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Watson Pharmaceuticals, Inc. (WPI)

Q2 2007 Earnings Call

August 2, 2007 8:30 am ET

Executives

Patty Eisenhaur - IR

Allen Chao - Chairman and CEO

Tom Russillo - EVP and President of the Generic Division

Al Paonessa - EVP and COO of Anda

Ed Heimers - EVP and President of the Brand Division

Todd Joyce - VP and Corporate Controller

Analysts

Elliot Wilbur - CIBC World Markets

Rich Silver - Lehman Brothers

Randall Stanicky - Goldman Sachs

Tim Chiang - FTN Midwest Securities

Greg Gilbert - Merrill Lynch

Ricky Goldwasser - UBS

Ken Cacciatore - Cowen

Danny Kuo - Bear Stearns

Corey Davis - Natexis

Presentation

Operator

Good morning. My name is Sandrall, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson Pharmaceuticals Second Quarter 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Eisenhaur, you may begin your conference.

Patty Eisenhaur

Great. Thank you, Sandrall, and good morning everyone. I would like to welcome you to Watson's second quarter earnings conference call. Earlier this morning Watson issued a press release reporting its earnings for the second quarter of 2007. The press release is available on our web site at www.watson.com. Additionally, we are conducting a live webcast of this call, which will also be available on our web site after the call's conclusion.

During today's call, Dr. Allen Chao our Chairman and CEO will first provide a review of our operational and financial performance. Following Dr. Chao, Tom Russillo Executive Vice President and President of the Generic Division, will provide a review of the generic segment and Al Paonessa Executive Vice President and Chief Operating Officer of Anda will give a quick overview of the Anda distribution business.

Following Al, Ed Heimers, Executive Vice President and President of the Brand Division, will address the Brand segment for the second quarter and lastly Todd Joyce our VP and Corporate Controller will review our financial performance for the quarter. Dr. Chao will conclude our presentation with a discussion of recent strategic initiatives we have underway as well as an update on the outlook for the second half of 2007 and the succession planning announcement we made this morning.

Please also note that today's call is copyrighted material of Watson Pharmaceuticals, Inc. and cannot be rebroadcast without the company's express written consent. I would also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the company.

It's important to note that such statements about Watson's estimated or anticipated future results, prospects or other non-historical facts are forward-looking statements and reflect Watson's 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 Watson's current expectations and projections depending on a number of factors affecting Watson's business. These factors are detailed in Watson's periodic public filings with the Securities and Exchange Commission, including but not limited to Watson's form 10-K for the year-ended December 31, 2006.

With that, I would like to now turn the call over to Dr. Chao.

Allen Chao

Thank you, Betty. Good morning, everyone, and welcome to Watson's second quarter 2007 earnings conference call. I’d like to start by providing an overview of some key financial results for the quarter.

Our revenues in the second quarter 2007 were $603 million, which was an increase of 18% over the prior year period. Our GAAP earnings per share for the second quarter were $0.33 per diluted share, and non-adjusted earnings per share for the second quarter were $0.34. Our adjusted EPS excludes acquisition-related charges, and debt repurchase costs, a reconciliation of all adjustments to GAAP earnings, we provide in our earnings release.

Our cash flow from operations was $111 million for the quarter. Our consistent and strong operating free cash flow allows us to pay down an additional $100 million in debt obligations. During the second quarter, bringing the total number of debt reduction, for the year to $250 million.

I would like to mention some of the second quarter highlights. Our operating results in the second quarter were solid for all three divisions. Our Brand and Distribution divisions showed improvement over the first quarter of this year excluding OxyContin CR, which we stopped selling in late February '07. Our Generic operating results also show improvement on a sequential quarter basis.

On the costs front, we recently closed our Puerto Rico facility and have now sold our Phoenix, Arizona manufacturing plant. We have been on track to achieve the manufacturing cost savings originally forecast on the sale and closure of this facility. Our strategic initiatives and action plans to expand our pipelines and improving operating efficiency are on track.

Regarding our Davie, Florida plant, we continue to ready a plant for re-inspection. However, we can not predict when they will schedule the next inspection. Our current financial forecast for 2007 is not dependent on the launch of any new products from our Florida facility.

Our brand division had nice growth this quarter, resulting from higher product sales and co-promotion revenues. We remain optimistic about this division as our promising pipeline with specialty large product will ensure a steady growth in the future.

The distribution business continues to generate strong cash flow for the company. Going forward, it is poised to capitalize the industry environment and steady flow up new products as Brand products patent specifically.

Let me now turn the call over to Tom Russillo, who will discuss the Generic business.

Tom Russillo

Thank you, Allen and good morning to everyone. I'll begin with the review of the financial highlights for the Generic division.

Generic segment revenue in second quarter '07 was $346 million, consisting of $327 million in generic product sales and $18 million in other income.

The second quarter 2006 Generic revenue and gross margins were heavily influenced by the sale of two authorized generics Oxycodone CR and pravastatin sodium. Combined sales for these two products were $116 million for the second quarter 2006. That was the quarter we launched pravastatin.

Gross profit contribution from these two products was low due to the fact that they were authorized generic, and together they contributed $7 million in gross profit in the second quarter of 2006. Excluding the sales of these two large authorized generics, generic product sales actually increased $18 million or 6% from the second quarter last year, primarily as a result of the addition of products from the Andrx acquisition. Sales of Generic Oral Contraceptives were $91 million for the quarter, reflecting an increase of 16% over the year-ago period.

New products introduced in the second quarter include Generic Wellbutrin XL 300 Mg launched in the middle of June following the expiration of the 180 day exclusivity period. This launch has gone as expected. Other revenue for the second quarter was $18 million, an increase of $17 million from the prior year period. Other revenue for the second quarter included $14 million in revenue related to fentanyl citrate and royalties earned on Wellbutrin XL 150 Mg.

Generic segment, gross margins increased 12 percentage points to 39.1% in the second quarter from 27.1 in the second quarter of 2006. The improvement in gross margin reflects a number of items including lower sales of AGs, which I referred to earlier, the increase in other revenue, and a reduction in cost of goods, primarily as a result of the closure of our Puerto Rico facility.

We anticipate continued Generic margin improvements through the year due to an expected increase in other revenue from Generic Toprol XL 50 Mg, as well as higher margins from the addition of new products such as bupropion XL and the fentanyl patch, Fluticasone Nasal Spray. We finish up the results for the quarter; the generic division contributed $98.1 million to operating income.

Now I would like to present a quick outlook for the Generic business. For 2007, we are forecasting Generic segment revenue of approximately $1.5 billion. This forecast includes approximately $90 million in other revenue. Additionally, we are forecasting gross margins to come in at approximately 39% for the year.

And finally pricing declines on our base business continue to run at approximately 10% annually. This remains consistent with our forecast for 2007. I will now conclude with some commentary on our pipeline and Generic R&D initiatives. We currently have over 70 ANDA's on file including 15 tentative approvals and 11 first-to-file or shared-exclusive opportunities.

With that, I would like to turn the call over to Al Paonessa for a discussion on the Distribution business.

Al Paonessa

Thanks, Tom. For the second quarter 2007, Distribution segment revenue was 146 million $0.6 million up slightly from first quarter levels. As a reminder, Distribution revenue excludes ANDA sales of Watson Generic, and Brand product, as those product sales are included in their respective segment.

Overall, Distribution gross margins were 15.9% up slightly from the first quarter level. For the second quarter 2007, ANDA contributed 11million to operating income with a contribution margin of 7.5%. This is up from 4.4 in contribution in the first quarter of 2007. As a reminder the Distribution business had a $2.5 million acquisition related charge in the first quarter of 2007. I would like to quickly reiterate our outlook for 2007.

Distribution revenue for 2007 remains unchanged from our original forecast and is estimated at 575 to 615 million. Gross margins for the segment in 2007 are expected to be approximately 16% for the full year.

That concludes my overview on the Distribution business. I will now turn the call over to Ed Heimers for a discussion of our brand business.

Ed Heimers

Thank you, Al. I am pleased to provide details and a review of the second quarter performance of the Brand segment. Brand segment revenue for the second quarter was $111 million consisting of $97 million in products sales and $14 million in other revenue. Brand revenue increased 23% over the second quarter of 2006 and increased 9% from the first quarter of 2007.

The year-over-year growth was attributable to both strong growth in other revenue and solid brand product sale. I'll touch first on the product sales. 97 million of product sales consisted of 54 million of specialty product sales and 43 million of nephrology product sales. Brand product sales increased 10% or 9 million from the second quarter last year primarily as a result of strong sales of Androderm and Oxytrol as wholesale inventory levels are now normalized.

Other Brand revenue, which consists of AndroGel co-promotion revenue and revenue related to out-license products, was $14 million for the second quarter an increase of $12 million over the same period last year and an increase of $3 million from the first quarter of 2007. The year-over-year growth is due to the addition of revenue from the AndroGel promotion and the addition of Fortamet and Altoprev revenue resulting from the Andrx acquisition.

Brand gross margins was 76% and brand product margins were approximately 72%, and after operating expenses the brand division contributed $46 million to operating income. As far our forecast for 2007, we are on target to exceed our original forecast of $380 million to $405 million for brand revenue. Based on current trends, we are raising our forecast and anticipate brand revenues will be between $400 million and $420 million, which includes other revenues of $40 million to $45 million.

We remain comfortable with our brand segment gross margins originally forecasted at 76% for the year. Our ongoing brand R&D programs remain on track. On Silodosin, a product that will be used for the treatment of BPH, all patients have completed the one-year safety study and we are currently beginning to compile the data. We remain on track to file the NDA for this product in the first half of 2008. The Oxybutynin Gel Phase III program is on target to be completed in the second half of this year and we expect to submit the NDA in the first half of 2008.

On the business development front we recently announced an agreement with Depomed for the promotion of their ProQuin XR antibiotic in the urology market. Urinary track infections are one of the top ten conditions treated by urologist, so this will be a nice addition to our urology portfolio. We expect to launch that product into the urology market later this year.

With that I would like to turn the call over Todd Joyce, who will discuss our consolidated financial results.

Todd Joyce

Thanks Ed. This morning I will provide highlights of our consolidated second quarter financial performance. My comments will focus primarily on our sequential performance, as this is the second full quarter that includes the acquired Andrx operations.

Second quarter, net revenues were $603 million, a decline of $69 million or 10% from the first quarter. This decline was due to the loss of Oxycodone CR in February of this year. In the first quarter Oxycodone CR and pravastatin contributed $91 million of revenue, and $19 million in the gross profit.

On a sequential quarter basis, gross profit declined $4 million or 2%, $243 million. The decline in gross profit was also due to the loss of Oxycodone CR. This decline was offset by higher other revenue in both our Brand and Generic segments, lower manufacturing costs from the closure of our Puerto Rico facility, and the wind down of operations in our Phoenix manufacturing plant. In the absence of any acquisition related inventory charges during the second quarter.

The consolidated gross margin in the second quarter was 40.2% up from 36.8% in the first quarter of this year. First quarter, gross margin was impacted by sales of Oxycodone CR and acquisition related charges. Excluding these items first quarter, gross margin was 39.6%.

Operating expenses for the second quarter were $177 million; $8 million lower than the first quarter. Lower acquisition and litigation related items accounted for roughly 50% of the sequential quarter change. Amortization for the second quarter was $44 million. GAAP EPS for the quarter was $0.33 per share up from $0.29 per share in the first quarter.

On an adjusted basis excluding the impact of the loss on debt payments, gain on security sales, and acquisition litigation related items. The company's second quarter adjusted net income was 37.9 million or $0.34 per share.

Turning briefly to the balance sheet and cash flow. At June 30, cash and marketable securities was $85 million, accounts receivable was $302 million, and inventory was $554 million. Our DSO at quarter end was 46 days, and our inventory days on hand, was a 140.

Inventories increased $40 million in our Distribution business primarily due to a recent product launch. Our long-term debt at June 30 was just under $1 billion, which includes $575 million in convertible debt, and 400 million term loan. Our debt-to-capitalization ratio was 36%.

During the second quarter, we prepaid an additional $100 million of our term debt. There are no further principal payments required this year. Cash flow from operations for the second quarter was $111 million, and adjusted EBITDA was $137 million. With that, I will turn the call back to Dr. Chao for some concluding remarks.

Allen Chao

Thank you, Todd. Let me provide a few comments for the outlook for 2007. Our forecast and consolidated total revenues of approximately $2.5 billion for 2007 and adjusted EPS between $1.25 and $1.30 type of a range. Our Brand division had a solid performance this year, and as Ed mentioned we feel comfortable raising the forecast on Brand business, as we remain optimistic about this division outlook.

In fact, the strong performance of Brand division has helped to offset some of the launch delays, we have experienced in our Generic business. While remaining optimistic in our loss for Generic business, which is not to raise our forecast at this time pending the launch of Sandoz Generic Toprol XL 50-milligram and the potential approval of either transdermal fentanyl or Fluticasone Nasal Spray. As soon as we have more information on these products we will adjust our forecast as appropriate.

This morning I announced my retirement as Watson's President and CEO effective September 4, 2007. As for my retirement, I will continue my role as Chairman of Board of Directors. Let me provide some comments regarding my announced retirement many of you know that I have been planning to retire within next few years, but would only do so when I felt that all the pieces of strategic plan were in place and execution of this strategic action are well underway.

With the successor could take [twain] and lead Watson to its next level of growth. Over the course of nearly 24 years in the business referred and actual reputations through the emphasis of Watson's integrity, quality, new product, customer services. This provides us a rapid growth in the business and a highly competitive business as we are servicing.

While the journey has no way been easy, our collective accomplishment has been considerable. In recent years, we have been working to implement long-term strategic plans to expand the pipeline, enhance our operating efficiency and reduce our overall cost structure. In particularly our focus being including robust division with strong capable leaders, including our generic brand pipeline, and nurturing, promising new operations in both India and China. We have made progress on all fronts. Thanks to our dedicated and hard working management team.

With regard to pipeline, thanks to the collective efforts and the focused efforts over the last several years together with the addition of the Andrx product line technology, we will now have one of the most robust pipelines in the generic industry. We have almost 70 ANDAs pending with FDA, additionally our brand pipeline include two promising urology products completing Phase III studies.

Enhancing operating efficiencies are now being realized from the closure of several manufacturing facilities as well as improvements we are making in our other facilities. Our efforts over the last couple of years have also been focused on establishing API product development and manufacturing capabilities in India.

These initiatives are in place, we are successfully executing them and we are starting to see the benefit of our actions. I believe we have turned the corner and 2007 to 2010 will be another period of growth for Watson. As such I believe it is the right time to handover the reins to someone, who will continue to execute strategic initiatives by put in place and looking for new opportunity for the longer-term.

So, I delight to welcome Paul Bisaro someone I know for many, many years as Watson's new President and CEO effective September 4, 2007. For many of you probably a very familiar name, he has been with Barr Pharmaceutical for the past 15 years, most recently as the President and COO since 1999. He is someone who obviously knows Watson and the industry as well as follows our strategy and execution and is very much in touch with the environment we think which we will operate.

As a veteran of both brand and generic industry, Paul brings to Watson a wealth of knowledge and experience. His career at Barr has included a wide variety of responsibilities. I know he will be successful in his new role and that he is well qualified to take what has been created at Watson and accelerate it further.

I expect he will hit ground running and that this will be a very smooth transition. Till the end of December I assumed the role of Executive Chairman focused primarily working with Paul concerning our ongoing expansion activities in Asia and the transitioning of day-to-day operations. In December, I will be leaving the day-to-day management knowing we had a pipeline that we have expanded significant more efficient operations and solid foundation to build on both India and China.

I believe my transition creates another exciting day for Watson that it marks our new chapter and history of a great company. I am confident that in Paul, we have chosen the best candidate, who can help Watson execute and what has been successfully put in place to meet the challenges and demands of ever shifting pharmaceutical marketplace.

Our focus must now be on the future success of Watson, and as one of the Watson largest shareholders I am obviously motivated to see continued results. I see great opportunity and success in Watson future. And many thanks to all of you, our shareholders, and analysts for continued support. Patty?

Patty Eisenhaur

Right. Thank you very much. And operator, we will now open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Elliot Wilbur with CIBC World Markets.

Elliot Wilbur - CIBC World Markets

And thank you. And before ask the question Allen, I just want to thank you for your many years of wisdom, insight and generosity. I very much appreciate it. And best of luck to you in the next phase of your career, I am sure you will remain very active in the company.

With respect to the revision to guidance at least in terms of the expenses, can you just may be go into a little bit more detail in terms of what's driving that, do you believe that to be somewhat sustainable and perhaps driving a sort of new lower end of the expense spend, and just perhaps elaborate whether these are all actual cash savings?

Allen Chao

Well, the expenses, I assume you are referring to operating expenses Elliot.

Elliot Wilbur - CIBC World Markets

Correct, the reduction in R&D and SG&A guidance as the percentage of sales by roughly 50 to 100 basis points for the year?

Allen Chao

We don't see any significant reduction in R&D expense. It fluctuates sometime at the timing of the clinical studies. Sales and marketing expenses also depends on the programs we've and can go up and down. So, it's not any reduction. Yes, we've general combination of Andrx, as a part of the acquisition percentages because the combined Andrx and the Watson.

And so, we did see some R&D synergies put the Andrx budgets R&D and Watson's budget R&D that was discussed in the last year. During the acquisition phase as well as closing the deal that we've synergies in R&D. And total SG&A and R&D operating synergies were approximately $30 million that continued to be the case. But we could not have anything specific in looking at quarter-to-quarter savings on the operating expenses side.

Elliot Wilbur - CIBC World Markets

Okay. And then just a question, with respect to couple of items in the Generic segment performance as well. First of all for Tom, I was not successful in trying to back out what the contribution of Pravachol and Oxy could have been in 2Q '07 based on the percentages that you threw out. So, I'm just wondering if you could provide those numbers top line as well as the gross profit contribution, if you have them in front of you?

Tom Russillo

We've previously disclosed that OxyContin was no longer marketed by us as of February of 2007. So, there was no second quarter OxyContin and Pravastatin was very small.

Elliot Wilbur - CIBC World Markets

Okay, fair enough. And then with respect to the change in guidance of the modest reduction in generic segment guidance seems to be just primarily related to timing on couple of products, but seems like you've got more visibility recent terms of monetization of Toprol XL. So I'm just sort of wondering, Allen if the kind of leave the door open in the possibility that, you could back and raise those number. So I'm wondering if that product in now itself is sufficient to perhaps make up for where looks to be roughly a $100 million reduction in potential product sales for the generic business?

Tom Russillo

The key as you mentioned Elliot it is timing on the introduction of the new products and as the quarter unfolds if they are significantly difference in plan, we will adjust.

Elliot Wilbur - CIBC World Markets

All right. Thank you.

Operator

Your next question comes from the line of Rich Silver with Lehman Brothers.

Rich Silver - Lehman Brothers

Good morning.

Allen Chao

Good morning, Rich.

Good morning, Allen. Congratulation, I won't take much of the call. So just congratulations to you, just back on Elliot's question regarding operating expenses so it's clear in you press release did you say that, you are looking at 16.5% of revenue from SG&A and 6% for R&D those are numbers that are lower than the guidance that you provided before. So, can you just again clarify that because, if previously it was 16.5% to 17.5% and 6% to 6.5% for R&D?

Allen Chao

That was the range we provided for the year, but tell probably by quarter after quarter about 6%. And this year, so that's the range we will be providing for SG&A has been 16.5% to 17% range and we are about in that range. So it's not adjust the throughout the year we tightening the numbers as we see it experiencing as we go.

Rich Silver - Lehman Brothers

Okay. And then just on generic Duragesic and Flonase, may be I didn't hear this Allen, in the prepared remarks are those still included and probability weighted in your guidance?

Allen Chao

Current guidance we have modest numbers on the one of them, set a patch or Fortical Nasal Spray because timing is still uncertain at this point in time, we have not received approvals either one of them. And then obviously once get approval the competition would determine how much the market share prices going to be and we will address at that time. That's one of the reason we choose not to touch the upper end the regiment though we are bring total of the range, but still within $30 and we will valued as and go sound and all successfully get approval and launch those products.

Rich Silver - Lehman Brothers

In what quarter are you assuming one of those?

Allen Chao

We continue to assume the third quarter of this quarter.

Rich Silver - Lehman Brothers

Okay. Okay, I will jump in the queue. Thanks very much and again congratulations, Allen.

Allen Chao

Thank you.

Operator

Question comes from the line of Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs

Hi, Allen thanks for the question. Let me add my congratulations. I just have two questions first when Paul comes on board whether will be any form of strategic review or should we assume that the current asset base is that the future direction of the company. And I have one follow up.

Allen Chao

We believe would be this current step up, current plan will be continuing and Paul obviously would take his time to evaluate, to review, to understand, what we have and then making some modification changes appropriate when he joins the company.

Randall Stanicky - Goldman Sachs

Okay. Fair enough. And then just a question on the other revenue in the Generic segment I think you mentioned $90 million I think previously have been $85 to $95 I believe that's largely Wellbutrin with an expectation of Toprol is that the right way to think about it?

Allen Chao

That's correct.

Randall Stanicky - Goldman Sachs

And then so just the ramp that we're expecting in the second half understanding we're probably not seeing a lot of growth and I think it's largely an expectation of contribution from Toprol XL?

Allen Chao

That's what we expect that's going to be Toprol XL generic 50-milligram, when Sandoz launches the product.

Randall Stanicky - Goldman Sachs

Okay. That's helpful. Thank you very much.

Allen Chao

Thank you.

Operator

Your next question comes from the line of Tim Chiang with FTN Midwest Securities.

Tim Chiang - FTN Midwest Securities

Hi, thanks. Allen I wanted to ask you, it seems like your generic revenues you are adjusting your numbers down for the year and yet your gross margins this quarter were actually better than expected. I just sort of wondered to get your thoughts on, is this a sustainable trend you think or do you think the gross margins are going to fall back down to your original guidance for the year around 38%?

Todd Joyce

We are expecting our gross margins Tim to end the year averaging between 38% and 39%.

Tim Chiang - FTN Midwest Securities

Okay, great. And just one additional question Allen I guess, I wanted to ask you, why did you, I mean, I guess what was your thought process in deciding to retire this year?

Allen Chao

As I just indicated Tim and I'm 61 year's old going to 62, and we have all the plan setup today and during the last few years and the plan in place and each four, five years historically within Watson since going public, we have to do some activities. This is first year of just another cycle, you might believe. And then we need time for the new leaders to take the ring and digest and then move around to new territories, new fronts, and new heights for the company, and it takes time. And now we would like to have someone, who would help now to do it and with me he is continue to be healthy, if you are able to helping him and go along.

Tim Chiang - FTN Midwest Securities

Okay great. Congrats Allen.

Allen Chao

Thank you.

Operator

Your next question comes from the line of Greg Gilbert with Merrill Lynch.

Greg Gilbert - Merrill Lynch

Thanks, good morning. First on the brand side, you mentioned inventories are normalized can you tell us what that means in terms of weeks and also where we entered the quarter versus where we ended the quarter?

Tom Russillo

Yes Greg, we ended the first quarter at less than four weeks of inventory on all of our major products and we ended the second quarter of less than four weeks. So, essentially for I would say from February on four major promoted products in the Watson line are somewhere slightly below four weeks in inventory.

Greg Gilbert - Merrill Lynch

Great. And then on the generic side would you mind estimated what percentage of your royalty sales come form generic seasonale so that we can access possible outcomes on a possible settlement or something that could result from the patent re-issuance from Barr?

Allen Chao

The seasonale sales was up and I mean, we will report a major to total that seasonale sales was not significant part of this and obviously don't we don't want to comment on anything about the settlement issues.

Greg Gilbert - Merrill Lynch

Okay. And lastly Allen is the CFO search ongoing or will that be handled by your successor?

Allen Chao

One of the first priorities for Paul would be selecting CFO; that's one of the reason we've not being including Paul first, and then being put that on hold for a little while until this time and then obviously, Paul would be actively looking at that as soon as he get started.

Greg Gilbert - Merrill Lynch

Okay and one last quick one. What are the guiding factors in monetizing Prilosec 40 at this point it is just OAI or other things?

Allen Chao

We have to go through OAI first, obviously we don't know when this going to be. And Greg, this is not in our, this year's plan.

Greg Gilbert - Merrill Lynch

Thanks very much and all the best to you, Allen.

Allen Chao

Thank you.

Operator

Your next question comes from the line of Ricky Goldwasser with UBS.

Ricky Goldwasser - UBS

Good morning, a few follow-up questions. First of all just a matter of clarification I think you said earlier that guidance includes a modest contribution from either as long as your Duragesic in 3Q '07 on the other hand you are saying that you're not raising guidance I guess is the modest contribution being somewhat offset by the better results i.e. if you don't get Flonase or Duragesic will you be able to be maintain guidance at 125 to 130?

Allen Chao

We believe will be within a range of 125 to 130 or we have a better outcome, better view on the new products and obviously we are just doing accordingly.

Ricky Goldwasser - UBS

Okay. So again just in terms of clarification if you will get these products approved and you will be able to adjust guidance upward?

Allen Chao

Ask again, I am sorry.

Ricky Goldwasser - UBS

I guess the question is, if you will get approval on either of these products then you would feel comfortable raising the upper end of the range?

Allen Chao

We will evaluate at that time, it depends on timing and competition.

Ricky Goldwasser - UBS

Okay. And then as far as Toprol 50 does your payments from Sandoz depend on they are exclusive to the market or really you'll be paid even when there is going to be another player entering the market?

Tom Russillo

We haven't disclosed the terms of that deal and I won't be able to do this morning either.

Ricky Goldwasser - UBS

Okay. And then lastly, on pricing environment I think you assume in your budgeting a 10% price erosion, how you've been trending so far in the quarter I know that last quarter you said you were I think, three quarters of what's you've expected?

Tom Russillo

In the second quarter it was little higher than the first, but all in all we are still on target.

Ricky Goldwasser - UBS

So higher than the first would mean lower price erosion or higher price erosion?

Tom Russillo

Higher price erosion.

Ricky Goldwasser - UBS

Okay. And is higher than 10% or within that range?

Tom Russillo

No. The total for the year is still targeted for 10%.

Ricky Goldwasser - UBS

Okay. Thank you.

Allen Chao

Thank you.

Operator

You next question comes from the line of Ken Cacciatore with Cowen.

Ken Cacciatore - Cowen

Hi, thanks for the question. Allen, I guess I don't know this is the right way of looking at it, but you get to a point where you can either decide to succession plan, which you've done or you can look at the business as a major shareholder and decide it, maybe time to sell the businesses. One, is that kind of an incorrect way of your decisions that you made, can you just walk us through kind of that thought process and then I have another follow-up question.

Allen Chao

I believe we have done many things to increase value for the company and this is a lot more value to begin and by having a younger, more aggressive and experienced person to work with me in during transition and then work with the rest of the management team, lead them to new grounds. And that's the better way to look at it as a shareholder, a long-term shareholder and that the decision as we was set.

Ken Cacciatore - Cowen

We should look at this is that Watson should be a standalone company for quite a few many years, is that part of how we should read this succession plan?

Allen Chao

As many years we want and the environment will allow us and obviously clearly see that we have a path for growth with Paul coming in to take the leadership.

Ken Cacciatore - Cowen

Okay. And then operationally just wondering if you are a shareholder how would you view or how would you model out the potential for generic, is that, should we would be conservative of the thing that in sometime in 2008, we should think that one is coming or if do you think that this product you could have indefinitely?

Allen Chao

Well I can't say anything indefinitely, okay. But at least short-term we continue to see that there is no generic coming, but that's our view. And sometime you guys out there probably hear more information however; we haven't heard and seen where the citizen's petition just sent me. FDA would strongly believe that the product itself, present itself a harder challenge for the generic to make it while equivalent and that's our view, that's been our view for many years. And the amortization, significant amortization cost in our financials caused by the acceleration of Ferrlecit that we will be aiming by December quarter this year. So, the plan we had and continue to execute it. I don't see any changes it's growing time.

Ken Cacciatore - Cowen

Great. Congratulations Allen.

Allen Chao

Thank you.

Operator

Your next question comes from the line of [Danny Kuo] with Bear Stearns.

Danny Kuo - Bear Stearns

Good morning. And thanks for taking the question. Allen, as a shareholder in the industry, I guess, you are now the very large shareholders in the only the US generic company have not yet stepped just internationally and still have some of, I guess, lower API manufacturing. Can I think in five years down the road, do you think that company like Watson will need to develop those two capabilities?

Allen Chao

Firstly, internationally, we use international as a base for our supply chain, and R&D base and we are not looking to nationalize the marketing place obviously we will be looking at it selectively, but not a major move towards European or any part of the world at this point in time. And I'll leave Paul to as experienced veteran at Sydney International operation, and to take a lead on that particular effort. And as far as API, we've started our API operations in India and we are not intending to be fully integrated, vertically integrated with API. We're selectively looking at API. We will continue working with many, many capable partners API, which I believe some of them many of them can be more cost effective than try to do everything ourselves.

Danny Kuo - Bear Stearns

And second question just looking down in '08 the Generic trial, Teva have launched only at risk. I guess you guys have some window in 2008 where we might be able to enter the market as well. I know, you are not giving guidance in '08, but how should we think about literal at this point?

Allen Chao

I don't know, what to think about at this point because we haven't looking at 2008 specific plans yet. And Teva probably the company knows most and best about their products and we will rely on their judgment at this point in time

Danny Kuo - Bear Stearns

Thank you.

Allen Chao

Thank you.

Operator

Your next question comes from the line of Corey Davis with Natexis.

Corey Davis - Natexis

Thanks very much. I guess, I just ask one quick question at a broad level now you had sometime to digest the Andrx acquisition. How is it met or not met your initial expectations in terms of both financial and strategic synergies?

Allen Chao

First of all, we believe Andrx is like great asset to be add to Watson, and near term or longer-term, near term the synergies are really in place. And as we've indicated the synergy of $30 million I believe, we're very well on the way, and Andrx provide other products other assets for example Toprol XL 150 revenue we got from the GSK came from Andrx asset. And the ability to launch the Toprol XL 300 also came from Andrx and plus many other assets and once we get through OAI, which is expect to be taking many month and sometime next few months hopefully then we have other aligned that product great opportunity for company to moving forward beyond 2007.

Corey Davis - Natexis

I understand you said earlier. But is there any update on the OAI?

Allen Chao

No, there is no update at this point. We can not predict when FDA will be coming, walking in facility, they can do anytime, any day. We haven't no expectation, that to be a little forecast when they coming.

Corey Davis - Natexis

Okay, great. Thanks Allen.

Allen Chao

Thank you.

Operator

And you have a follow-up question from Rich Silver with Lehman Brothers. Rich, are you there?

Rich Silver - Lehman Brothers

Sorry. Yeah, just look like the OCs were strong in the quarter, can you provide any detail on why that might have been the case?

Tom Russillo

Rich, this is Tom. If there was some increase in a customer base, but it's mostly due to the normal fluctuations on a quarter-to-quarter basis.

Rich Silver - Lehman Brothers

Thank you.

Operator

Your next question comes from Greg Gilbert with Merrill Lynch.

Greg Gilbert - Merrill Lynch

A couple of quick follow up. Tom, have any marketing activities gotten underway for Lovenox, what so ever?

Tom Russillo

No. We continue to wait for our partners at Amphastar would come through with that product.

Greg Gilbert - Merrill Lynch

Okay. Is there anything you can say Allen about the royalty rate on the ACTOS, Fortamet product that I guess would get launched once OAI is resolved by your partner?

Allen Chao

I mean ACTOS plus Metformin?

Greg Gilbert - Merrill Lynch

Yes.

Allen Chao

No, we won't be able to, its agreement with together prevents us to disclose in the financial terms.

Greg Gilbert - Merrill Lynch

Would you say that it's a material driver potentially?

Allen Chao

Longer term potentially, yes.

Greg Gilbert - Merrill Lynch

Okay. And lastly any financial terms on the sterile facility you can provide?

Allen Chao

There is no facility we sold for [Technical Difficulty].

Greg Gilbert - Merrill Lynch

I'm sorry didn't hear that.

Allen Chao

Oh, purchase prices can not disclosed and I understand agreement in front of view.

Greg Gilbert - Merrill Lynch

Okay, thank you

Operator

(Operator Instructions). And you have a follow up question from Tim Chiang with FTN Midwest Securities.

Tim Chiang - FTN Midwest Securities

Thanks. Really quickly I know you did have highlighted one new product launch the Wellbutrin XL 300 mg, How is that done for you so for, I know its pretty early in the launch what your expectations for this product and where to have as almost 90% share this market and I think Amgen is also coming in if I'm not mistaken?

Tom Russillo

You are correct Amgen and ourselves entered the market. We launched in middle of June, it's gone directly as expected and we are optimistic about the future.

Tim Chiang - FTN Midwest Securities

Is there any color you can give us in terms of where your pricing that product at or what your expectations for price erosion is on that product with just three competitors?

Tom Russillo

Yeah, there is no way to predict that now. It changes on a daily basis.

Tim Chiang - FTN Midwest Securities

Okay, great. Thanks

Allen Chao

Thank you

Operator

And there are no further questions at this time.

Patty Eisenhaur

Great. Well thank you everyone for participating in the call and we will look forward to speaking with you soon. Thank you.

Operator

Ladies and gentlemen this does concludes today's Watson Pharmaceutical second quarter 2007 earnings conference call. You may now disconnect.

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