Watson Pharmaceuticals' CEO Discusses Q1 2012 Results - Earnings Call Transcript

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 |  About: Allergan plc (AGN)
by: SA Transcripts

Watson Pharmaceuticals (WPI) Q1 2012 Earnings Call April 30, 2012 8:30 AM ET

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

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

George Frederick Wilkinson - Executive Vice President of Global Brands

Sigurdur Oli Olafsson - Executive Vice President of Global Generics

Analysts

Michael Faerm - Crédit Suisse AG, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Timothy Chiang - CRT Capital Group LLC, Research Division

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

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

David G. Buck - The Buckingham Research Group Incorporated

Jami Rubin - Goldman Sachs Group Inc., Research Division

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

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

David Risinger - Morgan Stanley, Research Division

David Amsellem - Piper Jaffray Companies, Research Division

Marc Goodman - UBS Investment Bank, Research Division

Elliot Wilbur - Needham & Company, LLC, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

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 First Quarter 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 First Quarter 2012 Earnings Conference Call. Earlier this morning, Watson issued a press release reporting its earnings for the first quarter ended March 31, 2012. The press release is available on our website at www.watson.com. Additionally, we are conducting a live webcast of this call, which will also be available on our website after the call's conclusion.

With us on today's call are Paul Bisaro, our President and CEO, who will provide an overview of our first quarter results; Todd Joyce, our Global Chief Financial Officer, will then provide additional details on the performance of our business segments, as well as our consolidated financial results for the quarter. Paul will conclude our presentation with an 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, President of Global Generics; Fred Wilkinson, President of Global Brands and Biosimilars; Bob Stewart, President of Global Operations; Al Paonessa, Executive Vice President and Chief Operating Officer of our Anda Distribution Division; and David Buchen, our Global Chief Legal Officer.

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

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

Watson disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. Actual results may differ materially from current expectations and projections, depending on a number of factors affecting the Watson business. Factors are detailed in our periodic public filings with the Securities and Exchange Commission, including but not limited to, Watson's Form 10-K for the period ended December 31, 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 this morning. Watson is off to a great start in the first quarter of 2012. Net revenues increased 74% to $1.5 billion. Non-GAAP earnings per diluted share were up 84% to $1.64 per share. Adjusted EBITDA increased 70% to $367 million in the quarter. If you exclude the $0.52 contribution from the sales of generic LIPITOR this quarter, non-GAAP earnings per share were up 26% from last year. We also had a very busy quarter in terms of strategic global expansion of our company. We are aggressively integrating the Ascent business acquired in late January, which made us the fifth largest generic company in Australia and the leader in Southeast Asia. The integration is progressing very well and many financial and IT-related items have already been completed. Last Wednesday, we announced the further expansion of our Global Generics business with the agreement to acquire Actavis. When completed, this acquisition will transform Watson. We will more than double our reach outside the U.S. and we will have access to new markets with exciting growth trajectories. In addition, the acquisition will expand our range of product offerings in all markets into semi solids, liquids and injectables. We are pleased to have been able to capitalize on this opportunity and look forward to working with Actavis leadership to complete this transaction and then move rapidly to execute the integration of the combined company.

Among other highlights in our generic -- our Global Generics business, we saw continued strong U.S. sales of generic Concerta, and we launched 3 new products in the first quarter, including generic versions of LOVENOX, YAZ and Prometrium and in the second quarter, launched generic VANCOCIN.

All of our key international markets experienced growth in the quarter, including U.K., France, Greece and Australia. We continued to expand our pipeline globally with 6 new patent challenges in the U.S. and 28 new product submissions globally. In our Global Brands business, we had strong sales of key promoted products including RAPAFLO, Generess Fe, Gelnique and CRINONE. We also launched last week Gelnique 3% pump. The new product is available in a convenient metered-dose pump that is shown to be effective and safe, and a safe treatment for OAB. We initiated a Phase III U.S. trial of Esmya for the treatment of anemia associated with uterine fibroids. The trial is expected to be completed by early 2013, and we also plan to submit the NDS for the product in Canada by mid-2012.

We continue to make great progress on our global development program for our rFSH product and have created a development timeline for the products related to our collaboration with Amgen. We now have strong revenue growth during the quarter for our Anda Distribution business. Additionally, Anda's relocation of our Ohio distribution facility to Mississippi is in the final inspection stage. We expect to begin shipping from this location this quarter. The expansion into Mississippi allows us to provide our customers enhanced ability to move products rapidly to pharmacy shelves around the country.

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

R. Todd Joyce

Thanks, Paul, and good morning, everyone. I will now review our results on a consolidated and divisional basis. Watson's net revenues for the first quarter were $1,524,000,000, an increase of 74% over the prior year, reflecting strong growth in all 3 divisions. In our Global Generics division, their revenues were $1,116,000,000, up 86% year-over-year, which include sales in new products including generic versions of CONCERTA and LIPITOR and the generic version of LOVENOX, which was launched in January. The addition of Specifar and Ascent also contributed to the year-over-year revenue growth. Sales of extended-release products were $350 million, up 91% as a result of the addition of generic CONCERTA, partially offset by lower sales of metoprolol and Potassium XR due to competition. Sales of oral contraceptives were $97.3 million, up 4% compared to the prior year as sales in new products more than offset declines in our base oral contraceptive franchise. New products in the current year include the generic versions of YAZ and LoSeasonique launched in the first quarter and sales of the generic version of Seasonique launched in the fourth quarter of last year. x U.S. net revenues were $171.7 million, up 58% from the first quarter of 2011. International net revenues increased as a result of the acquisition of Specifar last year and Ascent in January.

Global Generics adjusted gross margin was 45.1%, down 6.7 percentage points year-over-year, primarily due to lower margins on sales of the authorized generic versions of CONCERTA and LIPITOR.

Moving to our Global Brands division. Net revenues were $110 million, up 13% on higher sales of promoted products, including RAPAFLO and the addition of new products, including Generess Fe. Global Brands gross margin was 76.5%, down 5.1 percentage points due to a favorable product mix in the prior-year period. Finally, net revenues from our Anda Distribution division were $299 million, up 66% on higher new product sales and revenue from logistic services provided to certain chain customers. Anda's gross margin for the quarter was 11.5%, down 5.7 percentage points year-over-year on lower margins from logistics services.

Turning now to operating expenses. Consolidated GAAP R&D for the first quarter was $88.5 million, up 90% year-over-year. Our GAAP results for the current year period include $11.8 million in development milestones related to our U.S. Phase III study initiation on Esmya and our recombinant FSH program and costs related to our global supply chain initiative, including the closing of our R&D facility in Corona. SG&A for the first quarter was $283 million. SG&A for the current year period includes a $59.8 million charge related to certain litigation matters, as well as $14.6 million in acquisition costs related to the acquisition of Ascent and the pending acquisition of Actavis. Excluding these items, SG&A on a non-GAAP basis increased 27%, primarily as a result of higher international expenses related to Specifar and Ascent, higher Global Brand sales and marketing expenses in the U.S. and Canada and higher corporate G&A expenses, primarily as a result of higher legal costs. Amortization expense for the first quarter was $131.9 million, up from $56.6 million in the prior year period due to amortization of our Atorvastatin product rights and amortization of intangibles related to our Specifar and Ascent acquisitions.

On a non-GAAP basis, our income tax rate for the quarter was 35.5%, down from 36.1% in the prior-year period. Our income tax rate on a GAAP basis was 43.6%. On a non-GAAP basis, which excludes amortization and impairment charge and other charges detailed in Table 4 of our press release, earnings for the first quarter were $1.64 per share, up 84% year-over-year. Non-GAAP earnings for the first quarter includes $0.52 per share contribution from generic LIPITOR. GAAP earnings for the first quarter were $0.43 per share. Our adjusted EBITDA for the first quarter was $367 million, a 70% increase. Cash flow from operations for the first quarter was $100 million, and cash and marketable securities were $182 million at year end.

At quarter end, our revolving credit facility balance was $315 million. Our existing capital structure will provide us the ability to finance the acquisition of Actavis at favorable rates, and future cash flow from the combined business will provide us the cash flow to delever quickly as Watson has done with acquisitions in the past.

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. I'll now provide an update on Watson's forecast for 2012. As a reminder, we have not included any potential sales for generic Lidoderm. Our forecast includes certain assumptions for increased competition on our oral contraceptive and extended-release products with the exception of CONCERTA. We still do not anticipate competition on CONCERTA in 2012. Eight certain launches included in the forecast are generic versions of Actos and Xopenex, as well as other undisclosed launches. Due to the recent district court decision in favor of Bayer on generic YAZ, we have now removed any contribution from generic YAZ for the remainder of our full year forecast.

Watson's non-GAAP forecast for 2012 excludes any pre-acquisition costs or post-acquisition earnings from Actavis. We expect to complete the acquisition of Actavis in the fourth quarter of 2012. Our updated forecast is as follows. Our estimate for full year net revenue increased to $5.5 billion. We continue to expect our Global Generics revenue to be between $3.9 billion and $4.1 billion. We continue to expect Global Brands net revenue to be between $500 million and $525 million. And in Anda Distribution business, we have increased revenue projections to $950 million to $1 billion. We expect adjusted EBITDA of $1,310,000,000 to $1,375,000,000. Based on our strong first quarter, we have pulled up the bottom end of our range of our forecast. We now expect non-GAAP earnings per diluted share in the range of $5.55 and $5.80 per share.

I believe that 2012 will be another historic year for Watson. Within Global Generics, the proposed acquisition of Actavis is consistent with our strategy to grow this business globally. For Global Brands, we continue to pursue development of new products, including biosimilars. And in Anda, we are taking steps to expand in the area of specialty distribution for future growth. I would like to thank our employees around the world for their hard work and dedication in helping us achieve a very successful first quarter of 2012. And I look forward to continued growth in 2012 and beyond. With that, we'll now take questions.

Patricia L. Eisenhaur

Thanks, Paul. Therese, we can open up the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Faerm with Credit Suisse.

Michael Faerm - Crédit Suisse AG, Research Division

Two revenue questions. One on the distribution revenues, could you elaborate a little bit more on the sources of the strength there, you mentioned logistic services? And also any color you could give on the outlook for that going forward, to what extent that strength is durable? And secondly, on the branded revenues, the -- sequentially, they were down a bit, if you can give any color on perhaps sources as to why that might have been down.

Paul M. Bisaro

Okay. Al, you want to take the first one?

Albert Paonessa

Sure. On our distribution revenues, we are doing a lot more with the chains and working with manufacturers. Part of the other business that continues to grow is our new product launches. We've expanded that and our capabilities, which will also get enhanced in our move to Mississippi, the Memphis areas. So we do consider this to continue to grow, but they are a quarter-by-quarter opportunities that come to us. So, so far, about 3 quarters in a row, it's been steadily growing. We do assume it will continue the rest of the year.

George Frederick Wilkinson

It's Fred. And on the brand revenues, I think the guide was a simple issue of product mix, the 2 products that we're in the process of preparing for launch. One was the ANDRODERM 2/4 replacing the 2.5, so you had some inventory adjustments that were going on within the trade environment as they pull the 2.5 out and the 2/4 in. Second is that they prepared for the pump. Same thing was going on with -- so Gelnique 2% and Gelnique regular pump. So there was nothing else that was really moving around the brand business.

Operator

And your next question comes from Randall Stanicky with Canaccord Genuity.

Randall Stanicky - Canaccord Genuity, Research Division

Paul, just -- and maybe I missed it, but did you talk about the growth target for 2013? I know you've talked about 10%. And can you just remind us what's in there? I think you have generic competition for CONCERTA, but no Adderall and then I have a follow-up.

Paul M. Bisaro

Sure. We did speak about our growth targets on the year-over-year basis. We've consistently said on a Watson standalone basis, we would anticipate double-digit. Our target was to achieve double-digit growth between 2012 and 2013. We stand behind that double-digit growth rate. And you're right, there was -- I believe we had said that we didn't anticipate any -- as we do our modeling, you know how we handle products that have questions around them like patent challenges or citizens petitions and the like. As we get clarity, we tend to put them in. I think we said in 2013, it did include a contribution from Lidoderm, and I don't believe we included a contribution from Adderall XR in that 2013 number. But again, those 2 things balance each other. If things move around, we have the opportunity to -- if Adderall XR accelerates, that would be good. If Lidoderm accelerates, that would be good for '12. So it's a moving target for sure.

Randall Stanicky - Canaccord Genuity, Research Division

And then -- that's helpful. And then as you think about spending trends for this year, and obviously Actavis is going to have some level of influence at some point, but how do we think about your R&D and SG&A outlook? Are there any moving parts to those components over the next several quarters?

Paul M. Bisaro

Well, I'll start and then I'll have Todd jump in with me from a macro perspective. We will continue to operate as a standalone company. We'll continue to file our -- and move forward with our R&D program as anticipated, so we don't expect any changes from that perspective. SG&A, I think, the same issue, we'll continue to move forward with our sales force projections that we have in place. We'll continue to drive our brand revenue through the sales force -- sales team we have, plus the launches up in Canada, where we've launched 4 products so far and we've got a team on the ground there. So no anticipated change on a macro level. Todd, did you...

R. Todd Joyce

Sure. On a non-GAAP basis, our estimates for the year really haven't changed. On a GAAP basis, we have had -- we did take a litigation charge in the first quarter. We also had the integration cost associated with Ascent and Actavis. And we will have additional charges throughout the year for pre-integration work with the Actavis acquisition.

Operator

Your next question comes from Tim Chiang with CRT Capital.

Timothy Chiang - CRT Capital Group LLC, Research Division

So Paul, could you just comment a little bit about generic LOVENOX? How's that product doing for you?

Paul M. Bisaro

Well, I'm going to turn that over to Siggi to let him answer.

Sigurdur Oli Olafsson

Tim, it's Siggi. I think it's going all right. We're getting much better supply now. We were building up supply in the beginning. I think where the issue is, just to remind you, we only have the retail part of the business versus the non-retail. There were challenges in the beginning to only sell to the retail because many of our customers supply both retail and non-retail, including the hospitals. I think we have sorted those technical issues out pretty well, and we have steadily getting more market share. I think the prices have gone a little bit lower than we expected. We clearly see that both Sandoz and Sanofi have reacted to the market. But overall, we are quite pleased with where we are with the LOVENOX product.

Timothy Chiang - CRT Capital Group LLC, Research Division

Okay, great. And I just have one follow-up. Maybe Fred, you could address this. It's just -- what's the future pathway for CRINONE and PROCHIEVE, I mean, since the FDA decision? I mean, are you guys still going to pursue PROCHIEVE for preterm labor?

George Frederick Wilkinson

Yes. We've had some -- we're in active discussions with the agency. We've already had a couple of discussions with them and have a few more coming up. There is a pathway. We're probably not going to comment until we really kind of see the light to the eyes as to how do they are going to proceed. And I think, as Paul has described, we will give you a good update when we see there's a positive discussion. But yes, we are pursuing.

Operator

Your next question comes from Corey Davis with Jefferies.

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

First question would be, has there been any change to your enthusiasm even more enthusiastic or even more negative about your ability to get a generic Lidoderm approved prior to the 31-stay expiration in July?

Paul M. Bisaro

Well, Corey, I think our enthusiasm is still where it was before. We have spent all the money we needed to spend to increase our capacity in Salt Lake City. The capacity is complete. We've got all the raw material we need to launch the product. We've got validation completed. And we're working with the agency in the final stages of getting what we hope will be a tentative approval, and then onto a final approval. So we're moving everything we can to go forward. Obviously, there is still the Citizen Petition overhang, which sits out there and of course, we're waiting for a trial decision. But we are doing everything we can to be ready to go at the earliest possible time.

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

Okay. And second and -- if I missed it in the press release or in your prepared remarks, but could you break out any of the generic products like CONCERTA, Lipitor, the OCs, extended-release?

Paul M. Bisaro

Well, Corey, I think we've only -- I think we gave some numbers around the OCs and the general category of extended-release. Todd, do you have this one?

R. Todd Joyce

Yes, I do. The OCs were $97 million for the quarter. Extended-release was $350 million for the quarter.

Paul M. Bisaro

Yes, and I guess the other product we gave specific numbers for was LIPITOR, which was $0.52 contribution for the quarter.

Operator

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

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

So first for Paul on 2013, can you walk us through the 2013 versus '12 growth drivers that we should know about? I know that you know more than we do on what could come in thankfully. But other than we know you have some Lidoderm, clearly have a full year of Xopenex, can you walk through a couple of the pieces that the market should know about, so that we know how much is sort of the trust Watson factor on '13 growth versus '12? And then I have a follow-up for Al.

Paul M. Bisaro

I kind of like the trust Watson factor. First, the -- one of the growth, I mean, all of those things that you mentioned that are included in the growth trajectory, we do anticipate additional new extended-release products being launched, but we also expect greater contribution from our international franchises as we integrate -- fully integrate the Ascent and continue to drive new product launches in our key markets around the world. So that's an additional growth driver. We've continued to expect to see growth in our brand franchise with RAPAFLO, Generess Fe and CRINONE even in this current form, continuing to see some growth. We have the new Gelnique pump, of course, and all of these projects will continue that we think to drive the growth rate. We have 130 ANDAs pending, so we do expect to launch a fair number of products in 2013. So all those things combined give us comfort that we can hit this double-digit growth rate, plus we have a number of patent challenges that are sitting out there that some, as I said, Lidoderm is included, but others are not. So the general way we've always forecasted and modeled is the way you should think about it, and we have a number of shots on goal that can achieve that growth rate.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

If you kept your model exactly as is and removed Lidoderm, could you still grow in the year? Or would you still grow...

Paul M. Bisaro

I think it -- well, I'm not sure with -- yes, but I don't believe it will be double-digit.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Right, I get that. Okay, and then the second question is for Al. What's the right margin structure to use for Anda in the future given some of the tweaks to your business model and removal of some these, what sound to be one-timers? And can you also comment on any opportunities presented by the Actavis transaction? It seems to me that there could be some low-hanging fruit on the revenue front.

Albert Paonessa

All right, Greg, thanks for the second question. I usually don't get this many questions, but caught off-guard to get the first one. But Greg, first off on the Actavis piece, there will be some limited upside overall and kind of well-diversified amongst the vendors outside of Watson. We did look at the overall product line that Actavis has, and we've never been in a situation where we try to move products directly through Watson, and it will be the same situation for Actavis. So we'll look at those on a one-by-one basis after the integration, and it will be business as usual until then. As for our overall margin, one thing I hope to get out when Michael asked the question, the first question, that I didn't mention is that overall margin on the base business that we have has been consistent year-over-year and quarter-after-quarter. And the business has also grown nicely those 3 quarters also. Now as to the overall margin, as you mentioned, these are -- we do have more new product launches that will happen this year, a huge year for product launches. We've worked some agreements with some of our partners that we will be doing more product launches than we had anticipated going into this year. And those have already shown up in the first quarter. They will continue in the next 3 quarters, but -- and they are low-margin, there's no question. But over the next 3 quarters, they'll continue. But even though there's $38 billion that's supposed to come off patent this year, there's a lot of these are me too’s [ph] . So we will be doing a lot of launches that not as high dollars for the rest of the year. As for these one-offs that we're doing quarter-by-quarter, those are opportunities that continue to come to us. They will be low margin. I really can't put a number on that. So the overall margin -- we know we were quite low in the 11% range this time. I believe it will go up slightly, but I don't believe it will be back to the 17% range – the 15% to 17%, over the next couple of quarters.

Operator

Your next question comes from Chris Schott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co, Research Division

First question, just coming back to Lidoderm. I know, obviously, you remain very confident in approval here. Does the recent Actavis acquisition change your priorities in terms of the terms that you would -- potentially what you’d get out of a settlement if you chose to go down that route? Or is this really viewed as a really independent discussion on that product or decision on that product?

Paul M. Bisaro

Yes, Chris, that's a good question. I think people are -- have thought about that, but we think of it as a standalone opportunity, much like we pursue all of our opportunities. There are -- we will evaluate any offers and discussions and possible settlements based on the risks that we perceive to getting the product launched. So it really is a standalone decision. It is not related to our moving forward with the Actavis group. So hope that covers it for you.

Christopher Schott - JP Morgan Chase & Co, Research Division

Okay, great. And then just a second question while we're -- I appreciate the comments on Anda. But in light of this -- again, this transaction contemplating here, I mean, is there any thoughts on monetizing Anda at some point down the line? I know in the past you've talked about this is a core asset, but does -- again, does that thinking change at all with this transaction?

Paul M. Bisaro

No, Chris, it really doesn't. I think Anda is an integral part of the Watson group, and it is, it is becoming more important to us, particularly as we look for -- as the world develops and specialty distribution develops as we look at Biologics, as we look at additional brand products, as we look at indirect-to-physician distribution, all of these things, I think, will make Anda a continuing high-value asset for Watson. So we do not have any plans to divest that asset.

Christopher Schott - JP Morgan Chase & Co, Research Division

Okay, great, thanks and if I could slip in one final question here, generic LIPITOR, obviously, getting the post-exclusivity period becoming a very near-term event, any updated thoughts in terms of how you see the dynamics of that market shaping up kind of post-exclusivity?

Sigurdur Oli Olafsson

Yes, it's Siggi here, Chris. It's going to be a tough market. We have said before, we expect around at least 4 to 6 players in the market. Our estimation is that the price will probably be lower than 4% of brand rack [ph] price, so it's going to be tough on day 181 for sure.

Operator

Your next question comes from David Buck with Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

First on generic CONCERTA, can you give us a reminder of what the step-up is going to be in terms of gross margin for 2012 and 2013? And then for Siggi, can you talk a little bit about what you saw in terms of international pricing, Europe and what was the level of sales from acquired businesses year-over-year?

Paul M. Bisaro

David, I'll take the CONCERTA issue. We've said that when a first new launch -- when a new generic launches on CONCERTA, our royalty does increase and we've said substantially, but we've not given the specific numbers. So that's about the best I can do there. It's consistent with our agreement with J&J, but Siggi?

Sigurdur Oli Olafsson

Yes, I think on the international business, we saw basically price erosion in line with our forecast. I think the average price erosion in France was probably between 8% and 10%. That was the worst market. You have to look at the markets individually. U.K. was better this quarter for us. In Australia, I think January was fine, but obviously, 1st of April, there was this PBS reform on the price erosions. We had built that into our forecast when we acquired Ascent, and the price erosion that we saw 1st of April for Australia did not surprise us at all. It's even a little bit better than we have built into our forecast. I think for Greece, there's enormous price pressure increase, but there's also a volume increase at the same time. The Greek government is working very hard to lower the healthcare costs overall, and we are hoping that they are finding that increasing volume is a much better way than pushing down the cost over time. So we feel that overall, there's a price pressure in Greece, probably to around a 10% per year at the moment, but we also see some significant volume increase in the Greek market. In terms of revenue, we don't break out the new market from the international revenue.

Operator

Your next question comes from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

Paul, so if I take the midpoint of your guidance range this year, $5.55 to $5.80, tack on 10% for standalone Watson 2013 and then add another 30% for Actavis synergies, I'm getting about $8.10. Is that the sort of right way to look at that? And then secondarily, if you could talk about what the swing factors are to the high-end of the range this year, it seems that it's mostly in the brand -- in the Global Generics business. If you could talk to some of the specific swing factors, that would be helpful.

Paul M. Bisaro

Sure. I think I'm not going to comment specifically on the question about the number for 2013. I think a number of people have done the math on this. We will provide you with very specific or try to provide you with specific numbers for 2013 and then guidance for 2014 when we close the transaction. We're going to try this to avoid giving specific answers around a dollar figure. Regarding the swing factors, I mean, some of that is the swing factor question. And the clearest, the biggest swing factor, of course, is Lidoderm for 2012. We have Adderall and obviously, Actavis has and Adderall. So we've got -- that's a second swing factor that would affect overall accretion in 2013. And then I think the biggest -- the other, the most biggest swing factor, probably, is growth in our international businesses. If you look at the Watson business, it would be continuing growth in Australia, U.K., France to a lesser extent because it's been such a challenging pricing dynamic there. Canada, we expect to see continued growth from the Actavis side. I think their growth will come from a number of markets, but Central and Eastern Europe and Russia would probably be the single-biggest swing markets for them. And so there's a lot of upside, a lot of upside levers in the combined company, which is why we're so excited about it.

Jami Rubin - Goldman Sachs Group Inc., Research Division

So just Paul, as a quick follow-up, remind me, I don't think your 2013 guidance -- I think your 2013 guidance assumes that there will be another generic CONCERTA on the market early in the year.

Paul M. Bisaro

Yes, it does, Jami.

Operator

Your next question comes from Frank Pinkerton with SunTrust.

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

Just have one on the branded pipeline. Can you please outline for us kind of what you have there in development? I know you made some comments on PROCHIEVE earlier. But outside of PROCHIEVE, what's there and ultimately, how do you see that business? Does some capital need to be deployed there to bring in some additional products? Or do you have enough kind of internal capacity to generate R&D and sustain that business longer-term?

George Frederick Wilkinson

Well, I think the most exciting project right now that's new is the Esmya project, which is a product for reduction in uterine fibroid-related bleeding problems. We started Phase III in first quarter. Paul mentioned in the opening remarks we should be completing that in early 2013, and then filing shortly after. I think the larger change though with Esmya is that we intend to file in Canada in the second quarter of 2012. We'll be able to file it off the European data, which should allow us actually to introduce the product in Canada prior to when we introduce in the U.S. Beyond that, we have a vaginal contraceptive ring that is in the works. We have a progesterone-only patch that has completed Phase III. We're just having a lot of patients coming out over the next quarter and a half, and then we'll be filing. We obviously have a line extension for CRINONE and a series of other things, and that's before we get to the Biologics. So I think there is a significant lineup here that puts us both in Urology and in Women's Health and then beyond that, the Biologics, which we start to participate in very aggressively through both FSH, which we're doing in the Amgen relationship, which we're managing together.

Paul M. Bisaro

Frank, I was just going to talk about capital deployment. I was going to -- consistent with our desire to pay down our debt and delever quickly, available cash -- we do expect to have available capital to deploy and we would look to, as a priority, to look to continue to focus on our brand franchise. I think there's one product that Fred missed that the Actavis Group is bringing to us, and that's the MoxDuo product, which could be an interesting opportunity for 2012, and well mostly for 2013, as it probably will hit its stride in the launch cycle in 2013.

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

And I guess just as a follow-up, thinking about the pipeline, because I know that Actavis brings some things that were like, you mentioned with MoxDuo, but also they have historically had things like some branded pain medications, so other things. Can you talk about what they potentially can also bring over and will that change the way in which we've looked at a long-term kind of contraceptives, Women's Health, Urology portfolio being larger?

Paul M. Bisaro

Yes, I think as we look at our brand franchise, as we continue to focus from a Watson perspective on Urology and Women's Health. However, as Actavis brings, as you mentioned, the -- or as we discussed, the MoxDuo product, it's an opportunity to look beyond those 2 therapeutic categories, and we will do that. Also the Actavis group brings some legacy brand products, some I believe they‘re antibiotic products from Roche that they -- maybe it's not Roche -- Siggi, you remember that. But anyway, some older products that are worldwide rights -- we have worldwide rights too, and those will be nice products to add to our franchises around the world. But this does give us an opportunity to look again maybe at the pain franchise and see if there's an opportunity there to get beyond just one product. Watson was historically very strong in pain product development. You may recall we have Norco and a few other brand products. So a lot of thinking ahead to do, but we're very excited about our brand franchise overall.

George Frederick Wilkinson

The only thing to add to that too is that I think now, we'll have a footprint where the output from the R&D effort will make it so we have viable applications and potentially commercial structure to be able to put some of these products that we're developing on an international basis in the marketplace. We'll be evaluating those one-off as they come along. Before, we didn't have that structure, so we have a license now. Now with the Actavis acquisition, we should have that structure, and should be able to put some of these products into the marketplace more effectively.

Operator

Your next question comes from Gary Nachman with Susquehanna Financial.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Just following on the brands. We saw some margin pressure in that business with a 3% segment margin. Now that the Biologics development will be in there for R&D, what's a reasonable target to think about for margin and brands? Just remind us of the impact from increasing spend on Biologics.

Albert Paonessa

Yes, the spending in biosimilars on the R&D side will impact the margins going forward. I think as you've seen in the past quarter, our margin was down to 13.4%. We, actually, for the full year 2012, we're expecting somewhere around 18%, 19% contribution margin for the brand business. And then as we expand that, as we expand our biosimilar spending going forward, it will be further impacted by that spending, that R&D spending.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just for Siggi, could you talk about the expected contribution from the Ascent deal and how much more will that business benefit from the Actavis portfolio, leveraging a presence both in Australia and Southeast Asia?

Sigurdur Oli Olafsson

Yes, I think the Ascent deal, we haven't broken it up directly what Ascent delivers to the Watson numbers. But I think there's quite a significant synergies both in Australia, but also in Southeast Asia. I think Ascent has a growing business in Australia, mainly focusing -- they are also focusing on the hospital business. We own a company in Australia called Willow. I think there's an opportunity between the 2 companies to have the whole range of the injectable oncology product. In Southeast Asia, that's probably the fastest growing market for Actavis. They have a strong presence in Indonesia with a manufacturing plant and quite a large portfolio, which we would see the opportunity of taking into the market we acquired with the Ascent acquisition. But they also have been building presence in markets like Vietnam, where we have a small presence through agencies, but they have their own up-and-running sales and marketing vehicle. So we feel that this will help us both in Australia, but also in the Southeast Asian markets in terms of portfolio, but also in terms of low-cost manufacturing from the Indonesian side.

Operator

Your next question comes from David Risinger with Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

A couple of things here. I guess, first of all, with respect to LIPITOR, Todd, can you just help us with what we should be expecting for the second quarter? And also is the full year EPS contribution guidance still $0.75? And then the other financial question I had is with respect to tax rate expectations, is anything changing for the year? The first -- the reason why I ask is the first quarter was a little bit below what we were expecting. And then with respect to PROCHIEVE, just wanted to get a little bit more of a framework for thinking about it. So when you're meeting with FDA next, what are the realistic scenarios, both the positive scenario and the negative scenario, just so we understand what's being considered here?

Sigurdur Oli Olafsson

David, let me start on the LIPITOR, and then hand it over to Todd. I think what happens in the second quarter is that all the customers will start to lower their inventory in the anticipation of the further generic competition on day 181. I think that day is around the 28 of May, roughly. So we see already that they are looking to the inventory to have as low inventory as possible at the end of the month to be able to take in the inventory at the lower price by the end of May.

R. Todd Joyce

And we did give guidance of $0.75 for the full year as the contribution from generic LIPITOR. We haven't changed that view of the contribution from that product. It's going to be heavily weighted towards the second quarter. We do expect some very minimal contribution in the second half of the year from generic LIPITOR.

David Risinger - Morgan Stanley, Research Division

Tax rate?

R. Todd Joyce

Oh, and in terms of the tax rate, we're looking at on a non-GAAP basis in the 36%, 37% range for the full year.

George Frederick Wilkinson

So your question on PROCHIEVE is a good one, and unfortunately, we're not going to give you a good answer to that. We've kind of gotten radio silent here because we are in a good active discussion with the agency. We think that's probably better handled behind the scenes with -- between the sponsor and the agency. I think you've seen the downside, which is we got a complete response. I think, obviously, we're working to resolve that issue and try to find a way to the market, and trying get to the marketplace. You have seen, however, some guidance changes that have happened out there, both the maternal, fetal medicine group and ACOG have put out guidance as related to the screening and then the use of progesterone for limited short cervix. So the market's moving a little bit, and now it's really just a matter as to find a way to have a product that will participate.

Operator

Your next question comes from David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

Here are my 2. So with Actavis coming into the fold, does that change in any way your long-term goal regarding getting brand revenue to near or over $1 billion longer-term? And now with the re-exploration of the pain space, are you looking at potentially any other therapeutic areas? And then secondly, can you just remind us what key U.S. generic opportunities that -- other than the obvious ones that you're excited about for 2013, either date certain launches or cases where you think there's a high probability to launch?

Paul M. Bisaro

Sure. On the brand questions, we do still have a target of $1 billion of revenue. We might give further a little bit of a breathing space here, give them another year to get there, but we do anticipate continuing to grow our brand franchise. I think it's critical for a company like us to have a balanced business model, and we need our brand franchise to continue to see growth that had seen. As to re-examining additional spaces, we will take that on, David. It is hard to -- probably the hardest thing to do is finding the right brand opportunities, they’re few and far between. There's a lot of people changing these kinds of opportunities, so we've been working very hard to identify the right kind of candidates in the right areas. But we still are, of course, are interested in oncology products that would overlap with the Women's Health and Urology and any sort of ancillary products that would fit within the hospital business as we now prepare for our biologic franchise to see the light of day, hopefully, as early as 2015, 2016, 2017, in that range. Frankly, it's not that far away now. So we've got a lot of work to do between now and then, but we think we're pretty good about that. As to -- I'll hand it over to Siggi for additional upside...

Sigurdur Oli Olafsson

I think what we haven't discussed in detail the pipeline for 2013, but we have a significant pipeline both in the U.S., but also internationally. We feel that internationally, we will have a good year from esomeprazole. That will be the biggest single product internationally, will be launched this year for sure, but it's growing next year. The portfolio in the U.S. is benefiting from the investment that was increased like 4, 5 years ago. We have pending quite a few ophthalmology [ph] products, which we are working on. We haven't named them, but we think there's an opportunity for ophthalmology. We also have quite a few other Paragraph IV, but we don't point out anything in addition to the Lidoderm for next year.

David Amsellem - Piper Jaffray Companies, Research Division

Okay. When will you start pulling back the curtains on 2013? When should we expect that?

Paul M. Bisaro

Well, I think, David, you'll probably see that after the close of the transaction, and then we have to reevaluate all of the -- at that point, we'll reevaluate the – well, the way we articulate it because we'll have now a bigger group of products to discuss, so probably at the close.

Operator

Your next question comes from Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank, Research Division

Yes, can you give us a little more color on the oral contraceptive business, both the branded product, Generess, I mean, are we happy with the ramp so far? And just how much effort are you putting behind that? Just give us a flavor there and how that is relative to the competition out there in branded OCs? And then on the generic side, I mean, the number seem to be hanging in there pretty good, except that you keep guiding to the business kind of deteriorating more. We're seeing products getting approved by competitors, but your numbers are hanging in pretty well. So just give us a little flavor on what's going on behind the scenes.

George Frederick Wilkinson

Actually, we're very pleased with the Generess launch. I mean, we've got 60% of growth currently while the OC marketplace is actually going -- the branded OC marketplace is actually going down a bit. We've been able to steal substantial share from almost all the different players out there. I think we ended up being the fourth largest branded OC out there at this particular point. The effort that we've put behind it is, as you've seen, has been traditional sales and marketing effort, along with a whole a lot of activities that are going on in social network. You've not seen us on TV and probably will not, and I think we're very, very pleased with the uptake of Generess today.

Sigurdur Oli Olafsson

I think, Marc, on the generic OC, we'll probably give you a little reacting what other companies are saying in the market. I think quite a few companies are expecting approvals. They have been much, much slower than we expect, that they expect and we expect. I think Glenmark has had a few approvals. Obviously, Lupin, Sandoz and Coulter [ph] have been in the market, but there clearly there hasn't been any approval for Mylan at this point in time. We've been hanging in there and we are doing quite well. We are obviously -- we are the leader in the OC market with Teva and that gives us benefit. We have a much, much broader product range and that helps us in the competition in the market. But clearly, molecule by molecule, we have seen price erosion when the new approval comes to the market.

Operator

Your next question comes from Elliot Wilbur with Needham.

Elliot Wilbur - Needham & Company, LLC, Research Division

This is for Paul and Siggi, just switching gears a little bit, maybe turning to the Actavis business. One thing I don't recall being discussed on the conference when you announced the acquisition is what percentage of that business may be dossier-based and thoughts on opportunity to transition manufacturing to internal means, much as you plan to do with the Specifar business? Then the second question for Todd, back in your Analyst Day, you talked about total R&D spend being up roughly 10% -- or excuse me, the generic business being up about 10%, in total, being up 20%, which would imply something like 40% or 50% for the brand business. I'm just curious, within that brand spend, how much of that is sort of ongoing spend versus milestone-based?

Sigurdur Oli Olafsson

Elliot, let me start to talk about the Actavis third-party business. They have a third-party business under the name MEDIS. This is roughly about 10% of their overall revenue. They have a quite a strong business. They have about probably about 70 active molecules. We have a license from them, but that also includes or most of the biggest generic companies in the world. This business, as we have said before, it's not growing, but it's flat, it's usually not growing very fast. So what you bring in is that you bring in new molecules, but at the same time, there’s some other older molecules that are falling off on the other side at the same time. Because usually, you get -- with the new development, you have a supply agreement with the customer for a number of years. This is quite synergistic with our Specifar business. We acquired Specifar last year and this was quite a significant portion of that. And we see an opportunity for the combined company of MEDIS and Specifar going forward, although probably not the fastest growing business of the combined company.

R. Todd Joyce

Yes, and in terms of the R&D spend, for the full year on the brand side, non-GAAP R&D is roughly in the range of $110 million, $115 million. And so the milestone-based component to get to the GAAP numbers would be another roughly $15 million for the full year.

Operator

And your next question comes from Shibani Malhotra with RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

I've just got a couple. The first is, I was going through your filing on the Actavis transaction, and I noticed that you did have details on 2 products, Suboxone and more important, Adderall, in terms of contingency payments, et cetera. I was just wondering why you highlighted these products as potential for market entry in '12 or '13. And Paul, just based on the diligence you guys have done, how confident are you that Actavis' Adderall can actually be approved? And how does that compare with your filing, if you could just discuss that? And then second on Lidoderm, do you expect the FDA to kind of provide us with some sort of response before May 13? Or do you think this is something that will drag on longer than that?

Paul M. Bisaro

Sure. On the Lidoderm issue, I don't think we can predict what the agency is going to do. I think as I've consistently said, Shibani, that if we have our application in a position where a tentative approval would have been granted, but the Citizen's Petition, the agency has maintained that they will not -- they withhold the exclusivity, so we won't get hit or dinged because -- we didn't get a tentative of approval because of the outstanding Citizen Petition. And I also have consistently said I think we're going to be in that position. So whether we have our formal announcement for the agency, I don't know. But if we do, we'll certainly pass it along, and we'll keep you updated on that. Regarding the 2 products, as you look into the SPA, you will see that the earnout is an EBITDA-based earnout, it's built off of a percentage increase over -- year-over-year 2011 versus '12. And as we were, of course, in the process of negotiating these things, people then come to realize that it's very difficult, as we've always said, to predict the timing of approvals. And you mentioned the 2 products that are called out specifically. If in fact the way that it work -- the way that the thing works out is based on a 2012 EBITDA number, however, for a very short period into 2013, it's just due to timing, those 2 products got approved and launched, they would count toward achievement of the objective for the earnout. So it was just the way to reconcile really the problem that we all have with trying to figure out exactly when approvals are going to come. So again, I wouldn't read too much into that. It was just the negotiated arrangements between the parties with those 2 particular products because obviously, if they are both -- either one of those are approved, it would be a fairly big deal for the Actavis Group in 2012.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Can I just pursue the dynamic? [ph] Is there -- I mean, how different is their filing from yours? I guess, how confident are you on their product versus yours, if you're willing to comment on that.

Paul M. Bisaro

Well, sorry, I can't comment on that. We're still too early in the process. That probably has to wait until we get closer to close.

Operator

And your final question comes from Ken Cacciatore with Cowen and Co.

Ken Cacciatore - Cowen and Company, LLC, Research Division

I just had a question on generic CONCERTA and one of the competitors, KUDCo, have you ever seen the PK profile for that product? Has J&J allowed to share that with you during their litigation at any point? And then also, was wondering if you could set the baseline for us on Lidoderm and discussions in terms of where they've been, and are there any more going on? So I know that on Analyst Day, it sounds like there were discussions, maybe you could just set baseline, so where we are today if there is -- if it's just radio silent?

Paul M. Bisaro

Sure. On the KUDCo product, we have not, obviously, have not seen anything and Johnson & Johnson has not shared anything with us. So that's an easy one. As to discussions with Anda, we've had discussions with them. We continue to have discussions with them. As -- well, so far, they’ve not been fruitful, but we will continue to discuss as long as we can until something comes up, like an approval or court decision and that sort of stuff. Obviously, one of those events would obviously further change the dynamics of the conversation. We will continue to have discussions with them as long as they're prepared to do so.

Patricia L. Eisenhaur

Well, thank you, everyone, for joining us today. And Therese, I'll turn the call back over to you for concluding remarks.

Operator

Thank you. Thank you for participating in today's Watson Pharmaceuticals First Quarter 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 Monday, May 14, 2012. The conference ID number for the replay is 73123257. Again, the conference ID number for the replay is 73123257. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. Thank you for today's participation in the conference call. You may now disconnect.

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