-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NV3Ul3Q5utjjADv0F/e4qjjYqh4ymJLihZWvLGHF6eOX1j5h5MLSTxgLxVfATGCZ zkHc7YLvKM5ecn12diyIJQ== 0001017062-02-000964.txt : 20020515 0001017062-02-000964.hdr.sgml : 20020515 ACCESSION NUMBER: 0001017062-02-000964 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATSON PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000884629 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 953872914 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13305 FILM NUMBER: 02648183 BUSINESS ADDRESS: STREET 1: 311 BONNIE CIRCLE CITY: CORONA STATE: CA ZIP: 92880 BUSINESS PHONE: 9092701400 MAIL ADDRESS: STREET 1: 311 BONNIE CIRCLE CITY: CORONA STATE: CA ZIP: 92880 10-Q 1 d10q.htm WATSON PHARMACEUTICALS, INC Prepared by R.R. Donnelley Financial -- Watson Pharmaceuticals, Inc
Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
 
or
 
¨
  
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
  
95-3872914
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
311 Bonnie Circle
Corona, CA 92880-2882
(Address of principal executive offices, including zip code)
 
(909) 493-5300
(Registrant’s telephone number, including area code)
 
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  x    No  ¨
 
The number of shares outstanding of the Registrant’s only class of common stock as of May 8, 2002 was approximately 106,496,695.
 

Table of Contents
 
WATSON PHARMACEUTICALS, INC.
 
TABLE OF CONTENTS
 
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
 
   
PART I.    FINANCIAL INFORMATION
     
        
PAGE
Item 1.    
  
Consolidated Financial Statements:
     
      
1
      
2
      
3
      
4
Item 2.    
     
10
Item 3.    
     
14
        
Item 1.    
     
16
Item 6.    
     
17
  
18

Table of Contents
 
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
 
    
March 31,
2002
   
December 31,
2001
ASSETS
              
Current Assets:
              
Cash and cash equivalents
   
$
170,491
   
$
193,731
Marketable securities
   
 
90,099
   
 
135,688
Accounts receivable, net
   
 
174,420
   
 
173,085
Assets held for disposition
   
 
39,120
   
 
45,496
Inventories
   
 
254,990
   
 
252,325
Prepaid expenses and other current assets
   
 
33,560
   
 
32,710
Deferred tax assets
   
 
36,787
   
 
56,703
    
  
Total current assets
   
 
799,467
   
 
889,738
Property and equipment, net
   
 
243,011
   
 
234,911
Investments and other assets
   
 
107,946
   
 
113,086
Deferred tax assets
   
 
21,675
   
 
21,675
Product rights and other intangibles, net
   
 
882,846
   
 
825,936
Goodwill, net
   
 
442,988
   
 
442,988
    
  
    
$
2,497,933
   
$
2,528,334
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Current liabilities:
              
Accounts payable and accrued expenses
   
$
153,035
   
$
159,809
Income taxes payable
   
 
53,926
   
 
10,766
Current portion of long-term debt
   
 
56,102
   
 
68,102
Current liability incurred for acquisitions of products and businesses
   
 
9,548
   
 
6,448
    
  
Total current liabilities
   
 
272,611
   
 
245,125
    
  
Long-term debt
   
 
395,929
   
 
415,703
Long-term liability incurred for acquisitions of products and businesses
   
 
6,381
   
 
9,311
Deferred tax liabilities
   
 
146,320
   
 
186,145
    
  
Total liabilities
   
 
821,241
   
 
856,284
    
  
Commitments and contingencies
              
Stockholders’ equity:
              
Preferred stock; no par value per share; 2,500,000 shares authorized; none issued
   
 
—  
   
 
—  
Common stock; $0.0033 par value per share; 500,000,000 shares authorized; 106,483,600 and 106,458,800 shares outstanding
   
 
351
   
 
351
Additional paid-in capital
   
 
791,269
   
 
790,742
Retained earnings
   
 
855,139
   
 
823,054
Accumulated other comprehensive income
   
 
29,933
   
 
57,903
    
  
Total stockholders’ equity
   
 
1,676,692
   
 
1,672,050
    
  
    
$
2,497,933
   
$
2,528,334
    
  
 
See accompanying Notes to Consolidated Financial Statements.

1

Table of Contents
 
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in thousands, except per share amounts)
 
    
Three Months Ended 
March 31,
  
    
2002
     
2001
  
Net revenues
   
$
285,690
 
   
$
296,846
 
Cost of sales
   
 
129,535
 
   
 
132,758
 
    
  
Gross profit
   
 
156,155
 
   
 
164,088
 
    
  
Operating expenses:
                  
Research and development
   
 
18,382
 
   
 
14,345
 
Selling, general and administrative
   
 
61,566
 
   
 
50,193
 
Amortization
   
 
13,294
 
   
 
19,936
 
Loss on assets held for disposition
   
 
6,986
 
   
 
—  
 
    
  
Total operating expenses
   
 
100,228
 
   
 
84,474
 
    
  
Operating income
   
 
55,927
 
   
 
79,614
 
    
  
Other income (expense):
                  
Equity in losses of joint ventures
   
 
(1,059
)
   
 
(1,010
)
Gain on sales of securities
   
 
—  
 
   
 
31,275
 
Interest and other income
   
 
1,628
 
   
 
992
 
Interest expense
   
 
(5,160
)
   
 
(7,718
)
    
  
Total other (expense) income, net
   
 
(4,591
)
   
 
23,539
 
    
  
Income before income tax provision
   
 
51,336
 
   
 
103,153
 
Provision for income taxes
   
 
19,251
 
   
 
40,697
 
    
  
Net income
   
$
32,085
 
   
$
62,456
 
    
  
Earnings per share:
                  
Basic
   
$
0.30
 
   
$
0.59
 
    
  
Diluted
   
$
0.30
 
   
$
0.58
 
    
  
Weighted average shares outstanding:
                  
Basic
   
 
106,467
 
   
 
105,702
 
    
  
Diluted
   
 
107,423
 
   
 
108,092
 
    
  
 
 
See accompanying Notes to Consolidated Financial Statements.

2

Table of Contents
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
    
Three Months
Ended March 31,
  
    
2002
     
2001
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
Net income
   
$
32,085
 
   
$
62,456
 
    
  
Reconciliation to net cash provided by (used in) operating activites:
                  
Depreciation
   
 
6,026
 
   
 
6,056
 
Amortization
   
 
13,294
 
   
 
19,936
 
Deferred income tax (benefit) provision
   
 
(1,272
)
   
 
10,402
 
Equity in losses of joint ventures
   
 
1,101
 
   
 
1,084
 
Gain on sales of securities
   
 
—  
 
   
 
(31,275
)
Tax benefits related to exercises of stock options
   
 
140
 
   
 
2,400
 
Other
   
 
317
 
   
 
198
 
Changes in assets and liabilities:
                  
Accounts receivable
   
 
(1,335
)
   
 
(108,205
)
Assets held for disposition
   
 
6,376
 
   
 
(7,576
)
Inventories
   
 
(2,665
)
   
 
6,722
 
Prepaid expenses and other current assets
   
 
(850
)
   
 
(4,975
)
Accounts payable and accrued expenses
   
 
(6,774
)
   
 
2,013
 
Income taxes payable
   
 
43,160
 
   
 
(5,917
)
Other assets
   
 
2,703
 
   
 
—  
 
    
  
Total adjustments
   
 
60,221
 
   
 
(109,137
)
    
  
Net cash provided by (used in) operating activities
   
 
92,306
 
   
 
(46,681
)
    
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                  
Additions to property and equipment
   
 
(14,750
)
   
 
(11,041
)
Acquisitions of product rights
   
 
(70,204
)
   
 
(4,119
)
Issuance of note receivable
   
 
—  
 
   
 
(2,000
)
Proceeds from sales of marketable equity securities
   
 
—  
 
   
 
32,599
 
Other investing activities, net
   
 
625
 
   
 
—  
 
    
  
Net cash (used in) provided by investing activities
   
 
(84,329
)
   
 
15,439
 
    
  
CASH FLOWS FROM FINANCING ACTIVITIES:
                  
Principal payments on long-term debt and acquisition liabilities
   
 
(31,604
)
   
 
(12,737
)
Proceeds from exercises of stock options
   
 
387
 
   
 
6,456
 
    
  
Net cash used in financing activities
   
 
(31,217
)
   
 
(6,281
)
    
  
Net decrease in cash and cash equivalents
   
 
(23,240
)
   
 
(37,523
)
Cash and cash equivalents at beginning of period
   
 
193,731
 
   
 
66,194
 
    
  
Cash and cash equivalents at end of period
   
$
170,491
 
   
$
28,671
 
    
  
 
 
See accompanying Notes to Consolidated Financial Statements.

3

Table of Contents
 
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE A – GENERAL
 
Watson Pharmaceuticals, Inc. (Watson or the company) is a diversified specialty pharmaceutical company primarily engaged in the development, manufacture, marketing and distribution of both branded and off-patent (generic) pharmaceutical products. Watson also develops advanced drug delivery systems designed to enhance the therapeutic benefits of existing drug forms.
 
The accompanying consolidated financial statements should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2001. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from the accompanying consolidated financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary to present fairly Watson’s consolidated financial position, results of operations and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The company’s results of operations and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods or for the full year.
 
Marketable securities
 
Marketable securities consist of Watson’s investment in the common stock of Andrx Corporation – Andrx Group (Andrx) and Dr. Reddy’s Laboratories, Limited (Dr. Reddy). The company accounts for these investments at fair value as available-for-sale securities.
 
Andrx is primarily engaged in the formulation and commercialization of controlled-release pharmaceutical products using proprietary drug delivery technologies. Andrx common stock trades on the Nasdaq National Market System under the symbol ADRX. As of March 31, 2002, Watson owned 1.5 million shares of Andrx common stock (approximately 2% of the total Andrx common stock then outstanding) with a market value of approximately $58.3 million. The unrealized gain on the company’s investment in Andrx was approximately $32.5 million and $62.4 million (net of income taxes of $21.7 million and $41.6 million) at March 31, 2002 and December 31, 2001, respectively. This unrealized gain was the primary component of accumulated other comprehensive income in the stockholders’ equity section of Watson’s consolidated balance sheets. Watson sold no shares of Andrx common stock during the three months ended March 31, 2002. During the three months ended March 31, 2001, Watson sold approximately 600,000 shares of Andrx common stock for $32.6 million and recorded a pre-tax gain of $31.3 million.
 
Dr. Reddy is a developer and manufacturer of active pharmaceutical ingredients and products. Dr. Reddy’s shares trade on the Bombay Stock Exchange and on the New York Stock Exchange in the form of American depositary shares. As of March 31, 2002, Watson owned approximately 1.4 million shares of Dr. Reddy common stock (approximately 2% of the total Dr. Reddy common shares then outstanding) with a market value of approximately $31.8 million. The unrealized gain on the company’s investment in Dr. Reddy was approximately $6.7 million and $4.1 million (net of income taxes of $4.4 million and $2.7 million), at March 31, 2002 and December 31, 2001, respectively.
 
Comprehensive income
 
Comprehensive income includes all changes in equity during a period except those that resulted from investments by or distributions to the company’s stockholders. Other comprehensive income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity. Watson’s other comprehensive income is comprised of unrealized holding gains on its publicly traded equity securities, net of realized gains included in net income. The components of comprehensive income and related income taxes consisted of the following (in thousands):

4

Table of Contents
 
    
Three Months Ended
March 31,
  
    
2002
     
2001
  
Net Income
   
$
32,085
 
   
$
62,456
 
    
  
Other comprehensive loss:
                  
Unrealized holding losses on securities
   
 
(46,617
)
   
 
(10,997
)
Less related income taxes
   
 
18,647
 
   
 
4,399
 
    
  
    
 
(27,970
)
   
 
(6,598
)
    
  
Reclassification for gains included in net income
   
 
—  
 
   
 
(31,275
)
Less related income taxes
   
 
—  
 
   
 
12,271
 
    
  
    
 
—  
 
   
 
(19,004
)
    
  
Other comprehensive loss
   
 
(27,970
)
   
 
(25,602
)
    
  
Comprehensive Income
   
$
4,115
 
   
$
36,854
 
    
  
 
Recent accounting pronouncements
 
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and applies to all long-lived assets, including discontinued operations. This statement also amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations – Reporting the Effects of Disposal of a Segment of a Business.” SFAS No. 144 develops one accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale as well as addresses implementation issues related to SFAS No. 121. The company adopted the provisions of SFAS No. 144 on January 1, 2002, which had no material impact on the company’s results of operations or financial position.
 
Earnings per share (EPS)
 
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding during a period. Diluted earnings per share is based on the treasury stock method and is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding during the periods presented assuming the exercise of all in-the-money stock options. Common share equivalents have been excluded where their inclusion would be anti-dilutive. A reconciliation of the numerators and denominators of basic and diluted earnings per share consisted of the following (in thousands, except per share amounts):

5

Table of Contents
 
    
Three Months Ended 
March 31,
    
2002
   
2001
Numerator:
              
Net income
   
$
32,085
   
$
62,456
    
  
Denominator:
              
Basic weighted average common shares outstanding
   
 
106,467
   
 
105,702
Effect of dilutive stock options
   
 
956
   
 
2,390
    
  
Diluted weighted average common shares
              
outstanding
   
 
107,423
   
 
108,092
    
  
Basic earnings per share
   
$
0.30
   
$
0.59
    
  
Diluted earnings per share
   
$
0.30
   
$
0.58
    
  
 
Stock options to purchase 9.7 million and 1.0 million common shares at March 31, 2002 and 2001, respectively, were outstanding but not included in the computation of diluted EPS because the option exercise price was greater than the average market price of the common shares.
 
NOTE B – ACQUISITIONS OF PRODUCT RIGHTS
 
In January 2002, Watson acquired the United States (U.S.) rights to Actigall® (ursodiol USP capsules) from Novartis Pharmaceuticals Corporation (Novartis). Actigall® contains ursodiol, a naturally occurring bile acid, and was introduced in the U.S. in 1988. Actigall® is indicated for the dissolution of certain types of gallbladder stones and the prevention of gallstone formation in obese patients experiencing rapid weight loss. Watson also has certain negotiation rights relating to the commercialization of the product for the prevention of colorectal growths, an indication Novartis currently has under development. The company paid approximately $70 million in cash for the rights to Actigall®.
 
NOTE C – OPERATING SEGMENTS
 
Watson is a manufacturer and marketer of pharmaceutical products with two reportable operating segments: branded and generic pharmaceutical products. The branded products segment includes the company’s lines of Women’s Health, Nephrology, Urology and General and Pain Management Products. Watson has aggregated its branded product lines in a single segment because of similarities in regulatory environment, manufacturing processes, methods of distribution and types of customer. This segment includes patent-protected products and trademarked generic products that Watson promotes directly to healthcare professionals as branded pharmaceutical products. The generic products segment includes off-patent pharmaceutical products that are therapeutically equivalent to proprietary products. The company sells its products primarily to pharmaceutical wholesalers, drug distributors and chain drug stores.

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Table of Contents
 
The accounting policies of the segments are the same as those described in the company’s Annual Report on Form 10-K for the year ended December 31, 2001. Watson primarily evaluates the performance of its segments based on net revenues and gross profit. The “other” classification includes revenues from research, development and licensing fees and contingent payments received from the settlement of a legal dispute. The company does not report depreciation expense, total assets, and capital expenditures by segment as such information is not used by management, nor accounted for at the segment level. Net revenues and gross profit information for the company’s segments consisted of the following (in thousands):
 
    
Three Months
Ended March 31,
    
2002
   
2001
Net revenues:
              
Branded pharmaceutical products
   
$
161,527
   
$
150,905
Generic pharmaceutical products
   
 
116,083
   
 
144,778
Other
   
 
8,080
   
 
1,163
    
  
Total net revenues
   
$
285,690
   
$
296,846
    
  
Gross profit:
              
Branded pharmaceutical products
   
$
125,503
   
$
120,330
Generic pharmaceutical products
   
 
22,572
   
 
42,595
Other
   
 
8,080
   
 
1,163
    
  
Total gross profit
   
$
156,155
   
$
164,088
    
  
 
NOTE D – INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value) and consisted of the following (in thousands):
 
    
March 31,
2002
   
December 31,
2001
Raw materials
   
$
94,934
   
$
86,844
Work-in-process
   
 
57,725
   
 
56,377
Finished goods
   
 
102,331
   
 
109,104
    
  
Total inventory
   
$
254,990
   
$
252,325
    
  
 
 
NOTE  E—GOODWILL AND OTHER INTANGIBLE ASSETS – ADOPTION OF SFAS NO. 142
 
Effective January 1, 2002, the company adopted SFAS No. 142, “Goodwill and Intangible Assets” issued in June 2001. SFAS No. 142 requires goodwill and indefinite lived intangible assets to be tested for impairment annually using a two-step process, and written off when impaired, rather than being amortized as previous standards required. The first step is to identify potential impairment, which is measured as of the beginning of the fiscal year. The company has until June 30, 2002 to complete the first step. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, which must be completed by December 31, 2002. We expect to complete the steps in accordance with these guidelines. Any impairment loss resulting from the transitional impairment tests will be reflected as a cumulative effect of a change in accounting principle. The company is in the process of evaluating impairment of goodwill in accordance with SFAS No. 142 and anticipates that impairment losses, if any, will not have a material impact on the results of its operations.

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Table of Contents
 
A reconciliation of reported net income and basic and diluted earnings per share, assuming SFAS No. 142 is applied retroactively, is as follows (in thousands, except for EPS):
 
    
Three Months Ended
March 31,
    
2002
   
2001
Net income as reported
   
$
32,085
   
$
62,456
Add back:
              
Goodwill amortization
   
 
—  
   
 
4,795
    
  
Adjusted net income
   
$
32,085
   
$
67,251
    
  
Basic earnings per share:
              
Net income as reported
   
$
0.30
   
$
0.59
Goodwill amortization
   
 
—  
   
 
0.05
    
  
Adjusted net income
   
$
0.30
   
$
0.64
    
  
Diluted earnings per share:
              
Net income as reported
   
$
0.30
   
$
0.58
Goodwill amortization
   
 
—  
   
 
0.04
    
  
Adjusted net income
   
$
0.30
   
$
0.62
    
  
 
Intangible assets, excluding goodwill, which are comprised primarily of product rights, consist of the following (in thousands):
 
    
March 31,
2002
     
December 31,
2001
  
Product rights and related intangibles
   
$
1,054,976
 
   
$
984,771
 
Less accumulated amortization
   
 
(172,129
)
   
 
(158,835
)
    
  
    
$
882,847
 
   
$
825,936
 
    
  
 
Estimated amortization expense on product rights and related intangibles consist of $54.0 million in 2002, $54.3 million in 2003, 2004 and 2005, and $54.2 million in 2006.

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Table of Contents
 
NOTE F – LONG-TERM DEBT
 
Long-term debt consisted of the following (in thousands):
 
    
March 31, 2002
     
December 31,
2001
  
Term loan facility, due 2005
   
$
301,649
 
   
$
333,402
 
Senior unsecured notes, 7.125%, face amount of $150 million, due 2008
   
 
148,911
 
   
 
148,874
 
Other notes payable
   
 
1,471
 
   
 
1,529
 
    
  
Total debt
   
$
452,031
 
   
$
483,805
 
Less current portion
   
 
(56,102
)
   
 
(68,102
)
    
  
Total long-term debt
   
$
395,929
 
   
$
415,703
 
    
  
 
In July 2000, the company entered into a credit agreement that provided for a $500 million term loan facility and a $200 million revolving credit facility for working capital and other needs. Watson subsequently borrowed $500 million through the term loan facility, which is repaid in quarterly increments. The interest rate under this credit agreement is based on a margin over the London Interbank Offered Rate (LIBOR). The margin is determined based on a leverage test, with the margin increasing and decreasing in 1/8% increments based on an interest rate grid. The interest rate is subject to adjustment each quarter, based on a leverage ratio. The LIBOR rate, which is subject to market fluctuations, may also change. At March 31, 2002, the effective interest rate on this credit agreement was approximately 4.0%. Watson is subject to customary financial and operational covenants. As of March 31, 2002, the company had not drawn any funds from the $200 million revolving credit facility.
 
In May 1998, Watson issued $150 million of senior unsecured notes. These notes are due in May 2008, with interest only payments due semi-annually in May and November at an effective rate of 7.2%, but may be redeemed earlier under certain circumstances. Pursuant to the indenture under which the notes were issued, the company is subject to customary financial and operational covenants.

9

Table of Contents
 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS
 
The following discussion of our financial condition and the results of our operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report and under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2001.
 
Results of Operations—Three Months Ended March 31, 2002 Compared to the 2001 Period
 
Net revenues for the three months ended March 31, 2002 were $285.7 million, compared to $296.8 million for the corresponding 2001 period, a decrease of $11.1 million or 4%. The decline was primarily due to customer allowances, in excess of sales, for certain generic products during the quarter.
 
We launched buspirone, the generic equivalent to Bristol-Myers Squibb’s BuSpar®, in April 2001 and benefited from marketing exclusivity until February 2002. The entry of multiple generic competitors during the first quarter of 2002 resulted in significant pricing competition which caused prices for the product to decline severely. In response to the decline in price, the company granted significant price concessions to our customers, which is customary in our business. The price concessions were based upon the level of customer inventory on hand at the date of the price decline.
 
We also launched metformin (the generic equivalent to Bristol-Myers Squibb’s Glucophage®) during the first quarter of 2002. Due to substantial generic competition, we granted significant price concessions in connection with the launch of this product.
 
In addition, we experienced a decrease in sales of pain management products within our generics division which was offset by our continued growth in branded product sales from our Women’s Health division. We expect brand sales to increase in 2002 within our Women’s Health division and generic sales are expected to decline due to the lack of significant new product introductions offset, in part, by anticipated increases in sales of our nicotine gum.
 
During the first quarter of 2002, branded product sales accounted for approximately 58% of our net product sales, with the balance being from sales of our generic products. The percentage of generic product sales is lower than expected primarily due to the price concessions granted to our customers discussed above. In 2002, we expect our overall net product sales mix to be approximately 54% branded product sales and 46% generic product sales. The balance of our net revenues is comprised primarily of certain contingent payments relating to the settlement of a legal dispute.
 
Our gross profit margin on product sales decreased to 53% in the first quarter 2002 from 55% in the prior year period. This decrease was primarily due to pricing competition on our 2002 product launches in our generic division and price concessions to our customers for buspirone.
 
Research and development expenses increased to $18.4 million in the first quarter of 2002, compared to $14.3 million for the corresponding 2001 period. Branded product development continued to be our focus, while spending on certain generic projects declined. Spending on clinical studies for branded products increased significantly in the first quarter 2002. We expect to continue to have increases in research and development expenses as we emphasize the development of branded products.
 
Selling, general and administrative expenses increased to $61.6 million in the first quarter of 2002, compared to $50.2 million for the corresponding 2001 period, primarily due to sales and marketing costs associated with our branded product focus, the anticipated launch of Oxytrol® and increased litigation costs.

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Amortization expense for the three months ended March 31, 2002 was $13.3 million, compared to $19.9 million for the corresponding 2001 period. The decrease was due primarily to the implementation of SFAS No. 142 which prohibits the amortization of goodwill effective January 1, 2002.
 
Our loss from joint ventures was approximately $1.1 million in the first quarter of 2002, compared to a loss of approximately $1.0 million in the first quarter of 2001. The loss was primarily attributable to our 50% joint venture in Somerset Pharmaceuticals, Inc. (Somerset). We expect to continue recording losses from the Somerset joint venture for the balance of 2002.
 
In the first quarter of 2001, we sold approximately 600,000 shares of Andrx common stock and received proceeds of $32.6 million. We recorded a pre-tax gain of approximately $31.3 million on the sale. There were no sales of shares of Andrx common stock during the first quarter of 2002. See Notes to Consolidated Financial Statements, “Note A – General – Marketable securities” in this Quarterly Report.
 
Interest and other income in the first quarter of 2002 increased to $1.6 million from approximately $1.0 million in the first quarter of 2001. The increase in interest and other income was caused by higher average cash balances generated primarily by cash flows from operations.
 
Interest expense in the first quarter of 2002 decreased to $5.2 million from $7.7 million in the first quarter of 2001 due to lower average bank debt balances in the first quarter of 2002, compared to the corresponding 2001 period. We capitalized interest expense of $764,000 during the first quarter of 2002 related to a self-constructed asset and $2.7 million during the first quarter of 2001 related to the carrying value of assets held for disposition.
 
Our income tax provision in the first quarter of 2002 reflected a 37.5% effective tax rate on pre-tax income, compared to 39.5% in 2001. The variance in the effective tax rate from 2002 to 2001 was primarily the result of our January 1, 2002 adoption of SFAS No. 142 prohibiting the amortization of goodwill, which is non-deductible for tax purposes.
 
Liquidity and Capital Resources
 
We assess liquidity by our ability to generate cash to fund our operations. Significant factors that affect the management of our liquidity include: cash flows provided by operations; levels of our accounts receivable, inventory and accounts payable balances; our investment in capital improvements; access to financing sources, including credit and equity arrangements; and financial flexibility to attract long-term capital on satisfactory terms.
 
We generated cash in excess of our working capital requirements for the three months ended March 31, 2002. Our operating cash flows were $92.3 million in the first quarter of 2002, compared to cash used by operations of $46.7 million in the first quarter of 2001. The increase in 2002 was primarily due to the change, year over year, in income tax liabilities and accounts receivable balances. Significant uses of cash included acquisition of product rights ($70.2 million), principal payments on our term loan facility and acquisition liabilities ($31.6 million) and additions to property and equipment ($14.8 million). We currently expect to spend between $70 million to $80 million for property and equipment additions for the full year of 2002.
 
As discussed in Note F to Consolidated Financial Statements, we entered into a credit agreement with a bank and a consortium of lenders that included a $500 million term loan facility and a $200 million revolving credit facility. In connection with the acquisition of Schein Pharmaceutical, Inc., in July 2000, we borrowed the entire amount of the $500 million term loan. As of March 31, 2002, approximately $302 million remained outstanding under this term loan, at an effective interest rate of approximately

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4.0%. Under the credit agreement, we are subject to certain financial and other operational covenants. We have not drawn any amounts on the revolving credit facility.
 
In April 1998, we filed a shelf registration statement with the Securities and Exchange Commission that would allow us, from time to time, to raise up to $300 million from offerings of senior or subordinated debt securities, common stock, preferred stock or a combination thereof. In May 1998, pursuant to this registration statement, we issued $150 million of senior unsecured notes due May 2008, with interest payable semi-annually in May and November at an effective rate of 7.2%. Subject to preparation of a supplement to the existing prospectus and certain other matters, the balance of this registration statement remains available for issuance at our discretion.
 
Our cash and marketable securities, which included our ownership of Andrx common stock, totaled approximately $260.6 million at March 31, 2002. The fair value of the Andrx common stock may fluctuate significantly due to volatility of the stock market and changes in general economic conditions. See Item 3. in this Quarterly Report. We believe that our cash and marketable securities balance, our cash flows from operations and the financing sources discussed herein will be sufficient to meet our normal operating requirements during the next twelve months. However, we continue to review opportunities to acquire or invest in companies, technologies, product rights and other investments that are compatible with our existing business. We could use cash and financing sources discussed herein, or financing sources that subsequently become available, to fund additional acquisitions or investments. In addition, we may consider issuing additional debt or equity securities in the future to fund potential acquisitions or growth, or to refinance existing debt. If a material acquisition or investment is completed, our operating results and financial condition could change materially in future periods. However, no assurance can be given that additional funds will be available on satisfactory terms, or at all, to fund such activities.
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Any statements made in this report that are not statements of historical fact or that refer to estimated or anticipated future events are forward-looking statements. Such forward-looking statements reflect our current perspective of existing trends and information as of the date of this filing. These include, but are not limited to, prospects related to our strategic initiatives and business strategies, express or implied assumptions about government regulatory action or inaction, anticipated product approvals and launches, business initiatives and product development activities, assessments related to clinical trial results, product performance and competitive environment, and anticipated financial performance. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” or “pursue,” or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements.
 
We caution the reader that certain important factors may affect our actual operating results and could cause such results to differ materially from those expressed or implied by forward-looking statements. We believe the following important risks, uncertainties and other factors, among others, may affect our actual results:
 
 
•
 
the success of our product development activities and uncertainties related to the timing or outcome of such activities;
 
 
•
 
the timing and unpredictability of regulatory authorizations and product rollout, which is particularly sensitive in our generic business;

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•
 
the outcome of our litigation (including patent, trademark and copyright litigation), and the costs, expenses and possible diversion of management’s time and attention arising from such litigation;
 
 
•
 
our ability to retain key personnel;
 
 
•
 
our ability to adequately protect our technology and enforce our intellectual property rights;
 
 
•
 
our ability to obtain and maintain a sufficient supply of products to meet market demand in a timely manner;
 
 
•
 
our dependence on sole source suppliers and the risks associated with a production interruption or supply delays at such third party suppliers or at our own manufacturing facilities;
 
 
•
 
the scope, outcome and timeliness of any governmental, court or other regulatory action that may involve us (including, without limitation, the scope, outcome or timeliness of any inspection or other action of the FDA);
 
 
•
 
the availability to us, on commercially reasonable terms, of raw materials and other third party sourced products;
 
 
•
 
our exposure to product liability and other lawsuits and contingencies;
 
 
•
 
our mix of product sales between branded, which typically have higher margins, and generic products;
 
 
•
 
our dependence on revenues from significant products, in particular, Ferrlecit®, for which sales are in excess of 10% of our net revenues;
 
 
•
 
the ability of third parties to assert patents or other intellectual property rights against us which, among other things, could cause a delay or disruption in the manufacture, marketing or sale of our products;
 
 
•
 
our ability to license patents or other intellectual property rights from third parties on commercially reasonable terms;
 
 
•
 
the expiration of patent and regulatory exclusivity on certain of our products that will result in competitive and pricing pressures including but not limited to regulatory review by the FDA,
 
 
•
 
difficulties and delays inherent in product development, manufacturing and sale, such as products that may appear promising in development may fail to reach market for numerous reasons, including efficacy or safety concerns; the inability to obtain necessary regulatory approvals and the difficulty or excessive cost to manufacture; seizure or recall of products; the failure to obtain, the imposition of limitations on the use of, or loss of patent and other intellectual property rights; and manufacturing or distribution problems;
 
 
•
 
our successful compliance with extensive, costly, complex and evolving governmental regulations and restrictions;
 
 
•
 
market acceptance of and continued demand for our products and the impact of competitive products and pricing;

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•
 
our ability to successfully compete in both the branded and generic pharmaceutical product sectors;
 
 
•
 
our timely and successful implementation of strategic initiatives including integration of companies we acquire;
 
 
•
 
other risks and uncertainties detailed herein and from time to time in our Securities and Exchange Commission filings.
 
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We also may make additional disclosures in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we may file from time to time with the Securities and Exchange Commission (SEC). Please also note that we provided a cautionary discussion of risks and uncertainties under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2001. The factors identified above and those set forth in our SEC filings are the factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
We are exposed to market risk for changes in the market values of our investments (Investment Risk) and the impact of interest rate changes (Interest Rate Risk). We have not used derivative financial instruments in our investment portfolio. The quantitative and qualitative disclosures about market risk are set forth below.
 
Investment Risk
 
As of March 31, 2002, our total holdings in equity securities of other companies, including equity-method investments and available-for-sale securities, were $150.1 million. We regularly review the carrying value of our investments and identify and record losses when events and circumstances indicate that any declines in the fair values of such investments, below our accounting basis, are other than temporary. At March 31, 2002, we had equity-method investments of $47.6 million and publicly traded equity securities (available-for-sale securities) at fair value of $102.5 million ($90.1 million of which was included in “Marketable securities” and $12.4 million of which was included in “Investments and other assets”). The fair values of these investments are subject to significant fluctuations due to volatility of the stock market and changes in general economic conditions. Based on the fair value of the publicly traded equity securities we held at March 31, 2002, an assumed 25%, 40% and 50% adverse change in the market prices of these securities would result in a corresponding decline in total fair value of approximately $25.6 million, $41.0 million and $51.3 million, respectively.
 
As discussed in Note A of the Notes to Consolidated Financial Statements in this Quarterly Report, our investment in Andrx consisted of 1.5 million shares of Andrx common stock with a fair market value of approximately $58.3 million at March 31, 2002. As a publicly traded equity security, our holdings of Andrx have exposure to investment risk. The market price of Andrx common stock has been, and may continue to be, volatile. For example, on March 28, 2002, the last trading day in the first quarter of 2002, the closing price of Andrx common stock was $37.94. On May 8, 2002, before our filing of this Quarterly Report, the closing price of Andrx common stock was $46.12. The following table sets forth the high and low market price per share of Andrx common stock, based on published financial sources, through March 31, 2002 and for 2001:

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High
   
Low
2002
          
First quarter
   
$
71.27
   
$
31.13
2001, by quarter
          
First
   
$
72.25
   
$
38.50
Second
   
$
77.00
   
$
44.94
Third
   
$
77.39
   
$
58.02
Fourth
   
$
76.52
   
$
61.30
 
In addition, our marketable securities include common stock of Dr. Reddy (also discussed in Note A of the Notes to Consolidated Financial Statements in this Quarterly Report). As of March 31, 2002, Watson owned approximately 1.4 million shares of Dr. Reddy common stock with a market value of approximately $31.8 million. Dr. Reddy’s shares trade on the Bombay Stock Exchange (BSE) and on the New York Stock Exchange in the form of American depositary shares. However, the shares of Dr. Reddy common stock that we hold are currently tradable only on the BSE, since our shares are not presently in the form of American depositary shares. The liquidity of our Dr. Reddy investment may be limited due to the current Dr. Reddy daily trading volume on the BSE, among other factors.
 
Interest Rate Risk
 
Our exposure to interest rate risk relates primarily to our non-equity investment portfolio and our long-term debt. We generally invest our excess cash in money market mutual funds and other short-term, variable interest rate instruments. Under certain circumstances, we may invest in A-rated or higher fixed income securities. The fair value of fixed rate securities may be adversely impacted due to a rise in interest rates. We may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates.
 
As discussed in Note F of the Notes to Consolidated Financial Statements in this Quarterly Report, as of March 31, 2002 we had approximately $301.6 million outstanding under a LIBOR-based, variable interest rate term loan. A hypothetical 100 basis point increase in interest rates, based on the March 31, 2002 term loan balance, would reduce our annual net income by approximately $1.8 million. Any future gains or losses may differ materially from this hypothetical amount based on the timing and amount of actual interest rate changes and the actual term loan balance.
 
Based on quoted market rates of interest and maturity schedules for similar debt issues, we estimate that the fair value of our fixed-rate senior unsecured notes approximated its carrying value of $148.9 million at March 31, 2002. While changes in market interest rates may affect the fair value of our fixed-rate long-term notes, we believe the effect, if any, of reasonably possible near-term changes in the fair value of such debt on our financial condition, results of operations or cash flows will not be material.
 
At this time, we are not party to any interest rate or derivative hedging contracts and have no material foreign exchange or commodity price risks.

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PART II.    OTHER INFORMATION AND SIGNATURES
 
ITEM 1.    LEGAL PROCEEDINGS
 
The company is party to certain lawsuits and legal proceedings, which are described in “Part I, Item 3. Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2001. The following is a description of significant developments as of the date of this Quarterly Report and should be read in conjunction with the Annual Report referenced above.
 
Phen-fen Litigation.    With respect to the phentermine hydrochloride product liability lawsuits pending against the company, certain of its subsidiaries, and others, additional actions raising similar issues have been filed, and some actions have been settled and/or otherwise dismissed. As of April 15, 2002, approximately 600 actions were pending against the company and other company entities in a number of state and federal courts. The company believes that it will be fully indemnified by The Rugby Group’s former owner, Aventis Pharmaceuticals (Aventis, formerly known as Hoechst Marion Roussel, Inc,) for the defense of all such cases and for any liability that may arise out of these cases. Aventis is currently controlling the defense of all these cases as the indemifying party under its agreements with the company.
 
Buspirone Litigation.    In early April 2002, the class plaintiffs, States, and several individual plaintiffs filed or sought leave to file complaints or amended complaints in the consolidated buspirone antitrust action pending in the United States District Court for the Southern District of New York (In re: Buspirone Antitrust Litigation, MDL Docket No. 1410). The new complaints and amended complaints name Bristol-Myers Squibb Company (“BMS”), the company, and company subsidiaries Watson Pharma, Inc. (formerly known as Schein Pharmaceutical, Inc.) and Danbury Pharmacal, Inc. (collectively, “Schein”) as defendants. The complaints allege that in 1994 Schein entered into an unlawful agreement with BMS in an attempt to block competition in the buspirone market. The complaints allege that BMS paid Schein in exchange for Schein’s agreement not to pursue its attempts to invalidate BMS’ U.S. Patent No. 4,182,763, claiming buspirone, and not to launch a generic version of BMS’ branded product BuSpar®. BMS has agreed to indemnify and defend us and our affiliates (including Schein) in connection with these claims. BMS is currently controlling the defense of these actions pursuant to the terms of the agreement.
 
FDA Matters.    In May 2002, we announced that we had reached an agreement with the U.S. Food and Drug Administration (FDA) on the terms of a consent decree with respect to the company’s Corona, California manufacturing facility. The court approved the consent decree on May 13, 2002 (United States of America v. Watson Laboratories, Inc., and Allen Y. Chao, United States District Court for the Central District of California, EDCV-02-412-VAP). The consent agreement with FDA does not require any fine, a facility shutdown, product recalls or any reduction in production or service at the company’s Corona facility. The consent decree applies only to the company’s Corona facility and not its other six manufacturing sites. The decree requires Watson to ensure that its Corona, California facility complies with FDA’s current Good Manufacturing Practices (cGMPs) regulations. Pursuant to the agreement, Watson will hire an independent expert to conduct inspections of the Corona facility at least once each year. A report of each inspection by the independent expert will be prepared and submitted to the FDA and Watson, with an opinion from the expert as to cGMP compliance at the Corona facility. The first such expert report will be due in the first quarter of 2003. If, in the future, FDA determines that with respect to its Corona facility Watson has failed to comply with the consent decree or FDA regulations including cGMPs, the consent decree allows the FDA to order Watson to take a variety of actions to remedy the deficiencies. These actions could include ceasing manufacturing and related operations at the Corona facility, and recalling affected products. Such actions, if taken by FDA, could adversely affect the company, its results of operations, financial position and/or cash flows.
 
The company and its affiliates are involved in various other disputes, governmental and/or regulatory inspections, investigations and proceedings, and litigation matters that arise from time to time in the ordinary course of business. The process of resolving matters through litigation or other means is inherently uncertain and it is possible that the resolution of these matters will adversely affect the company, its results of operations, financial position and/or cash flows.

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ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
 
(a)  Exhibits:
 
Reference is hereby made to the Exhibit Index on page 19.
 
(b)  Reports on Form 8-K filed during the quarter ended March 31, 2002:
 
No Reports on Form 8-K were filed during the quarter ended March 31, 2002.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
WATSON PHARMACEUTICALS, INC.
(Registrant)
By:
  
/s/    MICHAEL E. BOXER
   
Michael E. Boxer
   
Senior Vice President – Chief Financial Officer
   
(Principal Financial Officer)
 
By:
  
/s/    R. TODD JOYCE
   
R. Todd Joyce
   
Vice President – Corporate Controller and Treasurer
   
(Principal Accounting Officer)
 
Dated: May 15, 2002

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WATSON PHARMACEUTICALS, INC.
 
EXHIBIT INDEX TO FORM 10-Q
For the Quarterly Period Ended March 31, 2002
 
 
Exhibit
No.
   
Description
+10.1
   
Packaging Agreement between Searle & Co. and Watson Laboratories, Inc. dated February 15, 2002.
 
 
+      Confidential
 
treatment has been requested with respect to certain portions of this exhibit. Omitted portions will be filed separately with the SEC.

19
EX-10.1 3 dex101.txt PACKAGING AGREEMENT Exhibit 10.1 Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as (----) . A complete, unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission. - -------------------------------------------------------------------------------- PACKAGING AGREEMENT ------------------- TABLE OF CONTENTS ----------------- ARTICLE 1. DEFINITIONS......................................................................3 ARTICLE 2. PROCESSING AND PACKAGING AND PRICE...............................................5 ARTICLE 3. FORECASTS AND ORDERS.............................................................7 ARTICLE 4. SPECIFICATIONS...................................................................8 ARTICLE 5. PACKAGING MATERIALS..............................................................8 ARTICLE 6. QUALITY CONTROL; ADVERSE EXPERIENCES AND RECALLS.................................9 ARTICLE 7. WARRANTIES......................................................................11 ARTICLE 8. INDEMNIFICATION.................................................................12 ARTICLE 9. CONFIDENTIALITY.................................................................13 ARTICLE 10. TERM AND TERMINATION............................................................13 ARTICLE 11. GOVERNING LAW...................................................................14 ARTICLE 12. MISCELLANEOUS...................................................................14
PACKAGING AGREEMENT ------------------- THIS AGREEMENT made as of this 15th day of February , 2002, (the ---- ---------- "Effective Date"), (the "Agreement") by and between SEARLE & CO., a Delaware corporation ("SEARLE"), and WATSON LABORATORIES, INC., a Nevada corporation ("WATSON"); WHEREAS, WATSON has obtained rights to certain Products (as hereinafter defined) and desires to have the Products packaged by SEARLE; NOW, THEREFORE, the parties agree as follows: ARTICLE 1. DEFINITIONS 1.1. "Affiliate" of a party means any corporation or other business entity controlled by, controlling or under common control with, such party. For this purpose "control" shall mean direct or indirect beneficial ownership of more than fifty percent (50%) of the voting or income interest in such corporation or other business entity. 1.2. "Assets" has the meaning ascribed to such term in Section 2 of the Asset Purchase Agreement entered into between G.D. Searle & Co., SCS Pharmaceuticals and Watson Laboratories, Inc. dated September 30, 1997 and the Asset Purchase Agreement entered into between G.D. Searle & Co. and Watson Laboratories Inc. dated September 18, 1998. 1.3. "ANDA" means an abbreviated new drug application that is submitted to the FDA for approval to manufacture and/or sell a pharmaceutical product in the United States. 1.4. "Asset Purchase Agreement(s)" mean the Asset Purchase Agreement entered into between G.D. Searle & Co., SCS Pharmaceuticals and Watson Laboratories, Inc. dated September 30, 1997 and the Asset Purchase Agreement entered into between G.D. Searle & Co. and Watson Laboratories Inc. dated September 18, 1998. 1.5. "Batch" means one (1) production lot of a Product as listed for each Product on Schedule 1.5. 1.6. "Bulk Tablet Testing Specifications" means the procedures, requirements, standards, and other items related to testing of the Products in bulk tablet form attached as Schedule 1.6 as amended from time to time in accordance with the 3 provisions hereof. 1.7. "Contract Year" shall mean each consecutive twelve (12) month period commencing on January 1, 2002 and ending on the first anniversary of such date and each consecutive twelve (12) month period ending on an anniversary of such date during the term hereof. 1.8. "FDA" means the United States Food and Drug Administration. 1.9. "FTC" means the United States Federal Trade Commission. 1.10. "Law" means any federal, state or local law, ordinance, rule, regulation, or governmental requirement or restriction of any kind, and any rules, regulations, and orders promulgated thereunder. 1.11. "NDA" means a New Drug Application that is submitted to the FDA in order to obtain approval to manufacture and/or sell a pharmaceutical product in the United States. 1.12. "Ogestrel Agreement" means the Supply Agreement entered into between G.D. Searle & Co. and Watson Laboratories, Inc. dated October 16, 1997 and the Letter dated March 29, 2001, notifying Searle that Watson was extending this Supply Agreement solely for the products, Low-Ogestrel and Ogestrel. 1.13. "Packaging" means filling, inspecting, labeling, packaging and packing of the Products or any part thereof in accordance with the Packaging Specifications. The terms "Package," "Packaged" and "Packaging" in this Agreement shall have the identical meaning. 1.14. "Packaging Specifications" mean the procedures, requirements, standards and other items related to Packaging of the Products attached hereto as Schedule 1.14, as amended from time to time in accordance with the provisions hereof. 1.15. "Product(s)" means the pharmaceutical products listed on Schedule 1.5, meeting the Specifications. 1.16. "Public Information" means information that is publicly available or is generally known in the pharmaceutical industry. 1.17. "Searle Labeling" means the printed labels, labeling and packaging materials, including printed carton, container label and package inserts, as currently used by 4 SEARLE for each Product. 1.18. "Specifications" shall mean both the Bulk Tablet Testing Specifications and the Packaging Specifications. 1.19. "Territory" means the United States and its possessions. 1.20. "Watson Labeling" means the printed labels, labeling and packaging materials, including printed carton, container label and package inserts, used by Watson and bearing Watson's name for each Product. ARTICLE 2. PROCESSING AND PACKAGING AND PRICE 2.1. Undertaking. ----------- (a) Subject to the limitations contained herein, SEARLE or its Affiliates hereby agrees to Package or to have Packaged WATSON's orders for the Products in the Territory and WATSON agrees to pay SEARLE for the quantity of Products so Packaged in accordance with this Agreement. However, for the Product, Nor Q.D., SEARLE hereby only agrees to conduct the required testing according to the Quality Responsibilities in Schedule 6.1. WATSON is responsible for all other aspects of Packaging Nor Q.D. SEARLE shall not be obligated to Package Products in excess of the capacity limitations described in Sections 3.1 and 3.2. For the duration of this Agreement, WATSON hereby grants to SEARLE a royalty-free license and right in the Territory to use such of the Assets as are necessary or useful to SEARLE in fulfilling its obligations under this Agreement. (b) In addition, SEARLE or its Affiliates agree to conduct bulk tablet testing of the Products or to have such testing conducted and will report the results of these tests to WATSON within five (5) working days of receiving the results of these tests. SEARLE or its designee will conduct the tests in accordance with the Bulk Tablet Testing Specifications contained in Schedule 1.6. (c) WATSON will review the results of the bulk tablet tests and in WATSON's sole discretion determine which lots of bulk Product are acceptable for release to SEARLE for Packaging. For each lot of bulk Product that WATSON releases to SEARLE for Packaging, WATSON shall provide SEARLE with written authorization to accept those lots of bulk Product. Without such written authorization from WATSON, SEARLE will not accept shipment of these lots of bulk Product. (d) The parties acknowledge that any of SEARLE's obligations hereunder may be carried out, at SEARLE's election, by third party manufacturers appropriately qualified under all Laws to perform the Packaging obligations hereunder in compliance with the Specifications and all Laws; provided that SEARLE's use of any third party manufacturer shall require WATSON's 5 prior written consent, which consent shall not be unreasonably withheld, and the written agreement by the third party to abide by and comply with the terms of this Agreement. Notwithstanding the above, the use of any third party manufacturer shall not relieve SEARLE of its obligations under this Agreement. (e) WATSON will supply SEARLE, free of charge, with sufficient released Product in bulk form at least sixty (60) days before any finished Product delivery date set pursuant to Article 3 for SEARLE to comply with its Packaging commitments to WATSON under this Agreement. 2.2. Price and Payment. ----------------- (a) During the first Contract Year, the prices for Packaging the Products are set out in Schedule 2.2(a). Thereafter, the prices shall be adjusted as provided in subsection (c) below. (b) Except as otherwise provided herein, including an event of Force Majeure affecting either party, during each Contract Year of this Agreement, WATSON shall purchase a minimum quantity of Products equal to US $(----) ("Minimum Quantity"). If in any such Contract Year, WATSON fails to purchase such Minimum Quantity, then WATSON shall pay SEARLE an amount equal to (----)% of the difference between US $(----) and the total price for all Products purchased by WATSON for delivery in such Contract Year. Purchase Orders issued by WATSON in 2001 for Product to be delivered in 2001 will not be included in the Minimum Quantity for 2002 even if Product so ordered is not delivered until 2002. Such Minimum Quantity will include the purchases made by WATSON under the Ogestrel Agreement for Ogestrel and Low-Ogestrel during the applicable Contract Year. It is agreed and understood that these liquidated damages are intended to compensate SEARLE for its lost profits and overhead costs which are difficult to calculate and project due to uncertainties in scheduling its manufacturing operations, and in no way are such liquidated damages to be construed as a penalty for WATSON's breach. (c) By December 1st of each Contract Year, SEARLE shall provide WATSON with written notice of the prices for the following Contract Year. Effective January 1 of each year, SEARLE may increase its prices for the Product by an amount equal to increases in the Producer Price Index for Pharmaceutical Preparations, PCU2834, as published by the U.S. Bureau of Labor Statistics, over the previous twelve (12) month period, September to October. Price increases for the Product shall not exceed (----)% annually. Price changes will take effect January 1 of each year and shall be effective for one year. These price changes will apply to any Purchase Orders issued by WATSON in the previous Contract Year provided the Purchase Order specifies a delivery date after January 1 of the current Contract Year. In the event the verifiable cost of SEARLE's packaging materials increases by more than (----)% 6 in a Contract Year, however, SEARLE may adjust the Product(s) price to WATSON to reflect these increased packaging component costs. (d) The Products will be shipped to a location in the Territory designated by WATSON, FCA (Incoterms 2000) SEARLE's manufacturing plant. Title and risk of loss shall pass to WATSON upon delivery of the Products to the common carrier. (e) WATSON will pay in US currency for each shipment of Products within (----) days after the shipment of the Product(s). ARTICLE 3. FORECASTS AND ORDERS 3.1. Forecasts. --------- (a) On a monthly basis, WATSON will provide SEARLE with a written (----) month non-binding rolling forecast of the quantities of each Product that WATSON expects to purchase during each of the next (----) months (the "(----) Month Forecast"), or the remaining months of the contract, if less than (----) months left in the contract. Except as may be provided otherwise in this Section 3, the forecast for each Contract Year will be limited to an amount not greater than (----)% of the forecast for the prior Contract Year. (b) The first (----) months of each (----) Month Forecast (the "(----) Forecast") shall be firm and shall not have been changed from the forecasted amounts for the same calendar months contained in the prior (----) Month Rolling Forecast. 3.2. Permitted Amount to be Ordered. WATSON shall submit a purchase order to ------------------------------ SEARLE referencing this Agreement each month as required, with a delivery date of not less than (----) days after the date thereof. SEARLE will use its commercially reasonable efforts, but will be under no obligation, to supply Product in excess of (----)% of the (----) Month Forecast. 3.3. Minimum Order Size. The minimum size of any order for any Product shall be ------------------ (----) Batch of such Product with larger orders being in whole number multiples of a Batch. A Batch of bulk Product may be split between trade and sample presentations as long as the whole Batch is consumed in packaging within one month's time. 3.4. Failure to Supply. ----------------- (a) In the event SEARLE fails or is unable to Package or conduct testing in accordance with the Bulk Tablet Testing Specifications or has reason to believe that it will be unable to so test or to Package the quantities of the Products ordered by WATSON to meet WATSON's requirements (within 7 the limits described in Section 2.1 above and within thirty (30) days after the delivery date set forth in the applicable purchase order), WATSON may (i) purchase or obtain so much as to meet its requirements or any portion thereof from any other source, and/or (ii) to the extent permitted by law, Package or have Packaged the same under the applicable Specifications and quality control procedures. In such event, SEARLE shall provide WATSON or WATSON's contract manufacturer with all documents, data and other information necessary or useful for Packaging the Products at no cost for so long as SEARLE is unable to supply sufficient quantities of the Products to meet WATSON's requirements. Any such quantities Packaged by a secondary source pursuant to this Paragraph shall nonetheless be credited against the WATSON's Minimum Quantity purchase obligation under Paragraph 2.2(b). ARTICLE 4. SPECIFICATIONS 4.1 Specifications. The Products shall be tested, Packaged, stored and shipped -------------- in accordance with the Specifications and all Laws. 4.2 WATSON's Changes. The Specifications may be changed by WATSON, provided ---------------- the Specifications at all times shall be in compliance with the Product Registration, from time to time with SEARLE's consent which shall not be unreasonably withheld, but not more often than (----) per year unless required by the FDA or other US government agency. All such changes shall be communicated to SEARLE in writing, after which the parties shall agree on the date of implementation of such changes as soon as reasonably practicable. If any such change results in increased Packaging, testing costs or obsolescence of any materials specifically purchased by SEARLE for Packaging of the Products under this Agreement prior to being notified in writing by WATSON of the change in the Specifications, WATSON shall reimburse SEARLE for any such increased costs and the actual out-of-pocket cost of all such materials except to the extent the quantity of such materials exceeds requirements greater than the previous (----) months of WATSON's forecasts. Upon being reimbursed for obsolete material and at WATSON's written request, SEARLE shall promptly ship any such materials to a location designated by WATSON or destroy such materials at WATSON's expense. If any such change or proposed change to the Specifications results in costs and expenses to SEARLE, WATSON shall promptly reimburse all such reasonable documented out-of-pocket costs and expenses. ARTICLE 5. PACKAGING MATERIALS 5.1. Supply. SEARLE will supply all materials required to Package the bulk ------ Product provided by WATSON as described in Section 2.1 (e). 8 5.2. Title and Risk of Loss. Title and risk of loss to all materials provided ---------------------- by SEARLE shall pass to WATSON upon delivery of the finished Products incorporating such materials to the common carrier at SEARLE's manufacturing plant. SEARLE shall store and maintain all bulk Product and Packaging materials in accordance with the Specifications and in compliance with all applicable Laws. ARTICLE 6. QUALITY CONTROL; ADVERSE EXPERIENCES AND RECALLS 6.1. Quality Responsibilities. The Quality Responsibilities for SEARLE and ------------------------ WATSON attached as Schedule 6.1 to this Agreement, shall be used by both Parties to assign the day-to-day responsibilities and manage the operations of both the WATSON and SEARLE Quality Assurance groups in regards to the Packaging of the Products by SEARLE for WATSON. 6.2. Testing. SEARLE shall perform quality control tests and assays on the ------- Products in accordance with the Bulk Tablet Testing Specifications. Results of such tests and assays as well as specific Batch samples of Products packaged under this Agreement following the date hereof will be submitted to WATSON with a Certificate of Analysis. 6.3. Samples. SEARLE shall retain for at least one (1) year after the ------- expiration date of the applicable lot or batch of Products a file sample properly stored from each lot or batch of Products Packaged, including market packages, sufficient to perform each quality control test specified in the Bulk Tablet Testing Specifications at least two (2) times. 6.4. Quality Issues Bulk Product. Any quality, safety or similar issues related --------------------------- to the bulk Product supplied by WATSON to SEARLE are WATSON's responsibility to resolve; provided, however, that any quality, safety or similar issues related to the bulk Products caused by SEARLE's failure to comply with the terms of this Agreement or Laws, or SEARLE's negligence or willful misconduct shall be the responsibility of SEARLE, such responsibility to include, without limitation, the obligation to reimburse WATSON for loss or damage to the bulk Product. For any Product which cannot be released due to quality or safety issue related to the bulk Product which is the responsibility of WATSON hereunder, WATSON shall reimburse SEARLE for the direct cost of manufacture of the affected Product, said direct cost of manufacture to be calculated by adding the actual cost of : a) Packaging materials and supplies used to Package the affected Products; b)Wages of those employees directly employed in the packaging of the affected Products; and, (c) That portion of SEARLE's fixed overhead expenses directly attributable to the actual Packaging of the affected products, calculated and apportioned in accordance with generally accepted accounting principles. 9 6.5. Other Products' Adverse Drug Experiences and Quality Complaints. WATSON --------------------------------------------------------------- shall be responsible for handling all Product complaints related to all Products. SEARLE and WATSON shall promptly forward any Product complaints received by either of them to the other no later than three (3) days following receipt and shall provide assistance in investigating such complaints as may be reasonably requested. Each party shall designate a representative who will handle Product complaint activities for such party and coordinate such activities with the other party. 6.6. Recalls Relating to Products. Recalls of the Products shall be the ---------------------------- responsibility of WATSON. The party desiring to initiate a recall shall notify the other and, immediately thereafter, both parties shall discuss appropriate alternatives, including whether a recall is required and the method of implementing a recall. SEARLE shall cooperate with WATSON in the event of any recall, field alert or similar event and provide such assistance in connection therewith as WATSON may reasonably request. The costs of any such recall or similar event shall be borne by WATSON, except if the recall resulted from SEARLE's negligence, or breach of this Agreement, in which case SEARLE shall reimburse WATSON for the costs and expenses reasonably borne and paid by WATSON to effect the recall. 6.7. Inspection. SEARLE agrees to permit WATSON's designated representatives to ---------- whom SEARLE has no reasonable objections to inspect SEARLE facilities at which the Products are Packaged, stored or tested for the purpose of determining compliance with applicable Law and the Specifications at reasonable times after reasonable notice during regular business hours. 6.8. Quality Control Evaluation. Within (----) days after receipt of each -------------------------- shipment, WATSON will inspect and make a quality control evaluation of such shipment (which shall include a certificate of analysis). In the event any shipment or part thereof fails, or there is manifest cause for WATSON to reasonably believe that any shipment or part thereof fails to conform to the Packaging Specifications or shall have been Packaged or shipped under conditions which do not comply with the FDA requirements or the provisions of this Agreement, WATSON may reject the same by giving written notice to SEARLE within the (----) day period, specifying the manner in which it fails to meet the requirements. SEARLE shall have (----) days within which to accept or reject WATSON's claims. 6.9. Disputes. In the event of any dispute as to whether any shipment of -------- Products fails in whole or part to meet the Packaging Specifications, such dispute shall be promptly resolved by an independent testing organization of recognized repute within the US pharmaceutical industry mutually agreed upon by the parties, the appointment of which shall not be unreasonably withheld or delayed by either party. Until any dispute is resolved, WATSON will not dispose of any 10 nonconforming shipment without prior written authorization from and agreement with SEARLE. The fees and costs of such testing organization shall be borne by the party whose position is not sustained by the testing organization. 6.10. Replacement Products. If any Products shipped hereunder are rejected by -------------------- WATSON, SEARLE agrees to ship as soon as reasonably possible after notice of such rejection (or if there is a dispute with regard to the rejection, after notice of the determination of the independent testing organization) replacement Products either newly packaged or, with the consent of WATSON, reworked from the rejected shipment using an FDA approved procedure with respect thereto. SEARLE's requirement to ship replacement Product is entirely contingent on first receiving sufficient replacement bulk Products from WATSON to allow SEARLE to package replacement Product, the cost of such replacement bulk Product to be reimbursed to WATSON within (----) days if SEARLE does not reasonably and in good faith dispute Watson's rejection of Product. If SEARLE does so dispute WATSON's rejection, SEARLE will only be responsible for the cost of such replacement bulk Product if its position is sustained by the testing organization as set forth in Section 6.9 above. 6.11. Government Inspections/Communications. Each party shall promptly notify ------------------------------------- the other part of any government inspections or communications to or from any governmental agency (including the reporting of adverse drug experiences or field alerts) that might adversely affect the other parties' ability to perform its obligations under this Agreement. ARTICLE 7. WARRANTIES 7.1. SEARLE Warranties. SEARLE warrants that: ----------------- (a) the Packaging and all materials furnished by SEARLE will comply with the Packaging Specifications and with all applicable Laws, including all current Good Manufacturing Practices ("GMPs"); (b) EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, SEARLE MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 7.2. WATSON Warranties. WATSON warrants that: ----------------- (a) to the extent that it provides any bulk Product, other materials or engages in Packaging with respect to the Products, all such bulk Product, materials and Packaging will comply with the Specifications and with all applicable Laws, including GMPs; and 11 (b) EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, WATSON MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ARTICLE 8. INDEMNIFICATION 8.1. In Favor of SEARLE. WATSON shall defend, indemnify and hold SEARLE, its ------------------ Affiliates and the officers, directors and employees of each harmless from and against any and all claims, demands, losses, damages, liabilities, settlement amounts, costs or expenses whatsoever (including reasonable attorneys' fees) arising from or related to any claim, action or proceeding made or brought against such party by a third party (i) as a result of WATSON's use, promotion, sale and/or distribution of the Products except to the extent such liability arises from SEARLE's breach of any warranty or representation herein, SEARLE's failure to perform any covenant herein, or the negligent act or omission of SEARLE in performing its obligations under this Agreement or (ii) as a result of WATSON's breach of any warranty or representation herein, WATSON's failure to perform any covenant herein, or the negligent act or omission of WATSON in performing its obligations under this Agreement. 8.2. In Favor of WATSON. SEARLE shall defend, indemnify and hold WATSON and its ------------------ officers, directors and employees harmless from and against any and all claims, demands, losses, damages, liabilities, settlement amounts, costs or expenses whatsoever (including reasonable attorneys' fees) arising from or related to any claim, action or proceeding made or brought against such party by a third party as a result of SEARLE's breach of any warranty or representation herein, SEARLE's failure to perform any covenant herein, or the negligent act or omission of SEARLE in performing its obligations under this Agreement. 8.3. Notice; Defense. In the event of any claim, action or proceeding for which --------------- a party is entitled to indemnity hereunder, the party seeking indemnity ("Claimant") shall promptly notify the other party ("Indemnitor") of such matter in writing, provided that the failure to give timely notice to the Indemnitor shall not release the Indemnitor from any liability to Claimant except to the extent the Indemnitor is actually prejudiced thereby. Indemnitor shall promptly, but in no event later than thirty (30) days from date of notice, assume responsibility for and shall have full control of the defense of such matter and Claimant shall fully cooperate in Indemnitor's handling and defense thereof. Failure to assume the defense within the aforementioned time period shall constitute a waiver of the Indemnitor's rights to assume the defense and, except as otherwise provided herein, the Claimant shall have the full right to conduct the defense, settle or otherwise dispose of the claim at the Indemnitor's expense. The Indemnitor shall have the right to settle or 12 compromise claims against the Claimant involving the payment of money by Indemnitor only in exchange for an unconditional release of Claimant. All other dispositions of claims must be approved by Claimant, which approval shall not be unreasonably withheld. 8.4. Limitation. Notwithstanding any provision of this Agreement which might ---------- otherwise be to the contrary, except as expressly set forth in Section 2.2(b), (i) no party shall be entitled to indemnification with respect to any claim or suit to the extent such claim or suit results from its own negligence or willful misconduct, or any action to which it has consented to in writing, and (ii) neither party shall be liable to the other for punitive, exemplary, indirect or special damages or lost profits or other consequential damages of any kind. ARTICLE 9. CONFIDENTIALITY During the term of this Agreement and for a period of three (3) years thereafter except as otherwise provided in the Asset Purchase Agreement, no party shall, without the specific written consent of the other party, disclose to any third party (except to governmental health or regulatory authorities to obtain and maintain the registration of the Products or other disclosures required by law) or use for its own purposes any confidential information which is received from the other party or its agent(s) pursuant to this Agreement concerning the Products or the other party's business unless such information: a. was or becomes public through no fault of the receiving party, or b. was obtained from a third party legally entitled to use and disclose the same, or c. was known to the party prior to entering into this Agreement. For this purpose, Assets shall be deemed WATSON's property in the Territory and not subject to any obligation of confidentiality by WATSON with respect to the Territory. ARTICLE 10. TERM AND TERMINATION 10.1. Term. The term of this Agreement shall be, unless terminated earlier as ---- provided herein commencing on the Effective Date and termination on December 31, 2003. 10.2. Termination by Either Party. Either party shall have the right to --------------------------- terminate this Agreement immediately upon written notice to the other: (a) if the other party is dissolved or liquidated, files or has filed against it a petition under any bankruptcy or insolvency law, makes an assignment for the benefit of its creditors or has a received appointed for all or substantially all of its property and is not withdrawn within sixty (60) days of appointment; or 13 (b) if the other party shall commit any material breach (whether remediable or not) of its obligations under this Agreement and, if remediable, shall fail to remedy the breach within sixty (60) days after receipt of written notice from the non-breaching party describing such breach. 10.3 Termination With Notice. WATSON shall be entitled to terminate this ----------------------- Agreement in its entirety, with an effective date of December 31, 2002, by giving written notice to SEARLE on or before July 1, 2002. In the event, WATSON submits a written request to SEARLE by July 1, 2002, that it would like to terminate this Agreement only as related to an individual Product or Products, effective December 31, 2002, SEARLE will have 1 month to respond to this request. No later than August 1, 2002 Pharmacia will notify WATSON in writing if it accepts WATSON's request for termination. This decision will be at Pharmacia's sole discretion and if WATSON does not receive a response from SEARLE by August 1, 2002, SEARLE will be deemed to have rejected WATSON's request for a partial termination. 10.4 Without Prejudice. Termination of this Agreement, due to the fault of ----------------- either party, shall be without prejudice to any other rights or remedies then or thereafter available to either party under this Agreement or otherwise. 10.5 Products and Materials. Promptly after expiration or termination of this ---------------------- Agreement, SEARLE will complete work on all in process Products. WATSON will pay SEARLE the price determined pursuant to Section 2 for Products Packaged by SEARLE. In addition, WATSON shall reimburse SEARLE for the cost of any packaging and labeling materials remaining in SEARLE's inventory, which packaging and labeling material will be promptly delivered to WATSON at a place of WATSON's designation. However, in no event shall the quantity of Products and packaging/labeling materials to be purchased by WATSON under this provision after expiration or termination exceed WATSON's forecasts for the preceding six (6) month period. ARTICLE 11. GOVERNING LAW This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of Delaware of the United States of America regardless of the choice of law principles of Delaware or any other jurisdiction. ARTICLE 12. MISCELLANEOUS 12.1. Costs. Each party shall bear its own costs and expenses incurred in ----- negotiating this Agreement. 14 12.2. Notices. Any notice required or permitted to be given hereunder shall be ------- deemed sufficient if sent by facsimile letter or overnight courier, or delivered by hand to SEARLE or WATSON at the respective addresses and facsimile numbers set forth below or at such other address and facsimile number as either party hereto may designate. If sent by facsimile letter, notice shall be deemed given when the transmission is completed if the sender has a confirmed transmission report. If a confirmed transmission report does not exist, then the notice will be deemed given when the notice is actually received by the person to whom it is sent. If delivered by overnight courier, notice shall be deemed given when it has been signed for. If delivered by hand, notice shall be deemed given when received. if to SEARLE, to: Searle & Co. Calle Jardines #99 Caguas, Puerto Rico 00725 Attention: Finance Director Fax number: (787) 286-4034 with a copy to: Legal Counsel Pharmacia CentreSource 7000 Portage Road Kalamazoo, Michigan 49001-0199 Fax number: (616) 833-6310 if to WATSON, to: Watson Laboratories, Inc. PO Box 1900 311 Bonnie Circle Corona CA 91718-1900 Attention: Maria Chow Fax number: (909) 493-5807 with a copy to: General Counsel Watson Laboratories, Inc. 311 Bonnie Circle Corona, CA 92880 Fax number: (909)279-8094 12.3. Survival. The provisions of Articles 8, 9 and 11 shall survive the -------- expiration or other termination of this Agreement. 15 12.4. Entire Agreement. This Agreement, together with any Schedules hereto and ---------------- the Asset Purchase Agreement, constitute the entire Agreement between the parties concerning the subject matter hereof; it may not be modified or amended except in writing signed by all parties. All agreements or arrangements (if any) among the parties executed prior to the date hereof (except for the Asset Purchase Agreement), whether written or oral, relating to the subject matter hereof are hereby canceled and superseded. 12.5. Schedules. The Schedules (as amended from time to time by agreement of the --------- Parties in writing) form part of this Agreement and shall have the same force and effect as if expressly set out in the body of the Agreement and any reference to the Agreement shall include the Schedules. To the extent that there is conflict between or ambiguity relating to, on the one hand, any or all of the Schedules and, on the other, the remainder of this Agreement, the wording of the Agreement shall prevail. 12.6. Headings. Headings are inserted for convenience and shall not by -------- themselves determine the interpretation of this Agreement. 12.7. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original but together constituting one agreement. 12.8. Assignment. Except as otherwise provided in this Section, neither party ---------- may assign or delegate any right or obligation hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld, and any attempted assignment or delegation in violation hereof shall be void. WATSON and SEARLE may each assign all or part of its rights and obligations hereunder to an Affiliate on notice to and without the necessity of securing the other party's consent, subject to and for so long as such assignee remains an Affiliate of the assignor. In addition, either party may assign all of its rights and obligations hereunder to a purchaser of all or substantially all of the assets or business to which this Agreement relates. 12.9. Waiver of Default. No waiver of any default hereunder by any party or any ----------------- failure to enforce any rights hereunder shall be deemed to constitute a waiver of any subsequent default with respect to the same or any other provision hereof. No waiver shall be effective unless made in writing with specific reference to the relevant provision(s) of this Agreement and signed by a duly authorized representative of the party granting the waiver. 12.10. Not for Benefit of Creditors. The provisions of this Agreement are ---------------------------- intended only for the regulation of relations between the parties. Except as expressly provided in Article 8 (and then subject to the limitations stated in such Article), this Agreement is not intended for the benefit of any person, firm or entity not a party 16 hereto and no rights are granted to such third parties hereunder. 12.11. Force Majeure. If any party is prevented from performing any obligation ------------- hereunder by reason of fire, explosion, strike, labor dispute, casualty, accident, lack or failure of transportation facilities, flood, war, civil commotion, acts of God, any law, order or decree of any government or subdivision thereof or any other cause beyond the reasonable control of such party ("Force Majeure), then such party shall be excused form performance hereunder to the extent and for the duration of such prevention, provided it first notifies the other party in writing of such prevention. The foregoing shall not apply to any prevention due to any governmental regulatory action resulting directly from the fault of SEARLE. 12.12. Publicity. Neither SEARLE nor WATSON, nor any Affiliate thereof, will --------- issue or cause publication of any press release or other announcement or public communication with respect to this Agreement or the transactions contemplated hereby without the prior written consent of the other party, which consent will not be unreasonably withheld or delayed. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. SEARLE & CO. WATSON LABORATORIES, INC. By: By: ----------------------------- ----------------------------- Title: Title: -------------------------- -------------------------- 17 SCHEDULES --------- 1.5 Products and Batch Lot Sizes 1.6 Bulk Tablet Testing Specifications 1.14 Packaging Specifications 2.2(a) Purchase Prices 6.1 Quality Agreement and Quality Responsibilities SCHEDULE 1.5 PRODUCTS AND BATCH LOT SIZES ----------------------------
CODE DESCRIPTION LOT SIZE (Cartons) TABLETS - ---- ----------- ------------------ ------- 25428 Brevicon (----) (----) (----) X25428 Brevicon (----) Samples (----) (----) 27928 Levora (----) (----) (----) X27928 Levora (----) Samples (----) (----) 26528 Norinyl 1/50 (----) (----) (----) 25928 Norinyl 1/35 (----) (----) (----) X25928 Norinyl 1/35 (----) Samples (----) (----) A023091 NorQD tablets (----) (----) 27428 Tri-Norinyl (----) (----) (----) X27428 Tri-Norinyl (----) Samples (----) (----) 29128 Trivora (----) (----) (----) X29128 Trivora (----) Samples (----) (----)
Schedule 1.5 to Packaging Agreement TRIVORA Tablets Low Dose: Levonorgestrel 0.05 mg / Ethinyl Estradiol 0.03 mg Medium Dose: Levonorgestrel 0.075 mg / Ethinyl Estradiol 0.04 mg High Dose: Levonorgestrel 0.125 mg / Ethinyl Estradiol 0.03 mg - ------------------------------------------------------------------------------------------------------------------------------------ Bulk Tablet Holding Period (----) days from start of manufacture of the earliest of the Trivora lots - ------------------------------------------------------------------------------------------------------------------------------------ Expiration Date Assignment (----) months from start of manufacture of the earliest of the Trivora lots - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ IN-PROCESS SPECIFICATION (GRANULATION) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ TEST SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Blend Uniformity (----)% - (----)% L.S. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ FINISHED GOODS SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATION REGULATORY SPECIFICATION ------------------------------------------------------------------------------------------------ Low Dose Medium Dose High Dose Low Dose Medium Dose High Dose - ------------------------------------------------------------------------------------------------------------------------------------ Description Blue, round, White, round, Pink, round, Blue, flat- White, flat- Pink, flat- flat-faced, flat-faced, flat-faced, faced, faced, faced, bevel-edge, bevel-edge, bevel-edge, beveled-edge beveled-edge beveled-edge uncoated. uncoated. uncoated. tablets with tablets with tablets with Debossed Debossed one Debossed one the company the company the company one side side side identifier on identifier on identifier on "WATSON", "WATSON", "WATSON", one side and one side and one side and other side other side other side the product the product the product "50/30" "75/40" "125/30" identifier on identifier on identifier on the other. the other. the other. - ------------------------------------------------------------------------------------------------------------------------------------
Identification Test (HPLC) Retention time of main sample peak Retention time of main sample peak conforms to correspond to those of the standard. those of the standard. - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test (Melting Point, Class I) (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------
TRIVORA SPECIFICATION Schedule 1.6 to Packaging Agreement - ------------------------------------------------------------------------------------------------------------------------------------ Assay Levonorgestrel (HPLC) (----)% - (----)% (----)% - (----)% of the label claim - ------------------------------------------------------------------------------------------------------------------------------------ Assay Ethinyl Estradiol (HPLC) (----)% - (----)% (----)% - (----)% of the label claim - ------------------------------------------------------------------------------------------------------------------------------------ Content Uniformity (HPLC) Levonorgestrel Conforms to current USP criteria Conforms to current USP requirements - ------------------------------------------------------------------------------------------------------------------------------------ Content Uniformity (HPLC) Ethinyl Estradiol Conforms to current USP criteria Conforms to current USP requirements - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Levonorgestrel Q = 80% at 60 min. Conforms to USP Acceptance Table Conforms to current USP requirements - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Ethinyl Estradiol Q = 75% at 60 min. Conforms to USP Acceptance Table Conforms to current USP requirements - ------------------------------------------------------------------------------------------------------------------------------------
Residual Methanol (----) (----) (----) (----) (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ 6-Keto EE -------------------- 9,11 - DEE -------------------- 6-OH-LNRG -------------------- (----)% (----)% (----)% (----)% (----)% (----)% Related 6-OH-EE on any on any on any on any on any on any Substances -------------------- individual individual individual individual individual individual 6-Keto-LNRG -------------------- 6,7 - DEE -------------------- 6,7 - DLNRG -------------------- 5,6 - Delta LNRG -------------------- LNRG SYNT. IMP --------------------------------------------------------------------------------------------------------------------- Total Related Substances (----) (----) (----) (----) (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic NMT (----) NMT (----) NMT (----) NMT (----) NMT (----) NMT (----) Microbial Count cfu/g cfu/g cfu/g cfu/g cfu/g cfu/g - ------------------------------------------------------------------------------------------------------------------------------------
Escherichia coli (----) - -------------------------------------------------------------------------------- Salmonella (----) No filed requirement - -------------------------------------------------------------------------------- Coliform bacteria (----) (----) (----) - -------------------------------------------------------------------------------- Fungi (----) (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------
TRIVORA SPECIFICATION Schedule 1.6 to Packaging Agreement NORINYL 1 + 35 Tablets Norethindrone 1 mg / Ethinyl Estradiol 0.035 mg - ------------------------------------------------------------------------------------------------------------------------------------ Bulk Tablet Holding Period (----) days from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------ Expiration Date Assignment (----) months from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ IN-PROCESS SPECIFICATION (GRANULATION) - ------------------------------------------------------------------------------------------------------------------------------------ TEST SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Blend Assay Norethindrone: (----)% - (----)% l.s. Ethinyl Estradiol: (----)% - (----)% l.s. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ FINISHED GOODS SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATION REGULATORY SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Appearance Yellow-green, round, flat-faced, bevel-edged Yellow-green, flat-faced, beveled-edge tablets tablet. Debossed one side "WATSON"; other with the company identified on one side and the side, "259". product identifier on the other side. - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test Retention time of main sample peak correspond Conforms to current USP requirements. (TLC or HPLC) to those of the standard. Norethindrone - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test (HPLC) Retention time of main sample peak correspond Retention time of main sample peak conforms to Ethinyl Estradiol to those of the standard. that of the standard. - ------------------------------------------------------------------------------------------------------------------------------------ Assay Norethindrone (----)% - (----)% (----)% - (----)% of label claim - ------------------------------------------------------------------------------------------------------------------------------------ Assay Ethinyl Estradiol (----)% - (----)% (----)% - (----)% of label claim - ------------------------------------------------------------------------------------------------------------------------------------
NORINYL 1+35 SPECIFICATION Schedule 1.6 to Packaging Agreement - ------------------------------------------------------------------------------------------------------------------------------------ Uniformity of Dosage Units Conforms to current USP criteria Conforms to USP requirements Norethindrone - ------------------------------------------------------------------------------------------------------------------------------------ Uniformity of Dosage Units Conforms to current USP criteria Conforms to USP requirements (Ethinyl Estradiol) - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Conforms to USP Acceptance Table Conforms to USP Norethindrone Q = 75% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution HPLC Conforms to USP Acceptance Table Conforms to USP Ethinyl Estradiol Q = 75% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic (----) N/A Microorganisms - ------------------------------------------------------------------------------------------------------------------------------------ Escherichia coli (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Salmonella (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Fungi (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Coliform bacteria (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------
NORINYL 1+35 SPECIFICATION Schedule 1.6 to Packaging Agreement NORINYL 1 + 50 Tablets Norethindrone 1 mg / Mestranol 0.05 mg - ------------------------------------------------------------------------------------------------------------------------------------ Bulk Tablet Holding Period (----) days from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------ Expiration Date Assignment (----) months from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- IN-PROCESS SPECIFICATION (GRANULATION) No filed requirement for blend uniformity or blend assay. - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ FINISHED GOODS SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATION REGULATORY SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Appearance White, round, flat-faced, bevel-edged tablet. White, round, flat-faced, beveled-edge tablet; Debossed one side "WATSON"; other side, debossed "WATSON" on one side and "265" on "265". the other side. - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test Retention time of main sample peak correspond Conforms to current USP requirements. (TLC or HPLC) to those of the standard. Norethindrone - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test B HPLC Retention time of main sample peak correspond Retention time of main sample peak conforms to Mestranol to those of the standard. that of the standard. - ------------------------------------------------------------------------------------------------------------------------------------ Assay Norethindrone (----)% - (----)% (----)% - (----)% of label claim - ------------------------------------------------------------------------------------------------------------------------------------ Assay Ethinyl Estradiol (----)% - (----)% (----)% - (----)% of label claim - ------------------------------------------------------------------------------------------------------------------------------------ Uniformity of Dosage Units Conforms to current USP criteria Conforms to current USP requirements Norethindrone - ------------------------------------------------------------------------------------------------------------------------------------
NORINYL 1+50 SPECIFICATION Schedule 1.6 to Packaging Agreement - ------------------------------------------------------------------------------------------------------------------------------------ Uniformity of Dosage Units Conforms to current USP criteria Conforms to current USP requirements Mestranol - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Norethindrone Conforms to USP Acceptance Table Conforms to USP requirements Q = 75% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Ethinyl Estradiol Conforms to USP Acceptance Table Conforms to USP requirements Q = 75% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic (----) N/A Microorganisms - ------------------------------------------------------------------------------------------------------------------------------------ Escherichia coli (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Salmonella (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Fungi (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Coliform bacteria (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------
NORINYL 1+50 SPECIFICATION Schedule 1.6 to Packaging Agreement BREVICON 0.5/35 Tablets Norethindrone USP 0.5 mg / Ethinyl Estradiol 0.035 mg - ------------------------------------------------------------------------------------------------------------------------------------ Bulk Tablet Holding Period (----) days from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------ Expiration Date Assignment (----) months from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ IN-PROCESS SPECIFICATION (GRANULATION) - ------------------------------------------------------------------------------------------------------------------------------------ TEST SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Blend Assay Norethindrone: (----)% - (----)% Ethinyl Estradiol: (----)% - (----)% - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ FINISHED GOODS SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATION REGULATORY SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Appearance Blue, round, flat-faced, bevel-edged tablet. Blue, flat-faced, beveled-edge tablets with Debossed one side "WATSON"; other side, company identifier on one side and product "254". identifier on the other, - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test Retention time of main sample peak correspond Passes test. Norethindrone to those of the standard. - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test Retention time of main sample peak correspond Passes test. Ethinyl Estradiol to those of the standard. - ------------------------------------------------------------------------------------------------------------------------------------ Assay (Norethindrone) (----)% - (----)% (----)% - (----)% L.S. - ------------------------------------------------------------------------------------------------------------------------------------ Assay (Ethinyl Estradiol) (----)% - (----)% (----)% - (----)% L.S. - ------------------------------------------------------------------------------------------------------------------------------------ Uniformity of Dosage Units Conforms to current USP criteria Conforms to USP requirements Norethindrone - ------------------------------------------------------------------------------------------------------------------------------------
BREVICON SPECIFICATION Schedule 1.6 to Packaging Agreement - ------------------------------------------------------------------------------------------------------------------------------------ Uniformity of Dosage Units Conforms to current USP criteria Conforms to USP requirements Ethinyl Estradiol - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Norethindrone Conforms to USP Acceptance Table Conforms to USP requirements Q = 75% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Ethinyl Estradiol Conforms to USP Acceptance Table Conforms to USP requirements Q = 75% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic (----) N/A Microorganisms - ------------------------------------------------------------------------------------------------------------------------------------ Escherichia coli (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Salmonella (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Fungi (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Coliform bacteria (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------
BREVICON SPECIFICATION Schedule 1.6 to Packaging Agreement LEVORA 0.15/30 Tablets Levonorgestrel 0.15 mg / Ethinyl Estradiol 0.03 mg - ------------------------------------------------------------------------------------------------------------------------------------ Bulk Tablet Holding Period (----) days from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------ Expiration Date Assignment (----) months from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ IN-PROCESS SPECIFICATION (GRANULATION) - ------------------------------------------------------------------------------------------------------------------------------------ TEST SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Blend Assay Levonorgestrel: (----)% - (----)% L.S. Ethinyl Estradiol: (----)% - (----)% L.S. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ FINISHED GOODS SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATION REGULATORY SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Description White, round, flat-faced, beveled edge tablet, White, flat-faced, beveled-edge tablets with the uncoated. Debossing one face, "15/30"; other company identifier on one side and the product face "WATSON". identifier on the other. - ------------------------------------------------------------------------------------------------------------------------------------ *Identification Test (HPLC) Retention time of main component peaks in the Retention time of main sample peak conforms to sample compares to that of the corresponding that of the standard. peaks in the standard. - ------------------------------------------------------------------------------------------------------------------------------------ *Identification Test (----) (----) (Melting Point, Class I) - ------------------------------------------------------------------------------------------------------------------------------------ Assay (Levonorgestrel) (----)% - (----)% (----)% - (----)% of the label claim - ------------------------------------------------------------------------------------------------------------------------------------ Assay (Ethinyl Estradiol) (----)% - (----)% (----)% - (----)% of the label claim - ------------------------------------------------------------------------------------------------------------------------------------ Content Uniformity HPLC Conforms to current USP criteria Conforms to current USP requirements Levonorgestrel - ------------------------------------------------------------------------------------------------------------------------------------
LEVORA SPECIFICATION Schedule 1.6 to Packaging Agreement - ------------------------------------------------------------------------------------------------------------------------------------ Content Uniformity HPLC Conforms to current USP criteria Conforms to current USP requirements Ethinyl Estradiol - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Conforms to USP Acceptance Table Conforms to current USP requirements Levonorgestrel Q = 80% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Dissolution Conforms to USP Acceptance Table Conforms to current USP requirements Ethinyl Estradiol Q = 75% at 60 min. - ------------------------------------------------------------------------------------------------------------------------------------ Disintegration (----) N/A - ------------------------------------------------------------------------------------------------------------------------------------ Residual Methanol (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ 6-Keto EE (----) --------------------------------------------------------------------------------- 9,11 - DEE (----) --------------------------------------------------------------------------------- 6-OH-LNRG (----) --------------------------------------------------------------------------------- 6-OH-EE (----) *Related --------------------------------------------------------------------------------- Substances 6-Keto-LNRG (----) (----) --------------------------------------------------------------------------------- 6,7 - DEE (----) --------------------------------------------------------------------------------- 6,7 - DLNRG (----) --------------------------------------------------------------------------------- 5,6 - Delta LNRG (----) --------------------------------------------------------------------------------- LNRG SYNT. IMP (----) --------------------------------------------------------------------------------- Total (----) (----) Related Substances - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic (----) (----) Microorganisms - ------------------------------------------------------------------------------------------------------------------------------------ Escherichia coli (----) - ---------------------------------------------------------------------------------------------------- Salmonella (----) Not a filed requirement - ---------------------------------------------------------------------------------------------------- Fungi (----) - ---------------------------------------------------------------------------------------------------- Coliform bacteria (----) - ------------------------------------------------------------------------------------------------------------------------------------
*Identification and Related Substances testing performed by PHARMACIA; all other results derived from Certificate of Analysis provided by (----). - -------------------------------------------------------------------------------- LEVORA SPECIFICATION Schedule 1.6 to Packaging Agreement NOR-QD Tablets Norethindrone, USP 0.35 mg - ------------------------------------------------------------------------------------------------------------------------------------ Bulk Tablet Holding Period (----) days from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------ Expiration Date Assignment (----) months from start of manufacture - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ IN-PROCESS SPECIFICATION (GRANULATION) - ------------------------------------------------------------------------------------------------------------------------------------ TEST SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Assay (Norethindrone) (----)% - (----)% L.S. - ------------------------------------------------------------------------------------------------------------------------------------ Content Uniformity Passes Test - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic Microorganisms (----) - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ FINISHED GOODS SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATION REGULATORY SPECIFICATION - ------------------------------------------------------------------------------------------------------------------------------------ Appearance Yellow, round, flat-faced, bevel-edged tablet. Yellow, flat-faced, beveled edge tablets Debossed one side "WATSON" and "235"; debossed with "Watson 235" on one side, and the other side blank. blank on reverse. - ------------------------------------------------------------------------------------------------------------------------------------ Identification Rf values of standard and sample compare. Rf values of standard and sample compare. - ------------------------------------------------------------------------------------------------------------------------------------ Assay (Norethindrone) (----)% - (----)% (----)% - (----)% L.S. - ------------------------------------------------------------------------------------------------------------------------------------ Content Uniformity Conforms to current USP criteria Conforms to current USP requirements - ------------------------------------------------------------------------------------------------------------------------------------ Disintegration (without disks) (----) (----) the use (----) - ------------------------------------------------------------------------------------------------------------------------------------
NOR-QD SPECIFICATION Schedule 1.6 to Packaging Agreement PLACEBO TABLETS, 50 mg
- ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATIONS REGULATORY SPECIFICATIONS - ------------------------------------------------------------------------------------------------------------------------------------ Description Round, flat-faced, disc, beveled edged Flat-faced, discoid, beveled edged tablets, no tablets. 3/16 inch diameter, uncoated. scoring, debossed with company identifier on Debossed: One face "WATSON"; "P1" on one side. the other side Orange colored, 50 mg tablet 40-0996-XX Orange / pale orange / peach colored, 50 mg tablet - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test (TLC) Absence of steroids No steroids present - ------------------------------------------------------------------------------------------------------------------------------------ Disintegration (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Hardness (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Residual Methanol (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic Microbial Count (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Coliform bacteria (----) No filed requirement - ---------------------------------------------------------------------------------- Fungi (----) - ---------------------------------------------------------------------------------- E. Coli (----) - ---------------------------------------------------------------------------------- Salmonella (----) - ------------------------------------------------------------------------------------------------------------------------------------
SPECIFICATION: PLACEBO 50 mg Schedule 1.6 to Packaging Agreement PLACEBO TABLETS, 100 mg (for LEVORA)
- ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATIONS REGULATORY SPECIFICATIONS - ------------------------------------------------------------------------------------------------------------------------------------ Description Round, flat-faced, beveled edged tablets. Flat-faced, discoid, beveled edged tablets, no Uncoated, 1/4 inch diameter. Debossed: One scoring, debossed with company identifier on face "WATSON"; "P1" on the other side one side. Pale orange / Peach colored, 100 mg tablet 40-0997-XX Orange / pale orange / peach colored, 100 mg tablet - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test (TLC) Absence of steroids No steroids present - ------------------------------------------------------------------------------------------------------------------------------------ Disintegration (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Hardness (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Residual Methanol (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic Microbial Count (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Coliform bacteria (----) - ---------------------------------------------------------------------------------- Fungi (----) - ---------------------------------------------------------------------------------- No filed requirement E. Coli (----) - ---------------------------------------------------------------------------------- Salmonella (----) - ------------------------------------------------------------------------------------------------------------------------------------
SPECIFICATION: PLACEBO 100 mg (for Levora) Schedule 1.6 to Packaging Agreement PLACEBO TABLETS, 100 MG (for TRIVORA) -------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ TEST INTERNAL SPECIFICATIONS REGULATORY SPECIFICATIONS - ------------------------------------------------------------------------------------------------------------------------------------ Round, flat-faced, beveled edged tablets. Flat-faced, discoid, beveled edged tablets, Uncoated, 1/4 inch diameter. Debossed: One no scoring, debossed with company identifier face "WATSON"; "P1" on the other side on one side. Peach colored, 100 mg tablet 40-0997-XX Orange / pale orange / peach Description colored, 100 mg tablet - ------------------------------------------------------------------------------------------------------------------------------------ Identification Test (TLC) Absence of steroids No steroids present - ------------------------------------------------------------------------------------------------------------------------------------ Disintegration (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Hardness (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Residual Methanol (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Total Aerobic Microbial Count (----) (----) - ------------------------------------------------------------------------------------------------------------------------------------ Coliform bacteria (----) - ---------------------------------------------------------------------------------- Fungi (----) No filed requirement - ---------------------------------------------------------------------------------- E. Coli (----) - ---------------------------------------------------------------------------------- Salmonella (----) - ------------------------------------------------------------------------------------------------------------------------------------
SPECIFICATION: PLACEBO 100mg (for Trivora) Schedule 1.6 to Packaging Agreement SCHEDULE 1.14 PACKAGING SPECIFICATIONS ------------------------ Schedule 1.14 to Packaging Agreement Applicable 'Product Assembly Specification' 25428 Brevicon (----) PAS # 9467 X25428 Brevicon (----) Samples PAS # 9467 Brevicon Blister PAS # 9448 27928 Levora (----) PAS # 9445 X27928 Levora (----) Samples PAS # 9492 Levora Blister PAS # 9482 26528 Norinyl 1/50 (----) PAS # 9459 Norinyl 1/50 Blister PAS # 9450 25928 Norinyl 1/35 (----) PAS # 9459 X25928 Norinyl 1/35 (----) Samples PAS # 9467 Norinyl 1/35 Blister PAS # 9449 27428 Tri-Norinyl (----) PAS # 9477 X27428 Tri-Norinyl (----) Samples PAS # 9518 Tri-Norinyl Blister PAS # 9476 29128 Trivora (----) PAS # 9441 X29128 Trivora (----) Samples PAS # 9491 Trivora Blister PAS # 9466 Schedule 1.14 to Packaging Agreement SCHEDULE 2.2(a) WATSON PHARMACEUTICALS, INC. PRODUCT PRICING DESCRIPTION / UNIT OF MEASURE PRICE - ----------------------------- ----- Trivora 28 168 (X29128) / CN $(----)* Trivora 28 168 (29128) / CN $(----)* Norinyl 1/35 28 84 PTP ((X25928) / CN $(----)* Norinyl 1/35 28 W 168 (25928) / CN $(----)* Norinyl 1/50 28 W 168 (26528) / CN $(----)* Brevicon .5/35 28 84 PTP (X25428) / CN $(----)* Brevicon .5/35 28 W 84 (25428) / CN $(----)* Tri-Norinyl 28 84 PTP (X27428) / CN $(----)* Tri-Norinyl 28 W 168 (27428) / CN $(----)* Nor QD Tablets (A023091) / FULL LOT $(----)** Levora 28 84 PTP (X27928) / CN $(----)*** Levora 0.15/30 28 168 (27928) / CN $(----)*** Levora 28 84 PTP (X27928) / CN $(----)**** Levora 0.15/30 28 168 (27928) / CN $(----)**** * Includes packaging, tablet release, stability and micro testing. ** Includes only tablet release, bulk stability and micro testing. *** Represents Pharmacia continuing with the (----) bulk contract through April 15, 2002 and includes tablet manufacture, packaging, tablet release, stability and micro testing. **** Represents Pharmacia packaging bulk tablets provided from Watson, tablet release, stability and micro testing after expiration of the (----) bulk contract. Schedule 2.2(a) to Packaging Agreement CONTRACT MANUFACTURER QUALITY AGREEMENT THIS QUALITY AGREEMENT made as of this 15th day of February , 2002, (the ---- --------------- "Quality Agreement") by and between SEARLE & CO., a Delaware corporation, and its Affiliates ("SEARLE"), and WATSON LABORATORIES, INC., a Nevada corporation ("WATSON"). This Quality Agreement supplements the Packaging Agreement signed by both parties on the 15th day of February , 2002. ---- --------------- 1.0 QUALITY REQUIREMENTS This Quality Agreement defines requirements to be followed when finished Product is packaged and/or tested for WATSON to ensure compliance with current Good Manufacturing Practice guidelines ("cGMPs"), and other regulatory requirements. 2.0 DEFINITIONS Product Testing - includes analytical and microbiological testing, when required, of in-process granulation and finished product testing. Internal Specifications - statistically based in-house action limits; these specifications cannot exceed registered specifications. Registered Specifications - Product specifications as submitted in the approved Product's (s) NDA/ANDA. 1 Schedule 6.1 to Packaging Agreement 3.0 PRODUCT Refer to Attachment 1 for the list of products and the services to be provided by SEARLE for each of the products. The list is limited to the Products covered by the referenced Packaging Agreement. 4.0 PROCESSES 4.1 Premises 4.1.1 SEARLE will package and/or test the products at its Caguas, Puerto Rico facility and will not use or transfer at a later date any of the operations/testing for the products to third parties or other sites without the prior written agreement of WATSON. Approval by WATSON shall not be unreasonably withheld. 4.1.2 The premises and equipment used to package and/or test must be in compliance with cGMPs, current regulatory requirements, and in accordance with the documentation approved by WATSON. 4.2 GMP Guidelines The cGMP guidelines to be applied are the United States cGMPs listed in Code of Federal Regulations ("CFR") Parts, 210 and 211 and associated Compliance Guidance. 4.3 Materials SEARLE is responsible for ensuring that all materials procured for use in production or in analytical and microbiological testing are in full compliance with the registered specifications. 4.4 Documentation 4.4.1 SEARLE will provide on request packaging, analytical and microbiological testing documents which have been approved by its Quality and Compliance unit. Routinely, SEARLE will provide Watson with Certificates of Quality (C of Q) and Certificates of Analysis (C of A) for products packaged and/or tested by SEARLE. 4.4.2 SEARLE will maintain original documentation according to the record retention procedure consistent with cGMP requirements. 2 Schedule 6.1 to Packaging Agreement 4.4.3 WATSON shall be responsible for providing SEARLE with the relevant portions of the most current NDA/ANDA's listed in Attachment 1, including but not limited to the Registered Specifications, so that SEARLE may fully comply with its responsibilities under this Quality Agreement. 4.5 Methods The Product must be packaged and/or tested exactly as specified within the Specifications. No changes may be made to these methods without the prior written authorization of WATSON. 4.6 Packaging Specifications The current, approved Packaging Specifications will be utilized. No changes may be made to these Packaging Specifications without the prior written authorization of WATSON. 4.7 Batch Numbering Products manufactured by a facility other than SEARLE: The batch numbering system of the company that manufactured the Product will be used. At its discretion, SEARLE may assign a SEARLE batch number but all documents must cross-reference the batch number assigned by the facility that manufactured the product. 4.8 Expiration Date Assignment Established expiry dating shall be used for all products packaged by SEARLE. Expiration date assignment will be calculated as follows: date of manufacture plus established expiry dating. For calculation of expiration dating, the date of manufacture is defined as the date in the manufacturing process when the active ingredient is added. 4.9 Rework. Rework is not permitted without prior authorization by WATSON. Routine corrective actions performed in process do not require prior authorization by WATSON. 4.10 Manufacturing and Equipment Data SEARLE is responsible for keeping records of machine usage, raw materials 3 Schedule 6.1 to Packaging Agreement batch numbers and certification, in process results and parameters, and previous Product used in machinery if non-dedicated machinery is used. 5.0 QUALITY ASSURANCE 5.1 Testing 5.1.1 Packaging components. SEARLE will ensure that all materials used are in compliance with the approved Packaging Specifications. 5.1.2 Finished Product. SEARLE will test all Product batches to the Specifications. Test results failing the internal specifications require an investigation and must be reported to WATSON. WATSON concurrence on disposition of the product is required. 5.2 Release Procedures 5.2.1 SEARLE is responsible for ensuring and documenting conformance with the approved Specifications for those operations/testing performed by SEARLE. 5.2.2 WATSON has responsibility for ensuring proper documentation and conformance with the approved NDA/ANDA requirements for those operations performed at facilities other than SEARLE. 5.2.3 Product Acceptance. WATSON will inspect each delivery of Product prior to release for distribution. WATSON will provide written notification to the appropriate facility when defects are found. Transfer of product into inventory shall be deemed Product acceptance by WATSON. 5.2.4 Release to the Market. The Quality Assurance Department of WATSON will release the Product for distribution based on inspection results and C of A / C of Q documents. 5.2.5 Certificate of Analysis and Certificate of Quality. SEARLE will sign a C of A confirming that the Product has been tested, and meets the registered specifications. Test specifications and test results must be included for each test. SEARLE will also provide a C OF Q , see Attachment 2 for example, stating the Product has been packaged in accordance with the approved batch record. The C of Q will contain language that confirms any and all deviations and investigations related to the lot were completed in compliance with applicable SOP's, and the Quality Agreement. Both the C of A and of C of Q shall accompany each batch of Product shipped from SEARLE. When appropriate, the language contained in the C of Q example may be consolidated onto the C of A document. 4 Schedule 6.1 to Packaging Agreement 5.3 Product Refusal Product that have been inspected and fails to meet WATSON acceptance criteria will be rejected. Written notification will be supplied to the appropriate contract manufacturer detailing the reason(s) for the refusal of the Product. 5.4 Documentation Requests for full documentation. SEARLE commits to providing a full documentation package by fax within 24 hours or within a reasonable period if requested by WATSON for Product quality concerns, any regulatory reasons (e.g., batch recall) or unsatisfactory audit report. 5.5 Retained samples Finished Product. SEARLE will retain, at minimum, sufficient samples of the Product, to carry out two full specification tests for the expiry period of the Product plus one year. This section is applicable to those products packaged by SEARLE. 5.6 Stability SEARLE is responsible for maintaining a stability-testing program for the Product and will provide a stability report to WATSON annually. Any problem, which arises as a result of this program once confirmed, will be notified immediately to WATSON Quality Assurance. A minimum of one batch per year of the Product shall be included in the stability program.. 5.7 Regulatory Inspections SEARLE will inform WATSON of any Regulatory Inspections, which may involve the Product and permit a representative from WATSON Quality Assurance to be present if required by WATSON. A copy of any reports, notices issued by a Regulatory Authority, which relates to the Product shall be provided to WATSON. 5.8 Audits SEARLE shall agree to a facility site compliance audit with prior written notification given by WATSON to access manufacturing and control systems used to produce the Product. Such audits shall be conducted within regular business hours. 5 Schedule 6.1 to Packaging Agreement 5.9 Corrective Actions from Audits 5.9.1 Critical defects. In the case of any "Critical" defects arising during audits by WATSON or Regulatory Authorities, no further deliveries of Product may be delivered to WATSON until corrective actions have been completed to the satisfaction of WATSON. 5.9.2 Other defects. In the case of other defects arising during audits by WATSON or Regulatory Authorities, a satisfactory corrective action program must be in place to the satisfaction of WATSON before further deliveries of Product to WATSON may be made. 5.10 Recall / Field Alert / Complaints 5.10.1 WATSON and SEARLE shall work together to mutually agree on any recall decision. WATSON shall have the final authority to initiate a Product recall. Refer to Packaging Agreement, Article 6.6. 5.10.2 SEARLE shall notify WATSON immediately of any confirmed failure that meets Field Alert Report criteria. WATSON shall notify the District office within three (3) days of the failure. 5.10.3 Product Complaints. Refer to Packaging Agreement, Article 6.5. 5.11 Change Control and Deviations 5.11.1 Change Control. SEARLE will inform WATSON and obtain written approval in advance, of any proposal to change the following: . Packaging materials or Packaging Specifications . Site of packaging and/or testing . Equipment used in packaging . Product specifications . In-process test method and /or instrument . Laboratory equipment/instruments used in testing . Testing laboratory . Structural facilities, HVAC system . Any other change that could affect the registration status 6 Schedule 6.1 to Packaging Agreement 5.11.2 Deviations. SEARLE will record any accidental deviations from the packaging and/or testing of the Product in the batch/testing records and clearly notify WATSON of any and all deviations from the Quality Requirements for each batch. 5.12 Annual Product Review SEARLE is responsible for performing and providing an Annual Product Review (APR) for the products listed in Attachment 1. APR completion will be performed following SEARLE schedule. A copy will be provided to WATSON. 5.13 Signature Authority A list will be provided by WATSON detailing who has signature authority ("Quality") for items such as deviations, investigations, change controls, methods, specifications, master batch records etc. SEARLE is responsible to assure that only those listed approve documents. Any document approved by any other WATSON personnel may not be considered approved. 6.0 PROCESS CAPABILITY - VALIDATION 6.1 Cleaning Validation SEARLE is responsible for ensuring that adequate cleaning is carried out between batches of different Products to prevent cross contamination. The cleaning process will be validated before the first Product batches are processed for WATSON. The validation will be updated to cover any new Products packaged in the same equipment or facilities as those used for WATSON Products. 6.2 Computer System SEARLE is responsible for ensuring that computer systems, which are used for the packaging and/or laboratory testing of the batch, must be validated. Validation protocols and reports shall be available for WATSON for review on request. 7.0 STORAGE AND SHIPPING SEARLE will ensure that during packaging, storage and shipping of the Product that there is no possibility of deterioration, contamination or admixture with any other materials. SEARLE will only ship goods to WATSON warehouses or designated locations (listed in Attachment 2). 8.0 PERSONS FOR COMMUNICATION 7 Schedule 6.1 to Packaging Agreement The persons to whom communication regarding Quality Control and Quality Assurance matters between WATSON and SEARLE shall be identified. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth below. WATSON LABORATORIES, INC. SEARLE & CO. By: By: ------------------------------------ --------------------------------- Name: Name: ----------------------------------- ------------------------------- Title: Title: ---------------------------------- ------------------------------ Date: Date: ---------------------------------- ------------------------------- 8 Schedule 6.1 to Packaging Agreement Attachment 1
- --------------------------------------------------------------------------------------------------------------------- PRODUCT NDA/ANDA PRODUCT TESTING PACKAGING - --------------------------------------------------------------------------------------------------------------------- TRIVORA ANDA 74-538 X X - --------------------------------------------------------------------------------------------------------------------- LEVORA ANDA 73-592 X X ANDA 73-594 - --------------------------------------------------------------------------------------------------------------------- NOR-QD NDA 17-060 X - --------------------------------------------------------------------------------------------------------------------- BREVICON NDA 17-566 X X NDA 17-743 - --------------------------------------------------------------------------------------------------------------------- NORINYL 1+35 NDA 13-625 X X NDA 16-659 - --------------------------------------------------------------------------------------------------------------------- NORINYL 1+50 NDA 17-565 X X - --------------------------------------------------------------------------------------------------------------------- TRI-NORINYL NDA 18-977 X - --------------------------------------------------------------------------------------------------------------------- PLACEBO TABLETS 50 mg and 100 mg --------- X X - ---------------------------------------------------------------------------------------------------------------------
9 Schedule 6.1 to Packaging Agreement Attachment 2 CONTACT INFORMATION: -------------------- WATSON LABORATORIES, INC.
Primary: Secondary: Al Golfo Jeff Nornhold - -------------------------------------------- ------------------------------------------ Name Name Manager, Contract Manufacturing and Director, Contract Manufacturing and - -------------------------------------------- ------------------------------------------ Business Alliance Quality Business Alliance Quality - -------------------------------------------- ------------------------------------------ Title Title 311 Bonnie Circle, Corona CA 92880 311 Bonnie Circle, Corona CA 92880 - -------------------------------------------- ------------------------------------------ Address Address 909-493-5318 / agolfo@watsonpharm.com 909-493-5364 / jnornhol@watsonpharm.com - -------------------------------------------- ------------------------------------------ Phone/eMail address Phone/eMail address 909-493-5819 909-493-5819 - -------------------------------------------- ------------------------------------------ Fax Number Fax Number
SEARLE & CO.
Primary: Secondary: - -------------------------------------------- ------------------------------------------ - -------------------------------------------- ------------------------------------------ Compliance Advisor Quality & Compliance Team Leader - -------------------------------------------- ------------------------------------------ Title Title Calle Jardines #99 Calle Jardines #99 - -------------------------------------------- ------------------------------------------ Caguas, Puerto Rico 00725 Caguas, Puerto Rico 00725 - -------------------------------------------- ------------------------------------------ Address Address 787-746-6201 787-746-6201 - -------------------------------------------- ------------------------------------------ Phone Phone 787-286-4000 787-286-4000 - -------------------------------------------- ------------------------------------------ Fax Fax
WATSON DISTRIBUTION CENTERS: ---------------------------- Watson Laboratories, Inc. Watson Laboratories, Inc. 3400 W. Lake Avenue Mt. Ebo Corporate Park Glenview, IL 60025 Route 22 Brewster, NY 10509 10 Schedule 6.1 to Packaging Agreement Attachment 3 CERTIFICATE OF QUALITY ---------------------- Product: _________________________ Product Code: ____________________________ Lot Number: ______________________ Expiration Date: _________________________ Release Date: ____________________ Total Units Released: ____________________ I hereby certify that the above tested finished drug product packaged by SEARLE was packaged in accordance with all requirements listed in WATSON's Product Registration and in accordance with current Good Manufacturing Practices for Finished Pharmaceuticals as specified under 21 Code of Federal Regulations, Parts 210 and 211, United States of America. - ----------------------------- Name - ----------------------------- Title - ----------------------------- Date 11 Schedule 6.1 to Packaging Agreement Product: NORQD QUALITY RESPONSIBILITIES ------------------------ Product: NORQD Table 1. Quality Responsibilities for Searle and Watson
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Raw Material - Active Ingredient ... Specifications X -------------- ... Supply/procurement X ----------- ... Selection X --------- ... Test ... Sample Retention ... Investigations . Initiate -------- . Review X . Approve X ... Vendor Audits X ------------- ... Vendor Certification Program X ---------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Raw Material - Inert (1) NDA Related ... Specifications X(1) -------------- ... Supply/procurement ----------- ... Selection X --------- ... Test ... Sample Retention ... Investigations . Initiate -------- . Review X . Approve X ... Vendor audits ------------- ... Vendor Certification Program ---------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Mfg. Master Batch Record Watson may initiate changes. ... Issuance . Initiate . Approve X ... Change Control . Initiate . Approve X - ---------------------------------------------------------------------------------------------------------------------------- Changes in Specification & Test Methods (1) NDA Related -------------- (raw materials & bulk) ---- ... Initiate X(1) ... Review X ... Approve X - ---------------------------------------------------------------------------------------------------------------------------- Executed Batch Records (bulk) ... Storage - ----------------------------------------------------------------------------------------------------------------------------
12 Schedule 6.1 to Packaging Agreement Product: NORQD - -------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Bulk Tablets ... Supply Samples for Testing ... Sample Retention ... Investigation . Review X . Approve X - ---------------------------------------------------------------------------------------------------------------------------- Annual Product Review (bulk) /1/ Analytical Related ---- ... Provide Data X /1/ ... Review/Approve X ... Storage - ---------------------------------------------------------------------------------------------------------------------------- In-Process Testing ... Physical ... Analytical, if applicable X - ---------------------------------------------------------------------------------------------------------------------------- REPORTS ... Bulk tablet Drug listing X ... Product Drug listing X - ---------------------------------------------------------------------------------------------------------------------------- Bulk Tablets *QAN to Watson (Specification Testing) ... Supply Tablet Samples ... Test X ... Provide results to Watson X ... Disposition for Packaging X ... Investigation (Analytical) . Conduct X . Review X/*/ only X . Approve X MRB's X - ---------------------------------------------------------------------------------------------------------------------------- Packaging Components ... Specifications . Establish X . Change X . Approve X ... Supply X ... Test X ... Disposition for Use X - ---------------------------------------------------------------------------------------------------------------------------- Labeling ... Artwork/Approve X ... Master Labels . Review X . Approve X ... Printing/Approve for Use X ... Changes X - ---------------------------------------------------------------------------------------------------------------------------- Packaging In-Process Testing - ----------------------------------------------------------------------------------------------------------------------------
13 Schedule 6.1 to Packaging Agreement Product: NORQD - -------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Finished Product (Packaged) ... Specifications . Establish X . Change X . Approve X ... Product Disposition for Shipment X ... Retained Samples . Sampling X . Storage X - ---------------------------------------------------------------------------------------------------------------------------- Stability Samples ... Storage X ... Specifications/Methods/Protocol X . Establish X X . Change X X . Approve X X ... Testing X ... Report to Watson X - ---------------------------------------------------------------------------------------------------------------------------- Validation /1/ Packaging Related (Plans/Protocols/Reports) /2/ Analytical Related ... Initiate X /1/ X /2/ ... Approve X /1/ X /2/ ... Execute X /1/ X /2/ ... Final Approval X - ---------------------------------------------------------------------------------------------------------------------------- Product Complaints /1/ Packaging Related ... Receipt X /2/ Analytical Related ... Investigation . Initiate X /1/ X (2) . Review X X (2) . Approve X X (2) . Respond to Complaints X . Maintenance of Complaints Master File X . Complaints Trend Analysis X . Storage of Complaints samples X . Product recall decision X . Regulatory affairs X X - ---------------------------------------------------------------------------------------------------------------------------- Annual Product Review /1/ Packaging Related ... Compile Package X /1/ X /2/ /2/ Analytical Related ... Review/Approve X /1/ X /2/ ... Storage X /1/ - ----------------------------------------------------------------------------------------------------------------------------
14 Schedule 6.1 to Packaging Agreement Product: NORQD - -------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Annual Report /1/ Packaging Related ... Provide Documents X /1/ ... Submission X - ----------------------------------------------------------------------------------------------------------------------------
15 Schedule 6.1 to Packaging Agreement Product: Tri-Norinyl, Norinyls, Brevicon, Trivora - -------- QUALITY RESPONSIBILITIES ------------------------ Products: Tri-Norinyl, Norinyls, Brevicon, Trivora Table 1. Quality Responsibilities for Searle and Watson
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Raw Material - Active Ingredient ... Specifications X -------------- ... Supply/procurement X ----------- ... Selection X --------- ... Test ... Sample Retention ... Investigations . Initiate -------- . Review X . Approve X ... Vendor audits X ------------- ... Vendor Certification Program X ---------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Raw Material - Inert /1/ NDA Related ... Specifications X /1/ -------------- ... Supply/Procurement X ----------- ... Selection --------- ... Test ... Sample Retention ... Investigations . Initiate -------- . Review X . Approve X ... Vendor audits ------------- ... Vendor Certification Program ---------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Mfg. Master Batch Record ... Issuance . Initiate . Approve X ... Change Control . Initiate . Approve X - ----------------------------------------------------------------------------------------------------------------------------
16 Schedule 6.1 to Packaging Agreement Product: Tri-Norinyl, Norinyls, Brevicon, Trivora - --------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Changes in Specification & Test Methods /1/ NDA Related -------------- (raw materials & bulk) ---- ... Initiate X /1/ ... Review X ... Approve X - ---------------------------------------------------------------------------------------------------------------------------- Executed Batch Records (bulk) ---- ... Storage - ---------------------------------------------------------------------------------------------------------------------------- Bulk Tablets ... Supply Samples for Testing ... Sample Retention ... Investigation . Review . Approve - ---------------------------------------------------------------------------------------------------------------------------- In-Process Testing ... Physical ... Analytical, if applicable X - ---------------------------------------------------------------------------------------------------------------------------- Reports ... Bulk tablet Drug listing XX ... Product Drug listing - ---------------------------------------------------------------------------------------------------------------------------- Bulk Tablets ... Supply tablet samples ... Test X ... Provide results to Watson X X ... Disposition for Packaging ... Investigation (Analytical) . Conduct X . Review X X . Approve /*/only X MRB's - ---------------------------------------------------------------------------------------------------------------------------- Packaging Components Watson may initiate changes ... Specifications . Establish X X . Change X X . Approve X X ... Supply X ... Test X ... Disposition for Use X - ----------------------------------------------------------------------------------------------------------------------------
17 Schedule 6.1 to Packaging Agreement Product: Tri-Norinyl, Norinyls, Brevicon, Trivora - --------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Labeling Watson may initiate changes ... Artwork/Approve X ... Master Labels . Review X X . Approve X X ... Printing/Approve for Use X ... Changes X X - ---------------------------------------------------------------------------------------------------------------------------- Packaging In-Process Testing X - ---------------------------------------------------------------------------------------------------------------------------- Finished Product (Packaged) ... Specifications . Establish X X . Change X X . Approve X X ... Test X ... Results to Watson X ... Product Disposition for Shipment X ... Retained Samples . Sampling X . Storage X - ---------------------------------------------------------------------------------------------------------------------------- Stability Samples ... Storage X ... Specifications/Methods/Protocol X . Establish X X . Change X X . Approve X X ... Testing X ... Report to Watson X - ---------------------------------------------------------------------------------------------------------------------------- Validation /1/ Packaging and Analytical (Plans/Protocols/Reports) ... Initiate X /1/ ... Approve X X /1/ ... Execute X /1/ ... Final Approval X X /1/ - ----------------------------------------------------------------------------------------------------------------------------
18 Schedule 6.1 to Packaging Agreement Product: Tri-Norinyl, Norinyls, Brevicon, Trivora - --------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Product Complaints /1/ Packaging ... Receipt X ... Investigation . Initiate X /1/ . Review X X /1/ . Approve X X /1/ . Respond to Complaints X . Maintenance of Complaints Master File X . Complaints Trend Analysis X . Storage of Complaints samples X . Product recall decision X . Regulatory affairs X - ---------------------------------------------------------------------------------------------------------------------------- Annual Product Review /1/ Packaging ... Compile/Package X /1/ ... Review/Approve X /1/ ... Storage X /1/ - ---------------------------------------------------------------------------------------------------------------------------- Annual Report /1/ Packaging ... Provide Documents X /1/ ... Submission X - ----------------------------------------------------------------------------------------------------------------------------
19 Schedule 6.1 to Packaging Agreement Product: Levora - -------- QUALITY RESPONSIBILITIES ------------------------ Product: Levora Table 1. Quality Responsibilities for Searle and Watson
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Raw Material - Active Ingredient ... Specifications X -------------- ... Supply/procurement X ----------- ... Selection X --------- ... Test ... Sample Retention ... Investigations . Initiate -------- . Review X . Approve X ... Vendor audits X ------------- ... Vendor Certification Program X ---------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Raw Material - Inert ... Specifications X -------------- ... Supply/procurement ----------- ... Selection X --------- ... Test ... Sample Retention ... Investigations . Initiate -------- . Review X . Approve X ... Vendor audits X ------------- ... Vendor Certification Program X ---------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Mfg. Master Batch Record ... Issuance . Initiate . Approve X ... Change Control . Initiate . Approve X - ----------------------------------------------------------------------------------------------------------------------------
20 Schedule 6.1 to Packaging Agreement Product: Levora - --------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Changes in Specification & Test Methods -------------- (raw materials & bulk) ------ ... Initiate X ... Review X ... Approve X - ---------------------------------------------------------------------------------------------------------------------------- Executed batch Records (bulk) ---- ... Storage - ---------------------------------------------------------------------------------------------------------------------------- Bulk Tablets ... Supply Samples for Testing ... Sample Retention ... Investigation . Initiate . Review X . Approve X - ---------------------------------------------------------------------------------------------------------------------------- Annual Product Review (bulk) ---- ... Provide Data ... Review/Approve X ... Storage - ---------------------------------------------------------------------------------------------------------------------------- In-Process Testing ... Physical ... Analytical, if applicable X - ---------------------------------------------------------------------------------------------------------------------------- Annual Report ... Provide Data ---- ... Submission X - --------------------------------------------------------------------------------------------------------------------------- Product Complaints (bulk) /1/ Packaging ... Receipt X ... Investigation . Initiate X /1/ . Review X . Respond to Complaints X ... Maintenance of Complaints Master File X ... Complaints Trend Analysis X ... Storage of Complaints samples X ... Product recall decision X ... Regulatory affairs X - ----------------------------------------------------------------------------------------------------------------------------
21 Schedule 6.1 to Packaging Agreement Product: Levora - --------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Process & Cleaning Validation (Master Plan/Protocols/Reports) ... Initiate ... Approve X ... Execute ... Final Approval X - ---------------------------------------------------------------------------------------------------------------------------- Reports ... Bulk tablet Drug listing X ... Product Drug Listing X - ---------------------------------------------------------------------------------------------------------------------------- Bulk Tablets ... Test X ... Provide Results to Watson X ... Disposition for Packaging X ... Investigation (Analytical) . Conduct X . Review X . Approve X - ---------------------------------------------------------------------------------------------------------------------------- Packaging Components ... Specifications . Establish X X . Change X X . Approve X X ... Supply X ... Test X ... Disposition for Use X - ---------------------------------------------------------------------------------------------------------------------------- Labeling ... Artwork/Approve X ... Master Labels . Review X X . Approve X X ... Printing/Approve for Use X ... Changes X X - ---------------------------------------------------------------------------------------------------------------------------- Packaging In-Process Testing X - ----------------------------------------------------------------------------------------------------------------------------
22 Schedule 6.1 to Packaging Agreement Product: Levora - --------
- ---------------------------------------------------------------------------------------------------------------------------- Description of task Watson Searle Comments - ---------------------------------------------------------------------------------------------------------------------------- Finished Product (Packaged) * Only MRB's ... Specifications . Establish X X . Change X X . Approve X X ... Test X ... Results to Watson X ... Product Disposition for Shipment X/*/ ... Retained Samples . Sampling X . Storage X - ---------------------------------------------------------------------------------------------------------------------------- Stability Samples ... Storage X ... Specifications/Methods/Protocol X . Establish X X . Change X X . Approve X X ... Testing X ... Report to Watson X - ---------------------------------------------------------------------------------------------------------------------------- Packaging/Cleaning/Method Validations (Plans/Protocols/Reports) ... Initiate X ... Approve X ... Execute X ... Final Approval X - ---------------------------------------------------------------------------------------------------------------------------- Product Complaints ... Receipt X ... Investigation . Review X X . Approve X X . Respond to Complaints X - ---------------------------------------------------------------------------------------------------------------------------- Annual Product Review Copy to Watson ... Compile Package X /1/ /1/ Packaging ... Review/Approve X X ... Storage X - ---------------------------------------------------------------------------------------------------------------------------- Annual Report ... Provide Documents X ... Submission X - ----------------------------------------------------------------------------------------------------------------------------
23 Schedule 6.1 to Packaging Agreement -----END PRIVACY-ENHANCED MESSAGE-----