Fitch IBCA Affirms Watson's 'BBB-' Rated $150M Senior Notes.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 2, 2000

Watson Pharmaceuticals, Inc.'s (Watson) 'BBB-' rated $150 million 7.125% senior notes due 2008 are affirmed by Fitch IBCA.

The affirmation reflects Watson's strong product portfolio, solid financial performance, and favorable industry trends. The rating also considers the company's appetite for acquisitions and pending legal and regulatory issues.

Watson's has a strong portfolio of both branded and generic pharmaceutical products. The company's generic operation, which accounted for 48% of 1999 sales, benefits from its focus on products that are difficult to manufacture while its branded business is centered on specific therapeutic areas including women's health, dermatology, and general products. Over the past few years, Watson has grown its branded line through a series of acquisitions of products and businesses. As a result, branded products accounted for 52% of fiscal 1999 sales up from 41% in 1997. This activity has reduced the company's reliance on any one product, with the top 10 products accounting for about 43% of revenues in 1999, down from 62% in 1997.

As a result of the growth in Watson's branded business and the strong performance of its portfolio of products, the company has been able to increase revenues and maintain a solid financial profile. From 1997 to 1999, revenues and EBITDA almost doubled to $689 million and $302 million, respectively. Over that same period, EBITDA margin remained strong at more than 40%. Watson's solid operating performance has allowed it to maintain its strong cash flow generation, with net free cash flow (EBITDA less interest, taxes, capital expenditures, and changes in working capital) of $90 million in 1999.

Watson's acquisition activity, which has been financed with both debt and equity, resulted in its debt burden more than doubling to $207 million from year-end 1997 to year-end 1999. However, bondholder protection measures have remained solid with leverage (measured by total debt to EBITDA) below 1.0 times (x) and EBITDA coverage of interest in excess of 25.0x, over that period. While the company is expected to continue to make strategic acquisitions, to the extent that it can continue to effectively integrate acquisitions and bondholder protection is maintained, this activity will not be viewed as a credit concern.

There are various legal and regulatory issues facing the company, with uncertainty surrounding their final outcome. These include the FDA's investigation into the company's Corona, CA manufacturing plant, the recall and launch delay of the company's Nicotine Gum product due to legal issues regarding product packaging as well as potential supply issues related to Dilacor XR. While the strategic implications of these matters remain unclear, they are not expected to have a material impact on the company's credit profile.