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Executives

R. Joyce - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Corporate Controller and Treasurer

Paul Bisaro - Chief Executive Officer, President and Director

Patricia Eisenhaur - Vice President of Investor Relations & Corporate Communications

Albert Paonessa - Chief Operating Officer of Distribution Division and Executive Vice President of Distribution Division

Analysts

John Boris - Citigroup Inc

Richard Silver - Barclays Capital

Ronny Gal - Sanford C. Bernstein & Co., Inc.

Timothy Chiang - CRT Capital Group LLC

Randall Stanicky - Goldman Sachs Group Inc.

David Amsellem - Piper Jaffray Companies

Christopher Schott - JP Morgan Chase & Co

David Buck - Buckingham Research

Gregory Gilbert - BofA Merrill Lynch

Marc Goodman - UBS Investment Bank

Michael Tong - Wells Fargo Securities, LLC

Ken Cacciatore - Cowen and Company, LLC

Watson Pharmaceuticals (WPI) Q1 2010 Earnings Call May 10, 2010 8:30 AM ET

Operator

Good morning. My name is Therese, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson Pharmaceuticals First Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Patty Eisenhower, Vice President of Investor Relations and Corporate Communications. You may begin, Patty.

Patricia Eisenhaur

Thank you, Therese, and good morning, everyone. I'd like to welcome you to Watson's first quarter 2010 Earnings Conference Call.

Earlier this morning Watson issued a press release reporting its earnings for the first quarter 2010. The press release is available on our website 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 website after the call's conclusion.

With us on today’s call is Paul Bisaro, our President and CEO, who will provide an overview of the first quarter, including highlights on the performance of our Global Generics, Global Brands and Distribution business segments; Todd Joyce, our Chief Financial Officer, will then provide some additional details of our financial results for the quarter. Paul will conclude our presentation with our updated outlook for 2010. We’ll then open the call up for questions and answers.

Also on the call and available during the Q&A, are Tom Russillo, Executive Vice President of our Global Generics Division; Fred Wilkinson, Executive VP of Global Brands; Bob Stewart, Senior Vice President of Global Operations; 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 expressed written consent. I’d also like to remind you that 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 the 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 period ended December 31, 2009.

With that, I'll turn the call over to Paul.

Paul Bisaro

Thank you, Patty, and good morning, everyone, and thank you, for joining us today. We began 2010 with an exceptionally strong performance across all of our businesses, and we entered into the second quarter with a great deal of positive momentum. Our results also reflect the first full quarter contributions from our newly acquired international businesses.

Net revenue for the first quarter increased 28% to $857 million. Adjusted cash net income for the quarter increased 25% to $100 million or $0.81 per share, and adjusted EBITDA for the first quarter increased 26% to $199 million. Additionally, cash flow from operations was $112 million. We used our strong cash flow in the quarter to reduce our outstanding debt by $220 million and also to increase our investment in Biologics. We finished the quarter with $182 million in cash and investments on hand. And we made considerable progress on our global objectives, capitalized on favorable industry dynamics and certainly exceeded our financial expectations. With this strong momentum, we are increasing our forecast for 2010, raising adjusted cash EPS to between $3.25 and $3.45 and adjusted EBITDA to between $800 million and $850 million.

Now I'd like to run through some of the year-to-date highlights. In our Global Generics business, we received FDA approval for several key generic products. In the U.S., this includes Diltiazem LA, which we launched in March and the 100-milligram and 200-milligram doses of metoprolol ER, which we launched in the 3rd week of April, allowing us to now compete in all dosage forms of that product, x U.S. we received approval for Clopidogrel in Australia, and the product was recently launched.

Even with the challenges in many markets, we continue to expect to achieve double-digit year-over-year revenue growth in Canada, France and Australia this year.

In Global Generics R&D, we have announced 10 new patent challenges to date, including the blockbuster Lidoderm and more recently, Rapamune. In our Global Brand business we received FDA approval for our six-month formulation of TRELSTAR, the first and only intramuscular GnRH agonist available for the palliative treatment of advanced prostate cancer that can be stored at room temperature. We began shipping this product ahead of schedule on April 15.

We completed a number of brand business development initiatives discussed with you at our Analyst Day, adding significant breadth to our women's health franchise in our Biologics capabilities, which I'll summarize in a few moments.

Since the close of the Arrow acquisition, integration has been going according to plan. Our Global Operations team has been actively reviewing all our supply chain capabilities. We have concluded that excess capacity at other facilities notably, Malta and India, is adequate to absorb current product from our Toronto manufacturing facility, as well as projected manufacturing needs. Additionally, these sites can do so in a more favorable cost. As a result, we announced to our Toronto-based employees a few weeks ago, that we plan to close our Toronto [audio gap] facility by the end of 2011. We expect to realize significant operating cost savings, as well as lower overall cost of goods related to this initiative.

I'd like to also spend a moment updating you on healthcare reform, which is being phased in over several years and will influence our U.S. brands and Generic businesses in different ways and at different stages during the implementation. Near-term industry changes resulting from healthcare reform, include increases in Medicaid rebates for both brand and generic products and the addition of rebates for patients in Medicare managed care plans or dual eligibles. Beginning next year, our Brand division will began funding its portion of the Medicare donut hole and will be contributing the excise tax based on market share of our NDAs. Longer term on the Generic side, we anticipate that there will be an overall increase in utilization of Generic Pharmaceuticals due to increases in total number of Americans now having access to prescription drug benefits. While there are still some questions on how healthcare reform will be implemented, we have factored these changes into our revised forecast.

Generally speaking, the impact to our business is relatively modest and is far outweighed by growth that we’re seeing in our Generic businesses and overall pricing stability.

I would now like to provide you with some details on our three business segments. Global Generics net revenues were $544 million, an increase of 35% and include x U.S. net product sales of $106 million. Sales on our Oral Contraceptive business were $90 million in the first quarter, and our U.S. Generics over performance in the quarter was driven by three factors; strong sales of extended-release products, higher volumes and increased efficiencies, which are contributing to lower overall product costs. We also experienced lower generic price erosion in the U.S. than originally participated, which also provided some upside.

Internationally, we experienced pricing pressure in some of our overseas markets such as France, the U.K. and Canada. There are changing dynamics within these markets that we will continue to watch closely. While these actions are happening swifter than expected, we have been anticipating these changes as governments look to control their healthcare expenditures. Ultimately, we anticipate increased utilization of Generics overall and based on our current market share, product offerings and pipeline, we believe that we can continue to grow these markets over the long term.

During the quarter, we increased our investment in Generic R&D by 40% to $42 million. We concluded the quarter with over 100 ANDAs on file with the U.S. FDA and with 77 Paragraph IV challenges and more than 900 applications pending outside of the U.S. Close to half of the U.S. Paragraph IV opportunities are first-to-file or shared exclusivity opportunities.

Moving to our Global Brands division, revenue was $91 million, down $21 million as anticipated in the first quarter. This decrease reflects the planned lost of Ferrlecit, which was returned to Santa Fe at the end of 2009 and was offset somewhat by the addition of our new products RAPAFLO and Gelnique. More recently, we are experiencing increased prescription transfer for RAPAFLO as result of Flomax going generic in March and also seeing growth in Gelnique due to increased promotion and reach by our sales force. We expect both products to be important contributors to our Global Brands business over the longer term.

Additionally, we continue to expect FDA approval of the generic version of Ferrlecit in the first half of 2010, recall that we signed a licensing agreement with GeneraMedix to market this product upon FDA approval, and we will be promoting it within our Brand division.

Since January, we have taken significant steps to expand our Brand business. We announced an agreement with HRA to become the commercial partner for a novel next generation emergency contraceptive, which is currently marketed in the U.K. as ellaOne. The FDA advisory committee on reproductive health will be meeting on June 17 to discuss this product. We also announced a licensing agreement with the Population Council to commercialize an investigational vaginal contraceptive ring in the U.S., Canada and Mexico. The ring is currently in Phase III clinical development for contraceptive use for up to one year.

We also announced an agreement during the quarter to acquire the exclusive U.S. rights to the Colombia’s bioadhesive progesterone gel products currently marketed under the trade names CRINONE and Prochieve, for the indications of infertility and secondary amenorrhea. Under the agreement, we will also collaborate on the ongoing Phase III development program toward a new indication for the prevention of preterm birth and women with a short cervix, as well as global development program for a second generation product for this indication. Of course this transaction is still subject to certain closing conditions and we continue to work with Columbia to get those conditions satisfied.

Lastly, we purchased the remaining 64% of Eden Biodesign for the development and commercialization of Biologics. Since the acquisition, we have approved several contract manufacturing projects designed to increase the near-term third-party revenue, while we simultaneously worked to implement internal R&D projects for Watson’s own Biologics development efforts.

Turning now to our Distribution business, and it had revenues of $221 million, an increase of 44%. Large contributors to ANDAs growth were new generic third party product launches notably generic versions of Aldara and Flomax, as well as additional brand products sales. With that, and I'll turn the call over to Todd to take us through some of the financials. Todd?

R. Joyce

The solid financial performance in the first quarter has us off to a good start for 2010. We experienced strong earnings in cash flow. Our liquidity improved with the sale of our interest in Scinopharm, and we used the proceeds and excess operating cash flow to reduce revolver borrowings. Our strong balance sheet has us well-positioned to capitalize on strategic investment opportunities, in support of our long-term growth objectives.

I will now review our financial performance on a consolidated and divisional basis, which includes a full quarter of our new Global business. For the first quarter of 2010, consolidated net revenues was $857 million, an increase of 28% over the prior year period. Net revenue for our Generic division was $544 million, up 35% on a year-over-year basis. This includes x U.S. product sales of $106 million, x U.S. sales were lower than expected due to pricing pressure in several key markets.

Foreign exchange also had some impact on our top line results, although the impact on net earnings was minimal. U.S. generic revenues and margins remain strong due to better-than-expected pricing and higher sales of our extended-release products, including the metoprolol ER and the recently launched Diltiazem LA. Sales of oral contraceptives were $90 million in the first quarter, up slightly on a year-over-year basis. Adjusted gross margin for the Generic division was 50.2%, up 3.5 percentage points on a sequential basis and up 7.8 percentage points on a year-over-year basis. The year-over-year increase in adjusted gross margin reflects higher sales of extended-released products at favorable margins, better-than-expected pricing for our base portfolio and lower year-over-year unit manufacturing costs, as a result of cost savings from our Global Supply Chain Initiative and slightly higher unit production.

We expect Generic gross margins to remain strong for the remainder of the year, given the recent launch of two new strengths of metoprolol and ongoing cost savings from our Global Supply Chain Initiative.

Moving to the Brand division, net revenue was $91 million, down 18% from the prior year period. Product sales were $72 million, down 26% year-over-year. The decrease reflects the loss of Ferrlecit, which was partially offset by sales of RAPAFLO and Gelnique, and increased sales of ANDRODERM. Brand other revenue was $19 million for the quarter, an increase of 36% over last year due primarily to higher co-promote revenue from Androgel and Femring. Brand adjusted gross margin was 73%, down from 78.4% in the first quarter of last year, reflecting the loss of Ferrlecit. Finally net revenue from our Distribution segment was $221 million, up 44% or $68 million from the prior year period due to higher third-party product launches and higher brand sales.

Distribution segment, adjusted gross margin for the quarter was 13.1%, down from 18% last year due to product mix, which includes the impact of higher brand sales. Gross margin in the first quarter of last year was favorably impacted by marketplace shortages on certain products.

Turning now to GAAP operating expenses. Consolidated R&D for the first quarter was $59.5 million, up 41% compared to the prior year period due to increased investment in both our Global Generic and Brand divisions. Generic R&D increased due to higher x U.S. development spending. The increased Brand R&D investment was due to product development and licensing and higher clinical spending.

For the full year 2010, we continue to expect total R&D spending in the range of $240 million to $260 million. We are currently trending toward the higher end of this range. SG&A for the first quarter was $152 million, an increase of $17 million over the prior year period. The current year period includes a $3 million litigation settlement, while the prior year includes $19 million in litigation charges. For 2010, we still expect our SG&A to be in the range of $630 million to $680 million. However, we now expect to be at the lower end of this range.

Amortization for the first quarter was $39 million, up from $22 million last year reflecting higher amortization as a result of the Arrow acquisition. For 2010, we expect amortization expense to be roughly $170 million. Our GAAP tax rate in the first quarter was 34.5%, down from 38.6% in the first quarter of last year, due primarily to a tax benefit associated with the sale of our investment in a foreign subsidiary. For 2010, we expect the GAAP effective tax rate to be roughly 39%.

On an adjusted cash basis, we still expect our 2010 effective tax rate to be in the range of 36% to 38%. On an adjusted cash basis, which excludes amortization, earnings for the first quarter was $0.81 per share, up 17% from $0.69 per share in the prior year quarter. Also excluded from the GAAP results for the adjusted cash basis reporting is, $26 million in acquisition and licensing charges, $5.2 million in costs associated with our Global Supply Chain Initiative and $3 million legal settlement.

Acquisition and licensing-related charges for the quarter include the amortization of an inventory step-up of $11.8 million, preferred stock accretion of $3.7 million, a licensing payment of $3 million and $2.9 million fair market value adjustment for our Atorvastatin contingent liability.

GAAP EPS for the quarter was $0.57. Our adjusted EBITDA for the first quarter was $199 million, up 26% compared with the prior year period. Cash flow from operations for the first quarter was $112 million. Our strong operating cash flow and the proceeds from the sale of our Scinopharm investment were used to repay $223 million of outstanding borrowings. We ended the quarter with just under $1.25 billion of debt and $182 million in cash and marketable securities. We have only $50 million outstanding on our revolver, leaving $450 million of undrawn capacity. At the end of the quarter, our debt-to-adjusted EBITDA ratio was 1.7x, and our debt-to-capital ratio improved to 28.6% from 32.5% at year end.

In summary, we're very pleased with the start of the year. We continue to execute and grow the business. Our strong balance sheet provides us with a great deal of flexibility to pursue investment opportunities, both internally through product development and externally as opportunities arise.

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. Our remainder of 2010 forecast includes a couple of things. First, the forecasted numbers, which I will discuss will include, as I said before, the impact of the new health care reform legislation. And as always, our forecasted numbers do not include any significant potential upside from patent challenges.

Our estimate for full year net revenue is now approximately $3.55 billion. We expect Generic revenue to be between $2.25 billion and $2.4 billion, with international revenues now being between $500 million to $550 million. These assumptions, assume in the U.S., some competition on generic Toprol in the fourth quarter and no competition on generic Micro-K. They also take into account revenue reductions in some international markets, by Canada and France.

On the Brand side of the business, we still expect net revenues to be between $440 million and $480 million for the year. This assumption continues to include a first half launch of the value brand of Ferrlecit.

In the ANDA Distribution business we now anticipate revenue to be up and to be between $730 million and $780 million. Based on all of these assumptions, plus current information we have available to us, we now expect adjusted EBITDA of $800 million to $850 million, and adjusted cash EPS in the range of $3.25 to $3.45.

In summary, we had a very strong first quarter. We experienced more than 25% growth in revenue, adjusted cash net income and adjusted EBITDA. We are launching new generic and brand products in the U.S. to support our continued growth, and we are focused on growing our key international markets. We are continuing to drive efficiencies throughout our Global Operations network. We continue to invest in a focused and harmonized global R&D pipeline, we continue to invest in business development and clinical development to expand our brand portfolio, and we continue to capitalize opportunities in the marketplace.

With all of this, I believe we have strong momentum built up, and I'm very confident we'll be able to achieve the commitments we made in value [ph] creation for our shareholders. With that, I'll turn it back to Patty to open up for questions.

Patricia Eisenhaur

Thank you, Paul. Therese, we can get underway with the Q&A if you can provide instructions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Michael Tong with Wells Fargo.

Michael Tong - Wells Fargo Securities, LLC

Good morning, Paul and congratulations on a good quarter. Just a couple of things to think about; number one, I know previously you've talked about EPS being more second half weighted and certainly given your guidance, and which you printed in Q1, that seems to be the case. But is it a little flatter now versus what you had expected before?

Paul Bisaro

No we still think it'd be weighted more to the second half. Although you're right, we probably would see more flattish for the second quarter and then probably up in the third and fourth quarter.

Michael Tong - Wells Fargo Securities, LLC

And then just your thoughts on cash balance given you're slightly under $200 million at the end of the first quarter, what do you think about in terms of flexibility were you to add incrementally to your international footprint?

Paul Bisaro

Well, Michael, as we've been saying, we will continue to look for opportunistic acquisitions to fill out our international footprint. And given the balance sheet we have now, we certainly have the flexibility to do that. Of course, it's opportunistic. So if something comes up, we will, of course, jump on it, but if not, what we will continue to do is pay off probably the remaining portion of the revolver, that gives us a free $500 million of revolver capability. And we'll continue to grow cash until we need to pay off the remaining sections of the debt. I think the debt sort of works out as a payment in the '11 to '12 and then we have the notes five years out. We are in very good shape to be able to take advantage of whatever presents itself, Michael.

Operator

Your next question comes from David Buck with Buckingham Research.

David Buck - Buckingham Research

First on the International business and the lower guidance, you were looking I guess at $600 million in International now its $500 million to $550 million. Paul, could you talk a little about the opportunity to reduce costs or what you're doing to offset that revenue drop and still be able to maintain guidance? And just as a reminder, what’s the assumption now for pricing in the U.S. market and how confident are you in those numbers and that things will stay the same?

Paul Bisaro

On the U.S. cost and price increase, we saw lower-than-anticipated price reductions in the first quarter, although we continue to forecast for the remainder of the year in the high single-digits arena for U.S. pricing. On the International revenue side, we're just taking into account the new realities that we see in Canada and France and the U.K., frankly, as pricing has dropped. With the changes though, that you see in many of those markets, we are not necessarily seeing any impact, all that much of an impact, on margin and profitability. The revenue’s being affected but not so much the profit because of the rebates or whatever the case may be. I think we're in still a pretty good position. We also in all of those markets are launching significant new products throughout the year. In Canada, for example, we expect to be launching LIPITOR sometime mid-year and so, we expect to see that make up the difference on the margin and profitability line, although with the revenue being somewhat funded by the changes that are taking place at the governmental level.

Operator

Your next question comes from Tim Chiang with CRT Capital.

Timothy Chiang - CRT Capital Group LLC

Paul, can you comment really briefly on how the Toprol XL launch has gone for you so far? Did you get a material benefit in the quarter? Also could you talk a little bit more about Canada? I know you kind of hinted that there is some pricing pressure going on there. How much of an impact does that really have on your business?

Paul Bisaro

On the Toprol, there was an impact on the quarter, a significant impact on the quarter on the 100 and 200 launch. We do expect that of course to continue, the marketplace is falling out quite nicely for us. We're pleased with the way things have been going, we sort of anticipate it to look a lot like the 25-milligram and 50-milligram metoprolol. I think that’s what people should look for, for the rest of the year with the Toprol. On Canada, I think that the issue here is, of course, you may have heard that the Ontario Provincial Government reduced the price of generic pharmaceuticals from 50% of brand price to 25%. That has not yet been implemented, although we do expect it to be implemented this year. The implications of that of course are to drive down the revenue in Canada because once Ontario does it, Québec follows in relatively short order, and we do expect the other provinces to follow along. Same sort of thing happened in France, where there was a reduction in overall generic reimbursement. Again, it affected more of the top line than the bottom line but we will see that on the revenue impact going forward. And I think Todd mentioned there’s sort of the weakening of the euro has also sort of impacted overall revenue projections out of rest of Europe and that's a trend that everybody’s sort of seeing.

Timothy Chiang - CRT Capital Group LLC

How meaningful do you think this value brand of Ferrlecit’s going to be, once you get the approval?

Paul Bisaro

Well, I think it’ll be a nice to have, it’ll certainly help the Brand business achieve its revenue projections. Although, it is certainly not a product that will have the margin that we saw when we had Ferrlecit. So I think people need to keep that in mind, is a product that is contract manufactured for us, and it is one that we pay a royalty on, back to GeneraMedix. So taking all those things into consideration, people have to mindful of the fact that it won't be as significant of a contributor as Ferrlecit was.

Operator

Your next question comes from Ronny Gal with Bernstein.

Ronny Gal - Sanford C. Bernstein & Co., Inc.

First [ph] on a couple of the previous comments, Paul you got on thinking forward if you think about Europe in general and you [ph] and you look at the balance of volume versus price reductions, what do you think is kind of like three- to five-year trajectory for this market and revenue are we looking at like a three year 5% borrow or do you think like a double digit growth in revenue over the next five years is realistic? And second about the U.S. market, I’ve been struggling to understand the A&P provision in the healthcare reform law, can you just talk to us a little bit about that and what could potentially be the implications for you and your colleagues in the generic industry?

Paul Bisaro

I would say looking at the European markets from a Watson perspective, as we evaluate our push into, continued push into many of the international markets, we evaluate a couple of things. Our current market share, our current portfolio products that we anticipate launching in those markets and what we think generic substitution is going to look like in those markets on a going forward basis. If you look at France, for example, I believe the last quoted number I heard was the generic substitution in France is still in the 20% and 25% range. And it’s our expectation that, that will have to get higher. And as that goes higher it bodes well for companies like Watson who have a strong pipeline of products, have a good sales force on the ground in France, and I think with that we can offset losses in revenue and profitability because of price declines by literally doing more volume and having more substitution in those markets. So that's kind of the way we look at it. I have not done, I don’t think we’ve done the analysis to kind of figure out what we think the three to five year projected growth rates are. I'm sure those kinds of analysis are out there but we haven't done that, we're looking more from a Watson perspective. So I think we’re in pretty good position across Europe to take advantage of that opportunity. Your question on AMP in the U.S. is a complicated one. We were just at NACDS and that was a conversation topic of intense conversation at NACDS between many of the participants there. And, of course, no one knows what's going to happen the first day AMP gets published for a particular product there will certainly be people who will look at their pricing and look at AMP and say well gee I'm in a pretty good spot, and there are other people who will look at AMP and say well I’m above AMP and so that can’t be good. So any time you have an average there is, by definition, going to be people above and people below. There's going to be some struggling with pricing in various segments of the U.S. market as everybody sort to sorts out where they fall and where everything falls. Also, it's not 100% clear to me that the definitions of AMP will be consistently applied across every manufacturer factor, so I think it's going to take some time to sort all that out. As I said, our conversations at NACDS indicate that everybody’s sort of in the same boat. We're going to just have to wait and see what happens.

Ronny Gal - Sanford C. Bernstein & Co., Inc.

Is it, essentially, when people begin to talk about ways to externalize some of the cost savings, that is doing more mail-order, if everybody will do mail order, or will there be some other way to provide services to the buyers other than a direct reduction to price?

Paul Bisaro

That is one of the things that people are talking about, you're right. Banners in stores, that like and the like.

Operator

Your next question comes from Chris Schott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co

First question, just regarding gross margins in your Generic business I know you've got a lot of push and pulls this year with Arrow being added in and the continued production shift to go up. When you say gross margins could remain strong, is the 50% range we saw this quarter sustainable or could we even see improvement off of that given the additional Toprol doses and the Cardizem launch? That's my first question. Second question, can you also help us understand a little bit better what's going to be driving the step up in SG&A as the year progresses? Seems like if you can hit the low end of your guidance range is requires a pretty significant step-up in quarterly spend from here?

Paul Bisaro

I'll start with maybe the easier question SG&A. That'll be the step up in brand activities around the launch of both value brand of Ferrlecit, as well as the CRINONE product. So that's what drives that. And that will be back-weighted to the second half the year as the products become available to us. If things get delayed then SG&A will be affected accordingly because we obviously won't affect the spend until we need to. On – I think your second question was U.S. generic markets – on margins I mean, I think we anticipate to stay at the high 40s, 50-ish range, being driven by two major factors. One is our extended release portfolio of products and some of the products we have coming on, which we expect to have reasonably substantial margins on, as well as the continued ability to drive costs out of our system, our operating system and that will continue. So I don't think you'll see us get much above that 50% range but we should stay fairly stable in that range right now, that's what we anticipate.

Operator

Our next question comes from Ken Cacciatore with Cowen and Co.

Ken Cacciatore - Cowen and Company, LLC

Question, Paul, on the bioequivalence meeting that you participated in with the remainder of the industry and wondering if you could speak specific to Concerta. If there's any interaction in terms of issuing of guidelines for that product, if you could update us there? And then follow-up to a couple of the questions that you've gotten on the European line, understanding that the Arrow acquisition is so recent and new. But all of us are hearing, as I'm sure you're hearing and experiencing, the pricing cuts and the pricing issues, has there been at all a pause in your thinking? I know it's been thought to add to that footprint and as you continue to say add as something comes available but has there been any internal kind of consideration to going aggressively expanding there, maybe thinking more about taking some of those resources and putting them to brand. Or is it really no change, these pricing cuts are meaningless for us investors that are hearing it, this is just how the world is and we shouldn't be thinking that anything is changing over in Europe?

Paul Bisaro

On the bioequivalence piece for Concerta, we did participate in the Advisory Committee, it is our belief that the agency – well from the results of that, from the results of that Advisory Committee we understand the agency is thinking about modifying basically Partial AUC data and being able to come up with various time points prior to the eight-hour time point for measurement. Since that Advisory Committee has been completed, we did recalculate, we had much of this data. We did recalculate our results, and we have shared those with the agency and we're currently working with the agency on discussing those with them and attempting to show them, of course, that we satisfy the requirements that were discussed at the Advisory Committee. And we hope we can convince them of that. As you also know, there are other things we have to overcome in the Concerta matter. We did make a huge leap last quarter with the victory of the Appoa Court [ph]. We expect the mandate to issue relatively soon and once that happens, if Empax does have exclusivity, their exclusivity will begin to run. If they do not, we'll then, and we can work our way through the agency's issues around Partial AUC data, we could have a potential opportunity. But we continue to work with the agency on that activity and of course as things warrant, we'll provide updates. On the European question, we have, like everyone else, you do have to sort of step back, and you're right, take a pause and think about what's going to happen in these markets and what do we anticipate going forward. I anticipate, I think what we've concluded is that people -- countries can only drive so much cost savings through pharmaceuticals and at the end of the day, they have to recognize, and will ultimately recognize that their single best means of lowering healthcare costs is providing good, solid generic products to their citizens. And most of these countries have not achieved the penetration rates for generics yet that they should. And so from our view is that there is an opportunity to participate in these markets because there's got to be growth in use of generics. As long as the pricing stays above marginal cost, then we think it makes sense for us to participate. And so as we look at the opportunity, we still see an opportunity and a good opportunity for Watson. So we will continue to look for specific strategic investments within the European market. However, we also, as I said before, are looking in South America, looking in Asia-Pacific, where many of the emerging markets are presenting a slightly different dynamic, but one where we think the margins will obviously remain stronger and where penetration rates are in the low single-digit ranges. And again, we want to be at the front end of participating in those growth curves. And then you made the comment about committing more resources to the Brand business. We do commit a lot of resources to our Brand business and we'll continue to commit substantial resources to our Brand business and our Biologics business going forward. We happen to be lucky enough to have the resources to be able to do that with cash flow generation and some of the great products that we've had and our execution on getting those products to market. So I think we can -- we're very busy, but we can do all that stuff, so we're pretty excited about all the opportunities.

Operator

Your next question comes from Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank

Paul, can you give us an update on this Global Supply Initiative where we are in the process? How much more savings is there to be taken out and then will the charges end this year or are they going to continue on now that you're doing another plant closing and how much money are we going to save from that plant closing?

Paul Bisaro

Global Supply Chain Initiative is a continuing effort. It doesn't ever end. And particularly as we continue to acquire companies and facilities, we always have to continuously look at which facilities we have and how best to use them. The Toronto closure should generate at somewhere between $18 million to $20 million on yearly basis of savings. But we do expect to have closure costs in that $35 million to $45 million range to achieve those. But that's an ongoing cost of business and I would expect that would carry over into 2011. We'll continue to evaluate, as I said, at all of our facilities to make sure we're achieving the right cost structure. We can also see ourselves investing more in plant and equipment in cases like Malta and India frankly. Malta is a great facility, it probably needs to grow a bit, and we expect to spend some time money there this year, not a lot but some for CapEx. And we continue to look at India to see how we can continue to drive throughput. We're doing about 3 billion units yet this year in India, we're going try to get to the 5 billion to 6 billion range in India over the next year, couple years. And we think that will have a major impact on our going-forward margins, particularly as we start taking products from India into Europe, which we also expect to do. So I do think Global Supply Chain will continue.

Marc Goodman - UBS Investment Bank

And then just in the international markets you talked about the pricing, which we all see and know what's going on. Can you talk about market share a little bit in your key markets?

Paul Bisaro

Well in Canada I think we just moved from eight to seven and market share continues to grow in Canada. I think Canada will be helped dramatically by the launch of Atorvastatin this year. We're not quite sure how many competitors are going to be there. There's been talk about three to four to maybe as many as five competitors in Canada but of course, the fewer the competitors, the larger market share we should be able to current. So we're pleased about our growing share there. I think our share in the other markets in Europe will be affected more by our launches of new products, particularly products of which we manufacture either in Malta or in one of our other facilities. And as we can get costs in line and not have to license in as many products, we should be able to grow our market share in those markets. So I do continue to see, as we said earlier on, double-digit growth on a year-over-year basis on revenue in our major international markets.

Marc Goodman - UBS Investment Bank

Just on the Brands side, can you just tell us what's assumes for this year as far as launches? You've got the Ferrlecit product you mentioned, anything else for new products?

Paul Bisaro

Well it assumes just the Ferrlecit generic product launch. We already launched the TRELSTAR 6.

Operator

Your next question comes from John Boris with Citi.

John Boris - Citigroup Inc

You indicated, Paul, you expected competition in the fourth quarter on Toprol XL. I think Novartis indicated they weren't going to be in the market. Any thoughts on who that's going to be? Is it KV, Mylan?

Paul Bisaro

Well I haven't heard but – well, let me step back, on the KV front, I certainly don't know, all I know is what I've read in their – from their financial listings they indicated that the earliest that they would be back would be potentially in the fourth quarter. We have sort of assumed, for purposes of our assumptions, that it's not KV. Maybe it is but for our purposes we assumed it wasn't and Sandoz indicated publically that they would not be – they did not anticipate bringing metoprolol back in the fourth quarter. There are a couple of names we've heard whispered around with the product. At least at the moment I have not heard of Mylan before, but it could be. And we thought to be prudent we'd put at least one competitor in, in the fourth quarter, and we'll see what happens. I think the problem we all have right now anticipating competition is estimating when the FDA will complete it, an evaluation of any particular product, particularly extended release products and particularly metoprolol. Given our experience going through the agency with metoprolol, I think it is a unique experience to say the least. And it is not like a normal immediate release approval where you can count on a certain number of cycles and a certain timeline. Our experience with one that required us to get through the standard procedure and then have a re-review and then a yet again, a re-review by higher levels in the agency. So if everybody else has to go through that same process, I would anticipate – if they haven't anticipated having their timelines, I guess the point is, it's hard to know when they're going to be coming.

John Boris - Citigroup Inc

On generic Ferrlecit is there a PDUFA date or action date that you're aware of?

Paul Bisaro

No, it's an A-B rated generic so it doesn't have that.

John Boris - Citigroup Inc

On the 100 products that you indicated that you have, or about to register in throughout Europe, how should be thinking about the magnitude of those products going forward and the timing of the launch of those products?

Paul Bisaro

Let me just clarify that, John. The 100 products are what's pending at the FDA right now, over 100 applications. What we're doing is systematically going through our products that we currently sell in the U.S., the Watson products, looking through and also systematically going through the products we have filed at the FDA and going through the products that we have in development and looking to see which ones and what priority we're going to be filing them around the globe. That effort is underway and we will be filing products very soon in many markets and we've already begun filing products in Canada and even before the closure, or the acquisition of Arrow, began filing products in Europe and Canada. The impact, of course, will be dependent on the time of the review cycles. Canadian review cycles are up a bit from what they used to be, so I think they're about an 18-month cycle. European cycles are dependent on which country you're in, and it's a mutual recognition process that you go through. I would suspect that we'll begin to see real impact from these products probably not in 2010, probably at the earliest late 2011, but more likely 2012.

John Boris - Citigroup Inc

Just one for Todd, on the excise tax on Medicare Part D, is that going to be tax deductible or not?

R. Joyce

My understanding is it will not be tax-deductible.

Paul Bisaro

It's really not a tax I guess.

Operator

Your next question comes from Greg Gilbert with Bank of America - Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

Paul, a popular question you've gotten in one form or another, from quarter-to-quarter is about the strength of the base business. To what extent do you think that's tied to temporary factors that could be affected by certain companies coming back versus more sustainable structural changes in the market? This is a U.S. question first.

Paul Bisaro

It's hard to know. I think people have learned and I think we've all learned to be cautious about how we attack markets. And then I guess from a specific Watson perspective, I like our base business because the more complicated the product, the more likely it is you're going to be stable. And we have a lot of complicated products, we have DOCs and we have the extended-release products, and we're getting more extended-release products. And those products are difficult to manufacture, they're difficult to start from a dead stop on and you don't see people generating tons of inventory, trying to launch in and take 20% market share that they have to sort of build their way in. That tends to lead, as we've discussed in the past, to more stable markets. So I like our base business. I think it's going to remain stable over the long haul because of the way we structure ourselves. And I forgot one major factor, our patch business. Our patch business and gel business gives us a lot of strength on the bench, and we look forward to bringing as many of those products to market as we can. We've seen those markets remain very, very stable. So I like the base business.

Gregory Gilbert - BofA Merrill Lynch

So it sounds like you think predominantly this is product mix issue and that there really aren't psychological changes at the buyer level in terms of who to do business with, whether it's just a complex or commodity type of product?

Paul Bisaro

I would say this, about that. The first time in a long time at NACDS we heard people say, look we can't afford to have product shortages, simply can't. And there was at least a recognition, that supply chain was very critical to the decision-making process. Doesn't mean they're not going to look for lowest possible price but supply chain has become a critical matter for people. Big customers are going and doing their own audits of suppliers. And in some cases, are choosing not to do business with some customers. So it is -- that's the first time I've ever heard that happen. I mean, I think it's just a recognition of the fact that if they lose their supply of a generic, it is devastating to their bottom line.

Gregory Gilbert - BofA Merrill Lynch

My follow-up is on Europe, again maybe hard to answer with one bullet point here but if pricing in certain countries is cut before ideal penetration rates are even achieved, does that call into question the concept of branded generics and do those markets need to quickly evolve to more generic generic type of markets?

Paul Bisaro

Well, I think we've all said that this, I think the markets are continuing to evolve away from branded generics to generic generics, particularly European markets and there are some structural factors that are going to prevent them from achieving the penetration rates that we see here in the U.S. but once those structural factors are addressed in those markets, I would anticipate penetration rates to be achieved very, very quickly. Structural factors like not allowing chain drug stores, for example. That has an impact on the ability of penetration because each pharmacist and there's 300 pharmacies or 500 pharmacies across a particular region, each one gets to make their own buying choice. That leads to a branded generic market. If there are chains, like we see here in the U.S., CVS makes one decision and every pharmacy has that product and they drive the product. So there are structural things that will change in these markets ultimately and will lead to higher substitution rates.

Gregory Gilbert - BofA Merrill Lynch

One quick last one on distribution, was generic PROTONIX a material driver in the quarter and can you confirm that there's nothing left there for the remainder of the year in your distribution guidance, given Teva and Sun's announcements to stop shipping?

Paul Bisaro

Well Al, I'll hand that one to you.

Albert Paonessa

Yes, PROTONIX wasn't a driver in the first quarter, it was Aldara and Flomax like we mentioned earlier. We do have inventory on PROTONIX right now but we don't anticipate that there'll much more that we'll be getting the rest of the year. That could change, we don't know, but right now we're stocked with PROTONIX ourselves, and we'll see how the product plays out.

Operator

Your next question comes from David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray Companies

Quick one on the Brand business, you commented on the reimbursement landscape for Gelnique and RAPAFLO, any big formulary wins and talk about the portion of covered lives that have unrestricted access at this point and how that has changed over time?

Frederick Wilkinson

This is Fred Wilkinson. Obviously we've had a couple of evolutions happen in the Brand business, particularly around the RAPAFLO marketplace with Flomax going generic, the generic process taking place and then further competition arising. There have been significant changes in most of the plans, and we've been a beneficiary of a great many of those in either improving our position into a second-tier spot or reducing some of the blocks that were happening in our third-tier business. So right now we're experiencing some good solid growth with RAPAFLO, primarily because the managed-care landscape's kind of opened itself out. Gelnique was already actually in a fairly favorable position as these products are mostly reimbursed at the same level. So we experienced some second tier and many third tier but third tier was pretty well on an upper. So we feel like we're in a really solid position for both of the key products that we have and then with the increased promotional efforts that we're putting behind it in, starting the first of the year. We're seeing some good solid growth out of both of them.

David Amsellem - Piper Jaffray Companies

Just one more on the U.S. Generic business, looking at the 2011 and 2012. Just remind us other than LIPITOR being a big opportunity, can you talk about which and as you're particularly excited about that are first-to-file or shared exclusivity opportunities and how should we be thinking about those that you're particularly enthusiastic about?

Paul Bisaro

Well there's a number of them, some of which are disclosed and some of them which are not and obviously, we'll just stay away from the ones that we've not disclosed. You mentioned LIPITOR in 2011. I would remind everybody that we also have in XOPENEX in2012, where we expect to launch the product on a date certain with a minimum of six-month exclusivity. We don't even expect an authorized generic in 2012 for that. Also, we have products like Concerta that we haven't factored into our guidance. But the way the landscape is now working, I would say it's now a question of not if, but when. And so we have to factor that in and we haven't included in the 2010 guidance but by the time we get to 2011 we might have to think about it, whether we put it in or not. Those kinds of product opportunities, there are other products in our pipeline like Antora and our patent challenge pipeline, of course the Lidoderm product, while it's still early it has great potential we think. And a number of other patent challenges out there that we think we can help bring to market. As you see by the numbers we have over 100 applications, over 75 Paragraph IV challenges, everything is Paragraph IV challenge now. But it's a question of being first-to-file and we've got our share of first-to-files that I think we can capitalize on.

Operator

Our next question comes from Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs Group Inc.

Number one, would you guys or Al, maybe, be able to characterize how many months of PROTONIX are in the channel?

Albert Paonessa

No, I wouldn't tell you.

Randall Stanicky - Goldman Sachs Group Inc.

Paul, at your Analyst Meeting in late January talking about the pricing in France, you had mentioned that the average generic pricing is 45% of branded. It sounds like pricing is one of the things that's playing into your altered view for your x U.S. business now. So could you characterize maybe where that has gone, if it was 45% on average before where you think it's going to go now, as we think about this year?

Paul Bisaro

I'll ask Tom to comment on that one.

Thomas Russillo

The average pricing has come down slightly. The real difference is not the average pricing, the part that concerns us the most is the rebate allowances because it doesn't allow you to compete with the other products if you can't adjust your rebate. So rebates are frozen at 19% in France, and we believe that's going to change with time.

Randall Stanicky - Goldman Sachs Group Inc.

I guess as you think about those markets the U.K., France, Australia, Paul, where do you think the most -- where is your concern over pricing the greatest?

Paul Bisaro

Well I think U.K. is probably at the pricing point now where it is achieved almost its equilibrium point. It really can't go much lower than where it's at. So there, the business is now about cost and how you drive down your acquisition costs and for us it's about switching in-license products with manufacturing products there. France I think pricing, while it's still in the – I think it's down somewhat from the 45%, I think it may be down 5% or 7% off of that, we don't expect that to continue to go down, I think the French government has said that they're done for a while on that. But as Tom indicated, our concern is what do they do about rebates because that obviously affects margin more dramatically than potentially pricing. And then I guess your other question was Canada. I think the Canadian -- if Ontario continues with the idea of the 25% range, I do think the other provinces will follow. We do anticipate Canada revenue to be down because of that. But again, it becomes a question of rebates. How is that affecting – because the Canadian government has then said, okay you don't pay rebates. Now Canadian pharmacists are not real happy about that, so it's a question of how do they find new ways to increase revenues or save revenue for them, as opposed to losing revenue. So we have to work our way through the nuances of each of those markets. Having said all that, I think we're still in a good spot with the products that we're going to be launching, the number of products that we're going to be launching and basically from our starting point. So we're still bullish on these markets and we're still going to be very active in them.

Randall Stanicky - Goldman Sachs Group Inc.

And just a clarification, is the SG&A guidance, is that GAAP or is that adjusted?

R. Joyce

That's GAAP.

Randall Stanicky - Goldman Sachs Group Inc.

Would you mind giving us what the adjusted number would be?

R. Joyce

For the?

Randall Stanicky - Goldman Sachs Group Inc.

Full year.

R. Joyce

Full year, the SG&A guidance would be roughly somewhere in the $620 million range.

Operator

Your final question comes from Rich Silver with Barclays Capital.

Richard Silver - Barclays Capital

First, on the assumptions for your brand launches, you didn't mention TRELSTAR 6-month or CRINONE? Were those also included in the 2010 numbers?

R. Joyce

Yes, TRELSTAR was in the numbers and TRELSTAR has launched as Paul mentioned.

Richard Silver - Barclays Capital

Okay so this is just future launches that you're referring to?

R. Joyce

Yes, exactly.

Richard Silver - Barclays Capital

And the second question is around the changed assumptions for the Generics business in the U.S. and just to be clear, previously you were assuming Micro-K competition and now you're not. And then on Toprol XL, it was just earlier in the year, maybe the beginning in the third quarter rather than the fourth, are those the only two changes in terms of the higher revenue assumptions for the year?

Paul Bisaro

No, there are other changes but those are the significant ones.

Richard Silver - Barclays Capital

Then lastly can you just quantify the healthcare reform impact for this year that is included?

Paul Bisaro

It's roughly $12 million this year.

Patricia Eisenhaur

Well, thank you, everyone, for joining us. And for those that we weren't able to address on the call, we're happy to follow-up with you later today. Thank you, everyone.

Operator

Thank you, for participating in today's Watson Pharmaceutical's First Quarter 2010 Earnings Conference Call. This call will be available for replay beginning at 11:30 a.m. Eastern Time today through 11:59 p.m. Eastern Time on May 24, 2010. The conference ID for the replay is 66758855, again, the conference ID number for the replay is 66758855. The number to dial for the replay is 1-800-642-1687 or you may dial 1-706-645-9291. Thank you, for your participation today. You may now disconnect.

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