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Executives

Patricia Eisenhaur - Vice President of Investor Relations & Corporate Communications

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

Paul Bisaro - Chief Executive Officer, President and Director

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

George Wilkinson - Executive Vice President of Global Brands

Sigurdur Olafsson - Executive Vice President of Global Generics

Analysts

David Risinger - Morgan Stanley

Ken Cacciatore - Cowen and Company, LLC

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

Richard Silver - Barclays Capital

Elliot Wilbur - Needham & Company, LLC

Shibani Malhotra - RBC Capital Markets, LLC

Timothy Chiang - CRT Capital Group LLC

Gregory Gilbert - BofA Merrill Lynch

Christopher Schott - JP Morgan Chase & Co

David Buck - Buckingham Research Group, Inc.

Marc Goodman - UBS Investment Bank

David Amsellem - Piper Jaffray Companies

Frank Pinkerton - SunTrust Robinson Humphrey, Inc.

Louise Chen - Collins Stewart LLC

Watson Pharmaceuticals (WPI) Q1 2011 Earnings Call April 27, 2011 8:30 AM ET

Operator

Good morning. My name is Darla, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings conference call. [Operator Instructions] Thank you. Ms. Patty Eisenhaur, you may begin your conference.

Patricia Eisenhaur

Great. Thank you, and good morning, everyone. I'd like to welcome you to Watson's First Quarter 2011 Earnings Conference Call.

Earlier this morning, Watson issued a press release reporting its earnings for the first quarter ended March 31, 2011. 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 first 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 up the call 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 Executive Vice President, General Counsel and Secretary.

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, 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. I am pleased to report that we are off to a solid start in 2011, with strong growth in the first quarter.

Net revenue for the first quarter reached $877 million. Non-GAAP net income for the first quarter increased 12% to $112 million or $0.89 per share, and adjusted EBITDA for the first quarter increased 9% to $216 million. These results reflect net revenue growth of 10% in our Global Generics division and 6% in our Global Brands division, and strong profitability with adjusted generic and brand gross margins of 51.8% and 81.6%, respectively. R&D investment grew over 25%, and we generated strong cash from operations of $232 million in the quarter.

I would now like to highlight some of our achievements thus far in 2011. In our Global Generics business, we received FDA approval for 2 new products and now have more than 130 ANDAs [Abbreviated New Drug Applications ] filed at the FDA and a significant number of applications globally. We disclosed 4 new patent challenges, including OxyContin, where we believe we were first to file on several strengths. We also made preparations to launch generic versions of Concerta, and we will launch that product on Monday.

In our Global Brands business, in April, we saw the publication of the positive PROCHIEVE Phase III PREGNANT Study results in the White Journal.

As was published, PROCHIEVE lowered the rate of preterm birth in women with a short cervix by 45% before 33 weeks of gestation, which was the primary endpoint of the study. The results also showed a significant reduction in the rate of preterm birth at 2 other important endpoints, before 28 and 35 weeks of gestation. The published data also showed strong trends favoring PROCHIEVE in terms of neonatal safety outcomes. As announced last night, Columbia, working with us, filed the ANDA for PROCHIEVE and should the filing be accepted under expedited FDA review, we could receive FDA action before the end of 2011.

We also prepared for the launch of our new oral contraceptive, which will occur in just a few days at the ACOG [American Congress of Obstetricians and Gynecologists] meeting. The product offers the popular 24/4 dosing regimen, and we have a unique marketing program, which will benefit a number of women's charities.

We received FDA approval during the first quarter for our value-brand product Nulecit, a generic version of Ferrlecit. We have begun marketing the product in our Global Brands division. Unfortunately, the market for this product has seen unusual competitive behavior and intense price erosion. So the revenue opportunity is not what it was a year ago. As a reminder, Nulecit was never expected to be a significant contributor to brand profitability this year.

We saw a lower year-over-year and sequential revenue for our ANDA Distribution business due to a lower number of third-party generic launches. That said, we saw expanded gross margins in our ANDA Distribution business by over 4 percentage points year-over-year. ANDA continues to be an important contributor for Watson and will play an important part in the launches of our generic versions of Concerta and LIPITOR in 2011.

Finally, we ended the quarter in excellent financial condition with $515 million in cash and marketable securities and a debt-to-adjusted-EBITDA ratio of below 1.2x. With that, I'll turn the call over to Todd, and he can take us through some more financial results. Todd?

R. Joyce

Thanks, Paul, and good morning, everyone. We're very pleased with our first quarter financial performance. We saw a strong year-over-year earnings growth and operating cash flow. All in all, it was a great start to the year.

I will now review our first quarter results on a consolidated and divisional basis. Net revenues were $877 million, an increase of 2% over the prior year period, reflecting strong revenue growth in our Global Generics and Global Brands divisions, offset by lower revenue in our ANDA Distribution business.

Net revenue for our Global Generics division were $600 million, up 10% on a year-over-year basis. Our U.S. business results were strong as a result of stable pricing, higher sales of our extended-release products and the launch of new products, including Zarah, our generic version of YASMIN.

Sales of extended-release products were $183.6 million, up 33%. Oral contraceptive sales were up 5% to $93.8 million due to the launch of Zarah, offset by some erosion in our base OC franchise. First quarter international net revenue was $108.7 million, down 2% from the prior year as lower pricing in the key markets offset the impact of higher unit sales.

Global Generics' other revenue was $15.1 million, up $5.4 million year-over-year due to a settlement of a long-standing commercial dispute. The settlement of $7.4 million has been excluded from our non-GAAP results. Adjusted gross margin for the Global Generics division was 51.8%, 1.6 percentage points higher than last year as a result of increased sales of higher margin extended-release products.

Moving to the Global Brands division. Net revenue was $96.9 million, up 6% from the prior year period. The increase reflects higher sales of RAPAFLO, ANDRODERM, Gelnique and the addition of Crinone. Global Brands adjusted gross margin was 81.6%, up 8.7 percentage points from 72.9% in the first quarter of last year as a result of favorable product mix. For the full year, we now expect our Global Brands adjusted gross margin to be at the high end of our previous forecast range as a result of lower anticipated sales of Nulecit.

Finally, net revenue from our Distribution segment was $179.5 million, down 19% from the prior year period as a result of fewer third-party product launches in the quarter. Distribution segment adjusted gross margin was 17.2%, up 4.1% from last year as a result of lower chain sales in the current year quarter.

Turning now to GAAP operating expenses. Consolidated R&D for the first quarter was $74.3 million, up 25% over the prior year period, as a result of increases in both our Generic and Brand businesses. Global Generics R&D includes $4.5 million of cost related to the closure of our California and Australia R&D facilities. Our Global Brands R&D includes $4.4 million in cost related to the revaluation of the contingent liability related to the Progesterone business acquired from Columbia Labs.

SG&A for the first quarter was $164.8 million, an increase of $12.8 million over the prior year period. The increase reflects higher international SG&A expenses and an increase in our brand selling and marketing expenses due to increased prelaunch activity in support of our upcoming launch of our new branded oral contraceptive.

Amortization for the first quarter was $56.6 million, up from $39 million last year, reflecting higher amortization of intangible assets in our international business as a result of product launches and higher amortization rates. Our international tax rate -- excuse me, our income tax rate on a GAAP basis was 48% in the first quarter, reflecting certain international losses and impairment charges for which no tax benefit was recognized. On a non-GAAP basis, our income tax rate was 36% in the first quarter, consistent with prior year.

On a non-GAAP basis, which excludes amortization impairment charges and other charges as detailed in Table 4 of our earnings press release, earnings for the first quarter were $0.89 per share, up 10% from $0.81 per share in the prior year quarter. GAAP fully diluted EPS for the quarter was $0.36.

Our adjusted EBITDA for the first quarter was $215.9 million, up 9% compared with the prior year period. Cash flow from operations for the first quarter was very strong at $232 million. We ended the quarter with $515 million in cash and marketable securities. Our debt-to-adjusted-EBITDA ratio was just below 1.2x, and our debt-to-capital ratio improved to 23%.

I'm very pleased with our financial performance in the first quarter. Watson's beginning 2011 was strong financial results and ability to continue to make investments in growth during the year. With that, I will 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 you with an update on the 2011 forecast.

Our estimate for full year net revenue remains at approximately $4.2 billion. We now expect our Global Generics segment revenue to be up slightly to between $2.9 billion and $3.1 billion.

Turning to the assumptions for our U.S. Generics business. We continue to assume we will see some additional competition on our generic Toprol [Toprol XL] and our generic oral contraceptive franchise in 2011. The impact of this competition was modeled in throughout the remainder of the year. Our U.S. Generics forecast includes contributions from new launches of generic Concerta, generic LIPITOR and a small contribution from Paragraph IV patent challenges.

On the Brands side of the business, we now expect net revenue to be between $445 million and $465 million for the year, reflecting on the positive side continued growth of RAPAFLO, Gelnique, Crinone, ANDRODERM and ella, the launch of our new OC and some amount of PROCHIEVE sales late in the year. The reduction in the forecast simply reflects much lower-than-anticipated revenue from Nulecit due to the market conditions previously described.

With the ANDA distribution business, we now anticipate revenue to be down from the original forecast and be between $770 million and $800 million. This reduction is the result of fewer-than-expected third-party product launches. As a reminder, sales from 2 of the largest generic product launches in 2011, Concerta and LIPITOR, will not be included because they will be launched by Watson. We now expect adjusted EBITDA of $950 million to $1 billion and non-GAAP EPS in the range of $3.95 and $4.20.

In summary, we had a very solid beginning to 2011, with strong results in the first quarter. We continue to be focused on driving shareholder value by executing on the opportunities that we have for 2011 and over the longer term by utilizing our strong balance sheet to fund investments for additional growth and expansion in all of our integrated businesses.

Lastly, our positive results would not be possible without the efforts of our employees. So I'd like to thank all of our Watson employees around the globe for their continued support. With that, I'll turn the call back to Patty for questions and answers.

Patricia Eisenhaur

Thank you, Paul. Darla, we can open up the call now for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Amsellem from Piper Jaffray.

David Amsellem - Piper Jaffray Companies

Thanks. Just a couple. Quick question on the debt. What is your goal on where you would want the debt-to-EBITDA ratio to get to in the next 12 months or so? And what's your appetite for a nearer term bump in the ratio if you saw an attractive acquisition opportunity, and where could you see taking the ratio to in that context?

Paul Bisaro

Well, David, we've been -- debt is just a factor of paying down various obligations as they come due, of course. Our current long-term debt of about $850 million we'll probably keep on the books for some time. We don't have any many sort of plans to pay that off. We have some shorter-term debt that we expect to pay off in due course. As to longer-term appetite for debt, we've talked about and talked with rating agencies about 3.5x debt-to-EBITDA ratio as something we'd like to stay at or below. We've talked about getting over that if the right opportunity presented itself, and then we've tried to delever as quickly as possible. Of course, that will depend on having the right opportunities present themselves.

David Amsellem - Piper Jaffray Companies

Okay. And then a quick question on Nulecit. I know that your expectations are muted but there was a recent suspension of manufacturing and distribution from the competitive product, Venofer. Any thoughts on how you believe that could impact Nulecit? Do you expect a temporary bump in demand? And does that change your view, at least in the near term, on what that product can do?

Paul Bisaro

Well, I think we're all sort of waiting to see what will happen with the Venofer product. There's been sort of conflicting reports about the availability of product and how many manufacturing sites there might be for the product. But as of now, we stand ready to fill whatever need is presented in the marketplace, and we'll continue to work with customers to try to get Nulecit into as many customers as possible. But I think it's just a little too early to tell what Nulecit might do over the year and how long Venofer may have its issues.

David Amsellem - Piper Jaffray Companies

Okay. And then, one last quick one if I may on Lidoderm. I know it's in your 2013 growth targets. I guess a broader question is do you think we'll see other filers beyond Mylan? How would you think about that?

Paul Bisaro

Well, I mean it's -- I'm sure other people have looked at the product and certainly, a significant product, and there are other people who have the ability to develop patches. So I would anticipate that we could see additional competition or additional filers on Lidoderm. But we're about a year or so ahead of Mylan in the process. So I think I like our position right now where we sit.

David Amsellem - Piper Jaffray Companies

Okay, great. Thanks.

Operator

The next question comes from the line of Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank

Yes. First question is on the gross margin on the Generics line. Todd, can you help us understand what's going on behind the scenes? Obviously, you got a product mix shift, you got a lot of work you're doing with your supply initiative. Can you help us maybe carve out the difference? How much is really going on behind the scenes on the global supply initiative, how much you're improving margins there if product mix was not shifting? And then second question is on PROCHIEVE. What are your expectations for how ACOG is going to treat recommending this new product, and how this all plays out? Thanks.

R. Joyce

Well, on your question on margins, the main driver for the quarter really was the higher extended-release sales, and those are much higher than our average margin. As we've said in the past, the supply chain initiative has contributed and continues to contribute to the gross margin, although we're not seeing a significant benefit year-over-year in 2011 as we've seen in the past. So it's still contributing, but it's less than 1 percentage point of the year-over-year variance.

Paul Bisaro

Fred, you want to take the PROCHIEVE question?

George Wilkinson

Marc, this is Fred Wilkinson. Obviously, ACOG, the MFM society and some of the other groups around there will be critical factors on determining practice standards for utilizing TVUs [transvaginal ultrasound], which is the key entry to this product and then the general practice for how the product will be used. ACOG meeting is a national meeting on next week. We have many meetings scheduled with both the national committees and the district committees. There will be at least 3 presentations at that meeting on the results of the study, as well as some new insight as to the value of conducting TVUs on all women that are pregnant. So this is going to be a critical issue, of course. And we've been working on it for about 6 months now, and we'll continue to work on it until the time the product is approved and then launched.

Marc Goodman - UBS Investment Bank

Okay.

Paul Bisaro

Thanks, Marc.

Operator

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

David Buck - Buckingham Research Group, Inc.

Just a couple of quick questions. First, on the international pricing at the analyst meeting earlier this year, you talked about the expectation that you see stabilization. Can you just give an update on the trend there? For LIPITOR, can you talk about what your assumptions are, currently? And do you expect to have any update on potential for early entry in LIPITOR? And then on PROCHIEVE, can you talk a little bit about the reimbursement landscape as you see it in, say, the first couple of months of launch with Medicaid reimbursement and commercial? Thanks.

Paul Bisaro

Okay, well. Siggi why don't you handle this, international.

Sigurdur Olafsson

On the international front, let's just remind everybody that our international business is about 30% of our overall business. On top of that is Canada. Clearly, in the first quarter in Canada, the prices have stabilized. We see much less price erosion in Canada than we have seen previously in first quarter. On the 3 European markets, Germany, France and U.K., there is still a price erosion in those markets, especially in France where we saw that earlier in the year. We are relatively small in these markets. We are #5 and #6 in France and U.K. So it doesn't affect our overall result. I think what we have done, obviously, to adjust to that is we have -- as Todd explained in his talk, we are little bit down on the International business, the reason is the price erosion. But also we have done some pruning to focus on our bottom line. But there is a significant volume increase in the product that we have kept on the market. But clearly, in France and Germany, it has been the price erosion in the market. In the [indiscernible] I mentioned at the Analyst Day, the prices have been much, much more stable.

Paul Bisaro

Thanks, Siggi. And then I think on the LIPITOR question, David, we have secured launch quantities so we're ready to go at the earliest possible time, and we'll be ready to go at the earliest possible time. We are obviously watching closely Mylan's lawsuit against the FDA. I think there's a hearing tomorrow. We'll be watching -- as I said watching closely and be ready to react to whatever happens. For purposes of guidance and forecast, what we've done is we've left the LIPITOR in the model, in our models for November, late November launch with 1 competitor. And we assume that competitor will be Ranbaxy. Until there's a change we're not going to do anything on changing the model. And then I guess, Fred, on PROCHIEVE.

George Wilkinson

On the PROCHIEVE reimbursement front, there's 2 places we're working very aggressively with the insurance groups and the third-party reimbursers versus the drug. It does feel to us that the insurers are pretty well set up to reimburse for important therapy like this as far as both in the government sector and the third-party sector. Most important factor we're working on is making sure that physicians get reimbursed for the use of TVUs. So we're active on both fronts. We're having positive discussions with most of the insurers and have a clear plan to have ourselves all set up by the time we launch the product.

David Buck - Buckingham Research Group, Inc.

Just a follow-up to that, Fred. What's the process just to get that, in terms of timing, to get that physician reimbursements, say, in the Medicaid channel?

George Wilkinson

Actually for Medicaid, it could happen very rapidly. It could happen at launch, primarily because of the patient population where the drug is being you used.

David Buck - Buckingham Research Group, Inc.

And do you expect a controversy with the competitive product? Actually a different indication, but do you expect that to limit your ability to price in the market?

George Wilkinson

I think it will make people pay a lot of attention to how we price. So there's been clearly a heightened awareness to some of the pricing practices of our competitors. But I don't think it changes our view on how we will go out. Obviously, we have a pricing study that's still fielded. It needed to be pulled back and put back out again because of the unique pricing in the environment that came from Makena. But we're actively working on that and doing the analysis as we speak.

David Buck - Buckingham Research Group, Inc.

Great. Thank you.

Operator

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

Richard Silver - Barclays Capital

First, on the financial side, how should we think about SG&A and R&D spend for the remainder of the year in terms of sort of quarters or at least kind of just trending? And then second is on Concerta pricing. Given that you're launching on Monday, can you give us any sense of what level of discounting relative to brand?

Paul Bisaro

I'll start with the Concerta question, and then we'll turn it back to Todd for SG&A. But on the Concerta piece, we are -- we don't normally disclose pricing, and we won't start that process now. But I think I've said in the past, in a situation that's presented here where you're at a single generic, you would assume that we would price the product at the point where it would maximize utilization and profitability. So that number is probably in the range of 40% off of the brand price. Somewhere in that range would be appropriate to use.

R. Joyce

And then, if you look at the rest of 2011 compared to the last 3 quarters of 2010, I think you should expect roughly, on an adjusted basis, roughly 10% to 12% increase year-over-year.

Richard Silver - Barclays Capital

And that's, sorry, in for what line?

R. Joyce

For both R&D and SG&A.

Richard Silver - Barclays Capital

Okay. And then just on a sequential basis, the brand sales declined. Can you give us any sense of what was behind that?

George Wilkinson

Most of that was related to, actually, to some of the smaller products than to our legacy products that have just kind of it on that, a slow steady decline in units although kind of offset a little bit by price. Some of the other issues that were out there was TRELSTAR, because TRELSTAR is still being impacted by the negative pricing that's going on by the OCA reimbursement process being rebuilt.

Richard Silver - Barclays Capital

Thanks very much.

Operator

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

Christopher Schott - JP Morgan Chase & Co

Great. Thanks very much. The first question was on gross margins for the Generic business, just following up on an earlier question. If we exclude Concerta and LIPITOR, is this kind of 51% range or so in the quarter sustainable as you move through the rest of this year?

R. Joyce

I would say yes, but it's going to depend upon the level of competition we get on both Potassium XR and Toprol. So we factored some competition in. And we've also been a beneficiary of some other company's issues, manufacturing issues, and so we have taken some pricing here and there. And that provided a benefit in the first quarter, and so it will depend upon how our competitors come back to market on some of these products. So but yes, somewhere in that 50% range, if you exclude LIPITOR and Concerta. I, think we'd be very close to that level of profitability

Christopher Schott - JP Morgan Chase & Co

Great. And then just my follow-up question, can you just also talk about your latest kind of U.S.-based business pricing assumption on the Generics side for this year? I think you mentioned some competitor supply interruptions. But how does your view changed in terms of the relative health of the base business as we go through this year?

Paul Bisaro

I think we've been looking at -- saying that the base business has been at the high-single digits. I think now we're moving things more to the mid-single digit range as price declines. We've seen a lot more stability and pricing over the last few quarters, and we continue to see that. As Todd mentioned, it will really sort of depend on when competitors start coming back on some products and how the come back into those markets and what their process is. And that will affect pricing probably most significantly.

Christopher Schott - JP Morgan Chase & Co

Great. Thanks very much.

Operator

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

Louise Chen - Collins Stewart LLC

First question I had was on Crinone and PROCHIEVE. If you do get PROCHIEVE approved and you want to increase your pricing there, would you keep Crinone on the market or would you take it off? How should we think for that?

George Wilkinson

I think it's a little early to describe what the strategies would be on the approval of the product. Obviously, we value the infertility business very highly. We're growing it nicely. We now own the #1 share position in that category from progesterone replacement. So and we're bullish on the infertility side, and we're going to stay on that business. We have a pricing study that's fielded, that's looking at a lot of different alternatives. And just really too early to comment on that.

Louise Chen - Collins Stewart LLC

And then second question I have was just what are your thoughts on M&A and business development for Watson going forward? And do you assume anything in your long-term guidance for these potential endeavors?

Paul Bisaro

Well, the last question is the easiest one to answer and that's no. We have not included any income from any possible acquisitions for 2011. But we are actively looking at opportunities in our Brand, Biologic and Generic businesses. And I would expect that you'll see us intensify our activity throughout the rest of the year. These deals take time, and we hope to get some things done before the end of the year to improve our overall Generics business, Brand business and as I mentioned, Biologics business as well.

Operator

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

Elliot Wilbur - Needham & Company, LLC

Thanks. With respect to Distribution segment performance in the quarter. And I understand it's not the sexiest part of the story, no offense to Al. But the underperformance is pretty substantial relative to expectations. And I guess sort of the reduction in 4-year guidance is pretty significant particularly considering when we last heard from you guys in terms of what your expectations were. So I'm wondering. Has there been some sort of fundamental change in that business? It just seems unusual that there's such a large deviation.

Paul Bisaro

Well, let me try this. I'll start and then Al. On the Distribution side of the business, I think there's 2 things that affected the forecast. 1 is FDA have slowed down on approvals and sort of the lack of -- we've talked about the lack of new product launches. A lot of that is the things that our competitors have faced. As more and more competitors are facing issues, not getting approvals, being on OAI status and the like, that directly affects the Distribution business. I would anticipate that, that's something that everyone in the Distribution segment is facing, just this lack of new products. And that's what feeds the business. Al has the additional problem, that we mentioned before, of 2 of the biggest launches, LIPITOR and Concerta, will not be included in his numbers for the year. And so that's going to affect the perceived performance but of course he's a major part of our distribution strategies for those products. So he's sort of swimming upstream a little bit with those 2 issues. Al, did you want to add anything to that?

Albert Paonessa

Yes. I mean, basically the biggest issue is the lack of new launches. We are kind of surprised that there hasn't been a few unexpected launches that have come out. Usually, it happens in the first quarter, maybe a little bit in the second quarter but it hasn't happened at all. This is the worst -- first quarter was the worst quarter we've ever had for new product launches going back to 2005 since I've kept track. So that's the best of big missing picture. When I look at my normal retail independent business that's out there. My units are up, my customer base is up. And it's pretty consistent so I'm good there. It's just the chains are down, and it's basically driven by the launches.

Elliot Wilbur - Needham & Company, LLC

Okay. Al, maybe just follow up on that real quickly. It definitely soft quarter in terms of the top line but it's also very strong quarter in terms of the margin performance. I know that there's some mention in the press release of sort of the like contribution from chain drug store sales in the quarter. Is that just an anomaly?

Albert Paonessa

No. I mean margins are going to be up when it's your normal base business. The large launches that we do in that is to the warehousing chains, and the margins are lower on those type of products. So the first quarter, the margins were good. They were stable. We're seeing a little bit of competition right now, which normally will happen after you have a long drought without launches. You'll see more competition through the big 3 and everybody else. So we're starting to see some stress in the top line number. But the manufacturers have been working with us, and basically, our margins have remained steady. So we're comfortable there. I'm really happy that I have my independent base, and it's been consistent for quarter after quarter for about, I'd say, 6 quarters. So we're comfortable where we are. I think it would be a totally different conversation right now, had I just got 2 launches that were significant, we wouldn't be even having this conversation.

Elliot Wilbur - Needham & Company, LLC

And then, one follow-up question for Fred as well. With respect to PROCHIEVE, I know when you did the original call announcing the positive results of the Phase III study, you talked about an addressable market at roughly 5% of singleton burst. But then in sort of looking for the more detailed Phase III results that were published, it seems like there's a fairly large screen sample, around 35,000 women. And I know that the estimated or the eligible women were about 2% and 2.3% of that population. So I'm wondering if you're still sort of thinking maybe that's just a sample-size effect or maybe the market is closer to what we saw in terms of the Phase III study.

George Wilkinson

Yes. To me, I think, what you've got is the book ends. What occurred in the study, I remember, is in a study so there were a whole lot of other factors that were involved in the inclusion, exclusion criteria of those women before they even went to be screened. So they got an abnormally low number in the 2.3%. There had been 2 other published articles that are out there looking at short cervix, the size of cervixes. And I think the range is somewhere in that 4% to 6% range of the marketplace that's below 2 centimeters. So that's a reasonable position to be looking at. The burning issue that everybody’s still trying to address is what kind of utilization might happen above 2 centimeters. And I think that's part of the market research that's going on right now.

Elliot Wilbur - Needham & Company, LLC

All right. Thank you.

Operator

Your next question comes from the line of Frank Pinkerton with SunTrust.

Frank Pinkerton - SunTrust Robinson Humphrey, Inc.

First question, can you speak broadly to once the Arrow acquisition completed, there was a thesis that there was an over filing of products we rolled out to other European countries. Where does Watson stand with rolling that out? And what countries could we expect next? And is that still a significant theme to expanding the international presence?

Paul Bisaro

Yes, Frank, it is. We've been working very hard at filing products that we've developed here in the U.S, basically, leveraging our U.S. portfolio across the globe. In Canada, we just launched our nicotine gum product, and we're doing quite nicely with it up there. And we expect to be launching that throughout Europe. Australia is also going to see some benefit, and South Africa will see some benefit of our products. Also Brazil will start seeing launches of Watson products over the next few months. So we are rolling those out. And that's a top priority and continues to be a top priority for us this year and as well as next year. Sig?

Sigurdur Olafsson

Yes, I think also part of your question was in the Arrow acquisition. It was that Arrow had marketing authorizations in countries where we are not commercially selling them today. It's still true, and we are still filing in these markets. We have a significant numbers of marketing authorizations approved in countries like Switzerland, Italy and Belgium where we now have no commercial operation. We are looking at our strategic options in these markets. The experience in these markets is unique to have a significant portfolio before you kick off the cost of a commercial operation. But this could be a benefit also going forward as we look at these markets when we file our Watson portfolio today in Europe. So every time we file a product in Europe, we file in markets usually between 8 and 15 different markets even though our core markets in Europe is maybe 5 or 6.

Frank Pinkerton - SunTrust Robinson Humphrey, Inc.

Great, and then thanks. As a follow up, the oral contraceptive business. I know that on the Investor Day you gave guidance for that to be down first half of the year gross profit and then second half of the year, gross profit down even further. Has there been any change in your view on the competitive landscape there with launches or competitors coming to market where that guidance in January may have been conservative? Thank you.

R. Joyce

No. I think we're pretty much on target with the guidance we provided on the OC franchise. We are seeing additional competition on some of the older products as the approvals have come. And I think we're pretty comfortable with where we are on that.

Operator

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

Gregory Gilbert - BofA Merrill Lynch

Recognizing that LIPITOR timing as what it is in your guidance, Paul, I have to ask you as a lawyer what your personal legal view is on the chances of an accelerated launch. I know there's precedent for AIP products getting approval. But I'm not sure a judge has been asked to weigh in a specific way before. So I realize what your guidance is, let's put that aside. What's your personal view?

Paul Bisaro

Greg, it's always an uphill battle to argue that the FDA somehow misused its authority, so I think it's going to be a tough fight for Mylan to get this one done. Tomorrow, we'll see how the hearing goes. But I think it's going to be a tough battle.

Gregory Gilbert - BofA Merrill Lynch

All right. Thanks for replying. And then my follow-up is on Venofer. Have you submitted an ANDA on Venofer? Do you have a development program there? And lastly can you comment on how user-fee discussions are going or not going for the industry? Thanks.

Paul Bisaro

On the Venofer question, the answer is no. Venofer and Nulecit are, I think, reasonably interchangeable in the marketplace. So we don't see any real value having a version of Venofer if we already have a version of Ferrlecit. On the user fee front, user-fee discussions are going well. We continue to meet, the GPhA continues to meet with the FDA task force that's working on user fees. We meet about every 2 weeks. And I think we've had 3 or 4 meetings. I think there's another meeting coming up this week. I think these things, they do take time. I think we're pleased that the agency has listened to our concerns as an industry and is trying to address them. And we're trying to help them find a way to fund the resources they need to deal with the backlog, deal with the ANDAs that are out there, as well as dealing with the compliance issues and inspection processes and the challenges that they face trying to inspect thousands of manufacturing sites around the world. So I think, I'm optimistic that we'll get something done this year.

Gregory Gilbert - BofA Merrill Lynch

Thanks a lot.

Operator

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

Timothy Chiang - CRT Capital Group LLC

Paul, I just want to go back to Concerta. I know that -- I guess via the settlement, J&J's supplying the product. How comfortable are you in terms of getting pretty sizable chunk of the market starting next week? Is there any sort of ballpark figure that you guys have targeted for a share in this market this year?

Paul Bisaro

Well, Tim, we would answer the first part of the question. We really have -- Johnson & Johnson has been great supplying us product. We have no issues with that at all. We're ready to go on Monday. And as far as market share, I'd say as I mentioned earlier the pricing will be around 40% to 45% off the brand price. I think it's kind of what I -- it's the range I kind of gave in that sort of a traditional single-player market. It could be a little bit bigger than that, but there is a link between the price that we have and the total market penetration we're going to have. So we're trying to maximize both. So I think you just need to factor that thought into your model when you think about doing Concerta.

Timothy Chiang - CRT Capital Group LLC

Okay. And just one follow-up, I remember when you guys talked about your deal with J&J, that the margins would be tiered, and I guess, in other words, through the launch. Is there a potential that you could get a higher margin this year? Or is it really -- how does the tiering really work on the gross margins?

Paul Bisaro

I think, Tim, what we said was that margins would increase over time, and then they would begin below our current generic margins. And then they would sort of plateau at about our generic margin. And that's kind of the guidance we've given and it takes -- it will occur over several quarters. So obviously, the first quarters will be lower and the later quarters will be higher.

Timothy Chiang - CRT Capital Group LLC

Okay, great. Thanks, Paul.

Operator

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

Ken Cacciatore - Cowen and Company, LLC

Thanks. Paul, just to clarify, when you talk about the price decrease on Concerta, are you talking about an un-rebated product or off of the rebated as we try to size the market?

Paul Bisaro

You mean -- are you talking about the brand rebates or are you talking about ...

Ken Cacciatore - Cowen and Company, LLC

Yes. So when we're trying to, you're saying 40%, 45% off, should we be looking at...

Paul Bisaro

A brand wack is what I'm talking about.

Ken Cacciatore - Cowen and Company, LLC

Okay, great. Thanks. And then, Fred, if you could help us understand. We don't, clearly, don't hear from the company that's introducing the product too often. But can you give us a sense of how KV has been on the second price cut in securing reimbursement? And should we think of that at some level of framework for what you could be using as maybe a price top on PROCHIEVE? Or are these totally disparate? I understand that they're different indications. But can you help us at least understand how they've been doing in securing reimbursement out of a cut price this second time?

George Wilkinson

I mean, my understanding is that they have -- they're doing reasonably well with the reimbursement issue. I think where they are struggling is the acceptance of the product now because among several association and everybody involved in this has kind of come out with a negative position on it. And I think they've positioned it so they could go back to the compounded product. I don't know that I would use the Makena experience as an example in any way as to how Columbia will be, and Watson will be launching this product.

Ken Cacciatore - Cowen and Company, LLC

Fred, I know that it's, again, of a different indication. But doesn't that concern you a bit that the standard of care is essentially going to still be secured to a certain extent from compounders that doesn't -- that potentially have some impact on your introduction?

George Wilkinson

No, because you got to remember 17P has been used for 4, 5 years now as a compounded product. So and we don't have the experience right now with Crinone. We've got a very unique delivery system that allows you to use bio-adhesive vaginal gel so that you get good long extended-release of the product vaginally. So you get good local coverage, very different than what they're doing with the compounded product and then what ended up resulting as an approved product from the FDA. So I don't think those experiences even mimic each other. The other side is we're in very different indications. I mean, it is preterm live birth but ours is in short cervix, which is a very measurable issue. There is this in previous preterm which are just really patient history issues.

Ken Cacciatore - Cowen and Company, LLC

Okay. And then one just last follow-up on Nulecit. Paul, I understand the conservatism of Watson and I know there's a lot of unknowns about the manufacturing and the supply, but our understanding is that it's a couple of hundred million dollars-plus product Venofer, maybe even more. Any reason to believe -- and understanding your pricing on Nulecit is fairly low so that would limit that opportunity if you could go approach some of what Venofer has now. But is there any reason to believe that this couldn't be substantial? I understand that you're trying to be keep our expectations low.

George Wilkinson

Actually, there are 3 things that really affected this market. So the first is the fact that you've got a significant shift of the market share from Ferrlecit to other products. I mean, it's been cut almost in a third since the time we turned it back over to Sanofi at the end of 2009. So the natural shift of Ferrlecit to just a generic Ferrlecit is a much smaller position. The price is almost equally cut because we have everyone in the market is chasing price. And that actually was occurring before we've even brought the generic to the marketplace. And the third is that we have an advantage at launch, which was we had a vial. And since then, Sanofi has launched a vial of Ferrlecit. So one of the advantages of the product we had has also gone away. We're seeing actually everyone chase price. So the price on this from almost all the manufacturers in this category has dramatically declined. I think the glimmer of hope here is that there's a supply issue from Venofer but we're walking watching that closely. And today as we talk to customers, everybody feels comfortable that the supply will stay intact.

Ken Cacciatore - Cowen and Company, LLC

Great. Thanks guys.

Operator

Your next question comes from David Risinger for Morgan Stanley.

David Risinger - Morgan Stanley

Thanks very much. So my first question is on France. I was hoping that you could maybe explain in some detail what's happening with respect to price erosion. I'm assuming that it's basically competitors becoming more aggressive, launching new products into the market, taking price down et cetera, that, that's the main driver rather than the government. But if you could frame that and explain it that would be helpful.

Sigurdur Olafsson

Yes, it's Siggi here, David. The situation in France was that there was a budget cut by the government but not many have effect on the branded business in France. But you're absolutely right, the main price erosion in the generic market has been due to competition by the companies there. Obviously, Teva and Ratiopharm have now merged, and they're a bigger competitor than Mylan and Biogaran. Those are the 3 big companies and they're fighting extremely hard for a top line in that market. That leads to discounts that are happening, which takes down the generic price. So overall, there is a part of it which is the governmental budget issue when they have introduced that they needed to cut the overall healthcare budget in the pharmaceutical. But more for the generic industry, it has been the top line competition that has happened in the market. Our response to that has been that we have focused more on, as I mentioned before, pruning our portfolio. We have also looked at the opportunity of lowering our cost. Our global operations initiative has really helped us enormously for a product that's manufactured in-house. And we are taking more and more of outsourced target products in-house to allow us to compete in this market.

David Risinger - Morgan Stanley

Okay. That's very helpful. And with respect to volumes in France, broadly speaking, obviously, you're paring back, but maybe you could just characterize whether there's decent growth in volume in France or not.

Sigurdur Olafsson

There is a decent growth. Let's remind ourselves that the general penetration in France is still very low especially if you compare to Germany or U.K. Germany and U.K., we are talking about 70% to 80% penetration, where in France we are talking about around 20%, maybe 20%-plus. But this is growing very fast now because in every country where they need to cut the healthcare cost, the best way to do that is to use more generic and France is finding that formula pretty well at the moment. So there is an increase in volume, and we see that very significantly on our products both in the retail pharmacy side but also in our hospital portfolio. There's much more usage of generics in France.

David Risinger - Morgan Stanley

That's very helpful. And a quick follow-up to that. With respect to the gross margin, Todd, is there any way that you can characterize for us how much the Fentora inventory write-off impacted your cost of goods line?

R. Joyce

Well, we had a very small Fentora write-off. So it had very little impact on the gross margin in the first quarter.

Operator

Your next question comes from Shibani Malhotra from RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC

Just got a quick question on PROCHIEVE. Paul can you -- and Fred, actually, can you talk about your expectations in terms of whether you think you can get a first round of approval from the FDA and whether you're expecting a panel? And then can you also clarify the P-value requirement and that these are actually just under 0.05 rather than 0.01, which I think has caused some confusion with investors? And I have a quick follow-up on OxyContin.

Paul Bisaro

We're very hopeful on the first round of approval. In fact, we're very hopeful that the product will be accepted on a fast-track of these cycles. That's what we've applied for, and that's the discussions at Columbia have had with the agency were pointing in that direction so are very hopeful that would happen. Obviously, the results were very positive. As we put in the press release and as I think Columbia has mentioned before, really -- the submission is really based on 2 clinical programs. There was a previous trial that was done in women with a history of preterm, which is small -- a subset of that was looking at short cervix. And that's the foundation for second part of the data that’s submitted were there was a large reduction in the instance of 33 weeks [indiscernible]. So we think the data's robust. We think that we've met the criteria. The meetings with the agency that Columbia's had have pointed on the right direction so we think we're in a nice spot to be delighted. We submitted yesterday, looking forward to the acceptance position within the next 45 to 60 days and then obviously, just try to get the ANDA before the end of the year.

Shibani Malhotra - RBC Capital Markets, LLC

Okay, great. And then very quickly, Paul on OxyContin. I know you've got 4 to 5 data on the TR dose, can you talk about your expectation for generics of the current -- rather, the older version of OxyContin? Do you expect generics or do you think this will be a TR market and the entire thing available to you at first to file?

Paul Bisaro

Well, just to clarify, I think I said we believe we're first to file on some of the strains, not all of the strains. And I guess over time, we would anticipate that this would become a complete tamper-resistant market. And that's basically what we're planning for. I think that's what everyone expects to have happen. It's probably the safest thing to have happen. So I think we're all moving in that direction. It will be a -- We've seen a little bit of movement in some of the state governments to try to limit the ability of distribution, of non-tamper-resistant narcotics. We don't expect those actually have much of an effect, and we've been sort of defending against those because it's going to -- of course, there are always -- when you state the activity is going on there always overbroad. And they try to prevent any substitution of tamper-resistant products. So that means it could impact the generic substitution of an equivalent product to tamper-resistant. So we continue to follow those very closely, and we will continue to combat them at Watson as well as GPhA going forward.

Shibani Malhotra - RBC Capital Markets, LLC

Just to clarify, you're not expecting generics for the old OxyContin?

Paul Bisaro

It's going to be interesting to see what the FDA does on that topic. I hesitate to sort of weigh in on that. It's really the agency's call. I think they could take the position, the agency, that is, that they're not going to approve that. I mean they could take that position. That would not shock me.

Shibani Malhotra - RBC Capital Markets, LLC

All right. Great. Thank you.

Operator

And your last question comes from the line of Ronny Gal with Sanford Bernstein.

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

Thank you for taking the question. First, a couple on particular products, Fentora and Mucinex. Can you just give us a quick update? Is that in the guidance or do you expect the product to be launched this year? And second on Fentora, should we think about this product as essentially being gone for Watson? It is essentially a product for Sanofi? But are they likely to enter the market or is there still some things out there other than the appeal, that could allow you to monetize it? And second, you comment about getting some Biologicals in and I know you guys have been thinking significantly about what you're going to your bio similar initiatives. Can you give us kind of an idea about how much money you think about spending in that area organically for the next couple of years? What does it really take for you guys to bring a product to market there?

Paul Bisaro

Well, I'll go backwards and start with the Biologics first. As you know our first product, FSH, is in development now. And I think we've said that we expect to bring that product to market will cost us somewhere in the $50 million to $60 million range. We would anticipate that, that would be the low end of a Biologic development effort. And as we look at rolling out additional projects and products, we're contemplating how much the balance sheet -- the balance sheet can take it, it's how much of the P&L can take on how many products we can do at any one time. So we're looking for ways to be creative and find partners to help fund some of these opportunities. We just don't see ourselves doing 20 different products, however. I would think that number is somewhere in the 5, 6, 7 range of products, and we wouldn't start them all at the same time. So I think we'll sort of layer them on over time. And that's kind of the way we build our internal R&D models for '11, '12 and '13. On Fentora and Mucinex, I think we don't really comment on what specific products are in the guidance so I'm going to refrain from doing that. I do think we will ultimately find a way to monetize the Fentora product. I think we have a strong position on appeal, and I look forward to -- and we won in the first 2 cases as well. So and then on Mucinex, of course, we're working to get our product approved. So as soon as we get that approved, I think you'll see us go quickly. The real issue with us is getting these applications through the agency, and that's not a problem that's unique to Watson. And it's a problem that everybody is struggling with.

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

Right. Just coming back to Biologicals for a second. Do you guys think it's important to be there on day 1 with a similar launch? Or is there something that if you come in couple of years after the first launch, you'll be okay? Are you layering the projects, basically, will get couple in the first round or the first wave, couple of them second wave? What's your thoughts about [indiscernible]?

Paul Bisaro

Yes, I think we're looking to try to find those product opportunities where we're not going to be coming in that late. I mean, I think our preference would be to come at the time of market formation and be one of the first movers of those products. I don't -- I wouldn't say we would never do that but I think that we've said pretty clearly that the first wave of Biologics, EPOS , the GCSS and the like, you won't see us in unless we acquire a company that has them. That's not something we're going to go out and develop and try to be the fifth, sixth player into those markets.

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

Right. Thank you guys.

Paul Bisaro

Sure.

Patricia Eisenhaur

And sorry we weren't able to fit everyone on our call today. We'll certainly follow up with you afterwards. But thanks everyone for joining us. And have a great day.

Operator

Thank you for participating in today's conference call. This call will be available for replay at 11:30 a.m. Eastern time today through 11:59 p.m. Eastern time on 5/11/2011. The conference ID number for the replay is 56748589. 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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