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WPI Valuation

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					Watson Pharmaceuticals
Ticker: WPI                                                                                        Key Model Assu
                                                                            Beta
                                                                            Market Risk Premium
                                                                            Risk Free Rate
                                                                            Tax Rate
                                                                            Cost of Equity
                                                                            Cost of Debt
                                                                            WACC
                                                                            Terminal Growth Rate
(expressed in millions)
                                            2009       2010E       2011E             2012E
Revenue                                $2,793.0     $3,575.6    $4,072.2          $4,593.7
    % Growth                              10.2%        28.0%       13.9%             12.8%
COGS                                   $1,596.8     $1,966.6    $2,239.7          $2,480.6
    Gross Margin                          42.8%        45.0%       45.0%             46.0%
R&D                                     $197.3       $321.8      $366.5            $413.4
    % of Revenue                            7.1%        9.0%        9.0%              9.0%
Selling & Marketing                     $263.1       $321.8      $366.5            $413.4
    % of Revenue                            9.4%        9.0%        9.0%              9.0%
G&A                                     $257.1       $303.9      $346.1            $390.5
    % of Revenue                            9.2%        8.5%        8.5%              8.5%
EBITDA                                  $478.7       $661.5      $753.4            $895.8
    EBITDA Margin                         17.1%        18.5%       18.5%             19.5%
Loss (Gain) on Asset Sale                   $2.2           -           -                 -
    % of Revenue                          -0.1%         0.0%        0.0%              0.0%
Amortization                              $92.6      $143.0      $162.9            $183.7
    % of Revenue                            3.3%        4.0%        4.0%              4.0%
EBIT                                    $383.9       $518.5      $590.5            $712.0
    EBIT Margin                           13.7%        14.5%       14.5%             15.5%
Loss on Early Extinguishment of Debt       ($2.0)          -           -                 -
    % of Revenue                          -0.1%         0.0%        0.0%              0.0%
Interest Income                             $5.0           -           -                 -
    % of Revenue                            0.2%        0.0%        0.0%              0.0%
Interest Expense                         ($34.2)      ($53.6)     ($81.4)           ($91.9)
    % of Revenue                          -1.2%        -1.5%       -2.0%             -2.0%
Other income                                $9.9           -           -                 -
    % of Revenue                            0.4%        0.0%        0.0%              0.0%
EBT                                     $362.6       $464.8      $509.0            $620.1
    EBT Margin                            13.0%        13.0%       12.5%             13.5%
Income Taxes                            $140.6       $172.0      $188.3            $229.5
    Tax Rate                              38.8%        37.0%       37.0%             37.0%
Net Income                              $222.0       $292.8      $320.7            $390.7
    % of Revenue                            7.9%        8.2%        7.9%              8.5%
Adjustments:
Changes in NWC                           ($45.0)     ($57.6)     ($65.6)            ($74.0)
CapEx                                    ($71.9)     ($88.6)     ($80.3)            ($80.3)
FCF                                                  $146.6      $174.8             $236.4

PV of FCF                                           $1,236.5                Value of Operating Business
                                                                            Add: Cash
Terminal Value:                                     $9,697.1                Less: Debt
Discounted Terminal Value:                          $6,293.3                Equity Value
                                                                            Common Shares Oustanding
Implied Fair Value Per Share
Current Share Price


Upside Potential
                    Key Model Assumptions
                                                    1.09
ket Risk Premium                                  4.16%
                                                  3.77%
                                                 37.00%
                                                  8.31%
                                                  5.77%
                                                  7.47%
minal Growth Rate                                 3.00%

                        2013E          2014E       2015E
                     $5,191.2       $5,876.1    $6,661.8
                        13.0%          13.2%       13.4%
                     $2,803.2       $3,173.1    $3,597.4
                        46.0%          46.0%       46.0%
                      $467.2         $528.9      $599.6
                         9.0%           9.0%        9.0%
                      $467.2         $528.9      $599.6
                         9.0%           9.0%        9.0%
                      $441.2         $499.5      $566.3
                         8.5%           8.5%        8.5%
                     $1,012.3       $1,145.8    $1,299.0
                        19.5%          19.5%       19.5%
                            -              -           -
                         0.0%           0.0%        0.0%
                      $207.6         $235.0      $266.5
                         4.0%           4.0%        4.0%
                      $804.6         $910.8     $1,032.6
                        15.5%          15.5%       15.5%
                            -              -           -
                         0.0%           0.0%        0.0%
                            -              -           -
                         0.0%           0.0%        0.0%
                       ($51.9)        ($58.8)     ($66.6)
                        -1.0%          -1.0%       -1.0%
                            -              -           -
                         0.0%           0.0%        0.0%
                      $752.7         $852.0      $966.0
                        14.5%          14.5%       14.5%
                      $278.5         $315.3      $357.4
                        37.0%          37.0%       37.0%
                      $474.2         $536.8      $608.6
                         9.1%           9.1%        9.1%

                       ($83.6)        ($94.7)    ($107.3)
                       ($80.3)        ($80.3)     ($80.3)
                       $310.3         $361.9      $421.0

 e of Operating Business                        $7,529.8
                                                 $201.4
                                                $1,150.2
                                                $6,581.0
 mon Shares Oustanding                             123.5
ied Fair Value Per Share    $53.29
ent Share Price             $42.84


pside Potential            24.4%
Revenue Analysis
                   2008      2009     2010E    2011E    2012E    2013E    2014E    2015E
 Generic          1404.0    1641.8    2275.0   2661.8   3061.0   3520.2   4048.2   4655.4
   % Growth        -0.3%    16.9%     38.6%    17.0%    15.0%    15.0%    15.0%    15.0%
 Brand              397.0     393.7    413.4    442.3    477.7    520.7    572.8    635.8
   % Growth         5.8%     -0.8%     5.0%     7.0%     8.0%     9.0%    10.0%    11.0%
 Distribution       606.2     663.8    716.9    774.3    836.2    903.1    975.3   1053.4
   % Growth         7.1%      9.5%     8.0%     8.0%     8.0%     8.0%     8.0%     8.0%
 Other              128.3      93.7    170.3    193.9    218.7    247.2    279.8    317.2
   % of Revenue     5.1%      3.4%     5.0%     5.0%     5.0%     5.0%     5.0%     5.0%
Revenue           2535.5    2793.0    3575.6   4072.2   4593.7   5191.2   5876.1   6661.8
   % Growth         1.6%    10.2%     28.0%    13.9%    12.8%    13.0%    13.2%    13.4%
Actual Case
                                  2009    2010E
                       Revenue   1641.8   2275.0
Actual Case        1                      38.6%
Obama Re-elected                          38.6%
2011E    2012E    2013E    2014E     2015E
2661.8   3061.0   3520.2   4048.2    4655.4
17.0%    15.0%    15.0%    15.0%     15.0%
17.0%    20.0%    80.0%    90.0%    100.0%
WACC Calculation and Debt/Capital Ratios

WACC Calculation:                          Debt and Borrowing Capacity:
Asset Beta               1.09                 CODES
Risk-Free Rate         3.77%                  LT Debt
Risk Premium           4.16%               Total Debt
D/C                   17.86%               Total Equity
Tax Rate              37.00%               Total Debt and Equity
Bond Rating             BBB-
Spread                 2.00%               Debt to Capital
                                           Equity to Capital
Cost of Equity         8.31%

Cost of Debt           5.77%

WACC                 7.47%
     0
1150.2
1150.2
5290.7
6440.9

17.86%
82.14%
Company Name                            Ticker   Market Value   EPS     Yield % Beta
ROCHE HOLDING AG                        RHHBY    218,154.96     2.45    2.9     0.44
JOHNSON & JOHNSON                       JNJ      177,829.52     4.76    3.3     0.56
PFIZER INC.                             PFE      133,403.26     1.23    4.3     0.7
NOVARTIS AG                             NVS      116,820.17     4.11    3.2     0.54
MERCK & CO., INC.                       MRK      107,665.35     5.65    4.3     0.83
GLAXOSMITHKLINE PLC                     GSK      94,564.42      3.38    5.3     0.58

SANOFI-AVENTIS                          SNY      90,417.35      2.8     3.5     0.8
ABBOTT LABORATORIES                     ABT      78,051.36      3.41    3.5     0.18
ASTRAZENECA PLC                         AZN      65,162.56      5.19    5.1     0.68
BAYER AG                                BAYRY    56,927.10      2.37    1.9     1.15
TEVA PHARMACEUTICAL INDUSTRIES LTD.     TEVA     51,914.10      2.23    0.9     0.19
BRISTOL-MYERS SQUIBB CO.                BMY      41,722.19      5.33    5.2     0.68
LILLY (ELI) & CO.                       LLY      40,083.32      3.88    5.6     0.79
NOVO NORDISK A/S                        NVO      38,775.87      3.32    1.2     0.35
ALLERGAN, INC.                          AGN      18,528.86      2.03    0.3     0.98
SHIRE PLC                               SHPGY    12,126.32      2.69    0.5     0.97
FOREST LABORATORIES, INC.               FRX      8,142.85       2.25            0.79
WARNER CHILCOTT PLC                     WCRX     6,867.84       2.05            0.92
MYLAN INC.                              MYL      6,658.00       0.31            0.58
PERRIGO CO.                             PRGO     5,382.38       2.08    0.4     0.79
DR. REDDY'S LABORATORIES LTD.           RDY      4,595.41       -1.27   0.4     1.42
ELAN CORP. PLC                          ELN      3,933.68       -0.14           0.89
VALEANT PHARMACEUTICALS INTERNATIONAL   VRX      3,366.64       3.14            0.53
ENDO PHARMACEUTICALS HOLDINGS INC.      ENDP     2,703.46       2.27            0.49
BIOVAIL CORP.                           BVF      2,626.58       1.4     2.1     0.74
KING PHARMACEUTICALS, INC.              KG       2,462.35       0.37            0.76
SALIX PHARMACEUTICALS, LTD.             SLXP     2,176.76       -0.88           0.79
AUXILIUM PHARMACEUTICALS, INC.          AUXL     1,664.84       -1.22           1.03
MEDICIS PHARMACEUTICAL CORP.            MRX      1,455.72       1.21    0.9     1.49
NEKTAR THERAPEUTICS                     NKTR     1,315.72       -1.11           0.14
VIROPHARMA INC.                         VPHM     982.44         -0.14           2.01
PAR PHARMACEUTICAL COMPANIES, INC.      PRX      940.9          2.25            0.73
VIVUS, INC.                             VVUS     782.36         -0.75           0.9
PHARMAXIS LTD.                          PXSLY    649.17         -2.78           2.04
INSPIRE PHARMACEUTICALS, INC.           ISPH     556.69         -0.6            0.82
CARDIOME PHARMA CORP.                   CRME     537.51         -0.79           1.42
QUESTCOR PHARMACEUTICALS, INC.          QCOR     515.99         0.4             -0.6
CADENCE PHARMACEUTICALS, INC.           CADX     500.06         -0.93           1.56
EURAND N.V.                             EURX     491.57         -0.18           1.03
MAP PHARMACEUTICALS, INC.               MAPP     472.12         -0.4            3.65
OPTIMER PHARMACEUTICALS, INC.           OPTR     468.47         -1.3            0.4
ARDEA BIOSCIENCES, INC.                 RDEA     463.49         -1.7            0.92
MEDICINES CO. (THE)                     MDCO     417.16         -1.46           0.73
TARO PHARMACEUTICAL INDUSTRIES LTD.     TAROF    390.89         1.27            -0.14
POZEN INC.                              POZN     326.69         -0.23           1.25
JAZZ PHARMACEUTICALS, INC.                JAZZ    324.88   -0.23   2.83
XENOPORT, INC.                            XNPT    315.6    -2.31   0.59
BIOMIMETIC THERAPEUTICS, INC.             BMTI    295.23   -1.03   1.06
OBAGI MEDICAL PRODUCTS, INC.              OMPI    290.33   0.52    1.5
HI-TECH PHARMACAL CO., INC.               HITK    285.79   2.46    1.53
PAIN THERAPEUTICS, INC.                   PTIE    268.61   -0.08   0.54
DURECT CORP.                              DRRX    260.26   -0.36   1.33
CARACO PHARMACEUTICAL LABORATORIES LTD.   CPD     259.94   -0.22   1.83
AVANIR PHARMACEUTICALS                    AVNR    258.48   -0.27   2.53
SIMCERE PHARMACEUTICAL GROUP.             SCR     233.1    0.3     1.58
BMP SUNSTONE CORP.                        BJGP    220.19   -0.05   1.48
FLAMEL TECHNOLOGIES S.A.                  FLML    211.72   -0.47   0.7
CORCEPT THERAPEUTICS INC.                 CORT    201.9    -0.38   0.71
DEPOMED, INC.                             DEPO    197.8    -0.43   1.55
SANTARUS, INC.                            SNTS    197.21   0.54    0.96
CYPRESS BIOSCIENCE, INC.                  CYPB    191.05   -0.74   0.79
SUPERGEN, INC.                            SUPG    188.47   0.08    1.24
SOMAXON PHARMACEUTICALS, INC.             SOMX    185.13   -0.69   3.11
AKORN, INC.                               AKRX    181.81   -0.28   1.56
ALEXZA PHARMACEUTICALS, INC.              ALXA    173.46   -2.68   1.77
ACURA PHARMACEUTICALS, INC.               ACUR    171.85   -0.4    0.32
CHINA PHARMA HOLDINGS, INCORPORATED       CPHI    142      0.48    2.45
JAVELIN PHARMACEUTICALS, INC.             JAV     141.6    -0.62   2.09
STARPHARMA HOLDINGS LTD                   SPHRY   141.38   -0.19   1.39
EMISPHERE TECHNOLOGIES, INCORPORATED      EMIS    136.72   -0.61   1.8
ISTA PHARMACEUTICALS, INC.                ISTA    135.53   -1.74   0.84
LANNETT CO., INC.                         LCI     121.14   0.27    0.66
PENWEST PHARMACEUTICALS CO.               PPCO    118.96   -0.05   1.3
GENEREX BIOTECHNOLOGY CORP.               GNBT    117.61   -0.18   1.6
PHOSPHAGENICS LIMITED                     PPGNY   108.98   -0.29   0.95
BIODEL INC.                               BIOD    106.28   -1.87   1.93
SUCAMPO PHARMACEUTICALS, INC.             SCMP    103.97   -0.02   0.93
Bottom up Beta:   1.0903
Operating lease inputs
Operating lease expense in current year =        $ 20.00
Operating Lease Commitments (From footnote to financials)
    Year    Commitment ! Year 1 is next year, ….
      1      $ 20.60
      2      $ 18.20
      3      $ 12.40
      4      $     8.70
      5      $     8.40
6 and beyond $ 33.40

Pre-tax Cost of Debt =        4.52%     ! If you do not have a cost of debt, use the attached ratings estimator


From the current financial statements, enter the following
Reported Operating Income (EBIT) = $ 383.90 ! This is the EBIT reported in the current income statement
Reported Debt =                        $ 1,457.80 ! This is the interest-bearing debt reported on the balance sheet
Reported Interest Expenses =           $ 34.20
Output
Number of years embedded in yr 6 estimate = 2        ! I use the average lease expense over the first five years
                                                     to estimate the number of years of expenses in yr 6
Converting Operating Leases into debt
    Year                P
            Commitment resent Value
          1 $ 20.60 $ 19.71
          2 $ 18.20 $ 16.66
          3 $ 12.40 $ 10.86
          4 $      8.70 $       7.29
          5 $      8.40 $       6.73
6 and beyond $ 16.70 $ 25.06 ! Commitment beyond year 6 converted into an annuity for ten years
Debt Value of leases =    $     86.32

Restated Financials
Operating Income with Operating leases reclassified as debt =      $ 387.80
Debt with Operating leases reclassified as debt =                  $ 1,544.12



Full Operating lease adjustment
Reported Operating income =         $383.90
                                     $20.00
+ Current year's operating lease expense =
- Depreciation on leased asset =     $12.33
Adjusted Operating Income           $391.57
 Inputs for synthetic rating estimation
 Please read the special cases worksheet (see below) before you use this spreadsheet.
 Before you use this spreadsheet, make sure that the iteration box (under calculation options in excel) is checked.
 Enter the type of firm =                                                                                       Small: <$5 billion
                                          2 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial service firm)
 Do you have any operating lease or rental commitments?                     Yes
 Enter current Earnings before interest and taxes (EBIT) =                   383.9 (Add back only long term interest expense for financial firms)
 Enter current interest expenses =                                             34.2 (Use only long term interest expense for financial firms)
 Enter current long term government bond rate =                              3.77%
 Output
 Interest coverage ratio =                     11.23
 Estimated Bond Rating =                        AA                     Note: If you get REF! All over the place, set the operating lease comm
 Estimated Default Spread =                    0.75%                   to No, and then reset it to Yes. It should work.
 Estimated Cost of Debt =                      4.52%


   If you want to update the spreads listed below, please visit http://www.bondsonline.com
  For large manufacturing firms                                      For financial service firms (default spreads are slighty different)
If interest coverage ratio is                                        If long term interest coverage ratio is
        >           ≤ to      Rating is Spread is                    greater than      ≤ to      Rating is   Spread is
     -100000     0.199999        D          15.00%                      -100000     0.049999         D        15.00%
        0.2      0.649999         C         12.00%                        0.05      0.099999         C        12.00%
       0.65      0.799999        CC         10.00%                         0.1      0.199999        CC        10.00%
        0.8      1.249999       CCC          8.50%                         0.2      0.299999       CCC         8.50%
       1.25      1.499999        B-          5.50%                         0.3      0.399999        B-         5.50%
        1.5      1.749999         B          5.25%                         0.4      0.499999         B         5.25%
       1.75      1.999999        B+          4.25%                         0.5      0.599999        B+         4.25%
         2      2.2499999        BB          4.00%                         0.6      0.749999        BB         4.00%
       2.25       2.49999       BB+          3.50%                        0.75      0.899999       BB+         3.50%
        2.5      2.999999       BBB          2.00%                         0.9      1.199999       BBB         2.00%
         3       4.249999        A-          1.50%                         1.2       1.49999        A-         1.50%
       4.25      5.499999        A           1.25%                         1.5       1.99999         A         1.25%
        5.5      6.499999        A+          1.00%                          2        2.49999        A+         1.00%
        6.5      8.499999        AA          0.75%                         2.5       2.99999        AA         0.75%
       8.50       100000        AAA          0.50%                          3        100000        AAA         0.50%

  For smaller and riskier firms
If interest coverage ratio is
  greater than      ≤ to      Rating is      Spread is
    -100000      0.499999        D            15.00%
       0.5       0.799999        C            12.00%
       0.8       1.249999       CC            10.00%
      1.25       1.499999      CCC             8.50%
       1.5       1.999999        B-            5.50%
        2        2.499999        B             5.25%
       2.5       2.999999       B+             4.25%
        3        3.499999       BB             4.00%
       3.5      3.9999999      BB+             3.50%
  4     4.499999   BBB   2.00%
 4.5    5.999999    A-   1.50%
  6     7.499999    A    1.25%
 7.5    9.499999    A+   1.00%
 9.5   12.499999    AA   0.75%
12.5     100000    AAA   0.50%
 is spreadsheet.
n options in excel) is checked.
  Small: <$5 billion

m interest expense for financial firms)
 est expense for financial firms)




 lace, set the operating lease commitment question in cell F5




spreads are slighty different)
        Waton Pharmaceuticals
              Ticker: WPI               2009
Global Generic Segment
Product Sales                       1,641.8
Other                                    26.4
    Net Revenues                    1,668.2
Cost of Sales                         (947.1)
R&D                                   (140.4)
Selling and Marketing                   (53.8)
  Global Generic Contribution          526.9
  Contribution Margin                  71.6%
                                                 Generic        71.60%
Global Brand Segment                             Brand          23.10%
Product Sales                         393.7      Distribution    5.20%
Other                                   67.3
    Net Revenues                     461.0
Cost of Sales                          (89.3)
R&D                                    (56.9)
Selling and Marketing                (144.5)
  Global Brand Contribution           170.3
  Contribution Margin                 23.1%

Distribution Segment
Product Sales                         663.8
Other                           -
    Net Revenues                     663.8
Cost of Sales                        (560.4)
R&D
Selling and Marketing                  (64.8)
  Distribution Contribution             38.6
  Contribution Margin                   5.2%

Total Contribution                    735.8
G&A                                  (257.1)
Amortization                          (92.6)
Gain (Loss) on Asset Sale              (2.2)
  Operating Income                    383.9
      Contribution Margin

      5%

23%                         Generic

                            Brand

                            Distribution
            72%
                         Relative Valuation
Name     Price   Mkt Cap     EPS     P/E    Gross Margin  EV/EBITDA    Debt/EBITDA
Watson   42.84      5.32 B   3.05   14.05          44.00%      10.10           2.40
Teva     58.66     54.17 B   3.37   17.41          58.40%      13.14
Mylan    21.71      6.66 B   1.30   16.70          46.40%      10.15

				
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