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WATSON PHARMACEUTICALS SPENDING $37 MIL. TO EXPAND MANUFACTURING

Executive Summary

WATSON PHARMACEUTICALS SPENDING $37 MIL. TO EXPAND MANUFACTURING facilities in 1993 and 1994 as the generic drug manufacturer gears up to meet anticipated product sales growth. The Corona, Calif-based company expects to spend around $14 mil. on plant expansion, property acquisition and new equipment in 1993 and plans to use the proceeds from a proposed offering of 765,000 shares of common stock for an additional $23 mil. in capital expenditures in 1994, according to an Oct. 18 preliminary prospectus. The planned expansion will nearly double Watson's primary manufacturing plant to 115,000 square feet and add an adjacent 20,000 sq. ft. building to be used for product packaging. Watson has received 12 ANDA approvals covering six products since its initial public offering in February 1993 and has an additional 12 ANDAs representing 11 drugs pending at FDA. The pipeline includes 14 generics under development in 36 dosage forms and strengths. The six recently approved drugs include four dosage strengths of the first generic version of Abbott's Ogen (estropipate tablets) for hormone replacement therapy in postmenopausal women. Other approvals are albuterol sulfate syrup (Schering-Plough's Proventil); verapamil 40 mg (Searle's Calan 40); carbidopa- levodopa (DuPont Merck's Sinemet); and a generic equivalent of an OTC product, J&J's Imodium A-D. Watson expects to begin shipping after getting clearance under FDA's pre-shipment validation process. During pre-approval inspections in 1992, "FDA identified certain issues relating to past pilot batch production and testing procedures, which the company believes delayed the approval of certain ANDAS," the prospectus notes, but the company believes that the subsequent approvals indicate that the problems have been resolved. The introduction within the past year of three new products, two of which have no off-patent competition, has helped to more than double Watson's sales for the first nine months of 1993 to $49.1 mil., compared to $22.8 mil. from the year-earlier period; net income has grown five-fold to $8.6 mil. from $1.7 mil. One of the recently introduced products, a generic equivalent of an analgesic marketed as Vicodin (Knoll) and Lortab (Russ), accounted for 50% of the company's sales in the first nine months of 1993, according to the prospectus. The early 1993 launch of an anti-spasmotic (Merck's Flexeril) also contributed to the jump in sales. An important older product is the tranquilizer loxapine succinate (Lederle's Loxitane), which contributed 17% of total sales. Watson currently markets 53 dosages of 17 drugs; the company received first ANDA approval for 25 of the 53 and is still the only generic marketer for 12 of the products. Watson is also applying various drug delivery systems to develop 17 proprietary drugs, primarily hormone replacement therapies. A three-and-one-half day transdermal estradiol patch is in Phase III trials and has been licensed to a U.S. company. Phase II trials of progesterone in the form of tablets and vaginal suppositories are ongoing, and Watson has a U.S. partner for those products. FDA recently requested additional long-term clinical studies for a buccal estradiol product for which partner Schering- Plough filed an NDA in 1990; the studies have not yet started. The proposed 2 mil. share offering includes 765,000 shares being sold by Watson and 1.2 mil. shares sold by selling stockholders. Watson estimates net proceeds will total $23.7 mil., based on the selling price immediately prior to the filing of $33.25 per share. Watson's stock has nearly tripled since its IPO when it raised $26 mil. through the sale of 2 mil. shares. Watson will have 16.3 mil. shares outstanding if the current offering is successful, and $43.8 mil. in cash and cash equivalents.
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