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Executives

Patty Eisenhaur - Executive Director, Investor Relations

Paul M. Bisaro - President and Chief Executive Officer

Mark W. Durand - Chief Financial Officer

Albert Paonessa III - President, Anda Distribution Division

Analysts

Rich Silver - Lehman Brothers

Gregory Gilbert - Merrill Lynch

Ken Cacciatore - Cowen and Company

Ricky Goldwasser - UBS

Analyst for Randall Stanicky - Goldman Sachs

Marc Goodman - Credit Suisse

David Buck - Buckingham Research

Lei Huang - Summer Street Research

Rodney Dowell - Bernstein

Watson Pharmaceuticals, Inc. (WPI) Q3 2008 Earnings Call October 29, 2008 8:30 AM ET

Operator

Welcome to Watson Pharmaceuticals third quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you have already done so, please press the pound sign now. Then press star one again to ensure your question is registered. If you would like to withdraw your question press the pound key. Miss Eisenhaur, you may begin the conference.

Patty Eisenhaur - Executive Director, Investor Relations

Thank you and good morning. I’d like to welcome you to Watson’s third quarter 2008 earnings conference call. Earlier this morning Watson issued a press release reporting its earnings for the third quarter 2008. The press release is available on our website at www.watson.com. Additionally, we are conducting a live webcast of this call, which will also be available on our website after the call’s conclusion.

With us on today’s call are Paul Bisaro, President and CEO of Watson and Mark Durand, our Chief Financial Officer. Also present and available during the Q&A portion of the call are Tom Resillo, President of our Generics Division, Ed Heimers, President of our Brand Division, Al Paonessa, Chief Operating Officer of our Anda Distribution Division, and David Dusion, our General Counsel.

During the formal portion of today’s call Paul will provide an overview of our results for the quarter and Mark will then provide further details of our financial performance and an update on our outlook for the remainder of the year. Paul will conclude our presentation, and then we’ll open up the call for questions and answers.

Please note that today’s call is copyrighted material of Watson Pharmaceuticals, Inc. and cannot be re-broadcast without the company’s express written consent. I’d also like to remind you that during the course of the call management will make projections or other forward-looking remarks regarding future events for the future financial performance of the company. It’s important to note that such statements about estimated or anticipated Watson results, prospects of other non-historical

Statements about estimated or anticipated Watson results, prospects or other non-historical facts, are forward-looking statements and reflect our current perspective of existing trends and information as of today’s date. Watson disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Actual results may differ materially from current expectations and projections depending on a number of factors affecting Watson’s business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission, including but not limited to the Watson Form 10-K for the year ended December 31, 2007.

Now I’ll turn the call over to Paul.

Paul M. Bisaro - President and Chief Executive Officer

Thanks, Patty, and good morning everyone. This has been a positive quarter for Watson and one that continues to demonstrate the strength and financial health of the company. I’m happy to report that we had a number of very promising events take place during this quarter and that we will be raising our forecast for the remainder of the year. Mark and I will review all of this with you.

Taking a look at this morning’s report we are pleased to announce that the third quarter finished strong in line with our expectations. We posted gap earnings of 62 cents and adjusted earnings of 47 cents per share. On an adjusted basis third quarter EPS increased 42% over last year.

Our performance this quarter was spread across all of our divisions. Our Generic Division had another solid quarter with new approvals and lodges. Our Anda Distribution Division performed particularly well due to a couple of significant generic product launches, and we had some very exciting developments in our Brand business highlighted by our receipt of approval for Rapaflow, which our Brand Division is actively preparing for launch.

During the past three earnings calls we have described 2008 as being a year of execution for Watson. I think perhaps it would have been better to describe it as a year of focus, execution and momentum building. As I look at each of the three business segments, I am very pleased with the focus we have had and the progress we have made on all of our strategic initiatives, the ability of our company to execute against the objectives we established at the outset of 2008, and the momentum we are building across all of our divisions. I am very optimistic about the opportunities and growth prospects in front of us as we approach 2009.

As I said, there were a number of events and accomplishments during our third quarter, and I think it’s appropriate to highlight them now. First, in our Generic Division we continue to make progress, both operationally and on the R&D front. We continue to gain approvals and launch products out of our Florida site, and during the quarter we launched 40 milligram and potassium chloride from Florida. These products, as well as our Fentinel patch product contributed significantly to our generic products sales in the quarter.

On the cost side, progress on our global supply chain initiative continues or have some form of meaningful differentiation.

Moving now to our Brand Division, we continue to see solid performances from both our nephrology and urology groups. By far the biggest news this quarter, however, was in the urology specialty area with the approval of Rapaflow, our new alpha blocker for BTH. This was a very important milestone for Watson, as we received this first-cycle approval in only ten months, which is particularly impressive for a new chemical entity and which speaks volumes about the high-quality and efficiency of our R&D and regulatory groups. With a strong efficacy and an exceptional safety profile, we believe Rapaflow provides us with an excellent long-term opportunity and will help strengthen the foundation for future growth within our urology area.

We are working actively on launch preparations for this new brand, and we anticipate that Rapaflow will be available to BTH patients by late first quarter or early second quarter of 2009. The approval of Rapaflow marks the continued expansion of Watson into the urology arena. We are continuing to work toward the first-half 2009 launch of the gel product for the treatment of over-active bladder. As you know, this product is a unique formulation and is under review by the FDA.

We also anticipate that our twelve-star six-month application will be on file in the fourth quarter. It is highly likely that Watson will be in the unique position of being able to introduce three new brand products during 2009 that treat the top three conditions in urology.

Moving now to nephrology, there are a lot of developments within this institutional area, and we have seen significant activity in this space in the last quarter. First, discussions over extending our supply and marketing agreement for less will continue. Second, while there have been changes in the competitive landscape, we continue to anticipate generating value in 2009. Third, we are continuing to develop contingency plans should we not be able to negotiate an extension or the competitive landscape changes faster than we anticipate.

Long ago we recognized the potential for increased competition in the I.V. iron space, and over the last several years we have taken clear steps to reduce our dependence by continuing to look for new institutional commercial opportunities. Additionally, we continue to invest and develop assets in our Brand and Generic Divisions that should replace any reduction in profitability from our iron business. We think we’ve done quite a good job of covering our bases here.

Turning now to our Distribution Division, our revenues increased significantly this quarter to $171 million, an increase of 32% from the third quarter last year and an increase of 34% sequentially. As we have said before, this business is sensitive to new generic product launches, and the recent quarter saw some decent-sized launches, primarily generic generic Lanactyl, which contributed to Anda’s success in the quarter.

Additionally, Anda’s margins remain strong at 15.7%, a direct reflection of the recent purchasing initiatives we implemented this year. Going forward, the Anda’s business model is broadening, and we’re moving from being just a distributor of generics to a model that enables us to distribute a variety of specialty pharmaceuticals, including brand products.

While this will change Anda’s margin profile over time, it should increase Anda’s over-all contribution to Watson’s profitability. We don’t, however, anticipate any significant impact on Anda’s margins in the next few quarters. For now we expect Anda will benefit from a few new generic industry launches in the fourth quarter which, when combined with the new efficiency initiatives underway, should contribute to continued good performance for Anda through the remainder of the year.

As you can see, we continue to make good progress on the objectives we set out for ourselves at the beginning of the year, and we are ahead of the curve on dealing with both opportunities and challenges. We continue to post solid financial results, generate good cash flow and are making healthy investments in our R&D to grow our business further.

We also continue to look outside of Watson for growth and have been very active in evaluating new opportunities for all of our businesses

Within Brands, we have been looking to expand our product development pipeline in urology, nephrology and gynecology.

Since we have been looking to expand our product development pipeline in urology, nephrology and gynecology. In generics, we continue to evaluate opportunities to expand our selling and marketing capabilities globally in the longer term in the bio-similar space.

We remain mindful of managing our balance sheet appropriately, especially in today’s credit market, while continuing to be open to the right opportunities to broaden our footprint and grow our company.

All in all, I am very pleased with the progress the leadership team and our employees have made in the quarter and in 2008 to date. Importantly, I am very excited about the prospects for Watson in 2009.

With that, I’ll hand the call over to Mark who will give you details on our financials for the quarter.

Mark W. Durand - Chief Financial Officer

Thanks, Paul, and good morning. I’d like to now provide highlights of our third quarter financial results, as well as update you on our expectations for the remainder of the year. For the third quarter of 2008 net revenue was $641 million up 8% from $595 million in Q-3 of 2007. This consisted of $364 million from Generics, $106 million from the Brand Division, and $171 million from the Anda Distribution Division.

Gross profit on a gap basis for the quarter increased 2% to $254 million, up from $248 million during the third quarter of 2007. Our consolidated gross margin decreased by 2 percentage points from the prior year period to 39.7% in the third quarter. This decrease in gross margin was due primarily to an inventory charge taken during the quarter related to our Emfed product. The charge was specific to certain lots of Emfed inventory, and we believe it will not impact our on-going supply of Emfed to the market.

The Generics Division’s third quarter net revenue was $364 million, an increase of $6 million, or 2%, compared to the prior year quarter. Third quarter Generics revenue is down sequentially from the second quarter revenue of $377 million, and the increase from the third quarter 2007 is due primarily to increased product sales from new launches offset by decline in other revenue.

Products that contributed to the quarter over quarter growth included Anaprosol 40 milligrams and Tranamynol, which were launched in Q-3, and growth from Transvermal Fentinel, which was launched in the third quarter of last year. A decline in Generics’ other revenue contributed to the quarter over quarter results, and is primarily a result of lower royalties on sales of generic Toforol Excel.

Oral contraceptive sales in the third quarter were $80 million, down from $92 million in last year’s Q-3. This is in line with our expectations, reflecting slightly lower units and pricing across our portfolio of OC’s.

Generics’ gross profit was $151 million in the third quarter, an increase from $147 million in the year-ago period and reflects higher margins on new products.

Moving on to the Brand Division, net revenue was $106 million, consisting of $94 million in product sales and $12 million in other revenue. Compared to the third quarter of 2007, Brand revenue decreased slightly and is down sequentially from the second quarter revenue of $118 million.

Brand product sales consisted of $54 million in specialty products sales and $40 million in nephrology sales, while other Brand revenue was $12 million. Brand gross margins in the third quarter were 71.5% down on a year-over-year and sequential quarter basis. As mentioned, the decrease in Brand gross margin reflects the inventory charge related to Emfed.

Finally, net revenue from the Anda Distribution Division was $171 million up 32% from the prior year due to the launch of new products of generic Respirol and generic Lanactol. Distribution gross margin was 15.7% consistent with the second quarter 2008 and up from 12.7% in the prior year period primarily as a result of recent initiatives to enhance efficiencies in the business, as well as the $2 million inventory charge in the prior year period.

Turning now to our operating expenses, R&D’s spending for the third quarter was $45 million, which is up about $10 million or 27% compared with the prior-year period.

The increased spending reflects increased activity in support of both Generic and Brand pipelines. SG&A for the third quarter was $101 million.

During the quarter we had a $5.9 million favorable settlement of a tax-related liability due to the resolution of an IRS audit. Amortization for the third quarter was $20 million, a decrease of $24 million from the third quarter last year, reflecting the full amortization of product rights in 2007.

On a GAAP basis, the effective tax rate was 24% in the current quarter versus 38% in the third quarter of last year. The current year period was impacted by the favorable resolution of the IRS audit and a favorable tax treatment associated with two non-recurring adjustments. Adjusted EPS for the quarter was 47 cents per share and excludes the impact of the IRS settlement, a gain on the sale of the Somerset joint venture, and costs associated with our global supply chain initiative. Gap EPS for the quarter was 62 cents per share. Details on all the adjustments can be found in the reconciliation table in our press release.

Excluding these items the effective tax rate for the current year quarter is 37%, which is in line with recent trends and is slightly above our expected tax rate for the fourth quarter.

The third quarter was $137 million up slightly from last year and even with the second quarter. Cash flow from operations for the third quarter was $74 million resulting in a year-to-date cash flow of $240 million. CapEx for the third quarter was $14 million, flat with the year-ago quarter and up from $11 million in the second quarter of this year.

As of the end of the third quarter, cash and marketable securities were $352 million, up over $136 million from $216 million at the beginning of the calendar year. Our capital structure remains very strong. Current debt is $828 million, consisting of $575 million convertible, paying a 1.75% coupon rate and a $250 million term loan at live or plus 75 basis points. As of September 30th, our debt to capital ratio was below 30% and our debt to EBITDA ratio was 1.5. At the end of the quarter, we had $350 million in cash and marketable securities, and an untapped $500 million revolver.

We believe we have significant financial resources to fund strategically important business development activities. I would like to now revisit our outlook for the remainder of 2008. We continue to expect consolidated revenues to be approximately $2.5 billion. Given the results for the first nine months of 2008, and our forecast for the remainder of the year, we are maintaining our forecasted revenues for the segments as follows. We expect generics revenues to be between $1.4 and $1.5 billion, generics price erosion is expected to remain at about 10% on an annual basis for the remainder of the year. Based on overall prescription trends, OC sales will be between $80 and $85 million for Q4.

We are maintaining our prior estimates for the brand segment net revenues, between $450 and $470 million for the year and Andrex distribution revenue estimates also remain the same as prior expectations, between $580 million and $610 million. We expect R&D spending to remain at approximately $160 million, with about two-thirds going towards generics and one-third to brand programs. SG&A expenses are expected to be between $420 and $430 million, reflecting a slightly higher marketing spend in anticipation of the RAPAFLOW and Oxybutynin Topical Gel product launches.

Amortization expense for 2008 is expected to be approximately 80 million. Adjusted EBITDA is expected to be between $560 and $570 million with CAPEX anticipated to be closer to $65 to $70 million for the year, and cash flow from operations is expected to remain strong. Given our strong performance and outlook on all three business segments, we are increasing our 2008 adjusted EPS forecast range so $1.98 to $2.03. Let me know turn the call back over to Paul for some concluding remarks.

Paul M. Bisaro - President and Chief Executive Officer

Thanks Mark. I think as you all can see, we have a lot of activity going on and we’ve had a very strong financial quarter. The only thing that I would add is that we haven’t included any upside from any of our patent challenges or the potential launch of generic LOVENOX. So with that, I’ll turn it back to Patty for questions.

Patty Eisenhaur - Executive Director, Investor Relations

Great. Operator, can we open up the queue for Q&A?

Question-and-Answer Session

Operator

Yes, Ma’am. [Operator instructions] Your first question comes from the line of Tim Chang with FTN Midwest Reasearch.

Tim Chang

I just wanted to get an update on the generic pipeline, I think you just sort of mentioned one of the key products in that pipeline, generic LOVENOX, but I also wanted to get your thoughts on Toprol XL, Concerta, you know, what sort of moves the needle in the back half of this year and into ’09? What do you think the prospects are for the oral contraceptives side of business now that Teva is joining the band wagon, I guess?

Paul M. Bisaro - President and Chief Executive Officer

Well, let me start with the last part first. On the OC front, I don’t see any specific difference between Teva owning the assets or borrowing the assets. I think both companies are strong competitors and Watson is certainly strong in that space. I think that we will continue to see a pretty stable market for some time to come in that arena. I suspect that, and I don’t know for sure but, I suspect that the next entrance would probably be someone who acquires the assets, the OC assets that Teva will have to divest, that we actually divested to Teva when Watson bought Andrex. But I don’t see that coming in the short term, and by “short term” I mean in the next quarter or so. I think it will take some time for people to kind of work through all those issues. So, I guess I continue to see the OC business to be strong, Mark talked about 80 to 85 million in that area and we don’t see much change in that, at least in the first quarter of ’09 and even further on into ’09.

Regarding what could move the needle, well, you mentioned a lot of the products that could move the needle. We do have some generic launches scheduled for the end of 2008 and into early ’09; I think everybody’s suffering a little bit from some of the slow-downs at the agency right now. Getting products through the system is becoming difficult, there is residual solvence issues that have to be resolved for everyone, and those things are adding to the workload that the agency has and I think its generally slowing down approvals. But, I do expect to see some interesting products launched from us. But the ones that you highlighted, the LOVENOX, Concerta and Toprol, we certainly anticipate launching them, but it’s just a question of when. So, stay tuned for more on those.

Tim Chang

Just one quick follow-up, Paul. Is it still your plan to get a partner for RAPAFLOW for the primary care market?

Paul M. Bisaro - President and Chief Executive Officer

It is still something we are actively considering. We are talking with companies even as we speak, but we have made no solid plans yet for a partner.

Tim Chang

OK, thanks.

Operator

Thank you, next question comes from the line of Marc Goodman with Credit Suisse.

Marc Goodman

Paul, yeah, just to carry on with the RAPAFLOW conversation, can you just talk about your strategy for marketing and how much money you are going to spend internally on this, or just give us an idea of what kind of a launch this is going to be and the focus and how many reps you’re going to put on this internally. And then discuss some of the conversations you’ve had with partners and what they find attractive about the product and how interested they are and how those conversations are going. Second of all, if you can talk about Concerta and the discussions you’ve had with FDA to try to get a tentative approval on that product. And third, just in the OC space, are prices now stable and everything’s kind of back to normal? At least for the next couple of quarters, do you think?

Paul M. Bisaro - President and Chief Executive Officer

OK, well let’s start with RAPAFLOW. Our current plan is to launch the product using our urology sales force of slightly over a hundred sales reps, and they will be targeting urologists, obviously, and we plan to educate the community using those reps as well as our key opinion leaders and thought leaders on the value of RAPAFLOW. As we’ve talked about in the past, we believe the product is differentiated from all the products that are currently available for several reasons: One, the fast onset of action, the strong efficacy in safety profile as well as the cardio-vascular benefits that this product provides.

So we’ll spend a fair amount of effort in dealing with that and educating the urologists on this topic and that will be the initial start of the launch. If and when we get a partner, we will probably have a sort of second launch, if you will, of the product into primary care and move forward on that front. I think that we have seen companies excited about the product for the reasons I described, I think certainly we will not be spending at the levels of FLOWMAX or a product like that, but I think that we can do quite well with the product out of the box. We do expect, though, that this product will grow over time. We also know that FLOWMAX is coming off patent in 2010 and we are always mindful of that issue and we expect that at some time in late ’09 or early ’10, the detailing and DTC on FLOWMAX will start to dissipate and that will make RAPAFLO a better opportunity for us.

I think you asked about Concerta. The situation remains pretty much where we’ve left it in the past. We are waiting for a decision. In our case, we are working with the agency to get tentative, and then ultimately final, approval. We are working to overcome some of the issues that the agency has with the general application, which is always normal. The CP is still outstanding, but we don’t, as I have said in the past, we don’t anticipate much of a problem there because we think our product actually complies with the CP whether it’s granted or not. So from that perspective, I think that we can continue to move forward with the Concerta application and we hope to see some value out of that some time in 2009.

On the OC front, I think you asked about pricing. As I said, the OC area remains very stable. We’ve seen no upsets or anything like that. If we’ve seen anything, we’ve just seen the normal unit decline that you would expect with the older products as new patients come on and they move to the promoted products. You would expect the units will decline in the older products, and that’s kind of what we’ve seen. Now, we also expect to launch a few oral contraceptives over the next couple of quarters, and so our overall franchise, I think will remain strong.

Marc Goodman

And so in the branded sales and marketing side, we’re going to start to see the numbers pick up in the fourth quarter, or is it going to be first quarter? When is the advertising and promotion stuff going to start to kick in?

Paul M. Bisaro - President and Chief Executive Officer

You will see some pick up in the fourth quarter, and then probably more of a pick up in the first quarter of ’09.

Marc Goodman

OK, thanks.

Operator

Thank you, and the next question comes from the line of Rich Silver with Berkley Capital.

Rich Silver

Yes, just a couple of things. Paul mentioned numerous OCs in the pipeline, can you give us some sense of what that quantity is? Is it double digits?

Paul M. Bisaro - President and Chief Executive Officer

As a matter of fact, it is. You can sort of guess, as Pat said in the past, we are working on all the oral contraceptives, so, you certainly know the ones we’ve disclosed, we have Yaz, Yasmin, Tri-Cyclen Lo, but any oral contraceptive, we’re working on it. So, you can sort of work your way through the…

Rich Silver

When you say numerous, you mean filed, or in development and filed?

Paul M. Bisaro - President and Chief Executive Officer

I mean filed.

Rich Silver

OK. So we should assume that within the next year or so, most of these would be on the market, yes?

Paul M. Bisaro - President and Chief Executive Officer

Well, there’s some legal issues to overcome with some of them, but assuming there’s no block, we would be able to get them on the market.

Rich Silver

OK. And, you also said in your prepared remarks that you expected several ANDA approved launches before the end of this year, if I heard you correctly, is that right?

Paul M. Bisaro - President and Chief Executive Officer

Yes, you did. You heard me correctly.

Rich Silver

Ok, so that’s also, I assume, to be even as much as mid to high single digits, yes? It just seems like a big number, that’s all, you know? We don’t have much time between now and the end of the year.

Paul M. Bisaro - President and Chief Executive Officer

Again, Rich, what we are facing, as well everyone is facing in the industry is the clear, I would say, slow down at the agency. And I don’t mean to imply that the agency isn’t working hard, they are, it’s just a question of being overworked and under funded. With all of the activity that they have to deal with, the application process is slowing down. And I can’t predict, no one can, and I think we all see it, that we expect products approved in a quarter that are being delayed because we just can’t get them through the agency fast enough. So, I can’t give you an exact number, but between the fourth quarter and the first quarter, we do expect a number of applications to be approved, and us to launch a number of new products.

Rich Silver

OK, and one last one, which is on the ’08 guidance. Since you raised the guidance by approximately $.05 a share and I do understand that you don’t provide quarterly guidance, but it would appear that that magnitude, a lot of that is actually in the fourth quarter. Is there a gross margin improvement that we should expect in the fourth quarter, and if so, what would be the reason for that?

Paul M. Bisaro - President and Chief Executive Officer

I am not sure, there may be a slight improvement in margins in the fourth quarter, but I think its just demonstration of a stronger quarter, revenue, and a recognition that we are not going to spend at the levels we thought we would spend in some of the areas. So, you’ve got a little bit of both going on. But I think you’re right that on a sequential quarter over quarter basis, you would have to anticipate that the numbers would be equal or greater than where they are right now.

Rich Silver

OK, thanks very much.

Operator

Thank you. Your next question comes from the line of Chris Schott with the J.P. Morgan

Chris Schott

Just a couple of questions on the branded side. For the iron replacement market, can you just elaborate on your remarks regarding the steps that you are taking due to the change in the market dynamics, particularly with the recent change in ownership of Venefor?

Paul M. Bisaro - President and Chief Executive Officer

Sure, but I think that there are a couple of things to recognize. First, we don’t anticipate a precipitous fall in Ferrlecit revenue. What we expect is a slower decline, based on the FMC acquisition of Venefor. We have been a long time supplier to many FMC clinics and the physicians are very comfortable with Ferrlecit and many of the patients are of course very stable on Ferrlecit. So we would anticipate no precipitous drop off due to that. We would expect a slower decline. Finally, there’s obviously an opportunity for us to actively market our product again to non-FMC clinics and so we are obviously doing that and we are focusing our efforts on that. So, we continue to think that Ferrlecit will be certainly a contributor at the end of ’08, as I mentioned in my remarks, a significant contributor in ’09 as well.

Chris Schott

And then on the branded product drug the cystitis drug, what’s the latest there and expectations for a date of reporting?

Paul M. Bisaro - President and Chief Executive Officer

The uresis product is finishing up phase 2 clinical studies and we’re beginning to look at meeting with the agency on a phase 3 program.

Chris Schott

Will you be presenting topline data on the phase 2 at some point?

Paul M. Bisaro - President and Chief Executive Officer

We don’t have any plans right now to disclose the phase 2 data. But I will say we are pleased with the product and we will continue to put resources against it, because we think it has a great future.

Chris Schott

Great, thank you.

Operator

Thank you, and next question comes from the line of Ken Cacciatore with Cowen and Company.

Ken Cacciatore

Hi Guys, good morning. I was just off a little bit during the call, but I wanted to ask if you spoke at all about Silodosin’s managed care status when you are going into the launch, and if you can give us an update on that and how we should anticipate its progress, and what tier we should anticipate it finally lands on?

Paul M. Bisaro - President and Chief Executive Officer

Well, that’s a good question. We are obviously working very hard on a strategy for managed care. We will be using our managed care reps to get out and certainly make the pitch for RAPAFLO. We like to call it by its brand name now. Anyway, we do hope and have expectations that the product will land at a decent spot on the formularies, but I can’t give you any hard prediction about where that’s going to be. I do suspect that the dynamic will change, particularly in that environment when FLOWMAX goes generic and we are working on strategies right now to deal with that situation as well.

Ken Cacciatore

OK, and also, I don’t know if you commented on Avandamet XR, any update?

Paul M. Bisaro - President and Chief Executive Officer

No. I didn’t comment on it and I don’t have any - oh the Actos

Ken Cacciatore

I’m sorry, Actos XR, I’m sorry, yeah.

Paul M. Bisaro - President and Chief Executive Officer

Ok, gotcha. Oh, you mean the Takeda issue, right. We continue to work with Takeda, Takeda is working on their approval, and once they get their approval, we’ll know a lot more about what their plans are, but this is really Takeda’s product and we are sort of waiting for them to give us the green light.

Ken Cacciatore

OK, thank you very much.

Paul M. Bisaro - President and Chief Executive Officer

You bet.

Operator

Thank you, and your next question comes from the line of Greg Gilbert with Merrill Lynch

Gregory Gilbert

Question, Paul, getting back to the number of launches between now and the year-end, there’s not much time. Is there a big disconnect between what you hope for by year-end and what should be included in guidance? I assume you haven’t built a whole lot in for guidance, knowing that the FDA can continue to be delayed. Can you give us some color on that? I think that’s what some folks are getting at.

Paul M. Bisaro - President and Chief Executive Officer

OK, guidance includes what we think is going to happen for the rest of the year. We do have some anticipated launches in the fourth quarter in guidance, but again, nothing of the magnitude of say, LOVENOX or Concerta or anything like that. So, it is consistent with what we believe will happen. Even though things are slow, we do have reason to know when we think we will get approval, based on where the application sits and contact with the agency. So, there is some in the guidance, but obviously the later you launch in the quarter, the more impact it’s going to have in ’09 as opposed to ’08.

Gregory Gilbert

Mark, can you talk about the other revenue lines for both brand and generics and how indicative 3Q levels are for what we should assume, not just for 4Q, but going forward in general. And talk about some of the important levers for those two rows?

Mark W. Durand - Chief Financial Officer

I think what you are saying Greg, in Q3 and probably you are looking at changes versus, as an example, in Q2 where we had some additional items there, such as the Sonestin payment that was in other revenues, so we’ll see some decreases there as well as an example, royalties from Bupropion that is also contributed to Q3/Q2 variance. I think Q3 is relatively indicative for what you’ll see in Q4 and going forward.

Gregory Gilbert

OK, going back to the revenue or generic launches, Paul, but from and ANDA perspective, do you expect any large industry launches in the near term?

Paul M. Bisaro - President and Chief Executive Officer

Anda does have some launches built-in to their forecast for the remainder of the year. I’m not sure if I would classify them as big.

Gregory Gilbert

Ok. I have one last one perhaps for Tom. Can you characterize how you see 40 environment shaking out over the next few quarters, how many players and when you expect them to show up?

Thanks

Tom

I am resolved as you can see from the numbers we are doing very well with it, just exactly as we expected. The exclusivity expires in January. There are, I believe, five or six TA’s out there. So I expect this would follow the very typical generic model.

Gregory Gilbert

Thanks

Operator

Your next question comes from the line of Adam Green with Stanford Group.

Adam Green

Good morning. My first question is for Mark and a follow up for Paul.

Does the SG&I and RND guidance you have for the year include the charges that we’ve seen this quarter and prior quarters? Also, if you could break out the charges from this quarter, where they fall on the P&L? Regarding the inventory charges for Infed, was that included or excluded in your adjusted EPL?

Mark W. Durand

That was included in cost of goods, and the SG&A, you first question again…

Adam Green

Whether the charges are in the guidance that you gave? The SG&A guidance and the RND guidance?

Mark W. Durand

Yes. They are.

Adam Green

Ok. And could you break out where the charges for this quarter, where they fall within the P&L?

That was in SG&A and then we have the Infed charge, those were the two major ones that was in cost to goods.

Adam Green

OK.

And for Paul: I would like to know If you have any update on Loashan 34, I believe the 30 months phase coming up, if you have any update on the litigation there, and also on SC&L..

Paul M. Bisaro

With respect to both of those products we continue to litigate those matters. I don’t really have any major update to give. I know that our 30 months expires sometime in February on Loastrun 24, and the Season L product we continue to sell our generic version of the product.

We’ll continue to litigate.

Patty Eisenhaur

Adam, you’re good?

I will go to the next question.

Operator

Your next question comes from the line of Elliot Wilbur with Meadham.

Elliot Wilbur - Meadham.

My question is for Mark, going back to the charge related to Infed. How much was that and it doesn’t look like that was added back to the adjusted EPS number. Is that correct?

Mark W. Durand -

Right. Is was included. It was not added back. Ok, and, I’m sorry. How much was the actual charge?

Mark W. Durand -

It was $7.7 million.

Elliot Wilbur - Meadham.

OK. Thanks.

Paul, I am going back to your earlier comments around the dispute with Sana Fee. Is there any update you can provide us with respect to the arbitration proceedings in either in terms of establishing a framework, or is there something more definitive on the time-line there?

Mark W. Durand -

Well, the arbitration proceedings have begun and we haven’t’ started the formal process yet. We have the arbitration panel. First of all the arbitration will take place, I believe, in Switzerland. The panel has been appointed. Both parties are obviously working on their briefs, I guess, to the panel.

We continue to believe that we are right in that dispute. But we also hope that we won’t even get to arbitration because we will be able to resolve this matter with Sana Fee in a way that extends the marketing and supply agreement.

Talk to them about extending the agreement, as I have just said, and I think we are hopeful that we will be able to achieve that.

Again, you can never guarantee anything until you sign the paper. But as I said, I think we are hopeful we can achieve a good result for both Sana Fee and for Watson.

Elliot Wilbur - Meadham.

Ok and I wanted to ask you if you could provide some color around the Transthermal Fentenal market dynamics since Teva’s launch, whether or not there have been any discernable changes in the overall pricing levels, and I guess, ordinarily, we’d think of Teva’s interest in the market has been a negative for all players involved. But, I’m thinking maybe there’s a positive side in the sense that….

Mark W. Durand -

I would say this; We have not seen. We, Watson, have not seen any particular impact yet.

We have not seen any price reduction or any sort of customer pressure.

I think that is really sort of the result of an anomaly with this particular product. As you probably, know, the Teva product is a matrix product and out product is a reservoir product.

Most pharmacies carry both products, because some patients prefer a reservoir vs. a matrix and vise versa. So, I suspect that the Teva launch with probably disproportionately effect a matrix product as opposed to a reservoir product.

That’s what we’re anticipating anyway for the fourth quarter and then into 2009.

Elliot Wilbur - Meadham.

I wanted to ask one last big picture question for you, Paul.

Outside of US Treasury’s, asset prices across the globe been depressed pretty significantly and it’s no secret that you guys are looking to expand your geographic footprint. But I guess the message, at least my interpretation has been that it’ll be on a smaller scale, not on the large scale acquisitions that we’ve seen some other players do, but, thinking about what is potentially a once in a lifetime opportunities, that some business that may be selling at distressed prices, specifically referring to the activist business. Has your thinking potentially been altered by the current asset prices that are out there.

Paul M. Bisaro

I would say this; we are and will look at all of the assets that become available and try to evaluate them in light of the opportunity. As assets, some assets are more distressed than others and some require more work than others. And we have to evaluate whether we’re capable and can do a turnaround for those assets if there is a problem with them. So we have to evaluate, not just the price. But we have to evaluate the opportunity in total.

You’re right. We have said. I have said continuously, that I think that for Watson, I think a step approach makes some sense, and we have been focused on that. But we will look at assets as they become available whether they are big or small.

I would point out a fact, that the credit markets are difficult even for companies as strong as ours with the balance sheet that we have. So we, I think everyone, is sort of constrained with the amount of leverage you might be able to put on your company right now.

Elliot Wilbur - Meadham.

Thank you.

Operator

Thank you.

Your next question comes from the line of David Buck with Buckingham Research

David Buck - Buckingham Research

This question may have been answered. But, just one question, Paul, on the outlook for next year, what do you see changing in the US generic market as a result of the pending merger and can you give an update? Are you seeing any potential opportunity for divestiture? You’re acquisition of divested products, and when are you expecting a tentative approval on Loestrun 24. Then, finally, on the XUS business development opportunity, .can you give us some sense of when you would see you’re first actions? What is the time-line for when we should expect to see some activity, at least? Thanks.

Paul M. Bisaro

I’ll try to tick them off in order. The market outlook for 2009, I think, I don’t think the US market outlook changes significantly, at least in my mind, from 08 to 09, certainly not just because of the Bar - Teva merger.

Certainly, Teva, is a strong competitor. You know that. We know that.

But we are also a strong competitor with 150 product families and new products being added all the time. So I think Watson is a preferred supplier of many, many customers and I don’t see that changing over time, certainly not in 2009.

I also, don’t expect to see any major change the pricing dynamics. I think they’ll continue as they have over 2008.

While I don’t want to give guidance for 2009, I can’t imagine that we would modify our 10% annual price reduction on the base business that we’ve been using for the last couple of years.

At least where I sit today it looks like a good number for thinking about 2009. So we’ll probably start there and probably refine that a bit. But that’s our current thinking.

I think you asked about the tentative approval for Loestrun.

We continue to work with the agency to get that approval. And now, of course, Loestrun has as citizen’s petition pending that we’ve got to deal with. So we’re working on that as well.

Then finally, you asked about timing of XUS. It’s really a question of what opportunity presents itself and when. We continue to look. We continue to talk with potential partners.

You need a willing seller and we are a willing buyer, but only at the right prices and the right times. So, I can’t give you a specific time-line. But I would hope that we would see some activity in 2009

David Buck - Buckingham Research

Thanks.

Operator

Thank you. Your next question comes from the line of Michael Tal with Wakovial Capital Market

Michael Tal - Wakovial Capital Market

Paul, I have a question on the generic margins, It’s nice to see the improvement there. But I’m wondering it you can kind of give us a flavor as to the source of that improvement as it relates to the question of how much of it came from Florida being operational again? How much of that was Omeprozal 40 And how do you see that margin trend going forward as well as on the distribution side with Anda. Is 15.7% reasonably good point to trend off of?

Paul M. Bisaro

Let me start with the generic business. II think that the improvement of margin there is the standard product mix answer. But really it’s movement away from the unauthorized generic model, perhaps is a way to describe it, to Omeferzal 40, to the potassium chloride, to Fenthenol patch, where as those begin better contributors of course margins will increase. And so, that’s really the issue there. Going forward we hope to continue to see strong margins on the generic side through new product launches.

But also on our global supply chain initiative we expect to see next year, and starting to see some of the value coming out of our India operation with, by the end of the year, doing about one billion units this year and next year approaching the three billion unit mark out of India for the full year, so I think that impact will have a cost-of-goods impact for us as well.

On the distribution side, I actually made a point about this and think it’s important for people to start to think about that while we expect margins to remain relatively stable for Anda through Q-4 and maybe into Q-1 we’re expanding the Anda business model a bit and moving just beyond generic distribution looking more to specialty distribution, including some Brand products. Of course, as we do that the margins will come down a bit as we’ll have higher-priced product going out at a lower over-all margin. I’d like to focus on the over-all contribution that Anda provides, however, and we expect that to go up. While margin is a surrogate for contribution, we are looking to increase Anda’s over-all contribution.

Michael Tal - Wakovial Capital Market

Paul, from an industry perspective, could you give us your thoughts on some of the recent health and safety concerns from the FDA around one of the Indian manufacturers. How widespread do you think this issue could be? Going forward, do you think this could have a spill-over effect into other OUS manufacturers? How do you think this potentially could play out over the next few years?

Paul M. Bisaro - President and Chief Executive Officer

There obviously had been an impact because of the issues that Brand had, and that impact was from potential new product opportunities as people moved into those product spaces. I don’t see this thing blowing up into a bigger issue.

They're now putting an office in India, or actually two offices, I think. They’re putting an office in China and maybe even one in Europe. I expect that the agency is going to take a harder look at many of the companies that are operating in those regions. I can only tell you that from our perspective we are very comfortable with the quality of our India operation. We monitor it. It runs under the same quality conditions that our facilities here in the US run under, so from a Watson perspective we don’t foresee any issue with our India or China operations. We’re in a good spot. I can’t really predict what will happen to others, but I do think the agency will spend a lot more resources doing inspections in those parts of the world.

Michael Tal - Wakovial Capital Market

I might have missed this earlier, but can you give us an update on the six-month formulation, the NDA submission for that, and could you help us understand what the market opportunity is for this indication? Thanks.

Paul M. Bisaro - President and Chief Executive Officer

We expect the product to be on file in the fourth quarter, so you should hear something from us relatively soon on that. As far as the product opportunity, if you look at the market for LHRH products, you’ll see that as products that have a longer duration of action come on the market, patients and physicians tend to gravitate toward them. We anticipate that the six-month product will do better than the one and the three-month that we currently sell. We also expect that it will take some of the scripts from the one and three month, but we think it gives us a market opportunity because we would be one of

two with the six-month formulation. We hope to be able to grow that product because we have the six month. Actually, that product’s been performing quite nicely with the new delivery system, and we’re very pleased.

Operator

Your next question comes from the line of Rich Bevelwick, Barclay’s Capital.

Rich Bevelwick, Barclay’s Capital

My question has been answered, thank you.

Patty Eisenhaur - Executive Director, Investor Relations

If there are no other questions I think we will conclude today’s call. I want to thank everyone for participating. Operator, we’ll terminate over here, but if you want to provide some re-play information, that would be helpful.

Operator

Thank you for participating in today’s Watson Pharmaceuticals third quarter 2008 earnings conference call. This call will be available for re-play beginning at 11:30 EST today and 11:59 p.m. EST on November 7, 2008. The conference I.D. number for the re-play is 68306114. The number to dial for the re-play is 1-800-642-1687 or 1-706-645-9291.

This concludes today’s conference call. You may now disconnect.

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