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Executives

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

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

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

Sigurdur Oli Olafsson - Executive Vice President of Global Generics

George Frederick Wilkinson - Executive Vice President of Global Brands

Robert A. Stewart - Executive Vice President of Global Operations

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

Analysts

Marc Goodman - UBS Investment Bank, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Timothy Chiang - CRT Capital Group LLC, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

David G. Buck - Buckingham Research Group Incorporated

Dewey Steadman

Elliot Wilbur - Needham & Company, LLC, Research Division

Christopher Caponetti - Morgan Stanley, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

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

Randall Stanicky - Canaccord Genuity, Research Division

David Amsellem - Piper Jaffray Companies, Research Division

Michael Faerm - Crédit Suisse AG, Research Division

John T. Boris - Citigroup Inc, Research Division

Michael K. Tong - Wells Fargo Securities, LLC, Research Division

Jason M. Gerberry - Leerink Swann LLC, Research Division

Watson Pharmaceuticals (WPI) Q4 2011 Earnings Call February 14, 2012 8:30 AM ET

Operator

Good morning. My name is Therese, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson Pharmaceuticals Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Patty Eisenhaur. Go ahead, Patty.

Patricia L. Eisenhaur

Thank you, Therese, and good morning, everyone. I'd like to welcome you to Watson's Fourth Quarter 2011 Earnings Conference Call. Early this morning, Watson issued a press release reporting its earnings for the fourth quarter and full year ended December 31, 2011. The press release, together with additional materials reconciling our GAAP and non-GAAP financial results and forecasts, are available on our website at www.watson.com. Additionally, we are conducting a live webcast of this call, which will also be available on our website after its conclusion.

With us on today's call are Paul Bisaro, our President and CEO, who will provide an overview of the fourth quarter and full year results; Todd Joyce, our Chief Financial Officer, will then provide additional details on the performance of our business segments, as well as our consolidated financial results for the quarter and year. Paul will conclude our presentation with our updated outlook for 2012. We'll then open the call up for questions and answers.

Also on the call and available during the Q&A are Siggi Olafsson, Executive Vice President of our Global Generics division; Fred Wilkinson, Executive Vice President of Global Brands; Bob Stewart, Executive Vice President of Operations; Al Paonessa, Executive Vice President and Chief Operating Officer of our Anda Distribution division; and David Buchen, our Executive Vice President, General Counsel and Secretary.

Please note that today’s call is copyrighted material of Watson Pharmaceuticals, Inc. and cannot be rebroadcast without the company’s expressed written consent.

I’d also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or future financial performance of the company. It's important to note that such statements about estimated or anticipated Watson results, prospects or other non-historical facts are forward-looking statements and reflect our current perspective of existing trends and information as of today’s date.

Watson disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. Actual results may differ materially from current expectations and projections, depending on a number of factors affecting the Watson business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission including, but not limited to, the Watson Form 10-K for the period ended December 31, 2010, and the Form 10-Q for the period ended September 30, 2011.

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

Paul M. Bisaro

Thanks, Patty, and good morning, everyone, and thank you for joining us today. 2011 was an extraordinary year for Watson. We continued to execute on our strategy for growth and ended the year with a number of important accomplishments, which will provide a solid foundation for Watson as we continue our growth trajectory.

But first, looking to the fourth quarter of 2011, we delivered record growth and profitability with net revenues of 62% and non-GAAP earnings per share of 90% to $1.77. Adjusted EBITDA increased 78% to $393 million. Excluding the launch of generic LIPITOR, non-GAAP earnings per share were $1.13, up 22% from last year.

I would now like to highlight a few of our accomplishments in 2011. In our Global Generics business, net revenues increased 44% from the prior year. In the U.S., we launched 16 new products. The most important launch of the year was generic Concerta, which we launched in May. We expect this product to remain a strong contributor to Watson's growth and profitability.

Additionally, our launch of the authorized generic LIPITOR on November 30 represented important accomplishment for our Generics business and the importance of an integrated supply chain. We expanded outside the U.S. through the launch of more than 180 new products and had solid execution in our key markets around the world. We also strengthened our presence and expanded our capabilities in Europe through the acquisition of Specifar.

Our Global Brands business continues to grow. We added new products to our portfolio: Generess Fe and ANDRODERM 2-milligram and 4-milligram. We continue to see strong sales of key promoted products including RAPAFLO, Gelnique and CRINONE. We took steps to expand our brand business in Canada and recently launched RAPAFLO and Gelnique with our new commercial team. And our Antares' oxybutynin gel product received FDA approval and is scheduled for launch in early 2012. We also announced the collaboration with Amgen to develop and commercialize a portfolio of oncology biosimilars. This, coupled with our continued work on rFSH, positions us well to be a major player in the biosimilars space.

Supporting these businesses is our focus on quality and global operational excellence. In 2011, all of our manufacturing facilities maintained their satisfactory GMP status. During the year, we invested in expanding capacity to 4.5 billion doses in Goa, India, added laboratory capabilities in Malta and expanded the capacity of our Salt Lake City facility which manufacturers patches and gels. The Salt Lake City expansion is on track to be completed this quarter.

Now I'd like to highlight a few noteworthy items from the first few weeks of 2012. On January 24, we announced the acquisition of Ascent Pharmaceuticals in Australia, strengthening our presence in Australia and in Southeast Asia. The integration is well underway, and we are currently focused on evaluating additional synergies across the 2 organizations. Additionally, we launched 2 new products in the U.S., generic LOVENOX and generic Yaz, which further strengthens our U.S. Generics portfolio. Both launches are progressing well.

We also announced the settlement with Mallinckrodt to market a generic version of Exalgo in November of 2013 and a settlement with Ortho-McNeil-Janssen to launch generic ORTHO TRI-CYCLEN LO. We also announced a new global R&D technology center in New Jersey which will support development of generic pharmaceutical products. In particular, inhalation technology and respiratory products.

With that, I'll turn the call over to Todd to take us through some of the financial results. Todd?

R. Todd Joyce

Thanks, Paul. I will now review our results on a consolidated and divisional basis. Net revenues for the fourth quarter were $1,545,000,000, an increase of 62% over the prior year, reflecting strong growth in all 3 divisions. Net revenues for our Global Generics division were $1,172,000,000, up 81% year-over-year, which includes sales of generic LIPITOR, the largest product launch in company history, sales of generic Concerta that was launched in May. The addition of Specifar also contributed to the year-over-year revenue growth.

Sales of extended-release products were $385 million, up 101% year-over-year on sales of generic Concerta. Sales of oral contraceptives were $95 million, down 3% compared to the prior year. Price declines in our base oral contraceptive franchise were offset in part by the launches of generic Seasonique and LoSeasonique in the third and fourth quarter, respectively.

x U.S. net revenues were $152 million, up 2% from the fourth quarter of last year. The prior year includes $25 million in revenue received from a development partner, which is excluded from our prior year non-GAAP results. On a non-GAAP basis, x U.S. net revenues increased 23% year-over-year, reflecting the acquisition of Specifar and a number of product launches in certain key markets. Adjusted gross margin for the Generic division was 43.8%, down 6.8 percentage points year-over-year, primarily due to lower margins on sales of the authorized generic versions of Concerta and LIPITOR.

Moving to Global Brands. Net revenues were $121 million, up 17% on higher sales of promoted products including RAPAFLO and CRINONE, and new products including Generess Fe. Global Brands adjusted gross margin was 78.4%, down 1.9 percentage points due to lower margins on our value brand of Ferrlecit.

Finally, net revenues from our Anda Distribution division were $252 million, up 24% on higher new product launches compared to the prior year. Anda's adjusted gross margin for the quarter was 14.6%, up 90 basis points from the prior year.

Turning now to operating expenses. Consolidated GAAP research and development for the fourth quarter was $67.2 million, down 32% year-over-year. Our GAAP results for the current year period includes a $13.1 million reduction expense due to the revaluation of contingent liabilities associated with our PROCHIEVE product development efforts, and the prior year includes $24.9 million of additional expense associated with the development milestone payments and revaluation of contingent liabilities.

On a non-GAAP basis, R&D spending in the fourth quarter increased 12%. For 2012, we expect R&D spending on a GAAP basis to be in the range of $360 million to $380 million. This includes $13 million of projected milestone payments, primarily related to Esmya product development. These milestone payments have been excluded from our non-GAAP earnings forecast. On a non-GAAP basis, we expect R&D expense to increase approximately 20% year-over-year, with roughly 65% of this increase attributable to our brand division. Brand R&D costs included all spending related to biosimilar development, including costs associated with our codevelopment arrangement with Amgen and cost of our Eden development group in Liverpool.

SG&A for the fourth quarter was $213 million, up 3% over the prior year on higher selling and marketing expenses in both our Generics and Brand businesses, partially offset by lower G&A costs. SG&A expense also increased as a result of the acquisition of Specifar. The prior year period includes a charge of $40 million associated with our drug pricing litigation.

For 2012, we expect SG&A on a GAAP basis to be in the range of $820 million to $850 million. On a non-GAAP basis, we expect 2012 SG&A costs to increase approximately 12% year-over-year. Net asset impairment charges during the fourth quarter were $53.1 million. This relates primarily to changes in our forecast for 2 significant pipeline products: PROCHIEVE and the authorized generic version of Xopenex.

Amortization expense for the fourth quarter was $151 million. For 2012, we expect amortization expense to be approximately $440 million, which includes approximately $90 million of amortization related to our Atorvastatin product rights and amortization of product rights acquired in connection with the Specifar and Ascent acquisitions.

On a non-GAAP basis, our income tax rate was 35% in the fourth quarter, down from 35.9% in the prior year period. Our income tax rate on a GAAP basis was 39.5%. For the full year 2012, we expect our effective tax rate on a non-GAAP basis to be approximately 37%, a slight increase from 2011 due to the expiration of the R&D tax credit and higher offshore R&D costs at a lower effective tax rate. The tax rate will also be impacted by product mix, as higher profit from outsource products reduces the manufacturing tax benefit in the U.S.

On a non-GAAP basis, which excludes amortization and impairment charges and other charges detailed in Table 4 of our earnings press release, earnings for the fourth quarter were $1.77 per share, up 90% year-over-year. Non-GAAP earnings for the fourth quarter includes a $0.64 per share contribution from generic LIPITOR. For 2012, we expect generic LIPITOR to contribute approximately $0.75 per share in non-GAAP earnings. This contribution will be heavily weighted to the first half of 2012.

GAAP earnings for the fourth quarter were $0.75 per share. Our adjusted EBITDA for the fourth quarter was $393 million, a 78% increase. Cash flow from operations for the fourth quarter was $222 million, and cash and marketable securities were $224 million at year end.

We remain well positioned financially following the acquisition of Assent Pharmaceuticals with a pro forma debt to adjusted EBITDA ratio of approximately 1.3x. Our current capital structure allows us to invest significantly in the growth of our business.

With that, I'll turn the call back over to Paul for an update on our 2012 forecast and concluding remarks.

Paul M. Bisaro

Thanks, Todd. Now I'd like to provide you with an update to our 2012 preliminary forecast that we provided at our Investor Day on January 24. This update accounts for the launch of generic LOVENOX, as well as other changes in our business from January 24 to today.

As a reminder, we have not included any potential sales of generic Lidoderm or any contribution from our progesterone gel product for the prevention of preterm birth. Our forecast includes assumptions for increased competition on our oral contraceptive franchise and extended-release products, with the exception of generic Concerta. We do not anticipate any additional generic competition on Concerta in 2012.

Date certain launches included in the forecast are generic versions of Actos and Xopenex, as well as other undisclosed launches throughout the rest of 2012. Regarding generic Xopenex, there's been a change in circumstances and we are now -- and we now expect to launch the product in August of this year with one additional generic competitor, NAG. We originally believed that we would be the only generic Xopenex for the first 180 days after our launch.

On January 23, we learned that Sunovion, formerly Sepracor, might launch its own generic product during our period of exclusivity. In order to be prudent, and since we had not completed an investigation nor confirmed Sunovion's intentions, we revised our assumptions for generic Xopenex to include a competitor during the exclusivity period prior to giving our preliminary forecast on January 24.

Since January 24, we have been informed by Sunovion that they intend to launch. The results of our investigation so far indicate that prior to our acquisition of Arrow, Arrow had entered into an understanding with Sepracor that would allow Sepracor to launch its own authorized generic product during our 180 days. This arrangement was not disclosed to us during due diligence or even subsequent to that. So for today's forecast, we continue to assume 1 additional generic competitor during the first 180 days.

We are continuing our investigation of this situation to decide on appropriate next steps. We, of course, intend to do everything possible to maximize the value of this launch. So with that, our updated forecast is as follows: Our estimated full year net revenue increased to approximately $5.4 billion. We now expect Global Generics segment revenue to be between $3.9 billion and $4.1 billion. On the Brand side of the business, we expect net revenue of $500 million to $525 million. With the Anda Distribution business, we continue to anticipate revenue to be between $850 million and $900 million. As a reminder, Anda's results do not include the sale of Watson products.

We expect adjusted EBITDA of $1.3 billion to $1,375,000,000 for the year. We now expect non-GAAP earnings per diluted share in the range of $5.50 to $5.80 per share. In summary, 2011 was a record year for revenue growth and profitability. We have executed on our strategy that has been in place since 2009. We have a balance sheet in place to capitalize on opportunities to grow the company, and we expect to meet or exceed our growth objectives of double-digit earnings growth for 2012 and 2013.

Lastly, and most importantly, I would like to thank all of our employees around the world for their hard work and dedication to the global growth of Watson.

With that, I'll turn it back to Patty for Q&A.

Patricia L. Eisenhaur

Thanks, Paul. Therese, we can get started with the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank, Research Division

Can you talk about LOVENOX a little bit and the launch? Maybe give us a sense of pricing and has there been anything different in the launches because of -- you have one channel, the other guys have the other channel. How that's working out?

Sigurdur Oli Olafsson

It's Siggi here. As we explained, we have the retail channel and our partner has the hospital channel. We have launched the product. We are building up stock at the moment. We launched everything we had in hand on day one and we expect that over the next few weeks, we will have a full stock to launch into the market. The price is as expected for this launch, and it's progressing very well at the moment.

Marc Goodman - UBS Investment Bank, Research Division

And is all the pricing the same? I mean, your price into your channel and your partner's price, how is that working?

Sigurdur Oli Olafsson

We don't compare prices.

Operator

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

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just want to ask about Lidoderm and maybe a little bit of a discussion, I know there were in some of the pretrial briefs that talk about settlement negotiations. Can you talk about whether the terms are still on the table that were originally proposed? Has there been any changes in terms of any of the dialogue? And then maybe if Siggi could just give us a sense on LOVENOX, what percent of sales is in the retail channel for that product?

Paul M. Bisaro

Sure, Ken. Settlement discussions are things that move around all the time. Obviously, we're moving and focused on the trial and we're looking forward to today's closing arguments. So we remain focused on trying to win the trial and getting prepared for launch. Regarding any potential settlement, those things take time; they may or may not occur. And right now, we're focused on the trial. So I guess that's where I leave it. With respect to LOVENOX, Siggi?

Sigurdur Oli Olafsson

Yes, on LOVENOX, we estimated at around 35% of the overall volume is in the retail channel.

Operator

Your next question comes from Tim Chiang with CRT Capital.

Timothy Chiang - CRT Capital Group LLC, Research Division

So, Paul, you increased your revenue guidance by about $100 million, your bottom line guidance for 2012 by around $0.25. Is that all attributed to LOVENOX, or is there some other products that you would sort of included in the new guidance?

Paul M. Bisaro

Well, Tim, it is primarily attributed to LOVENOX. There are, of course, moving parts and certainly our forecast changes and our expectations for products change all the time. So there's been other additional changes, but it's primarily LOVENOX.

Timothy Chiang - CRT Capital Group LLC, Research Division

And just a quick follow-up to that, I mean, how much share do you think you can grab on the LOVENOX market in the retail channel?

Paul M. Bisaro

Well, before I let Siggi answer that, one of the things we don't want to do is get too far ahead of ourselves when we talk about the commercial sensitivity of our products. So we don't mean to be short with you guys, it's just the question of we can't give out too much information. But, Siggi?

Sigurdur Oli Olafsson

Yes, the retail channel is mainly by Sandoz at the moment. Sanofi is there, and we expect that [indiscernible] Sanofi to come in the market. I think with a 4-player market, we expect a fair market share in the 4-player market for Watson.

Timothy Chiang - CRT Capital Group LLC, Research Division

Okay. Great. Paul, I don't mean to hog the call, but there was this FDA draft guidance on biosimilars that came out last week. What are your thoughts on that?

Paul M. Bisaro

Well, I'm going to let Fred answer that, but I think I'll just say -- I'll start with saying that I think it was a good first step, but it was simply a first step. Fred?

George Frederick Wilkinson

Yes, so actually we have a nice opportunity to analyze this both as Watson as a partner with Amgen, so we've had a lot of discussions about the guidance. I think they went a good step forward to get some clarity on certain issues and left other things off the table, particularly they did not address the naming issue, there's no clear path for the changeability. There are opportunities for extrapolation of indication. You can go from different dosage form to different dosage form. But I think they really are leaving it kind of as a product-by-product, specific-type program and are encouraging a lot of interactions with FDA as you go forward. So I think that's how we're approaching it. It's a terrific first step. It did put some clarity on certain pieces, but there's still a lot more work to do.

Operator

Your next question comes from Ronnie Gal with Sanford Bernstein.

Paul M. Bisaro

Ronnie, I got to tell you. I'll start with that one first. That has been something we've worked on for a lot of years. It is obviously something we will have looked at and will continue to look at. I think seriously, the biggest issue still remains access to the raw material and not so much anymore the question about whether we can characterize the product. So it is just the continuing problem of finding a source that is really viable. Regarding the respiratory business, I think our respiratory efforts are going to be wide ranging, and I think they will include partnerships where appropriate. And your question about whether we'll use a 505(b)(2) or traditional route will really depend on a product-by-product analysis. We've got -- there are some products where I think 505(b)(2) is going to be the more appropriate pathway. And I think there's going to be some products where we may be able to use the traditional route. So we're taking a broad view of respiratory. I think you'll see stuff from us coming reasonably soon. So Fred, I'll turn it over to you for biosimilars.

George Frederick Wilkinson

Yes. So as far as where we are with the Amgen collaboration, we have given little and probably will give no guidance on when we go into clinic and when we don't. We are controlled a little bit by our relationship. And I think that will be a decision to be made jointly by both parties as to announcing and/or not announcing where we are with respect to the individual products. I love your question on PREMARIN, and although it's still a good reminder that PREMARIN was approved under a drug and not under a DLA, so there are some differences still as to how that might be approached.

Patricia L. Eisenhaur

Thanks, Ronnie.

Operator

Your next question comes from Douglas Tsao with Barclays Capital.

Douglas D. Tsao - Barclays Capital, Research Division

Just -- Paul, sorry, in terms of LIPITOR, what we've seen in terms of market share, your share has sort of trended down away from your expectation of a split with Ranbaxy. I'm just wondering if you thought that was going to normalize on what you're seeing right now and if that's been adjusted in terms of your forecast for this year or for 2012.

Sigurdur Oli Olafsson

Doug, it's Siggi. Let me take this one. I think first of all, I think the picture about the IMS's painting is not a very accurate one. The reason for that is there's an over estimation of I think what is in the mail-order channel, but also a few of the customers we have don't report the data to IMS. I know IMS tries to estimate how much that is, but that leads to the differences between what we see as our sale and what the IMS shows. So we are very happy with our sales, without market share. I think we will continue to gain market share from Pfizer going forward but overall, we are very comfortable where we are today.

Douglas D. Tsao - Barclays Capital, Research Division

Okay. Great. And then one follow-up on LOVENOX, and Siggi, you might want to take this, is in terms of your production and your supply right now of the product, given the fact that it sort of -- the faucet got turned on very quickly from your ability to launch. You had some product and supply, how is that going to play out through the rest of the year and are you going to able to get manufacturing back up in time to have a sort of no interruption?

Robert A. Stewart

Doug, it's Bob Stewart here. I'll answer this one. With respect to Amphastar, they are ramping up production as we speak. And we expect that we're going to get continued supply from them as we mentioned before building up our inventories to ultimately take a reasonable share in the market.

Operator

Your next question games from David Buck with Buckingham Research.

David G. Buck - Buckingham Research Group Incorporated

Just a couple of quick ones. For Specifar, can you give some sense of the contribution for either fourth quarter or all of 2011 and what type of growth rate you'd be expecting in 2012? And then for the OC business, it sounds like you're assuming declines was a little bit lighter than we had thought in the current quarter, about $95 million. Should we be expecting that to be sort of the high watermark as we enter 2012 on a quarterly basis or is that expected to go up with the Yaz launch? And then just a quick follow-up. ClinicalTrials.gov is that where we should be seeing the Amgen products for this to be reported?

Paul M. Bisaro

I think the requirement for the website is entering Phase III though. Todd, you want to handle this number?

R. Todd Joyce

Sure. For perspective, we're expecting roughly $150 million to $175 million of revenues in 2012. That's up from $60 million in 2011. And Ascent will be at about the same revenue contribution for 2012.

Sigurdur Oli Olafsson

I think on the OC question, we are getting a continuous competition on the OCs on the base business. As you rightly said, we just launched the Yaz. Yaz will be a good product for us during 2012, but we still estimate that there will be a more competition on OC throughout the year 2012.

Operator

Your next question comes from Dewey Steadman with JPMorgan.

Dewey Steadman

Can you just talk about the dynamics of the Toprol market now that Mylan's entered the market, and what are your near-term expectations for pricing and the share in that market?

Sigurdur Oli Olafsson

Yes, let me take that. So as you said, Mylan entered the market at the end of last year. They took some market share from, I think, all the players in the market. The market is overall moving a little bit down. As we estimated, we said that at the beginning of '11. The competition came later than we expected. I think going forward, we don't know what's happening. We have said in our forecast that we estimate that there will be at least one more player during 2012 for this market. But overall, we don't comment on pricing or market share anymore than that.

Dewey Steadman

Okay. And then on PROCHIEVE, beyond waiting for the FDA response at the end of the month, can you just comment on any steps you're taking there and how that might change or a delay in PROCHIEVE might change your business development priorities going forward, either branded or generic, and the relative size of those business development opportunities?

George Frederick Wilkinson

Okay. Yes, so PROCHIEVE you saw the announcement yesterday. We did transfer the NDA from Columbia to Watson. That kind of puts us in the front seat with the FDA instead of in the backseat, and we intend to work very closely with them. We have been doing a significant amount of analysis based on what was presented at the advisory committee of the data, all the way down to case records. And we will be approaching the agency once we get a response from them and see how can we get this important product in the marketplace. Paul, you want to do...

Paul M. Bisaro

Yes, and Dewey, on your question about business development efforts, I think we -- just so we're all clear, we're still very committed to our brand franchise. We have a great pipeline. We intend to exploit that pipeline to its fullest potential. We'll continue to evaluate PROCHIEVE and the ability to use progesterone to get an indication for preterm birth. We'll do our -- everything we can to convince the agency that it's an appropriate product, the appropriate time for a much-needed indication. But we will continue to look for business development efforts across all of our businesses, but also particularly on the brand side, we're going to continue to focus on urology, women's health. And we'll look for ways to continue to shore up that pipeline. So again, heavily committed to our Brand business.

Operator

Your next question comes from Elliot Wilbur with Needham.

Elliot Wilbur - Needham & Company, LLC, Research Division

First is for you, Paul, I guess. Going back to the Analyst Day on the 24th, you had given a growth bogey for 2013 of approximately 20% bottom line growth, which I think at the time did include contribution from LOVENOX and Lidoderm. And obviously LOVENOX came much earlier. And with the increase in bottom line guidance this year, just wondering if that's still the appropriate growth metric to think about. And then follow-up question for yourself and probably Todd as well, if I look at your SG&A guidance and in light of what you did in -- or what you spent in 4Q and annualized that, obviously you get a number sort of over $850 million. I understand there may be some onetime accruals related to LIPITOR there. But I guess with the recent build-out of the sales force and the acquisition of Ascent, it still seems like there's multiple levers that you're -- they're using to kind of ratchet down the SG&A. I'm just wondering maybe give us a little bit more insight into that.

Paul M. Bisaro

Sure. As to the growth target for 2013, it remains the same. Our challenge internally and externally is to achieve the 10% -- greater than 10% growth, and that's what we're focused on. I think -- I'm sorry, approximately 10% growth. That's an important metric for us, and that's what our entire team is focused on doing. And that is our growth target. Todd?

R. Todd Joyce

Yes, in terms of SG&A, we've got roughly year-over-year, there will be a $50 million increase that's in the SG&A that's acquisition-related because of full year of Specifar and also the Ascent acquisition. The fourth quarter is not a good proxy for run rate. It was a little higher. There were some unusual items that we incurred in the fourth quarter. So really, if you look at kind of the average of third and fourth quarter and then you trend that out and take into account the increases because of the Ascent acquisition and the full year of Specifar, I think you get much closer to our guidance range.

Operator

Your next question comes from David Risinger with Morgan Stanley.

Christopher Caponetti - Morgan Stanley, Research Division

It's Chris actually for Dave. He dropped, unfortunately, but he gave me a list. I was wondering if you could -- will you just give some more clarity behind the 2013 EPS target, specifically how important is Lidoderm, what other P4 challenges are in there and when should we expect incremental competition in '13 on Concerta, please.

Paul M. Bisaro

Well, we have not given specific guidance around '13. What we've said is we intend to target a growth rate of approximately 10%. We did say at Analyst Day and we'll repeat here that we do have a number in for Lidoderm in 2013, so we do include it. But we do not include all of the additional potential patent challenges that could occur in 2013. So there's a lot of possible levers that could be pulled to achieve that growth from internal growth and then, of course, there's the opportunity to achieve or exceed it through external growth. So we have a lot of levers to pull to pull things forward. As to the Concerta, I think we have forecasted additional competition in 2013 for Concerta.

Christopher Caponetti - Morgan Stanley, Research Division

Okay. And would that be in the middle of the year or in the beginning?

Paul M. Bisaro

Well, we're not going to be that specific. Like we've said in the past, for purposes of when competition comes in, we're not going to say exactly when. It's included in the number. It doesn't -- if we get into the discussion about what month, it gets to be challenging to maintain guidance.

Christopher Caponetti - Morgan Stanley, Research Division

Got it. Got it. And then just one more follow-up for you guys. In terms of business development, Paul, you indicated you plan to do a larger branded acquisition.

Paul M. Bisaro

Don't believe everything you read. No, the comments that I made with a reporter were wide-ranging. We had a long conversation. I think it was probably fair to say that we were talking generally about acquisitions, and I was speaking to him about our ability to do a large transaction. I told him that we were focused on the Brand business, and that it would be something that we would consider would be a large brand transaction. However, I've also made it very clear that if the right generic-focused large transaction presented itself that would help us expand our footprint globally and drive additional growth through our Generics business, we would do that one as well. So it's really a question of opportunity as opposed to specific ideas. Unfortunately, we can't predict when people are willing and when companies are willing to discuss transactions. So we do have to be a bit opportunistic when it comes to that sort of thing. But again, I just want to be clear, we wouldn't not do a brand transaction and we wouldn't not do a generic transaction. We're prepared to do one or both if we can.

Operator

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

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Paul, you forgot to say you'd do one or both or none, right?

Paul M. Bisaro

Absolutely, Greg.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Okay. A very specific timing question. Have you learned anything new since the Analyst Day on your Lidoderm and for the FDA's view of the PROCHIEVE NDA?

Paul M. Bisaro

I'll take the Lidoderm and let Fred handle the PROCHIEVE. On the Lidoderm, I think there was some confusion and probably we should clear it up if it still exists, about some comments made by lawyers during the trial, and this is kind of what people get for listening too closely to lawyers. I can say that. The situation involved a biostudy on Lidoderm performed at Cetero. The study was performed -- when the Cetero issue first happened, there was a date range provided by the agency. That date range was subsequently narrowed, okay? The biostudy at question now falls outside of the range of concerns that the FDA has about Cetero. So there is no issue regarding the biostudy that was performed at Cetero. So it was a Red Herring and we tried to deal with that at the -- with a press release, but hopefully we've now clarified it specifically for everyone. Regarding the application, it's still moving forward and we do expect to get our tentative approval, and we expect to be ready to go at the earliest possible time to launch the product. Fred?

George Frederick Wilkinson

Regarding PROCHIEVE, we've had multiple discussions with multiple people and multiple different levels within the agency, so we've been extremely active in the process since the advisory panel and since our investor meeting. I think the only thing that we've learned with certainty is that the 26th is on a Sunday, which is our PDUFA date and that we anticipate that we'll get an action letter on Friday, which is the 24th. So other than that, I think there's just been a whole lot of conversations on how to approach things and what might be contained in that letter.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Okay. And then one more on the Xopenex issue, Paul. Is there a mechanism to adjust the value you paid versus the value received? It seems like it could be potentially a material different, although you wouldn't tell that from your 2012 guidance range. But can you walk us through what comes next in that regard?

Paul M. Bisaro

Well, the point out of the 2012 guidance change, that was -- the Xopenex was already removed from guidance when we gave the preliminary guidance. So that was not included in the first round then taken out in the second.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

I guess the question relates to more -- to the model you used to justify the price you paid.

Paul M. Bisaro

Exactly. That part, right now, I'm going to leave that. We're in the midst of an investigation. We've got a number of issues to resolve. I mean we're hoping we can resolve them. But at the moment, I can't really comment any further on that.

Operator

Your next question comes from Frank Pinkerton with SunTrust.

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

First one is you guys are kind of in a unique position. You've got an authorized generic on Concerta. You're challenging on Adderall. And if I believe my IMS data, you also manufacture some smaller stimulant products. So you probably get it from all sides from the DEA. Can you please just give us an update on what you think the DEA's role is in that market, what they've kind of done from a standpoint of supply and how they view abuse of those products versus price, and did they have any type of control over that market with that may be outside the control of the FDA?

Paul M. Bisaro

Well, let me first start and I'll then turn it over to Bob Stewart, but -- who focuses on this effort pretty dramatically. I think we have to be very clear that Watson supports the effort and has -- and continues to support the effort to make sure that there's no diversion of these drugs outside of the appropriate channels. I think the challenge has been and continues to be how best to accomplish that objective. And there has been a lot of activity around both our Watson business and our Anda Distribution business. But before I steal all of Bob's thunder, I'll let him take it over.

Robert A. Stewart

As Paul just mentioned, we continue to work with the DEA to make sure that we're tracking and doing suspicious monitoring, that we're doing the right reporting of any kind of potential diversion issues and things along those lines. We're also working with the DEA around the drug shortages side of things to make sure that we're securing the right amount of quota because as you mentioned, we do have a number of products in which that are in the space and so therefore, working with the agency to make sure that we have the appropriate quota allocation as well.

Paul M. Bisaro

Right. I think, Frank, I guess the last point I would make and just sort of a general point for at least from our perspective and perhaps the industry's perspective is more visibility to what the DEA and the FDA would like us to do and clarity around objectives and clarity around the kinds of programs they would like us to be moving toward would help move this needle forward. At the moment, I would say it's probably fair to say that the agencies are not well aligned internally, and they need to get that sort of piece resolved. And we stand ready to help them. But we need to get the right clarity from the DEA at the very highest level, so there's no misunderstanding about what they would like us to do. I mean, obviously there's certain things we can do. But I think it really requires an open and clear dialogue. And we stand ready, and I know others in the industry stand ready. We've had conversations with others in the industry, and we look forward to achieving that objective.

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

All right. Great. And then if I can have a follow-up, please, and this is not as large a concern for Watson as some of the other, I guess, more global players, even yourself out there. But can you give any color or speak to collections on Europe, specifically by country, and any language in your contracts with your different groups over there you're collecting from on what currency they have to pay in?

Sigurdur Oli Olafsson

It's Siggi here. I'll start. I think collection in Europe for us has not been an issue. We basically -- the 2 biggest market for us in Europe are France and U.K. We have a very, very small business in all the markets. So we haven't had any problems. If we focus on Greece, we are basically -- we are not selling to the Greek government at the moment. We don't participate -- intend to sell into the hospitals. But we sell to the wholesaler there, and we have -- we are in good collection with the Greek wholesalers at this point in time.

Operator

Your next question comes from Randy Stanicky with Canaccord Genuity.

Randall Stanicky - Canaccord Genuity, Research Division

Paul or maybe Siggi, can you just -- have you guys reviewed where Ranbaxy could lose some of their exclusivities and how that may or may not benefit you? And I'm thinking about Actos, but there may be some others, and I have a follow-up.

Sigurdur Oli Olafsson

Yes. We have reviewed it. We -- obviously, we don't know exactly where it's going to land for Ranbaxy. But we haven't -- we are reviewing it internally to see if there's an opportunity for us going forward both for Ranbaxy but also with the issue if that impacts us at the moment.

Randall Stanicky - Canaccord Genuity, Research Division

But currently, you've not identified any potential upside at this point?

Sigurdur Oli Olafsson

We have not included in our guidance any upside due to that.

Randall Stanicky - Canaccord Genuity, Research Division

Okay, great. And then a lot of discussion around Xopenex, maybe Siggi, how are you thinking about the opportunity post 180 days competitively?

Sigurdur Oli Olafsson

We estimate that after the 180 days, there will be at least a 4-player market as a minimum. That could be even one more. So I think the opportunity will be much lesser on day 181.

Randall Stanicky - Canaccord Genuity, Research Division

Great. And then just one last question. As you look at the international business, can you identify the markets where you're seeing the most pricing pressure and where some of that further pressure could come from?

Sigurdur Oli Olafsson

Yes, the biggest pricing pressure we estimate in our markets is in France for sure at the moment. There's both pressure from the government in France where they are saving money on the health care project. But also there's a pressure due to the competition in the market. There's a fierce competition among generic player for top line growth. So there has been a very significant pricing pressure in France. In our other markets, we have not seen it to that extent, for sure.

Operator

Your next question comes from David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

On Concerta, can you remind us what happens to your margins on the [indiscernible] there's one other generic conference and then what would happen to your margins contractually if there is a second entrant?

Paul M. Bisaro

Yes, I think what we have said around the margins is when another entrant comes in, our margins go up. And we said that it was not an insignificant amount. We have not identified what that number is. And that margins stays -- I believe it stays at that number until the agreement expires in late 2014.

David Amsellem - Piper Jaffray Companies, Research Division

So there's no additional adjustment in the margin if there's a second entrant?

Paul M. Bisaro

No.

David Amsellem - Piper Jaffray Companies, Research Division

Okay. And then second question on Revlimid. Any update there on the litigation? And then secondly, any color on how you feel you're able to circumvent the probably more patents and any light you can shed there.

Paul M. Bisaro

Again, I promised I wouldn't get into specific discussions about legal matters, so I'm going to turn this over to David, and let him answer that one.

David A. Buchen

No, on Revlimid I think the question has been about the Markman hearing. And the situation there there's some new patents that are going to be -- that are listed and we're evaluating and pending a decision on what's going to happen with those new patents and how they're going to be litigated. There's been a delay of getting Markman hearing scheduled so that we can consolidate everything and only do [indiscernible]. Other than that, I think the litigation is progressing and given where things are at this stage, I don't think we're going to say anything further.

Operator

Your next question comes from Michael Faerm with Crédit Suisse.

Michael Faerm - Crédit Suisse AG, Research Division

Two questions. One on Lidoderm, in the absence of any settlement, what are your expectations on the timing of a decision?

Paul M. Bisaro

Well, I can only tell you what I've read, and I think it's -- most of the folks would say that it may be that the judge could rule as early as today. But it is not unusual that a judge would write an opinion about this. He might actually verbally rule and then write an opinion. So there could be several ways to which this goes. David, do you want to add anything?

David A. Buchen

I think that's correct. There's a possibility that the judge would rule from the bench or shortly thereafter. There are 2 major issues that the court is going to rule on. One is infringement and the other is invalidity or obviousness. We don't know whether if there is a quick ruling whether they'll both happen today or whether they'll issue a decision. They'll have to, at some point, issue a decision so that appropriate appeals can be taken from whatever the result is. So we're waiting like the rest of you.

Michael Faerm - Crédit Suisse AG, Research Division

Okay. And just one other question to follow up on LIPITOR and your comments about IMS not accurately capturing things. I think the latest weekly showed about 23% for Watson and about 40% for Ranbaxy. What in your view is a more accurate depiction of that market share?

Sigurdur Oli Olafsson

What we have said before as we were going in the retail end of the business, we were going to get more than 50% per share of the retail part. I think there's a fair bit in the mail-order business, which was captured by Pfizer and then later on by Ranbaxy. But we don't comment exactly on how we see the business itself. But we think we have our biggest share in the retail than is being shown in IMS.

Operator

Your next question comes from John Boris with Citi.

John T. Boris - Citigroup Inc, Research Division

First question, Paul, I know you consistently said you don't believe that clinical trials are needed on Lidoderm, but it would seem from the hearing that Anda potentially has acquired some additional information that would lead them to file a citizen's petition in that your lawyers who maybe misspoke seem to imply that clinical trials would be needed for a generic. Can you maybe just discuss that issue a little bit? And then I have to 2 follow-ups.

Paul M. Bisaro

Sure.

David A. Buchen

John, it's David, I'll take this one. What happened at trial was that our witness said that you don't know whether a product works or not just by manufacturing it. You have to do a clinical trial. He did not mean a clinical endpoint study. He meant a general clinical trial like a PK study, which we have done. So there's no inconsistency in our position. We've done PK studies. I think that the people who were reporting on this I think misconstrued what he said when he said a clinical study. He meant a clinical endpoint study or a clinical trial rather as opposed to just a PK study.

John T. Boris - Citigroup Inc, Research Division

Great. Paul, if you do win, which it seems as though there is a pretty high probability you prevail in this trial, would you launch at risk or wait until after an appeal had occurred?

Paul M. Bisaro

Well, John, I think you probably know me well enough to know that if we remove all barriers, we would probably consider that a very high probability getting out with this product.

John T. Boris - Citigroup Inc, Research Division

Okay. Great. And then on LOVENOX, you indicated there would be 4 parties. Your assumption about when that fourth party might enter the market?

Sigurdur Oli Olafsson

That fourth party I'm talking about is the authorized generic from Sanofi. I was not talking about Teva per se.

John T. Boris - Citigroup Inc, Research Division

Okay. Great. And lastly for you, Siggi. It would seem as though in x U.S. markets, there's a trend to going more towards the U.S. model. In Italy, for example, pharmacists are now mandated to not continue to give people their branded generic but to substitute the cheapest generic product going forward. Do you see that trend potentially spreading more broadly throughout Europe, and what are the implications for your business and your acquisition strategy going forward if that takes hold?

Sigurdur Oli Olafsson

Yes, it's a good question, John. The point there is this has been in Europe for many, many years. This has been the model in all the Scandinavian countries for many years that the pharmacist has to put out the cheapest generic within usually 5% to 10%. So if you are within the band of 5% to 10% of the cheapest generic, you can be utilized for that period of time. The period of time is different between different markets. In Denmark, this period of time is 2 weeks. In other markets it can be 3 months. It could be 6 months in other markets. This will happen. We know that even the Greek government is looking to this. But this is beneficial to the generic industry. Yes, this puts the pricing pressure for sure but in these markets where the generic penetration is maybe 13% to 17% like it is in Greece, a legislation like this would tell -- pushes the pharmacist to change to generics in the pharmacy will increase the generic penetration. I think the Greek government in the latest negotiation have a goal of getting this generic penetration to 50% because they acknowledge and understand that by saving on the healthcare budget, they need to increase the penetration of generics.

Operator

Your next question comes from Michael Tong with Wells Fargo.

Michael K. Tong - Wells Fargo Securities, LLC, Research Division

Paul, a couple of years ago, you talked about ramping up your transdermal capabilities. How do you characterize that ramp-up? Is it progressing on schedule ahead, and when might we see additional filings or product launches from your transdermal franchise? And then secondly, maybe just remind me with Concerta, as you talk about the margin change upon the entry of additional competitors, is that because you think you have the ability to launch your own product or is it contractually stipulated that your margin goes up even if J&J continues to supply you with product?

Paul M. Bisaro

Let me answer the Concerta question first. It is contractually maintained. We wouldn't -- we would be launching our product at the end of the contractual period is the idea. On the transdermal, I'm going to hand this over to Bob in a second, but I think our ramp-up has been going very well. We've got a lot of activity going on in the transdermals, both patches and gels, but I'll let Bob...

Robert A. Stewart

Yes, to Paul's point, we have a number of products in development as well as a number of products in which that we have already filed. And that was one of the reasons for the expansion in Salt Lake City. A lot of people think the Salt Lake City expansion is specific for lidocaine. But it's actually to support not only lidocaine, but other products in which that we have in the pipeline as well, both on the gel side as well as on the patch.

Michael K. Tong - Wells Fargo Securities, LLC, Research Division

And so should we expect if everything goes well, launches in '13, that's part of your 10% growth objective?

Paul M. Bisaro

Yes. Some in '12 and some in '13 and then beyond.

Operator

Your final question comes from Jason Gerberry with Leerink Swann.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Most of my questions have been answered, but I'll try my luck with David on a Paragraph 4 question. You mentioned with Revlimid that, I guess, the delay to the Markman has to do with some I guess late listed patents to the Orange Book. Could you just confirm that those are the method of used patents which were not part of the original 10 patents in dispute? And then I guess just one follow up with Paul.

David A. Buchen

Yes, I think that's correct on the method of used patents.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Okay. And then, Paul, just understanding the whole Businessweek article, the M&A thing. But could you just maybe give us a range of size of what would be a transformational brand acquisition if one became available?

Paul M. Bisaro

That's a good question. I think we've talked about pretty clearly our objective is to remain within a band around 3.5x debt to EBITDA should we do a significant transaction. Of course, some of that EBITDA would come from the acquired company. So that gives you a sense for how big of a number we would try to reach for. We would be willing to use equity if it made sense in a transformational deal if we needed to close the gap, if you will. So we've got a lot of flexibility, Jason. Again, I think the challenge for us really is finding the right opportunity. And I'm sure that remains the case for everybody who's in a situation like we are where we've got strong balance sheet and we're out looking for opportunities.

Operator

I will now turn the call back to Patty.

Patricia L. Eisenhaur

Well, thank you, everyone, for joining us on today's call, and we look forward to following up with you in the near feature. Therese, if you want to give the replay information, that would be great. Thank you, everyone.

Operator

Of course. Thank you for participating in today's Watson Pharmaceuticals Earnings Conference Call. This call will be available for replay beginning at 11:30 a.m. Eastern Time today through 11:59 p.m. Eastern Time on February 28, 2012. The conference ID number for the replay is 44986086. [Operator Instructions] The number to dial for the replay is 1 (800) 642-1687 or 1 (706) 645-9291. Thank you for your participation. You may now disconnect.

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