10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

or

o  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 o

The number of shares outstanding of the Registrant’s only class of common stock as of November 6, 2002 was approximately 106,872,921.

WATSON PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

		PAGE
PART I.  FINANCIAL INFORMATION
Item 1.  Consolidated Financial Statements:
	Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001	2
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	3
	Notes to Consolidated Financial Statements	4
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.  Quantitative and Qualitative Disclosure about Market Risk		19
Item 4.  Controls and Procedures		20
PART II.  OTHER INFORMATION AND SIGNATURES
Item 1.  Legal Proceedings		21
Item 6.  Exhibits and Reports on Form 8-K		22
Signatures		23
Certifications		24

WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)

			September 30, 2002		December 31, 2001
ASSETS
Current assets:
	Cash and cash equivalents		$	249,035	$	193,731
	Marketable securities			58,277		135,688
	Accounts receivable, net			181,180		173,085
	Assets held for disposition			11,319		45,496
	Inventories			315,788		252,325
	Prepaid expenses and other current assets			24,187		32,710
	Deferred tax assets			59,603		56,703
		Total current assets		899,389		889,738
Property and equipment, net				273,478		234,911
Investments and other assets				95,437		113,086
Deferred tax assets				21,675		21,675
Product rights and other intangibles, net				903,076		825,936
Goodwill				442,988		442,988
		Total Assets	$	2,636,043	$	2,528,334
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses		$	172,541	$	159,809
	Income taxes payable			107,946		10,766
	Current portion of long-term debt			79,392		68,102
	Current liability incurred for acquisitions of products and businesses			2,728		6,448
		Total current liabilities		362,607		245,125
Long-term debt				355,656		415,703
Long-term liability incurred for acquisitions of products and businesses				5,962		9,311
Deferred tax liabilities				151,457		186,145
		Total liabilities		875,682		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; 106,863,700 and 106,458,800 shares outstanding				353		351
Additional paid-in capital				796,782		790,742
Retained earnings				955,752		823,054
Accumulated other comprehensive income				7,474		57,903
		Total stockholders’ equity		1,760,361		1,672,050
		Total liabilities and stockholders’ equity	$	2,636,043	$	2,528,334

See accompanying Notes to Consolidated Financial Statements.

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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2002			2001			2002			2001
Net revenues				$	307,860		$	270,942		$	893,624		$	866,766
Cost of sales					137,015			140,398			398,545			383,136
Gross profit					170,845			130,544			495,079			483,630
Operating expenses:
	Research and development				22,234			14,228			60,249			42,732
	Selling, general and administrative				55,140			48,409			175,808			153,118
	Amortization				16,176			17,681			44,012			57,944
	Charge for asset impairment				—			147,596			—			147,596
	Loss on assets held for disposition				8,072			50,705			21,817			50,705
			Total operating expenses		101,622			278,619			301,886			452,095
Operating income (loss)					69,223			(148,075	)		193,193			31,535
Other income (expense):
	Equity in losses of joint ventures				(1,945	)		(1,170	)		(3,759	)		(2,950	)
	Gain on sales of securities				—			4,495			—			52,168
	Gain from legal settlement				—			60,517			32,000			60,517
	Interest and other income				2,645			838			5,937			2,441
	Interest expense				(5,747	)		(7,203	)		(16,690	)		(21,881	)
		Total other income (expense), net			(5,047	)		57,477			17,488			90,295
Income (loss) before income taxes					64,176			(90,598	)		210,681			121,830
Provision (benefit) for income taxes					23,519			(31,965	)		77,983			51,762
Net income (loss)				$	40,657		$	(58,633	)	$	132,698		$	70,068
Earnings (loss) per share:
	Basic			$	0.38		$	(0.55	)	$	1.24		$	0.66
	Diluted			$	0.38		$	(0.55	)	$	1.24		$	0.65
Weighted average shares outstanding:
	Basic				106,784			106,343			106,590			106,008
	Diluted				107,199			106,343			107,284			108,421

See accompanying Notes to Consolidated Financial Statements.

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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

					Nine Months Ended September 30,
					2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income					$	132,698		$	70,068
Reconciliation to net cash provided by operating activites:
	Depreciation					18,900			17,642
	Amortization					44,012			57,944
	Charge for asset impairment					—			147,596
	Loss on assets held for disposition					—			45,346
	Deferred income tax benefit					(4,691	)		(59,993	)
	Equity in losses of joint ventures					3,467			3,317
	Gain on sales of securities					—			(52,168	)
	Tax benefits related to exercises of stock options					1,240			9,200
	Other					977			(3,308	)
	Changes in assets and liabilities:
		Accounts receivable				(8,095	)		(126,043	)
		Assets held for disposition				34,177			(11,508	)
		Inventories				(63,463	)		(2,145	)
		Prepaid expenses and other current assets				5,945			(13,832	)
		Accounts payable and accrued expenses				12,532			(55,147	)
		Income taxes payable				97,181			83,788
		Other assets				9,892			(11,563	)
			Total adjustments			152,074			29,126
				Net cash provided by operating activities		284,772			99,194
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment						(56,220	)		(48,240	)
Acquisitions of product rights						(121,152	)		(15,709	)
Issuance of note receivable						—			(3,500	)
Proceeds from sales of marketable equity securities						—			54,345
Other investing activities, net						(1,248	)		251
				Net cash used in investing activities		(178,620	)		(12,853	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and acquisition liabilities						(55,651	)		(42,703	)
Proceeds from stock plans						4,803			21,668
				Net cash used in financing activities		(50,848	)		(21,035	)
				Net increase in cash and cash equivalents		55,304			65,306
Cash and cash equivalents at beginning of period						193,731			66,194
Cash and cash equivalents at end of period					$	249,035		$	131,500

See accompanying Notes to Consolidated Financial Statements.

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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, sale 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.  Certain reclassifications, none of which affected net income or retained earnings, have been made to prior period amounts to conform to current period presentation.  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 include 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 September 30, 2002, Watson owned approximately 1.5 million shares of Andrx common stock (approximately 2% of the total Andrx common stock then outstanding) with a market value of $34.0 million. The unrealized gain on the Company’s investment in Andrx was $17.9 million and $62.4 million (net of income taxes of $12.0 million and $41.6 million) at September 30, 2002 and December 31, 2001, respectively.  This unrealized gain was included in accumulated other comprehensive income in the stockholders’ equity section of Watson’s consolidated balance sheets within this quarterly report. 

     Watson sold no shares of Andrx common stock during the nine months ended September 30, 2002.  During the three months ended September 30, 2001, Watson sold 70,000 shares of Andrx common stock for approximately $4.7 million and recorded a pre-tax gain of $4.5 million.  During the nine months ended September 30, 2001, Watson sold approximately 958,000 shares of Andrx common stock for $54.3 million and recorded a pretax gain of $52.2 million.

     Dr. Reddy is a developer and manufacturer of active pharmaceutical ingredients and pharmaceutical 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 September 30, 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 $24.2 million.  The unrealized gain on the Company’s investment in Dr. Reddy was $2.1 million and $4.1 million (net of income taxes of $1.4 million and $2.7 million), at September 30, 2002 and December 31, 2001, respectively.

     The Company did not sell any of its shares of Dr. Reddy during the nine month periods ending September 30, 2002 and 2001.

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Comprehensive income (loss)

     Comprehensive income (loss) 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 (loss) is comprised of unrealized gains (losses) on its holdings of publicly traded equity securities, net of realized gains included in net income (loss).  The components of comprehensive income (loss) and related income taxes consisted of the following (in thousands):

				Three Months Ended September 30,						Nine Months Ended September 30,
				2002			2001			2002			2001
Net income (loss)				$	40,657		$	(58,633	)	$	132,698		$	70,068
Other comprehensive (loss) income:
	Unrealized holding (loss) gain on securities				(16,368	)		(20,137	)		(84,049	)		12,011
	Less related income taxes				6,547			8,055			33,620			(4,804	)
			Total unrealized (loss) gain on securities, net		(9,821	)		(12,082	)		(50,429	)		7,207
	Reclassification for gains included in net income (loss)				—			(4,495	)		—			(52,168	)
	Less related income taxes				—			1,686			—			19,659
		Total reclassification, net			—			(2,809	)		—			(32,509	)
Total other comprehensive loss					(9,821	)		(14,891	)		(50,429	)		(25,302	)
Total comprehensive income (loss)				$	30,836		$	(73,524	)	$	82,269		$	44,766

Recent accounting pronouncements

     In August 2001, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 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.

     In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under previous guidance. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a material impact on its results of operations or financial position.

Earnings (loss) per share

     Basic earnings (loss) per share is computed by dividing net income by the weighted average common shares outstanding during a period.  Diluted earnings (loss) per share is based on the treasury stock method and is computed by dividing net income (loss) 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 (loss) per share consisted of the following (in thousands, except per share amounts):

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		Three Months Ended September 30,					Nine Months Ended September 30,
		2002		2001			2002		2001
Numerator:
	Net income (loss)	$	40,657	$	(58,633	)	$	132,698	$	70,068
Denominator:
	Basic weighted average common shares outstanding		106,784		106,343			106,590		106,008
	Effect of dilutive stock options		415		—			694		2,413
	Diluted weighted average common shares outstanding		107,199		106,343			107,284		108,421
Basic earnings (loss) per share		$	0.38	$	(0.55	)	$	1.24	$	0.66
Diluted earnings (loss) per share		$	0.38	$	(0.55	)	$	1.24	$	0.65

     Excluded from the computation of diluted earnings (loss) per share are outstanding common stock options with an exercise price greater than the average market price of the common shares for the period reported. For the three month periods, excluded from the computation were stock options to purchase 10.8 million and 2.1 million common shares at September 30, 2002 and 2001, respectively.  For the nine month periods, excluded from the computation were stock options to purchase 10.4 million and 1.5 million common shares at September 30, 2002 and 2001, respectively.

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.  The product 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®.

     In August 2002, Watson acquired the exclusive U.S. rights to the 30mg and 60mg dosage strengths of nifedipine ER tablets from Elan Corporation, PLC (Elan).  Nifedipine ER is the generic version of Bayer AG’s Adalat CC®, indicated for the treatment of hypertension.  Watson paid approximately $43 million in cash for the rights to nifedipine ER.

NOTE C – OPERATING SEGMENTS

     Watson has 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 branded and generic products primarily to pharmaceutical wholesalers, drug distributors and chain drug stores.

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     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 consists primarily of contingent payments received from the settlement of a legal dispute and revenues from research, development and licensing fees.  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 September 30,				Nine Months Ended September 30,
					2002		2001		2002		2001
Net revenues:
		Branded pharmaceutical products			$	162,359	$	127,097	$	479,913	$	403,162
		Generic pharmaceutical products				136,291		141,530		387,383		457,316
		Other				9,210		2,315		26,328		6,288
				Total net revenues	$	307,860	$	270,942	$	893,624	$	866,766
Gross profit:
	Branded pharmaceutical products				$	129,673	$	88,819	$	380,695	$	304,938
	Generic pharmaceutical products					31,962		39,410		88,056		172,404
	Other					9,210		2,315		26,328		6,288
			Total gross profit		$	170,845	$	130,544	$	495,079	$	483,630

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):

		September 30, 2002		December 31, 2001
Raw materials		$	108,472	$	86,844
Work-in-process			58,125		56,377
Finished goods			149,191		109,104
	Total inventories	$	315,788	$	252,325

NOTE E – ADOPTION OF SFAS NO. 142 “GOODWILL AND OTHER INTANGIBLE ASSETS”

     On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires goodwill and indefinite-lived intangible assets to be tested for impairment annually and written off when impaired, rather than being amortized as previous standards required.

     Watson tests its goodwill and intangible assets with indefinite lives by comparing the fair value of each of the Company’s reporting units to the respective carrying value of the reporting units.  The Company’s reporting units have been identified by Watson as branded and generic pharmaceutical products.  The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units.  Under SFAS No. 142, goodwill is considered impaired if the carrying amount exceeds the fair value of the asset.  During the second quarter of 2002, the Company performed this assessment and determined there was no indication of goodwill impairment.

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     A reconciliation of reported net income (loss) and basic and diluted earnings (loss) per share, assuming SFAS No. 142 was applied retroactively, is as follows (in thousands, except for earnings (loss) per share):

				Three Months Ended September 30,					Nine Months Ended September 30,
				2002		2001			2002		2001
Net income (loss) as reported				$	40,657	$	(58,633	)	$	132,698	$	70,068
	Add back:
			Goodwill amortization		—		5,359			—		15,148
Adjusted net income (loss)				$	40,657	$	(53,274	)	$	132,698	$	85,216
Basic earnings (loss) per share:
	Net earnings (loss) as reported			$	0.38	$	(0.55	)	$	1.24	$	0.66
			Goodwill amortization		—		0.05			—		0.14
	Adjusted net earnings (loss)			$	0.38	$	(0.50	)	$	1.24	$	0.80
Diluted earnings (loss) per share:
	Net earnings (loss) as reported			$	0.38	$	(0.55	)	$	1.24	$	0.65
		Goodwill amortization			—		0.05			—		0.14
	Adjusted net earnings (loss)			$	0.38	$	(0.50	)	$	1.24	$	0.79

     There was no impairment of or additions to goodwill recorded during the nine months ended September 30, 2002.  At September 30, 2002, goodwill for the Company’s reporting units consisted of the following (in thousands):

Branded pharmaceutical products		$	358,798
Generic pharmaceutical products			84,190
	Total goodwill	$	442,988

   Other intangible assets consist primarily of product rights.  The original cost and accumulated amortization of these intangible assets is as follows (in thousands):

		September 30, 2002			December 31, 2001
Product rights and related intangibles		$	1,103,944		$	984,771
Less accumulated amortization			(200,868	)		(158,835	)
	Total product rights and related intangibles, net	$	903,076		$	825,936

     Assuming no additions, disposals or adjustments are made to the carrying values and/or useful lives of the assets, annual amortization expense on product rights and related intangibles is estimated to be approximately $59 million in 2002, $64 million in 2003, and approximately $60 million in each of 2004, 2005, and 2006.  The Company’s current product rights and related intangibles have a weighted average useful life of approximately nineteen years.

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NOTE F – LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):

		September 30, 2002			December 31, 2001
Term loan facility, due 2005		$	285,773		$	333,402
Senior unsecured notes, 7.125%, face amount of $150 million, due 2008			148,985			148,874
Other notes payable			290			1,529
	Total debt	$	435,048		$	483,805
Less current portion			(79,392	)		(68,102	)
	Total long-term debt	$	355,656		$	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 at a spread over the London Interbank Offered Rate (LIBOR).  The LIBOR rate, which is subject to market fluctuations, may also change.  At September 30, 2002, the effective annual interest rate on borrowings under this credit agreement was approximately 3.9%.  Watson is subject to customary financial and operational covenants.  As of September 30, 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 annual 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.

NOTE G – GAIN FROM LEGAL SETTLEMENT

     On April 1, 2002, the Company reached a settlement with Bristol-Myers Squibb (BMS) resolving all outstanding disputes between the companies related to buspirone.  As a result of the settlement, Watson recorded a non-recurring gain of $32 million during the second quarter of 2002.  In addition, BMS reimbursed the Company for certain expenses associated with the litigation.

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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

Net Revenues

			Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):			2002		2001		% Change		2002		2001		% Change
Net Revenues by Segment:
	Branded pharmaceutical products		$	162,359	$	127,097		27.7%)	$	479,913	$	403,162		19.0%)
	Generic pharmaceutical products			136,291		141,530		(3.7)%		387,383		457,316		(15.3)%
	Other			9,210		2,315		297.8%)		26,328		6,288		318.7%)
		Total net revenues	$	307,860	$	270,942		13.6%)	$	893,624	$	866,766		3.1%)

     Total net revenues for the three and nine months ended September 30, 2002 increased compared to each of the corresponding 2001 periods.  Increases in net revenues from our branded segment were partially offset by declines in our generic segment.  Other net revenues increased as the result of the receipt of certain contingent payments relating to the settlement of a legal dispute and the timing of revenues received from research, development, and licensing fees.

Branded Pharmaceutical Products

     The increase in net revenues from our branded pharmaceutical products is primarily attributable to revenue growth within our Women’s Health and General Products divisions.  Contributing to the rise in our Women’s Health division’s net revenues was our launch of Microgestin®, an oral contraceptive product, late in the third quarter of 2001.  In addition, net revenues from various other oral contraceptive products within the division increased from the 2001 periods as a result of increases in price and unit sales increases.

     The increase in net revenues from our General Products division is primarily attributable to increases in net revenues from a variety of products, including Actigall® and Androderm®. We acquired the United States product rights to Actigall®,  which aids in the dissolution of certain types of gallstones, from Novartis during the first quarter of 2002.  The increase in net revenues of Androderm®, a male hormone replacement transdermal patch, was due mostly to price increases and increased market share. 

     The overall increase in net revenues from our branded segment was impacted by a decrease in sales within our Nephrology division.  For the quarter, net revenues from both InFed® and Ferrlecit®, our injectable products that treat iron deficiency anemia in patients with end-stage renal disease, decreased compared to the same quarter in 2001.  This decrease was a result of unit sales declines due to increased competition.  Year to date, net revenues from Ferrlecit® increased from the previous year due to unit sales increases.  However, the increase was offset by unit sales declines from InFed®.

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     In August 2002, we resubmitted a New Drug Application (NDA) with the U.S. Food and Drug Administration (the FDA) for Oxytrol ™, our transdermal oxybutynin therapy for the treatment of overactive bladder.  The FDA has accepted for filing our resubmitted NDA and we expect to receive a response from the FDA on the application during the first quarter of 2003.

Generic Pharmaceutical Products

     The decrease in the net revenues from our generic segment was primarily due to competitive pressures on price and unit sales, resulting from the loss of marketing exclusivity of buspirone.  In April 2001, we launched buspirone, the generic equivalent to Bristol-Myers Squibb’s BuSpar® and benefited from marketing exclusivity until February 2002.

     Net revenues from new product launches during the current year helped mitigate the overall decline in our generic segment.  The following table provides information related to some of our key generic product launches during 2002:

Product Name	Comparable Brand Name	Brand Holder	Therapeutic Classification	Quarter Launched
Metformin	Glucophage®	Bristol-Myers Squibb	Glycemic control	Q2
Tramadol	Ultram®	Ortho-McNeil	Analgesic	Q3
Nifedipine ER	Adalat CC®	Bayer AG	Anti-hypertensive	Q3
Lisinopril	Zestril®	AstraZeneca	Anti-hypertensive	Q3

Net Revenues Mix

		Three Months Ended September 30,				Nine Months Ended September 30,
		2002		2001		2002		2001
Product Net Revenues Mix:
	Branded pharmaceutical products		54%		47%		55%		47%
	Generic pharmaceutical products		46%		53%		45%		53%

     Generic product net revenues as a percentage of total product net revenues declined in 2002.  This decline was primarily due to the loss of marketing exclusivity on buspirone. 

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Gross Profit Margin on Product Net Revenues (Gross Margin)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002		2001		% Change		2002		2001		% Change
Gross Margin by Segment:
	Branded pharmaceutical products		79.9%		69.9%		14.3%)		79.3%		75.6%		4.9%)
	Generic pharmaceutical products		23.5%		27.8%		(15.8)%		22.7%		37.7%		(39.7)%
	Gross margin on product net revenues		54.1%		47.7%		13.4%)		54.0%		55.5%		(2.6)%

     Our gross margin on product net revenues improved for the third quarter of 2002 compared to the corresponding period in the previous year.   The reduced margin for the third quarter of 2001 was primarily attributable to a $21 million inventory charge, reducing gross profit within both our branded and generic segments.  The improved margin in the third quarter of 2002 was offset, in part, by a decline in our gross margin from generic products due to the loss of marketing exclusivity of buspirone.

     The decline in our gross margin on product net revenues for the nine month period was primarily attributable to the loss of marketing exclusivity of buspirone in the generic segment.  This decline was partially offset by gross margins on products launched during the third quarter of 2002 and the 2001 inventory charge discussed above.  

Research and Development (R&D) Expenses

		Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands):		2002			2001			% Change		2002			2001			% Change
R&D expenses		$	22,234		$	14,228			56.3%	$	60,249		$	42,732			41.0%
	as % of net revenues		7.2	%		5.3	%				6.7	%		4.9	%

     The increase in research and development expenses was primarily a result of increased spending on clinical studies for both branded and generic products.

     As a result of the National Institute of Health’s early termination of a portion of the Women’s Health Initiative trial and its impact on the hormone replacement therapy market as well as the reactions of the medical community, we have decided to terminate our oral estradiol plus progesterone combination hormone replacement Phase III study.

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Selling, General and Administrative (SG&A) Expenses

		Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands):		2002			2001			% Change		2002			2001			% Change
SG&A expenses		$	55,140		$	48,409			13.9%	$	175,808		$	153,118			14.8%
	as % of net revenues		17.9	%		17.9	%				19.7	%		17.7	%

     The increase in selling, general and administrative expenses for the three month periods was primarily due to the receipt of a reimbursement associated with a legal settlement during the third quarter of 2001, which decreased the expense for that period.  For the nine month period, the increase over the corresponding 2001 period was primarily due to pre-launch costs associated with Oxytrol™.

Amortization Expense

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):	2002		2001		% Change		2002		2001		% Change
Amortization	$	16,176	$	17,681		(8.5)%	$	44,012	$	57,944		(24.0)%

     The decrease in amortization expense was due primarily to the implementation of SFAS No. 142, which discontinued the amortization of goodwill effective January 1, 2002.  See Note E in the accompanying Notes to Consolidated Financial Statements in this Quarterly Report.  In addition, during the third quarter of 2001, we recognized an impairment charge and adjusted the carrying value of our product rights for Dilacor XR®.  This adjustment resulted in a substantial decrease in amortization expense for the third quarter of 2001 and subsequent periods as a result of the lower carrying value.  These decreases were partially offset by current year amortization expense related to new product acquisitions. See Note B in the accompanying Notes to Consolidated Financial Statements in this Quarterly Report.    

Charge for Asset Impairment

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):	2002		2001		% Change		2002		2001		% Change
Charge for asset impairment	$	—	$	147,596		(100.0)%	$	—	$	147,596		(100.0)%

     During the three months ended September 30, 2001, we recognized an impairment charge, adjusting the carrying value of our product rights for Dilacor XR®, as a result of declines in revenue and gross profit contribution from product sales.

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Loss on Assets Held for Disposition

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):	2002		2001		% Change		2002		2001		% Change
Loss on assets held for disposition	$	8,072	$	50,705		(84.1)%	$	21,817	$	50,705		(57.0)%

     Our loss on assets held for disposition is primarily related to Steris Laboratories, Inc. (Steris), our injectable products manufacturing facility located in Phoenix, Arizona.  The current periods’ losses represent the facility’s operating expenses for the three and nine months ended September 30, 2002.  The loss in the previous year is comprised of operating expenses of  $5.3 million and an adjustment of $45.4 million to the carrying value of certain assets.  We continue to discuss the potential sale of the Steris facility with interested parties.

Loss from Joint Ventures

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):	2002		2001		% Change		2002		2001		% Change
Loss from joint ventures	$	1,945	$	1,170		66.2%	$	3,759	$	2,950		27.4%

     Our loss from joint ventures was primarily attributable to losses from Somerset Pharmaceuticals, Inc. (Somerset), our 50% joint venture.  The increase in the loss from Somerset is a result of decreased net revenues and higher research and development spending. We expect to continue recording losses from the Somerset joint venture for the balance of 2002.

Gain on Sale of Securities

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):	2002		2001		% Change		2002		2001		% Change
Gain on sale of securities	$	—	$	4,495		(100.0)%	$	—	$	52,168		(100.0)%

     During the first three quarters of 2002, we did not sell any of our holdings in marketable securities.  During the three months ended September 30, 2001, we sold approximately 70,000 shares of Andrx common stock for a pre-tax gain of $4.5 million.  During the nine months ended September 30, 2001, we sold approximately 958,000 shares of Andrx common stock for a pre-tax gain of $52.2 million.  See Note A in the accompanying Notes to Consolidated Financial Statements in this Quarterly Report.

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Gain from Legal Settlement

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):	2002		2001		% Change		2002		2001		% Change
Gain from legal settlement	$	—	$	60,517		(100.0)%	$	32,000	$	60,517		(47.1)%

     During the second quarter of 2002, we received a one-time payment from Bristol-Myers Squibb of $32 million relating to the settlement of a legal dispute. See Note G in the accompanying Notes to Consolidated Financial Statements in this Quarterly Report.  In the third quarter of 2001, we recorded a gain from our litigation settlement with Rhone-Poulenc Rorer, Inc. related to Dilacor XR® and its generic equivalent.

Interest and Other Income

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands):	2002		2001		% Change		2002		2001		% Change
Interest and other income	$	2,645	$	838		215.6%	$	5,937	$	2,441		143.2%

     The increase in interest and other income was the result of higher average cash balances, generated primarily by cash flows from operations.

Interest Expense

		Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands):		2002			2001			% Change		2002			2001			% Change
Interest expense		$	5,747		$	7,203			(20.2)%	$	16,690		$	21,881			(23.7)%
	effective interest rate		5.0	%		5.7	%				4.9	%		5.6	%

     Interest expense declined due to lower average bank debt balances and lower effective interest rates in the current year, compared to the corresponding 2001 period.  For the nine months ended September 30, 2002, we capitalized interest of $0.8 million related to self-constructed assets and the implementation of our new Enterprise Resource Planning (ERP) system.  During the three and nine month periods ended September 30, 2001, we capitalized interest expense of $0.7 million and $4.6 million, respectively, related to the carrying value of assets held for disposition and self-constructed assets.

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Income Tax Expense

		Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands):		2002			2001			% Change		2002			2001			% Change
Income taxes		$	23,519		$	(31,965	)		(173.6)%	$	77,983		$	51,762			50.7%
	effective tax rate		36.6	%		35.3	%				37.0	%		42.5	%

     The change in the effective tax rate for the three and nine month periods was primarily the result of our January 1, 2002 adoption of SFAS No. 142, which discontinued the amortization of goodwill.  In previous periods, the amortization related to goodwill was 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: current balances of cash, cash equivalents and value of marketable securities; expected cash flows provided by operations; current levels of our accounts receivable, inventory and accounts payable balances; our expected investment in capital improvements; access to financing sources, including credit and equity arrangements; and the financial flexibility to attract long-term capital on satisfactory terms. 

     We generated cash in excess of our working capital requirements for the nine months ended September 30, 2002.  Our cash flows provided by operations were $284.8 million for the first nine months of 2002, compared to $99.2 million for the first nine months of 2001.  This increase in cash flow from operations was primarily due to the change, year over year, in net income and balances of accounts receivable, accounts payable and accrued expenses.  This increase was impacted by the build-up of inventories in support of expected new product launches and marketing initiatives. Significant uses of cash included the acquisition of product rights ($121.2 million), principal payments on our term loan facility and acquisition liabilities ($55.7 million) and additions to property and equipment ($56.2 million). We currently expect to spend between $75 million and $80 million for capital expenditures during 2002, of which we expect approximately $22 million to be related to the installation and implementation of our new ERP system.   

     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 September 30, 2002, approximately $286 million remained outstanding under this term loan, at an effective annual interest rate of approximately 3.9%.  As of September 30, 2002, scheduled quarterly principal payments under the term loan for the next twelve months total $79.4 million.  Under the credit agreement, we are subject to certain financial and other operational covenants, all of which, as of September 30, 2002, we are in compliance.  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. 

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     Our cash and marketable securities totaled approximately $307 million at September 30, 2002.  The fair value of our marketable securities 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 and our expected cash flows from operations 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 investments, 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;

• 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);

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• 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 products, which typically have higher margins, and generic products;

• our dependence on revenues from significant products, in particular, Ferrlecit®, for which current 2002 net revenues are slightly in excess of 10% of our total 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;

• difficulties and delays inherent in product development, manufacturing and sale, such as:

- products that may appear promising in the development stage 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;

• our ability to successfully compete in both the branded and generic pharmaceutical product sectors;

• our timely and successful implementation of strategic initiatives, including integrating companies and products we acquire;  and

• other risks and uncertainties detailed herein and from time to time in our Securities and Exchange Commission filings.

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We disclaim any 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 DISCLOSU RE 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 September 30, 2002, our total holdings in equity securities of other companies, including equity-method investments and available-for-sale securities, were $111 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 September 30, 2002, we had equity-method investments of $45.9 million and publicly traded equity securities (available-for-sale securities) with a fair value of $65.1 million ($58.3 million of which was included in “Marketable securities” and $6.8 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 September 30, 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 $16.3 million, $26.0 million and $32.6 million, respectively.

     As discussed in Note A of the Notes to Consolidated Financial Statements in this Quarterly Report, our investment in Andrx consisted of approximately 1.5 million shares of Andrx common stock with a fair market value of $34 million at September 30, 2002.  Because Andrx  common stock is 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 September 30, 2002, the last trading day in the second quarter of 2002, the closing price of Andrx common stock was $22.15.  On November 6, 2002, before our filing of this Quarterly Report, the closing price of Andrx common stock was $17.50.  The following table sets forth the high and low market price per share of Andrx common stock, based on published financial sources, through September 30, 2002 and for 2001:

		High		Low
2002, by quarter
	First	$	71.27	$	31.13
	Second	$	48.20	$	25.80
	Third	$	27.89	$	16.61
2001, by quarter
	First	$	72.25	$	38.50
	Second	$	77.00	$	44.94
	Third	$	77.39	$	58.02
	Fourth	$	76.52	$	61.30

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     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 September 30, 2002, Watson owned approximately 1.4 million shares of Dr. Reddy common stock with a market value of $24.2 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.  

Interest Rate Risk

     Our exposure to interest rate risk relates primarily to our non-equity investment portfolio and our variable rate debt. We generally invest our excess cash in money market mutual funds and other short-term, variable interest rate instruments.  Currently, our cash balances are invested in short-term A-rated or higher fixed income securities.  Consequently, our interest rate and principal risk are minimal. 

     As discussed in Note F of the Notes to Consolidated Financial Statements in this Quarterly Report, as of September 30, 2002 we had approximately $285.8 million outstanding under a LIBOR-based, variable interest rate term loan.  A hypothetical 100 basis point increase in interest rates, based on the September 30, 2002 term loan balance, would reduce our annual net income by approximately $1.7 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 $149 million at September 30, 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.

ITEM 4. CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Also, the Company has investments in certain unconsolidated entities.  As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries. 

     Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

     There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

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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 and in “Part II, Item 1. Legal Proceedings,” of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2002 and June 30, 2002.  The following is a description of material developments during the period covered by this Quarterly Report and should be read in conjunction with the Annual Report and Quarterly 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 October 15, 2002, approximately 150 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.

Cipro Litigation.   With respect to the Cipro litigation, the plaintiffs in several of the actions have filed amended complaints and motions seeking class certification.  The defendants are conducting discovery and investigation in connection with the motions seeking class certification, but have not yet responded to the motions.  The defendants have moved to dismiss the complaints in several of the actions.  The courts in which the dismissal motions were filed have not yet ruled.  In other actions, the plaintiffs have filed amended and/or consolidated complaints, to which the Company has not yet responded.  Aventis is currently controlling the defense of these matters as the indemnifying party under its agreements with the Company.

Governmental Reimbursement Investigations and Proceedings.   In August 2002, the defendants in the Rice v. Abbott Laboratories, Inc. matter filed a Notice of Removal of the action to the United States District Court for the Northern District of California.  Thereafter, the plaintiff moved to remand the action to the California Superior Court.  The defendants opposed the motion to remand, and the court has not yet ruled.  In August and September 2002, several additional actions were filed in the California Superior Court against the Company and numerous other pharmaceutical companies, generally alleging representative class claims that are similar to the claims alleged in the Rice v. Abbott Laboratories, Inc. matter.  The defendants have filed Notices of Removal of these matters to the United States District Court.  Additionally, in September 2002 the Company was named as a defendant in a consolidated class action complaint pending in the United States District Court for the District of Massachusetts (In re Pharmaceutical Industry Average Wholesale Price Litigation, Case No. MDL No. 1456).  The action alleges that the Company and other pharmaceutical companies engaged in fraudulent price reporting practices related to the reporting of the average wholesale prices of certain products, and committed other improper acts in order to increase prices and market shares.  The Company has not yet responded to these actions, but believes it has substantial defenses to the claims alleged by the various plaintiffs. These actions, if successful, could adversely affect the Company and could have a material adverse effect on our business, results of operations, financial condition and 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 26.
	(b) Reports on Form 8-K filed during the quarter ended September 30, 2002:
			On August 14, 2002, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission reporting, under Item 5, the certifications required by the Sarbanes-Oxley Act of 2002 for the 10-Q for the quarterly period ended June 30, 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: November 12, 2002

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CERTIFICATIONS

I, Allen Chao, Chairman and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Watson Pharmaceuticals, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/  ALLEN CHAO, Ph.D.

Allen Chao, Ph.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)

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I, Michael E. Boxer, Senior Vice President – Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Watson Pharmaceuticals, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/  MICHAEL E. BOXER

Michael E. Boxer
Senior Vice President – Chief Financial Officer
(Principal Financial Officer)

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WATSON PHARMACEUTICALS, INC.

EXHIBIT INDEX TO FORM 10-Q
For the Quarterly Period Ended September 30, 2002

Exhibit No.	Description
*10.1	Key Employment Agreement entered into as of August 15, 2002 by and between Charles Ebert and the Company.

*Compensation Plan or Agreement

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EX-10.1

EXHIBIT 10.1

WATSON PHARMACEUTICALS, INC.

KEY EMPLOYEE AGREEMENT

          This Key Employee Agreement (“Agreement”) is entered into as of August 15, 2002 (the “Effective Date”), by and between Charles Ebert, Ph.D. (“Executive”) and Watson Pharmaceuticals, Inc. (the “Company”), a Nevada corporation.

          Whereas, the Company and the Executive are parties to that certain Watson Pharmaceuticals, Inc. Key Employee Agreement dated June 30, 1999, as amended by that certain Amendment No. 1 to Watson Pharmaceuticals, Inc. Key Employee Agreement dated November 15, 2000 (collectively the “Original Agreement”); and

          Whereas, the Company and Executive wish to amend and restate the Original Agreement in accordance with the terms of this Agreement; and

          Whereas, the Company desires to employ Executive to provide personal services to the Company, and wishes to provide Executive with certain compensation and benefits in return for his services; and

          Whereas, Executive wishes to be employed by the Company and provide personal services to the Company in return for certain compensation and benefits, including the benefits provided under this Agreement;

          Now, Therefore, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between the parties hereto as follows:

          1.         Employment by the Company.   Subject to terms set forth herein, the Company agrees to employ Executive in the position of Senior Vice President, Research & Development, and Executive hereby accepts employment effective as of the Effective Date.  In this position, Executive shall perform such duties as are assigned from time to time by the Chief Executive Officer (“CEO”) of the Company or such other officer of the Company or one of its subsidiaries that the CEO in his discretion may from time to time designate (the “Designated Officer,” who shall hold the title of President, Chief Operating Officer, or higher position of such entity), consistent with the Bylaws of the Company and as may be required by the Company’s Board of Directors (the “Board”).  During his employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods as set forth herein and reasonable periods of illness or other incapacity permitted by the Company’s general employment policies) to the business of the Company.  Executive shall abide by the general employment policies and procedures of the Company, except that wherever the terms of this Agreement may differ from or are in conflict with the Company’s general employment policies or procedures, this Agreement shall control.

          2.         Compensation.

                       2.1          Salary.   For services to be rendered hereunder, Executive shall receive a base salary as set forth in Section 1 of the Compensation and Severance Terms Schedule,

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attached hereto as Exhibit A.  Executive will be considered annually for increases in base salary in accordance with Company policy and subject to review and approval by the CEO, Designated Officer, or the Compensation Committee of the Board, as appropriate.

                       2.2          Bonus.  Executive shall be eligible to participate in the Company’s bonus plan at the executive level throughout the duration of Executive’s employment with the Company.  The Company shall have the sole discretion to determine whether Executive is entitled to any such bonus and to determine the amount of the bonus.  The amount of Executive’s bonus may be determined in part based on Executive’s performance with respect to certain goals established by the Company and attainment by the Company of its planned financial objectives for the bonus period.  Notwithstanding the foregoing, no bonus is guaranteed to Executive.  Any bonus is subject to the approval of the CEO, Designated Officer, or the Compensation Committee of the Board, as appropriate.  The Company retains the authority to review, grant, deny or revise any bonus in its sole discretion.  To be eligible to receive a bonus, Executive must remain in employment with the Company throughout the entire fiscal year or as otherwise set forth in the applicable bonus plan.  The target level of such bonus is set forth in Section 2 of Exhibit A attached hereto.

                       2.3          Stock Options.  In addition to any stock options which the Company may have already granted to Executive prior to the Effective Date, subject to approval of the Board or the Compensation Committee of the Board, as appropriate, Executive will receive the stock option grants (if any) set forth in Section 3 of Exhibit A, and such additional grants of stock options as may from time to time be granted, pursuant to the terms and conditions set forth in the applicable stock option agreement and plan documents, copies of which will be made available upon Executive’s request.  For the purposes of this Agreement, all stock options granted to Executive by the Company prior to the Effective Date, granted hereunder, or granted in the future shall be referred to hereinafter as the “Options.”

                       2.4          Paid Time Off.  Executive shall be eligible to accrue paid time off (“PTO”) during the term of this Agreement, in accordance with the Company’s standard policy regarding PTO and in an amount commensurate with other employees at a level similar to that of the Executive.

                       2.5          Standard Company Benefits.  Executive shall be entitled to all rights and benefits for which he is eligible under the terms and conditions of the standard Company benefits plans (e.g., health and disability insurance, 401(k) retirement plan, etc.) and other benefits and incentives which may be in effect from time to time and provided by the Company to employees at levels similar to the Executive.

          3.          Proprietary Information and Inventions.

                       Executive agrees to execute and abide by the Employee Proprietary Information and Inventions Agreement attached hereto as Exhibit C and made a part hereof by this reference.

          4.          Outside Activities.

                       4.1          Activities.  Except with the prior written consent of the CEO or the Board, as appropriate, Executive will not during his employment with the Company undertake or engage

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in any other employment, occupation or business enterprise, other than ones in which Executive is a passive investor.  Executive may engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of his duties hereunder. Executive will not during his employment with the Company publicly disparage the Company or any of its subsidiaries, or their respective past or present products, officers, directors, employees or agents.

                       4.2          Investments and Interests. During his employment by the Company, Executive agrees not to acquire, assume or participate in, directly or indirectly, any position, investment or interest known by him to be adverse to or in conflict with the interest of the Company, its business or prospects, financial or otherwise. By way of clarification, nothing contained in this Agreement shall prevent Executive from holding, for investment purposes only, no more than one percent (1%) of the capital stock of any publicly traded company.

                       4.3           Non-Competition.  During his employment by the Company, except on behalf of the Company, Executive will not directly or indirectly, whether as an officer, director, stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever known by him to compete directly with the Company, anywhere in the world, in any line of business engaged in (or planned to be engaged in) by the Company.

          5.          Other Agreements.

                       Executive represents and warrants that his employment by the Company will not conflict with and will not be constrained by any prior agreement or relationship with any third party.  Executive represents and warrants that he will not disclose to the Company or use on behalf of the Company any confidential information governed by any agreement with any third party except in accordance with an agreement between the Company and any such third party.  During Executive’s employment by the Company, Executive may use, in the performance of his duties, all information generally known and used by persons with training and experience comparable to his own and all information which is common knowledge in the industry or otherwise legally in the public domain.

          6.          Termination Of Employment.

                       6.1          At-Will Employment.  Executive’s relationship with the Company is at-will.  The Company shall have the right to terminate Executive’s employment with the Company at any time with or without Cause and with or without notice.

                       6.2         Termination by Company for Cause.  If the Company terminates Executive’s employment at any time for Cause, Executive’s salary shall cease on the date of termination; and Executive will not be entitled to severance pay, pay in lieu of notice or any other such compensation.

                                       (a)     Definition of “Cause.”  For purposes of this Agreement, “Cause” shall mean (i) Executive’s conviction of any felony; or, (ii) Executive’s gross misconduct, material violation of Company policy, or material breach of Executive’s duties to the Company,

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which Executive fails to correct within thirty (30) days after Executive is given written notice by the CEO or the Board, as appropriate.

                       6.3         Termination by Company Without Cause.  If the Company terminates Executive’s employment at any time without Cause, Executive shall be entitled to severance benefits as set forth in Section 4.1 of the Compensation and Severance Terms Schedule, attached hereto as Exhibit A. 

                       6.4         Executive’s Voluntary Resignation.  Executive may terminate his employment with the Company at any time, with or without Good Reason, and with or without notice.  In the event Executive voluntarily terminates his employment other than for Good Reason, he will not be entitled to severance pay, pay in lieu of notice or any other such compensation.

                       6.5         Executive’s Resignation for Good Reason.  Executive may resign his employment for Good Reason so long as Executive tenders his resignation to the Company within sixty (60) days after the occurrence of the event which forms the basis for his termination for Good Reason.  If Executive terminates his employment for Good Reason, Executive shall be eligible for severance benefits as set forth in Section 4.2 of Exhibit A, attached hereto.

                                       (a)     Definition of “Good Reason.”  For purposes of this Agreement, “Good Reason” shall mean any one of the following events which occurs on or after the Effective Date:  (i) any material reduction of the Executive’s then existing annual base salary, except to the extent the annual base salary of all other executive officers of the Company is similarly reduced (provided such reduction does not exceed fifteen percent (15%) of Executive’s then existing annual base salary); (ii) any material reduction in the package of benefits and incentives, taken as a whole, provided to the Executive (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would materially and adversely affect the Executive’s participation or reduce the Executive’s benefits under any such plans, except to the extent that such benefits and incentives of all other executive officers of the Company are similarly reduced; (iii) any material diminution of the Executive’s duties and responsibilities, taken as a whole, excluding for this purpose (A) a diminution of duties and responsibilities that occurs as a consequence of a restructuring of the Company’s business, or (B) an isolated, insubstantial or inadvertent action not taken in bad faith which is remedied by the Company immediately after notice thereof is given by the Executive; (iv) following a Change of Control, any diminution of the Executive’s duties, responsibilities, authority, reporting structure, titles or offices, excluding for this purpose an isolated, insubstantial or inadvertent action not taken in bad faith which is remedied by the Company immediately after notice thereof is given by the Executive; (v) any material breach by the Company of its obligations under this Agreement; (vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or (vii) any requirement that the Executive relocate to a work site that would increase the Executive’s one-way commute distance by more than thirty-five (35) miles from his then principal residence to the Company’s facility in Salt Lake City, Utah, unless the Executive accepts such relocation opportunity.

4.

                       6.6         Termination for Death or Disability.  Executive’s employment with the Company will be terminated in the event of Executive’s death, or any illness, disability or other incapacity in such a manner that Executive is physically rendered unable regularly to perform his duties hereunder for a period in excess of one hundred eighty (180) consecutive days or more than one hundred eighty (180) days in any consecutive twelve (12) month period.  The determination regarding whether Executive is physically unable regularly to perform his duties shall be made by the Board.  Executive’s inability to be physically present on the Company’s premises shall not constitute a presumption that Executive is unable to perform such duties.  In the event that Executive’s employment with the Company is terminated for death or disability as described in this Section 6.6, Executive or Executive’s heirs, successors, and assigns shall not receive any compensation or benefits other than payment of accrued salary and PTO and such other benefits as expressly required in such event by applicable law or the terms of applicable benefit plans.

                       6.7         Cessation.  If Executive violates any provision of Section 8 of this Agreement or the Employee Proprietary Information and Inventions Agreement and Executive fails to correct such violation within ten (10) days after Executive is given written notice by the CEO or the Board, as appropriate, then any severance payments or other benefits being provided to Executive will cease immediately, and Executive will not be entitled to any further compensation from the Company.

          7.          Change of Control.

                       7.1         Definition.  For purposes of this Agreement, Change of Control means the occurrence of any of the following: 

                                      (a)     a sale of assets representing fifty percent (50%) or more of the net book value and of the fair market value of the Company’s consolidated assets (in a single transaction or in a series of related transactions);

                                      (b)     a liquidation or dissolution of the Company;

                                      (c)     a merger or consolidation involving the Company or any subsidiary of the Company after the completion of which: (i) in the case of a merger (other than a triangular merger) or a consolidation involving the Company, the shareholders of the Company immediately prior to the completion of such merger or consolidation beneficially own (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or comparable successor rules), directly or indirectly, outstanding voting securities representing less than sixty percent (60%) of the combined voting power of the surviving entity in such merger or consolidation, and (ii) in the case of a triangular merger involving the Company or a subsidiary of the Company, the shareholders of the Company immediately prior to the completion of such merger beneficially own (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules), directly or indirectly, outstanding voting securities representing less than sixty percent (60%) of the combined voting power of the surviving entity in such merger and less than sixty percent (60%) of the combined voting power of the parent of the surviving entity in such merger;

5.

                                      (d)     an acquisition by any person, entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act or any comparable successor provisions), other than any employee benefit plan, or related trust, sponsored or maintained by the Company or an affiliate of the Company and other than in a merger or consolidation of the type referred to in clause “(c)” of this sentence, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules) of outstanding voting securities of the Company representing more than thirty percent (30%) of the combined voting power of the Company (in a single transaction or series of related transactions); or

                                      (e)     in the event that the individuals who, as of the Effective Date, are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least fifty percent (50%) of the Board.  (If the election, or nomination for election by the Company’s shareholders, of any new member of the Board is approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new member of the Board shall be considered as a member of the Incumbent Board.)

                       7.2         Termination After a Change of Control.  In the event Executive’s employment with the Company is terminated without Cause, or Executive resigns for Good Reason, within ninety (90) days prior to or twenty-four (24) months following a Change of Control (a “Change of Control Termination”), then Executive shall be eligible for severance benefits as set forth in Section 4.3 of Exhibit A, attached hereto.

                       7.3         Parachute Payments.  In the event that it shall be determined under this Section 7.3 that any payment or benefit to Executive or for the benefit of Executive or on Executive’s behalf (whether paid or payable or distributed or distributable) pursuant to the terms of this Agreement or any other agreement, arrangement or plan with the Company or any Affiliate (as defined below) (including, without limitation, the severance benefits as set forth in Section 4.3 of Exhibit A, attached hereto) (individually, a “Payment” and collectively, the “Payments”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any successor provision thereto (the “Excise Tax”), then Executive shall be entitled to receive from the Company one or more additional payments (individually, a “Gross-Up Payment” and collectively, the “Gross-Up Payments”) in an aggregate amount such that the net amount of the Payments and the Gross-Up Payments retained by Executive after the payment of all Excise Taxes (and any interest and penalties imposed with respect to such Excise Taxes) on the Payments and all federal, state and local income tax, employment taxes and Excise Taxes (including any interest and penalties imposed with respect to such taxes and Excise Taxes) on the Gross-Up Payments provided for in this Section 7.3, and taking into account any lost or reduced tax deductions on account of the Gross-Up Payments, shall be equal to the Payments.  For purposes of this Section 7.3, an “Affiliate” shall mean any successor to all or substantially all of the business and/or assets of the Company, any person acquiring ownership or effective control of the Company or ownership of a substantial portion of the assets of the Company’s assets, or any other person whose relationship to the Company, such successor or such person acquiring ownership or control is such as to require attribution between the parties under Section 318(a) of the Code.

6.

                                      (a)     All determinations required to be made under this Section 7.3, including whether and when any Gross-Up Payment is required and the amount of such Gross-Up Payment, and the assumptions to be utilized in arriving at such determinations, shall be made by the Accountants (as defined below), which shall provide Executive and the Company with detailed supporting calculations with respect to such Gross-Up Payment within thirty (30) days of the receipt of notice from Executive or the Company that Executive has received or will receive a Payment.  For the purposes of this Section 7.3, the “Accountants” shall mean the Company’s independent certified public accounting firm serving immediately prior to the Change of Control (or other change in ownership or effective control, or change in ownership of a substantial portion of the assets, of a corporation, as defined in Section 280G of the Code) with respect to which such determination is being made.  In the event that the Accountants are also serving as the accountants, auditors or consultants for the individual, entity or group effecting the Change of Control (or other change in ownership or effective control, or change in ownership of a substantial portion of the assets, of a corporation, as defined in Section 280G of the Code), the Company shall appoint another nationally recognized independent certified public accounting firm, reasonably acceptable to Executive, to make the determinations required hereunder (which accounting firm shall then be referred to as the “Accountants” hereunder).  All fees and expenses of the Accountants shall be borne solely by the Company. 

                                      (b)     For the purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, such Payments will be treated as “parachute payments” within the meaning of section 280G of the Code, and all “parachute payments” in excess of the “base amount” (as defined under Section 280G(b)(3) of the Code) of Executive shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Accountants, such Payments (in whole or in part) either do not constitute “parachute payments” or represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4) of the Code) in excess of the “base amount,” or such “parachute payments” are otherwise not subject to such Excise Tax.

                                      (c)     For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made and to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of Executive’s adjusted gross income); and to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-Up Payment in Executive’s adjusted gross income.

                                      (d)     Any determination by the Accountants shall be binding upon the Company and Executive.  As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that the Gross-Up Payment made will have been an amount less than the Company should have paid pursuant to this Section 7.3 (the “Underpayment”).  In the event that the Company exhausts its

7.

remedies pursuant to Section 7.3(f) and Executive is required to make a payment of any Excise Tax, the Underpayment shall be promptly paid by the Company to or for Executive’s benefit.

                                      (e)     Executive shall notify the Company in writing of any claim by the Internal Revenue Service or other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment.  Such notification shall be given as soon as practicable after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid.  Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes, interest and/or penalties with respect to such claim is due).  If the Company notifies Executive in writing prior to the expiration of such period that the Company desires to contest such claim, Executive shall:  (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, engaging legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claims; provided, however, that the Company shall bear and pay directly all costs and expenses, including attorneys’ fees (including additional interest and penalties) incurred in connection with such contest and shall indemnify Executive for and hold Executive harmless from, on an after-tax basis, any Excise Tax or income, employment or other taxes (including interest and penalties with respect thereto) imposed as a result of such representation and payment of all related costs and expenses.

                                      (f)     Without limiting the foregoing provisions of this Section 7.3, the Company shall control all proceedings taken in connection with such contest and, at the Company’s sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the Internal Revenue Service or other taxing authority in respect of such claim and may, at the Company’s sole option, either direct Executive to pay the amount claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify Executive for and hold Executive harmless from, on an after-tax basis, any Excise Tax or income, employment or other taxes (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance (including as a result of any forgiveness by the Company of such advance); provided, further, that any extension of the statute of limitations relating to the payment of taxes, interest and penalties for the taxable year of Executive with respect to which such contested amount is claimed to be due shall be limited solely to such contested amount.  Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

8.

                                      (g)     The Gross-Up Payments provided for in this Section 7.3 shall be paid to Executive not later than the date upon which the severance benefits payable to Executive under Section 4.3 of Exhibit A, attached hereto, are due; provided, however, that if the amounts of such Gross-Up Payments cannot be finally determined by the Accountants on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such Gross-Up Payments and shall pay the remainder of such Gross-Up Payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) not later than 30 days after the amount thereof can be determined by the Accountants.  In the event that the amount of the estimated payments exceeds the amount subsequently determined by the Accountants to have been due to the Executive, such excess shall constitute a loan by the Company to Executive, payable not later than 30 days after such determination and demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code).

          8.          Nonsolicitation.  While employed by the Company, and for one (1) year following the termination of Executive’s employment with the Company, Executive agrees not to solicit, attempt to solicit, induce, or otherwise cause any employee or independent contractor of the Company to terminate his or her employment or contractual relationship in order to become an employee or independent contractor to or for Executive or any other person or entity.

          9.          Release.  In exchange for the severance compensation and benefits provided under this Agreement to which Executive would not otherwise be entitled, Executive shall enter into and execute a release substantially in the form attached hereto as Exhibit B (the “Release”) upon Executive’s termination of employment.  Unless the Release is executed by Executive and delivered to the Company within twenty-one (21) days (forty-five (45) days in the event of a group termination) after the termination of Executive’s employment with the Company, Executive shall not receive any severance benefits provided under this Agreement, acceleration, if any, of Executive’s Options as provided in this Agreement shall not apply and Executive’s Options in such event may be exercised following the date of Executive’s termination only to the extent provided under their original terms in accordance with the applicable stock option plan and option agreements.

          10.       General Provisions.

                      10.1          Notices.  Any notices provided hereunder must be in writing and shall be deemed effective upon personal delivery (including, personal delivery by facsimile transmission) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at his address as listed on the Company payroll (which address may be changed by written notice).

                      10.2          Severability.  Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity or unenforceability will not affect any other provision or any other jurisdiction, and such invalid or unenforceable provision shall be

9.

reformed, construed and enforced in such jurisdiction so as to render it valid and enforceable consistent with the intent of the parties insofar as possible.

                      10.3          Waiver.  If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement.

                      10.4          Entire Agreement.  This Agreement, together with the Employee Proprietary Information and Inventions Agreement, constitute the final, complete, and exclusive embodiment of the entire agreement between Executive and the Company regarding the subject matter hereof and supersede any prior agreement, promise, representation, or statement, written or otherwise, between Executive and the Company with regard to this subject matter. This Agreement is entered into without reliance on any promise, representation, statement or agreement other than those expressly contained or incorporated herein, and it cannot be modified or amended except in a writing signed by Executive and a duly authorized officer of the Company.

                      10.5          Counterparts.  This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement.

                      10.6          Headings.  The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.

                      10.7          Successors and Assigns.  This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably.

                      10.8          Attorneys’ Fees.  If either party hereto brings any action to enforce his or its rights hereunder, the prevailing party in any such action shall be entitled to recover his or its reasonable attorneys’ fees and costs incurred in connection with such action.

                      10.9          Arbitration.  To provide a mechanism for rapid and economical dispute resolution, Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to this Agreement (including the Release) or its enforcement, performance, breach, or interpretation, will be resolved, to the fullest extent permitted by law, by final, binding, and confidential arbitration held in Orange County, California and conducted by Judicial Arbitration & Mediation Services/Endispute (“JAMS”), under its then-existing Rules and Procedures.  Nothing in this Section 10.9 or in this Agreement is intended to prevent either Executive or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.

10.

                      10.10        Remedies.  Executive’s duties under Section 8 and the Employee Proprietary Information and Inventions Agreement shall survive termination of Executive’s employment with the Company.  Executive acknowledges that a remedy at law for any breach or threatened breach by Executive of the provisions of these sections and the Employee Proprietary Information and Inventions Agreement would be inadequate, and that such a breach would cause irreparable harm to the Company; and Executive therefore agrees that the Company shall be entitled to injunctive relief in case of any such breach or threatened breach.

                      10.11        Governing Law.  All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California as applied to contracts made and to be performed entirely within California.

          In Witness Whereof, the parties have executed this Agreement effective as of the Effective Date above written.

WATSON PHARMACEUTICALS, INC.

By:    /s/ ALLEN CHAO
	Name: Allen Chao
	Title: Chief Executive Officer
Executive:
/s/ CHARLES EBERT
Name: Charles Ebert, Ph.D.

11.

Exhibit A

COMPENSATION AND SEVERANCE TERMS SCHEDULE

1.         BASE SALARY

            For services to be rendered under this Agreement, Executive shall receive an initial base salary at an annualized rate of $350,000, payable in accordance with the Company’s standard payroll practices, and subject to increases as set forth in the Agreement.

2.         BONUS

            Executive’s annual bonus, if granted, shall be at a target level of 30% of the Executive’s then current base salary.

3.         STOCK OPTIONS

            As of the Effective Date, Executive has outstanding option(s) to purchase the number of shares of Company common stock as indicated on Attachment A to this Exhibit A.

4.         SEVERANCE BENEFITS

            4.1    Termination By Company without Cause.  If the Company terminates Executive’s employment at any time without Cause, the Company shall provide to Executive, within thirty (30) days after the Effective Date of the Release attached hereto as Exhibit B (as “Effective Date” is defined in the Release), as the only severance compensation and benefits all of the following:

                     (a)     A lump sum severance payment, subject to standard withholdings or deductions, in an amount equal to the sum of: (i) twenty-four (24) months of Executive’s then base salary; (ii) two times Executive’s target bonus to be earned for the year in which termination occurs or two times the bonus amount paid to the Executive in the prior year, whichever is greater; and (iii) Executive’s prorated bonus (based on Executive’s target bonus amount) for the year in which the termination occurs.

                     (b)     Continued group health insurance benefits (e.g., medical, dental, vision, etc.) for Executive and Executive’s eligible dependents for a period of up to eighteen (18) months under COBRA, and if Executive is not covered under the Company’s group health insurance plan at the end of eighteen (18) months, the Company shall use its best efforts to provide Executive and Executive’s eligible dependents with comparable health insurance coverage for an additional period of up six (6) months, but the Company shall not be obligated to pay more than one hundred fifty percent (150%) of the cost of COBRA coverage for such comparable coverage; provided, however, that in any event the Company’s obligation to provide any health benefits pursuant to this sentence ends when Executive becomes eligible for health insurance with a new

1.

employer (and Executive agrees to promptly notify the Company in writing of any such event of eligibility).

                     (c)     Outplacement services for one year with a nationally recognized service selected by the Company.

          4.2     Executive’s Resignation for Good Reason.  If Executive terminates his employment with the Company for Good Reason, the Company shall provide to Executive, within thirty (30) days after the Effective Date of the Release attached hereto as Exhibit B (as “Effective Date” is defined in the Release), as the only severance compensation and benefits, the same severance compensation and benefits provided in Section 4.1 hereof.

          4.3     Change of Control Termination.  In the event of a Change of Control Termination, the Company shall provide to Executive, within thirty (30) days after the Effective Date of the Release attached hereto as Exhibit B (as “Effective Date” is defined in the Release), as the only severance compensation and benefits, (a) the same severance compensation and benefits provided in Section 4.1 hereof and, (b) any unvested Options held by Executive shall have their vesting accelerated in full so as to become one hundred percent (100%) vested and immediately exercisable in full as of the date of such termination.

5.       Relocation.

Executive shall relocate his principal residence within the six months following the Effective Date to a location in the Salt Lake City, Utah metropolitan area, and thereafter shall report to the Company’s facility in Salt Lake City, Utah as his principal place of business.  Executive shall be eligible to receive such relocation assistance as offered generally by the Company to its executives pursuant to the Company’s then existing policies as of the Effective Date; provided however, that should Executive’s employment with the Company terminate (other than by the Company without cause) within two (2) years of the Effective Date, Executive will reimburse the Company for such relocation expenses incurred by the Company.  Concurrently with the execution of this Agreement, Executive agrees to execute a Relocation Reimbursement Agreement in a form acceptable to the Company.

2.

Exhibit B

RELEASE AGREEMENT

I understand that my position with Watson Pharmaceuticals, Inc. (the “Company”) terminated effective _______________ (the “Separation Date”).  The Company has agreed that if I choose to sign this Release, the Company will, within thirty (30) days after the Effective Date of this Release,  pay me certain severance benefits (minus the standard withholdings and deductions) pursuant to the terms of the Key Employee Agreement (the “Agreement”) entered into as of ______________, 2002, between myself and the Company, and any agreements incorporated therein by reference.  I understand that I am not entitled to such severance benefits unless I sign this Release.  I further understand that, regardless of whether I sign this Release, the Company will pay me all of my accrued salary and paid time off through the Separation Date, to which I am entitled by law.

In consideration for the severance benefits I am receiving under the Agreement, I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, parents, subsidiaries, and affiliates (“Releasees”) from any and all claims, liabilities, demands, causes of action, attorneys’ fees, damages, or obligations of every kind and nature, whether they are now known or unknown, arising at any time prior to the date I sign this Release.  This general release includes, but is not limited to:  all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, harassment, defamation, fraud, wages or benefits, or claims for any form of equity or compensation.  Notwithstanding the release in the preceding sentence, I am not releasing any right of indemnification I may have for any liabilities and costs of defense (including without limitation reasonable attorneys’ fees) arising from my actions within the course and scope of my employment with the Company.

In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction:  “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

If I am forty (40) years of age or older as of the Separation Date, I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended (“ADEA”).  I also acknowledge that the consideration given for the waiver in the above paragraph is in addition to anything of value to which I was already entitled.  I have been advised by this writing, as required by the ADEA that:  (a) my waiver and release do not apply to any claims that may arise after my signing of this Release; (b) I should consult with an attorney prior to executing this Release; (c) I have twenty-one (21) days (forty-five (45) days in the event of a group termination) within which to consider this Release (although I may choose to voluntarily execute this Release earlier); (d) I have seven (7) days following the execution of this release to revoke the Release; and (e) this Release will not be effective until the eighth day after this Release has been signed both by me and by the Company (“Effective Date”).

I acknowledge that I remain bound by the Invention Assignment and Confidential Nondisclosure Agreement which I signed in connection with my employment (“Invention Agreement”) and that the provisions of the Invention Agreement shall remain in full force and effect. In accordance with my existing and continuing obligations under the Invention Agreement, I have returned to the Company all materials required to be returned pursuant to the Invention Agreement, as well as any other Company property in my possession.  In consideration for the severance benefits I am receiving hereunder, I agree that I will reasonably cooperate with the Company for ninety (90) days after the Separation Date to assure the smooth transition of pending matters and to answer questions which may arise from

time to time regarding my former duties and responsibilities.  Effective as of the Separation Date, I resign any and all offices and directorships with the Company and any of its affiliates, and will execute all documents reasonably requested by the Company or its affiliates to effectuate such resignations.  Further, I agree that I will not hereafter disparage the Company or any of the Releasees, either orally or in writing, to any person or entity.  The Company agrees that its officers and directors will not disparage me, either orally or in writing, to any person or entity.

Agreed:
Date	[Employee]
Date	WATSON PHARMACEUTICALS, INC.

2.

Exhibit C

EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT