Michael Faerm - Crédit Suisse AG, Research Division
Good morning. I'm Mike Faerm with Credit Suisse, I cover Specialty Pharmaceuticals, and we're very pleased to have with us, Watson Pharmaceuticals. Presenting for the company will be Paul Bisaro. Paul has been the Chief Executive of Watson since 2007. Prior to that, he was the President at Barr Laboratories, and we're looking forward to hearing about Watson's plans, not only for this year, but their growth plans for the next year and beyond. Paul?
Paul M. Bisaro
Well, thank you, Michael, and it's a pleasure to be here. This was my very first conference as a CEO, as a matter-of-fact, so it brings back warm memories. Anyway, I thought we'd kick off right away and save a little time for questions at the end. I'll start with the forward-looking statement, of course, and then, maybe just a quick overview of what Watson is and what we've accomplished so far this year. And then as Michael said, we will talk about our growth drivers for 2012 and then beyond.
As a quick overview, we operate our business in 3 segments. The Global Generics business, which is our largest segment, I should say that we expect to do about $4.5 billion this year in revenue. Of that revenue, about $3.3 billion comes from our Global Generics business, very strong in the U.S., about 85% of our sales, generic sales, come out of the U.S., with about 15% to 20% now internationally and that area growing. As you can see, we've got approximately 130 ANDAs pending at the FDA, plus presence in 20 countries around the world and continuing to increase our presence in those countries with the acquisition of Specifar, as well as continuing to file important dossiers around the world.
In addition to our Global Generics business, we have our Global Brand business. Today, it's focused principally on the U.S. We'll do this year, roughly $445 million in sales, about 30 products that we currently sell is Brand products, about 7 or so of those that are directly detailed to physicians. We have about a 450-person sales force in the United States that focuses on Urology and Women's Health care products. A growing product line, we'll talk about the pipeline, as well at the great opportunities there. And we also operate under our Global Brand umbrella, our Eden Biodesign or biosimilar program. As you know, we acquired Eden, I guess earlier in 2010, and it's been the center of excellence for our biosimilar development. We have FSH in development and we'll talk a bit about that.
In addition to those 2 segments, we focus very heavily on our operations footprint. We are traditionally a generic company, so therefore operations are very critical to what we do. We have to be a low-cost producer and we have to be a high-quality producer, and we're both of those things. In addition to that, we're always looking for ways to improve on our cost and one way to do that is make your own API, and that's active pharmaceutical ingredients. More and more of our products now are backward integrated into using our own API or our own developed formulation for API. That obviously gives us a competitive advantage as we look to participate in markets where cost becomes critical.
In addition, we have our own CRO [clinical research organization] which allows us to do bio studies on our own timeline and with better cost to do those studies. So all of those pieces are now in place and things are really starting to hum and certainly in 2011. And we have a diverse global manufacturing footprint with facilities in the U.S. as well as tax advantageous locations like Malta. We're also in Greece. We have operations in, as I mentioned, in the U.S. as well. So from a global footprint, we're in obviously a very good position. And then finally, what makes us a bit unique is we have a distribution business in the U.S. We have our own basically wholesaler, and that's called ANDA, that's our ANDA distribution business. This year, they will do about $770 million of revenue of third-party sales. This excludes any Watson products that are sold through ANDA and that's important because Watson, thankfully, has had 2 of the major -- will have 2 of the major launches this year: one being Concerta and of course the next one being LIPITOR, which ANDA, while they do so sell, they don't get credit for the revenue. So while revenue appears to be down, their contribution has certainly been great.
About a week ago, we announced earnings, and this is just a quick recap of our third quarter results. We had record revenue of $1.1 billion. I think, the area to focus on, for me, is our current capitalization, debt to capitalization, adjusted EBITDA rate of 1.2x. We paid down almost all of the debt that we acquired for Specifar. We have about $125 million remaining on our revolver which we just refinanced and redid last quarter as well. And we expect to pay off that $125 million by the end of this year. So we'll be in an extraordinarily strong position as we enter into 2012 to look at business opportunities to grow our generics business, our brand business, as well as fund our biologic opportunities as well.
Quick overview of our generics third quarter. There was strong growth. Of course, we did almost approximately $800 million in sales on our generics side, and that was due to strong growth and strong improvement in our extended-release franchise, as well as strong, continued strong growth and strong contribution from our oral contraceptive franchise. We're seeing better pricing in the U.S., not so in other markets around world, but principally in the U.S., the market remains quite strong. And again, those things help drive our growth quarter-over-quarter, year-over-year.
We also increased our international footprint by a full quarter of Specifar and then a higher number of launches around the globe. And certainly quick achievements for the generics division. We've of course expanded our extended-release franchise and oral contraceptive franchise, with the launch I mentioned of generic Concerta, which continues to be a major contributor to our results, as well the launch of generic Seasonique also in the quarter. I mentioned we acquired Specifar and then we have preparations underway to launch generic LIPITOR on November 30. So lots of activity happening in our Global Generics franchise, not just in the U.S. but around the world.
On the Global Brand side, we did about approximately $110 million for the quarter, that increase in sales on a year-over-year basis was driven by continued growth of RAPAFLO, a very nice product for us on a BPH category; continued good strong sales of Crinone; and of course, the launch of Generess Fe, the new contraceptive product that is Watson's brand product. And RAPAFLO in the quarter reached a milestone of over 500,000 prescriptions dispensed since launch. So very pleased with the way and the trajectory in which RAPAFLO is going.
And some of the brand achievements so far this year, of course, PROCHIEVE, the NDA was filed with a PDUFA date, February 26, 2012. Of course PROCHIEVE is for the -- for preterm birth, a very exciting opportunity for Watson. Obviously, lots of preparations is underway to move toward that February 26 date and assuming all goes well, we'll be ready to launch the product very, very quickly after that approval, if it comes through.
As I mentioned, we launched the new OC Generess FE. Nice programs around that, we're seeing good trajectory in that product, so we are pretty excited about that one. And we also entered into an agreement to acquire from Antares, the next generation, basically next-generation Gelnique product for us for overactive bladder and we have a PDUFA date of December. Of that product, not to be outdone, we also got approval for our launch of -- and launching our ANDRODERM next-generation 2 and 4 milligram patch product. ANDRODERM has been a little bit of a sleeper in our pipeline but it's certainly done very, very nicely this year and we expect to see continued growth from Androderm, particularly now since we've got the newer version, the newer and improved version of the product.
We've expanded our coverage. We've invested in our marketing and sales programs. We've added 40 new representatives in the third quarter to focus on RAPAFLO, as these representatives now get on line to get prepared for the launches we have coming up. And so we're investing in both R&D as well as our marketing, sales and marketing capabilities.
And we also, that last quarter, extended our agreement on the rights to RAPAFLO, so we now have RAPAFLO rights for all of North and South America. So as you can see, and as you will see, we're moving our brand division beyond just the U.S. and into other markets around, in the region.
On the ANDA distribution side, we did about $170 million of revenue in the third quarter. And that, as I mentioned, was off a bit, but that was principally due to lack of third-party launches. It's been a pretty difficult year for launches. I think delays at the FDA, companies having issues with manufacturing problems, those have led to fewer-than-expected launches and so ANDA's top line of course suffered from that. But nevertheless, ANDA continues to do quite well, was very instrumental in driving growth in our Concerta launch and we expect good things from ANDA on our LIPITOR launch as well.
In the quarter, we began construction of a new distribution facility for ANDA, just outside of Memphis, Tennessee, close to the FedEx facility, as you might expect, to allow for easier shipment of product. ANDA will now be able to literally launch a product at midnight and have it in the stores in the morning. So that's a terrific advantage for ANDA to have and one that we're very excited about and we expect to exploit over the next few years.
And looking to the rest of the year, this is the forecast guidance we gave. Obviously, very strong on a year-over-year basis. Again, $4.5 billion in total revenues, $3.3 billion for Generics, $450 million for Brands and $770 million for ANDA, and then an adjusted EBITDA of, approximately $1.1 billion. And we increased our guidance for non-GAAP EPS to between $455 million and $465 million per share. And as a reminder, we also said on our call that, that included about $0.48 to $0.53 of contribution from Lipitor sales in the fourth quarter. And we decided to do that this year to give you a sense for how -- what the impact would be. Because on a going-forward basis, people will always want to try to measure what the base business looks like as vis-a-vis LIPITOR. So we thought in this one case, we'd go ahead and give you what our expectation is for the fourth quarter. That, of course, is based on a certain set of assumptions and those assumptions include launching with 1 competitor in the market and as well as the Brand taking about 40% or maintaining about 40% market share. So we can talk more about that later, but that's the underlying assumptions behind the Lipitor numbers. And as I said, we can talk about that later.
But now, as we look for our continued growth, because that's the next question, we're very excited about 2012 and beyond. And how do we grow? Well, we continue to focus on our Generics business, we invest through internal R&D, which we continue to do in a very strong way. We also use our strong balance sheet to provide complementary acquisitions, to grow our footprint, to improve on our existing markets and improve our position in the existing market, so good opportunities around that. And then, some specific growth drivers, and by no means, are these all of the growth drivers, but here's some specific ones. We know we have a date certain launch of Xopenex next year in 2012, where we have 180 days of exclusivity, where there will be no authorized generics. And we expect to launch generic Actos and Opana ER, as well.
But we also have a large and growing stable full of Paragraph IV challenges. Lidoderm, the 30-month stay expires in mid-2012. We have generic Pulmicort, we have first-to-file position on about half the strength of the new Purdue product, OxyContin product. We have a generic Adderall filed, we're working that process through, and of course, we have a generic version of Celgene's Revlimid, which roughly now is -- roughly, from what we can tell, about a $3 billion product. So some great products in the pipeline and we also, by the way, mentioned Daytrana, the patch product. So some great first-to-file opportunities where Watson stands to be able to improve and grow for '12, '13 and '14. Outside the U.S., we have the Esomeprazole tablet opportunity. We expect to launch that product late this year in France and then move on to Spain and other markets around Europe with the tablet product. So good opportunities in Europe as well, and as well as other existing products. International expansion, we continue to focus on that opportunity, expansion through M&A, and then a strong global supply chain and without having best in quality, it doesn't really matter what else you do.
On the Brand side of the business, same sort of business model. We're going to continue to strongly invest in internal R&D, licensing, late-stage development products for Women's Health, Urology and now Oncology, and then complementary acquisitions. And here, you see the regional approach we've taken on the brand side. By the way, I didn't mention, we expect to launch our own brand, franchise brand division up in Canada, the beginning of January. So that will be a great opportunity. We already have salesforces on the ground and products in place in Brazil and Mexico and looking forward to growing those franchises as well. So we continue to invest in our Brand division, focusing principally regionally and that, of course, follows the property rights that we have for those products. So again, a focused approach, strong focused approach makes, I think, the most sense for a brand division like ours. And then we'll continue to invest in Biologics. That's an important franchise and will be an important franchise in the years to come. And we're going to spend a lot, you'll hear a lot more from us on this topic very, very soon.
Quick look at the brand pipeline. Of course, no product, no brand franchise matters unless you have a strong pipeline and I think we do. You could see the approved products there in blue. We have RAPAFLO approved in Canada, Gelnique approved in Canada, Gelnique is now approved in Europe, and ANDRODERM second generation has been approved, as I mentioned, and we're launching that even as we speak. And then you can see the NDA -- the products we have at the NDA filing stage, as well as Phase III, Phase II. Esmya is a product that I think has some great value for Watson in Phase II, very excited about this opportunity in the U.S. And then of course our FSH product will be moving into Phase I early next year. So lots of activity going on, on the Brand franchise as well.
And the potential growth drivers, well, I said, I already talked about PROCHIEVE, but the PDUFA data again is February 26. Great opportunity there. I mentioned the second generation Gelnique product, the Antares product, the December PDUFA date, international expansion into Canada, Esmya in Phase III and FSH, of course, moving into Phase I. And that also doesn't include continued growth of RAPAFLO and Generess Fe and the current products in the pipeline. So very exciting things brewing on the Brand side as well.
Well, and I'll wrap up here with this slide. And just say, look, as we look forward from '12 -- from '11 to '12, while we traditionally don't give guidance until early '12, what I can say is we do expect a strong growth of EPS from '11 to '12. And as we look out beyond that, we continue to see growth opportunities from '12 to '13. So -- and we're -- how are we going to do that? We're going to do that through a balanced growth strategy. We've been very clear about that with Generics Brands and Biologics. And we have the balance sheet to be able to fund all those development efforts, both internal as well as external opportunities.
So with that, I will turn the phone or floor over to you, Michael.
Michael Faerm - Crédit Suisse AG, Research Division
Thanks, Paul. We'll open it up to Q&A at this point I think we'll have a microphone available to people in the audience who'd like to ask a question, but first I'll get it started off with a question.
Paul, maybe we could start with LIPITOR. You've said consistently that your expectation is that you'll launch November 30 with Ranbaxy also in the market. Recently Teva has made comments about an undisclosed product that they potentially could launch in the fourth quarter and there's a fair amount of speculation that it's Lipitor. I'm just wondering what your thoughts are on the likelihood of that being Lipitor? And also if it is, how do you think that changes the landscape for you?
Paul M. Bisaro
Well, I guess that really depends on what form they would be launching. If they will be launching as a third competitor, that would of course affect the market share assumptions that we put into the model. Although this seems to me to be a pretty unlikely event, that they would be entering as a third competitor. It's possible, anything is possible. But it still doesn't feel like that would be the right approach if Ranbaxy had issues, they would look for a way to transfer the ANDA or do something that would allow for one last competitor, sort of, in the market. Again, I can't say that what Ranbaxy would ultimately do. But my assumption right now or our assumption right now is that it will be a 2-competitor marketplace. As we get closer to the 30th, if Ranbaxy doesn't get any more clarity around its application or its situation with the FDA, we'll be ready to launch and cover the whole market, if that's what it takes. I have said this before and I'll say it again, for Ranbaxy, they certainly have to make their own financial decisions. But because they have 180 days of exclusivity and no one else can get approval, at the time there's no particular magic to November 30, for them. They can wait until they have sufficient quantities of product and launch and there will be plenty of market opportunity out there when they do launch. So there's probably, I know there's a lot of hype around this issue, but it seems to me that the most logical and reasonable assumption is, that we'll be launching with 1 competitor or a delayed entry of that competitor.
Any questions from the audience?
Unknown Analyst -
Paul, do the steps that Pfizer took to keep its brand positioned in the formularies surprise you? Did it cause you to adjust downward your estimates of income from the authorized generic launch? And does it suggest, in the future, that authorized generic launches are going to be more challenged by the innovator in a way that -- in a way similar to that which Pfizer's doing, please?
Paul M. Bisaro
Well, did it surprise us? I would say, no, it didn't surprise us. What I think surprised, if there was a surprise, was to the extent that they were willing to go to institute new things, like NDC blocks and other things that traditionally haven't been done and maybe I'll take a second, I think we have a little time, so I'll take a second to explain kind of what's been going on. How we sort of get to the 40% market share is probably pretty important for you all. What we expect is that about 5% of that market is going to be Brand, no matter what, because certain people, as you know, will only take a Brand product and pay whatever price they want to pay for it. So there's certain inelastic demand that exists. LIPITOR happens to be a chronic care medication and a lot of people get their medications, chronic care medications, through mail order. What Pfizer was able to do is go through those mail-order houses, provide them unmatchable arrangements by us, and literally convince the mail-order companies to not dispense generics and some of them simply won't. And what's been a little bit different this time, and that, by the way, is probably about 20%, 25%, 28% of the market, so it's a big chunk of LIPITORs sold through mail order. So this is somewhat unique in that situation. Then what also they've done this time is gone out to a number of plans, drug plants, and literally paid the drug plan to block generic substitution, literally block the NDC. So you go in with your prescription and your plan is XYZ plan, that has blocked the generic, you can't get the generic even if you wanted it. So it in a new tactic, not so new, but it is probably the most widespread that we've seen so far. So it has been a very aggressive program by Pfizer. I think, people will have to ask themselves whether this is a good thing or a bad thing for the economy and for the healthcare system. Because day 181, or whenever there's multiple generics, all of these great deals are going to go away, and people are going to be scrambling to look for generics. But it's a very interesting dynamic that we're seeing playing out here. So yes, it has affected our overall substitution rates and obviously, revenue projections.
Any other questions from the audience? In the back?
Unknown Analyst -
We've heard a lot of comment, FDA's view on biphasic and difficult-to-make generics. We haven't had a generic Adderall yet, we don't yet clear what generic Adderall will have to produce. How confident are you that your work that you've done will satisfy the standards that the FDA will finally come up with? And when do you expect the FDA to finally come up with some standards so that we can check whether you're right or not?
Paul M. Bisaro
I wish I was clever enough to know when the FDA will actually do that, but I don't know. I think, the FDA has got a lot on their plate. As you know, we've been -- we, Watson, we've been very instrumental, along with other generic companies in developing a generic user fee program to allow the agency to have the resources it needs to be able to address questions like this. But I do expect there will be a guidance eventually around these partial AUC drugs, like Adderall. It is not clear to me when that will happen. But what I can tell you is when we looked at our Adderall and when we did a biostudy, that measured the various time points within the first 8 hours, we feel very comfortable that our product matches whatever the brand matches. So depending on what the ultimate regulation turns out to be, we think we're in pretty good position to be able to satisfy that partial AUC. I suspect there are other people who feel the same way, and that ultimately will be determined by the agency. But I do think user fees will go a long way in dealing with these complex -- we tried to structure the user fee program so the agency would have sufficient resources, and not just to review applications, but to really answer these kinds of questions. So there was a lot of thought went into the user fee program to make sure that we get -- we don't have these barriers keep popping up through the citizens petition process or whatever.
Unknown Analyst -
I have 2 quick questions. First, with respect to the breakdowns of your various businesses, is this -- do you expect that proportion of generics, the branded biologics to stay the same? Or is there a desire to kind of change that mix over the next year or 2? And then the follow-on was, you mentioned several times about the balance sheet strength and the opportunities that provides to you. Just want to get a better sense for what specifically you're signaling there? Is that more in-licensing thing or is it that just larger scale M&A type sort of outlook?
Paul M. Bisaro
Well, I'll answer the first -- the last question first. I think the balance sheet gives us the flexibility to do a lot of different things. We'll continue to focus on in-licensing, late-stage products for our Brand division, continue to feed that pipeline because I think it's critical. But if we were presented with the right opportunity in the Brand side, we'd certainly spend some of that capital. The -- additionally, as to big and small acquisition opportunities, it's really a question of what is available and what makes sense for us. We've looked at a lot of different transactions, we haven't pulled the trigger on too many of them, but we will continue to search for the right kind of product and/or company on the generic side that gives us additional footprint outside of the U.S., could strengthen our U.S. business if the right opportunity presents itself, but we will spend that capital to do that. And as to this, the percentages between the various businesses, we don't have any particular percentages in mind other than the fact that we want to grow our businesses. And all 3 of those business segments have to grow for us to do that. And I certainly think they all can, we set a target for our Brand division to be $1 billion in revenue in 5 years, and I think we're well underway to achieve that objective, with PROCHIEVE, and then ultimately Esmya, pushing us over the top of that billion dollar number. And billion dollar number is 70% gross margin is going to be a great driver for our growth. So we don't -- that's really the only major target we've set, but on the generic side, we'd also continue to see growth through international expansion so.
I think we'll need to stop there. We'll be moving to the breakout session down the hall. Thanks to Watson for being here. Thanks to everyone for coming.
Paul M. Bisaro
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