Rumors Fly, but Watson Zips Its Lips

The drug firm is being scrutinized by the FDA, pummeled by analysts and sued. But it still ain't talking.
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You want rumors on

Watson Pharmaceuticals

(WPI)

? The market's got 'em. But Watson is above all that. It doesn't comment on that stuff, you scurrilous gossips.

Watson traded as low as 30 1/2 Wednesday, as shorts and longs scrambled to figure out what the hell was going on. It bounced back, but still closed down 4 1/4, or 11%, at 35 1/16 on huge volume of 6.7 million shares.

As all this was going on, Watson's management, acting like six-year olds during a thunderstorm, hunkered down and refused to take calls from institutions and media alike. After the end of the trading day, the company issued a particularly informative statement saying, "The company does not comment on rumors nor make projections relative to earnings prior to the end of the quarter. The company plans to issue its earnings release in the normal course in late July or early August."

Now that's investor relations.

Watson, a grow-by-acquisition generic drug company, is under siege. The

Food and Drug Administration

has been sending it so many warning letters that the agency and the company should be on

AOL's

Instant Messenger

with each other. The agency has concerns about numerous quality control lapses at Watson facilities, which the company has said it's addressed.

Short-sellers think the company is in trouble given the FDA concerns (which were covered in a

TSC

story and a

Herb

column), slowing growth and a falling stock price, which could make acquisitions tougher.

Further, well-known forensic accounting firm

Center for Financial Research and Analysis

, run by Howard Schilit, put out a damning report on the company June 18 noting some accounting worries. The report, obtained by

TheStreet.com

, cites flat sequential revenue growth, increases in inventory and receivables ratios, a cumulative operating cash flow shortfall, lengthy amortization periods for product rights, increasing customer concentration and the warning letters. It'd be nice to hear what the company has to say in response, but it didn't return three phone calls.

But none of these concerns explains today's movement. Instead, rumors were flying.

The word in the morning was that

Donaldson Lufkin & Jenrette

said the company would miss its second-quarter numbers. A DLJ analyst didn't return a call seeking a comment. Oh, neither did Watson.

Another rumor was that the FDA was going to shut down all or part of Watson's Corona, Calif., facility, which has been the subject of agency concern. An officer in the local FDA office wouldn't comment, and an FDA spokeswoman didn't return calls. Neither, for that matter, did Watson.

There were other rumors, some not appropriate for unconfirmed publication, all swirling around the market with different degrees of plausibility. But Watson doesn't comment.

And then there is a recently filed lawsuit against Watson. This isn't a rumor. The suit was filed in Utah District Court in early June. Filed by the founder and former chairman of a company called

Theratech

that was taken over earlier this year by Watson, the suit alleges that Watson misrepresented what kind of conditions would be placed on new stock William Higuchi would receive.

Watson accounted for the purchase of Theratech as a pooling of interests, not as a purchase. To qualify for pooling accounting, which is more favorable for a company, a deal has to fit several criteria. One is that all "affiliates," such as some major shareholders and directors, be required to not sell stock in the newly combined company before it reports a certain period of combined financials. Before the deal, Watson didn't consider Higuchi an affiliate, meaning it didn't need the former Theratech chairman to sign off on the deal, according to Higuchi's lawyer. But after the deal went through, Higuchi was given restricted stock that he couldn't sell immediately. His lawsuit charges that not being able to sell cost him $11.5 million because the stock fell.

OK, it's small-time, but there's a theory involving the suit that may have contributed to Wednesday's stock action. One West Coast short-seller speculates that Watson needed to get the Theratech acquisition done to get the attendant revenue boost. Therefore, it was convenient to treat Higuchi like a non-affiliate before the merger and then as an affiliate afterwards, so that Higuchi wouldn't be able to immediately unload the stock. Higuchi's attorney, Greg Phillips, wouldn't speculate on why Higuchi was given restricted stock.

What does Watson think? The company didn't respond.