United
States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2003 or |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 0-20045
Watson Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
311 Bonnie Circle, Corona, CA 92880-2882
(Address of principal executive offices, including ZIP code)
95-3872914
(I.R.S. Employer Identification No.)
Registrant’s telephone number, including area code: (909) 493-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0033 Par Value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes ý No o
Aggregate market value of Common Stock held by non-affiliates of the Registrant, as of June 30, 2003:
$4,339,556,396 based on the last reported sales price on the New York Stock Exchange
Number of shares of Registrant’s Common Stock outstanding on March 5, 2004: 108,699,047
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s proxy statement for the 2004 Annual Meeting of Stockholders, to be held on May 17, 2004. Such proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2003.
WATSON PHARMACEUTICALS, INC.
TABLE OF CONTENTS
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
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Business Overview
Watson Pharmaceuticals, Inc. (Watson, which may be referred to as we, us or our) is engaged in the development, manufacture, marketing, sale and distribution of branded and off-patent (generic) pharmaceutical products. We also develop advanced drug delivery systems designed to enhance the therapeutic benefits of existing drug forms. Watson operates manufacturing, distribution, research and development, and administrative facilities primarily in the United States of America (U.S.).
Watson was incorporated in 1985 and began operations as a manufacturer and marketer of off-patent pharmaceuticals. In February 1993, we completed our initial public offering. Through internal product development and acquisitions of products and businesses, we have grown into a diversified specialty pharmaceutical company. As of December 31, 2003, we marketed more than 35 branded pharmaceutical products and more than 120 generic pharmaceutical products.
Our principal executive offices are located at 311 Bonnie Circle, Corona, California, 92880. Our internet website address is www.watsonpharm.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, from 1998 to present, are available free of charge on our internet website. These reports are posted on our website as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (SEC). Our website also includes a section concerning corporate governance, including our Corporate Governance Guidelines, Board Committee Charters, Code of Conduct and other information.
Business Developments
During 2003, we continued to acquire products and businesses and invest in internal product development and other strategic alliances to grow our existing product pipeline and strengthen our resources and capabilities.
In February 2003, we acquired the U.S. rights to the Fioricet® and Fiorinal® product lines from Novartis Pharmaceuticals Corporation (Novartis). These products are indicated for the treatment of tension headaches.
In February 2003, we received final U.S. Food and Drug Administration (FDA) approval of our New Drug Application (NDA) for Oxytrol® (oxybutynin transdermal system), the first and only transdermal therapy to treat overactive bladder with symptoms of urge urinary incontinence, urgency and frequency. There were numerous milestones related to Oxytrol®, during 2003, including:
• March 2003—Filed European Marketing Authorization Application seeking European marketing approval for Oxytrol®.
• March 2003—Entered into a service agreement with Ventiv Health providing full-time sales representatives and managers to compliment Watson’s existing sales force.
• May 2003—Acceptance for review of New Drug Submission for Oxytrol® by Health Canada, Therapeutic Products Directorate.
• September 2003—Entered into a marketing and supply agreement with UCB Pharma, whereby UCB Pharma will market Watson’s oxybutynin transdermal product in Europe.
• November 2003—Received positive opinion from the European Agency for the Evaluation of Medicinal Products (EMEA) Committee for Proprietary Medicinal Products (CPMP). The CPMP opinion serves as the basis for a European Commission approval, which is under review.
In March 2003, we issued $575 million of convertible contingent senior debentures (CODES). The CODES, which are convertible into shares of Watson common stock upon the occurrence of certain events, are due in March 2023.
In May 2003, we entered into an agreement with a syndicate of lenders for a five-year, $300 million senior, unsecured revolving credit facility for working capital and other general corporate purposes.
During 2003, we expanded our strategic alliance with Cipla Ltd. (Cipla), the second largest pharmaceutical company in India. The original agreement to develop, manufacture and commercialize generic pharmaceutical products was entered into in December 2002. Under the terms of the expanded agreement, the companies will work together to develop additional products. The products included in our agreement with Cipla represent a substantial portion of the generic products we currently have in development. Watson will be responsible for pursuing regulatory approvals and will have exclusive U.S. marketing rights for all developed products. Cipla will be the primary manufacturer of the products.
In October 2003, we acquired Amarin Development AB (ADAB), a wholly-owned drug development subsidiary of Amarin Corporation plc (Amarin). The acquisition included a number of patented, oral, controlled-release drug delivery technologies developed and under development by ADAB, together with the products it has developed using these technologies, including glipizide extended release tablets, for which Watson received FDA
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approval of the 10 mg and 5mg strength in September 2003.
In February 2004, the FDA issued an approvable letter relating to EmSam™, a selegilene transdermal patch for the treatment of depression being developed by Somerset Pharmaceuticals (Somerset), a joint venture between Watson and Mylan Laboratories, Inc. The FDA’s letter indicates that Somerset has submitted sufficient data to support the efficacy of EmSam™ (20mg, 30mg & 40mg) in the acute and maintenance treatment of major depressive disorder. Somerset has initiated discussions with the FDA to review and clarify its comments. These comments include a requirement that Somerset conduct Phase IV post-marketing pharmacokinetic and safety studies, as well as additional pharmacology/toxicology studies. In addition, Somerset will initiate discussions with the FDA regarding proposed labeling, including FDA’s request to include labeling addressing tyramine dietary restrictions while taking EmSam™. Somerset is exploring opportunities to outlicense the EmSam™ product to a marketing partner.
In February 2004, we commenced a cash tender offer and consent solicitation for all of our $150 million principal amount of 7 1/8% Senior Notes due 2008. As a result of this tender offer, we repurchased approximately $102 million of our 1998 Senior Notes for a total consideration of $115 million, or a 13% premium over the face amount of each note.
Business Description
Prescription pharmaceutical products in the U.S. are generally marketed as either brand or generic pharmaceuticals. Branded pharmaceutical products are marketed under brand names through programs that are designed to generate physician and consumer loyalty. Generic pharmaceutical products are bioequivalents of their respective branded products and provide a cost-efficient alternative to branded products. As a result of the differences between the two types of products, we operate and manage our business as two segments: branded and generic pharmaceutical products.
Branded Pharmaceutical Products
Newly developed pharmaceutical products are normally patented and, as a result, generally are offered by a single provider when first introduced to the market. We currently market a number of patented products to physicians, hospitals, and other markets that we serve. We also market certain trademarked off-patent products directly to healthcare professionals. We classify these patented and off-patent trademarked products as our branded pharmaceutical products. Net revenues from our branded products accounted for approximately 53% of our total product net revenues in 2003.
Our branded pharmaceutical business currently develops, manufactures, markets, sells and distributes products primarily through the following sales and marketing groups:
• Women’s Health
• General Products
• Urology
• Nephrology
We market our branded products through these sales and marketing groups, represented by 768 sales professionals. Each of our specialized sales and marketing groups focuses on physicians who specialize in the diagnosis and treatment of different medical conditions and each group offers products to satisfy certain needs of these physicians. There are several branded products such as Oxytrol®, which are applicable to multiple physician audiences and each of the sales groups promotes those products to their physician audiences. We believe this focused sales and marketing approach enables us to foster close professional relationships with physicians and cover the primary care physicians who also prescribe in selected therapeutic areas. We generally sell our branded products under the “Watson Pharma” and the “Oclassen® Dermatologics” labels.
Our sales and marketing groups have targeted selected therapeutic areas predominately because of their potential growth opportunities and the size of the physician audience. Our expanded primary care sales force (consisting of both Watson and Ventiv employees) supports the specialty therapeutic areas by promoting products from each of these areas to primary care physicians and other specialties, who fall outside of the established therapeutic areas. We believe that the nature of these markets and the identifiable base of physician prescribers provide us with the opportunity to achieve significant market penetration through our specialized sales forces. Many of our branded products realize higher profit margins than our generic products. We intend to continue to expand our branded product portfolio through internal product development, strategic alliances and acquisitions.
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Our portfolio of branded pharmaceutical products includes the following products, which represented 89% of total branded product net revenues in 2003:
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WATSON BRANDED PRODUCT |
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ACTIVE INGREDIENT |
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THERAPEUTIC CLASSIFICATION |
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Actigall® |
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Ursodiol |
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Dissolution of gallstones |
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Androderm® |
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Testosterone (transdermal patch) |
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Male hormone replacement |
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Condylox® |
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Podofilox |
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Genital warts |
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Ferrlecit® |
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Sodium ferric gluconate in sucrose injection |
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Hematinic |
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Fioricet® |
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Butalbital, caffeine and acetaminophen |
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Barbiturate and analgesic |
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Fiorinal® |
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Butalbital, caffeine and aspirin |
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Barbiturate and analgesic |
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INFeD® |
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Iron dextran |
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Hematinic |
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Levora® |
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Levonorgestrel and ethinyl estradiol |
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Oral contraceptive |
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Low-OgestrelTM |
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Norgestrel and ethinyl estradiol |
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Oral contraceptive |
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Microgestin® |
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Norethindrone acetate and ethinyl estradiol |
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Oral contraceptive |
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Microzide® |
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Hydrochlorothiazide |
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Anti-hypertensive |
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MonoNessa® |
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Norgestimate ethinyl estradiol |
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Oral contraceptive |
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Necon® |
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Norethindrone and ethinyl estradiol |
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Oral contraceptive |
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Necon 7/7/7® |
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Norethindrone and ethinyl estradiol |
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Oral contraceptive |
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Nor-QD® |
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Norethindrone |
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Oral contraceptive |
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Norco 10s® |
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Hydrocodone bitartrate & acetaminophen |
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Analgesic |
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Oxytrol® |
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Oxybutnin (transdermal patch) |
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Overactive bladder |
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TriNessaTM |
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Norgestimate and ethinyl estradiol |
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Oral contraceptive |
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Tri-Norinyl® |
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Norethindrone and ethinyl estradiol |
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Oral contraceptive |
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Trivora® |
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Levonorgestrel and ethinyl estradiol |
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Oral contraceptive |
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Zovia® |
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Ethynodiol diacetate and ethinyl estradiol |
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Oral contraceptive |
WOMEN’S HEALTH
Our Women’s Health product lines include oral contraceptives, a genital warts treatment, a hormone replacement therapy and a visual cervical screening device. Currently, we have a total of 17 oral contraceptives in our product portfolio. We market our Women’s Health products primarily to obstetricians and gynecologists.
GENERAL PRODUCTS AND UROLOGY
Our General Products and Urology product lines include urology, anti-hypertensive, neurology, psychiatry, pain management and dermatology products. Currently, we have a total of 20 products being marketed through this marketing group. We market these products to urologists and primary care physicians, as well as endocrinologists.
NEPHROLOGY
Our Nephrology product line consists of products for the treatment of iron deficiency anemia. We generally market our Nephrology products to nephrologists and dialysis centers. Our primary product in the Nephrology group is Ferrlecit®, which is indicated for patients undergoing hemodialysis in conjunction with erythropoietin therapy. Ferrlecit® accounted for 9%, 11%, and 12% of our consolidated net revenues in 2003, 2002 and 2001, respectively. Ferrlecit® (sodium ferric gluconate complex in sucrose injection), introduced in 1999, was granted a five-year exclusivity period by the FDA as a new chemical entity. This exclusivity period ended in February 2004. We have submitted a pediatric study to the Ferrlecit® NDA which could extend this exclusivity period for an additional six months.
Generic Pharmaceutical Products
When patents or other regulatory exclusivity no longer protect a branded product, opportunities exist to introduce off-patent or generic counterparts to the branded product. These generic products are the therapeutic equivalent to their brand name counterparts and are generally sold at prices significantly less than the branded product. As such, generic pharmaceuticals provide an effective and cost-efficient alternative to branded products.
Watson is a leader in the development, manufacture and sale of generic pharmaceutical products. We currently market more than 120 generic pharmaceutical products. With respect to generic products, our strategy is to continue to target generic drugs that are difficult to formulate or manufacture or that will complement or broaden our existing product lines. Since the prices and unit volumes of our branded products will likely decrease upon the introduction of generic alternatives, we also intend to develop generic alternatives to our branded products where market conditions and the competitive environment justify such activities. Net revenues from our generic products accounted for approximately 47% of our product net revenues in 2003.
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Our portfolio of generic pharmaceutical products includes the following products, which represented 62% of total generic product net revenues in 2003:
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WATSON GENERIC PRODUCT |
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COMPARABLE |
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BRAND HOLDER |
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THERAPEUTIC CLASSIFICATION |
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Butalbital, aspirin, caffeine and codeine (BACC) |
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Fiorinal® |
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Watson Pharmaceuticals |
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Analgesic |
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Carisoprodol |
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Soma® |
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Medpointe |
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Muscle relaxant |
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Cyclobenzaprine |
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Flexeril® |
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Merck & Co., Inc. |
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Muscle relaxant |
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Folic acid |
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Folvite® |
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Wyeth |
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Hematinics, Others |
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Glipizide ER |
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Glucotrol XL® |
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Pfizer Laboratories |
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Anti-diabetic |
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Hydrocodone bitartrate/ acetaminophen |
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Lorcet® |
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Forest Pharmaceuticals |
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Analgesic |
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Hydrocodone bitartrate/ acetaminophen |
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Vicodin® |
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Abbott Laboratories |
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Analgesic |
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Hydroxychloroquine |
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Plaquenil® |
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Sanofi-Synthelabo |
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Anti-malarial |
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Hydroxyzine |
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Atarax® |
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Pfizer Laboratories |
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Anti-anxiety |
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Lisinopril |
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Zestril® |
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AstraZeneca |
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Anti-hypertensive |
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Lorazepam |
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Ativan® |
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Wyeth |
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Tranquilizer |
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Meprobamate |
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Miltown®, Equanil® |
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Medpointe, Wyeth |
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Anti-anxiety |
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Metformin |
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Glucophage® |
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Bristol-Myers Squibb |
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Anti-diabetic |
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Minocycline |
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Minocin® |
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Wyeth |
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Anti-infective systemic |
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Nicotine polacrilex gum |
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Nicorette® |
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GlaxoSmithKline |
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Aid to smoking cessation |
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Nicotine transdermal system |
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Habitrol® |
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Novartis |
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Aid to smoking cessation |
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Nifedipine ER |
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Adalat CC® |
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Bayer AG |
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Anti-hypertensive |
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Oxycodone/acetaminophen |
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Percocet® |
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Endo Pharmaceuticals |
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Analgesic |
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Promethazine |
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Phenergan® |
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Wyeth |
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Antihistamine |
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Propafenone hydrochloride |
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Rythmol® |
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Abbott Laboratories |
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Anti-arrhythmic |
We predominantly market our generic products to various drug wholesalers and national retail drugstore chains utilizing 21 sales and marketing professionals. We sell our generic products primarily under the “Watson Laboratories” label, with the exception of our over-the-counter products which we sell under our “Rugby” label or under private label.
Increasingly aggressive tactics employed by brand pharmaceutical companies to delay generic competition have increased the risks and uncertainties regarding the timing of approval of generic products. Expansion of our generic product line in recent years has been attributable to alliances, internal product development and acquisitions.
Financial Information About Segments
Watson primarily evaluates the performance of its branded and generic segments based on net revenues and gross profit. Summarized net revenues and gross profit information for each of the last three fiscal years is presented in Note 15 in the accompanying Notes to Consolidated Financial Statements.
Research and Development
We devote significant resources to the research and development of branded and generic products and proprietary drug delivery technologies. We incurred research and development expenses of $102.1 million in 2003, $82.2 million in 2002, and $64.1 million in 2001. Our research and development strategy focuses on the following product development areas:
• the development of sustained-release technologies and the application of these technologies to existing drug forms;
• the application of proprietary drug-delivery technology for new product development in specialty areas;
• the expansion of existing oral immediate-release products with respect to additional dosage strengths;