Watson Pharmaceuticals, Inc. Company Valuation Sixuan Chen Advanced Corporate Finance Prof. Satya Gabriel April. 11, 2006

Presentation Overview Industry profile Current situation: company profile Forward looking: strategic plans Business environment: customers and competitors Financial performance Valuation (assumptions, merger analysis)

Industry Profile Global sales: $300 billion annually U.S. - largest market share, followed by Europe and Japan Brand drugs: customer loyalty, exclusive rights Generic drugs: bioequivalents, cost- efficient

Company Profile Development, manufacture, marketing, sale and distribution of brand and generic drugs Fourth largest generic drugmaker by market cap (after Teva, Barr and Mylan) Key statistics: Total revenue in 2005: $1.6 billion Total assets 1 : $3.1 billion Market cap 2 : $3.2 billion Footnote: 1: as of 12/31/20052: as of 4/3/2006

Generic vs. Brand segment 76% of total revenue More than 125 generic products 47 ANDAs on file Development in 2005: six new launches 24% of total revenue More than 20 brand products Two sales groups: Specialty Products Nephrology

Branded Product Pipeline Branded Product Disease Market AllianceStatus Silodosin TM Benign-Prostatic Hyperplasia KisseiLate Stage 2 nd Generation Oxybutynin Overactive Bladder Early Stage Trelstar ® line extension UrologyEarly Stage Intrinsa TM Female Sexual Dysfunction P&GFiled EmSam TM DepressionSomerset- BMS Approved

Strategic Alliances and Collaborations Somerset Pharmaceuticals, JV with Mylan (agreement w/ BMS) Feb. 2006, FDA approval for Emsam ® Generics development alliance with Cipla Citalopram (Q4, 2004)

R&D Capacity R&D expense in 2005: $125.3 million (7.6% of revenue) R&D facilities: Corona, California Danbury, Connecticut Copiague, New York Salt Lake City, Utah Malmo, Sweden Changzhou, China

Strategic Plans Generic: Development of generic drugs that are difficult to formulate Market generic alternatives to brand products Distribute generic versions of third-party brands “Watson Lab”, “Watson Pharma”, “Rugby” Brand: 2005 launches: Trelstar ® and Oxytrol ® Higher profit margin Continue to expand through Internal product development Strategic alliances and acquisitions

Business Environment High entry-barrier Customers: drug wholesalers, retailers, distributors Consolidation in distribution network Pricing pressure

Competitive Landscape Brand products: J&J, Novartis, Pfizer No competitive advantage Generic products Teva, Barr, Mylan, brand name companies in the generic market Key: timing of product’s regulatory approval and launch

Financial Performance Revenue growth 5-year CAGR: 9.13% In 2005, total revenue growth 0.34% Generics: -2.51% Price declines on nicotine gum due to entry of a competitor Increase in R&D expenses Brand: 4.37% Specialty - Trelstar ® Nephrology - Ferrlecit ® Impairment charge: $25.1 million (2005)

Stock Performance Source: Datastream, Yahoo!-Finance

1-year Stock Performance WPI vs. Industry 1-year Stock Performance WPI vs. S&P 500 Source: Datastream, Yahoo!-Finance

Valuation – DCF Key assumptions: Operations: Organic revenue growth Gross/operating margin CapEx, Depreciation Working capital

Valuation – DCF (cont’d) CAPM model: Risk free rate: 4.86% Market risk premium: 6.00% Beta: 1.55 Default spread: 2.00% (Bond rating: BBB-) Debt ratio: 15.47% Tax rate: 37% WACC = 12.65%

Valuation – DCF Result 5-year top-line growth: 6% Continued growth: 5% Price per share: $30.45 Current share price 1 : $29.01 Consensus estimates: Valueline 3-5 year price range: $45-$65 Thompson 12-month target price: $32 1: Share price as of April 3, 2006

Valuation – DCF Sensitivity Analysis Continued growth rate 5-year top-line growth 6%5%4% Management prediction 9.25%$34.91$31.16$28.27 Valueline estimate 6.00%$34.02$30.45$27.70 Worst-case estimate 4.00%$33.37$29.91$27.26

Valuation – DCF Sensitivity Analysis (cont’d) Continued growth rate WACC6%5%4% 10%$59.12$48.62$ %$46.97$40.21$ %$38.88$34.22$30.73

Valuation – Comps Brand: Pfizer, J&J, Glaxosmithkline, Novartis, Bayer Generic: Teva, Barr, Mylan, King, Alpharma, Par Forward P/E 1 : $27.21 Forward Price/Sales 1 : $ : For both P/E and Price/Sales used Generic Median; Sales and EPS estimates from Thompson One

Potential Merger Analysis WPI agreed to acquire Andrx for $1.9 billion in cash ($25 per share, 32% premium) Andrx – Drug delivery Total revenue in 2005: $1 billion Total assets: $1.2 billion Total market cap: $1.7 billion Current P/E: 27.9x Drug distribution (65%), manufacture (35%)

Potential Merger Analysis (cont’d) Merger positives Third-largest generic drug maker, 60 generic drugs in pipeline Synergies in SG&A Distribution network Merger negatives Potential opposition Creditwatch by S&P Andrx production halted by FDA

SUMMARY DCF valuation range: $27-35 Potential upside Merger impact Industry prospect: aging population Recommendation: cautious buy at low

THANK YOU! Questions?