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Executives

Patty Eisenhaur – Executive Director, IR

Paul Bisaro – President and CEO

Todd Joyce – SVP and CFO

Frederick Wilkinson – EVP, Global Brands

Al Paonessa – EVP and COO, Anda, Inc., Watson's distribution Subsidiary

Analysts

Chris Schott – JP Morgan

David Buck – Buckingham Research

Rich Silver – Barclays Capital

Louise Chen – Collins Stewart

John Boris – Citi

Gregg Gilbert – Banc of America/Merrill Lynch

Tim Chang [ph] – CRT Capital

Marc Goodman – UBS

Ken Cacciatore – Cowen and Company

Elliot Wilbur – Needham & Company

Ronny Gal – Bernstein

Michael Tong – Wells Fargo

Watson Pharmaceuticals, Inc. (WPI) Q4 2009 Earnings Call Transcript February 23, 2010 8:30 AM ET

Operator

Good morning. My name is Arnika and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson Fourth Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator instructions). Thank you. Ms. Eisenhaur, you may begin your conference.

Patty Eisenhaur

Great, thank you and good morning, everyone. I d like to welcome you to Watson’s Fourth Quarter and Full Year 2009 Earnings Conference Call.

Earlier this morning Watson issued a press release reporting its earnings for the fourth quarter 2009 and full year 2009. The press release is available on our Web site at www.watson.com and includes a reconciliation of our GAAP and adjusted financial results and forecasts. Additionally, we are conducting a live webcast of this call which will also be available on our Web site after the call conclusion.

With us on today’s call are Paul Bisaro, President and CEO of Watson, who will provide an overall perspective of the fourth quarter, including highlights on the performance of our three business segments. Todd Joyce, our Chief Financial Officer will then provide additional details of our financial results for the quarter. Paul will conclude our presentation with our updated outlook for 2010. We’ll then open up the call for questions and answers.

Also present and available during the Q&A portion of the call today, are Tom Russillo, Executive Vice President of our Global Generics division, Fred Wilkinson, Executive VP of Global Brands, Bob Stuart, Senior Vice President and Global Operations, Al Paonessa, Chief Operating Officer of our ANDA Distribution Division and David Buchen, our General Counsel.

Please note that today’s call is copyrighted material of Watson Pharmaceuticals, Inc. and cannot be rebroadcast without the Company’s express written consent.

I’d also like to remind you during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the Company.

It’s important to note that such 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 the factors affecting the Watson 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 period ended December 31, 2008 and Watson Form 10-Q for the period ended June 30, 2009.

With that I’ll turn the call over to Paul.

Paul Bisaro

Thanks, Patty and good morning, everyone, and thank you for joining us today. We completed the fourth quarter and full year 2009 with strong results across the Company. We grew overall revenues and profitability, we invested in the growth of our Generic and Brand businesses, we expanded globally, restructured our balance sheet and we continue to focus on making Watson one of the most profitable pharmaceutical companies in the industry.

Some of our achievements for 2009 are strengthening our generic business with the launch of eight products and we filed 36 ANDAs with the Food and Drug Administration. At year-end, we had over 100 applications pending in the U.S. plus more than 240 filings outside of the U.S.

On the Brand side we launched two important new products and realigned our sales and marketing organization to better present our expanding urology and women’s health portfolio to targeted physicians.

Since year-end, we have taken a number of significant steps to grow our Brand business with more to come. We also made excellent progress on our global supply chain initiative with additional savings being recognized in 2009.

We also restructured our balance sheet and finished 2009 with the solid financial position, which will allow us to invest in future growth. And finally, we put the talent in place to support our new global operating structure.

Our fourth quarter and full year financial results were at or above expectations across all of our businesses. As a reminder, the following results include approximately four weeks of Arrow.

GAAP net income for the fourth quarter was 57 million or $0.51 per diluted share based on a 22% increase in net revenue of $786 million. Adjusted cash net income for the quarter increased 28% to $94 million or $0.85 per share. The increase in adjusted net income was driven by the contribution of new products and continued savings from our global supply chain initiative in 2009.

Adjusted EBITDA for the fourth quarter increased 32% to $189 million. Adjusted EBITDA for the full year 2009 grew 22% to $689 million. Cash flow from operations was strong at 141 million for the fourth quarter and 377 million for the full year.

Now, I’ll provide some highlights from our three business segments. Global Generics net revenues increased 27% in the fourth quarter of 2009 compared to the fourth quarter of 2008. Adjusted gross profit in our Global Generics segments increased 37% to $218 million for the quarter. Our adjusted gross margin was 46.7%, up over 340 basis points year-over-year.

We continued to increase volumes at our India site contributing to lower overall manufacturing costs. In addition, the phase out of our Carmel, New York facility and increased volume in our daily Florida facility has resulted in significant savings. We expect the global supply chain initiative to provide continued benefits in 2010 and beyond.

We increased our investment in R&D by 21% to $43 million during the quarter and by 18% to $140 million for the full year. A portion of this increase comes from the inclusion of Arrow’s R&D for December, but overall, is consistent with our continued emphasis to aggressively file new product applications.

Since January, we have further expanded our disclosed U.S. patent challenge portfolio with the initiation of challenges for Generic Lidoderm, Nuvigil, LoSeasonique, Rozerem and Implensa [ph].

Moving now to the Brand division, total revenue for our Brand division was up by 5% in the fourth quarter over the same period last year influenced by the higher co-promotion revenue from AndroGel and Femring.

The 2009 launches of RAPAFLO and GELNIQUE in the urology arena, continue to grow at an average TRX growth rate of 35% quarter-over-quarter. Brand adjusted gross margin in the fourth quarter was 81.5% versus 78.4% last year. As we mentioned, however, we expect our Brand margins to decrease in 2010 as we work to replace Ferrlecit, which was a high margin product for us.

As you know, we signed a license agreement for a value brand with Ferrlecit with GeneraMedix which we expect to replace a portion of the revenue generated from Ferrlecit. This product is currently pending approval with the FDA.

We also filed an NDA for a six-month formulation of TRELSTAR with an assigned PDUFA date in March and we expect to launch this product in the second quarter of 2010.

As we explained during our Analyst day, we are focused on aggressively growing our Brand business through both business development and internal R&D projects.

I would like to now discuss two of the concluded deals. Earlier this month, we announced an agreement with HRA to become the commercial partner for a novel next-generation emergency contraceptive, which is currently marketed in the UK as LO-1 [ph]. This product will provide a new important alternative to the current emergency contraceptives on the market.

Clinical results published in Lancet and the Green Journal are significant and we are optimistic about the prospects of providing U.S. women with a new emergency contraceptive option.

The next deal was certainly critical to our long-term goal of being a major player in biologics, as we purchased the remaining 64% of Eden Biodesign for approximately $15 million, which will be part of our Brand division.

Eden will provide the foundation for Watson to accelerate our activities for development and commercialization of both Biosimilars and Biobetters for the global market. We are very pleased to add Eden team to our Watson family.

Lastly, we continue to pursue additional product acquisitions and as we mentioned at our Analyst day, we are in late stage discussions on a number of new women’s health opportunities, including a product for infertility, long acting contraceptive that includes a novel progestin and a late-stage product that will take us into labor and delivery. We anticipate providing you with updates on these initiatives in the very near future.

Turning now to our Distribution division, ANDA had a better than expected sales in the fourth quarter, primarily due to sales of new third-party products including generic versions of Valtrex and Prevacid. ANDA also benefited from the relaunch in the quarter of generic Pulmicort as well as an increase in third-party Brand sales.

And with that I’ll turn the call over to Todd, he can take us through the financials in more detail. Todd?

Todd Joyce

Thanks, Paul, and good morning, everyone. 2009 was an exceptional year for Watson. We increased revenues across all our businesses and increased operating margins as well. We acquired Arrow in December, refinanced our convertible debt at favorable rates and finished the year with a strong balance sheet and capital structure.

Our Global Supply Chain initiative continued to yield cost savings and we expect additional savings in 2010. We are also able to increase R&D investment to enhance our product pipeline and support future growth. Clearly, we are entering 2010 very strong financially.

I will now review our fourth quarter financial performance on a consolidated and divisional basis, which includes the results of Arrow since December 2nd. For the fourth quarter of 2009, consolidated net revenue was 786 million, an increase of 22% from the prior year period.

Excluding the impact of Arrow, Watson’s standalone revenues grew 15% year-over-year. Net revenue for our Generic division was 467 million, up 27% on a year-over-year basis. The increase was primarily due to new products such as the Toprol ER and increased sales of potassium chloride and oral contraceptives.

Sales of oral contraceptives were 95 million in the fourth quarter, up 19% on a year-over-year basis, reflecting the addition of two new products during the year as read in Next Choice.

Adjusted gross margin for the Generic division was 46.7%, up 3.4 percentage points on a year-over-year basis. The increase reflects lower year-over-year unit manufacturing costs as a result of our Global Supply Chain initiative and higher margins on new products.

On a sequential quarter basis, the generic adjusted gross margin declined 3.7 percentage points as the third quarter margin was favorably impacted by product mix.

Moving to the Brand division, net revenue was 121 million, up 5% from the prior year period and 7% sequentially. Product sales were 102 million, roughly flat with the prior year. Sales from our 2009 launches of RAPAFLO and GELNIQUE as well as strong sales of AndroGel and TRELSTAR were offset by lower sales of Ferrlecit.

The agreement with Sanofi expired at year-end. Ferrlecit’s sales in the fourth quarter were 24, million down 11 million on a year-over-year basis. Brand other revenue was 19 million for the quarter, an increase of 43% over the prior year, due to higher co-promote revenue from AndroGel and co-promote revenue from Femring which was not present in the prior year quarter. Brand adjusted gross margin was 81.5% roughly flat with the third quarter of this year.

Finally, net revenue from our Distribution segment was 197 million, up 35 million or 22% from the prior year period, due to an increase in third-party product launches included in the generic versions of Valtrex and Pulmicort. We also had higher sales of third-party Brand products in the quarter.

Distribution segment adjusted gross margin was 14.6%, down one percentage point from last year. The year-over-year decrease in gross margin is due to an increase in Brand sales which carry a lower gross margin.

Turning now to GAAP operating expenses. Consolidated R&D spending for the fourth quarter was 61 million, up 27% compared to the prior year period due to higher product development spending in our Generics and Brand division. This also includes one month of R&D spending from Arrow. For the full year 2010, we expect total R&D spending in the range of 240 million to 260 million.

SG&A for the fourth quarter was 137 million, an increase of 26 million over the prior year period. Roughly, half of this increase is due to the inclusion of Arrow in our fourth quarter results. The remainder is primarily due to higher litigation cost and higher promotional spending in our Brand division. For 2010, we expect SG&A to be between $630 million and $680 million.

Amortization for the fourth quarter was 27 million, an increase of 7 million over the prior year. This includes amortization of product rights acquired as part of the Arrow acquisition. For 2010, we expect amortization expense to be roughly 170 million.

As discussed in our recent Analyst day, we will be supplementing our GAAP earnings disclosure with adjusted cash basis reporting, which excludes amortization expense and so there are certain other adjustments as disclosed in the reconciliation table of our earnings release.

On an adjusted cash basis, earnings for the fourth quarter were $0.85 per share compared with $0.64 per share in the prior year quarter. The current year adjusted cash results exclude 22 million or $0.12 per share of Watson standalone amortization expense and roughly 27 million of total amortization expense.

We’re reporting 2009 results on an adjusted cash basis due to the inclusion of Arrow in our fourth quarter results. Our adjusted cash basis results also exclude 21.6 million in acquisition and licensing related charges, 7.8 million in costs associated with our global supply chain initiative and 2.4 million legal settlement. GAAP EPS for the quarter was $0.51 per share.

Our adjusted EBITDA for the fourth quarter was 189 million, up 32% compared with the prior year period and up 6% on a sequential quarter basis reflecting strong contributions from all three divisions.

Cash flow from operations was 141 million for the quarter and 377 million for the year. Our GAAP tax rate in the fourth quarter and full year was 36.5% and 38.8% respectively. The lower tax rate in the fourth quarter was due to the recognition of 1.8 million in deferred tax assets.

For 2010, we expect the GAAP effective tax rate to be roughly 40% primarily due to non-deductible expenses associated with the Arrow acquisition. On an adjusted cash basis, we expect our 2010 effective tax rate to be in the range of 36% to 38%.

We ended the year with 1.46 billion of debt and 215 million in cash and marketable securities. We currently have 250 million of undrawn capacity on a revolving credit facility. As of year-end, our debt-to-adjusted-EBITDA was roughly 2.1 times and our debt-to-capital ratio was approximately 33%.

Our capital structure provides us with sufficient flexibility to strategically invest in the business and achieve our growth objectives going forward.

With that I will turn the call back over to Paul for an update on our 2010 forecast and concluding remarks.

Paul Bisaro

Thanks, Todd. As Todd just said, I’ll update you on our 2010 forecast. We continue to estimate full year net revenues at approximately $3.5 billion. We expect Global Generic revenue to be between 2.2 billion and 2.4 billion with international revenues of $550 million to $610 million.

The assumptions include a first half launch of generic Toprol XL 100 and 200 mg strength and a first half launch of generic Cardizem LA. We now expect competition on generic Toprol later in 2010 and we continue to anticipate minimal competition on generic Micro-K. We continue to have no major patent challenges included in our forecast, including generic Concerta, Lovenox and Pulmicort.

On the Brand side of the business we expect net revenue to be between $440 million and $480 million for the year. The assumptions include a first half launch of TRELSTAR six month and the launch of a value brand version of Ferrlecit in the first half as well. In addition, we have included revenue from a product resulting from a business development opportunity yet to be disclosed.

In the ANDA Distribution business we anticipate revenue to be between $670 million and $740 million. We expect adjusted EBITDA of 760 million to 810 million and adjusted cash EPS in the range of $3.05 to $3.30 in line with the previous forecast we provided at our Analyst day. Regarding our quarterly progression of earnings, we expect our earnings to be more heavily weighted to the second half of the year.

In summary, 2009 was a remarkable year for Watson. We delivered a 10% increase in net revenues to $2.8 billion. We delivered 24% increase in net income to $349 million and an adjusted cash basis, we delivered a return of $3.04 per share. For the full year 2009, adjusted EBITDA was $689 million and cash flow from operations was a strong 377 million.

We are proud of these results and are committed to continuing to grow Watson in 2010 and to deliver on our goal of a 10% compound annual growth rate over the next three years and

Now, I’ll turn it back to Patty for questions and answers. Patty?

Patty Eisenhaur

Thanks, Paul. The Q&A.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from Chris Schott with JP Morgan.

Chris Schott – JP Morgan

Great, thanks. Maybe just to kick-off with how should we just think about gross margins as we go through 2009? Seems like you’ve had a lot of push and pulls with the addition of Arrow, continuing to shift production in Goa, how should we think about the gross margins going through the year? And also an update of where production volumes were in 2009, where they’re going in 2010? I’ve got one follow-up question from there.

Paul Bisaro

Chris, I’ll answer the Goa production question first, probably, by the end of the year we’ll be doing about 20% of our total capacity at GOA, about 3 billion units or so and we would expect to see that trend to continue up to its total capacity of 4 billion units to 5 billion units. Obviously, the more products we’re able to move into that facility, the better off our margins will be. Also, we would expect to see more of an impact in 2010 of our own API production out of our facility in Ambernath, which is the outside of Mumbai. So more to come on the global supply chain initiative. We did see a pretty strong inclusion in gross margin, particularly, on the generic side.

I think where you should think about the generic margins are consistent with what we talked about at Analyst day, which is sort of in the high 40s, high 40 range. A lot of that fluctuation, I guess, the three percentage point fluctuation we saw was due principally to product mix, the more new launches we have with limited competition, higher the margin, and therefore higher the gross margin in total. So you’ll see some movement around that high 40s range affecting in the third quarter we saw as high as 50%, but probably high 40s is good.

On the Brand side, having to replace Ferrlecit, as everybody knows, that was a very high margin product skewed our margins up a bit. I think most people have not brought those Brand margins down probably low enough. Probably, there we’re looking more in the 70 range as opposed to the 80 range we were before.

Chris Schott – JP Morgan

Okay, great. And then can you just give us a quick update on just I know you don’t have maybe as much overlap as some of your competitors, but thoughts on what type of impact you saw from the Apotex supply interruptions, as we think about Q4 results, and as you’re looking out to 2010, and maybe just your latest thoughts on the overall more base business pricing environment for Generics right now? Thanks.

Paul Bisaro

Apotex and other companies face challenges and we assume that they’ll come back like everyone, they will find a way to get themselves back in the game and those opportunities are often very limited and fleeting, but we did see some opportunities particularly in some extended release products, but as you point out we didn’t have a lot of overlap with Apotex. I expect that over 2010, the generic playing field will be somewhat stable for a number of reasons, principally, economic conditions, customer consolidation, and general lack of approvals coming out of the FDA.

As I’ve often said on pricing and if you want to call it instability in the market, comes from an event and generally, the event is a new competitor getting an approval and coming into the marketplace, looking to get some market share, which generally lowers pricing. But the FDA being backlogged as they are and we certainly have seen that in spades, I would expect that until that issue is resolved one positive is the stability in the pricing arena.

Chris Schott – JP Morgan

Great, thanks very much.

Operator

Your next question comes from David Buck with Buckingham Research.

Paul Bisaro

Hi, David.

David Buck – Buckingham Research

Yes, thanks for taking the question. First, on the assumptions for Generics, you mentioned that you’re still expecting Cardizem LA and also the additional strengths of Toprol Generics to be launched first half, but you’re looking at more of a back weighted year and you also did change the assumption for competition. Can you give us a sense of why you’re still confident in your own time table, why you moved out your competitors’ time table and why the earnings progression is a little more back weighted given those launches? Thanks.

Paul Bisaro

Okay, we’re still comfortable that we will get the approvals. We think we’ve done everything necessary to get the approvals. We’re trying to work with the agency to get these things approved and we expect them in the first half. We’re trying to get them through the agency, as I said, it’s become somewhat of a more difficult task than I certainly have seen in my 20 years in the industry.

Regarding competition of metoprolol, we’ve moved it back because of basic what we’ve heard from other people talking about their current state of their application so we thought it was appropriate to move those numbers back a little bit.

Regarding the progression of earnings, I think it’s important for you recognize that the fourth quarter, for example, had about, I believe $24 million in Ferrlecit’s sales in the fourth quarter that simply won’t be there in the first quarter. And as I just mentioned it's pretty high margin product. So what we will see is an increase.

You need to take that into consideration as you’re thinking about what the first quarter numbers are going to look like and as it grows throughout the year, our revenue and profitability grows throughout the year from other product launches, we’ll be replacing that but that income will be more backward weighted. To be specific about it, that Ferrlecit accounts for about $0.12.

David Buck – Buckingham Research

Okay. Just one follow-up on Arrow, you mentioned since December 2nd you gave some Clariter’s [ph] growth rate. Can you give us a dollar number of sales from Arrow and what should we be looking for in terms of seasonality of their sales in 2010?

Paul Bisaro

I don’t think they have any real seasonality in sales in their portfolio. I think the way we’re now looking at Arrow, in fact, Watson, is we’re thinking about Watson globally and from the U.S. perspective, we’re not even going to try to break it out. It’s really subsumed now within the Watson business.

On the international front, I guess you could look at the Arrow piece there and I think we said roughly 600 million in sales and I think I gave a range of $550 million to $610 million, so remember, what will impact international sales, of course, is currency fluctuations and those things, but as to seasonality, I don’t really see any in their business. We expect a strong contribution from the international business not just this year but also going forward in '11 and '12 with some key launches in Australia and Canada.

David Buck – Buckingham Research

Great, thank you.

Operator

Your next question comes from Rich Silver with Barclays Capital.

Paul Bisaro

Hi, Rich.

Rich Silver – Barclays Capital

Hey, Paul. Just back to the issue of FDA and backlog of ANDAs, can you give us some sense from your perspective, impact on larger companies versus smaller companies, if it’s somewhat indiscriminate or maybe it’s just the smaller companies might be feeling it more because of the nature of their products or perhaps the concentration of products? And then just in terms of the commentary around expectations for competition on Toprol XL as well as expectation on the strength that you haven’t received approval on, how much of that do you think is specific to this product and the issues that we’re familiar with the product versus the general resource issues at the FDA?

Paul Bisaro

I’m trying to go backwards and start with the last question first. I think there is both things are contributing to what I guess are delays in the approval of Metoprolol and Cardizem. There’s clearly a lack of sufficient resources at the FDA to process all of the applications that are pending. The single individuals are being asked to review multiple products and they become through really no fault of their own a bottleneck.

We also experienced the unfortunate event of the 200 year snowstorm in Washington which shut down the FDA for somewhere between five days to seven days, pushing back PDUFA dates and approval dates. It’s not something that was welcome because everybody was delayed already and then to throw five days to seven days of no activity on top of that was even more difficult to deal with.

I think as we talked about at the GPhA Association Meeting last week that FDA told us the backlog of ANDAs and FDAs now over 1900, mean approval times are over 26 months for approval times. That affects both big companies and small companies. Probably, disproportionately, hurts the smaller companies because their life blood, like ours, is new product approval. The reason why it doesn’t hurt us quite as much is because we have a basket of over 170 different molecules we’re currently manufacturing. So our continued cash flow is not really at risk, but for smaller companies, it becomes quite difficult.

I think the answer ultimately is that we need to continue to push for additional funding for the Office of Generic Drugs and also their compliance group so that those groups don’t cause delays. And as we said at our GPhA Meeting that Watson and other members of the industry are willing and able to negotiate a user fee program that should help fund some of the activities that offer the generic drugs to get these backlogs brought down to something more reasonable.

Rich Silver – Barclays Capital

And commentary specific to Toprol XL?

Paul Bisaro

Toprol XL, as I said is suffering from the two problems. It’s a difficult product to manufacture, I think the agency is concerned about the process for not just from Watson, but also from the other competitors who had the product so they’re taking a very hard look at the application. They’re asking for more data and things like that and we’ve provided a lot of that information.

Rich Silver – Barclays Capital

And why discriminate between what would be required for the strength already approved versus the strength that have yet to be approved? What would account for the difference?

Paul Bisaro

That I can’t tell you, although as I think we’ve mentioned in the past, for us, it’s a separate application. So we had one application for the 25 and 50 and one application for the 100 200. And just remember, the FDA is looking to cross the board at all extended release products and they’re trying a process for dealing with approving these products and trying to anticipate where concerns will be raised and trying to get out ahead of that. So I think the approvals will come, and I think they will come in the first half of the year and we’re standing ready to launch the products upon approval.

Rich Silver – Barclays Capital

Very helpful, thanks.

Operator

Your next question comes from Louise Chen with Collins Stewart.

Louise Chen – Collins Stewart

Hi, good morning. So first question I had was just on your guidance of the 550 million to 610 million in international sales. Is that all generics or are there other types of products in there as well?

Paul Bisaro

That’s all generics.

Louise Chen – Collins Stewart

And can you give any gross margin on that amount of sales?

Paul Bisaro

Louise, we didn’t break out, we do internally, but we haven’t given gross margin by country, so I m going to decline to give that number.

Louise Chen – Collins Stewart

Second question I had was just on your balance sheet. What are your plans to deleverage the balance sheet post the Arrow transaction and then when do you think you’d be ready to expand your base business after the integration of Arrow?

Todd Joyce

In terms of delevering the balance sheet as we mentioned in our Analyst day we’ll have sufficient cash flow in the short-term to pay off our revolver. We have $250 million staying in our revolver. We’ll also be paying off the debt that was assumed as part of the Arrow acquisition so. In total, we expect debt pay downs of roughly $305 million and we’ll continue to delever, there is an additional 150 million outstanding in our term loan facility, which is due in 2011. We’ll next pay off that and we also have the preferred stock that matures in 2012.

Paul Bisaro

And Louise, we do stand ready now to take advantage of business development opportunities to expand not only our Brand division, which I talked about two deals that we’ve already completed and others that are in the works and late stage discussions, but we also are beginning the process of looking at international expansion of our generic business. Once we find the right opportunity, we’ll be folding that into the existing structure. And like I said we stand ready today to be able to do that if the right opportunity.

Louise Chen – Collins Stewart

Thank you.

Operator

Your next question comes from John Boris with Citi.

John Boris – Citi

Thanks for taking the questions. First question on the ex-U.S. generic gross margin, that was the question Louise just asked, is it at all possible with a 550 million to 610 million guidance that you’re giving if you take that in aggregate is the generic gross margin of that business higher than the '09 average or lower than the average in any kind of range that you can give in aggregate for would be helpful? And I have a follow-up.

Paul Bisaro

Okay, John, I would think it’s pretty fair to say that it’s probably a lower margin business in the U.S. base today. Part of that reason, of course, is in countries like France, where you license in a lot of products, to fill out your basket of offerings, you’re going to have a lower margin business because you’re not manufacturing that. As one of our stated objectives like everyone else is to be able to manufacture more of our own products. As more and more of the products are manufactured by a Watson family manufacturing facility, margins will grow in those markets. So it is lower, it is a lower margin business than the U.S. margin than the U.S. counterpart today.

John Boris – Citi

Okay. And then on Toprol XL in the fourth quarter, can you give us any color on the sell-through on the 25 mg and 50 mg product?

Todd Joyce

All that sell-through is complete. I think we sold somewhere a little over 50 million in total for the 25 and 50, somewhere in that range.

John Boris – Citi

And then just on at least in the release, you indicate the 22.2 million of amortization expense or the $0.12. Can you just help us understand how you get $0.12 on the amortization part?

Todd Joyce

$0.12 using the weighted average shares and using a marginal effective rate of 37.5% for the taxes.

John Boris – Citi

Okay, all right, thanks.

Operator

Your next question comes from Gregg Gilbert with Banc of America/Merrill Lynch.

Paul Bisaro

Hi, Gregg.

Gregg Gilbert – Banc of America/Merrill Lynch

Good morning.

Paul Bisaro

First, a housekeeping question on the popular international revenue segment. What was that number in the fourth quarter and are you going to give us the specific number by quarter going forward?

Todd Joyce

We will probably be giving you international number on a going forward basis. And in the fourth quarter it was a little disjointed because we only had the one month, so it doesn’t, it’s not really a valuable number for you.

Gregg Gilbert – Banc of America/Merrill Lynch

On distribution, intrigued by the increase in Brand sales. I know it’s not a huge number yet, but can you give us the breakdown of Brand generic at ANDA right now in terms of sales?

Todd Joyce

Al will kill me if I do that. The answer is you remember what we did was to help out in the ANDA Distribution business be able to compete in specific therapeutic categories, things like narcotics area, we decided to increase our brand capability there and become basically a full line supplier of narcotic products. That coupled with the ANDA’s specialty technology of sea sauce which is that electronic handling of DEA forms, 222 forms and the like, give ANDA a competitive advantage in that area. So that’s why we’ve spent more time on giving Al the opportunity to get into more Brand business.

Gregg Gilbert – Banc of America/Merrill Lynch

Can you comment on any near-term generic launch opportunities through ANDA that are maybe in the works or that are important for the guidance?

Paul Bisaro

No, I m sorry, I can’t.

Gregg Gilbert – Banc of America/Merrill Lynch

Okay.

Paul Bisaro

Good try.

Gregg Gilbert – Banc of America/Merrill Lynch

I’ll ask you one more follow-up on your GPhA hat. It didn’t sound to me like the new FDA commissioner has a game plan to address the ANDA backlog other than to get additional resources via user fees which may or may not happen and certainly would take some time. Do you agree with that and or do you see some signs that there is in fact a strategy to get some of the products, particularly, the tougher ones across the finish line independent of, I guess, the FDA having its handout for user fees? Thanks.

Paul Bisaro

She did give probably a key note speech in her administration as FDA commissioner at GPhA and we certainly welcomed her participation and look forward to working with her and her staff going forward. I think what she signaled was a willingness to discuss lots of opportunities. That is I think a welcome change from where we have been in the last few years with the FDA and when she says we can work together on developing user fee metrics, I took that as a very positive sign that they’re willing to consider changes to the way they do business that will allow the backlog to be affected.

I also took as a positive to her comments that biologics would be processed even without a “pathway” to get them done. I thought that was a very good signal from the FDA that at least the FDA is going to start working on reviewing biologic applications and we think that’s positive and certainly critical to Watson’s long-term success. I actually hope that translates over to more difficult products like the Lovenoxs and other products that are out there.

Gregg Gilbert – Banc of America/Merrill Lynch

Thank you, Paul.

Operator

Your next question comes from Tim Chang [ph] with CRT Capital.

Tim Chang – CRT Capital

Hi, Paul. I had a question about just the generic oral contraceptive line. It seems like it’s been ramping over the last couple quarters. Is this $90 million to $95 million per quarter run rate, is that a sustainable number or do you think you’ll actually grow that number in 2010?

Paul Bisaro

Tim, I think that’s a sustainable number. It’s kind of the range we sort of set for ourselves for 2010. We know that there was going to be some fluctuations in this sector because of additional competition hitting at some point in the OC arena, at least for some products. But we also anticipate launching some additional OCs ourselves. So we think the offset, the decline can be offset by sort of new products.

And as you point out we’ve seen some good results with our current OC line, particularly, our new products, Azurett and Next Choice.

Tim Chang – CRT Capital

Just a quick follow-up, Paul. On Ferrlecit, how do you sort of view that market when it goes generic? Do you think it will be a very competitive launch? Do you think it will be a very quick ramp of that product and how much resources are you going to put behind it?

Paul Bisaro

The competitive nature of that area will be sort of determined by how many products get approved either of (inaudible) generic or Ferrlecit generic. All I can do is comment on sort of our application or the GeneraMedix application. We do expect approval in the first half and we do expect to launch the product in the first half. We will be putting our resources behind it that we use to sell Ferrlecit for 15 years. And we have good relationships within the nephrology community and we’re going to put those relationships to work. It’s not our intention to compete necessarily on price. We’re going to provide a new product that has some benefits over the older Ferrlecit product, principally because vial is opposed to an anti, so I think we’ve got some built in advantages as we look out to the launch of generic Ferrlecit.

Tim Chang – CRT Capital

Now, Paul, how many sales people do you have left on the iron side of the business?

Paul Bisaro

We don’t actually think about it that way anymore, Tim. What we’ve done is we’ve restructured our sales force to focus on sort of a district by district basis, where within each district there are representatives who handle urology, representatives who handle female health and there’s representatives who focus on the clinic sale, oncology, nephrology, hospital sales and the like. Those people, we usually have one or two per district depending on how concentrated within that district, there is these clinics exist so, we don’t really think about it anymore as a nephrology group with 70 representatives. We think about representatives who call on institutions, one or two per district.

Tim Chang – CRT Capital

Okay, great. Thanks, Paul.

Operator

Your next question comes from Marc Goodman with UBS.

Marc Goodman – UBS

Paul, can you give us any flavor for the latest interactions with the FDA for Concerta?

Paul Bisaro

Just to bring everybody up to speed, I guess, about three weeks ago, the appeal was heard and since it is an appeal at the circuit level we expect to get a decision relatively short order, maybe three months or four months. And if that goes our way then certainly we hope to start shaking things loose with the FDA.

Marc Goodman – UBS

The FDA, like, tell you before because you had a ruling last May or whenever it was. I would have thought that was enough to shake them.

Paul Bisaro

They have, it is our understanding that, and I think what I said is we have asked them for final approval so we know it’s working its way through the system. It is an extended release product so there’s some issues there, there’s a Citizen Petition that has to be dealt with so we’ve asked them to deal with that. We’ve also provided them some suggestions about what we think about that Citizen’s Petition with respect to our product.

And as many of you probably know we’ve started to do some additional work around the product in the event that they have additional questions so we’re trying to prepare ourselves to deal with anything that the FDA has on the plate. We’ve not included Concerta in our numbers for 2010, but I also don’t think it’s an impossibility that we would have some contribution from Concerta in 2010.

Marc Goodman – UBS

The last month or so, has there been any reason that the FDA, anything from them that gives you a sense that you’re moving forward on this?

Paul Bisaro

No, not specifically, no.

Marc Goodman – UBS

Not specifically? And what are the first-to-file type opportunities would you point us to keep an eye on for the next year, year and a half, two years, something like that?

Paul Bisaro

I think our list of first-to-file opportunities has grown and will be growing. A number of applications are still pending that haven’t been accepted for filing yet but could result in some pretty positive first-to-file opportunities. We certainly like Lidoderm. That’s a nice one. We’ve got Seasonique, we’ve got other, we destinies the Xopenox product of course, thorva statin [ph] product in 2011, and we’ve got a number of products that I think give us some real traction in 2011 and 2012 and assuming we are still able to discuss the possibility of settlements, we could see some of those come out through 2010 and 2012.

Marc Goodman – UBS

One other question on the international business that you’ve acquired here, what countries do you feel like you have critical mass and what countries do you not have critical mass but you definitely want to have critical mass?

Paul Bisaro

I think we’re very strong and pleased with where we stand in Canada, UK, France, Australia. I think there’s opportunities for us to continue to grow in other markets, perhaps South Africa, Germany and the Scandinavian markets as well. We’ve got some pretty exciting things going on there. I also think we’re interested in looking at some of the areas in Latin America.

We’ve got an operation in Brazil that we want to figure out how we’re going to grow that operation and business. That could then lead to other opportunities in the region. We also are interested in continuing to look at our Chinese operation. We’ve got about a little over 100 sales representatives on the ground in China and we’d like to find a way to grow that business as well. That could lead to other opportunities throughout Asia including South Korea and Japan, but again, Australia and New Zealand being the key down there sort of leading the way for us.

Marc Goodman – UBS

Thanks.

Operator

Your next question comes from Ken Cacciatore with Cowen and Company.

Ken Cacciatore – Cowen and Company

Thanks, guys. Paul, you mentioned just peripherally Lovenox. I was wondering if you could give us your take on what’s going on there in terms of timing. And then also you mentioned you’re getting more confident about generic Ferrlecit. Just trying to understand why that confidence is there. Is it a right filing, you’re indicating filings are taking over 27 months. Is it just very, very ripe or is something kind of moved with your old Citizen Petition and things like that?

Paul Bisaro

Well, I think the filing has been there a long time and it’s now ripe for approval. We sort of know through contacts with the agency where it stands and we’re pretty comfortable we should be able to get the product approved in the first half. So it’s really timing and length of stay and where it’s at in the queue. So from that perspective we’re happy about that. Regarding Lovenox, Ken, I don’t really have enough insight to give you any valuable read on Lovenox. As you know our partner, Amphastar is the one who deals directly with the agency and we don’t really participate in those conversations, so we don’t have the sort of direct hands-on knowledge. I think others like Momenta, Teva have probably more direct knowledge.

Ken Cacciatore – Cowen and Company

They are not ramping you up for a launch, I guess, is that the best way to phrase it?

Paul Bisaro

I would say that’s probably fair.

Ken Cacciatore – Cowen and Company

And also just on the Eden Biodesign and just in general for biologics, you now have the asset, but can you give us a sense of how much it costs to bring one of these products through, what likely will be or maybe you can give an opinion on the clinical studies? We’ve heard as much as 20 million to 30 million so, how you look at that in context to your P&L these opportunities?

Paul Bisaro

I’ll pass that one over to Fred. Do you want to –

Fred Wilkinson

I think the 20 million to 30 million range is a reasonable range if you kind of start from scratch. What I think the advantage that we have with the Eden Biodesign Group is they currently have about a dozen active projects that they are working on for partners through their consultant and their CMO business.

I think that’s afforded us the opportunity to take a look at some of those as well as some of the discussions we’ve had with other folks and potentially pick up a couple of products that are a little farther advanced that will allow us to accelerate and jump little quicker into the biologics business but I think we’re looking at it as if it’s essentially almost a full BLA in the way we’re spending on the clinical side and the advantage again that Watson has there is the ability to use our Salt Lake City team to manage the clinical programs, very efficiently and effectively as we drive those for both FDA and rest of world.

Ken Cacciatore – Cowen and Company

Great, thanks guys.

Operator

Your next question comes from Elliot Wilbur with Needham & Company.

Paul Bisaro

Hi, Elliot

Elliot Wilbur – Needham & Company

Hey Paul, how are you?

Paul Bisaro

Good.

Elliot Wilbur – Needham & Company

Just want to return to the popular subject of timing of Cardizem LA, generic approval and metoprolol. Have there been pre-approval inspections related to these applications? Would that be required?

Paul Bisaro

No, there wouldn’t be necessarily pre-approvals; pre-approval inspections can be required for applications. There have been inspections of the Florida site over the past few months and to the extent that we’ve had any discussions with the agency about those, we felt we’ve dealt with any issues they’ve raised. In fact, the last inspection we had of the Florida site generated 483. So we think we’re in a good position from compliance perspective in Florida and we’re awaiting our approval.

Elliot Wilbur – Needham & Company

And then just with respect to your commentary on Micro-K, sounds like maybe you’re now allowing for the possibility you may see generic competition over the course of this year. Is that specifically related to anything coming out of KV or are you just allowing for the possibility there maybe someone sitting at the agency with an application?

Paul Bisaro

I think it’s probably to the extent that it’s going to be anybody in 2010, I suspect it would be KV. As far as we know, there’s no application that’s right for approval at this time. And I guess what we’ve done is just sort of prudently thought about a minimal amount of competition sort of late in the year for Micro-K. Maybe that won’t happen, but I think it’s just sort of prudent to do that.

Elliot Wilbur – Needham & Company

And just one last question. I didn’t hear anyone ask about this, but the famous WC3026 low-dose OC, I know that there was some compliance issues with respect to another application they have pending and wasn’t disclosed whether or not this particular product is coming from the same facility, but do you still have the same degree of confidence in terms of the launch timing of that product that you did back at the Analyst day.

Fred Wilkinson

Yes, Elliott, we do. We don’t see any major issues. We’ve been in contact with Chilcott on the subject and we don’t see any major concerns there.

In fact, we do expect the product to be approved in a reasonable time schedule.

Elliot Wilbur – Needham & Company

All right, thank you.

Operator

Your next question comes from Ronny Gal with Bernstein.

Ronny Gal – Bernstein

Good morning. Thank you for taking my questions. The first one is for Fred. Fred, did I hear you right? You said it’s about $30 million per product to bring a biological to the market from essentially standstill because that’s a lot lower than other figures we’ve been hearing.

Fred Wilkinson

I think it depends on the product, the number of indications and the size of the clinical file. I think we’ve been working with a number in the $20 million to $40 million range if you were to start from scratch. Our attention is really not to start any projects from scratch though. We think that these are through partnerships or through development already ongoing with the Eden Group we’ll be picking these things up somewhere midstream.

Ronny Gal – Bernstein

Right. And that includes antibodies and so forth just in terms of conceptually that kind of a price range?

Fred Wilkinson

Yes, the Eden Group is capable of doing just about any sell back ties, so it would include both monoclonals as well as any of the other forms of biologics.

Ronny Gal – Bernstein

And second, Paul, when you think about OGD, I m sure you’ve interacted with them on this issue of clinical trial when it came to Lidoderm, but can you speak more broadly about OGD and their approach to more of a efficacy end point or safety end point clinical trial for products? Are they ramping up their capabilities? And how should we think about the requirement for complex oral solids going forward?

Paul Bisaro

As far as I know, OGD isn’t ramping up their clinical capabilities. I would suspect they’d have to be going over to the new drug division to handle that. What the commissioner did say at GPhA was that they were willing to begin the process of looking at biologic applications even though there was no specific pathway. I guess your last question was sort of complex small molecule products like extended release and the like.

Ronny Gal – Bernstein

Yes.

Paul Bisaro

I think the FDA is working toward finding or developing a process or procedure that they want companies to follow. In fact, probably developing a guidance on the topic, in which case we will follow those, but in the meantime, those of us who have pending applications for these kinds of products are trying to, if you will, guess at what they might want in trying to do some preparatory work ahead of time so that if they come back and say, look, we sort of changed our mind, we want you to do this, this and this, we’ve got most of that work completed, so we can give them the data right away and not slow down any longer than necessary the application process.

Ronny Gal – Bernstein

Great, thank you.

Al Paonessa

Next question. Yes, Arnika, we will take our last question.

Operator

Your final question comes from Michael Tong with Wells Fargo.

Michael Tong – Wells Fargo

Hi, good morning, Paul. Just a couple of quick follow-up questions. Your commentary about your quarterly EPS progression had more to do with kind of sort of the revenue flow so is it fair to assume that your expenses are relatively stable across the quarters in 2010?

Paul Bisaro

Yes, I think that’s fair.

Michael Tong – Wells Fargo

Okay. And then secondly, you also mentioned that currency has an effect on your international revenue, obviously. So to what degree are you naturally hedged in that regard?

Todd Joyce

Well, at this point, we don’t have much in the way of hedges. There is transactions between the European operations and the U.S., which will result in some favorable impact to offset the decline in foreign exchange rates, but we have minimal hedges in place at this point.

Michael Tong – Wells Fargo

And would you contemplate synthetic hedges then?

Todd Joyce

Yes, we would.

Michael Tong – Wells Fargo

Thank you.

Al Paonessa

Great. Arnika, we’ll conclude today’s call. Thank you, everyone, for participating, and we look forward to following up with you shortly.

Paul Bisaro

Thanks, everybody.

Operator

This concludes today’s Conference Call. You may now disconnect.

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Source: Watson Pharmaceuticals, Inc. Q4 2009 Earnings Call Transcript
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