Fitch Upgrs Watson Pharmaceutical's Sr Unsecd Debt Rtg to 'BBB'.Business Editors CHICAGO--(BUSINESS WIRE)--March 22, 2004 Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. upgrades Watson Pharmaceuticals Watson Pharmaceuticals, Incorporated (NYSE: WPI) is the 5th largest pharmaceutical company in the United States based on number of prescriptions dispensed. Based in Corona, California, Watson's Generics division markets over 150 pharmaceutical product families, including one of the , Inc.'s (Watson) senior unsecured and bank loan credit ratings to 'BBB' from 'BBB-'. The ratings apply to approximately $622 million of outstanding debt. The Rating Outlook is changed to Stable from Positive. Watson has sustained credit metrics indicative of the new rating by strengthening revenues and earnings from its more stable and higher margin branded drug portfolio and mitigating the volatility inherent to its generics business through a series of product and technology acquisitions, internal development, and licensing arrangements. The breadth of the branded drug portfolio increased in 2003 with the launch of the internally-developed Oxytrol product, the in-licensing agreement with Ortho McNeil (J&J) regarding oral contraceptive oral contraceptive n. A pill, typically containing estrogen or progesterone, that prevents conception or pregnancy. Also called birth control pill. products, and the acquisition of the Novartis pain management products -- Fiorinal and Fioricet. Additional support to the rating comes from Watson's incremental investment for internal research and development, and R&D licensing arrangements to broaden both the branded and generic drug generic drug, a drug sold or prescribed under the nonproprietary name of its active ingredients or under a generally descriptive name rather than under a brand or trade name. R&D portfolios. Additional confidence for the new rating includes Watson's successful refinancing transactions completed in March 2003, which moved the capital structure away from the term loan and revolving credit Revolving Credit A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. facilities with restrictive covenants Restrictive covenants Provisions that place constraints on the operations of borrowers, such as restrictions on working capital, fixed assets, future borrowing, and payment of dividends. , to longer term debt maturities and a lower cost of capital. The recent reduction in leverage, in conjunction with the repurchase of approximately 68% of all outstanding 7.125% senior debentures due 2008, further supports the new rating. Positive industry factors, which include the wealth of brand-name pharmaceuticals set to expire within the intermediate term, and a political environment amenable to controlling health care costs (in light of the Medicare Prescription Drug prescription drug Prescription medication Pharmacology An FDA-approved drug which must, by federal law or regulation, be dispensed only pursuant to a prescription–eg, finished dose form and active ingredients subject to the provisos of the Federal Food, Drug, Benefit), lend assurance to Watson's strategy of expanding the generic drug portfolio. The company is also attempting to boost generic product margin as its competitive efforts intensify in the commodity generics market, through vertical integration and more cost-effective raw material supply procurement. Fitch's concerns include EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become margin erosion, occurring since 2001, which may continue year-over-year as in-licensing agreements bolster revenues at the cost of lower margins, and a surge in lower-margin revenues and earnings from commodity-type generic products not offset by those from internally developed or purchased branded drug products. However, Fitch recognizes that increased investment for R&D and new product launches, which support future revenues and earnings generation, contributed to the EBITDA margin declines. |
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