Watson Pharmaceuticals, Inc.
Company Valuation
Sixuan Chen
Advanced Corporate Finance
Prof. Satya Gabriel
April. 11, 2006
Presentation Overview
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Industry profile
Current situation: company profile
Forward looking: strategic plans
Business environment: customers and
competitors
Financial performance
Valuation (assumptions, merger analysis)
Industry Profile
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Global sales: $300 billion annually
U.S. - largest market share, followed by
Europe and Japan
Brand drugs: customer loyalty, exclusive
rights
Generic drugs: bioequivalents, costefficient
Company Profile
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Development, manufacture, marketing, sale
and distribution of brand and generic drugs
Fourth largest generic drugmaker by
market cap (after Teva, Barr and Mylan)
Key statistics:
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Total revenue in 2005: $1.6 billion
Total assets1: $3.1 billion
Market cap2 : $3.2 billion
Footnote: 1: as of 12/31/2005
2: as of 4/3/2006
Generic vs. Brand segment
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76% of total revenue
More than 125
generic products
47 ANDAs on file
Development in 2005:
six new launches
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24% of total revenue
More than 20 brand
products
Two sales groups:
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Specialty Products
Nephrology
Branded Product Pipeline
Branded
Product
Disease
Market
Alliance Status
SilodosinTM
Benign-Prostatic
Hyperplasia
Kissei
2nd Generation
Oxybutynin
Overactive
Bladder
Early Stage
Trelstar® line
extension
Urology
Early Stage
IntrinsaTM
Female Sexual
Dysfunction
P&G
Filed
EmSamTM
Depression
SomersetBMS
Approved
Late Stage
Strategic Alliances and
Collaborations
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Somerset Pharmaceuticals, 50-50 JV with
Mylan (agreement w/ BMS)
Feb. 2006, FDA approval for Emsam®
Generics development alliance with Cipla
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Citalopram (Q4, 2004)
R&D Capacity
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R&D expense in 2005: $125.3 million (7.6% of
revenue)
R&D facilities:
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Corona, California
Danbury, Connecticut
Copiague, New York
Salt Lake City, Utah
Malmo, Sweden
Changzhou, China
Strategic Plans
Generic:
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Development of generic
drugs that are difficult to
formulate
Market generic alternatives
to brand products
Distribute generic versions
of third-party brands
“Watson Lab”, “Watson
Pharma”, “Rugby”
Brand:
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2005 launches:
Trelstar® and Oxytrol®
Higher profit margin
Continue to expand through
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Internal product
development
Strategic alliances and
acquisitions
Business Environment
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High entry-barrier
Customers: drug wholesalers, retailers,
distributors
Consolidation in distribution network
Pricing pressure
Competitive Landscape
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Brand products:
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J&J, Novartis, Pfizer
No competitive advantage
Generic products
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Teva, Barr, Mylan, brand name companies in
the generic market
Key: timing of product’s regulatory approval
and launch
Financial Performance
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Revenue growth 5-year CAGR: 9.13%
In 2005, total revenue growth 0.34%
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Generics: -2.51%
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Brand: 4.37%
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Price declines on nicotine gum due to entry of a
competitor
Increase in R&D expenses
Specialty - Trelstar®
Nephrology - Ferrlecit®
Impairment charge: $25.1 million (2005)
Stock Performance
Source: Datastream, Yahoo!-Finance
1-year Stock
Performance
WPI vs. Industry
1-year Stock
Performance
WPI vs. S&P 500
Source: Datastream, Yahoo!-Finance
Valuation – DCF
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Key assumptions:
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Operations:
Organic revenue growth
 Gross/operating margin
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CapEx, Depreciation
Working capital
Valuation – DCF (cont’d)
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CAPM model:
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Risk free rate: 4.86%
Market risk premium: 6.00%
Beta: 1.55
Default spread: 2.00% (Bond rating: BBB-)
Debt ratio: 15.47%
Tax rate: 37%
WACC = 12.65%
Valuation – DCF Result
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5-year top-line growth: 6%
Continued growth: 5%
Price per share: $30.45
Current share price1: $29.01
Consensus estimates:
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Valueline 3-5 year price range: $45-$65
Thompson 12-month target price: $32
1: Share price as of April 3, 2006
Valuation – DCF Sensitivity
Analysis
Continued growth rate
5-year top-line
growth
Management
9.25%
prediction
Valueline
6.00%
estimate
Worst-case
4.00%
estimate
6%
5%
4%
$34.91
$31.16
$28.27
$34.02
$30.45
$27.70
$33.37
$29.91
$27.26
Valuation – DCF Sensitivity
Analysis (cont’d)
Continued growth rate
WACC
6%
5%
4%
10%
$59.12
$48.62
$41.61
11%
$46.97
$40.21
$35.39
12%
$38.88
$34.22
$30.73
Valuation – Comps
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Brand: Pfizer, J&J, Glaxosmithkline,
Novartis, Bayer
Generic: Teva, Barr, Mylan, King,
Alpharma, Par
Forward P/E1: $27.21
Forward Price/Sales1: $44.14
1: For both P/E and Price/Sales used Generic Median;
Sales and EPS estimates from Thompson One
Potential Merger Analysis
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WPI agreed to acquire Andrx for $1.9
billion in cash ($25 per share, 32%
premium)
Andrx – Drug delivery
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Total revenue in 2005: $1 billion
Total assets: $1.2 billion
Total market cap: $1.7 billion
Current P/E: 27.9x
Drug distribution (65%), manufacture (35%)
Potential Merger Analysis (cont’d)
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Merger positives
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Third-largest generic drug maker, 60 generic
drugs in pipeline
Synergies in SG&A
Distribution network
Merger negatives
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Potential opposition
Creditwatch by S&P
Andrx production halted by FDA
SUMMARY
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DCF valuation range: $27-35
Potential upside
Merger impact
Industry prospect: aging population
Recommendation: cautious buy at low
THANK YOU!
Questions?