Watson Pharmaceuticals, Inc. Company Valuation Sixuan Chen Advanced Corporate Finance Prof. Satya Gabriel April. 11, 2006.

Watson Pharmaceuticals, Inc. Company Valuation

Sixuan Chen

Advanced Corporate Finance

Prof. Satya Gabriel

April. 11, 2006

Presentation Overview Industry profile Current situation: company profile Forward looking: strategic plans Business environment: customers and

competitors Financial performance Valuation (assumptions, merger analysis)

Industry Profile Global sales: $300 billion annually U.S. - largest market share, followed by Eu

rope and Japan Brand drugs: customer loyalty, exclusive ri

ghts Generic drugs: bioequivalents, cost-efficien

t

Company Profile 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:

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 76% of total revenue More than 125 generi

c products 47 ANDAs on file Development in 2005:

six new launches

24% of total revenue More than 20 brand

products Two sales groups:

Specialty Products Nephrology

Branded Product PipelineBranded Product

Disease Market

Alliance Status

SilodosinTM Benign-Prostatic Hyperplasia

Kissei Late Stage

2nd Generation Oxybutynin

Overactive Bladder

Early Stage

Trelstar® line extension

Urology Early Stage

IntrinsaTM Female Sexual Dysfunction

P&G Filed

EmSamTM Depression Somerset-BMS

Approved

Strategic Alliances and Collaborations Somerset Pharmaceuticals, 50-50 JV with

Mylan (agreement w/ BMS) Feb. 2006, FDA approval for Emsam®

Generics development alliance with Cipla Citalopram (Q4, 2004)

R&D Capacity R&D expense in 2005: $125.3 million (7.6% of r

evenue) R&D facilities:

Corona, California Danbury, Connecticut Copiague, New York Salt Lake City, Utah Malmo, Sweden Changzhou, China

Strategic PlansGeneric: Development of generic dru

gs that are difficult to formulate

Market generic alternatives to brand products

Distribute generic versions of third-party brands

“Watson Lab”, “Watson Pharma”, “Rugby”

Brand: 2005 launches:

Trelstar® and Oxytrol®

Higher profit margin Continue to expand through

Internal product development

Strategic alliances and acquisitions

Business Environment High entry-barrier Customers: drug wholesalers, retailers,

distributors Consolidation in distribution network Pricing pressure

Competitive Landscape Brand products:

J&J, Novartis, Pfizer No competitive advantage

Generic products Teva, Barr, Mylan, brand name companies in

the generic market Key: timing of product’s regulatory approval

and launch

Financial Performance Revenue growth 5-year CAGR: 9.13% In 2005, total revenue growth 0.34%

Generics: -2.51% Price declines on nicotine gum due to entry of a competito

r Increase in R&D expenses

Brand: 4.37% 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 Key assumptions:

Operations: Organic revenue growth Gross/operating margin

CapEx, Depreciation Working capital

Valuation – DCF (cont’d) CAPM model:

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 5-year top-line growth: 6% Continued growth: 5% Price per share: $30.45 Current share price1: $29.01 Consensus estimates:

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

6% 5% 4%

Management prediction

9.25% $34.91 $31.16 $28.27

Valueline estimate

6.00% $34.02 $30.45 $27.70

Worst-case estimate

4.00% $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 Brand: Pfizer, J&J, Glaxosmithkline, Nova

rtis, Bayer Generic: Teva, Barr, Mylan, King, Alphar

ma, 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 WPI agreed to acquire Andrx for $1.9 billi

on in cash ($25 per share, 32% premium) Andrx – Drug delivery

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) Merger positives

Third-largest generic drug maker, 60 generic drugs in pipeline

Synergies in SG&A Distribution network

Merger negatives Potential opposition Creditwatch by S&P Andrx production halted by FDA

SUMMARY DCF valuation range: $27-35 Potential upside Merger impact Industry prospect: aging population Recommendation: cautious buy at low

THANK YOU!

Questions?