Fitch affirms Watson

Fitch Ratings said it affirmed Watson Pharmaceuticals Inc.'s BBB issuer default, senior unsecured debt and bank loan ratings. The outlook is stable.

Fitch said Watson's credit profile remains consistent with the current rating category, given the company's ability to strengthen free cash flow generation over the past few years despite the contraction of EBITDA margins during that time period. Free cash flow for 2005 was about $246.7 million, free cash flow margin in 2005 remained consistent with 2004 at 15%, and Fitch anticipates free cash flow generation around $200 million annually in the intermediate term, despite greater revenues and earnings volatility from increased reliance on the generic drug portfolio and authorized generic product agreements.

The ratings reflect the company's continued investment in internal research and development and external licensing arrangements to strengthen the branded and generic drug portfolios, the agency said. The company had 47 Abbreviated New Drug Applications filed with the FDA at the end of 2005, of which seven could be first-to-file opportunities.

The agency said it is concerned, however, about the company's large amount of share repurchases and will monitor the activity compared with Watson's cash flow generation through the intermediate term.

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