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Executive Summary

WATSON LABORATORIES HAS 25 ANDAs PENDING AT FDA and 12 generic products have been approved by the agency in the last six months, firm said in a March 6 preliminary prospectus for an initial public offering. The spate of approvals, which includes the first generic version of Searle's Demulen (ethynodiol diacetate and ethinyl estradiol), followed a two-year dry spell. Watson attributes the hiatus to the after-effects of the generic drug investigation. Watson will market the Demulen equivalent, approved on Dec. 30, under the trade name Nelulen. Earlier in 1991, FDA approved Watson's generic version of another oral contraceptive, marketed by Ortho as Modicon and Syntex as Brevicon. The remaining approvals include an anti-spasmotic (Merck's Flexoril) and an analgesic (Knoll's Vicodin/Russ' Lortab). Watson is pursuing a two-pronged strategy for future growth, the prospectus says. First, the firm will continue developing generic drugs, with an emphasis on being the first to market with given products. In addition to Nelulen, other Watson generic firsts include versions of amoxapine (Lederle's Asendin) and loxapine succinate (Lederle's Loxitane). Second, Watson "intends to pursue aggressively the development of proprietary pharmaceutical products and drug delivery systems," the filing states. The company currently has 19 drug delivery products in its pipeline and filed an NDA for a buccal dosage form of estradiol in 1990. Rights to the buccal hormone replacement therapy have been licensed to Schering-Plough for sale in the U.S., Canada and Japan, the prospectus states. Other Watson pipeline products include a buccal contraceptive, several nonsteroidal anti- inflammatory drugs and analgesics and buccal administrations of nicotine for smoking cessation and desmopressin for bladder control. Also in the pipeline are two new chemical entities. A buccal anti-Parkinson's therapy is in preclinical trials, and Watson has a chlorhexidine polyanionic polymer complex gum in development for treatment of plaque and gingivitis. In all, the company has licensing agreements with nine companies, including American Home Products, Sandoz and Whitby. Product development will be supported in part by proceeds from the initial stock offering. The prospectus registers 3 mil. shares for sale, 2.25 mil. by the company and the remaining 750,000 by current stockholders, at an expected price of $11 to $13 per share. Morgan Stanley, Donaldson, Lufkin & Jenrette and Furman Selz are underwriting the offering. At $13 a share, the stock sale would gross $29.3 mil. The company is allotting $8 mil. for production facility improvements and the purchase of R&D equipment. The remaining proceeds are intended for "research and development activities, working capital and other general corporate purposes." Revenues for 1991 increased 26% to $29.5 mil. The company attributes the increase primarily "to increased sales of certain off-patent pharmaceutical products and broader distribution of the company's product line." Watson's net income for 1991 was $1.6 mil., up 25% from 1990. Major customers include Rugby Laboratories (21% of sales or $6.2 mil.), Goldline (15% or $4.4 mil.), Warner Chilcott (10% or $2.9 mil.) and Geneva Pharmaceuticals (10%). Watson says it intends to increase sales of its own branded products. Corona, Calif.-based Watson was founded in 1983 as a generic drug manufacturing company. The company merged with Zetachron, a company engaged in drug delivery R&D, in October 1991. Zetachron cofounder Alec Keith, PhD, a former Key exec, assumed the role of Watson chairman following the merger. Watson's president and CEO is Allen Chao, PhD, a co-founder of the firm and former director of technology and packaging development at Searle. Chao and members of his family currently own 51.8% of the company stock. After the offering, those holdings will be reduced to 44.1%. Watson operates three facilities in Corona and is building a fourth. The Zetachron subsidiary has two facilities in State College, Penn. The company has approximately 200 employees.

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