Acquisitions and Divestitures

6 Months Ended

Jun. 30, 2011

Acquisitions and Divestitures [Abstract]

NOTE 3 — ACQUISITIONS AND DIVESTITURES

Acquisition of Specifar

On May 25, 2011, Watson and each of the shareholders (together, the “Sellers”) of Paomar PLC (“Paomar”) entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) pursuant to which Watson purchased all of the outstanding equity of Paomar for cash and certain contingent consideration (the “Specifar Acquisition”). Paomar is a company incorporated under the laws of Cyprus and owner of 100 percent of the shares of Specifar Commercial Industrial Pharmaceutical, Chemical and Construction Exploitations Societe Anonyme (ABEE) (“Specifar”), a company organized under the laws of Greece. Specifar owns 100 percent of the shares of Alet Pharmaceuticals Industrial and Commercial Societe Anonyme (“Alet”). In accordance with the terms of the Stock Purchase Agreement, the Company acquired all the outstanding equity of Paomar for the following consideration:

•

The payment of cash totaling EUR 400 million, or $561.7 million.

•

Certain contingent consideration (not to exceed an aggregate total of EUR 40 million) based on the gross profits on sales of the generic tablet version of Nexium^{^®}(esomeprazole) developed by Specifar during its first five years of sales in countries including major markets in Europe, Asia and Latin America, as well as in Canada. For additional information on the contingent payment, refer to “Note 11 —Fair Value Measurements”.

Through the acquisition, Watson gains a generic pharmaceuticals product development company that develops and out-licenses generic pharmaceutical products primarily in Europe. In addition, the acquisition enhances the Company’s commercial presence in key European markets by providing a portfolio of products and provides a commercial presence in the branded-generic Greek pharmaceuticals market, including the Specifar and Alet brands of products. Specifar maintains an internationally approved manufacturing facility located near Athens, Greece and is constructing a new facility located outside of Athens, which will expand manufacturing capacity. Specifar’s pipeline of products includes a generic tablet version of Nexium^{^®}(esomeprazole). Watson funded the transaction using cash on hand and borrowings from the Company’s revolving credit facility. Specifar results are included in the Global Generics segment.

Allocation of Consideration Transferred

The transaction has been accounted for using the purchase method of accounting under existing U.S. GAAP. The purchase method under existing U.S. GAAP requires, among other things, that assets acquired and liabilities assumed in a business purchase combination be recognized at their fair values as of the acquisition date and that IPR&D be recorded at fair value on the balance sheet regardless of the likelihood of success of the related product or technology.

The following table summarizes the preliminary fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at acquisition date, with the excess being allocated to goodwill. As of June 30, 2011, certain amounts have not been finalized including assessment of closing day working capital, uncertain tax positions and final contingent consideration and intangible asset values (in millions):


	Amount
Cash and cash equivalents	$	0.6
Accounts receivable		27.4
Inventories		23.3
Other current assets		5.7
Property, plant & equipment		66.0
IPR&D intangible assets		162.8
Intangible assets		265.2
Goodwill		186.5
Other assets		5.1
Current liabilties		(21.8	)
Long-term deferred tax and other tax liabilities		(94.8	)
Long-term debt		(27.9	)
Other long-term liabilities		(36.4	)

Net assets acquired	$	561.7

In June 2011, the Company paid and retired $28.8 million in long-term debt assumed in the Specifar Acquisition.

Inventories

The fair value of inventories acquired includes a step-up in the value of inventories of approximately $7.6 million. Approximately $2.7 million of the step-up was amortized to cost of sales during the quarter ended June 30, 2011.

IPR&D and Intangible Assets

IPR&D intangible assets represent the value assigned to acquired R&D projects that, as of the acquisition date, had not established technological feasibility and had no alternative future use. The IPR&D intangible assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project and launch of the product, the Company will make a separate determination of useful life of the IPR&D intangible and amortization will be recorded as an expense over the estimated useful life.

The fair value of the IPR&D and identifiable intangible assets was determined using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those assets valuations include the estimated net cash flows for each year for each project or product (including net revenues, cost of sales, research and development costs, selling and marketing costs and working capital/asset contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors. The discount rate used to arrive at the present value of IPR&D projects as of the acquisition date was approximately 17.0% to reflect the internal rate of return and incremental commercial uncertainty in the projections as the products have not yet received regulatory approval. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include development, legal and regulatory risk. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change or the timely completion of each project to commercial success will occur. For these and other reasons, actual results may vary significantly from estimated results.

Intangible assets represent currently marketed products and have an estimated weighted average useful life of seven years. IPR&D intangible assets represent products that are expected to be approved for marketing over the next one to three years.

Goodwill Allocation

Among the primary reasons the Company entered into the Specifar Acquisition and factors that contributed to a preliminary purchase price allocation resulting in the recognition of goodwill were a history of operating margins and profitability, a strong R&D organization and expanded commercial footprint on a global basis, which will enable Watson to expand its product offerings. The goodwill recognized from the Specifar Acquisition is not deductible for tax purposes. All goodwill from the Specifar Acquisition was assigned to the Global Generics segment.

Contingent Consideration

The Company determined the acquisition date fair value of the contingent consideration obligation to be $28.5 million based on a probability-weighted income approach derived from revenue estimates and post-tax gross profit levels and a probability assessment with respect to the likelihood of achieving the various earn-out criteria. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The resultant probability-weighted cash flows were discounted using an effective annual interest rate of 17.0%. At each reporting date, the Company adjusts the contingent consideration obligation to estimated fair value and records changes in fair value as income or expense in our consolidated statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. As of June 30, 2011, the range of outcomes and the assumptions used to develop the estimates have not changed significantly from those used at acquisition date. Accretion expense related to the increase in the net present value of the contingent liability is included in interest expense for the period. During the three and six months ended June 30, 2011, the Company recorded $0.3 million in interest expense related to the esomeprazole contingent consideration.

Long-Term Deferred Tax Liabilities and Other Tax Liabilities

Long-term deferred tax liabilities and other tax liabilities result from purchase accounting adjustments for the inventory fair value step-up, contingencies adjustment and identifiable IPR&D and intangible assets fair value adjustment. These adjustments create excess book basis over the tax basis which is multiplied by the statutory tax rate for the jurisdiction in which the deferred taxes exist.

Acquisition-Related Expenses

Included in general and administrative expenses in the consolidated statement of operations for the quarter ended June 30, 2011 were pre-tax charges totaling $6.0 million for advisory, legal and regulatory costs incurred in connection with the Specifar Acquisition.

Unaudited Pro Forma Results of Operations

The following table presents the unaudited pro forma consolidated operating results for the Company, assuming the Specifar Acquisition had occurred as of the beginning of each period presented. The unaudited pro forma results reflect certain adjustments related to past operating performance, acquisition costs and acquisition accounting adjustments, such as increased depreciation and amortization expense on the fair valuation of assets acquired, the impact of acquisition financing in place at June 30, 2010 and the related tax effects. The pro forma results do not include any anticipated synergies which may be achievable subsequent to the acquisition date. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of the future operating results of the combined company.


	Six Months Ended June 30,
	2011		2010
(Unaudited)	(in millions, except per share amounts)
Net revenues	$	2,002.1	$	1,782.2

Net income	$	98.9	$	119.6
Earnings per share:
Basic	$	0.80	$	0.98
Diluted	$	0.78	$	0.97

Acquisition of Eden Biopharm Group Limited

In January 2010, Watson purchased the remaining 64% interest, which the Company did not already own in Eden Biopharm Group Limited (“Eden”) for $15.0 million. Eden provides development and manufacturing of generic biologics and its results are included within our Global Brands segment.

Acquisition of Crinone^® and Prochieve^® Assets from Columbia Laboratories, Inc. (“Columbia”)

On July 2, 2010, the Company completed the acquisition of the U.S. rights to Columbia products Crinone^® and Prochieve^® and acquired 11.2 million shares of Columbia’s common stock, representing approximately a 13% ownership share, for initial cash consideration of $62.0 million and certain contingent consideration of up to an additional $45.5 million based upon the successful completion of certain milestones and regulatory approvals.

The transaction was accounted for using the purchase method of accounting under existing U.S. GAAP with assets acquired and liabilities assumed recorded at their fair values as of the acquisition date. The purchase price for the Columbia acquisition was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date as follows:


	Amount
	( in millions)
Investments	$	11.5
IPR&D intangible assets		75.8
Intangible assets		39.5
Long-term deferred tax assets		24.3
Contingent consideration obligations		(64.8	)
Long-term deferred tax liabilities		(24.3	)

Net assets acquired	$	62.0

Pro forma results of operations have not been presented because the effect of the acquisition was not material.

Acquisition of Equity Interest in Moksha8 Pharmaceuticals, Inc. (“Moksha8”)

On October 4, 2010, the Company entered into an agreement with Moksha8 to expand into markets in Brazil and Mexico. The Company made an initial investment of $30.0 million in cash in Moksha8 in exchange for an ownership share in Moksha8. The Company is also committed to invest an additional $20.0 million in Moksha8 contingent upon the successful execution by Moksha8 of additional third-party product acquisitions during 2011.

Sale of Scinopharm Taiwan Ltd. (“Scinopharm”)

On March 24, 2010, all closing conditions were satisfied in our agreement with Uni-President Enterprises Corporation to sell our outstanding shares of Scinopharm. Under the terms of the stock purchase agreement, we sold our entire holdings of common shares for net proceeds of approximately $94.0 million resulting in a gain on sale of securities in the amount of $23.4 million for the three months ended March 31, 2010.