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Executives

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

Siggi Olafsson -

Patricia Eisenhaur - Vice President of Investor Relations & Corporate Communications

Paul Bisaro - Chief Executive Officer, President and Director

George Wilkinson - Executive Vice President of Global Brands

Analysts

Christopher Caponetti

Ken Cacciatore - Cowen and Company, LLC

Ronny Gal - Bernstein Research

Richard Silver - Barclays Capital

Elliot Wilbur - Needham & Company, LLC

Gregory Gilbert - BofA Merrill Lynch

Timothy Chiang - CRT Capital Group LLC

Christopher Schott - JP Morgan Chase & Co

Shibani Malhotra - RBC Capital Markets Corporation

David Buck - Buckingham Research Group, Inc.

David Amsellem - Piper Jaffray Companies

Louise Chen - Collins Stewart LLC

Watson Pharmaceuticals (WPI) Q3 2010 Earnings Call November 4, 2010 8:30 AM ET

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson Pharmaceuticals Third Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Patty Eisenhaur, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Patricia Eisenhaur

Thank you, Brandy, and good morning, everyone. I'd like to welcome you to Watson's Third Quarter 2010 Earnings Conference Call.

Earlier this morning, Watson issued a press release reporting its earnings for the third quarter and year-to-date period ended September 30, 2010. The press release, together with additional materials reconciling our GAAP and adjusted financial results and forecast, are available on our website at www.watson.com. Additionally, we are conducting a live webcast of this call, which will also be available on our website after the call's conclusion.

With us on today's call are Paul Bisaro, our President and CEO, who will provide an overview of the third 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 segment, as well as our consolidated 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 Siggi Olafsson, Executive Vice President of our Global Generics division; Fred Wilkinson, Executive Vice President of Global Brands; Bob Stewart, Executive Vice President of Global Operations; Al Paonessa, Executive Vice President and Chief Operating Officer of our ANDA Distribution division; and David Buchen, our General Counsel.

Please note that today’s call is copyrighted material of Watson Pharmaceuticals Inc. and cannot be rebroadcast without the company’s 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 the Form 10-Q for the period ending June 30, 2010.

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. I am pleased to report yet another very strong quarter for Watson. Net revenue for the third quarter increased 33% to $882 million. Adjusted net income for the third quarter increased 18% to $106 million or $0.85 per share and adjusted EBITDA for the third quarter increased 18% to $211 million.

Our performance in the third quarter was driven by a number of factors. In our Global Generics business, we continue to see strong sales of new and existing products in the U.S., particularly from our extended-release product portfolio; the addition of product sales for our international markets; and of course, better-than-expected pricing in the U.S. These factors resulted in adjusted generic gross margin of over 50%.

In our Global Brands business, we acquired the Progesterone business from Columbia in July and expanded Columbia's previous promotional efforts for Crinone, a treatment for infertility by adding it to the products offered by our OB/GYN sales and marketing team. Crinone has been well received by doctors and their patients, and we expect sales of Crinone to continue to increase over the next couple of quarters as our efforts begin to yield results.

Overall, brand revenue was lower than anticipated in the third quarter due to the two factors: one, the delay of approval of our value brand of Ferrlecit; and second, an issue that affected sales of our TRELSTAR product. The majority of TRELSTAR sales are reimbursed under the least costly alternative program administered by CMS [Centers for Medicare & Medicaid Services], and TRELSTAR has historically been the lowest-priced alternative. Earlier this year, a U.S. federal district court struck down this program which, along with other products, disadvantaged TRELSTAR from the physician reimbursement standpoint. In short, following the decision, physicians received lower reimbursement using TRELSTAR than Lupron and Eligard. We are currently pursuing all available options to re-establish a relatively level reimbursement environment. Finally, our ANDA Distribution business had another great quarter, with our third-party sales up 35% due primarily to the launch of generic Effexor XR and continued sales of products launched in prior quarters.

We continue to make significant investments in our business to support future growth. During the quarter, we invested heavily in our R&D programs. Our Global Generic R&D spending increased 46% to $54 million, and our Global Brand R&D increased 45% to $21.7 million. We also completed an agreement with moksha8 to market a select number of Watson products in Brazil and Mexico. This is part of a long-term strategy to expand Watson's presence into these high-growth emerging markets. We will begin to launch some of these products in these markets in the first half of 2011.

We also continued to execute on our Global Supply Chain initiative. We are on track to close our New York facility by year end. The Australian R&D facility will close in the second quarter of 2011, and the Toronto facility is on track to close in early 2012. We continue to move products to and invest capital in our India and Malta facilities. Our focus on Global Supply Chain initiative will ensure that we remain competitive in a global marketplace.

We also had a number of developments since quarter end, and I would like to provide some background on these. First, our agreement with Ortho-McNeil-Janssen on Concerta. Under the agreement, we will be the exclusive authorized generic beginning May 1, 2011, for the duration of the agreement which ends in December of 2014. This agreement provides a date-certain launch of a more affordable generic Concerta product. It also allows us to continue to pursue FDA approval of our ANDA, and launch our own generic version expiry of the agreement. Additionally, the economics of this agreement are not structured as a typical authorized generic agreement.

During the initial few quarters, the gross margins realized by Watson will be below current gross margins in our Global Generics business. However, following the initial first few quarters, the gross margin will be comparable to or modestly above current gross margins in our Global Generics business.

In our Brands business, we continue to prepare for the launch of ella, the emergency contraceptive that weed license from HRA Pharma. We anticipate the product will launch later this quarter. Columbia's Phase III clinical trial on Crinone for the prevention of pre-term birth in women with a short cervix is nearing completion, and we anticipate results will be available at the end of the year.

Also, we licensed our FSH [follicle-stimulating hormone] product from Itero Biopharmaceutics during the quarter. The collaborative work involving Itero, our Salt Lake City R&D team and Eden Biodesign has begun. They are currently in the process-transfer stage for the product.

Moving to our International business. We continue to face challenges in many of our major markets driven by the dynamics and competitive pricing issues within each market. In the U.K. and Canada, we are seeing price weakness outpace volume growth. In France, sales and profitability are in line with our expectations. We do, however, expect fourth quarter international net revenues to be higher than our third quarter.

In summary, our performance in the quarter was strong, and we continue to execute well on our strategic goals that we had set to grow the business.

With that, I'll turn the call over to Todd for some financial review. Todd?

R. Joyce

Thanks, Paul. I will now review our financial performance on a consolidated and divisional basis. For the third quarter of 2010, net revenues were $882 million, an increase of 33% over the prior-year period. Net revenue for our Generics division was $578 million, up 45% on a year-over-year basis. U.S. Generic revenues and margins remain strong due to stable pricing in the U.S., higher sales of our extended-release products including metroporol ER, potassium XR and Diltiazem LA and the launch of new products including Zarah, our generic version of YASMIN.

For the quarter, oral contraceptive sales were $101.3 million, up 9% over last year. X U.S., net revenues were $102.2 million. Sequentially, international product sales were down 11% due to seasonal factors and lower pricing in certain key markets. Adjusted gross margin for the Generic division was basically flat at 50.3%, as increased sales of our higher-margin extended-release products and oral contraceptives were offset by lower margins in our International business.

Moving to our Brand division. Net revenue was $99.7 million, down 12% from the prior-year period. Product sales were $82.4 million, down 14% year-over-year. The decrease reflect the loss of Ferrlecit and lower sales of TRELSTAR, which were partially offset by increased sales of RAPAFLO, Gelnique, ANDRODERM and the addition of Crinone. Brand other revenue was $17.3 million for the quarter, an increase of 4% as a result of higher Androgel co-promote revenue and the addition of Eden Biodesign. Brand adjusted gross margin was 80.1%, down 1.6 percentage points compared to last year due to the loss of Ferrlecit. Finally, net revenue from our ANDA Distribution business was $205.1 million, up 35% from the prior-year period due to higher third-party product launches. Adjusted gross margin for the quarter was 14.8%, essentially flat with the third quarter of last year.

Turning now to GAAP operating expenses. Consolidated R&D for the third quarter was $75.8 million, up 46% over the prior-year period as a result of increased development spending in both our Generic and Brand businesses. Generic R&D increased as a result of the addition of our International business. Brand R&D increased primarily as a result of product development milestones for FSH, Uracyst and ella. For the full year 2010, we now expect total R&D spending on a GAAP basis to be in the range of $265 million to $275 million.

SG&A for the third quarter was $241.6 million, an increase of $121.5 million over the prior-year period. The current-year period includes an $89.9 million charge related to the potential settlement of certain drug pricing litigation and SG&A expenses related to our International business. For 2010, we expect our SG&A spending on a GAAP basis to be in the range of $700 million and $720 million.

Amortization expense for the third quarter is $45.9 million, up from $22.2 million last year as a result of the Arrow acquisition. For 2010, we expect amortization expense to be approximately $180 million.

Our income taxes on a GAAP basis reflect an $18.7 million tax benefit associated with favorable resolution of an IRS audit. Our GAAP tax rate also reflects $4.2 million in other non-recurring tax benefits recognized during the quarter. For 2010, we now expect the GAAP-effective tax rate to be approximately 30%. On an adjusted cash basis, we continue to expect our 2010 effective tax rate to be approximately 37%.

On an adjusted cash basis, which excludes amortization expense, earnings for the third quarter was $0.85 per share, up 9% from $0.78 per share in the prior-year quarter. Also excluded from the GAAP results, for adjusted cash basis reporting purposes, were $10.6 million in acquisition and licensing related charges, $9 million in costs associated with our Global Supply Chain initiative, an $89.9 million litigation charge and $22.9 million in favorable tax benefits.

Included in the $10.6 million of acquisition and licensing related charges are $8.2 million of GAAP interest deductions related to the revaluation of liabilities associated with the acquisition of the Arrow and the acquisition of the progesterone business from Columbia. The acquisition of progesterone business was treated as a business combination for GAAP purposes. Consequently, contingent liabilities associated with the acquisition have been valued as of the acquisition date and reflected on our balance sheet. Adjustments to the fair-market value of these contingent liabilities will be reflected in earnings on a go-forward basis.

GAAP earnings for the quarter was $0.21 per share. Our adjusted EBITDA for the third quarter was $211.1 million, up 18% compared with the prior-year period. Cash flow from operations for the third quarter was strong at $136.5 million.

We ended the quarter with just under $1.2 billion of debt and $266 million in cash and marketable securities. During the quarter, we repaid $50 million on our revolver, leaving the entire $500 million undrawn at quarter end. With this debt repayment, our debt-to-adjusted-EBITDA ratio improved to 1.5x as compared to 2.1x at year end.

I'm pleased with our financial performance in the quarter and with our ability to utilize our strong cash flows to both delever and reinvest in the growth of the business. Watson is in a great position to capitalize on opportunities for future growth.

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

Paul Bisaro

Thanks, Todd. Now we'll talk about the remainder of 2010 forecast. Our estimate for full year net revenue is approximately $3.5 billion. We expect our Global Generic segment revenue, including our international revenues, to be approximately $2.3 billion.

Turning to the assumptions for our U.S. Generics business. We are assuming no new competition on metroporol or Micro K for the remainder of the year. We have, however, accounted for KVs re-entry on generic Micro K. Our U.S. forecast does not include any contribution from additional patent challenges. On the international front, we continue to expect our international revenues in the fourth quarter to be higher than those in the third quarter.

On the Brand side of the business. We expect net revenues to be approximately $400 million for the year. And with the ANDA Distribution business, we anticipate revenue to be approximately $825 million. We expect adjusted EBITDA of $835 million to $850 million and adjusted cash EPS in the range of $3.37 to $3.45.

In summary, with the majority of 2010 now complete, I can say that I'm extremely pleased with how the year is progressing for Watson. The business is performing well, and we've made considerable progress on every one of our objectives for the global growth of our company. I want to thank my Watson colleagues for their hard work and dedication, without which our performance today would not have been possible.

With that, let's turn the call back to Patty for questions. Patty?

Patricia Eisenhaur

Thanks, Paul. And Brandy, we'll open up the queue for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Scott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co

Just a couple of follow ups on the Concerta agreement. Can you elaborate a little bit more on the step up in gross margins? Is that something that's just a time-based event? Or is that tied to your own approval or something else? And give us a little bit more color on the gross margins in the first two quarters? Is that something that's going to be meaningfully below your current gross margins?

Paul Bisaro

It is a time-based step up, okay? And as to the first few quarters, I would say it's modestly below the generic margin. And then as we said in the last few quarters or after the first few quarters, it steps up to being more like our Generic margins and then at some point, modestly higher.

Christopher Schott - JP Morgan Chase & Co

And then just a final Concerta question. Is there any constraint on the amount of product that you're going to be able to ship into the market?

Paul Bisaro

No.

Christopher Schott - JP Morgan Chase & Co

Micro K, you mentioned you have accounted for the re-entry of a competitor in the space. Can you just talk about how you're thinking about price in that market and about that re-entry in terms of your share and just the dynamics overall?

Paul Bisaro

Well, like anything else, it's a question of market dynamics. We would anticipate, since there's certainly plenty of product in the market that we've provided, that it should be orderly. It wouldn't make a lot of sense for mass disruption, so we're expecting a more orderly marketplace. Only time will tell, however.

Operator

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

Elliot Wilbur - Needham & Company, LLC

First question is just with respect to potential future expansion efforts, particularly outside the U.S., given that you've now successfully established a global beachhead in, I guess, in light of some very fast-moving market dynamics over the past couple of months. Has that, at all, altered your acquisition game plan going forward? Or at least maybe changed your potential angle of attack in terms of buy versus build in some of the countries that you're currently in, in terms of building more optimal scale and also thinking about expansion into some additional territories particularly in the EU?

Paul Bisaro

As you correctly pointed out, Elliot, it has been a fast-moving environment. But I think the base fundamentals are still in place that attracted us to those global markets. And those base fundamentals are the continued need to increase generic utilization in many of these markets, as well as which we think we'll certainly outpace any pricing declines. Also the fact that, that Watson is, I think, well and strategically placed now with our facilities and global supply chain to be competitive in those markets on a long-term basis. So things haven't changed for us. We still want to expand our global footprint. As to the opportunities, there are obviously less and less opportunities every day. But the consolidation of the generic marketplace continues pretty aggressively. And we've been very selective at what we've been looking for. We want to find the right opportunity in the right market. We have certainly key markets that we want to continue to build like France and Germany and the U.K. and Canada, Australia as well. I mean places where we currently have a good business, but we know we can build it. And we're going to go after those in two different ways. We're going to continue to use our internal resources, our own applications, follow our own products and build the businesses. But we're also going to look for selected opportunities to grow them by acquisition. If a bigger opportunity presented itself, we would certainly look at that. But those opportunities are fewer and fewer out there. As to emerging markets, I think you saw us do the deal with moksha8 where we acquired about 20% of moksha8. That's a strategy that we'll probably follow more and more in these emerging markets that are really sort of difficult to enter. They're difficult to enter because of local environment, local players, costs of manufacturing generic drugs in those markets and a brand-to-generic strategy in many of these markets. moksha provides us a great opportunity to do in-brand and generic strategy in two very attractive markets. And we'll look for those kind of opportunities in other emerging markets around the world.

Elliot Wilbur - Needham & Company, LLC

As a follow up to that, how would you rank order your acquisition priorities in terms of just building on additional scale in some of the global market in which you're currently present on the generic side versus looking for a scalable platform in which to leverage your U.S. Branded business in their international markets versus potentially even enhancing your U.S. generic positioning with some select product acquisition?

Paul Bisaro

I think we're lucky enough to be in a financial position to be able to do sort of all three of those things. You ask me to rank them, I guess we're very aggressively looking around for generic growth opportunities globally. However, we're also looking pretty aggressively at how we expand our brand footprint outside of the U.S., focused primarily on countries where we have scale, where we have critical mass. And for example, we have a number of products filed in Canada. And so the Canadian brand opportunity is probably the next one we'll look at as a way to take advantage of those products that are filed there. And then finally on the U.S. side, on the generics piece, I mean I think we're a very, very large company here in the U.S. We're number three or four, depending on how you count it. And additional scale for us doesn't really do much for us in the marketplace. We have a great pipeline, we've got great products. So there's not a lot of incentive to do a big deal for a generic piece in the U.S. However, we do continue to look very aggressively at brand opportunities to continue to fill out our urology and women's healthcare portfolios including in the pipelines. I think they're very strong, but you can always make them stronger. And then as we prepare for even more future opportunities, we have to continue to look at biologics and continue to keep focus on the fact that five, seven, 10 years from now, biologics are going to be the drivers of growth. So all of those opportunities, we're working on all of them, and we have the balance sheet to be able to do that.

Operator

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

David Buck - Buckingham Research Group, Inc.

Paul, since it's about a year from the acquisition date or close to it, of Arrow, can you talk about how you see that in terms of kind of returns you've been getting from that business versus what you had expected? And can you talk a little bit about just what the currency impact might have been year-over-year? And then just a quick one, Paragraph IV, opportunities generic Ferrlecit and the generic Fentora, just an update on the expectation now and why they're not in the guidance?

Paul Bisaro

As to Arrow acquisition, that's sort of a rehash of kind of where we're at. I think it was, in retrospect, it was a very solid acquisition for us. It gave us many, many of the things we needed. I think Elliot called it a beachhead, and I think that's probably what it did. It gave us a global footprint that we can build off of. And from that perspective, we really couldn't be happier. We did face some headwinds and challenges in international markets, just like everyone else has done, but that's to be expected. It's to be expected that in some years, international markets are going to face some challenges, and in some years, the U.S. market's going to face some challenges. And that's the point of being diversified. So when one market is struggling, hopefully another market is picking up. And I think we're in a good position to take care to take off of them. And we've also had some very, very good assets from Arrow on the U.S. side. We, of course, look forward to the launch of atorvastatin next year. We have the launch Xopenex in 2012. Some very solid assets were provided to the company from the Arrow acquisition. So all in all, I think we're very pleased with where we ended up. I'll let Todd address the currency question.

R. Joyce

Sure. Sequentially, David, there was minimal impact of the currency fluctuations for the quarter.

David Buck - Buckingham Research Group, Inc.

And Todd, just year-over-year, what would the impact have been if you had owned it last year in the portfolio?

R. Joyce

We didn't evaluate it on that basis.

Paul Bisaro

And then, David, I think you asked about Fentora. And Fentora, we decided to remove it from the guidance principally because it's late in the year, and we've faced a couple of issues there. There's an injunction that was entered against us while the judge is preparing her decision. We do expect the decision any day, and then we'll see what happens. So it made sense to take that out. We also are, there's I think two new sets of petitions or two relatively new sets petitions that were filed, and of course, as you know, we have to address those, and that always takes a little time. I think the other question you asked about was Ferrlecit. The generic Ferrlecit, this is one of the frustrations, I think, the entire industry is having. It's the predictability of FDA approval is, I've learned the hard way, is impossible. Our application continues to be in the queue for approval. It's an expedited review, but expedited doesn't mean what you and I think it means. It means something else, which is slow.

David Buck - Buckingham Research Group, Inc.

Is there any actual dialogue on that or is just...

Paul Bisaro

We're just waiting for them to sign the papers.

Operator

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

David Amsellem - Piper Jaffray Companies

I want to come back to Brazil real quick and just emerging markets. I mean what's your appetite for doing a larger-scale acquisition there? And just given the growth of the overall pharma market there, is that a market where you see yourself looking to expand your brand footprint?

Paul Bisaro

Yes to answer the last question. First, it is absolutely where we're looking to expand our brand footprint, which is why the moksha transaction is so valuable. moksha is principally a brand company today, with brand sales forces calling on physicians, and in some cases, pharmacies. It's our intention to put our brand portfolio into Brazil and Mexico using their sales forces. In addition, we'll be using their sales forces to sell branded generic products in those markets, and then at the same time using our own capability, which we currently have in Brazil, to sell more tender-like generic products. So if you think about it, we're coming at the whole market from sort of a two-pronged approach. We've got combined with moksha, we're using a brand strategy and branded generic strategy and then a tender strategy for our generic products that fit that kind of category. So it is an attractive market. If another opportunity in Brazil presented itself, we would certainly take a look at it. I think as you know, the acquisition prices for opportunities in those markets are a little high at the moment, and so we have to be cognizant of that. And we're pretty careful of what we look at to buy, and we want to make sure the numbers would work.

David Amsellem - Piper Jaffray Companies

Quick one on ellaOne, and I may have made this since I joined late, but just remind us what your time line is for the commercial rollout and how we should think about pricing relative to your competitors?

George Wilkinson

Yes, this is Fred Wilkinson. We're in the final stages of preparing the launch. Approval came in late August, early September. Supply is available to us, and we'll go into the marketplace, I think, before the end of the quarter.

David Amsellem - Piper Jaffray Companies

Just any update on the Lidoderm Paragraph IV, where you are in the litigation? And any expectations regarding movement from the FDA on the Citizen's Petition?

Paul Bisaro

The Lidoderm litigation sort of just in the early stages. We don't think we're going to follow the Citizen's Petition. We said that before, we'll say it again. The guidance we followed, the equivalency [ph] guidance as issued by the FDA, which actually came out about six months after the Citizen's Petition was filed. So we feel pretty comfortable we satisfied the requirements -- well, the arguments laid out in the Citizen's Petition. And I guess, you should probably recognize that our 30-month stay on Lidoderm ends in July of 2012.

Operator

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

Ken Cacciatore - Cowen and Company, LLC

Paul, on Concerta. Can you just talk about maybe the sustainability of this product? Are you aware any of industry chatter about other Concerta approvals or where folks stand? And then as well, I would just say to you, do you really want to us to be left to our own devices here looking out to 2011 and 2012? They seemed like huge economics as they escalate, I guess, per your guidance, north, near 50%. So do you want to take a cut at giving us some direction? You previously were at 10% growth in those years. It seems like this would escalate dramatically higher. Do you want to comment on that?

Paul Bisaro

Well, as to the competition, I mean, there has to be sort of point to two companies that we know have, looks like they have applications. One we know, Codco [ph] is in litigation right now with Ortho-McNeil-Janssen on the product. We don't expect them to get approval on the time period between now and May. And Impact has indicated, I think, that they're still working on their application. So right now, for both of those companies, we don't really expect any competition in the short term. Regarding guidance, we'll give a lot more color on 2011 guidance at Analyst Day, which we expect to happen January. But I think, well, we did give you pretty specific guidance around what margins to use. I think one thing you need to remember, of course, is Concerta will also be supporting the revenues and the profitability for Concerta will also be replacing some of the product loss that we have on a year-over-year basis in our normal Generic business. Normal Generic business has the unfortunate problem of a decline every year because of new competition, price declines and the like. So it doesn't necessarily be all additive. And also, some of that we could reinvest in R&D and the like. So we think it's a good arrangement for us. We think it's a good arrangement for Ortho-McNeil, we think it's a good arrangement for consumers because we've got a product out. We know we're going to get it out, we know we're going to get a lower-cost alternative out, and we know when that's going to happen. And we don't have to wait for approvals and the vagaries of fighting through the Citizen's Petitions and everything else. So hope that helps.

Operator

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

Louise Chen - Collins Stewart LLC

First question I had was with respect to your o-U.S. Generics business, maybe the Arrow. How are the sales of that business tracking relative to your initial expectations? And then what do you expect for growth in 2011? I know you gave some guidelines this year, will you provide those again for next year, for 2011?

Siggi Olafsson

Hi, Louise, it's Siggi Olafsson. I think our International business is tracking quite well relative where we have seen the price pressure probably a little bit more than we built it. Forecast was in Canada and the U.K. On the other hand, there has been more volume increase that helped going into the [indiscernible] on the countries. But we have a volume increase in our U.K. market of around 20% year-over-year, but the price pressure has built that down. On the other hand, in France, we are in line or about with our expectation. And then we have smaller markets around the world that Paul explained. Those are the platforms for our new portfolio going forward. So I think the overall international markets outside of the U.S. really has the opportunity of growth. With regard to forecast, we will give that again on the Analyst Day in January, how we see the 2011 and the future for these markets.

Louise Chen - Collins Stewart LLC

Second question is just with respect to your women's healthcare franchise. You obviously have a lot of potential shots and goal with respect to new product approvals and potential product approvals coming up. Can you talk about how big your business is today? And where do you want it to be over the next, say three to five years?

George Wilkinson

Remember, this is our first year back into women's healthcare. We've been focusing on a couple of smaller products to help rebuild our knowledge of the customer base and establish kind of an understanding of how the OB/GYN works today. We currently promote Gelnique and Femring. And as of July, we put Crinone into the bag. Starting the end of this year, we'll have ella. Beginning of next year, we'll add an oral contraceptive and it goes from there. And hopefully, with some good luck on the Crinone Phase III program, the pre-term labor, we'd like to get that into the marketplace at the end of next year. So we see ourselves that this is a year of re-emerging in the market. Several assets have come into the bag at the end of this year and the beginning of next year, which really takes us into the base business of women's healthcare. And then with some good luck, we'll be introducing a novel therapy in the category, where there's a completely unmet need.

Operator

Your next question comes from the line of Rich Silver with Barclays Capital.

Richard Silver - Barclays Capital

A few questions on the Brand side. Can you give us an update on RAPAFLO and Gelnique, what you're seeing quantitatively, qualitatively in terms of the trends there?

George Wilkinson

Absolutely. So Gelnique and RAPAFLO continue to grow. We've shifted some emphasis to RAPAFLO versus Gelnique. So RAPAFLO now is sitting in first position in all of the bags, as we get out of into the marketplace. So we've increased the coverage of the urologist for RAPAFLO. We're still experiencing about 23% to 24% of growth quarter-over-quarter on prescriptions, which is good news because each quarter it's a higher volume. I think our revenue actually increased about 38% quarter-over-quarter on RAPAFLO. And this is trending in a position that we think we'll be making a meaningful product out of it in the end of 2010 and going into 2011. We also have some new data on an indication or potential new indication, that we're starting to put into the marketplace that help differentiate product from this and the other competitors. And so we're bullish on RAPAFLO and the opportunity there. Gelnique is actually functioning in a much tougher marketplace because we're seeing the marketplace declining slightly. We think that's a significant impact on the economy, because we see it in all of the products in the OAB marketplace. We're actually growing about 10% to 12% quarter-over-quarter on prescriptions or a bit higher than that on our revenue as we put it in the quarter. And we've got that into a solid second position detail from the bulk of urologists and the primary care physicians. So still looking for growth for both of those products. I think you can anticipate a little larger growth out of RAPAFLO than Gelnique.

Richard Silver - Barclays Capital

And just shifting to the Generics side. The 2Q to 3Q increase, excluding International, can you comment on that? Anything there that might be noteworthy?

Paul Bisaro

In terms of revenue?

Richard Silver - Barclays Capital

Yes.

Paul Bisaro

I think the revenue growth in 2Q to 3Q was driven principally by our extended-release products. That would include -- we've got quite a portfolio of extended-release products now, with the metoprolols, the potassium chloride, clarithromycin and [indiscernible]. We certainly have a good and growing portfolio. We would continue, you should continue to expect to see continued products like that from us. These products present great opportunities, generally less competition, and that generally means that the product is going to continue to grow for you over time. So that's kind of what we did, Rich.

Richard Silver - Barclays Capital

And one last one on Concerta. The agreement, can you at least tell us whether the step ups are equal in time. If say 3 1/2 year agreement, is it equal, divided by the 3 1/2 or 1.2 each? And I guess the last thing is you said time based. Is there any component at all of the agreement that's not time based that might take into consideration, additional competition during that period until 2014?

Paul Bisaro

Yes, the economics would change in the event of competition. So that is not a time-based issue. But the step ups are time based. And because of confidentiality constraints, we're sort of prevented from giving much more detail than that.

Richard Silver - Barclays Capital

And how would it change if there was competition?

Paul Bisaro

The economics would change.

Richard Silver - Barclays Capital

Right, and...

Paul Bisaro

Again, Rich, I'd love to tell you, but I can't.

Operator

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

Timothy Chiang - CRT Capital Group LLC

I know you can't really discuss the agreement with J&J that much. But are there defined minimums as to how much J&J has to supply you with Concerta starting May next year?

Paul Bisaro

No, Tim. We're not constrained either with minimums or maximums. So we're working with them right now to prepare for the launch of the products, and we don't expect any issues or any hiccups with that. There's always a start-up potential concerns issue with products which is from one label to another. But I don't really foresee anything right now. Our folks, supply chain people are on it. And I think we've had a good relationship with working with Ortho-McNeil in the past, and we've certainly done a number of products with them, and we don't see any issue, really.

Timothy Chiang - CRT Capital Group LLC

And you don't see anything with the DEA [Drug Enforcement Administration] quota? I mean basically, you're going to be working underneath Ortho-McNeil's quota, is that right?

Paul Bisaro

Right. And the good news is they have quota for the whole market right now, so it makes it a lot easier. Otherwise, we would have had to get our own quota, convince the DEA to take part of their quota. So this actually makes it a little easier.

Timothy Chiang - CRT Capital Group LLC

I've always thought that you guys were the frontrunner in Concerta and that you certainly would be in the driver's seat if the FDA ever decided to approve this product. And I guess with the settlement, maybe you can talk a little bit about what your expectations for an actual FDA decision on generic Concerta is? I mean do you think this is going to take years? Or do you think this is the right deal, even if a generic Concerta doesn't get approved in the next six months?

Paul Bisaro

I think, Tim, as we've seen and as I sort of indicated with my frustration regarding the generic Ferrlecit, it's become very difficult, if not impossible, to predict the timing of the Agency's ability to deal with complex questions. We were pleased to see that they moved earlier in the year difficult products like the Ambien then also the Lovenox. But it takes a long time for them to get to that spot. And what we wanted to do and what we're able to do with this transaction is provide certainty and provide certainty for us and provide certainty for consumers. So I think for all those reasons, it made sense. And as you say, even if competition does appear, we think we did the right thing.

Operator

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

Ronny Gal - Bernstein Research

First, regarding the closing of Carmel in the end of the year and Toronto and Puerto Rico later, roughly how much -- I understand all of the costs come out just when you close down a factory. Roughly what will be the step up in gross margin or in gross profit that will come from the closing of the Carmel facility once we enter 2011?

Paul Bisaro

Well, Ronny, let me just clarify, you said Puerto Rico, it was actually Australia R&D that we're talking about there, the R&D facility in Australia. It was a smaller facility that the Arrow folks had. But I'll turn it over to Todd for the question about the step up.

R. Joyce

Sure. In terms of margin, what we've communicated previously in terms of the savings from our Global Supply Chain initiative, it's running about 2% of margin impact. So we've seen a 2% favorable margin impact from the actions we're taking.

Ronny Gal - Bernstein Research

And how much of that will come in just when you close the facility? It's kind of tough for us to estimate when those cost savings begin to trickle in and when do they end.

R. Joyce

Well, right now, these facilities, the cost we're occurring is to transfer the product outwards, excluding those from our adjusted numbers. So we were already seeing really the impact of that. What you're not seeing fully is the impact of shifting that production from high-cost manufacturing to low-cost manufacturing, and so that's going to be incremental. And you'll start to see that as we actually move, complete the process of moving products from the U.S. into Malta and India.

Ronny Gal - Bernstein Research

So somewhere next year, we should see those 2%?

R. Joyce

You'll start to see that. You're seeing some of it now, and you'll see the rest of it in '11 and '12, early...

Ronny Gal - Bernstein Research

And the follow up is on Micro K. Paul, I've looked at the ROV right now on the from potassium chloride. And I'm guessing right now, what's happening is that your competition is trying to shift the ROV back to them, and then they can launch their own generic. My question is really about additional competition of that market. Is it fair to say that given the unclarity who the ROV is and just the length of time to do the clinicals on this product, we are probably not going to see another Micro K competitor until 2012?

Paul Bisaro

I don't think I would go that far. I think people who are working on the product and the ROV shift is not -- it's my understanding, I think that's a very good question, does that affect the timing? I believe the Agency's position is as long as you use one of the ROVs at the time for the...

Ronny Gal - Bernstein Research

Okay. So it's either one it's not...

Paul Bisaro

I don't think that's going to impact the timing of another competitor. But again, I would hesitate to say we won't see competition before 2012. I don't think that's probably accurate.

Operator

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

Gregory Gilbert - BofA Merrill Lynch

Just one other Concerta question, I don't think you've had yet. Can you just confirm that your approach here will be a typical generic approach, where you try to maximize penetration in all channels?

Paul Bisaro

Yes, I think that's exactly it.

Gregory Gilbert - BofA Merrill Lynch

I have a LIPITOR question, it might more of an industry question too. It's my understanding that starting next year, when patients hit the doughnut hole, they might have to pay more for an authorized generic than a pure generic? Do you see it that way? And if so, do you think that has implications for your LIPITOR share, and in general for industry's shares for AGs versus pure generics, because this is a unique situation starting in 2011?

Paul Bisaro

Yes. I think it's true that AGs fall within the brand version of the reimbursement. So they do participate as part of that doughnut hole issue. Do I think it's going to affect the utilization? Not really at all, frankly. I don't think that's going to happen. I think more likely, the people will just continue to use the whatever generic the store provides to them.So I don't think it's going to have an impact on utilization.

Gregory Gilbert - BofA Merrill Lynch

And then lastly, I know you've gotten a lot, I think, similar questions about your two-step strategy internationally. But I wanted to ask if you step back, are you considering any business development strategies that would be more transformational in nature relative to geographic diversity business mix, tax structure? Are you considering any large transformational-type things that could even include mergers of equals at this point?

Paul Bisaro

I think the answer is we're always open to consider those kinds of opportunities. And we would consider them, provided that we convinced ourselves that it was right for our shareholders and our company. And we have looked and will continue to look at some of those opportunities. I think it's very clear, I've been very clear about this. Anything we can do to lower our overall corporate tax rate makes an enormous sense for us. 37% to 38% is a very big number, and it's a very big challenge for American companies. They have to deal with that when our top competitors are paying half that amount. So we've got to find a way to get that down, and sometimes, the way you do it is with a transformational transaction. That has to be well thought out and well understood by everyone before you do something like that. So that's the answer.

Operator

Your next question comes from the line of David Risinger with Morgan Stanley.

Christopher Caponetti

It's actually Chris for Dave. I was wondering if you can comment on LIPITOR. Do you guys expect Pfizer to do more deals with the mail order firms besides Medco for LIPITOR post-November 2011?

Paul Bisaro

Well, I think we've said as we've talked to people about how they should think about the opportunity, we said we would expect, and I think it's reasonable to expect, that Pfizer will do what other companies have done in this space and as to play a bit of a defense in close-model opportunities. So we don't expect that the full $8 billion market would be open to our product, but we do expect that still to be a very significant market. So yes, I guess we would expect that to happen. If it doesn't, we'll be ready for that as well. Pfizer will have to make its own decision economically whether that makes more sense, or whether it makes more sense through their transaction with us on the authorized generic, does it make more sense for them to not do that? That's their call.

Christopher Caponetti

You talked about Micro K in 2011, but could you just comment on incremental competition for metoprolol next year?

Paul Bisaro

Well, I think we sort of study and listen to what other folks had said, and we would expect to see additional metoprolol competition in 2011. Certainly, Sandoz has been pretty clear that they're working on getting their product back. So I would expect to see them at some point in 2011 and perhaps one or two others. It is a big marketplace. It is solid, and we would expect to have on orderly marketplace as people enter. But only again, time will tell on that.

Operator

Your next question comes from the line of Shibani Malhotra of RBC Capital.

Shibani Malhotra - RBC Capital Markets Corporation

I'm sorry to ask another question on Concerta, but I just wanted to make sure that I heard correctly. Paul, did you say that the gross margins on Concerta are going to be close to your generic margins, which are around 50%? Am I misunderstanding something? Because when we spoke earlier this week or when we were trying to kind of run an analysis, we were thinking better than the typical authorized generic margins, and we were modeling 25% to 50%. But this looks like maybe like you're talking more like 45% to 55%. Is that the correct way of interpreting what you're saying?

Paul Bisaro

Well, Shibani, remember what I said was that in the early quarters, the first few quarters, it's lower than our generic margins.

Shibani Malhotra - RBC Capital Markets Corporation

But you're not saying how much lower?

Paul Bisaro

Correct. And then I said in the later portion of the agreement, they would be equivalent to or modestly above.

Shibani Malhotra - RBC Capital Markets Corporation

And then just a follow up on your oral contraceptive business. We've heard both Mylan and Lupin talk about entering the market but we really haven't seen that much as yet. But can you just talk us through what you're expecting going forward in the next couple of years?

Paul Bisaro

Well, Shibani, I've been in this business for a long time, at bar and now at west and with oral contraceptives, and I've answered this question every quarter, people saying that there's going to be additional competition. And frankly, we just have never really seen that. For the remainder of the year, we see no major disruption in our Oral Contraceptive business because of additional competition. In 2011, I try to remind everybody that we have somewhere around 25, 26, 27 different products. As far as I can tell, the FDA has never granted 27 approvals to any one company in one year. So it's very unlikely that anybody's going to be able to compete with that basket of oral contraceptive products, either the Watson portfolio or the tablet portfolio. So anybody who enters this marketplace will be disruptive to that particular product. But overall, our business, well I think, will remain strong into 2011. I would expect it to also be a contributor, maybe not as major of a contributor in 2012.

Patricia Eisenhaur

Well, thank you, everyone. We're going to conclude today's call. And Brandy, if you could repeat the replay information for everyone's benefit. Thanks again.

Operator

Thank you for participating in Watson Pharmaceuticals Third Quarter 2010 Earnings 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 Sunday, November 14, 2010. The conference ID number for the replay is 14461923. The number to dial for the replay is 1(800)642-1687 or 1(706)645-9291. You may now disconnect.

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