Watson Pharmaceuticals Inc Company Valuation Sixuan Chen Advanced

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

Presentation Overview n n n Industry profile Current situation: company profile Forward looking: strategic plans Business environment: customers and competitors Financial performance Valuation (assumptions, merger analysis)

Industry Profile n n 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 n n n Development, manufacture, marketing, sale and distribution of brand generic drugs Fourth largest generic drugmaker by market cap (after Teva, Barr and Mylan) Key statistics: n n n Total revenue in 2005: $1. 6 billion Total assets 1: $3. 1 billion Market cap 2 : $3. 2 billion Footnote: 1: as of 12/31/2005 2: as of 4/3/2006

Generic vs. Brand segment n n 76% of total revenue More than 125 generic products 47 ANDAs on file Development in 2005: six new launches n n n 24% of total revenue More than 20 brand products Two sales groups: n n Specialty Products Nephrology

Branded Product Pipeline Branded Product Disease Market Alliance Status Silodosin. TM Benign-Prostatic Hyperplasia Kissei 2 nd Generation Oxybutynin Overactive Bladder Early Stage Trelstar® line extension Urology Early Stage Intrinsa. TM Female Sexual Dysfunction P&G Filed Em. Sam. TM Depression Somerset. BMS Approved Late Stage

Strategic Alliances and Collaborations n n n Somerset Pharmaceuticals, 50 -50 JV with Mylan (agreement w/ BMS) Feb. 2006, FDA approval for Emsam® Generics development alliance with Cipla n Citalopram (Q 4, 2004)

R&D Capacity n n R&D expense in 2005: $125. 3 million (7. 6% of revenue) R&D facilities: n n n Corona, California Danbury, Connecticut Copiague, New York Salt Lake City, Utah Malmo, Sweden Changzhou, China

Strategic Plans Generic: n n 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: n n n 2005 launches: Trelstar® and Oxytrol® Higher profit margin Continue to expand through n n Internal product development Strategic alliances and acquisitions

Business Environment n n High entry-barrier Customers: drug wholesalers, retailers, distributors Consolidation in distribution network Pricing pressure

Competitive Landscape n Brand products: n n n J&J, Novartis, Pfizer No competitive advantage Generic products n n Teva, Barr, Mylan, brand name companies in the generic market Key: timing of product’s regulatory approval and launch

Financial Performance n n Revenue growth 5 -year CAGR: 9. 13% In 2005, total revenue growth 0. 34% n Generics: -2. 51% n n n Brand: 4. 37% n n n 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 n Key assumptions: n Operations: n Organic revenue growth n Gross/operating margin n n Cap. Ex, Depreciation Working capital

Valuation – DCF (cont’d) n CAPM model: n n n n 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 n n n 5 -year top-line growth: 6% Continued growth: 5% Price per share: $30. 45 Current share price 1: $29. 01 Consensus estimates: n n 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 n n Brand: Pfizer, J&J, Glaxosmithkline, Novartis, Bayer Generic: Teva, Barr, Mylan, King, Alpharma, Par Forward P/E 1: $27. 21 Forward Price/Sales 1: $44. 14 1: For both P/E and Price/Sales used Generic Median; Sales and EPS estimates from Thompson One

Potential Merger Analysis n n WPI agreed to acquire Andrx for $1. 9 billion in cash ($25 per share, 32% premium) Andrx – Drug delivery n n n Total revenue in 2005: $1 billion Total assets: $1. 2 billion Total market cap: $1. 7 billion Current P/E: 27. 9 x Drug distribution (65%), manufacture (35%)

Potential Merger Analysis (cont’d) n Merger positives n n Third-largest generic drug maker, 60 generic drugs in pipeline Synergies in SG&A Distribution network Merger negatives n n n Potential opposition Creditwatch by S&P Andrx production halted by FDA

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

THANK YOU! Questions?