 142 billion in current sales will lose patent protection over the next five years.
5
Watson Pharmaceuticals Inc.
University of Oregon investment group
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
Profit margin as a percentage of revenue is expected to decrease only slightly to 14.7% in 2015, versus 14.9%
in 2011.

In early 2010, the Patient Protection and Affordable Care Act was signed. This healthcare reform is expected
to benefit generic pharmaceutical and medicine manufacturers for the most part.
Weaknesses

In the generic brands segment entry can be difficult as they have to wait for patents to expire, and then gain
approval of the FDA.

The increased costs associated with the legislation will be manageable for most firms without causing material
damage to their profits.
Opportunities

Opportunities exist to introduce off-patent or generic counterparts of the brand products.

Capitalization on emerging markets such as Central and Eastern Europe, Turkey, Japan and South Africa.

New changes within the structure of biosimilars.
Threats

The congress has proposed significant reforms to the U.S health care system. We are unaware how this will
affect the healthcare segment, and what affect it will have on their margins.

With the new healthcare reform we can expect more penetration within the segment, therefore decreasing are
margins.

Numbers of companies in the next five years to 2015 are expected to increase by 1,138 representing an
average annual growth rate of 1.4%.
PORTER’S 5 FORCES ANALYSIS
Supplier Power
In the generic market they are already competing in the pricing market, so the ability to change the prices along the
line can often be hard. The effects of increasing the cost of a generic drug would drastically change the amount of
drugs bought do to the fact that people looking for generic drugs are looking for a cheaper alternative to brand
names.
Barriers to Entry
6
Watson Pharmaceuticals Inc.
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There are many barriers of entry in this market as the top for players only account for 36.5% of the total sales. In this
market large size does not offer the same level of advantages to generic manufacture as brand names do. Generic
firms can be smaller because the cost of research and development is significantly lower. There are supposed to be
many more companies to enter the market within the next couple of year but the larger companies are going to be
able to acquisition smaller companies. Generic drugs do not have a defense of a patent so therefore the barriers to
entry are increasing. With the new entrants they must compete with more established and more sizeable companies.
Buyer Power
There is very little buyer power in the market because everything that goes into COGS must be inspected by the Food
and Drug Administration. To become one of these facilities can take quite some time so there are little suppliers to
the companies producing drugs.
Threat of Substitutes
The threats of substitutes are very little since the generic drugs are the substitutes. There is a problem with brand
name drug companies coming into the market. Such companies as Pfizer have started to take an interest in the
Generic Drug segment. With increased drug companies that have been around coming into the market will cause
margins to drop as it becomes more competitive.
Degree of Rivalry
Competition in the Generic Pharmaceutical & Medicine Manufacturing industry is growing at a fast rate. Competition
in the U.S market continues to increase as more companies are becoming increasingly aware of how fast the generic
market is growing. There are many drugs that plan to go off patent during the patent cliff, and we can expect more
companies to enter the market as well as already sustained companies to get more aggressive.
COMPARABLES ANALYSIS
I chose my companies based on their business segment, as companies within the pharmaceutical segment will
be facing the same risk and rewards going into the future. Other things I took into consideration consist of companies
that had a similar future growth, and how aggressive these companies are with their acquisitions. Along the same lines
I looked at companies with similar beta’s, global presence, and infrastructure. I found four companies that fit these
criteria: Mylan, Inc., Teva Pharmaceutical Industries, Forest Laboratories, Inc., and Abbott Laboratories.
7
Watson Pharmaceuticals Inc.
University of Oregon investment group
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Mylan, Inc. – MYL (30%)
“Mylan Inc. and its subsidiaries engage in the development, manufacture,
marketing, licensing, and distribution of generic and branded generic pharmaceuticals,
specialty pharmaceuticals, and active pharmaceutical ingredients (APIs) worldwide. It
operates in two segments, Generics and Specialty. The Generics segment offers
generic or branded generic pharmaceutical products in tablet, capsule, or transdermal
patch form, as well as APIs. This segment markets its products for the proprietary and
ethical pharmaceutical wholesalers and distributors, drug store chains, drug
manufacturers, institutions, and public and governmental agencies located primarily in
the United States and Canada, Europe, the Middle East, Africa, Australia, Japan, India,
and New Zealand." ~ Yahoo!/Finance
Similar to Watson, Mylan is expected to growing at a high percentage for the next three years. On FactSet in
the fiscal year of 2011 they are expected to be growing at a 13.5% rate for their EBITDA which is very comparable to
Watsons 12.2%. Along these lines they also have a very similar beta, and also have global presence. This will make
them a very good comparable company as they will have the same risk in the states as well as overseas. Another thing
to mention is they are heavily invested into generic drugs, and as I feel generics will be more prominent in the future
as we can expect them to face the same growth as well as struggles. Mylan’s extreme comparability to Watson made
me weight them at 30% due to their similar business strategies.
Teva Pharmaceutical Industries Limited – TEVA (30%)
“Teva Pharmaceutical Industries Limited engages in
the development, production, and sale of a range of generic
and branded pharmaceuticals, biogenerics, and active
pharmaceutical ingredients (APIs) worldwide. The company’s
principal products include Copaxone for multiple sclerosis;
and Azilect for Parkinson’s disease. Teva Pharmaceutical also
provides specialty pharmaceutical products, which include
respiratory products based on its proprietary delivery systems, including Easi-Breathe, an advanced breath-activated
inhaler; Spiromax/Airmax, a multidose dry powder inhaler; Steri-Nebs, the blow-fill-seal based nebulizers; and
Cyclohaler, a single dose dry powder device.” ~ Yahoo!/Finance
Teva is very comparable to Watson, its revenues come mainly from the U.S but it also has a lot of global
presence. It plans to expand through acquisitions and like Watson has had many acquisitions in last couple of years.
They are growing around the same percentage for their top line revenue as well as EBITDA. Also regarding beta, and
gross margin they are very similar. Along the lines they also have their hand in both the generic segment as well as the
brand segment. I chose to weight TEVA at 30% because like MYL they are very comparable companies in many
different ways.
Forrest Laboratories – FRX (20%)
“Forest Laboratories, Inc. develops, manufactures, and sells branded
and generic forms of ethical drug products. Its principal products
include Lexapro to treat depression; Namenda to treat Alzheimer's
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disease; Bystolic, beta-blocker to treat hypertension; and Savella for the treatment of fibromyalgia. The company also
provides Sudocrem, a topical preparation to treat diaper rash; Colomycin, an antibiotic to treat cystic fibrosis; Infacol,
which is used to treat infant colic; and Exorex, which is to treat eczema and psoriasis.” ~ Yahoo!/Finance
The reasoning for choosing Forrest Laboratories is the have a very similar beta, they have relatively close
margins, and they are going to be faced with the same business risk going into the future. They are also growing at the
same percentage that the generic drugs market is supposed to be growing. Forrest Laboratories has also made some
recent acquisitions, and also states in their most recent conference call they expect to grow through acquisitions. I
chose to weight FRX at 20% because while they are very similar to Watson I felt the two companies chosen above
had an edge on how comparable they were.
Abbott Laboratories – ABT (20%)
“Abbott Laboratories engages in the discovery,
development, manufacture, and sale of health
care products worldwide. It operates in four
segments: Pharmaceutical Products, Diagnostic
Products, Nutritional Products, and Vascular
Products. The Pharmaceutical Products
segment offers adult and pediatric
pharmaceuticals for rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, psoriasis, Crohn's disease,
dyslipidemia, HIV infection, hypothyroidism, advanced prostate cancer, endometriosis and central precocious
puberty, anemia, obesity, epilepsy and bipolar disorder, migraines, secondary hyperparathyroidism, gastroesophageal
reflux disease, duodenal and gastric ulcers, and erosive esophagitis, as well as provides anesthesia products and antiinfectives.” ~ Yahoo!/Finance
Abbot was a good choice for a comparable company because they sell products worldwide. This company
was a good choice because they to as well as Watson have a segment that is involved in the distribution of drugs. They
also offer next day delivery, as well as many other services for drugs. Another key part to this company is they plan to
invest more in R&D and this is similar to Watson as they want to grow their brand products while also keeping their
generics in line. I chose to weight abbot at 20% because they are very similar but had some differences in margins and
beta.
Valuation Multiples
EV/Revenue, EV/Gross Profit, EV/EBITDA, and EV/OCF were all used to find the implied price of Watson
Pharmaceuticals. Each was evenly waited as there were no significant differences in the metrics. EV/Gross Profit
gives an indication on how well the firms’ pure revenue performance compared to how the market is pricing.
EV/EBITDA was used to determine how the company is performing without taking into account the companies
expenses and depreciation. I used EV/Revenue to be a good measure of how the market is pricing a company based
off its revenue. Lastly I used EV/OCF takes into account the actual cash that flows into and out of the company.
Unlike EV/Net Revenue which can be affected by different accounting principles, EV/OCF is a better indicator of
the company’s financial health. I weighted all of these metrics the same as there was no reason to weight one more
than the other.
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DISCOUNTED CASH FLOW ANALYSIS
For the discounted cash flow analysis of Watson Pharmaceuticals Inc. I chose to use a percentage of revenue method.
I broke down their company into 4 segments, Generic, Brand, Distribution, and Other Revenue. For my revenue
projections I relied heavily on company guidance, and also IBISWorld report on the growing industry of the Generic
market. When calculating my discounted cash flow, I discounted the free cash flows to calculate the net present value
of the company, and used the diluted shares outstanding in order to find the implied price of the company. I used my
normal WACC in order to discount their free cash flows. When calculating my PV of Terminal Value and Terminal
Value I used a terminal WACC that uses the 30 year Treasury bond. This is a more accurate projection of what the
implied price will be due to the fact that the 10 year Treasury bond is so low.
Revenue
The revenue model was built through forecasting the growth of WPI’s four segments. I used a lot of company
guidance as well as information provided by IBISWorld in order to project future revenues. The company is growing
rapidly and also plans to make a substantial amount of acquisitions.
Cost of Goods Sold
The COGS margin for generics increased until the year through the mid-1990s, and since then, there has been a
gradual decline. During the past five years, generic companies have been able to reduce costs through consolidation
and sourcing raw materials from global suppliers.
Depreciation
Depreciation has historically been fairly constant as a percent of revenue, and was projected to only slightly increase
going forward as the company plans to invest more into plants and equipment.
Selling and Marketing Expenses
Were projected as percentage of revenue, but I do have it slightly increasing within the next couple of years as they are
expected to increase their marketing expenses as they have recently gone overseas. This will allow them to capitalize
on the generic market overseas as they gain more sustainability and recognition.
Taxes
The higher tax rate year ended for December 31, 2009 was primarily due to the impact of the non-recurring tax
benefits which occurred in 2008. The tax rate for the company is expected to lower within the next couple years due
to non-recurring tax benefits associated with the Arrow Acquisition. The six months ended in June 30th, 2010 was
31.5% and is expected to be at 32% for the fiscal year ending. This is expected to stay constant for a couple years then
tread back up to a more realistic historical average.
Working Capital
The company has given little indication that significant changes in its working capital will take place. Because of this I
projected current assets and current liabilities based off their historical percentages of revenue.
10
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Acquisitions
Companies in the healthcare sector gain a lot of growth through acquisitions. In the last couple of years Watson has
made multiple acquisitions and is going to continue to grow through acquisitions. I put their acquisitions as a
percentage of revenue and tried to tread it higher in order to properly project the acquisitions they might make in the
future.
Beta
I used many methods to determine if there was a correct beta, I ran a 5 year monthly, 2 year weekly, and 1 year
weekly. They all came out with betas around .5 (+/- .05), which I felt was not a great projection of what the beta is,
especially if my comparable companies all have higher betas. I chose to run a Vasicek beta test where I came out with
a beta of .74. I felt this was a more accurate representation of how volatile my company was to the sector.
RECOMMENDATION
Watson Pharmaceutical Inc. is a growing company and based on the implied price from my DCF analysis and my
comparable analysis I arrived at a final price of 53.90. This represents a current undervaluation of 16%. With the new
changes in the healthcare reform and the substantial amount of consumers or companies that will be going to generic
drugs as supplements for brand name drugs, we can expect a very promising future for Watson. Watson is an
exceptional company with a lot of growth potential, and with a driving management team that has been around for
years. We can also expect Watson to grow internationally and penetrate markets that have not been touched. I am
recommending a BUY for all portfolios due to the undervaluation given by my discounted cash flow and comparable
analysis.
Price
Comparables Implied Price
DCF Implied Price
Weighted Implied Price
Current Price
Undervalued
Weighting
50.66
50%
57.13
50%
53.90
100%
46.65
16%
11
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APPENDIX 1 – COMPARABLES ANALYSIS
The University of Oregon Investment Group
30.00%
($ in millions, except per share data)
Stock Characteristics
Current Price
50 Day Moving Avg.
200 Day Moving Avg.
Beta
Size
ST Debt
LT Debt
Cash and Cash Equiv.
Diluted Share Count
Market Cap
Enterprise Value
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense (MRQ)
Debt/Equity (MRQ)
Debt/EBITDA (LTM)
EBITDA/Interest Expense (LTM)
Operating Results
Revenue (FLM)
Gross Profit (FLM)
EBITDA (FLM)
Free Cash Flow (FLM)
EV/Revenue
EV/Gross Profit
EV/EBITDA
EV/Free Cash Flow
WPI
TEVA
30.00%
MYL
20.00%
20.00%
FRX
ABT
Weighted Average
Max
54.70
53.23
54.73
0.71
Min
20.32
18.24
19.08
0.50
Avg.
39.85
38.65
38.03
0.64
Median
42.19
41.57
39.15
0.68
46.65
44.11
42.94
0.74
54.70
53.23
54.73
0.67
20.32
18.24
19.08
0.71
33.05
31.11
28.41
0.69
51.32
52.02
49.88
0.5
39.38
38.07
37.80
0.65
8,182
12,612
4,854
1,552
79,638
89,544
610
301
6,389
8,225
2,487
6,366
2,877
772
36,588
42,564
883
6,426
3,022
618
30,163
36,244
85
1,159
225
124
5,771
6,789
8,182
7,640
4,854
921
50,379
61,347
151
5,212
610
314
6,389
11,142
1,723
301
9,948
8,225
1615
12612
4321
1551.8
79,638
89,544
2,822.90
6,378.00
2,848.00
741.18
34,947.52
41,300.42
57.05%
24.20%
29.03%
15.10%
55.60%
22.45%
29.25%
16.55%
44.00%
17.30%
23.80%
7.90%
53.00%
20.90%
28.60%
14.40%
40.70%
21.70%
24.70%
1.80%
76.30%
31.00%
32.90%
25.50%
58.20%
23.20%
29.90%
18.70%
267.05
0.28
1.35
13.95
274.25
0.16
1.13
13.69
34.2
20%
1.24
27.26
230
15%
1.17
28.43
318.5
82%
3.14
5.21
0.00
0%
0.00
0.00
519.7
16%
1.09
22.17
268.49
0.32
1.51
14.52
3,518.1
1,764.0
932.4
499.7
1.93 x
3.85 x
7.28 x
13.59 x
18,725.0
10,872.0
6,538.2
4052.2
3.28 x
5.64 x
9.38 x
15.14 x
6,045.9
2,873.8
1,659.0
877.7
1.84 x
3.88 x
6.72 x
12.69 x
4,539.4
3,481.2
1,544.8
1189.3
1.81 x
2.36 x
5.32 x
6.92 x
38,179
23,024
11,520
7,694
2.35 x
3.89 x
7.77 x
11.64 x
9,770.10
5,742.33
3,247.33
2,039.73
2.37 x
4.11 x
7.45 x
12.06 x
76.30% 40.70%
31.00% 20.90%
32.90% 24.70%
25.50% 1.80%
519.70
0.82
3.14
28.43
38,179
23,024
11,520
7,694
N/A
N/A
N/A
N/A
4,539
2,874
1,545
878
16,872
10,063
5,315
3,453
12,385
7,177
4,099
2,621
Metric
EV/Revenue
EV/Gross Profit
EV/EBITDA
EV/OCF
Implied Price
59.78
49.19
46.78
46.90
55%
24%
29%
14%
Weight
25.00%
25.00%
25.00%
25.00%
12
Price Target
Current Price
Under (Over) Valued
50.66
46.65
8.6%
Watson Pharmaceuticals Inc.
University of Oregon investment group
http://uoig.uoregon.edu
APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
The University of Oregon Investment Group
($ in millions, except per share data)
Total Company Revenue
% Y/Y Growth
Cost of Revenue
% Revenue
Gross Profit
Gross Margin
Selling and marketing expenses
% Revenue
General and administrative expeses
% Revenue
R&D
% Revenue
Amortization
% Revenue
Loss (gain) on asset sales and impairments
% Revenue
Total Operating Expenses
% Revenue
EBIT
% Revenue
Other (Expense) Income
% Revenue
Pre-tax Income
% Revenue
Less Taxes (Benefit)
Tax Rate
Net Income
Net Margin
Add Back Depreciation and Ammortization
% Revenue
Add Back Interest Expense*(1-Tax Rate)
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
Change in Net Working Capital
Capital Expenditures
% Revenue
Acquistions
% Revenue
Unlevered Free Cash Flow
Discounted Unlevered Free Cash Flows
2007
2496.70
26.2%
1504.80
60.3%
991.90
39.7%
215.40
8.6%
205.70
8.2%
144.80
5.8%
176.40
7.1%
6.10
0.2%
2241.00
89.8%
255.70
10.2%
-31.50
0%
224.20
9%
83.20
37%
141.00
6%
253.60
10%
19.81
414.41
17%
1173.78
47%
444.93
18%
728.85
29%
157.10
84.30
3%
0.00
0%
173.01
2008
2535.50
1.6%
1502.80
59.3%
1032.70
40.7%
232.90
9.2%
190.50
7.5%
170.10
6.7%
80.70
3.2%
0.30
0.0%
2177.30
85.9%
358.20
14.1%
0.10
0%
358.30
14%
119.90
33%
238.40
9%
170.70
7%
0.07
409.17
16%
1458.40
58%
482.00
19%
976.40
39%
247.55
108.70
4%
0.00
0%
52.92
0.5
2009
2010 Q12 A 2010Q34E
2793.00
1731.80
1866.20
10.2%
~
~
1596.80
1002.70
1002.62
57.2%
57.9%
53.7%
1196.20
729.10
863.58
42.8%
42.1%
46.3%
263.10
158.30
158.33
9.4%
9.1%
8.5%
257.10
150.30
152.26
9.2%
8.7%
8.2%
197.30
121.30
160.15
7.1%
7.0%
8.6%
92.60
82.10
76.21
3.3%
4.7%
4.1%
2.20
1.10
-1.10
0.1%
0.1%
-0.1%
2409.10
1515.80
1548.47
86.3%
87.5%
83.0%
383.90
216.00
237.83
13.7%
12.5%
12.7%
-21.30
-11.00
14.52
0%
0%
0%
362.60
205.00
252.35
13%
12%
14%
140.60
64.60
81.75
39%
32%
32%
222.00
140.40
170.60
8%
8%
9%
189.00
133.40
142.42
7%
8%
8%
13.04
7.53
-5.14
424.04
281.33
307.88
15%
16%
16%
1771.00
1757.10
2278.89
63%
101%
122%
1052.40
754.20
922.23
38%
44%
49%
718.60
1002.90
1356.66
26%
58%
-19%
-257.80
284.30
353.76
79.90
23.60
81.94
3%
1%
2%
968.20
0.00
123.13
35%
0%
4%
-366.26
-26.57
33.34
32.07
2010 AE
3518.10
26.0%
2005.32
57.0%
1512.78
43.0%
316.63
9.0%
302.56
8.6%
281.45
8.0%
158.31
4.5%
0.00
0.0%
3064.27
87.1%
453.83
12.9%
3.52
0%
457.35
13%
146.35
32%
311.00
9%
275.82
8%
2.39
589.21
17%
2278.89
65%
922.23
26%
1356.66
39%
353.76
105.54
3%
123.13
4%
6.77
1.5
2011 E
3946.23
12.2%
2249.35
57.0%
1696.88
43.0%
355.16
9.0%
343.32
8.7%
335.43
8.5%
157.85
4.0%
0.00
0.0%
3441.11
87.2%
505.12
12.8%
3.95
0%
509.06
13%
162.90
32%
346.16
9%
303.86
8%
2.68
652.71
17%
2525.59
64%
1018.13
26%
1507.46
38%
150.80
138.12
4%
147.98
4%
215.80
191.99
2.5
2012 E
4385.63
11.1%
2543.67
58.0%
1841.96
42.0%
399.09
9.1%
407.86
9.3%
377.16
8.6%
162.27
3.7%
0.00
0.0%
3890.05
88.7%
495.58
11.3%
4.39
0%
499.96
11%
159.99
32%
339.97
8%
337.69
8%
2.98
680.65
16%
2697.16
62%
1087.64
25%
1609.53
37%
102.07
153.50
4%
164.46
4%
260.62
214.47
3.5
2013 E
4884.07
11.4%
2808.34
57.5%
2075.73
42.5%
459.10
9.4%
439.57
9.0%
390.73
8.0%
170.94
3.5%
0.00
0.0%
4268.67
87.4%
615.39
12.6%
4.88
0%
620.28
13%
201.59
33%
418.69
9%
376.07
8%
3.30
798.06
16%
2954.86
61%
1162.41
24%
1792.45
37%
182.93
170.94
4%
183.15
4%
261.04
198.70
4.5
2014 E
5402.28
10.6%
3079.30
57.0%
2322.98
43.0%
497.01
9.2%
480.80
8.9%
378.16
7.0%
178.28
3.3%
0.00
0.0%
4613.55
85.4%
788.73
14.6%
5.40
0%
794.14
15%
262.06
33%
532.07
10%
415.98
8%
3.62
951.67
18%
3214.36
60%
1285.74
24%
1928.62
36%
136.16
189.08
4%
202.59
4%
423.84
298.42
5.5
2015 E
5919.62
9.6%
3344.58
56.5%
2575.03
43.5%
544.60
9.2%
520.93
8.8%
402.53
6.8%
195.35
3.3%
0.00
0.0%
5008.00
84.6%
911.62
15.4%
5.92
0%
917.54
16%
302.79
33%
614.75
10%
455.81
8%
3.97
1074.53
18%
3522.17
60%
1408.87
24%
2113.30
36%
184.69
207.19
4%
221.99
4%
460.67
300.03
6.5
2016 E
6374.27
7.7%
3601.47
56.5%
2772.81
43.5%
573.68
9.0%
548.19
8.6%
414.33
6.5%
210.35
3.3%
0.00
0.0%
5348.02
83.9%
1026.26
16.1%
6.37
0%
1032.63
16%
340.77
33%
691.86
11%
490.82
8%
4.27
1186.95
19%
3792.69
60%
1517.08
24%
2275.62
36%
162.31
223.10
4%
239.04
4%
562.51
338.87
7.5
2017 E
6817.19
6.9%
3851.71
56.5%
2965.48
43.5%
613.55
9.0%
572.64
8.4%
429.48
6.3%
224.97
3.3%
0.00
0.0%
5692.35
83.5%
1124.84
16.5%
6.82
0%
1131.65
17%
379.10
34%
752.55
11%
511.29
8%
4.53
1268.37
19%
3988.05
59%
1622.49
24%
2365.56
35%
89.95
245.42
4%
255.64
4%
677.36
377.46
8.5
2018 E
7230.18
6.1%
4085.05
56.5%
3145.13
43.5%
636.26
8.8%
614.57
8.5%
448.27
6.2%
238.60
3.3%
0.00
0.0%
6022.74
83.3%
1207.44
16.7%
7.23
0%
1214.67
17%
406.91
34%
807.76
11%
542.26
8%
4.81
1354.83
19%
4157.35
58%
1720.78
24%
2436.57
34%
71.01
260.29
4%
271.13
4%
752.40
387.83
9.5
2019 E
7663.47
6.0%
4329.86
56.5%
3333.61
43.5%
628.40
8.2%
636.07
8.3%
452.14
5.9%
252.89
3.3%
0.00
0.0%
6299.38
82.2%
1364.10
17.8%
7.66
0%
1371.76
18%
459.54
34%
912.22
12%
574.76
8%
5.10
1492.08
19%
4406.50
58%
1823.91
24%
2582.59
34%
146.02
275.89
4%
306.54
4%
763.64
364.10
13
Watson Pharmaceuticals Inc.
University of Oregon investment group
http://uoig.uoregon.edu
APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
Assumptions for Discounted Free Cash Flows Model
Tax Rate
33.50% Terminal Growth Rate
Risk-Free Rate
2.62% Terminal Value
Terminal Risk-Free Rate
3.91% PV of Terminal Value
Beta
0.74 Sum of PV Free Cash Flows
Market Risk Premium
7.00% Firm Value
% Equity
83.28% LT Debt
% Debt
16.72% Cash
Cost of Debt
5.56% Equity Value
CAPM
7.79% Diluted Share Count
Terminal CAPM
9.08% Implied Price
WACC
8.11% Current Price
Terminal WACC
9.18% Under (Over) Valued
3.00%
12721.4
5521.6
2703.9
8225.6
1158.5
224.8
7067.1
123.7
57.13
46.65
22.47%
APPENDIX 4 – BETA SENSITIVITY ANALYSIS
Beta
0.86
0.83
0.8
0.77
0.74
0.710
0.680
0.650
0.620
St. Deviation Implied Price Under (Over) Valued
2.00
49.99
6.91%
1.50
51.78
10.74%
1.00
53.66
14.76%
0.50
55.66
19.03%
0.00
53.90
15.27%
-0.50
60.00
28.31%
-1.00
62.37
33.38%
-1.50
64.89
38.77%
-2.00
67.57
44.50%
14
Watson Pharmaceuticals Inc.
University of Oregon investment group
http://uoig.uoregon.edu
APPENDIX 6 – WORKING CAPITAL MODEL
The University of Oregon Investment Group
($ in millions, except per share data)
Net Revenues
Current Assets
Cash and Cash Equivalents
% of Revenues
A/R
% of Revenues
Prepaid Expenses and Other Current Assets
% of Revenues
Deferred Tax Assets
% of Revenues
Inventories,net
% of Revenues
Marketable securities
% of Revenues
Total Current Assets
% of Revenues
Current Liabilities
A/P
% of Revenues
Income taxes payable
% of Revenues
Short-term debt and current portion of long-term debt
% of Revenues
Deferred tax liabilities
% of Revenues
Deferred Revenue
% of Revenues
Total Current Liabilities
% of Revenues
2007
2496.7
2008
2535.5
2009
2010 Q12A 2010Q34E
2793
1730.9
1866.2
204.6
8.2%
267.1
11%
86.1
3%
113.6
5%
490.6
20%
11.80
0.5%
1173.8
47%
507.6
20.0%
305.0
12%
48.5
2%
111.0
4%
473.1
19%
13.20
0.5%
1458.4
58%
201.4
7.2%
519.5
19%
213.3
8%
130.9
5%
692.3
25%
13.60
0.5%
1771.0
63%
398.154
15.9%
0.00
0.0%
6.42
0.3%
18.78
0.8%
21.75
0.9%
445.11
18%
381.328
15.0%
15.50
0.6%
53.20
2.1%
15.84
0.6%
16.10
0.6%
481.97
19%
615.2
22.0%
78.40
2.8%
307.60
11.0%
34.90
1.2%
16.30
0.6%
1052.40
38%
2011 E
3518.1
2012 E
3946.23
2013 E
4385.63
2014 E
4884.07
2015 E
5402.28
2016 E
5919.62
2017 E
6374.27
2018 E
6817.19
2019 E
7230.18
2020 E
7663.47
224.8
13.0%
502.1
29%
183.8
11%
135.8
8%
699.3
40%
11.30
0.7%
1757.1
102%
422.172
12%
484.6583
14%
281.448
8%
246.267
7.0%
844.34
24%
0.00
0%
2278.9
65%
513.0097
13%
552.472
14%
315.6983
8%
236.7737
6.0%
907.63
23%
0.00
0%
2525.6
64%
570.1319
13%
613.9882
14%
394.7067
9%
241.2097
5.5%
877.13
20%
0.00
0%
2697.2
62%
683.7692
14%
683.7692
14%
341.8846
7%
268.6236
5.5%
976.81
20%
0.00
0%
2954.9
61%
756.3198
14%
756.3198
14%
324.137
6%
297.1256
5.5%
1080.46
20%
0.00
0%
3214.4
60%
828.7463
14%
828.7463
14%
355.177
6%
325.5789
5.5%
1183.92
20%
0.00
0%
3522.2
60%
892.3985
14%
892.3985
14%
382.4565
6%
350.5851
5.5%
1274.85
20%
0.00
0%
3792.7
60%
886.2344
13%
954.4062
14%
409.0312
6%
374.9453
5.5%
1363.44
20%
0.00
0%
3988.1
59%
867.6219
12%
1012.226
14%
433.811
6%
397.66
5.5%
1446.04
20%
0.00
0%
4157.4
58%
919.6169
12%
1072.886
14%
459.8084
6%
421.4911
5.5%
1532.69
20%
0.00
0%
4406.5
58%
592.7
34.2%
20.90
1.2%
85.00
4.9%
35.6
2.1%
20.00
1.2%
754.20
44%
767.4345
22%
35.18
1%
91.47
3%
28.1448
1%
0.00
0.0%
922.23
26%
868.1702
22%
39.46
1%
78.92
2%
31.56983
1%
0.00
0.0%
1018.13
26%
964.8386
22%
43.86
1%
43.86
1%
35.08504
1%
0.00
0.0%
1087.64
25%
1074.494
22%
48.84
1%
0.00
0%
39.07252
1%
0.00
0.0%
1162.41
24%
1188.502
22%
54.02
1%
0.00
0%
43.21827
1%
0.00
0.0%
1285.74
24%
1302.316
22%
59.20
1%
0.00
0%
47.35693
1%
0.00
0.0%
1408.87
24%
1402.34
22%
63.74
1%
0.00
0%
50.9942
1%
0.00
0.0%
1517.08
24%
1499.781
22%
68.17
1%
0.00
0%
54.5375
1%
0.00
0.0%
1622.49
24%
1590.64
22%
72.30
1%
0.00
0%
57.84146
1%
0.00
0.0%
1720.78
24%
1685.964
22%
76.63
1%
0.00
0%
61.30779
1%
0.00
0.0%
1823.91
24%
15
Watson Pharmaceuticals Inc.
University of Oregon investment group
http://uoig.uoregon.edu
APPENDIX 6 – REVENUE MODEL
The University of Oregon Investment Group
Revenue Model
2007
2008
2009
1408.9
-6%
375.2
6%
566.1
510%
146.5
373%
2496.7
26.2%
1404
-0.35%
397
5.81%
606.2
7.08%
128.3
-12.42%
2535.5
1.55%
1641.8
16.94%
393.7
-0.83%
663.8
9.50%
93.7
-26.97%
2793
10.16%
2010Q12A 2010Q34E
2010 A+E
2012
2013
2014
2015
2016
2017
2018
2019
2020
2503.901 2829.40813 3197.23119 3580.89893 3956.89332 4273.44478
14.7%
13.0%
13.0%
12.0%
10.5%
8.0%
465.1548 497.715636 530.564868 565.051584 600.649834 636.688824
7.60%
7.00%
6.60%
6.50%
6.30%
6.00%
856.958 934.08422 1027.49264 1123.04946 1224.12391 1322.05382
9.0%
9.0%
10.0%
9.3%
9.0%
8.0%
120.2146 124.422111 128.776885 133.284076 137.949019 142.087489
3.1%
3.5%
3.5%
3.5%
3.5%
3.0%
3946.2284 4385.6301 4884.06558 5402.28405 5919.61608 6374.27492
12.17%
11.13%
11.37%
10.61%
9.58%
7.68%
4572.58592
7.0%
670.433332
5.30%
1427.81813
8.0%
146.350114
3.0%
6817.18749
6.95%
4860.65883
6.3%
705.295865
5.20%
1513.48721
6.0%
150.740617
3.0%
7230.18253
6.06%
5166.88034
6.3%
737.034179
4.50%
1604.29645
6.0%
155.262836
3.0%
7663.4738
5.99%
($ In millions, except per share data)
Generic Revenue
YoY % growth
Brand
YoY % growth
Distribution
YoY % growth
Other
YoY % growth
Total Revenue
% Growth
1094
~
1168
~
149.3
~
283
~
422.2
364
~
~
65.4
~
1730.9
51.2
~
1866.2
2183
32.96%
432.3
9.80%
786.2
18.44%
116.6
24.44%
3518.1
25.96%
16
Watson Pharmaceuticals Inc.
University of Oregon investment group
http://uoig.uoregon.edu
APPENDIX 7 – SOURCES










S&P Net Advantage
FactSet
Comparable Companies 10k’s
Yahoo! Finance
IBISWorld
Sec.gov
Healthcare.gov
Watson.com
Watson Pharmaceutical Inc. 10-k
Whitehouse.gov/healthreform
17