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Executives

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

Patricia Eisenhaur - Vice President of Investor Relations & Corporate Communications

Paul Bisaro - Chief Executive Officer, President and Director

Thomas Russillo - Executive Vice President of Global Generics and President of the Global Generic Division

George Wilkinson - Executive Vice President of Global Brands

Analysts

Ken Cacciatore - Cowen and Company, LLC

John Boris - Citigroup Inc

David Maris - Credit Agricole Securities (USA) Inc.

Ronny Gal - Bernstein Research

Richard Silver - Barclays Capital

Elliot Wilbur - Needham & Company, LLC

Michael Tong - Wells Fargo Securities, LLC

Timothy Chiang - CRT Capital Group LLC

Gregory Gilbert - BofA Merrill Lynch

Christopher Schott - JP Morgan Chase & Co

Randall Stanicky - Goldman Sachs Group Inc.

Marc Goodman - UBS Investment Bank

David Amsellem - Piper Jaffray Companies

Louise Chen - Collins Stewart LLC

Watson Pharmaceuticals (WPI) Q2 2010 Earnings Call August 5, 2010 8:30 AM ET

Operator

Good morning. My name is Lori, and I will be your conference operator. At this time, I would like to welcome everyone to the Watson Pharmaceuticals Second Quarter 2010 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Patty Eisenhaur. Please go ahead.

Patricia Eisenhaur

Thank you, Lori, and good morning, everyone. I'd like to welcome you to Watson Second Quarter 2010 Earnings Conference Call. Earlier this morning, Watson issued a press release reporting its earnings for the second quarter and year-to-date period ended June 30, 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 are Paul Bisaro, our President and CEO, who will provide an overview of the second quarter within our Global Generics, Global Brands and Distribution Business segments. Todd Joyce, our Chief Financial Officer, will then provide additional details on the performance of our business segments, as well as 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 Q&A are Tom Russillo, Executive Vice President of our Global Generics division; Fred Wilkinson, Executive Vice President of Global Brands; Bob Stewart, Executive Vice President of Global Operations; and David Buchen, our General Counsel.

Please note that today’s call is a 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 a number of 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, 2009 and Form 10-Q for the period ended March 31, 2010.

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

Paul Bisaro

Thanks, Patty, and good morning, everyone, and thanks for joining us today. It was another strong quarter for Watson. Net revenue for the second quarter increased 29% to $875 million. Adjusted net income for the second quarter increased 22% to $103 million or $0.83 per share, and adjusted EBITDA for the second quarter increased 26% to $207 million.

Our performance during the quarter was driven by a number of factors, including significant generic product introductions in the U.S., particularly the 100 and 200 mg strengths of Metoprolol, continued strength in our Oral Contraceptive business, the addition of product sales from our international markets and adjusted gross margin growth of five percentage points in our Global Generics business helped round out a solid performance in our Global Generics segment.

In our Global Brand business, the highlights include greater than 25% sequential increase in prescriptions in the second quarter for RAPAFLO and greater than 20% increase in prescriptions for Gelnique. We expect both products will remain important contributors to our Global Brand business over the longer term.

We also saw the best segment contribution ever from our Anda Distribution business. It delivered a 24% increase in net revenues, driven by new product launches in the industry. While delivering strong financial results, we also invested in supporting future growth. Investment in R&D was up 49% to $44.6 million for generic R&D and up 36% to $17.2 million for brand R&D. We announced a significant number of patent challenges in the U.S., with six new Paragraph 4 filings in the quarter, bringing the number to 12 year-to-date.

We currently have over 110 ANDAs pending at the U.S. FDA and over 900 dossiers pending outside of the U.S. We also took significant steps to expand both our brand product portfolio and our brand product pipeline. TRELSTAR 6-month is our newest addition to the portfolio, and the recent launch has been met with enthusiasm due to its unique attributes, including low needle pain and no need for refrigeration.

Also, on June 7, the FDA Advisory Committee on Reproductive Health (sic) [Advisory Committee for Reproductive Health Drugs] voted unanimously in favor of approval of HRA's next-generation emergency contraceptive product, currently marketed in Europe as ellaOne. We remain optimistic that this product will be approved this year. Additionally, we have a novel oral contraceptive pending FDA approval, and we expect to hear about that application by the end of the third quarter. We have not forecasted any sales for these two contraceptives in 2010.

We recently completed enrollment for the Phase II study for Uracyst for cystitis. The study will be completed by the fall, and we anticipate results later this year. If the data is positive, we will look to initiate a Phase III study in 2011.

Following the close of the quarter, we completed the acquisition of CRINONE's progesterone gel product line from Columbia. We immediately began marketing CRINONE to infertility clinics, and we'll be expanding promotion to OB/GYNs with our institutional and women's health field forces in the coming months. We expect to bring more than 3x the previous promotional effort to bear on this product.

Columbia's Phase III clinical trial for the prevention of pre-term birth is fully enrolled, and results are expected later this year. We are hopeful that the results will support the filing of an NDA in 2011. And lastly, we announced the worldwide licensing agreement with Itero Biopharmaceutics (sic) [Itero Biopharmaceuticals] for their rFSH product, currently in pre-clinical development for the treatment of infertility. This product leverages our world-class resources at Eden Biodesign in our Salt Lake City facility. We expect to be able to develop this product in a cost-effective way.

Now I'd like to provide some color on our International business. With the acquisition of Arrow, we gained a strong foothold in a number of countries and gained some terrific U.S. pipeline assets like generic LIPITOR, Pulmicort and ZOVIRAX. Since the beginning of the year, we have launched a number of new products in various markets, the largest opportunity of which was generic LIPITOR in Canada. While the market for this product was more competitive than originally anticipated, it is an important product to have in Canada.

It's important to remember, as you follow our International business, that Arrow was largely a decentralized organization, and they initially built their commercial infrastructure with many in-licensed products. We have made significant progress towards centralizing the organization, enhancing the management structures, balancing the product and development portfolios with the emphasis on manufacturing our own products globally and filing as many Watson products as possible into these markets.

We've had three key goals for each market: First, restructuring the existing commercial operations in that market to be agile, efficient and profitable; second, we are looking to expand the depth of our product offerings and total market share in each market; third, and longer term, we look to enhance our base business by shifting the balance from in-licensed products to our own manufactured products and creating a strong pipeline with significant product launches for the future. While we have a lot of work to do, I couldn't be more pleased with the assets that we purchased and the progress that we made thus far. And I'm excited for the future of this business, given the many opportunities that I see on the horizon.

Finally, yesterday, we announced that Siggi Olafsson has joined us as our new Executive Vice President for Global Generics Division effective September 1. Siggi most recently served as CEO of Actavis Group, where he was responsible for overseeing Actavis' $2.4 billion global pharmaceutical business, with operations in more than 40 countries. Siggi brings tremendous global experience to our team, and I couldn't be more pleased to have him join us. Siggi will succeed Tom Russillo, who will retire effective at the end of 2010.

I would just like to say that Tom played an instrumental role in the integration of the Arrow assets and in identifying strategies for Watson's global growth. Before that, Tom was critical to Watson's global supply chain improvement efforts, as well as a driving force in revitalizing our U.S. Generics R&D efforts. I would like to thank them for all of his efforts and wish him all the best in his retirement.

Over the next few months, Tom and Siggi will work together to continue our globalization efforts and begin the next phase of maximizing our current commercial footprint and capitalizing on additional opportunities to expand into these markets.

So in summary, we delivered strong financial results during the quarter, while continuing to take steps necessary to capitalize on numerous opportunities to grow our business globally. And with that, let me turn the call over to Todd for some more color on the financials. Todd?

R. Joyce

I will now review our financial performance on a consolidated and divisional basis. For the second quarter of 2010, consolidated net revenue was $875 million, an increase of 29% over the prior-year period. Net revenue for our Global Generics division was $571 million, up 42% on a year-over-year basis. x U.S. net revenues were $111 million. Sequentially, International net revenues were essentially flat, as unit growth was offset by lower pricing and the unfavorable impact of foreign exchange.

U.S. Generics revenues and margins remained strong due to relatively stable pricing and higher sales of our extended release products, including Metoprolol ER and Diltiazem LA. Oral contraceptive sales were up 12% over last year to $97 million. Adjusted gross margin for the Generics division was 48.6%, up 4.9 percentage points on a year-over-year basis. The increase in adjusted gross margin reflects the continuation of recent trends, including higher sales of extended release products and favorable margins, relatively stable pricing for our U.S.-based 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 levels.

Moving to the Brand division, net revenue was $104 million, down 10% from the prior-year period. Product sales were $77 million, down 21% year-over-year. The decrease reflects the loss of Ferrlecit, which was partially offset by increased sales of RAPAFLO, ANDRODERM and INFeD. Brand other revenue was $27 million for the quarter, an increase of 51%, as a result of outlicensing revenue for two legacy brand products. For the full year, we expect Brand other revenue to be approximately $80 million.

Brand adjusted gross margin was 77.2%, down from 80.9% in the second quarter of last year, reflecting the loss of Ferrlecit. Brand gross margin was up over four percentage points sequentially from 73% in the first quarter, reflecting the increase in other revenue and lower sales of products supplied to third parties under contract manufacturing arrangements.

Finally, net revenues from our Distribution segment was $201 million, up 24% or $40 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 16.1%, up from 15.1% last year, mainly as a result of favorable product mix in the quarter.

Turning now to GAAP operating expenses. Consolidated R&D for the second quarter were $61.8 million, up 45% compared to the prior-year period due to the addition of our International business and increased investment in generic and brand R&D. Generic R&D increased due to the higher investment in product development. Brand R&D increased as a result of Eden, as well as higher clinical spending, including the initiation of a Phase III study during the quarter. For the full year 2010, we expect total R&D spending on a GAAP basis to be in the range of $260 million to $275 million.

SG&A for the second quarter was $157 million, an increase of $28 million over the prior-year period. The increase is mainly as a result of our International business, higher legal and personnel costs and an increase in bad debt of $5.8 million related to our distribution business. The increase in bad debt was a result of the bankruptcy filing of Chem Rx. For 2010, we expect our SG&A spending on a GAAP basis to be in the range of $620 million to $650 million.

Amortization for the second quarter is $43 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 approximately $175 million.

Our GAAP tax rate in the second quarter was 28%, down from 42% in the second quarter of last year. The decrease was due to certain non-recurring tax benefits associated with the Arrow acquisition. These one-time tax benefits are excluded from our adjusted cash earnings. For 2010, we now expect the GAAP effective tax rate to be in the range of 32% to 34%. On an adjusted cash basis, we continue to 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 second quarter is $0.83 per share, up 14% from $0.73 per share in the prior-year quarter. Also excluded from the GAAP results for adjusted cash basis reporting were $8.8 million in acquisition- and licensing-related charges and $15.5 million in costs associated with our Global Supply Chain Initiative. Acquisition- and licensing-related charges for the quarter included preferred stock accretion of $3.8 million, a $3 million adjustment related to our terms debt and contingent liability, and integration costs of $2 million. GAAP EPS for the quarter was $0.57.

Our adjusted EBITDA for the second quarter was $207 million, up 26% compared with the prior-year period. Cash flow from operations for the second quarter was $74 million. We ended the quarter with $1.2 billion of debt and $236 million in cash and marketable securities. We have $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 1.6x, and our debt-to-capital ratio improved to 28.4% from 32.5% at year end.

We are pleased with our accomplishments this year. We're well positioned financially and have a proven track record of delevering after major acquisitions, as recognized by our ratings upgrades in the quarter by Moody's and S&P. We're well positioned to capitalize on a number of opportunities for future growth. With that, I will turn the call back over to Paul for an update of the 2010 forecast and concluding remarks.

Paul Bisaro

Thanks, Todd. I will now give you a little guidance on the rest of 2010. Our estimate for full year net revenue is approximately $3.5 billion. We expect our Global Generics segment revenue, including our International revenues, to be between $2.25 billion and $2.35 billion.

Turning to the assumptions for our U.S. Generics business, we now have one additional competitor in Metoprolol, which we estimate will have a modest pricing impact and a modest unit decline. We now expect no competition on generic Micro K in 2010. Our U.S. forecast does include a modest contribution from some patent challenges. However, we have not included any impact for generic Concerta or generic Lovenox.

On the International front, we are continuing to experience many positive dynamics, including unit growth. And we, as I've said earlier, have more than 900 pending dossiers outside of the U.S. As with all the players in these markets, we have been experiencing the impact of lower pricing, greater-than-anticipated changes in government regulations and the impact of foreign currency.

While we are very encouraged by the growth of the international operations, there are many moving pieces. And we currently expect our international revenues in the second half to be higher than the first half, weighted toward the fourth quarter. Conforming to industry practice, we have determined that there is limited value on a separate regional revenue forecast. We will, of course, continue to provide visibility on the performance of the business by reporting international net revenue on a quarterly basis.

On the Brands side of the business, we expect net revenues to be between $440 million and $460 million for the year. The assumptions now include a third quarter launch of our value brand of Ferrlecit.

With the Anda Distribution business, we anticipate revenues between $760 million and $800 million. We expect adjusted EBITDA of $820 million to $850 million and adjusted cash EPS in the range of $3.30 to $3.45.

In summary then, we experienced a great quarter and a great half year. We experienced more than 20% growth in revenue, adjusted cash net income and adjusted EBITDA. We continue to launch new generic products and expand our portfolio of brand products. We are making notable progress in growing our International business and expanding our global footprint. We're continuing to drive efficiencies resulting in continued strong profitability. And finally, we continue to invest in R&D patent challenges and business development.

As you can see, we're making significant strides in every one of the initiatives we set out to accomplish in 2010, and I couldn't be more excited about the prospects for the future of Watson. So with that, let's open it up for questions. Patty?

Patricia Eisenhaur

Thanks, Paul, and Lori, we can open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rich Silver of Barclays Capital.

Richard Silver - Barclays Capital

Just on the Brand business, on your last quarter conference call, you mentioned some positive development in terms of managed care with RAPAFLO and Gelnique. Can you give us an update on that front in terms of formulary access and whether we should expect any change in terms of penetration, noticeable change in penetration, in the coming quarters?

Paul Bisaro

For RAPAFLO particularly, 2Q was kind of a pivotal time frame because it was the time when Flomax had now gone from brand to a generic effective product. With that, what the most of the managed care plans were doing is waiting to see whether in fact the brand company is going to chase the generic price down or whether they will just going to allow generics to come in to the marketplace and hold the brand price. That's what they did. So Flomax was essentially then moved to Tier 3. Generics occupied Tier 1 and allowed us an opportunity to occupy Tier 2 in many of these plans. Most of that negotiation had been done during the fourth and first quarter of last year and this year. We are just waiting for the event. And so when that event occur, what they've allowed to do is now finalize those activities, get those programs in place. And what you're seeing in second and third quarter and will see in third quarter is the pull-through of this related to those plans. So yes, you should expect to see some incremental growth on RAPAFLO due to some better managed care physicians. Now Gelnique is just a general slug-it-out time to get additional placement in managed care. Our placement is actually pretty good right now. We occupy between Tier 2 and a non-encumbered Tier 3. Most of the major plans, we're in a pretty good position there.

Richard Silver - Barclays Capital

Do you have the sales numbers for those two products? I may have missed that.

Paul Bisaro

No, we don't go and we have not provided individual sales numbers on our brands.

Richard Silver - Barclays Capital

And then just shifting to Concerta, any update in terms of your discussions with the FDA, particularly given the April panel meeting?

Paul Bisaro

As I think, Rich, just to recap for everybody, what we've done, where we're at with Concerta is we did win the patent case, the mandate is issued. If, in fact, there is 180 days of exclusivity, it is now running. The panel, as you say, was a question about partial EEC, and we have provided data to the FDA to answer the question about partial EEC. We know the FDA is reviewing that data. And as of now, we have no additional update. But I guess that's where we're at.

Operator

Your next question comes from the line of Randall Stanicky of Goldman Sachs.

Randall Stanicky - Goldman Sachs Group Inc.

Paul, just looking at your International business, the run rate so far around, I guess, $430 million. Is the low end of the previous 500 to 550 still realistic? And then can you just remind us where the exposure in that International business lies?

Paul Bisaro

Well, Randall, on a going forward basis, as I said in my prepared remarks, we're not going to give guidance on a regional basis. So what I think and what I did say though was we do expect the run rate to go up in the second half of the year compared to the first half of the year weighted to the fourth quarter. With respect to -- I think your question was with respect to [indiscernible] among those markets...

Randall Stanicky - Goldman Sachs Group Inc.

The regions.

Paul Bisaro

Or areas where there would be concern, the big countries for us are Canada, U.K. and France and Australia. We did see that Canadian pricing changed, that happened faster than anticipated. The rest of the provinces followed. Ontario, a little quicker than I think everyone anticipated. So we did see a decline in Canada, overall projections for Canada in revenues. Our unit numbers are up but our revenues are going to be down there compared to what we originally projected. U.K., we had stronger-than-expected pricing competition across many of the molecules, so we did see reduction there. And in France, that market has stabilized and unit growth is helping to increase there. In Australia, Australia has been more question of a relationship with Sigma. As you may or may not know, Arrow has a long-standing relationship with Sigma, the distribution company there, where we supply products to Sigma for distribution. Sigma had a bit of a hiccup in the first quarter, first two quarters really in Australia, and that did affect our revenues a bit in Australia. But we do expect a pickup in the second half.

Randall Stanicky - Goldman Sachs Group Inc.

But Paul, I guess, most of the challenges, would they be reflected in this current 2Q number at this point?

Paul Bisaro

Yes.

Randall Stanicky - Goldman Sachs Group Inc.

And just one quick follow-up, on the branded side, the outlay from Sigma of the two branded products, is that fair to assume that's ongoing contribution that we should expect to continue, it's not a one-time payment?

R. Joyce

This is Todd. It's really a one-time item. There will be ongoing contribution, but at much lower level.

Randall Stanicky - Goldman Sachs Group Inc.

Is there anything else that we're missing? And I'm just thinking about the back half branded outlook, which implies a pretty sharp -- I understand RAPAFLO is performing well. Is there anything else that you guys have factored in, in terms of new launches that could provide a boost?

Paul Bisaro

I think clearly, Randall, the issue there is the generic Ferrlecit product. We have anticipated for some time the approval of that product. We're still working with the Agency and our partner's still working with the Agency to get approval. We do anticipate approval in the third quarter, and moving the FDA through that process is often a challenge. We also will be expecting a contribution from CRINONE in the second half that wasn't there in the first half.

Randall Stanicky - Goldman Sachs Group Inc.

And Ferrlecit will be in the branded segment, is that fair?

Paul Bisaro

Right. We're going to sell it as a value brand.

Operator

Your next question comes from the line of Chris Schott of JPMorgan.

Christopher Schott - JP Morgan Chase & Co

First question was just on generic Toprol. Can you still elaborate a little bit more on the dynamics you're currently seeing and expecting to see as it relates to price and volume? And does your guidance assume any further competition in that market in 2010? Just a quick follow-up in there.

Paul Bisaro

Yes, Chris. Our guidance does not assume any additional competition other than Wockhardt and Par at the moment for 2010. We have not heard of any new competitors entering, and Sandoz has made it pretty clear that they don't expect to be back in 2010. So based on that information, that's what we have in the model. Regarding current competition, I think the market is settling down after the entry of Wockhardt. I think everything was pretty good, the way everybody handled the situation. I think we feel very comfortable with our current projections and where we're at with Metoprolol. Prior to Wockhardt's entry, we were looking around a 50% market share for basically all four strengths. We haven't quite achieved that yet in the 100 and 200, but we were expecting to get there. We do expect some modest price decline and some modest unit decline, but not anything terribly significant.

Christopher Schott - JP Morgan Chase & Co

Follow-up question was on business development in international markets. Can you just give us a little bit of color of what geographies you're most attractive at this point? And it seems though we've got a lot of international markets from the generic side that are kind of in fluctuate now given overall kind of budgetary pressures facing a lot of countries. How does that factor, or does this make you at all consider backing off further business development plans or investments next year as market still -- can you just give us a little bit better sense of how some of these geographies really evolve?

Paul Bisaro

Actually, no Chris. I actually think this presents a great opportunity. A lot of the companies are re-evaluating their ability to operate in these markets, and that created an opportunity for Watson who is committed, and we are committed to growing our global business. And so for us, it creates a buying opportunity. And so we have been actively pursuing opportunities across multiple markets. We've not singled out any particular region or market that we want to be focused on. What we've said is we want to look at our European businesses, try to help support them by increasing their footprint and their magnitude within each of the countries. We've also said we've been looking at Asia-Pacific, the Asia-Pacific region. Since we have such a strong presence already in that region, we'd like to fill that region out. And finally, we've looked to emerging markets in South America, in Turkey and other places to also fill out. So a little bit will be driven by opportunity, when opportunities present themselves, but we have no particular country that we're focused on other than what the opportunities have presented.

Christopher Schott - JP Morgan Chase & Co

And just in terms of that opportunity, I mean, are you starting to see better prices in the market, given against some of these changing dynamics or...

Paul Bisaro

You mean pricing and products? Or you mean pricing...

Christopher Schott - JP Morgan Chase & Co

Price points of [ph] assets that you would look to pursue?

Paul Bisaro

I think multiples are probably coming down. It sort of depends on the asset, but multiples are moving in the direction in favor of the acquirer.

Operator

Your next question comes from the line of Greg Gilbert of Bank of America.

Gregory Gilbert - BofA Merrill Lynch

My first question is about M&A also. Can you comment more specifically on your interest in getting much larger in Australia, given press reports? And to what extent are you interested in helping to consolidate the U.S. branded specialty pharma industry? We keep waiting for more of that to happen but haven't really heard that featured in your commentary as it applies to M&A in the past.

Paul Bisaro

Well, I'll answer the first question. On the branded M&A side, I mean, we're probably looking more and I've said saw this quite frequently. We're probably looking more for product opportunities and pipeline opportunities and biologic opportunities than we are for growing into another therapeutic category. We're very pleased with the two categories that we're focused on, urology and female health. There's a lot of things to do there. We've just begun to scratch the surface in what can be done. And then on the Biologics front, you saw us sort of make our first big move with FSH that we announced with Itero this quarter. So I think that's probably our focus for Brand M&A for the U.S. As commenting on any specific international acquisition opportunity, I'm going to decline to do that. Only to say that we continue to look for opportunities that are presented and to the extent it makes sense for Watson to make a move into those markets, we'll be there.

Gregory Gilbert - BofA Merrill Lynch

One follow-up on specific pipeline question on Lidoderm. Why do you think the FDA did not require clinical trials in this case even though they have in many cases for other topically-acting products?

Paul Bisaro

I don't know. I think, we certainly have satisfied the requirements, we believe we satisfied the requirements that the FDA has set out for Lidoderm. I think the FDA must have concluded that a clinical study was not required.

Operator

Your next question comes from the line of David Amsellem of Piper Jaffray.

David Amsellem - Piper Jaffray Companies

Just a couple, I joined late, so you might have answered this on the progesterone assets. Just remind us what CRINONE and PROCHIEVE are currently annualizing at in terms of sales? And since you have a bigger sales reach than Columbia, by how much do you think you can grow those products without the additional label expansion in pre-term birth?

George Wilkinson

This is Fred Wilkinson. CRINONE sales last year reported by Columbia were just under $18 million. The indication is for supplementation and replacement of progesterone in all infertility treatments, so that the IVF and IUI and all the other different infertility approaches that are generally done by either the OB/GYN or the infertility specialist. We have not given individual product forecast for 2010 within the Brand business but suffice it to say, I think, Columbia have 24 representatives. We have 55 folks that are right now out in front of the infertility specialists, so another 130, 135 people that will be attacking [indiscernible]. So substantially a larger effort will be put behind CRINONE than Columbia could have reported to do. That's essentially the purpose of the deal. Secondly, we're looking forward to the results in pre-term labor, which as to remind you, they are at the end of their -- we'll be ending their trial in November-December time frame, announcing top line results sometime around that time and with the goal of successful filing an NDA in early first quarter.

Gregory Gilbert - BofA Merrill Lynch

And then question on the international markets, I mean, you've talked about new countries that you've entered like Poland or Turkey or you're about to enter. Can you give us some color on the pricing dynamics in the new markets that you're about to enter, particularly how they stack up versus other markets in Europe that have been subject of concern like Spain and the U.K.?

Thomas Russillo

This is Tom Russillo. Poland market has experienced some price pressures but that seems to have stabilized right now. We have just increased our presence in Poland. We are in a joint venture, which we now have a controlling interest in. And we will be launching a lot more of Watson products in that market, so we're very enthused about that. Finland, we just opened our own office in Finland, so we are now covered in all of the Nordic countries. So we're optimistic about increased sales there.

Operator

Your next question comes from the line of David Maris of CLSA Credit (sic) [Credit Agricole].

David Maris - Credit Agricole Securities (USA) Inc.

First on the recent Lovenox approval, and after looking at the documents that come out about it. Are there any implications for the industry or for Watson that you think have changed your opinion on how to do R&D for the more difficult to characterize products? Do you think that Momenta has some sort of special ability in characterization that you need to develop a similar ability or know this is a unique situation? And then my follow-up's on LIPITOR.

Paul Bisaro

I would be speaking for Craig Wheeler, I think he would say they have special ability, and they certainly -- we're going to congratulate them on their work. But I think -- I'll first start by saying I'm pleased that the FDA seems to be moving on these applications that have been pending for quite sometime and that's a good sign. We hope to get them to move on some other applications that have been pending for a long time. As to any new level or new bar, look, I think the FDA has always wanted us to characterize products and show that we know what the brand's doing, so that we can prove that the generic is going to be equivalent. I think that Watson has the capability to do that kind of activity, and we've proven it with Concerta. And I think we'll continue to -- and we certainly have done so with our, we believe, with our generic Ferrlecit application, so I think we have those capabilities as well. If the FDA has raised the bar, I applaud them and we're ready to meet that bar or that level, and as long as these applications come through, I couldn't be more happy.

David Maris - Credit Agricole Securities (USA) Inc.

My follow-up's on LIPITOR. Can you walk us through what you think the different ways that could play out and what your opinion is the most likely way that it will play out?

Paul Bisaro

That's a good question. Currently, our outyear projections assume that we will launch the product in November of next year, and Ranbaxy will be there with the generic as well, and we'll have two competitors at the bat for the first 180 days and that post-day 181, there will be additional entrants but not a flood of entrants. And that assumption is based on the fact that Pfizer continues to litigate against a number of companies, and there are patents that protect LIPITOR well out into 2018, I think. So people have to get through the patent fights before they can launch the product. As most people know, there is some possibility that Ranbaxy may not be there on day one and if they're not, then we will launch the product on the day it's certain, and we will be able to supply the entire generic need for the market. So that's our anticipation. But again, our main focus is, what I said the first point, my first discussion is I expect that we will have a competitor with Ranbaxy in November 2011.

Operator

Your next question comes from the line of Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank

Can we go back to this other revenue benefit? I just want to make sure I understand. Did you take two products, this Monodox and Cordran, sell them, so now the sales are no longer going to be booked in the Brand line and you booked a onetime gain in the quarter in the revenue line. I want to try to understand what happened in the quarter and what's the ongoing impact? And then second of all, in the International Generics business, what was the FX impact in the quarter? And how much is FX creeping from your kind of sales forecast in the second half of the year versus the other issues that are going on over there? And then one other question, Paul, you mentioned there's some -- Paragraph IV is actually in the numbers in the guidance this year. Is that a change for you? Is this something you're going to change going forward? What P IVs are in the numbers?

R. Joyce

I'll start out with the Brand revenue. This is something that -- we outlicensed these products in 2005. We've been recognizing revenues since 2005 on them that we did have a higher level of revenue related to payments that we received, the option payments we received. We continue to supply over the next three years one of the products, so there's still will be some revenue recognized related to one of the products under the contract manufacturing arrangement. On your question on the FX, the FX impact in the quarter was 5%. And Paul, the third...

Paul Bisaro

The Paragraph IVs. It is not a change in guidance strategy for us.

What that is, Marc, as we have said in the past, when we're at a point where the patent is challenged, where we believe we're going to be launching a product for whatever reason. We will put that in the model. For example in 2011, we know we have the approval of atorvastatin, so we'll put that in the model in 2011. It just so happens in the second half of this year, there are two product opportunities that we expect to -- well, we expect to launch in 2010, and so we have a modest contribution for them, recognizing that there could be challenges in launching the products. But you asked what the products were, I'll tell you, they're FENTORA and YASMIN.

Marc Goodman - UBS Investment Bank

And just on the FX, when you talked about -- you're not telling us the international sales guidance anymore, which is fine. But can you just help us understand, was it half FX and half European issues as far as taking the revenues down in the second half of the year in your model and your thoughts or how did you think about that?

R. Joyce

Well, in terms of the FX impact, the impact has been roughly around 5% and that's what's forecasted for the rest of the year. So it wasn't a dramatic -- that wasn't the primary driver for our view of full year international revenue.

Paul Bisaro

I think to be more blunt about it, I think certainly the price declines in those markets were the major driver. But again, units are up, so that's the good news.

Operator

Your next question comes from the line of Ken Cacciatore of Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC

Just one question on the URACYST commentary. Can you just talk about the development timing issue if you're going to roll in the Phase III, so maybe when will we see the most recently completed study? I know you just completed enrollment but maybe when will you release that data? And then potential timing of completion of the Phase III and maybe timing of what you're thinking in terms of introduction and maybe description of the opportunity?

George Wilkinson

So Phase III just -- our Phase II just completed enrollment. The study itself will functionally finish sometime late in 2010, probably the late November, early December time frame. It will take us probably a couple of weeks to cut the data to get top line results, that's sometime near the end of the year. We'll know whether we've got positive outcome from the Phase II program. We sized the program large enough to be able to give us a good indication whether we'll have a positive effect in Phase III, so this really was a predictive Phase II program. We take it into Phase III, that usually takes several months to get FDA approval, get your mechanics all established. And I think, bottom line is the timing of that would be probably something more than would be early to mid-'13 filing. So we've got several years to go on this. Now the interstitial cystitis market place is one that kind of hard to get the data around. There is a very large indications, as far as numbers of people who have been diagnosed with the problem but there's no current drug that's really effective in treating it. So most people are essentially on heavy pain meds. And so this would be an opportunity to introduce it into a market that has a very much of an unmet need.

Operator

Your next question comes from the line of Ronny Gal of Sanford Bernstein.

Ronny Gal - Bernstein Research

First one, on the FSH product, obviously, you guys had to, Fred, kind of put together your numbers both on the cost side timeline and some sort of projection for revenue. I wonder if you can help us a little bit in thinking about when you can bring something like this to market, and what is it kind of the total project costs on one side? And then on the other one, a few words about the market and what do you see as a potential for something like this and how does it differentiate from the current products in the market. Second question, I think you just mentioned FENTORA as a potential launch for this year. And quickly, how do you see the CP that Cephalon submitted and the time line to resolve that issue because I guess that will gauge your ability to come to market?

George Wilkinson

Let me do FSH first and I'm going to turn it over on FENTORA. The FSH marketplace globally is about a $1.2 billion market, about half of it in the U.S., half of it in Europe. Two competitors in there, which is a Serono product and I guess, a Merck Serono product now and an Organon product, which is now part of Pfizer, Merck, I guess. I don't know. Who knows what these are anyway? The patents that gave the introduction of the generic are in the '15, '16 time frame for both U.S. and Europe. So the development process for us in FSH is to essentially get there before those patents expire. We have a timeline established right now, functionally moving the product over to Liverpool, where our Eton team will scale up and develop the product. The clinical activities will be done, completed by the Salt Lake City team. And then the commercial approach will be utilizing our women's health care franchise. So the women's health care group essentially will have grown sufficiently to be able to manage a product like this in the infertility market place. It's a great combination for what we're doing with CRINONE, and it will be essential for us either to build out or to establish some kind of relationship for marketing this product outside the United States.

Ronny Gal - Bernstein Research

And so, if you have a word about the kind of a project cost? How much does it cost to bring a branded product, like the follow-on product branded products to the market? And just as a sidenote, there was some rumors that the Merck KGaA fertility business is for sale. I don't know if you guys can comment on this.

George Wilkinson

We've heard those rumors. And I don't think we've put out the cost but I think people are working with ranges in the $30 million to $45 million, $50 million range full in for the development of a biologic.

Ronny Gal - Bernstein Research

That's it?

George Wilkinson

At least for product along this line, yes, because they'll be fairly defined clinical programs. Those programs will be defined by what was done by the innovator. And with this particular product, it's important to remember that this is right now approved as an NDA, not as a BLA.

Paul Bisaro

And then, Ronny, I think you asked us about FENTORA. We have our stay ending in October of this year. We certainly have seen the two citizen petitions that have been filed so far by Cephalon. Regarding the first one, we don't believe we've run afoul of their argument, so we'll be submitting data to the agency to support that. So that's the one issue. The issue raised in the second CP, the FDA put out a guidance. Clearly, they thought about this beforehand. So once the guidance was issued, it was our position that the FDA carefully considered what they were going to do and issue the guidance. We met the guidance, so it should be denied. So we will continue to provide data to the agency as needed but that's kind of where we're at with FENTORA.

Ronny Gal - Bernstein Research

But you haven't put the full weight of the product in your guidance?

Paul Bisaro

I think it's pretty congested now. Probably better to be modest.

Operator

Your next question comes from the line of Louise Chen of Collins Stewart.

Louise Chen - Collins Stewart LLC

Just a few questions on generic Lipitor. With respect to Ranbaxy, when do you think they need to start production in order to be a meaningful supplier of generic Lipitor in 2011? And then, do you expect Pfizer to lower their pricing of branded Lipitor at all to meet the generic prices at least for a portion of the market?

Paul Bisaro

Well, Louise, the Ranbaxy question, it's a big product. So they'll probably have to start reasonably soon to start making product to handle the demand. But that's really within their control and they'll know their own timelines, certainly better than I would know. But with respect to what we're anticipating from Pfizer, I think I've said in the past that like any big product, we would expect a certain amount of defense to be played by the brand companies, we've seen it before. In certain close models, certain -- and sometimes in mail order. And when we look at the overall market, we assumed some of that market wouldn't be available to us because the brand company would go out and lower their price to be competitive with the generic. So we've made that assumption. We will make that assumption, when we build our models for 2011.

Louise Chen - Collins Stewart LLC

And then, can you give us any sense at all of what sales of generic Lipitor were in Canada?

Paul Bisaro

We don't -- well, I'll turn it over to Tom.

Thomas Russillo

We found Canada to be a little bit disappointing because there were six launches of Lipitor, generic Lipitor all at the same time. So our sales were probably about half of what we had expected. But we do see going forward with the movement of atorvastatin to Malta, a better price position than we expect in 2011 to have a better share.

Operator

Your next question comes from the line of Elliot Wilbur of Needham & Company.

Elliot Wilbur - Needham & Company, LLC

I don't know if you've provided any updated commentary on pricing working trends in the U.S. generic market but still seems like with some competitive disruptions and less erosion in the base and your ability to take increases that's still sort of tracking ahead of prior commentary that full year erosion would be in the high single digit or roughly 10% range?

Paul Bisaro

Elliot, we didn't talk about that yet but I agree. Our price erosion has been, I guess, less than we anticipated. We have moved from the double-digit number to a single-digit number for our models. So we're looking now, I would say, high single digit is probably a safe assumption and that's what we've been using for -- what we'll used for the second half of the year as opposed to a 10% number that we used to use what we started with at the beginning of the year. So price erosion still has -- prices still remained reasonably good in the U.S.

Elliot Wilbur - Needham & Company, LLC

I wanted to ask a similar line of question on some of the legacy brands, just looking in some of the recent pricing maneuvers there. The rate of increase has continued to move up and certainly seen some pretty big pricing increases on products like OXYTROL. And I'm guessing the working assumption there is just legacy brands relatively sticky demand and obviously not much elasticity does to pricing.

Paul Bisaro

Well, that's certainly true. The legacy brands, generally inelastic demand is there. It costs us money to manufacture them, so we'd often take prices to recognize that need. But you're correct, there has been -- we have taken prices in many of our legacy brand products.

Operator

Your next question comes from the line of Tim Chiang of CRT Capital.

Timothy Chiang - CRT Capital Group LLC

I wanted to ask you about the Oral Contraceptives business. What sort of growth did you guys record this quarter, and sort of how you look at this segment of your Generic business heading into next year? I think Mylan has indicated that they are going to try to get in the oral contraceptive business sometime next year. Can you comment on the competitive landscape of the Oral Contraceptive segment?

Paul Bisaro

Tim, ever since I've been in the industry, it seems, for the last 10 years, people have been telling us that the Oral Contraceptive business is going to be dead because of competition and in fact, it just doesn't go away. And I think people just sort of miss the point that we have something like 27, 28 different generic oral contraceptives. And it's hard to get approvals, A. And B, to get 20 or 25 to 30 approvals and have a basket of products is not something you can do overnight. Everybody knows the agency's taking 26, 28 months to get approvals done, and these are hard products, so the agency's going to take an extra look at them. So I guess, at the end of the day, we just haven't seen -- we also haven't seen the competition coming on as aggressively and as hard as that was originally anticipated. So our OC numbers are up slightly, I think, quarter-over-quarter. And I guess, we expect that trend to continue not necessarily up but to remain reasonably flat for the second half of the year. A lot of times too, it's the new launches, our new launches of products that help drive that number. And certainly, products like Next Choice have been very positive for Watson, and that also has helped offset any loss of share for the older brands or the older products that competitors have come in with. 2011 will be maybe a different story. We'll have to evaluate it at the time we give guidance for 2011. But again, I'm sort of reluctant to believe that somebody's going to get 30 approvals in a six-month period and be able to be fully competitive in that market.

Timothy Chiang - CRT Capital Group LLC

How meaningful do you think this new emergency contraceptive, you had a positive power view on will be in the market place?

Paul Bisaro

Well, I think it's going to be a very important product in the market place. It will not be an OTC product but it is one that gives women additional opportunity -- one of the hardest things with the current product is getting access to it quickly. This product gives women a couple of extra days to be able to get the product, and we're working on marketing strategies to provide that product to women as quickly as possible. So more to come on that but I do think it's going to be a good product.

Operator

Your next question comes from the line of Michael Tong of Wells Fargo.

Michael Tong - Wells Fargo Securities, LLC

Just wanting to ask a couple of questions on products that you haven't put into your model. With respect to Lovenox, has your partner given you any indication of where their application stands? And how confident are they in terms of getting approval? And then, with respect to Concerta, following the advisory panel meeting, do you expect the FDA to try to put together some guidance documents for public comment or you think they'll bypass that?

Paul Bisaro

Well, with Lovenox, that again, our partner Amphastar is managing that application. We do not have a lot of visibility into that application. That is something that they've been handling. As of now, as I said earlier, we don't have any numbers in for Lovenox for 2010. If that situation changes, we'll let everybody know. But right now, we don't expect anything for 2010. On Concerta, I don't believe the agency has to issue a guidance before they rule on our product. They certainly have the authority to do that without a guidance. But the agency does its own thing. So not sure what they're going to do. They haven't told us that they're going to issue a guidance before they approve the product but they also haven't told us that they won't. So we're going to continue to push them for final approval and go.

Operator

Your final question comes from the line of John Boris of Citi.

John Boris - Citigroup Inc

Paul, you alluded to the pricing impact being in the high single digit. Can you maybe break that out? Is it worse in Europe or is it better in Europe or how that compares and contrasts relative to the U.S.?

Paul Bisaro

Yes, in some of the markets in Europe, it's substantially worse and even in Canada, we saw the 25% reduction in price across-the-board. Well, not across-the-board but for a lot of the products in Ontario and then again, throughout the rest of the provinces. It has been greater. We're offsetting, just to remind everybody, offsetting those price declines though is certainly market penetration. Generics are underutilized in many of these markets. France, the utilization rate still is in the 20% to 30% range. If units -- these governments are certainly well served, I understand, they're trying to control costs by cutting price but they're actually better off by driving substitution. And I think it's the bet of all the generic companies that their governments are going to realize that and drive substitution. And over time, we'll be certainly better off with substitution rates in the 70% and 80% range, will certainly make up for any product, any cost decline. So we are seeing that dynamic happening in Europe.

John Boris - Citigroup Inc

With having a negative 5% impact from foreign exchange, can you maybe provide a little bit better granularity on the impact on the International business from price and what the volume offset is or the net would be there?

Paul Bisaro

Well, I think we said on a constant currency basis, our numbers were up over the prior quarter, 4%. So there was clearly -- you have the FX impact, you have the unit up impact and you have the revenue decline. So it's hard to put all those parts together without specifically laying amounts. So I guess, the answer is, John, I can't give you all that detail because it's a market-by-market analysis. So I guess, we'll have to leave it at that.

John Boris - Citigroup Inc

And on a couple of product-related questions, on Micro-K, were you able to take any price on Micro-K?

Paul Bisaro

No. I think our pricing has been relatively stable, and Micro-K does not have a brand product at the moment, so that product stays pretty much where it's at.

John Boris - Citigroup Inc

And then just on Concerta, can you just remind us of where you'll manufacture the product? And then, what is the trigger for building launch quantities or have you started that process yet or any clarity there will be useful.

Paul Bisaro

The manufacturing would be in Florida and like everything else, we will evaluate the launch quantities as we talk and building launch quantities around the time we get visibility from the FDA.

Patricia Eisenhaur

Thank you, John, and sorry, we've come up against our time slot. But anyways, thank you, everyone for joining us on today's call, and we look forward to following up with you shortly. Take care.

Operator

Thank you for participating in today's Watson Pharmaceuticals conference call. This call will be available for replay beginning at 11:30 a.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on August 15, 2010. The conference ID number for the replay is 84949830. The number to dial for the replay is 1 (800) 642-1687 or (706) 645-9291. This concludes today's conference call. You may now disconnect.

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