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Executives

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

David Buchen - Senior Vice President, Secretary and General Counsel

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

Ken Cacciatore - Cowen and Company, LLC

Corey Davis - Jefferies & Company, Inc.

David Risinger

James Dawson - Buckingham Research Group

Ronny Gal - Bernstein Research

Richard Silver - Barclays Capital

Michael Faerm - Crédit Suisse AG

Timothy Chiang - CRT Capital Group LLC

Gregory Gilbert - BofA Merrill Lynch

David Amsellem - Piper Jaffray Companies

Watson Pharmaceuticals (WPI) Q4 2010 Earnings Call February 15, 2011 8:30 AM ET

Operator

Good morning. My name is Cassandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson Pharmaceuticals' Fourth Quarter 2010 Earnings Call. [Operator Instructions] And now, I would like to turn the call over to Ms. Patty Eisenhaur. You may begin.

Patricia Eisenhaur

Thank you, Cassandra, and good morning, everyone. I'd like to welcome you to Watson's Fourth Quarter and Full Year 2010 Earnings Conference Call.

Earlier this morning, Watson issued a press release reporting its earnings for the fourth quarter and full year period ended December 31, 2010. The press release, together with additional materials reconciling our GAAP and adjusted financial results and forecasts, 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 fourth 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 consolidated financial results for the quarter. Paul will conclude our presentation with our updated outlook for 2011. 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; Al Paonessa, Executive Vice President and Chief Operating Officer of our ANDA Distribution division; Bob Stewart, Executive Vice President of Global Operations; and David Buchen, our General Counsel.

Please note that today’s call is copyrighted material of Watson Pharmaceuticals, Inc. and cannot be rebroadcast without the company’s expressed written consent. I’d also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the company. It's important to note that such statements about estimated or anticipated Watson results, prospects or other non-historical facts are forward-looking statements and reflect our current perspective of existing trends and information as of today’s date. Watson disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law.

Actual results may differ materially from current expectations and projections, depending on 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 September 30, 2010.

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

Paul Bisaro

Thanks, Patty, and good morning, everyone, and thank you for joining us today. Our focus on making Watson one of the most profitable pharmaceutical companies in the industry translated into a very strong year, financially. I'll highlight the fourth quarter and then give you a short overview of our overall 2010 accomplishments.

I am pleased to report that we concluded 2010 with strong results in the fourth quarter. Net revenue for the fourth quarter increased 21% to $953 million. Non-GAAP net income for the fourth quarter increased 23% to $117 million, or $0.93 per share. And adjusted EBITDA for the fourth quarter increased 17% to $221 million. These results reflect strong profitability with our adjusted generic and brand gross margins at about 50% and 80%, respectively. And we accomplished these results while continuing to significantly increase investment in both our generic and brand R&D over the fourth quarter of last year. Tom will provide you with more details shortly about that.

Turning to some of the highlights for the full year, in our Global Generics business, we filed 34 ANDAs in the U.S. and over 145 applications around the world. In the U.S., we launched seven products and disclosed 17 new patent challenges. We also announced an agreement to market generic Concerta in May, which will provide solid earnings and cash flow foundation for 2011.

In our Global Brands business, we launched three new products in 2010, a six-month formulation of TRELSTAR, Crinone and ella. We received approval for a new oral contraceptive in December, which we plan to launch during the second quarter of 2011. That product is a chewable 25-microgram Ethinyl Estradiol product with a unique 24/4 dosing regimen. Women using this product can expect to experience lighter, shorter periods.

We announced the initiation of our first Biologic development candidate, recombinant FSH, for infertility, which we licensed in from Itero Pharmaceuticals.

During the year, we completed the majority of the tech transfer to our Liverpool facility and have established our clinical program, which will result in registrations for this product around the world.

Finally, working closely with our partner, Columbia Labs, we announced the completion of the Phase III PREGNANT Study in December on PROCHIEVE for the prevention of preterm birth in woman with a short cervix. The results were statistically significant in reducing preterm birth at multiple time points in the study. There was an improvement in infant outcome and the side effect rates were extremely low. Columbia plans to file an NDA in the second quarter. Under an accelerated review, the product could be approved in the fourth quarter of 2011.

Our ANDA Distribution business was also a significant contributor to our positive results and overall profitability, with a 28% increase in segment contribution for the year. Additionally, we made significant progress throughout the year as we continued to strengthen our Global Supply Chain. We initiated the closure of our Australian R&D facility and our Toronto manufacturing facility, and we closed our Carmel, New York facility on schedule at the end of the year. More recently, we announced plans to phase out and ultimately end generic R&D activities at our Corona facility.

Activities at that site will be reassigned to our other three global R&D sites. I am very pleased with these efforts, which resulted in the overall improvement of our gross margins for 2010, and those improvements should continue to provide benefits into 2011.

Finally, we repaid over $450 million in long-term debt for 2010 and generated over $570 million in cash from operations, giving us the flexibility to invest and grow in our businesses. So clearly, a very strong year.

With that, I will now turn the call over to Todd to take us through the financial results. Todd?

R. Joyce

Thanks, Paul, and good morning, everyone. We were very pleased with our financial performance for 2010. We received upgrades from all three rating agencies during the year, and our strong cash flow allowed us to prepay $150 million in short-term debt obligations.

We ended the year with over $290 million in cash and marketable securities and $500 million of undrawn capacity on our revolving credit facility. We are well-positioned to invest in additional growth opportunities across all of our business units.

I will now review our fourth quarter financial performance on a consolidated and divisional basis. Consolidated net revenues were $953 million, an increase of 21% over the prior-year period. Net revenues for our Global Generics division were $646 million, up 38%. Generic product sales were $608 million, up 32%, reflecting the acquisition of our international business in December of last year and higher sales of our extended-release products, including Metoprolol ER and Diltiazem LA.

Sales of extended-release products increased 53% to $191.1 million. Oral contraceptive sales increased 3% year-over-year to $97.9 million. Ex-U.S. net revenues were $148.6 million, which includes $25 million of other revenue earned in connection with a third-party development agreement.

Excluding this item, international net revenues were up 24% sequentially as a result of new product launches in the current quarter and lower third quarter results due to seasonal factors. Adjusted gross margin for the Generic division was 50.6%, up 3.9 percentage points over last year on increased sales of extended-release products and favorable margins.

Moving to the Brand division, net revenue was $103.3 million, down 15% from the prior-year period. The decrease reflects the loss of Ferrlecit, which was partially offset by increased sales of RAPAFLO, Gelnique, ANDRODERM and the addition of Crinone. We seized marketing Ferrlecit at the end of 2009. Brand adjusted gross margin was 80.3%, down from 81.5% in the prior year. Finally, net revenues from our Distribution segment was $203.4 million, up 3% from the prior-year period. Distribution segment adjusted gross margin for the quarter was 13.7%, down slightly from the fourth quarter of last year.

Turning now to GAAP operating expenses, consolidated R&D for the fourth quarter was $99 million, up 63% over the prior-year period as a result of increased development spending for both of our Brand and Generic businesses.

Brand R&D increased $28.2 million from the prior year. This reflects a $17 million licensing payment for Esmya and a fair value adjustment for certain contingent liabilities assumed in connection with the acquisition of the Progesterone Gel business from Columbia Labs. Generic R&D increased $10.2 million as a result of higher international development spending. For the full-year 2011, we expect total R&D spending on a GAAP basis to be in the range of $290 million to $310 million.

SG&A for the fourth quarter was $205.9 million, an increase of $68.7 million over the prior-year period. The increase reflects a $40 million charge related to our drug pricing litigation and SG&A expenses for our acquired international business. For 2011, we expect our SG&A spending on a GAAP basis to be in the range of $650 million to $675 million.

Amortization for the fourth quarter was $52 million, up from $26.5 million last year, reflecting higher amortization from our international business. For 2011, we expect amortization expense to be approximately $270 million. The increase in amortization expense is primarily due to projected new product launches, including atorvastatin in the fourth quarter of 2011.

Our fourth quarter GAAP results include an impairment charge for certain in-process R&D acquired in connection with the Arrow acquisition. This non-cash impairment charge for the fourth quarter was $28.6 million. Our GAAP effective tax rate for the fourth quarter was 47%. On a non-GAAP basis, our income tax rate was 36%. For 2011, we expect our GAAP effective tax rate to be approximately 43%. On a non-GAAP basis, we expect our 2011 effective tax rate to be approximately 36%.

On a non-GAAP basis, earnings for the fourth quarter were $0.93 per share, up 9% from $0.85 per share in the prior-year quarter.

Our non-GAAP results exclude $52 million in amortization expense, a $40 million litigation charge, $31 million in asset impairments and $25 million in acquisition, licensing and Global Supply Chain expenses. A full reconciliation of GAAP to non-GAAP earnings is included in our press release.

GAAP earnings for the quarter were $0.15 per share. Our adjusted EBITDA for the fourth quarter was $220.8 million up 17% compared with the prior-year period. Cash flow from operations for the fourth quarter was $248 million.

During the quarter, we repaid a $250 million term loan that was due in late 2011 and our $35 million Lombard Loan. We ended the quarter with slightly over $1 billion of debt and $294 million in cash and marketable securities. Our debt-to-adjusted EBITDA ratio was 1.2x, and our debt-to-capital ratio improved to 24% from 33% at the end of 2009.

I am very pleased with Watson's financial performance in 2010. With our strong balance sheet, ample cash and undrawn revolver capacity, we are well-positioned to invest in support of future growth.

With that, I'll turn the call back over to Paul for an update on our 2011 forecast and concluding remarks.

Paul Bisaro

Thanks, Todd. Now I'd like to provide an update on 2011 forecast. As we set out in Analyst Day in January, our estimate for full-year net revenue is approximately $4.2 billion. We expect our Global Generics segment revenue, including our international revenues, to be between $2.8 billion and $3 billion.

Turning to the assumptions for the U.S. Generics business, we are assuming we will see additional competition on our generic Toprol, generic Micro K and our generic oral contraceptive franchises in 2011. The impact of this additional competition was modeled in throughout the year. Our U.S. Generics forecast includes contributions from new launches of generic Lipitor, generic Concerta, and a small contribution from Paragraph IV patent challenges.

On the Brand side of the business, we expect net revenues to be between $470 million and $490 million for the year, reflecting continued growth of RAPAFLO, Gelnique , ANDRODERM and ella, as well as the launch of our novel oral contraceptive, but only a nominal amount of PROCHIEVE sales late in the year.

In the ANDA Distribution business, we anticipate revenue between $820 million and $840 million. Recall that reported ANDA revenues only include third-party sales, not ANDA sales of Watson product. This year, sales of two of the largest generic product launches, Concerta and Lipitor, will not be reported by ANDA because they are Watson products. We expect adjusted EBITDA of between $925 million and $1 billion, and non-GAAP EPS in the range of $3.85 to $4.15. We expect our non-GAAP EPS in the second half of the year to be higher than the first half, with the fourth quarter being the strongest.

In summary, Watson is beginning 2011 with extraordinary momentum to grow across all of our businesses. We look forward to executing on our plans and utilizing our strong balance sheet to fund investments for additional growth in all of our integrated businesses and drive growth and shareholder value over the longer term.

Lastly, I want to personally thank all of our Watson employees around the globe for their continued dedication and tremendous efforts in 2010. It was a great year, and we look forward to continued success in 2011.

With that, let me turn the call back to Patty for questions and answers.

Patricia Eisenhaur

All right, thanks, Paul. And Cassandra, if you don't mind opening up the lines for Q&A, we'll get started.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Greg Gilbert from Bank of America.

Gregory Gilbert - BofA Merrill Lynch

First, Paul, on Lipitor, do you have any theories on why there are no tentative approvals yet? And how much flexibility do you and your partner have to expand production significantly beyond current levels if that is warranted? And then I have a follow up on PROCHIEVE.

Paul Bisaro

Okay, well, on Lipitor, I really don't have -- I don't have any explanation as to why there's no tentatives. Sometimes, the agency doesn't grant tentatives. They just wait till the end and grant final approvals. I'm not sure I would read all that much into that information. With respect to our ability to launch and be able to supply, we believe we'll have plenty of capacity and plenty of product to be able to supply the entire market, if need be, in November of 2011.

Gregory Gilbert - BofA Merrill Lynch

And would the pie expand significantly due to therapeutic substitution that we would expect?

Paul Bisaro

Well, we'll be ready for that as well. We hope so, but we'll be ready.

Gregory Gilbert - BofA Merrill Lynch

And then on the PROCHIEVE front, I know the products and markets are slightly different, but do you have any comments on KV's actions of late pricing strategy, et cetera, relative to your thinking on PROCHIEVE?

Paul Bisaro

Greg, I'm going to turn that over to Fred. He's probably best able to answer that one.

George Wilkinson

Greg, we've obviously watched the KV approval, KV announcements and many of the discussions have gone on following the MFM meeting, which was this last week. They're in a slightly different marketplace. They're going out for women that have previous preterm; we are in the market for women with short cervix. I think all it does is really help aim our market research which is ongoing, really helps aim some of the pricing strategies that we were out testing right now and helps us set up the marketplace so that we can effectively market this once we're approved.

Operator

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

David Amsellem - Piper Jaffray Companies

On the R&D, can you talk about the split between Brand and Generic R&D in 2011, and maybe give us a little more color on which R&D segment we should be thinking about is growing more?

Paul Bisaro

Sure. On a pro forma basis, we had R&D spending of roughly $250 million in 2010. We're expecting a roughly 9% increase, and out of that 9% increase into 2011, about 2/3 of that increase is going to come on the Brand side, and 1/3 will come on the Generic side.

David Amsellem - Piper Jaffray Companies

And then a quick Concerta question, I want to come back to your guidance, really on 2013 about additional entrants, and wondering if you can talk about, is that a function of just conservatism on your part? Or do you have any insights into what might change at the FDA between now and 2013 that would result in greater entrants? I guess the question is how is the agency's thinking going to change regarding approvals?

Paul Bisaro

Well, that's a tough question. I think the agency is still considering what to do with this question around partial AUC and what the blood levels need to look like in the first eight-hour period. I'm not certain that they've concluded yet on what they want to do. It may take them some time to do that. Right now, they probably are not looking very hard at Concerta applications because there's only, as far as we know, there's only one other filer and that filer is pretty early in the process. It's hard to predict how long it's going to take them to get to the end on this. I think our view on timing of a new entrant is related more toward the backlog at the FDA and the timing that it takes to get a product through the process, as well as any additional litigation that could come up from that. Well, that's, I guess, the point.

Operator

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

Richard Silver - Barclays Capital

Paul, a macro question, it seems like settlement ban is back on the table in two forms, both in terms of the legislative branch, as well as the budget. Do you care to comment on your latest thinking on likelihood that we actually see something this year?

Paul Bisaro

Well, Rich, I am very disappointed to see that in the President's budget. I think the CBO score for this is unbelievable, frankly. And what troubles me sort of generally is, if we know this issue, as well as we do, we understand the CBO's score is that badly wrong, how bad are all the rest of the scores in the President's budget? Because if this is the way we're building budgets in the U.S., this is a serious problem. I think as a Trade Association we'll continue to fight this issue, Watson, of course, is committed to fighting this issue. We think it's wrong. We think it hurts consumers, it certainly hurts the industry, and it simply doesn't make sense. So on the legislative front, I think we feel pretty comfortable. On the budget front, we'll go fight that fight. I guess the other issue and maybe to put it out there is that we've heard some rumblings about the FTC trying to get what they can't get legislatively and what they can't judicially through a regulatory process, where they change the regulations. It's amazing to me, the activism being displayed here by the Federal Trade Commission, and I think we'll continue to fight that and try to shine the light of day on this thing.

Richard Silver - Barclays Capital

And I guess, well can I ask it another way, maybe given that it at least on the legislative side, it's died a few times, do you think that the latest developments give you any reason to be less optimistic than before?

Paul Bisaro

No, I think the most surprising thing to me was to see it in the President's budget as sort of a positive pay-for. On the legislative side, I think we are in a good position to continue to fight it. As we described the situation to legislators, they get it, and they understand that it's just not the right thing to do. So we haven't gotten to the White House yet, so we got to fix that.

Richard Silver - Barclays Capital

And one other question is product specific on Mucinex. You don't have an approval yet. What's your thinking in terms of timeframe, and whether this is one that could take a while before the FDA actually approves it, and then likelihood that you would actually launch at risk?

Paul Bisaro

Well, we did win the district court decision, which is a very positive step. And we're going to push the agency for approval on our products. I guess that probably, the most I can say at the moment is, we're evaluating all of our options, and we'll kind of address each one of those things as they come up. And hopefully, we can get the agency to get the approval quickly, and we can then have additional options to consider. But we're very pleased with where this Mucinex sits right now and with the decision that we have.

Operator

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

David Risinger

So I have a couple of questions, let me just sort of go one by one here. The first is just sort of stating what I see as a fact that Crinone appears to be inappropriately priced to be the benchmark for preterm birth, I guess, just at a simplistic level, is there an opportunity to re-base that pricing?

George Wilkinson

This is Fred Wilkinson. Obviously, we are looking at pricing. This is not an atypical situation for pharmaceutical products to face when they are participating in two unique marketplaces. So we'll be looking at the opportunity to continue to participate in both, while taking advantage of the new opportunity in preterm birth. We have a very large market research and pricing study that is fielded right now, so it really would be premature for me to go out and describe what our plans are. But we're watching very intently the impact that KV will have on the pricing in this arena.

David Risinger

And then Paul, maybe you can just comment on a couple of things that you factored into your guidance, and my questions are when does the guidance assume that KV relaunches metoprolol in the first half? And then second, what has been the price impact that you've seen of KV's relaunch of generic potassium?

Paul Bisaro

Well, let me address the metoprolol question, then I'll turn it over to Siggi to handle the potassium question. On metoprolol, currently, our guidance doesn't anticipate KV coming back with that particular product. We know there are other people who may be coming back to the market like Sandoz and perhaps, even another company coming with metoprolol. So what we try to do with guidance this year is not lay out a specific point in time, but we tried to anticipate a decline over time. That way, it was going to be easier for us to sort of maintain our guidance and track it a bit easier. So that's what we did for metoprolol and then Siggi, I'll have you handle the potassium question.

Siggi Olafsson

David, it's Siggi here. On the potassium, we have seen that already that KV has relaunched both the Brand and the Generic version of potassium. And we basically build that into our budget as it is. It's tear out budget, which we explained at the Analyst Day. So I think exactly what we are seeing in the marketplace today is what we built in over the year, so no surprises.

David Risinger

I had misspoken, so I meant Sandoz on metoprolol, so just to confirm, Paul, so you're assuming Sandoz and one other competitor coming in on metoprolol this year but not at an exact point in time? Simply, you're factoring in declines in the franchise to reflect that anticipated new competition?

Siggi Olafsson

It's Siggi here, I think you're absolutely right, David. We expect an increased competition on metoprolol over the year. We have it declined over the year from first quarter to fourth quarter. There will be increased competition. Who that will be, will it be Sandoz or somebody else, or some other names, we don't know exactly. We don't know of the exact timing, but the overall decline from first quarter to fourth quarter, we have built in.

Operator

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

Ken Cacciatore - Cowen and Company, LLC

Just a quick question on PROCHIEVE as well, if Fred, maybe you can give us a sense of just the total progesterone used currently right now with either the 17P injections, which I know Makena just got approved but also suppositories and Crinone itself in preterm birth. KV threw out a number on 150,000. I know you're looking at it from purely cervical length, but can you give us a sense of how many patients per year you think are receiving some form of progesterone including all of the risk factors for preterm birth, just so we can help size this market? And I know we're putting the cart before the horse on pricing, but I would assume you believe that the Makena regulatory process clears the way very easily or a low hurdle now for your PROCHIEVE. And maybe if Paul could comment on Fentora, any expectations we should have in the next upcoming months on that product?

George Wilkinson

So the use of progesterone today, that's probably perplexes you guys as much as it does us because it's very difficult data to get to. On the use of Crinone today, it's very little based on the IMS audits. So it doesn't appear that there's a lot of Crinone that is right now being prescribed for the indication of preterm birth. As you know, the 17P product right now is a pharmacy compound. It's available through pharmacy compounding. And none of the IMS data or any of the other services are really capable of gathering that data. So it's really only people's guesses at this particular point. So again, very difficult to recognize.

Ken Cacciatore - Cowen and Company, LLC

And then Fred, do you care to give a guess, or not even try?

George Wilkinson

Actually, not going to. I think KV has done a nice job of setting out what their patient population is, which they think is about 140,000 patients, as you saw on their press release. Remember, that's women who have a previous preterm so that ignores all the women who have already -- who have never had a baby before, so all the first timers. Our indication is going to be for all women with a short cervix, so that will include those that are on their first, second, third, fourth, fifth baby where a short cervix is recognized, and we've kind of laid out some numbers during our investor call as to what fits in the pure definition of one to two, the two to two and a half, and two and a half to three. And again, we're fielding research to see what kind of utilization might happen at the different lengths. So still a lot more information to come. I think we're going to build the model out a little bit more as we get a little closer. Your last question as far as approvability, obviously, we were encouraged with the approval of the KV product. I think it does give us a little more confidence on the approval process. But we've got our head down judiciously working with Columbia to make sure that the file goes in on time in the second quarter.

Paul Bisaro

And Ken, I think you asked about Fentora, I'll have David give you a quick update on where we are from the legal perspective. But just remember, we do have approval, and that's a very good position for us to be in. So David, why don't you take that?

David Buchen

So we do have final approval from the FDA. As you know, we wrapped up the trial last May, and we finished our posttrial briefing last June. We are waiting for a decision from the court. Last week, the court asked us to send a letter in by the end of the day today, providing an opinion on what the impact would be if the court decides to rule on the Orange Book patent but not yet rule on the non-Orange Book patent. The three patents were all part of the same trial. So we're planning to send that letter in today, and we'll wait for the court's decision to see whether we get a decision on at least the Orange Book patents and what the impact of that may be. Right now, there's an injunction in place, and our decision on next steps is going to depend in large measure on how the court rules on these first set of patents.

Operator

Your next question comes from the line of Corey Davis from Jefferies.

Corey Davis - Jefferies & Company, Inc.

I want to follow up on Fentora, what you just answered. Assuming that the decision goes in your favor, and I know you have FDA approval, is there anything else that might hinder an immediate launch as things like manufacturing, supply and the other thing I'm thinking about is the REMS program with the FDA. What do you have in place right now? Because I think all of these immediate release products are undergoing kind of a consolidated REMS overhaul that's not yet in place, is that correct?

Paul Bisaro

Yes, I think on the REMS front, we're fine. We will be certainly in a position to be able to take advantage of a positive result. And so there's no -- we don't see any particular issues standing in the way from a manufacturing or regulatory standpoint. As part of the overall approval, the REMS program was approved as part of that. Well, that's all been resolved and I think we said in the past, we've got -- we're very comfortable dealing with REMS programs, we've dealt with them in the past and will certainly deal with them a lot going forward. So we're capable of that. I don't know if, David, legally, if there's any additional hurdles we have to address?

David Buchen

No. I think based on the courts letter, we have to assess whether the court is going to rule on all three patents or just on the first two Orange Book patents. It probably comes as no surprise that we think that if we prevail on the Orange Book patents, we don't think the injunction should remain in place. That would be the only additional hurdle from a legal standpoint that we'd have to clear before we could launch would be getting that injunction removed.

Corey Davis - Jefferies & Company, Inc.

Can you elaborate a little bit more on why she asked the question and what would happen if she only ruled on those two as opposed to the third? What could she be getting at?

David Buchen

I really can't elaborate on that. We evaluated it. I think the court is maybe taking these two groups of patents serially and understands that our 30-month stay has already run, and that we have final approval and asked both sides to comment on what the impact would be if she only rules on the first two Orange Book patents.

Operator

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

Timothy Chiang - CRT Capital Group LLC

Given that you've got about two and a half months before you launch Concerta, can you talk a little bit more about what your expectations for launch quantities will be? Also, anything you can provide in terms of market share dynamics, pricing that you expect you will encounter, Paul?

Paul Bisaro

Well, I'm going to pass this one over to Siggi and let him handle the market dynamics question.

Siggi Olafsson

On Concerta, we expect to launch in May. With regards to markets here, there will be two-player market, it will be us and Johnson & Johnson. Johnson & Johnson have just raised the price. I think you know that just recently by double digits. I think the pricing in the market clearly -- there will be a price erosion in the market, when there's an introduction of an AG, and we have to see how that comes out. But overall, our expectation is that we come and this will be a two-player market and that as Paul has said previously, we expect to be a two-player market for some time.

Timothy Chiang - CRT Capital Group LLC

And Siggi, just a follow-up on that, how much market share do you expect to get right at the onset of the launch? Is there a ballpark range you have targeted?

Siggi Olafsson

No, it's difficult to understand that until you see the market. Obviously, the mail-order pharmacies and the PBMs, we need to see how they react. Overall, I think we would be ready to take a very significant market share in the market. We will have to supply the whole market if needed. But overall, we have to see by May 1 how things will plan out.

Operator

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

Ronny Gal - Bernstein Research

Paul, I think we mentioned before that after 2012, respiratory players played a bigger role in your thinking about the Generic industry. Can you elaborate a little bit like that about this issue? Where do you see Watson potentially playing in that market? And anything you could tell us about what you see as the evolving climates of clinical trials for Generics on the respiratory market?

Paul Bisaro

Well, on the respiratory front, I do expect Watson to be a player in the respiratory arena along with others. And with regard to the clinical outputs or impact of that, we'll certainly continue to evaluate what has to be done. I mean, I think the harder questions are around things like plume geometry and all that kind of stuff that you have to deal with here, as well as the number of patents protecting not only the product, but also the device and then the use of that device and then the number of times per day. So it's a challenging arena, which by the way, makes it such an attractive arena. Because if you can overcome the challenges, then you probably have a long life cycle with those kinds of products. In addition as well, they've done, obviously, quite well. But we do expect Watson to be a player in that arena, and we certainly will be, as you know, launching this open ex product in 2012. And we, of course, have the budesonide product that you know about as well that we hoped to be launching as soon as we can get through the legal morass on that one. Siggi, did you want to add anything?

Siggi Olafsson

I think overall, we have like a threefold approach to the respiratory arena. Paul mentioned Xopenex, that came as part of the Arrow acquisition but also part of that Arrow had the company called in Breath in U.K. which focuses on respiratory development. On top of that, we are doing quite a significant co-development projects in this arena because as you said yourself, 2012 and onward, that $1 billion drugs are focused in this arena. So we have a multiple approach both in MDIs and on the other parts of this business, which we think that in '13 and '14 will pay out. But again, highlight what Paul said, there is a significant investment in the clinical studies to be able to get these product AP rated at the agencies.

Ronny Gal - Bernstein Research

And one more question about the -- you kind of mentioned upfront about the issue about OUS' seasonality in pricing. Can you just give us a feel for -- if we can go through a typical year, roughly, what percentage of revenue should be expected in each quarter based on seasonality of pricing in your OUS business?

Paul Bisaro

Ronny, I'm not sure I know that issue. I don't think we see seasonality necessarily. To the extent we see seasonality in the ex-U.S. business...

Ronny Gal - Bernstein Research

In the Generic Business.

Paul Bisaro

Generally, the third quarter is the lightest quarter of the year, and that's principally due to the holiday seasons throughout Europe, frankly. So I think as we look at the quarter-over-quarter international contribution, generally, the fourth quarter is stronger. Second quarter is generally strong, and you have maybe the lightest quarter would be the third quarter, followed by the first. So to the extent there is a seasonality to it, as far as pricing changes, those market dynamics are a country-by-country issue. And right now, we're seeing a bit of stability across many of the countries, although things change pretty rapidly with governments try to balance budgets. So we're trying to stay flexible and drive. For us, as we said at our Analyst Day, the most important factor for us on the, our international franchises, is making sure we have the right cost of goods, and if we maintain the right cost of goods, we can be competitive in any pricing environment that we face. So that's what we're focused on doing, and we think that will make us very successful.

Operator

Your next question comes from the line of Michael Faerm with Credit Suisse.

Michael Faerm - Crédit Suisse AG

Can you comment on some of the drivers of the strength in the international revenues this quarter versus the prior quarters apart from seasonality? And also, what are your expectations for next year in terms of international growth, and any comments you can give on volume and pricing growth in particular?

Siggi Olafsson

Michael, it's Siggi here. On the international market, I think fourth quarter always benefits from the launches throughout the year. Overall, we have quite a few launches in our international markets, wherein fourth quarter, you'd get the full benefit of that, and you'd have a wholesale in that quarter. So overall, I think that played a significant part of the business. Also, I think we have the volume increase both in Canada and on our French market as we explained in the Analyst Day. So overall, you see, as Paul mentioned before, fourth quarter is a little better than especially third quarter. Second quarter comes as the second-best quarter. With regard to this year, at our Analyst Day, we gave the indication that we expect that close to a 10% price erosion in this market. This is on the high side than on -- it's probably a little bit higher than some of our competitors have said. But I think it's also based a little bit on our portfolio. We are introducing a lot of new products in this market. We have a multiple new introduction in our key markets internationally throughout the year. So we, on that portfolio, always when there's a new introduction into the international market especially in Europe, the price erosion is very quick to begin with, and then it slows down the further it goes. So overall, I think the growth for the international business is around -- we expect a slow growth this year because we don't get the benefit of the Watson portfolio. And already in 2012, the Watson portfolio of products that we've had last year will start to benefit the international markets, and that will see a faster growth going forward.

Operator

Your next question comes from the line of James Dawson from Buckingham Research.

James Dawson - Buckingham Research Group

Could you get into a little more detail just on the percent of generic Micro K and Toprol-XL in the fourth quarter and full year?

Paul Bisaro

The percent of revenue?

James Dawson - Buckingham Research Group

Yes, the sales from those two products.

Paul Bisaro

Jim, we don't break out by product our sales. It gets us down a slippery slope, so we generally just pass on that. I would say that metoprolol, it was a significant -- but the metoprolol, it was certainly a significant contributor and so was Micro K as well. KV did not launch their generic until the beginning of this year. So potassium was certainly a significant contributor in the fourth quarter.

James Dawson - Buckingham Research Group

And then on Makena and for that market, particularly with the high price that they were talking about yesterday, what does that mean for your opportunities? Does that change your opportunity or could you just give a little more detail on that?

George Wilkinson

Yes. I think as we already described, we've watched the Makena pricing as it's been announced. We do have a significant pricing study that's fielded and in the marketplace right now. This will be a new factor that we'll put into that study and help us guide what our pricing strategy will be as we head towards commercialization.

Operator

You have a follow-up question from Greg Gilbert with Bank of America.

Gregory Gilbert - BofA Merrill Lynch

Paul, how broadly will you approach the store brand market for the Mucinex family given the large number of SKUs, different packaging configurations, et cetera? I know you have some experience in gum, but this seems a bit more complicated but correct me if I'm wrong on that.

Paul Bisaro

No, it's certainly complicated, and we're evaluating our approach into that arena. As you know, we do have a OTC business here at Watson. We sell it under the Rugby label, and we do have the experience with the gum as you mentioned. So we do have a way to get into that market, but we're evaluating all options at our disposal. And hopefully, we have some clever ways of getting this product to market.

Patricia Eisenhaur

Well, thank you, everyone, for joining us today. And I'll turn the call back over to Cassandra to give you all the replay information. Thanks, again.

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 Eastern Standard Time on March 1, 2011. The conference ID number for the replay is 40449367. The number to dial for the replay is 1(800)642-1687 or 1-706-645-9291. This concludes today's conference call. You may now disconnect.

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