Fitch upgrades Watson

Fitch Ratings upgraded Watson Pharmaceuticals, Inc.'s senior unsecured and bank loan credit ratings to BBB from BBB-. The outlook was changed to stable from positive.

Fitch said Watson has sustained credit metrics indicative of the new rating by strengthening revenues and earnings from its more stable and higher margin branded drug portfolio and mitigating the volatility inherent to its generics business through a series of product and technology acquisitions, internal development and licensing arrangements.

The breadth of the branded drug portfolio increased in 2003 with the launch of the internally developed Oxytrol product, the in-licensing agreement with Ortho McNeil (J&J) regarding oral contraceptive products, and the acquisition of the Novartis pain management products - Fiorinal and Fioricet.

Additional support to the rating comes from Watson's incremental investment for internal research and development and R&D licensing arrangements to broaden both the branded and generic drug R&D portfolios.

Additional confidence for the new rating includes Watson's successful refinancing transactions completed in March 2003, which moved the capital structure away from the term loan and revolving credit facilities with restrictive covenants, to longer term debt maturities and a lower cost of capital. The recent reduction in leverage, in conjunction with the repurchase of approximately 68% of all outstanding 7.125% senior debentures due 2008, further supports the new rating, Fitch added.

Positive industry factors, which include the wealth of brand-name pharmaceuticals set to expire within the intermediate term, and a political environment amenable to controlling health care costs (in light of the Medicare Prescription Drug Benefit), lend assurance to Watson's strategy of expanding the generic drug portfolio. The company is also attempting to boost generic product margin as its competitive efforts intensify in the commodity generics market, through vertical integration and more cost-effective raw material supply procurement.

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