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Watson Pharmaceuticals Inc. (WPI)

January 24, 2012 8:00 am ET

Executives

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

David A. Buchen - Executive Vice President, Secretary and General Counsel

Robert A. Stewart - Executive Vice President of Global Operations

Paul M. Bisaro - Chief Executive Officer, President and Director

Patricia L. Eisenhaur - Vice President of Investor Relations & Corporate Communications

Sigurdur Oli Olafsson - Executive Vice President of Global Generics

George Frederick Wilkinson - Executive Vice President of Global Brands

Analysts

Ken Cacciatore - Cowen and Company, LLC, Research Division

Jason M. Gerberry - Leerink Swann LLC, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

David Risinger - Morgan Stanley, Research Division

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Unknown Analyst

Jami Rubin - Goldman Sachs Group Inc., Research Division

David Amsellem - Piper Jaffray Companies, Research Division

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Michael Faerm - Crédit Suisse AG, Research Division

Timothy Chiang - CRT Capital Group LLC, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Elliot Wilbur - Needham & Company, LLC, Research Division

Corey B. Davis - Jefferies & Company, Inc., Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

David G. Buck - Buckingham Research Group, Inc.

Louise A. Chen - Collins Stewart LLC, Research Division

Frank H. Pinkerton - SunTrust Robinson Humphrey, Inc., Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Patricia L. Eisenhaur

So, good morning, everyone. My name is Patty Eisenhaur and I'm Watson's Vice President and Investor Relations and welcome to, I guess what's -- is now our Third Annual Investor Day. I want to go over a couple of housekeeping items before we get started. For those of you that are on the webcast, we will be posting the full slide deck shortly after the meeting concludes, but we'll have streaming slides going today. We'll hold a Q&A session at the end of the presentation. We're allocating, I believe about 45 minutes for upfront comments and the rest for Q&A. So when the Q&A starts, please wait for the microphone so that your question can be heard by those on the webcast.

And a couple formal remarks here, we'll be providing -- obviously, we have provided in our press release as you've seen, our preliminary 2011 earnings and forecast for 2012. It's important to remind you all that there are risks inherent in our business and we did outline these risks in our SEC filings, most notably our 10-K and our 10-Q filings. I would like to direct you to the note regarding our projections and forward-looking statements in our presentation and in our press release issued earlier this morning.

Now I'd like to introduce to you our management team. First off, Paul Bisaro, our President and CEO. He'll provide our 2011 preliminary results, business review and outlook. Sitting next to him, Fred Wilkinson, our Executive Vice President of Global Brands, he'll review last week's FDA Advisory committee meeting and an application update for our PROCHIEVE product. Siggi Olafsson, our Executive Vice President of Global Generics who will review the Ascent Pharmahealth acquisition announced late last night. And Todd Joyce, our Executive Vice President and Chief Financial Officer who will provide details regarding our 2011 preliminary financial review and 2012 forecast.

Also up on the stage is Bob Stewart, our Executive Vice President, Global Operations, and David Buchen, Executive Vice President and General Counsel and Secretary.

I'll now turn the microphone over to Paul and we'll get the presentation underway. Thank you.

Paul M. Bisaro

Thanks, Patty. Good morning, everyone. It's a pleasure to see you all again, and we got a lot of exciting stuff going on, so we're looking forward to sharing with you our view of '11, '12 and then beyond '12 into '13. And hopefully show you why we're so excited about Watson's future. Before I get started, I'd like to at least say hello to 2 special guests we have with us. Mike Fedida and Cathy Klema, who are board members, are here with us today. We also have a number of Watson management here. So after the meeting if you want to catch a few and say hello that'd be great.

So with that, why don't we kick it off. We're going to -- we'll try to move through our slides reasonably quickly so that we'd save a fair amount of time for questions, because I'm guessing there's going to be a few.

So we'll start with our usual introduction to Watson. We have a very solid balanced business model and we've been pursuing this business model for some time and we'll continue to pursue this business model for the foreseeable future. It includes a very substantial Generics portfolio and platform. Generics account for about 75% of our revenues right now. We are the third-largest in the U.S. probably fourth largest worldwide. We have operations in key countries. We just added to that today with the announcement of the Ascent acquisition. One of the things we do very well is R&D. And we will continue to focus hard, spend a lot of internal resources on R&D and do things that are unique, modified release products, oral contraceptives will continue to be important for us, narcotics and transdermals will become more and more important to us as we move out through the next few years.

And most important in all the things that we do is our global supply chain. As we've seen over the last few years, supplying products to our customers at a very high customer service level is extraordinarily important and it leads to upsides for you. And we've certainly benefited from having a leading global supply chain.

On the branded side of our business, which accounts for about 10% our revenue, we're going to be -- continue to focus on Urology and Women's Health. We're working very hard on a number of projects, we'll take you through what the pipeline looks like right now. And Fred will update you on PROCHIEVE, but turning to our marketing -- our marketed products, RAPAFLO, Gelnique, Trelstar, ANDRODERM, Crinone, and Generess Fe, have all proven to be great products for us. We'll continue to drive these assets into '12 and '13.

But we're not going to just stop with the U.S. in this case, we're going to move on into Canada. We'll talk about our activities going on in Canada today, as well as South America with our Brand business.

And then finally late last year, as you know, we entered into a transaction with Amgen to develop a monoclonal antibody products. Very exciting move for us, that's coupled with our SFH development program, it's moving us into a leadership position in biosimilars. So a lot of stuff happening on the Brand side.

And then turning into Anda, which is -- accounts for about 15% to 17%, of our revenue. Anda has been quite a little jewel for us, the fourth largest this distributor of generic pharmaceuticals in the U.S. Extraordinary reach, over 60,000 pharmacies and physician's offices as you can see a full line of generic products, a number of brand products now more and more. And most importantly, the value that it provides to Watson is the flexibility it gives us to launch products, get ahead of the launch curves. We saw Anda's value to Watson with the Concerta launch, with the LIPITOR launch. We've done some extraordinary things last year, and we're looking for new ways to help grow this business and we'll talk a bit about that.

So turning now quickly to our preliminary results for 2011. As you can see, I think we had an extraordinary year. Revenues were up approximately 28% to $4.6 billion. Our preliminary results for the year, we'll be giving our final results in February as we traditionally do. But our preliminary results are $4.75 to $4.77, I believe that's well above current consensus. That's a 39% increase above 2010 if -- and if you strip out LIPITOR from that number, you'll see the business grew at approximately 20% rate. So a very solid 2011 performance. And preliminary Q4 non-GAAP numbers are there and the contribution from LIPITOR was approximately $0.64, that's above the guidance we gave, that was principally due to the head start that we got, that first week head start. And again Anda's contribution to making sure we got products to every pharmacy we could on the very first day. So a very good, solid 2011.

Just take you through a few of the highlights for '11, obviously, a key launch for us was Concerta. We expect Concerta to continue to provide a lot of value in 2012, 2013 and into 2014. We expanded our oral contraceptive portfolio. We launched 2 key products in 2011. We just launched Yaz in 2012. So we continue to add to our oral contraceptive portfolio. Later -- late last year, we launched generic Kadian, the extended-release morphine product. So additional extended-release product added to our portfolio. And finally we had the exciting LIPITOR launch in November. So a lot of key launches in the U.S. last year.

But x U.S., we also performed well in Canada, we have the highest growth rate in prescriptions in the Canadian market. We launched 10 products in Canada. U.K. near the end of the year, we launched generic Nexium ahead of our competition by 2 months. We had a great head start with that. In France, recognizing the pricing difficulties in France, we've moved more toward the hospital sales and we've had a lot successful execution of our launch strategies. You heard me talking about the need to make sure we launch our own products, own manufactured products. In France, we're moving very quickly to get more of our own manufactured products and improve our overall market position.

In Germany, we have a small business but we're in the process of restructuring that arrangement, looking for new ways to get into the German market. In the Nordics, we brought in some new leadership, we're excited about the opportunities out there. And in New Zealand, where we are at least #1 maybe #2, but possibly #1, which is, it's always good to be #1 somewhere. And New Zealand is a beautiful country. So we had a very solid year in New Zealand.

And then also last year as you know we acquired Specifar, which not only gave us a third-party business which allows us to take advantage of some of the assets that we have in markets that we don't necessarily participate in. But it also allowed us to more quickly reduce our cost of goods and continue -- and manufacture more of our own products. So we're very pleased with the way 2011 worked on the international front.

Now some additional highlights and things I think people have focused on, and wanted -- and are curious about. Overall, volume increases exceeded price declines in many and -- or most of our key markets. We've been talking a lot about how and why we stay in key markets around the world when there's clear price declines. It's because of the volume increases are overrunning the price declines. There is so much generic penetration that still needs to happen in many of the markets that we operate in, that we can drive a lot of value for our company and our shareholders by participating in those markets and this is evidence that, that is in fact occurring.

On the price side in the U.S. we saw between 3% and 5% year-over-year price declines. Again, this is on a base business so you have to strip out certain products that might skew the numbers. But overall, the base businesses -- this is probably the lowest I've ever seen in my years in the industry. So that's a good trend for the U.S. market. X U.S., we saw about a 10% year-over-year price decline if you do it on a macro basis. So again, while price declines in some markets might be more sharp than others, some markets, obviously are remaining pretty stable.

So good trends are starting to emerge and we're excited about both the U.S. and inter X U.S. business.

Globally, we had 252 product approvals, 189 launches. So a very, very busy global supply chain. But they have executed extraordinarily well and I believe they really provided us with a competitive advantage.

Turning now to our Brand accomplishments for 2011. We continue to grow RAPAFLO and our other key products including Gelnique, and ANDRODERM and Crinone, we'll continue to drive sales on those products. We had 2 interesting launches this year with the Generess Fe and the new ANDRODERM 2 in a 4-milligram product which has very nice growth trajectory. We added 40 new sales reps to our U.S. operation. That brings us to a level where we believe we have almost 100% Urology coverage now and about 60% to 70% OB/GYN coverage and so we feel like we're in a very, very good spot to continue to grow our brands.

And then we expanded our RAPAFLO arrangement to Latin America, and this product will be one of the products that we'd move in into the key markets in Latin America as the springboard for our brand group in the region.

Some global supply chain highlights, as I mentioned how important this is, but it is always good to say it. All of our key manufacturing facilities underwent an FDA and EMA approval, and as well as other regulatory inspections, and all maintained a satisfactory GMP status. In other words, with did great on the quality side. We continue to stay focused on quality and make sure that we have no slip ups in that area.

We did invest in some -- our facility expansion as we mentioned. These are relatively modest investments but we do -- we now have our global facility up to 4.5 billion units. We expanded our footprint in Malta to do additional lab testing. And we initiated the Salt Lake City transdermal expansion. That expansion should be complete before the end of the first quarter. Certainly, ready for anything we need to do by midyear.

We also continue to globalize our quality system. Quality by design, we've built in now to our overall operations. And we've implemented a very sophisticated pharma tech structure that supports our -- not just our ongoing operations but moving products from our R&D to manufacturing to make sure that, that movement is seamless and we launch products on time.

I guess by any measure, 2011 was an exceptional year and if you look back on our performance, we've certainly delivered on that, on our expectations. We've seen double-digit growth from actually beginning all the way back in 2008 to '09 and all the way through to '11, where we had just some extraordinary year of almost 40% growth. Now, as I joked to the team yesterday, I said I would say this, so I'm going to. I know everybody in this room is going to say thanks, that was great, now what have you done for me lately? So, okay. So how do we drive growth from 2012 and beyond? So let's start talking about that.

We've been following this pretty basic growth strategy for quite some time and we're going to continue to follow this strategy. And if you start working it through, you'll see that if we're successful, we will have built a very balanced model, that will allow us to take advantages of each of these business segments depending on market cycles.

So if you look at the Global business, our challenge here is to maximize the value of all the generic R&D investments that we have and that we continue to spend on, and drive value and drive growth. So all the internal money needs to -- we need to make sure we execute and deliver that value.

We know we need to enhance our competitive position in our x-U.S. markets. We're very comfortable with our position in the U.S. but our x-U.S. markets, in some cases are subscale. I think today the Ascent transaction shows you how we will find ways to help jumpstart our ability to grow those markets.

And then finally we'll capitalize on our supply chain. As we've continued to get more and more customers coming to us for products because our supply chain is second to none.

On the Brand business, we're going to continue to invest in our Urology and Women's Health franchises. I'm a believer that this is our future that this will continue to drive growth in the out-years for us. We have a great pipeline and we'll continue to invest heavily on our Brand side. We're also going to expand our footprint outside the U.S. We'll talk about that in just a second. I think there's some great opportunities, we have some great products and I think leveraging those products across multiple markets makes perfect sense for us.

And finally, you've heard me say it and we -- I think we've delivered on this promise, we're going to be a major player in the biosimilar space with FSH and our Amgen collaboration, and as well as other collaborations potentially down the road. So we're going to be a major player in biosimilars.

And finally Anda. Anda continues to perform, as I said, extraordinary well, supports Watson as well as other third parties and their launches. But we look -- we're looking to find ways now to expand Anda, to do new things. Clearly the world is changing, there's more biologics, there's more direct-to-physician distribution going on. And Anda is going to move into those spaces in an aggressive way and look to become more of a specialty distributor in addition to its core business. So a lot of exciting things happening in Anda and you'll hear more about that over the next 12 to 18 months.

But we will continue to invest in R&D. You know I've said this for a long time, the most important thing we do is R&D. It drives all of our growth our -- certainly our internal growth and as you can see we've lived up to that commitment with our non-GAAP R&D investment increasing by 17% on a year-over-year basis. We have a good portfolio management team that looks hard at our portfolios both Generic and Brands, and make sure that when we're pursuing a product that doesn't make sense anymore, we stop. Or if we miss something, we start pursuing it or we find ways to accelerate that movement. The team has done extraordinarily well on all of those fronts. We need to continue to leverage our existing development capabilities to drive more products into more markets and we are, obviously very focused on that. And of course, the biosimilar collaboration will really start kicking off with the project development, really hitting its stride early in 2012.

But we're also going to invest on our sales and marketing team. We've invested heavily in our sales and marketing units around the world including in France, Brazil, Canada. We'll continue to do that. And as I mentioned, we expanded our U.S. sales and marketing team. We continue to look for ways to increase our reach into the physicians' offices, into the specialty care hospitals and clinics that we need to be in because that's an important way. If you don't invest in your business, frankly, it's not going to perform. So we have invested in those things.

And then finally we are going to invest -- continue to invest in business development. We're going to put our balance sheet to work, when it makes sense, we're going to make those acquisitions that help drive growth. As you know, we're very conservative about the way we present earnings and we don't include any M&A and business development items, until we have them in hand. I think that's the -- certainly the way we should continue. But if you look at our balance sheet, Todd, will give you that view in just a little bit, you'll see we have a lot of firepower to put to work.

So very comfortable with our continued investment in all these things.

So what does this investment -- what does it turn into? This is just a couple of snapshots just to give you a feel for kind of where we're at. If you look at just our U.S. Anda filings over the last 3 years, we've targeted 30% to 35% Andas every year and we're hitting that target. It depends on the difficulty of the products and the more difficult, it's generally less, you get done. But I think the important part of this slide is we're moving away from the more traditional oral solids and moving in the things that drive additional value.

Non-oral solids in particular, you'll see more patch products, more gel products, ophthalmic products from us. A lot of new technologies that are the new frontier really for our Generics business.

Modified release continues to be an important area for us and continue to focus on it. It is something we do extraordinarily well, we've demonstrated our capability to do that and we will continue to work on products that have modified release characteristics.

And then there are still good oral solids as well. So a good balanced breakout and as you can see, we're still at roughly 130 applications, maybe slightly more, you might say sometimes it moves around a bit because of the approvals, but overall, a good solid position to grow from in the U.S.

Another thing we've done quite well over the last few years is improve our position on the first to files. Paragraph IV challenges, first-to-file challenges. On this slide, you can see that about 25% of our U.S. filings, are first-to-file. Now this -- we have additional Paragraph IV challenges, but these are just stripping out the first-to-files. And I think probably the most important number on this slide is the 20 exclusive first-to-files. As you know, those are the ones that have potential to drive value for us and these are what is going to drive value in 2013, 2014 and 2015.

So that's the area for our investors to look at. And you'll see growth from those products. I think we've demonstrated a very strong track record in monetizing those assets either through launches, settlements or other ways to make sure we get the most value for consumers and investors from these assets.

Drivers of ex-U.S. growth. While we filed approximately 300 dossiers around the world last year, an extraordinary number for us. We have over 500 dossiers pending. We've got the nice opportunity with the generic Nexium tablet product, hopefully launching early this year in France and then into Spain and then across Europe. Capitalizing on additional Specifar capabilities, getting our products into markets where we don't have a current marketing program but we can license out to third parties to get additional value.

And then we continue to focus on M&A as we look to shore up many of the markets that we currently operate in.

Turning now to Global Brands. Again, the most important slide that we put up for the Brand side is this slide. This is our future. The pipeline is solid and strong, got a lot of activity going on here, some new additions, the Esmya product for Canada. We think we'll get that filed this year because of the results that our partners saw in Europe. We think we can accelerate the filing of Esmya in Canada which would be nice little addition. Our progestin-only patch continues to be one that we look forward to value. As you know the progestin -- the PROCHIEVE product, we'll talk about that, Fred will talk about that. We've removed it from our guidance for 2012, but we will continue to pursue all avenues around that product to get approval in the U.S. but for now, we've taken it off the slide, we do have the second-generation product still out there and still percolating along. And then of course our biosimilar products, that are a little further out, but FSH getting into Phase I this year, looking forward to getting that product through the clinic as quickly as we can.

Some drivers for growth in 2012 for the Brand side, of course Generess will -- we believe will continue to grow as we put additional resources behind that asset. I think the ANDRODERM 2 and 4 has a lot of exciting opportunities, as the testosterone market continues to expand this is a very nice product that's participating in that market. A bit unique really in that it's titrated down the dose with this new product and I think we can get some value from ANDRODERM. And then we'll continue to drive our core products. We also have launches anticipated for 2012 with the new product for oxybutynin gel, a new pump version of the product, new dispenser. So a way to get -- hopefully drive additional value for this product into -- in 2012 as well.

Now I mentioned this a couple times, we're expanding into Canada. We've already launched now 3 products in January and we'll be launching ANDRODERM in July. Our marketing promotional efforts are underway. We have a commercial team in place with 25 sales reps already. And we're, as I mentioned we're accelerating the Esmya program. So with a little luck and maybe a business development opportunity here and there, we think we can turn this product or this effort into a profitable entity very, very quickly. Of course any start up has a little bit of a negative drag on you for a bit but we do think that we can turn the corner on Canada very quickly with the products that we're bringing north of the border.

Continue to look for ways to expand our Latin American brand presence. I mentioned the RAPAFLO licensing extension. But we also plan to file now 3 products in Mexico and Brazil in 2012 would hopefully launch in 2013 in these key markets.

Just quickly on the biosimilar initiative. FSH treatment for infertility, as I mentioned is going into Phase I, very excited about that. And the Amgen collaboration. We continue to believe, I think both parties continue to believe this was the right transaction for us to do. It is not the only transaction we can and will do, but it is one that I think gives us a certain -- gives us the stepping off point for dealing with monoclonal antibodies so we're excited about the learning opportunity here and the overall commercial opportunity. A bit further out though, '16, '17 and '18, but nevertheless something we have to invest in today to make sure we're there in those years.

So I guess to sum things up, we're well-positioned to drive long-term growth. I think we have all the assets in place we need to continue to drive internally, the internal growth on both on the generic brand and Anda side. And we'll maintain our focus on execution, and executing against those assets to make sure we provide the highest value.

And finally, we'll continue to deploy our balance sheet as we can as we find the right opportunities, as we demonstrated this morning, to drive value to shore up our assets and help overall growth.

So again, well-positioned to drive long-term growth and I'm very excited about the future.

So with that, let me turn it over to Fred, who's going to give you a quick update on progesterone vaginal gel.

George Frederick Wilkinson

Well, thank you, and good morning. Obviously, all of us would hope that I'd be up here presenting that I had a 19 to 0 vote in favor of approval. We did not accomplish that as most of you may have seen at the advisory panel. The committee voted based on the questions that are put in front of them, 14 to -- or 13 to 4 against the approval of the product, but we'd like to present kind of our overview of what we saw at the meeting and where we stand.

So -- and at the end I'll give you a little update as to how we intend to manage this situation going forward and how we hope to resolve the issues.

Okay, so this is a quick reminder. This is a product that's seeking an indication of prevention of preterm birth in women with a short cervix. Short cervix as shown as everyone knows to be a very high predictor, probably the highest predictor of preterm birth if measured appropriately. It's easy to identify and there are no current therapies that are available for use in this area. Our product provides a very unique bioadhesive-delivered form of a natural progesterone. It took a long time for us to seem to get that message communicated to the advisory committee that there is something unique about delivering a product, in a sustained fashion, vaginally in order to achieve the benefits we're hoping. The indicator -- or the file itself was supported by a very large trial, I think the largest trial conducted in the area. It was a well-controlled Phase III clinical program but there is also was a lot of additional supported, published information that was presented appropriately in support of the file. And I think as most people saw and most people recognize, this is one of those rare moments when you're trying to file a new indication of a product that's been around for a long, long time, using the same type area. It's used for infertility so we have 14 years of safety data in women are taking this during the first trimester when we're recommending administering this in the second and third trimester. So that's kind of the foundation.

Cervical lengths itself just to remind everybody, it is the strongest predictor. I think the medical community continues to ride on the fact that this is something that's easy to identify, a simple test allows you to show whether the woman has a short cervix or not. And then with the appropriate treatment, they can solve that problem. And I think what you've seen over the last 6 to 9 months is now a lot of press on the cost savings that will result from proper diagnosis and then treatment of women with a short cervix. And I think as late as the December editorial in AJOG, simply said you've got to pay attention to this because this is not only a cost benefit but a reduction in the morbidity and mortality of infants.

The medical community, I think. Is also paying a lot more attention to the value of progesterone. So as more studies get published and more work goes on, you're seeing more and more noise about how the medical community has picked up on the value of progesterone and we've listed here just 4 areas in the last 3 months where there have been publications by the major associations and in major journals.

The first was a Journal of Obstetrics and Gynecology that reviewed through a peer review process of very intensive meta-analysis of the use of progesterone in general, in women with a short cervix. That came with a very strong conclusion that it reduces the risk of preterm birth and neonatal morbidity.

MFM has started to initiate guidelines and I think as most of us saw in the newsletter that came out in the November-December time frame, they're now describing that final guidelines will be established or have been established that make cervical screening a critical part of our care and that it would be -- would again result in improvement in overall obstetrical care. ACOG, in January in their newsletter put out a piece that saw that progesterone gel found the reduction for certain preterm births. And then we've been obviously following the blogs and the news that goes on in the medical community. We pulled out one from a very eminent university down in Philadelphia, Thomas Jefferson University, that has already made the shift to routinely testing women for their short cervix, whether to see if they have a short cervix and then implementing treatment.

So the community is, kind of, the trains going. These things moving along and so we were hoping to be in a position where we'll have a product that would be FDA approved and available for their use.

Let me remind everybody what's in our file. So Columbia filed this with Study 302, which was sponsored by Columbia and the NIH, cosponsored. A very well-run clinical program, probably the largest in the area, that's stratified for preterm birth, or they've -- I mean, looked at preterm birth with women with short cervix and stratified for those women who had already had a previous preterm as one of the original stratification factors. This was supported by a preplanned analysis of 300 where they did look at short cervix. So there was a large number of women that were included in the cohort that measured short cervix and then looked at the impact, that -- that's was really the idea generation trial that led to 302.

301 is your required 3-case study that showed the value of the micronized progesterone in a vaginal gel. And then finally supported by a very large clinical trial that was done outside the United States by Fonseca that evaluated the use of another progesterone product in women with a short cervix. So lots of data around it. This is a traditional file that goes in with one clear study and supporting documentation.

There's a lot on this slide, I'm going to focus you at the back end of it, which is what went on with the discussions with the agency because I think this is important. First of all, there was an advisory committee in 2007 where there was a strong recommendation that 37 weeks is not the appropriate time to be measuring and measuring the impact of therapy for preterm birth, that it needed to be at 35 or less. We took that guidance very much to heart and that's what formed the foundation of the protocol for Study 302, which had the primary endpoint of preterm birth in less than 33 weeks has to be measured 28 and 35 because as you go down the time frame, these babies, become sicker and sicker. We spent a lot of time negotiating this protocol and on -- and a lot of time, when I say we, which is Columbia and a lot of times spent on negotiating the statistical analytics plan, which is the foundation for what you do in your analytical analysis after you break the blind. This plan was locked down before the blind was broken and thus the complete plan was part of the NDA documentation. We've met with the agency prior to submitting the NDA, showed them the data and the analysis plan that was intended in which there was general agreement there. And there have been subsequently several meetings with the agency that showed appropriate progress on the review of the NDA.

So, body of evidence and I think this is really the most compelling slide that, I think, we need to take to heart as to why we're going to stay in this fight and fight our way through the process. It's that when you look at the chart, the primary endpoint was reduction of preterm birth, less than 33 weeks, a 44% reduction with a P value of 0.022. Okay, and that's with a preplanned placebo rate of 22%. The placebo rate in the study was actually 15%. So one would think that would bias the study to go the other way and make it even harder to show any impact for the drug. The drug still showed a 44% reduction with a P value of 0.02. And many people have asked why didn't you get 0.01 or less than that, primarily the influence of the placebo effect. But more importantly from this slide is that the effect stayed throughout the 3 time points that were measured. And as important as anything else, and I think was an attempt to accentuate this was the discussion around 28-week pregnancies because this is when a lot of bad things happen. Okay. On the other side and then the words what you'll see is the infant outcome, so -- and as was presented very appropriately backed by Dr. Campbell at the advisory committee, RDS was statistically significantly reduced and this is the most common thing that happens with preemies, respiratory distress syndrome, this was the first time that it had been shown any study have shown any kind of reduction since the implementation of surfactants several decades ago. So this is a very important finding. On top of that, these babies were healthier, bigger, had bigger head circumference and better effect and I think the one stat that could keep us going on was the reduction of the number of babies born with a birth weight of less than 15 grams, those are just pretty small babies. Okay.

And what I think became important to accentuate and will continue to be accentuate is that it's really impossible to understand how you might have an infant outcome improvement if you're not making any impact on the reduction of preterm birth. And I think that's the compelling argument that we're going to continue to put forward.

On top of that, there was evidence that our trial had a 44% reduction, that matched up with 3 other programs that have been in the press, using either a vaginal progesterone gel or other forms of vaginal progesterone. So the range was between 37% reduction and 44% reduction, and we were right in, right on top of that range.

So we all got a lesson on statistics if you attended the meeting. There was a lot of discussion on the statistical review on these things, I'm not going to pretend to be a statistician, but I am going to go through a little bit of what was looked at in the file, what was agreed upon prior to the submission of the file and then what was presented at the advisory committee because they were, although the same, there was some very important differences.

At the top is the CMH test, which looks at 9 sites and all of the stratification. This is your primary endpoint analysis of which you are looking for a P value that stays -- that gives you the confidence around the trial, okay? This was a prespecified endpoint and we hit 0.022, statistically significant. The secondary analysis behind that if you are looking to verify that methodology would be to look at 2 exact tests. One is the CMH test,and one is a Fisher test. You'll look at those generally if you've failed the first test. We passed the first test. We did the test anyway, looked at those and those were also statistically significant. And then when you take the same CMH test and you do different subgroup analysis around it to kind of test your stratification, this time with 16 sites, this was again a prespecified, pre-negotiated test, we had statistical significance on that. And I think what surprises us is those results were not presented by the agency at the advisory committee. Because those were the agreed-upon positions. When you then go to some of the secondary analysis, you can see although there were differences, the similarities are more striking. So these different tests were done with under different approaches and the only thing that reached outside of the statistical significance was the logistic regression test and that simply because the order in which you enter in the data, or enter in your stratification, can make a difference. We have prespecified a specific order and ran the test, got a P value of 0.04. When you alter that, you can get a P value of 0.05, 0.06, 0.07, you can keep altering that data in any way you want.

As important as anything also, is we reached the same conclusion on the impact on race. So all in all, it seemed like a fairly similar analysis although a slightly different approach to it. I think those of us who watched the advisory panel saw a very different presentation of the data though.

So what else happened at the advisory committee? I think important to note there was some management change just prior to the advisory committee in this division, and some of the senior management team had, that were involved early on, are not still with the agency. And we think that may have had an impact. We were very concerned with the way the questions were asked. And I think if you read this question, in some ways we're a bit surprised we got 4 yeses, because it really says that the answer is no before you answer no.

And now that was a bit concerning to us and I think some have a point of some of our discussions right now within the agency. And then the idea that they've brought a surprise witness up to rebut some of the world-renowned experts in preterm birth about a meta-analysis which is an appropriate way to look at all the studies that are done within an area. That made some inaccuracies in the statement that -- which forced actually the investigator to stand up and he tried to rebut those statements which is -- we think we saw something that you don't normally see within an advisory committee environment.

Okay more importantly, so kind of told you what we saw there. Where are we going? We have a PDUFA date of February 26th of this year, so less than a month away. We have engaged, it was a pretty busy weekend and a long day yesterday, we have engaged in a lot of discussions with many different levels within the agency and many different levels within the NIH, because this is their trial too. Those discussions have been reasonably positive yesterday afternoon, Paul, did talk to the Commissioner and has put forward a point of view and actually had a reasonably positive discussion that he can talk about if asked. So, but where we are is that the 2 companies are actually extremely supportive of trying to finalize a way forward for this product and we intend to work directly with the division to make sure that there is an answer that allows this important medication to get to the marketplace in a timely fashion. We have taken it out of our guidance. We think that's appropriate but we are continuing to move forward to try to get this product into the marketplace so that the use of product is not off label use of all these other progesterones, that it's an FDA-approved product, that we can collect all the safety data and whatever other things required around the pharmaceutical area of an FDA approved product. Okay?

So I hope that gives you an overview of maybe a little insight as to what we saw there. And I'm sure there'll be a few questions when we finish the presentation.

With that, let me turn it over to Siggi Olafsson, who's our Executive Vice President of the Global Generics business. Siggi?

Sigurdur Oli Olafsson

So, good morning, everybody. We are very excited to tell you a little bit about Ascent Pharmahealth. I think we've just announced the acquisition of this company late last night, or in fact very early this morning. The purchase price was in Australian dollars, $375 million. This is in fact the fifth largest generic company in Australia. Australia per se is a very interesting market for us. We have assets in Australia. We own Willow, which is a hospital business in Australia. Our focus is only on the injectable under hospital rings [ph]. But we also own a company called Spirit, which focuses on developing product for the Australian market. They have licensed out many of their products, but within these 2 companies, we have a significant portfolio, which we want to let work for us going forward. We really want to monetize the products, the MAs we have in Australia, and Ascent is a fantastic place to take it forward.

Not only are they #5 in Australia, they have a very good footprint in Southeast Asia. They're #1 in Singapore where they operate under the company named Drug Houses of Australia or DHA, a very well-known pharmaceutical company in Singapore.

And overall, this transaction is accretive this year and we expect to pay down the debt of this transaction within the next 6 to 9 months.

So the company itself, Ascent, as I mentioned has about 14% market share in the generic market in Australia. They have a strong, not only a strong generic prescription business, they have a strong OTC business. They have a skincare business. They have a prescription dermatology business and all the businesses with a very reasonable margin. And the growth of the Australian generic market is better than in most of the other western market, it's expected to grow around 8% over the next 5 years.

Southeast Asia, very interesting markets for us. What we have is a good base in quite a few markets, which we can take and expand further with our dossiers. We have been talking about Southeast Asia being a focus point for us, and this transaction drives that home. A good base in Singapore and a really fast growing base in Malaysia and Hong Kong. And then, there are marketing authorizations in other markets like Thailand, which we want to expand even further. The good thing about these markets is they readily accept our applications, which have been developed in the U.S. so we get a very quick turnaround and quick approvals to expand our portfolio in these markets.

There's a lot of sales reps in these markets, it's about 45 sales reps we have in Southeast Asia. And in fact in Ascent, they have the second-biggest sales reps in the Australian generic business. So it's a sales rep driven business especially the nonprescription drugs of OTC, skincare and dermatology in Australia. There is one manufacturing plant that comes with the transaction, it's relatively small, about 600 million units focusing only on supplying the Southeast Asian market, very little export or nearly no export outside of Southeast Asia.

So a little bit about the Australian market. It's a very interesting market for us. One of the few markets which are growing at a relatively good speed. They have been lowering prices so there has been a big push to use more of the generics. It's expected in 5 years' time that the generic penetration, will be about 75%, similar level as you see in the U.S, Germany, U.K. and Holland. So it's a fast-growing market but what's also interesting, it's a very difficult market to enter. The top 5 companies are 98% of the market. You can see the companies and it's heavily dependent on the size of the portfolio. The size of the portfolio here are 87% of PBS listing. PBS is the healthcare reimbursement system in Australia. So Ascent today has 87% of all the products that are reimbursed in Australia. With the addition of the portfolio Watson has already approved in Australia, we think we will have the biggest or the second-biggest portfolio of any generic or any pharmaceutical company in Australia. So we make our assets start to work for us from day 1, in fact.

So a little bit about the growth of the Australian market. You can see there in the last 3 years, the market has grown about 7.5%, expected to grow 8% going forward, the generics. The OTC business is also growing but you can see the big Pharma, the branded big Pharma business is declining in this market. Like in most of the markets we operate in today, there's a big push for more utilization of generics.

This is the Southeast Asian market. Interesting market for us, we have talked about it, fastest-growing market. You can see that the Malaysian market is expected to grow about 13%, they have grown about 18% over the last years. Singapore around 11%, very strong position in these markets but also a platform to go into other Southeast Asian markets. I mentioned Thailand before, Vietnam is another market we are very keen to get into. So a strong foothold to be able to expand with the assets we have both in Australia, Europe, and the U.S. to expand quickly into the region.

So quickly to summarize it up. This was a strategic acquisition for us. We have assets in Australia, which we wanted to start to work for us. Very important that the worst thing is to sit and run this business and know that you have between 50 and 100 marketing authorizations in the Asia-Pacific, and you don't have the vehicle to sell these products. So this was a strategic acquisition for us. We are starting the integration straight away from day 1. It's a relatively simple integration. It's a transfer of the product into the name of the Ascent and put more portfolio into the pipeline. As I mentioned before, there would be a debt repayment in about 6 to 9 months. And last but not least, this deal will already be accretive in 2012 non-GAAP earnings.

So with that, let me introduce Todd Joyce, the CFO.

R. Todd Joyce

Good morning, everyone. I'll be reviewing the preliminary results for 2011. Our performance trends over the past few years, our 2012 forecast including the key assumptions in that forecast. And I'll wrap up with a review of our capital structure.

I'll begin with the 2011 results, which are preliminary and unaudited. As Paul mentioned earlier, we're in the process of finalizing our financial statements for issuance in the 2nd week of February. It's been another great year, financially. We've seen consistent quarterly earnings growth throughout the year. We've launched 2 important products in 2011, the generic versions of Concerta and LIPITOR, which contribute to a record year of both sales and earnings.

Net revenues grew 28% to $4.57 billion, and non-GAAP earnings grew 39% to approximately $4.76 per share. And our 2011 results include a $0.64 contribution from the launch of the generic version of LIPITOR.

As you may recall, our sales on the generic LIPITOR are subject to earn out arrangement with the former Arrow shareholders, and under this arrangement the former Arrow shareholders are entitled to a percentage of the after-tax profits from the sales of this -- from this product. The earnout is not reflected in the GAAP financials or non-GAAP financials as this liability was established as of the acquisition date. And so it's paid off the balance sheet. Excluding the impact of generic LIPITOR, non-GAAP earnings for 2011 grew 20% year-over-year.

Now turning to our preliminary results on a divisional basis, our revenue, and earnings growth was driven in large part by the performance of our Generic division. Our extended-release products were especially strong due to the generic Concerta launch, and we had a year-over-year growth as well for Generic Toprol. We also benefited from a slight delay in Ranbaxy's launch of generic LIPITOR which lead to higher-than-forecasted sales and profit contribution in the fourth quarter. And our oral contraceptive franchise grew in 2011 as new product launches offset the impact of price erosion from competition.

And our x-U.S. revenues increased as a result of the acquisition and successful integration of Specifar in the middle of the year. And we also saw a relatively stable pricing environment in the U.S. with erosion rates of roughly 3% to 5% of our base portfolio.

On the Brand side, our Brand division also grew in 2011 with revenues up 11% year-over-year. RAPAFLO and CRINONE continued to grow and our -- the launch of Generess Fe contributed to the year-over-year earnings performance.

On the Distribution side, we saw a slight decline in sales of third-party products due to fewer product launch opportunities. However Anda, did play a key role in the successful launches of generic LIPITOR and Concerta during the year and these sales of Watson products are not reflected in the reported sales for this segment of the business.

I'll share some recent trends in the business. This slide shows the acceleration of earnings and adjusted EBITDA contribution in 2011. As you may recall, we communicated a long-range compounded annual growth goal a couple of years ago of roughly 10% on our Analyst Day. And we're well ahead of that target with compounded annual growth rates on both earnings and adjusted EBITDA of 25% and 27%, respectively.

The next slide shows the benefits of our operational excellence program, which includes plant consolidation in the U.S. And our expansion of our manufacturing facilities offshore in India and in Malta, and ultimately in Greece and -- as we move into 2012 and beyond.

As you could see from this chart, these initiatives have produced sustainable improvements in our gross profit contribution within our Generics business.

The next chart shows the investment that we've had, and the increased investment in research and development for both our Brand and Generic divisions. Our internal R&D spending has increased roughly 24% on a compounded annual growth rate basis since 2009. And we are getting to invest heavily in our pipeline as we position the company to achieve our long term growth objectives.

Now I'll move to the 2012 forecast and these are the forecast assumptions we have for the business. It does represent only the existing business so -- and that includes, as of today, Ascent. It does not -- we have no -- we have not included any projections for future business development, arrangements or M&A initiatives.

There's no material planned expansions assumed in this plan with the exception of the completion plan in Greece and there is a slight investments still in the early part of 2012 in Salt Lake City.

No further plant closures are factored into this plan and so there's only modest additional contribution for operational excellence

In 2012, we expect that products launched in 2011 and future product launches will drive the performance in '12 and this includes a full year of generic Concerta. We launched Concerta in May of -- in the second quarter of 2011, so we'll have a full year of generic Concerta at a higher margin under our arrangement with J&J. We have the remainder of exclusivity period for generic LIPITOR, although after the exclusivity period, we expect it to be a very competitive market so the majority of the contribution from generic LIPITOR is going to be weighted through the first half of 2012.

We have some key launches that are expected in 2012 and this includes generic Yaz, which we've already launched. As well as generic Xopenex and Actos. And in terms of what's not in the plan, we have not included any contribution from generic Lidoderm, LOVENOX or any significant patent challenges.

We do expect competition on our key franchises. We did get another competitor at the end of the year on Toperol. We have factored that into the plan and we do -- and we continue to believe we'll see additional competition across our portfolio in our oral contraceptives. And we also expect U.S. and x-U.S. price erosion consistent with 2011 levels.

This next chart shows the breakdown of some of the key product areas and what our expectations are for adjusted gross profit contribution in 2012, you see extended-release growing. That's the full-year impact, of generic Concerta, which has led to the improvement both in terms of full-year impact, full-year sales impact, as well as the higher percentage of the profit that we're entitled to receive under our arrangement with J&J. That's up 8% year-over-year, you'll see the decline in oral contraceptives as we expect the additional competition on our oral contraceptive portfolio, that would be offset in part by new product launches including generic Yaz that we've already launched this year.

Atorvastatin, you see the generic LIPITOR, there is a $20 million adjusted gross profit increase in 2012 versus 2011. And again that's going to be heavily weighted for the first half of '12 and then 47% for all of the other products in the portfolio for a total increase of 17%, roughly 17% year-over-year in adjusted gross profit contribution on the generics side.

Brands, as Fred mentioned earlier, we pulled this out of our forecast. So the forecast you're seeing today excludes any potential contribution from PROCHIEVE in 2012. We're expecting consistent prescription growth on our key promoted products, RAPAFLO, Gelnique and CRINONE. On the end of distribution side, we expect that overall the contribution or the gross profit, less selling and marketing expenses for that business to be roughly consistent with 2011 levels. We expect slightly higher third-party product launches though, you'll see that in the revenue forecast that I'll share with you shortly.

So this is the range, our forecast range for 2012. $3.8 billion to $4 billion on the Generic side with roughly an improving margin of 45% to 47%. An increase also in the sales of Brand revenues, $500 million to $525 million, 76% to 78% margins, that's roughly in line with 2011 and the revenues up to $850 million to $900 million, at 14% to 16% adjusted gross margin with adjusted EBITDA, $1.28 billion to $1.35 billion and non-GAAP EPS of $5.25 to $5.55.

We ended the year in a great position from a liquidity standpoint. We had $224 million of cash and marketable securities at year-end. Year-end borrowings, we're fully -- the year end revolver was fully available at $500 million. We did borrow USD $375 million to fund the Ascent acquisition, the remainder or the difference between the Australian dollar and the U.S. dollar was funded out of cash. We did -- we only have $200 million of debt maturities in the next 12 months. This is the preferred stock that matures in 2012.

And this is a pro forma of capitalization shown in the year-end capitalization, pro forma for the acquisition of Ascent. And as you see here, $375 million on the revolver, that we have the senior notes due in 2014 and 2019, deferred stock, which is currently at $183 million, which will accrete up to $200 million by the end of the year at maturity. For debt-to-cap at 28.3%, debt-to-EBITDA, roughly 1.3. So we're well-positioned going into 2012 from a balance sheet perspective to continue to invest in the business.

And now just to summarize the forecast, again it's based upon the existing business, total revenues of $5.3 billion, non-GAAP EPS growth in the range of 10% to 17%. We're going to continue to invest in the business through internal product development and increase in spending of 20%. This does include the funding that we expect to make under our arrangement with Amgen during 2012. And we're expecting to be able to delever very quickly and pay down both the revolver and the preferred stock that matures at the end of the year with cash flow from operations.

With that, I'll turn it back over to Paul.

Paul M. Bisaro

Thanks, Todd. Well I'll just wrap up with one slide and then we can open it up for questions. Our goal is to maintain double-digit growth rate while continuing to invest heavily in Watson. As you can see by the early performance of '09, '10, '11, we've demonstrated an ability to deliver growth. '12, we think we're going to continue to drive that growth and if you look at -- into -- from '12 to '13, you'll continue to see double-digit growth. So I hope we answered the question how are we going to grow? We laid it out -- we laid out what our plans are. We've laid out what our assets are and it's now about execution, and I think we've been -- we've demonstrated the ability to execute. We have a great balanced business model and we look forward to the results of 2012.

So with that -- let me just say what's included in 2013 before I jump off so I'll save everybody the question. Todd laid out what was in 2012, what was in the model, what was out of the model. For 2013, we would anticipate the contributions from Lidoderm and LOVENOX, we would not include any PROCHIEVE in that number. We would expect at least one competitor in Concerta in 2013, but no other significant patent challenges beyond the ones I just described.

So we have a basket full of patent challenges that may or may not hit in 2013, or may carry us into 2014. But for now, the way we end -- and by the way that would also include no M&A and no business development in 2013 as well. So purely organic growth on a year-over-year basis with additional upsides that are sitting hopefully getting monetized over the period.

So with that, we'll open it up for questions. Please wait for the microphone before you ask your question.

Question-and-Answer Session

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

It's Gregg Gilbert from BofA Merrill Lynch. My first question is about PROCHIEVE. And Paul did you request that Fred grow a beard until PROCHIEVE is approved?

Paul M. Bisaro

Very soon he'd shave it off and then we'll have it taken care of.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

But seriously, you wet our appetite with the point about your discussions with the commissioner. So can you shed some more light on that, and then my second question is a higher level capital deployment question. Looking at your valuation on EBITDA, which is quite low and some of the behavior patterns of other larger Pharma companies that investors could invest in, instead over in addition to Watson, are share buybacks and dividends in your future or are you totally convinced that external opportunities is solely the way to go for the next few years?

Paul M. Bisaro

Well let me first turn to my conversation with the Commissioner. She was truly made herself available for the call. She probably thought I was calling about PDUFA, or PDUFA but, no. She did take the call and she was engaged in the process. She was aware of the situation. She was committed to providing the resources or making the resources available at the agency to answer our questions and concerns. I raised those concerns with her and she articulated that she would make sure that at least we got a full and fair hearing of those concerns. Frankly, I don't think I could have asked her for anything more than that. I thought she was very open and very receptive to the question. Again, I take comfort from the fact that I think she was receptive and understood that -- what the call was about. We'll have to wait and see. We've got a month or so before the PDUFA date, and we are going to engage the agency at every level that we can. We're going to make our arguments and I think there's some compelling reasons to approve this product. Now that's us talking, but hopefully we can convince the agency that some post-approval analysis will solve whatever concerns they seem to have regarding this product. But we'll do our best to meet that. I think your second question was about deployment of cash, maybe in the cash and the share buyback. As I heard here today, I don't think that's the right way for us to return value to our shareholders. I think we can -- I mean, there's plenty of opportunities and ways for us to grow our business and I think that over time, our investor base will appreciate the assets that we have within our portfolio and get a better understanding of growth beyond '13, which seems to be somewhat of a hang up right now. But I think they'll get the value drivers that exist. I do think people get over -- overblow at this point over the patent cliff. There is a patent cliff but you need to look at the assets of the company to decide whether or not they're going to actually be affected by it. And as the slides that we put up about the patent challenge and opportunities in the United States as well as the growth opportunities, x-U.S. and the fact that we're seeing a trend now, of volume increases improving over price increases. I think has -- I think bodes well for not just Watson in this space but others as well.

Elliot Wilbur - Needham & Company, LLC, Research Division

Elliot Wilbur with Needham & Company. My first question is for Paul and/or Todd. Could you help ballpark for us the expected byline contribution from LIPITOR in 2012. Obviously 2013 EPS growth of 10% certainly looks much more robust considering that you're facing a pretty difficult comp. And then for Todd, or Paul as well, you talked about your underlying assumption regarding pricing erosion and any initiative being something that on the order of 3% to 5%. Obviously, that's an extremely low rate by historical standards and anyone who has been out in this industry for any period time knows that there tends to be some sort of reversion to the mean, so I'm kind of curious what whether your confidence level, if that, in fact, can be sustained over the next couple of years.

R. Todd Joyce

I'll answer the EPS contribution from Atorvastatin. It's roughly $0.77 and that equates to that $20 million increase that you saw on the chart within my presentation.

Paul M. Bisaro

Does that cover you on the Atorvastatin question? Okay. On the price erosion, I'll start and Siggi can jump in. I do think price around the U.S. as I mentioned in my remarks has never really reached this level before. I think what we're seeing now is the opportunity to improve pricing in some older products. You've heard people say that before. What's happening probably for the first time is it used to be you had to, sort of, be the solo player in that market.

I think there has come a point when some of the older products where people have basically said, look, either I'm going to raise price or I'm going to get out of the business. People have raised the price and those prices have stayed. So and again I think there is also a premium and I'm not so sure it's a huge premium, but there is a premium on your supply chain today, probably more so than ever before. I think the value that generics bring to our customers is so extraordinary that the customers can't afford to be out of stock. It is just too big of a hit for them. So the premium on your supply chain has allowed for some flexibility on pricing, which is actually a good thing. I mean that's what allows us to invest in our supply chain. Siggi?

Sigurdur Oli Olafsson

I think what we have also is the sustainability you are asking about. We proceed for the next year or maybe the year after, we don't know what effect the generic user fee will have if there will be additional approvals coming maybe late '13 into '14, so there will be a more crowded market when the backlog of the FDA will be released and more approvals coming through. But as the market is today, I think what Paul highlighted, people appreciate the service level and the quality and I think that gives us a big heads-up in the price in the market.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Good morning, Ronny Gal from Berstein. Two questions. First, following on Siggi's point. One of the concerns I have for the differentiated generics market is just that PDUFA, we are going to presumably see a lot more companies submitting applications and pushing their applications for differentiated products. The competition so far has been low and allowing the industry to profit quite a bit. So one question is, as you were negotiating PDUFA, how did you think about this issue of 5 people going after a differentiated product that, right now, one or 2 companies get and the product remains priced in a very good way. And second question, that one is for Fred, there was some communication towards the end of the Adcom about the recommendation of -- by ACOG and others to use progesterone without an indication and, obviously, you have a product in that market, CRINONE, which is now available, how do you see that the impact of -- let us assume for a second that PROCHIEVE does not get approved, how do you see the trajectory of CRINONE over the next 2 or 3 years as you might -- as you do another trial?

Paul M. Bisaro

I'll touch on the PDUFA question and on the generic user fees were negotiated by a group of companies and actually, all of the recommendations were brought to the Generic Pharmaceutical Association and approved by the whole group. As I think about what PDUFA will do, it will provide the agency with the resources it needs to do a number of things. I think, staff appropriately to improve applications in a timely manner. As you say, there's a big backlog of products but there's also a number of products that have enormous value that are sitting there that we can't bring out of the system. We, as an industry. And we have some of those and some of our competitors have others. So I look forward to the day that we release that value. The other thing I think it'll do is continue -- it will appropriately fund the compliance effort around the globe. And it is not just this question of whether there's a level playing field or not a level playing field, the agency has decided now that it's going to actually impose, on a very rigid basis, this idea that you can't get an approval unless every facility's been inspected within 2 years. The old days, as they used to say, "Well, you know it was okay ," because we got there 3 years ago when everything's fine. Now by imposing that strict rule, there's some further slowing down of the approval process because there's not enough inspections and [indiscernible]. So again, I think we will get value from that. Finally, I think we will discourage people from filing applications that add no real value to consumers. The filing of the 15th Prozac hopefully will go away because now it's going to cost money to do it and you got to do your facility and you got to do all those other things. So I think there's some value to the industry to sort of clean up some of the garbage that's going on and I do think PDUFA does that. So there could be an upset in the short-term but I do think we're just as likely to get some real value coming out of the pipeline.

George Frederick Wilkinson

Yes. As far as off-label use of progesterone products, I don't know that we really speculated on what that might look like. I think the dilemma that's going to be out there is that the medical community's just kind of figured out that short cervix is a predictor and then there is potential therapy and then there'll be just a void of information. And as much as everybody says pharmaceutical companies market and sell products but also educate a lot. And this is an area where there -- when there's no therapy, the ability to educate on appropriate use of the right times to test and the need to make sure you maintain use of medication throughout, this is just going to be lost in this environment because there won't be any promotion.

Frank H. Pinkerton - SunTrust Robinson Humphrey, Inc., Research Division

Paul, it's frank Pinkerton from SunTrust and I just want to ask a couple of questions on what I view as kind of your balance sheet, your strategic positioning and potential acquisitions. Can you speak about the appetite for acquisitions going forward on the brand versus the generic side? We're all expecting I think more geographic expanders from a standpoint of Europe. Is that something in the generic side that you need to be more focused on and have more scale? And then finally, can Todd -- can you please speak to the balance sheet, when we think of acquisitions, can the company do something very large, like they did a couple of years ago with Arrow? And is it something that we should be expecting, as the pieces are shuffled around in the company with that mix between distribution, generic and brand, does there need to be something that would be large and take up the balance sheet?

Paul M. Bisaro

Well let me -- I'll address the first part and then turn it over to Todd. On the scale and brand versus generic, acquisitions, I think we've been very clear: if the right brand opportunity presented itself, we would certainly go and try to acquire it. At the moment, because of the size of our business and what we can do and what we can't do, those are relatively small opportunities for us. Doing something transformative would be somewhat difficult in the brand space, o something of magnitude. But it doesn't mean we're not going to look at assets as they come available. On the generic side, we would like to get additional scale on the generic side. I do think there are markets all over the world and platforms all over the world that add -- that will be additive and value-creator for us and perhaps move us to that next level that we're looking for, so that we can have additional balance sheet power, post a transaction of some substance that allows us to move even faster and harder into the brand space. I've mentioned this a while ago, but I'll say it again, I do sort of see that we have space yet to grow on the generic side. We have not maximized our opportunities in the U.S. or have we maximized every opportunity around the world, so there is still the ability to grow and grow significantly. And with that growth would come the ability to do additional brand transactions of magnitude and that probably is the way we will proceed down this path. I think it makes the most sense. It gives us the most cash generation and comfort to do that. Todd?

R. Todd Joyce

And we do have a lot of flexibility on the balance sheet. You saw our year-end numbers in terms of what the debt levels were. We've always communicated that we feel comfortable going up to roughly 3.5x leverage on a large acquisition, so we have a lot of capacity today. And for a larger transaction, if we would find the right transaction that could transform the company, we would consider a mix of debt and equity to fund that acquisition.

David Amsellem - Piper Jaffray Companies, Research Division

David Amsellem from Piper Jaffray. Just a couple of quick ones, first for Fred, on PROCHIEVE. You didn't address the FDA's analysis of the U.S. versus x- U.S. sites and the variability in outcomes are their concerns. So the question here is, how do you think you can overcome that? Do you think you can overcome that given the existing body of work or should we expect a U.S.-only trial going forward? And then, second quick question, maybe for Paul or Siggi, on generic Lidoderm, your latest thoughts there. Endo has sounded I think a little more pragmatic or positive about a potential for a settlement so I wanted to get your latest thoughts there.

George Frederick Wilkinson

I think that was a part of the big debate that was going on at the advisory committee as the appropriateness of subanalysis when you have been powered to study for subanalysis. And I think, as you saw from several presenters, including some members on the -- at the actual advisory committee, that there was general agreement that you don't power for those you're not going to find statistical significance. And if there was an under -- lower effect in the United States, I mean, there'd be a more power effect outside the United States and there just really isn't any plausible reason as to why a woman would be different outside the United States than they would. It was a very well-balanced trial. It was designed as a multicenter international trial for the purpose -- for all those purposes. It was agreed upon that you would do the assessment on the body of the entire trial, not on subanalysis. And I think what we got was a tremendous education on where mistakes were made if you look at subanalysis and, in some ways, it's set back medicine like 15 years on the steroid issue. So I think there were some great examples of why you should not be doing that and we believe in the body of the total study. I think that's what people do, that's why you do clinical work and that's how you do it, you conduct it.

Paul M. Bisaro

I think you also asked about Lidoderm. Obviously we -- Bob and his team have built out the factory. We're also pursuing the application so I think things on that front are moving well. And David and his team are working on a litigation strategy. We have a trial scheduled for February, if I'm not mistaken. And we prepare -- we're preparing strongly for that. As we sit here today and think about the asset, we are ready to monetize it at the earliest possible time. I am confident we will be able to get a tentative approval in the timeframe we need to get it. If it's delayed, I think there is -- the agency has been very clear in saying that, that if it's delayed by a citizen's petition that does not affect your 30 months of -- sorry, your 180 days of -- I'll take the 30 months of exclusivity, but the 180 days of exclusivity. So from that perspective, I think we feel very comfortable with where we're heading. There's always risk associated with a litigation and there's risk associated with an approval. So there may be an option in some way to de-risk the situation but we'll have to wait and see how that plays out.

David G. Buck - Buckingham Research Group, Inc.

Paul, couple of questions. David Buck from Buckingham Research. First one, if we could just look at the International business. Can you talk about where that will go in terms of profitability this year that was within the other for generics and maybe a sense of what the bottom line accretion is from Ascent? And then just to follow-up on the last question on PROCHIEVE, Paul, from your discussion with the Commissioner, do you have a sense if FDA itself wants to see U.S. data? Any statistical significance there? Seems like the panel did but do you have any sense from the FDA?

Sigurdur Oli Olafsson

So David, let me take the international question. I think if we go through the markets outside of the U.S. that have performed extremely well for us last year, we were very pleased with our growth in Canada. If you look at IMS data, you can see that we are the fastest growing company, in terms of prescription in Canada. Our business in Brazil, again, per IMS data, is growing at a rate of 400% year-on-year. I know it's from a very small base, for sure, but we have a lot of products waiting approval in and out of Brazil. On this part of our Brazil operation is the generic, this is outside of the [indiscernible] which the brand business focuses on branded generics and the branded products. U.K. was better last year than the year before. I think what helped us there was the breadth and the size of our portfolio. There's more basket to work on and we can work with more product and we can think about the top line that I've mentioned in the analyst call, that we are not afraid of cutting top line to defend our bottom line. The toughest market we were in was, for sure, France. France was very tough, both in terms of the France Healthcare Authorities cutting prices, they want to make a significant savings over the next few years, but also the competition. It's a fierce competition in France. The top 3 companies are fighting for top line and are looking to fight for the customers in every way possible. So France is a very tough market. That's why we highlighted here our focus in France to grow has been through the hospital chain with a much less emphasis on the prescription market. So I think, overall, a mixed bag. As always, the beauty of being an international company is, there's always markets that perform better than you expected. I think included in that are probably U.K, Canada, U.S. and New Zealand. And then the market that performed a little bit worse, probably France and Nordic in that basket.

David Amsellem - Piper Jaffray Companies, Research Division

And just to follow-up, Siggi, what's the assumption that you're layering on for Ascent? How much accretion, bottom line?

Sigurdur Oli Olafsson

So it's not a big transaction. We have given out that the revenue from this is on a full year, 12 months, is around $150 million, we haven't given out the profitability. So it's a relatively small -- but the beauty of this transaction is that the margin in the generic in Australia is, how can I guide you, it's less than the U.S. and better than Europe. It's somewhere in between. But the beauty of the business is they have an OTC business with a good marked in. The dermatology business is good, the skin care business is good and then they have a very interesting -- with a fairly good margin in Southeast Asia. So I think, overall, without giving you the details of the bottom line, it's a good business we are excited about and looking forward to grow going forward.

Paul M. Bisaro

I guess you asked about U.S. only studies and as a result of the discussion at the advisory committee. I'm not a scientist, I don't pretend to have the statistical understanding of what many of these experts do. But as somebody who's got to make a decision before we sign a check to do a study of -- millions and millions of dollars, I'm going to ask Fred, how many -- do we have enough people in the U.S. and, if the answer is no, we're not going to do any studies outside the U.S. I mean, we're going to -- the agency has, at least in this particular instance, has made it abundantly clear that if you have any discrepancy in the U.S., they're going to take a position that is, at least it appears to me, to be completely inconsistent with what they've always said. So I'm sure we're not the only ones saying -- scratching their heads, trying to figure out what's going on here but that would be my answer to that. And Fred, maybe you have more to add there.

George Frederick Wilkinson

Yes, well I will add one thing. It is a diversion from policy to say that we're going to pull products from only studies in the United States. I don't think that's at all where that -- that we've seen policy programs going. The second piece is that the question was asked is U.S. efficacy if a -- something that's critical for the approval of the product, this was asked months and months and months ago, and the answer was, "No." So when we got to the advisory committee we were -- everybody's asking, "Why were you surprised?" It was one of the reasons we were surprised.

David Risinger - Morgan Stanley, Research Division

Dave Risinger from Morgan Stanley. I have 3 questions, the first is on Ascent. Siggi, I guess the strikes helped you or hurt you, I'm not sure, but they disclosed that the EBITDA margin is 18% to 20% for that business. But my question is, with respect to that margin, do you see that as sustainable later this year when Australia plans to cut the price of generic drugs by 23% in April? And then, second, with respect to the 2012 outlook, Todd, I was hoping that you could just sort of frame for us so that we get our models right, whether we should be assuming all of the EPS growth is in the first half of the year and the second half is flattish year-over-year. Obviously, just given the tougher comps of Lipitor and Concerta, or maybe even down, I'm not sure how to think about the second half of '12 EPS trend year-over-year. And then, Paul, with respect to Lidoderm, maybe you could just provide a little bit more color on the tentative approval outlook timing. You mentioned how the CP can play into that and just how we should be thinking about the process with the FDA and the timing --

Sigurdur Oli Olafsson

So let's start on the Ascent and the sustainability of the margin. The good thing is, we obviously knew about the PBS price decline. They announced quite a long time ago that on 1st of April, the prices would go down 25%. Even the price list was published in late December so in all our due diligence of the asset, we had the full understanding of the price erosion in the market. We are very comfortable with the margins, as they are. The beauty of being part of a bigger company is you have a lot more leverage on the cost of goods. We feel that our cost of goods and what we have to offer will have a significant impact on the cost of goods to defend the margin. But also, in addition to that, there's significant number of product, I mentioned, which we have already approved, in spirit, which are more complex, which have patent challenges in Australia, which we will add to the portfolio of Ascent to allow us to defend the margin going forward. So the PBS reform, as it's called in Australia, was no surprise built-in to our -- all our assumptions, full understanding but I think the breadth and the growth of the portfolio, the impact of the COGS and also I think how we expect the Australian market to react to the PBS reform, we are very comfortable on the margin going forward.

R. Todd Joyce

In terms of quarterly progression, we will have the first 6 months or the bulk of the Atorvastatin contribution will be in the first half of 2012, so that certainly will be a significant and weight the quarters towards the front end. We had fourth quarter 2011, launch of Lipitor, so year-over-year comparisons will be down in fourth quarter of 2012 versus fourth quarter of 2011. But beyond that it's going to depend upon timing of competition and so forth, but overall, the base business will be up because the overall growth rates are fairly comparable with the Atorvastatin growth rates for 2012.

Paul M. Bisaro

Bob, you want to take the Lidoderm?

Robert A. Stewart

Sure. In terms of?

Paul M. Bisaro

Application.

Robert A. Stewart

Yes. In terms of tentative approval so, right now, from a Lidoderm standpoint, we have already received a lot of feedback from the agency throughout the application process. We've responded to many questions, as well as including a full validation of our manufacturing process. So we've been through bio reviews, we've been through, at this point, the CMC reviews, as well as provided additional validation data and so, from that standpoint, we're now waiting for that tentative approval.

Paul M. Bisaro

Yes, then with respect to the citizen's petition, I think, as we've all seen, these things generally don't get picked up until the very last minute and as we start approaching approval and the approval time, the agency has demonstrated, not just in this product with other products, they understand that 30 months is important. We've got to get the tentative approval before the 30 months so we're hoping that they can get that resolved. As you know our position on that citizens' position, we feel the agency's already answered that question. We follow their guidance and I think we feel very comfortable with where we are.

Unknown Analyst

Pete Bayer [ph] from UBS. Just a quick yes or no question-type thing. It came out of the panel that the FDA had told you and/or Columbia that you needed a p-value of 0.01 or 2 studies. I was wondering if that's an accurate statement by the FDA and if so, when did they tell you that or Columbia? And I might have a follow-up depending on how you answer.

George Frederick Wilkinson

The answer is no. They did not tell them in 302 that a p-value of 0.01 was required in the discussions on 300. There was an understanding that, that needed to have a statistical significance of 0.01. When we went forward with 302 based on the fact that they would use 301 and 302 as the foundation of their file, so 2 trials. And I think that's been where there's been some deviation of understanding.

Jami Rubin - Goldman Sachs Group Inc., Research Division

Jami Rubin with Goldman Sachs. A question for Todd. Just help me to reconcile the difference between your EBITDA adjusted forecast for 2012, $1.28 billion to $1.35 billion, which I believe is largely in line with consensus, but earnings of $5.25 to $5.55 which are below consensus, what are the elements between EBITDA and the bottom line that explain that difference? And also just a question on Lidoderm, Paul, if you can talk about how you -- I understand that you have some Lidoderm in your 2013 guidance, how do you think about the risk adjustment to that?

R. Todd Joyce

Well, I'll start with the EBITDA question. We are expecting a higher tax rate in 2012 and 2011. A lot of that has to do with the mix of products. We have more outsourced products between generic Lipitor and generic Concerta are contributing more to our profitability in 2012, which means we'll have a lower Section 199 deduction. So that's escalating our U.S. tax rate. We also -- the R&D credit has also not been renewed so that's about a 50, 60 basis point change in the tax rate. So we're expecting taxes at roughly 36.5% to 37% and that's off 35.3% in '11.

Paul M. Bisaro

And I think, Jami, you asked me about the risk adjustment contribution of Lidoderm in 2013. We looked at a number of different possible scenarios and the scenario that I think we finally settled on, at least for now, is one that would be consistent with sort of a launch of the product and what that would look like with potential competitors and the like. So I'm not going to give you all the details because I don't want to give anything away but it was more of a launch of the product kind of contribution that we have anticipated for '13 --

Jason M. Gerberry - Leerink Swann LLC, Research Division

Jason Gerberry from Leerink Swann. First question for Siggi. Just in terms of the Ascent acquisition, how confident are you that this could actually grow the top line, 8% in line with the market over the next 5 years, as you disclosed, or is it more kind of offsetting price declines with volume? And then second question, for Paul. Just curious as we look at sort of the next patent cliff, the next cycle of innovation, the BD12s ingénues of the world, early 2020 . A lot of these are NCEs. Do you feel that there's an opportunity there for Watson or do you think that's going to be a highly shared opportunity amongst the generics?

Sigurdur Oli Olafsson

Yes, so the growth of Ascent in Australia, I think it's a really interesting case. Its growth in terms of -- first of all, its growth in terms of our portfolio being broadened. Its growth in terms of their portfolio they have under development. But the Australian market, per se, is the market which has one of the faster or market which has one of the fastest growing generic [ph] penetration rate. So currently it's around 60%, it has grown from 50% over a short period of time. It's estimated in the year 2016 to be around 75% even, I think, IMS has a number of 82% generic penetration. We have adjusted that ourselves, we think to get above 75% is difficult in the current environment. So with this significant growth because, this is all prescriptions going out of the pharmacy, I think your total Australian market is big, so if you get from 60% to 75% generic penetration, it's a huge growth for the company. So I think it's 3 things. It's the portfolio they have is the portfolio we build in, and it's the growth of the market and, against that, their price decreases in the market. The prices in Australia have declined. There was at 2008 or 2009, a same and similar 25% price deduction as is happening in 1st of April. But this has grown the market much faster than the prices have gone down. So there has been a positive trend that the utilization and the volume growth has outgrown the price decrease in the market. So we feel comfortable in going into this market with everything we have in hand.

Paul M. Bisaro

And I think you may be the first person to ever asked me about a patent cliff in 2020. So this is -- I'm sure where I'll be in 2020. I do think, as we approach any problem of this magnitude, what we're trying to do -- and this is sort of I think the value of the balanced business model. By this time, 5 years from now, we're going to be talking about a significant contribution from the small molecule franchises, hopefully on a regional basis. And we'll be focusing on the next generation of -- or next evolution really, of generics, which will be biosimilars. Because that's really where the value is heading. If you -- at least to me, you look at all the trends, the most recent spending, I think that 6 of the top 8 biggest-selling products in 3 years are going to be biologics. I mean, everybody's going to be focused on that. It is going to be a challenge to get through the intellectual property morass in there. And I think we're well-suited to deal with it but it is going to be a challenge. But I think out -- that far out, we're looking much more balanced and probably a lot more contribution from the biosimilar platform than even the small molecule platform.

Randall Stanicky - Canaccord Genuity, Research Division

Paul, it's Randall Stanicky from Canaccord Genuity. A couple of questions, number 1, Lipitor and, specifically, Pfizer's actions have created a ton of noise around the stock and the industry for that matter, too. So I guess the first question is, do you think there's a risk -- I'm thinking about Watson, as well as the industry, of additional actions by brand companies going forward and I'm just looking at a lot of settlements that we have, we're not privy to the terms and there's a lot of uncertainty that can be embedded in those settlements. And then, the second question I have, you alluded to an interest in deals in the U.S., in the generics side, can you just maybe talk a little bit about the capabilities that you're looking for within generics in the U.S. still, at this point?

Paul M. Bisaro

I'll start and maybe Siggi can add some -- his thoughts on Lipitor, the brand defense strategy. I guess people have to, after this is all over, sort of sit back and decide whether on a brand -- from a brand perspective, it was actually worth it. If you look at, I mentioned, I think at one of the earlier conferences this year, I said, if Pfizer was at the high watermark and, in fact, they were. And we didn't even get through January and they're starting to lose the market share. Those kinds of things that they've tried to do, in many cases, are counter to the best interest of the pharmacies, particularly in their revenue and profitability. So there's a huge incentive by the people who actually dispense the medications to not go that route. So it is an uphill battle. And then finally, as you think about -- as we think about it and we, of course, don't know all of the details behind all of their numbers, but it appeared that they were trying to protect revenue not profit. Because it just -- we couldn't ever make it work where -- what they were doing, the discounts they were giving to get this market share, was more profitable than what they would've done had they just let their authorized generic partner sell the product. So again, I think many people are going to have to sit back and decide whether this makes sense in the long-term because it hasn't demonstrated an ability to maintain market share over the long-term. It is certainly a short-term issue and it creates a lot of disruption and anxiety amongst the customers and I think, ultimately, consumers. So I don't think that this is going to be a long-term trend. It just doesn't feel like that's what's going to happen here. And then I think -- did you want to add anything to that?

Sigurdur Oli Olafsson

No, I think the only thing to add is, this has been tried about 10 times before by different companies at the launch of generics. Probably never has much market share has been kept by the brand company but I think the reason also for that is because Lipitor is a little bit unique. It's about 30% of all the prescriptions and mail order prescriptions. So the focus of Pfizer was not only to go to the PBMs, make this NTC block so a generic couldn't be given out of pharmacy. They went to the mail order and when they tried to block the mail order at the same time because very often the PBMs are linked to the mail order. So I think Lipitor was a little bit unique, so going forward, obviously, we'll monitor it but I think down to Paul's point, the benefit to the bottom line, it's very difficult to understand for the brand companies, why they do this.

Paul M. Bisaro

I think you asked about capabilities in the U.S., I think, and then maybe -- I'm going to answer in a different way. I'm going to answer x U.S. first. I think one of the areas we've -- actually in the U.S. too, one of the areas that I think would be helpful for us to have a bigger presence in is the hospital space. So injectable capability would be useful in many of our markets around the world. Certainly, it would've presented an intriguing opportunity in the U.S. this year and maybe next year, although I think the U.S. market's probably a bit more challenging from an injectable perspective. From a technology perspective, I think we have begun work on those respiratory products that everybody talks about. We have a program in place. It's an expensive undertaking, of course. And we do not own the technology ourselves, we have to go out and look for technology. We started that process, we have a big push in ophthalmic where we don't -- we have a partner that does that for us. So where we've sort of had a technology gap, we've been able to find good partners to help us. But on an acquisition front, if we were able to acquire some of those technologies and maximize the cost of goods and those sorts of things, we'd be all over it.

Unknown Analyst

A couple of questions here. So Todd, can you start with the tax rate again, I had a thought that the tax rate was going to be coming down to the low 30s over the next couple of years. So is this just a one-year blip and then we're going to come down again? That's first. Second of all, can also talk about the gross margin and the global supply initiative and, if everything else was equal, how much benefit to the gross margin would you be getting into this year or next year, just from that alone? And then also just a couple of other questions. One is, an additional competitor for Toprol, besides Mylan, baked into 2012. And then can you also comment on Revlimid and OxyContin, Paul, just your thoughts on that? Obviously, each one is a little bit unique. So on Revlimid, are you thinking we can beat the second patent but not the 2019 patent? Or how are you thinking about that? And then on Oxy, obviously, we're all trying to understand how this market moves, now that everything's tamper-resistant and have a pond [ph] and everything, so how are your thoughts on that, just in general?

R. Todd Joyce

I'll start with the tax rate, what we've communicated is over a 4 to 5 year period have somewhere in a 400 to 500 basis point improvement in the overall tax rate. We did say that in the near term, as we funded additional projects offshore that, that would actually have a negative impact -- negative impact on our tax rate in the short-term until some of these pipeline products actually launch, the higher value pipeline products that are funded, offshore launch. So that's part of the issue. The other is, as I mentioned earlier is, the mix of products, outsourced versus manufactured. For instance, Toprol is assumed to decline in 2012 versus 2011. But we have more than made up for that through sales of generic Concerta. Well generic Concerta is an outsourced product, its manufactured by J&J, we do not receive a Section 199 deduction for that, so that's impacted our U.S. tax rate and also the fact that we're delayed once again in the extension of the R&D tax credit. So as we're funding more and more R&D, unfortunately, we're not getting tax benefit for that. So that's impacting our tax rate as well.

Sigurdur Oli Olafsson

So on Toprol, we've got competition late last year when Mylan came to the market in December. We had mentioned that in the same meeting a year ago that we expected one competition last year. It came a little bit later than expected so I think Toprol was a little bit better last year for that reason. So it's a 4-player market now with [indiscernible], Mylan and ourselves, it's quite a stable market. Within our forecast, we expect one more player to come into the market in 2012. And likely, another player to come in the market 2013.

Paul M. Bisaro

And I think you asked about the patent landscape around Revlimid. I promised David, as a New Year's resolution, that I wouldn't engage in this discussion. So I'll let David handle this question and he can ...

David A. Buchen

The Revlimid base [ph] is pending. We're waiting for a hearing on the Markman briefing. We've got I think 10 patents in suit so I'm not going to comment on the specific patents in the case but we're aggressively pursuing the action. And Mark, was your other question, OxyContin? Litigation is pending and we're making progress. And, in any case, we feel we have good defenses when we go into these cases and we just have to see how they shake out. Litigation is never a certainty.

Paul M. Bisaro

I think you also asked like what was in the -- sort of the thoughts. I think for Revlimid, it's still early, so it's certainly not in '12. Not really contemplated for '13 as well. That would be upside for '13 if something would occur, 30 months, I believe, runs in '13 at -- I'm sorry, fewer than '13. And I think you also asked about the new OxyContin product and I think we're all sort of waiting to see what the agency does -- ultimately does here, with the tamper-resistant products. These things are not on the label. It's not clear that -- when we file a tamper-resistant product, Bob, if I mess up here, jump in, we perform studies that indicate that our product is tamper-resistant as well. And we believe that if they can call it a tamper-resistant, ours is tamper-resistant. We of course, do not infringe on -- we believe we don't infringe on their technology, but we achieve the same results with our technology. So I think the agency's got some work to do to figure out how they want to handle this. They don't have a lot of time to figure it out though, because it's starting to come into fruition as we know.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Ken Cacciatore from Cowen. Paul, question on the pathway forward for PROCHIEVE. I would think one of the issues, and was brought upon the panel is, the ethics of running a U.S.-only study. So wondering if, in part of your interactions with the FDA, you're going to be discussing or bringing with you Maternal-Fetal Medicine Society, ACOG, to discuss with the agency how one would accomplish if you needed an additional study? The ethics behind that. And then also you used to previously discuss about $1 billion in branded sales by 2015. Can you give us a sense now that you're discussing x PROCHIEVE, what that number would be, if it doesn't get approved?

Paul M. Bisaro

Okay. Regarding the --I'll start for them. I mean I think that is probably one of the biggest challenges, our people have said, is the ethics around running, not just the U.S.-only study but exactly how -- who do you put in the placebo group? How do you -- in knowing all that we know today, how do we tell a woman with a short cervix, we're going to give you a placebo when we know a product has 42% improvement over placebo-only. So but -- Fred, you want to ...

George Frederick Wilkinson

I think that handle -- I mean, obviously, this is one of the ethics issues that you're going to face all the way along is that, it's not just the body of evidence on PROCHIEVE, it's the evidence on progesterone.

Ken Cacciatore - Cowen and Company, LLC, Research Division

So what's been your interaction with those societies, are they dealing with you and interacting with the FDA?

George Frederick Wilkinson

Yes. So we've gone well beyond ACOG. We've gone to the individual investigator sites who are involved in our studies. It was our weekend work as we were trying to now prepare for our responses. We've also gone to the CRO's and asked the same question. We've gone to a whole series of places saying that if conducting a trial is necessary, how do we do this? And we get a variety of answers but we intend to bring that information to the agency because it is important consideration when we think about what to do next. I think you are predisposing that another trial's going to be necessary. So I think there are still avenues that a second trial may not be necessary.

Paul M. Bisaro

And I think you asked about our aspirations of $1 billion by 2015. Well certainly without PROCHIEVE, in the 2015, in the form that we're -- we've been talking about, it would be challenging from an organic perspective to get there with a product portfolio we have today. I'm not going to let Fred off the hook, he's going to have to find a way to do this. But we would like to -- I guess the aspiration is more of a target and signal to our investors that we are committed and, as well as the internal people frankly, that we're committed to this space. Sometimes you have setbacks on the brand business that you got to overcome and that's what we're going to do. But we're not, in any way, running from our commitment to Urology and Women's Health.

Christopher Schott - JP Morgan Chase & Co, Research Division

It's Chris Schott at JP Morgan. First question is on SG&A. If we do, in fact, get a PROCHIEVE delay here, can you just talk about is there any flexibilities to and how should we think about the branded SG&A budget as we go through to 2012 and '13? The second question, not to hit too much in Lidoderm, but your 2013 guidance, you've got this Lipitor $0.70 headwind, you're assuming additional competition on Concerta, you're still looking for 10% growth, how important is Lidoderm to that target? And as we think about a potential settlement, I mean, does that target either handicap or influence the terms you would think about in the settlement or is there enough cushion with 2013 that's kind of an independent discussion that isn't a factor here? And I still have one follow-up after that.

Paul M. Bisaro

You want to handle this?

George Frederick Wilkinson

Yes, sure. So if you look at our portfolio, our bag is full before PROCHIEVE. I mean that's been many of the comments that have been made as we evaluated and communicated to the sales force. We've got outstanding growth going on right now with CRINONE. Generess has now reached the 5th-largest branded OC out there in the marketplace, and that's just after what? 6, 7 months in the marketplace? Growing beautifully, week over a week, month over month. Terrific growth on RAPAFLO, which we think with a little more horsepower behind it, will grow. So we're simply, instead of looking at it from an SG&A cost, we're shifting those to the resources we have. We've got a great portfolio of products and we're just going to mine those until we get the opportunity to put PROCHIEVE back into the forecast. So...

Paul M. Bisaro

And then I think you ask about -- you're right, there is a gap that was presented by Lipitor, '12 versus '13. But one of the things I think people are not focused enough on is the breadth of the opportunities that we have across our company. Continued growth of RAPAFLO. Generess will be on its 3rd year. We've got CRINONE, still growing nicely. You sort of work your way down through the brand franchise and, if you assume continued growth rates, I think you'll see where a lot of that value is coming from. On the international side, most of -- or a lot of our new COG improvements, all manufactured products start to hit in late '12 and into '13, driving additional margin and value in those markets. And then of course there is a component of Lidoderm and LOVENOX and other things, but there is also a basket of things that we don't include. So what we've always try to do when we presented guidance, we tried to make sure that when we told you we think we can achieve it, we have a strong belief that, that can occur. And it can occur in multiple ways. One of the things that I think we've all -- those of you who followed the industry long enough, it's -- you kind of know where you're going to get to, you're just not quite sure how it's going to all happen. And that's what makes forecasting probably, in this industry, the most challenging. But as I sit here today, I am very confident that we can achieve the objectives we've set for ourselves. And frankly beyond 2013, this double-digit number is something we've continually driven home across our organization and it is embedded in our company to reach that success.

Douglas D. Tsao - Barclays Capital, Research Division

Doug Tsao, Barclays Capital. Just, Paul or Fred. Just in terms of PROCHIEVE, are you aware of any steps taken by ACOG or some of the other medical societies and groups, in terms of working with the FDA now, post the panel, to work with them and perhaps try to mobilize their efforts to, perhaps, get this product to market?

George Frederick Wilkinson

I would be surprised if ACOG came and supported an individual product. I would not be surprised to see members of them at the MFM Society who work very closely with us and the agency because this is their cornerstone, this is their expertise. I think the group that you left off is the NIH, because they were co-sponsors of the trial. This is a critical trial for them, it's been well published and communicated and I think they'll be very supportive of the process.

Douglas D. Tsao - Barclays Capital, Research Division

But you're not aware of any steps they've taken in terms of...

George Frederick Wilkinson

As a society, I don't -- we never really seen them supporting individual products. They generally support concepts, such a cervical scanning and support the use of progesterone. We've never really seen them come out and say, I'm supporting Watson or Pfizer or so and so's products. I think that's not what they're in the business to do.

Douglas D. Tsao - Barclays Capital, Research Division

Fair enough. And then, just, Todd, if you can just quickly run through, obviously, PROCHIEVE came out of the 2013 guidance and expectations, if you can just review quickly some of the other high-level changes in the model from when you were here last year?

R. Todd Joyce

Well, I guess that's one of the more significant changes in the model. I think that when we presented last year, we'd assumed high erosion of oral contraceptives going into 2012, so our year-over-year, our projections have improved from last year's presentation. I think Toprol will end up roughly about the same level as we expected last year, for 2012. So that's probably the biggest change. And then the overall erosion rate was favorable in '11 so our pricing, going into '12, is a little better.

Michael Faerm - Crédit Suisse AG, Research Division

Mike Faerm with Credit Suisse. So given all of your comments on SG&A a moment ago, could you just tell us how to think about SG&A spending growth going forward. And then secondly, on R&D, in your guidance, what are you assuming for second-generation PROCHIEVE, as well as the existing generation studies? And how should we think about R&D growth given that going forward?

George Frederick Wilkinson

Well, I don't think you're going to see much growth in SG&A. We had already actually sized up the sales force with additional 40 folks in the end of 2011 to handle the RAPAFLO needs and some of the other things, with the addition of PROCHIEVE, potentially coming or not coming. So I think you could look at the SG&A as reasonably flat. On our R&D program, obviously, what we've done is removed some of the work that was intended to be done on PROCHIEVE in the near-term. We still continue that project going forward because we're in the development phase. And we'll be prepared to re-establish that program should we get the right signals from the agency.

Paul M. Bisaro

And let me just make sure we're clear. Fred's speaking about the brand SG&A only.

George Frederick Wilkinson

Yes, sorry.

Paul M. Bisaro

So overall, SG&A will increase from international contributions and the like. So just make sure we're clear there. And then on the R&D spend, should it become clear that there is additional work to be done, we'll take a hard look at what needs to be done on the funding front.

Sigurdur Oli Olafsson

I think on the generic side, we are investing in more sales force next year. We are putting in 8 more people in Canada, investing in about 50 more sales reps in Poland. We are investing in sales reps in Brazil. So where the markets have shown growth in the year 2011, we are investing to continue the growth and accelerate it going forward.

Louise A. Chen - Collins Stewart LLC, Research Division

Louise Chen from Colin Stewart. First question I had was on the guidance range that you have, what are some of the bigger swing factors that get you to the high end of your guidance range? Second one is, any update on Mucinex and maybe the likelihood of a partnership with other players in the industry that launched that product. And then last question I have was -- I know you're probably being conservative here, but why do you think there might be competition for Concerta in 2013?

Paul M. Bisaro

I'm sorry can you just repeat the last...

Sigurdur Oli Olafsson

Concerta 2013.

Paul M. Bisaro

Why we think there's competition in 2013? Why don't I start with Mucinex and Concerta and I think you said the swing factors and the... On Mucinex, we are working to get our final approval from the agency. That effort is still underway. Bob and his team are on that one.

Robert A. Stewart

Yes, at this point, we're just waiting at this point for the approval.

Paul M. Bisaro

And at that point, we'll figure out whether it makes sense to do it alone or find a partner.

Sigurdur Oli Olafsson

The guidance range.

Paul M. Bisaro

Concerta, let me get that first. Okay, Concerta, I think as we look out and we look at the filers in Concerta just to remind you there's Codco [ph] and Impax were filers. Impax has indicated that they were probably pretty far out with their application, we're not 100% certain where Codco [ph] is, so we had to make a decision and what we did as we looked at the time we thought they filed, when their 30 months kind of would end and just kind of calculated what we thought the right time might be. And if all things go well for them, they should be there in either late '12 or early '13. So we put that into the model. Obviously, if that's -- that sort of, I think that's a key question for '13. If there is less competition in '13 on Concerta, we're obviously in a very good position to do some of the things that you guys are talking about with filling that LIPITOR gap then coming back to -- never sure how it's going to play out but we hope it's going to be positive. I think the swing factors in '12 are just those things. Todd's mentioned a couple and I'll mention a few as well. Competition around OCs, for example. You saw our assumptions around competition driving down additional gross profit, or gross profit down on a year-over-year a basis. So if that competition is further delayed, if there's not -- that impact, well then, that will be an upside. Whether Toprol will remain as strong as it's been, what happens with Johnson & Johnson? What do they do with pricing of the product with the Concerta product? Do they raise it? Do they not raise it? What do they do? Those are kinds of things that have fairly significant impact on what happens with 2012. Todd mentioned tax rate. If the government puts the tax -- R&D tax credit back in, he's got a few dollars to play with.

Corey B. Davis - Jefferies & Company, Inc., Research Division

Corey Davis from Jefferies. 2 clarifications on 2 earlier topics. First on PROCHIEVE. I don't want to put words in your mouth, but are you saying that if the FDA asks for another placebo-controlled study, that you'd probably choose not to fund it, given the challenges with enrollment?

George Frederick Wilkinson

No, that is putting words in my mouth. That's not what we said. If the agency's asked us to do a trial, then we recommend doing a trial. It could go either way. It will all be better days on whether we think we could do the trial. So we still have to answer the question that was raised in the back of the room is, could we get this through in IRB to actually conduct the trial. So there's a lot of exchange that could go on here, whether a trial's necessary, would it be placebo-controlled? Is it conductible? All those other things. And so that's the discussions that we expect to go on, but I did not say we will not fund the trials though.

Corey B. Davis - Jefferies & Company, Inc., Research Division

And then second on OxyContin. Is there a path for the FDA to provide guidance or have you asked the FDA to provide guidance on what standards there needs to be to establish tamper equivalence, not just tamper-resistance of your product?

Paul M. Bisaro

I'll turn that one over to you.

Robert A. Stewart

Not asked FDA to provide guidance, but what we have done is all of the typical studies in which that would be required to demonstrate that we are equivalent from a tamper-resistant standpoint. At some point they could.

Paul M. Bisaro

It is. And we're not trying to be evasive, I think there is some possibility the agency just pretends like tamper-resistant doesn't really exist. And they just approve a product that's bioequivalent. It would be odd but it's possible. There is no study that shows that tamper -- that these things actually even are tamper resistant to any significant extent and it's not on the label. So theoretically, at least, the agency is tasked with proving bioequivalence and if, I mean, they could prove it on that basis.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Shibani Mahotra from RBC Capital. So just a couple of questions. Paul, when you were talking about the 2012 drivers, I noticed you didn't put Lipitor in there. And just a few months ago, you were pretty confident that you wouldn't see massive competition. So can you just go through what's changed from that standpoint, and how certain are you that you will actually see a very competitive market? And then second, you talked about biosimilars as being the next opportunity for generics and clearly, a number of generic companies do talk about this, but can you highlight for us what you see as the opportunity? Which products do you see coming, being "genericized" first, and more importantly, what are your expectations for the sales and marketing efforts required given what's happening in Europe, which is that companies are finding they need to invest more in sales and marketing than they thought?

Paul M. Bisaro

Okay. On the Lipitor question, I think one of the things people should take a way from our guidance is, this is what we've assumed for purposes of this range. If it turns out that there is fewer competitors then Lipitor is going to do better in the second half of the year than we predicted. We don't have any visibility into the processes that the agency is working on right now with people who have pending applications. What we can do is look at what we've seen from public statements and what we've heard from scuttlebutt within the sales community in the U.S. What we know is, a number of players have said that they expect -- who are not in the market today, expect us to be a major product for them in 2012. So I mean, we have to take them at their word and assume that they're going to be there. We also know that some companies had built inventory in anticipation of Ranbaxy losing their exclusivity. So presumably, they think they're going to get approval. So I think what happened was, the number of parties we thought were going to be at approval is increased than when it was, when we were talking about this last year. However, we could be wrong. It could turn out that each of these applications are having problems and there's associated risk with the raw material or the formulation. If that works, you're right, that could be a big swing item for 2012 for us. With respect to the sales and marketing efforts of biosimilars and then I'll let Fred kind of touch on this. I just would make the following point, the beauty of the Amgen transaction is that very question, what does the sales and marketing effort need to be on a market-by-market basis when we bring these products to market? If it requires a brand presence with oncology, sales force and oncology teams that are well-respected and in place, Amgen can provide that value in the U.S. If it's more of a generic sale, if it's something that you got to do a lot of contracting with, we provide that value. So I think that is sort of the beauty of Amgen, if you will. I'll then turn the rest of it over to you.

George Frederick Wilkinson

Yes, I don't think it could be said better except I'll add one other thing is that I think this does give you the gradation to be able to use the assets and capabilities between Amgen and Watson around the world. By the time we get to these products, which is the second end of the decade, the generic landscape will look wildly different. I'm sure for the way Watson is participating. I'm sure our brand business will have expanded internationally in that environment and that we'll have the cadre of our sales force and selling efforts both in the brand and generic side and their selling capabilities to pick and choose from. So we really couldn't be in a better spot to be able to maximize commercialization efforts that comes out of these products.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

You do have it to put in SG&A, if you do have to increase your sales and marketing efforts, then how do you think about profitability and the price discount you can actually offer? And is that even worth your while?

George Frederick Wilkinson

So I think that's the critical question actually that's addressing is that we're already designing our selling efforts so that we could have absorbed these products into the selling effort. I have a 55-person sales force that right now is calling on the -- what the kind of a super specialists out there, they would be easily transferable over to selling biologics where the fit, Pfizer right number or not, by the time we get there, I don't know. But it would not be a magnitude shift on what we have to apply to it, it would be just a tweaking of the numbers. If we're not going to be involved in it, because this is an Amgen-type approach then I think, the numbers are kind of as the numbers are. But this would not be something we wake up one Thursday morning and need to apply 200 or 300 representatives at.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Ray Myers with Benchmark. This question is for Fred. Would you please discuss the FDA's determination and the basis for that determination, that study 300 would not be supportive of study 302?

George Frederick Wilkinson

300 does not support study 302. Yes, I think obviously, what their view was is that there were not enough patients that directly matched up with the number of the protocol design within 300, or within 302. That was kind of their assessment. So as you looked at it, there were over 116 patients that were looked at in that trial were cervical length was measured. As you gradate down and you look at what cervical size they fell into, that's one of the pieces of data presented was that there were 9 within 300 that applied directly to 302. And I think that's the point of discussion we're going to have with the agency.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

If I may follow up, what was it that changed in the -- either the facts or the FDA's analysis between the time you started 302, when it was your understanding that 300 would be supportive, and the FDA's later determination that it would not?

George Frederick Wilkinson

I don't know that they have determined that it would not be supportive. In their briefing book, they actually said this indication was filed with 300 as a support of trial for 302. So I don't think that it was definitive as you were describing, that they've said, "It is not a support of trial." And you know, I think this is what we're talking about is the nuances of the data.

Patricia L. Eisenhaur

We'll take a couple of more questions. Charlie, you want to...

Timothy Chiang - CRT Capital Group LLC, Research Division

Paul, Fred, Tim Chiang at CRT. Just one last question on PROCHIEVE...

Paul M. Bisaro

Is that a promise?

Timothy Chiang - CRT Capital Group LLC, Research Division

For me at least. Nobody brought up the Makena history. I find it kind of interesting because I think Makena went through a similar pattern of events, whether it was through Hologic or through KV, they were actually asked to do a pretty sizable global trial, which they're actually doing now, as a pre-requirement for getting FDA approval. And my question is, do you think if the FDA comes to you and says, "Look, you have to do this massive trial," would that be an acceptable outcome?

Paul M. Bisaro

It's an outcome. I think there's a -- I think, as Tim, as you've mentioned, I think you're 100% right, there was a similar saga, if everyone remembers in 2007, the advisory panel actually voted against the approval of Makena. And the agency went forward and approved the product under what's called a subpart H approval, which requires a second trial that's confirmatory. That process could go on with PROCHIEVE. We don't know. This is part of the discussion. There is a slight difference in that there's only one study that was ever conducted that shows that 17P, the base compound for Makena, works. And there is a preponderance of information that shows that progesterone, in general, works. And so one of the issues that really gets wrestled with is what are IRBs going to do when presented with another trial if, in fact, that's the direction we're going.

Unknown Analyst

And then just one last follow-up, are you somewhat limited by what you can do with price on PROCHIEVE, even if you did get the approval?

George Frederick Wilkinson

I would say we're not limited in what we're going to do on price but I think we're committed on what we're going to do on price. I think what we've seen is the debacle that went on with the Makena situation with -- where they raise the price on an astronomical fashion. I think we saw the backlash that occurred, that's still occurring, because people thought that, that wasn't appropriate. And so we've watched that very closely as we looked at our pricing strategies. We do have, again, a different scenario that we've got CRINONE out in the marketplace, the same product that is right now currently commanding a certain price. So it would be a very unique move to make a change on that one. But we have committed very, very clearly that this product, if approved, would've been launched at about the same price as CRINONE is currently being marketed at.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

It's Greg Gilbert over here, I have a follow-up, a couple of follow-ups. First, we have been modeling R&D stepping up substantially in '14 tied to the Amgen announcement. I think your guidance implies about a $55 million or $60 million step up in '12 versus '11. Todd, so am I right on that? And sort of how do you get there and how quickly can you get there from something that's in the 70s per quarter? And then I have a follow-up for Bob.

R. Todd Joyce

Well the non-GAAP -- we're expecting non-GAAP on a consolidated basis, non-GAAP R&D to increase roughly 20% from '11 to '12 and it's going to be more heavily weighted towards the Brand side of the business. So generic, non-GAAP generic R&D, is up about just under 10%. And the rest is through Brand. And then it will increase over '13 and '14 because of the commitments under the Amgen agreement.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

But the step up in '12 is non-biosimilar, non-generic brand spend, that steps up substantially in '12.

R. Todd Joyce

Though there is a component of the Amgen agreement as well in '12.

Paul M. Bisaro

Before we jump out, I do want to just touch on thing. You've mentioned 2014 and I know there's been speculation around what's going to go on in -- and I think I'd want to be clear about this, as we look at the projections for what we need to spend on a biosimilar development program, one of its challenges is what does that program ultimately look like? We we're waiting for guidance, we're waiting for a lot of information to come out and, again, the transaction between Watson and Amgen is very flexible with that work. We've committed up to $400 million but, if it's not required, we won't be spending it because we will tailor the trial to -- the trials necessary to achieve approval. Secondly, we have the ability to do offsetting work for that $400 million. That's the folks in Eden may take on one of the development programs and that worked with offsets in the spending. Having said all that, if you do get it into a situation where it looks like spending is going to be more than we would choose to put on our P&L, in any particular year, we've already had discussions with a number of parties that are willing to step up and be part of the process and, by helping us fund our R&D efforts in '14, '15 and '16 when that's -- obviously, we'll have to give up some of the upside, so we want to make sure we absolutely have to do that before we commit to that funding. But it is something that is readily available and we've had people approach us. So I don't -- I'm not -- I'm very comfortable with being able to deal with any major uptake in the biosimilar spend.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Okay. And then for Bob, first of all congrats on the record-setting speed to filing on Oxy. My questions are about your generic Concerta and your generic Aderol XR applications? How confident are you in their approvability? Obviously, the Concerta deal won't go on forever with J&J and, or maybe not obviously, but -- and then Aderol XR could get more interesting in the '14 timeframe when Teva and Impax might go away?

Robert A. Stewart

Yes. No question about it, they certainly are interesting projects. FDA has published their partial AAC guidance and I will tell you that both our Concerta application as well as our Aderol application, both conform to that partial AAC guidance. So therefore, we're pretty confident, we're confident.

Patricia L. Eisenhaur

We'll take our last question, down here.

David Risinger - Morgan Stanley, Research Division

Dave Risinger, again, from Morgan Stanley. Just, Paul, maybe you could paint the picture on OxyContin a little bit more. First of all, in terms of what percentage of the sales you're first to file on and, so the opportunity as you see it. And then with respect to the FDA's nonrecognition of tamper resistance to date, maybe you could just provide some color on the status of generics on the old form of OxyContin because, if the FDA doesn't take into consideration that tamper-resistant thesis, is there a possibility that the FDA will approve the old formulation as A-B rated to the tamper-resistant formulation? And then finally, would that negate your exclusivity?

Paul M. Bisaro

Okay. I'm not sure I heard the last question. But as regard to the OxyContin and the first to files, I think we have about the 50%, or 45% of the market, current market share of OxyContin. As to OxyContin itself, I think this is a sort of unique situation, Bob, jump in here if I mess this up, I believe they got a new NDA approved. So the references to the drug is now different. It's now a different one. So you couldn't switch one for the other. They didn't -- for some reason they we're able to keep the same name, which is a little unusual. But they have a new reference-listed drug so you'd actually have to do a study against that reference-listed drug so the old studies, I believe wouldn't apply in that situation. And I'm sorry, I didn't hear the third question, third part of the question.

David Risinger - Morgan Stanley, Research Division

Yes. I was just wondering if that would negate your exclusivity if the FDA approved the generic of the old formulation?

Paul M. Bisaro

No, not in that case because of the reference-listed drug issue, it is -- applies to that drug. So the exclusivity maintains. Well thank you, very much. We really appreciate your time and we look forward to seeing you again next year.

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Source: Watson Pharmaceuticals, Inc. - Shareholder/Analyst Call
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