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Executives

Lisa M. Defrancesco - Former Vice President of Global Investor Relations

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

R. Todd Joyce - Chief Financial Officer -Global

George Frederick Wilkinson - President of Global Brands and Biosimilars

Sigurdur Oli Olafsson - President of Global Generics

Analysts

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

David Amsellem - Piper Jaffray Companies, Research Division

Marc Goodman - UBS Investment Bank, Research Division

David G. Buck - The Buckingham Research Group Incorporated

Timothy Chiang - CRT Capital Group LLC, Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

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

Elliot Wilbur - Needham & Company, LLC, Research Division

Michael Faerm - Crédit Suisse AG, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

David Risinger - Morgan Stanley, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Watson Pharmaceuticals (WPI) Q2 2012 Earnings Call July 26, 2012 8:30 AM ET

Operator

Good morning. My name is Cassandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson second quarter earnings call. [Operator Instructions]

And now, I would like to turn the call over to Lisa Defrancesco, Vice President of Global Investor Relations.

Lisa M. Defrancesco

Thank you, Cassandra, and good morning, everyone. I'd like to welcome you to the Watson's Second Quarter 2012 Earnings Conference Call. Earlier this morning, Watson issued a press release reporting its earnings for the second quarter ended June 30, 2012. The press release will be available on our website at www.watson.com. Additionally, we are conducting a live webcast of this call, which will also be available on our website after its conclusion.

With us on today's call are Paul Bisaro, our President and CEO, who will provide an overview of the second quarter results; Todd Joyce, our Global Chief Financial Officer, who 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 our updated outlook for 2012. We'll then open up the call 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, President 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. These factors are detailed in our periodic public filings with the Securities and Exchange Commission, including but not limited to, the Watson Form 10-K for the period ending December 31, 2011 and the Watson Form 10-Q for the period ending March 31, 2012.

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

Paul M. Bisaro

Thank you, Lisa, and good morning, everyone, and thank you for joining us. We are pleased to report another quarter of solid revenue and double-digit earnings growth. Net revenues increased 25% to over $1.3 billion. Non-GAAP earnings were up 41% to $1.42 per share. Excluding the $0.21 per share contribution from our sales of generic LIPITOR, non-GAAP earnings per share were up 20% from last year. Adjusted EBITDA increased 37% to $330 million in the quarter. We also generated strong cash flow from operations during the quarter of approximately $200 million.

We had a number of highlights in each business segment. In our Global Generics business, we announced an agreement with Endo Pharmaceuticals to settle patent litigation related to Watson's generic version of Lidoderm. The agreement provides the date of certain launch of September 13 -- I'm sorry, September 15, 2013 pending FDA approval and eliminates any risk involving current, pending or future patent litigations surrounding the product.

We also launched 5 new products in the second quarter in the U.S., including generic VANCOCIN, and in third quarter, received approval for generic ARTHROTEC earlier than expected. We expect to launch this product in the fourth quarter.

Our International Generics business experienced the strongest quarter thus far, generating over $210 million in revenue as a result of the acquisitions of Ascent and Specifar and organic growth driven by new product launches in key markets.

In our Global Brands business, we launched Gelnique 3% and had continued strong sales of key promoted products, including RAPAFLO, Generess Fe and CRINONE.

The Phase III U.S. trial for Esmya is ongoing, and we expect the trial to be completed by late 2013. We also submitted the NDS for Esmya for the treatment of anemia associated with uterine fibroids in Canada.

We licensed Herceptin from Synthon and contributed the product to our Amgen collaboration. This transaction demonstrates the flexibility of this partnership to make changes and to capitalize on opportunities to develop quality assets for introduction at market formation.

Anda's relocation of its Ohio distribution facility to Mississippi is nearing completion, and Anda has begun shipping from this location. The expansion into Mississippi allows us to enhance our capabilities and service levels for our customers.

Of course, the big news for the quarter was the April 25 announcement of our intention to acquire Actavis. There has been a lot of activity around this, and here are a few highlights: at the announcement, Watson entered into an option to hedge the transaction at a dollar to euro strike price of $1.33. We have been able to unwind portions of that option and enter into forward contracts to capitalize on the decline of the euro. Todd will elaborate further on the details, however, to date, we have saved approximately $157 million on the cost of the deal. If the euro remains at today's levels, we could save close to $400 million in total on the transaction.

On June 22, we secured a new $1.8 billion senior unsecured term loan facility at very attractive rates. The proceeds of this term loan will be used to fund the Actavis transaction, in conjunction with the senior notes that we plan to issue later this year at the close of the transaction.

During the quarter, we also amended our revolving credit facility, increasing the borrowing capacity by $250 million to a total of $750 million.

As anticipated, on July 12, we announced that we received a second request from the Federal Trade Commission in connection with Watson's pending acquisition of the Actavis Group. We are working with the FTC on the review, and we continue to expect the transaction to close on the fourth quarter of 2012. We are aggressively planning for the successful integration of the Actavis business. And to date, we have held a number of integration team planning meetings and begun to define the management of the combined business going forward.

With that, I'll turn the call over to 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 second quarter were $1,355,000,000, an increase of 25% over the prior year.

In our Global Generics division, net revenues were $995 million, up 26% year-over-year, which includes sales of new products, including the generic version of LIPITOR, launched late last year; the generic version of LOVENOX, which was launched in January; and the generic version of VANCOCIN, launched in April. The addition of Specifar and Ascent also contributed to the year-over-year revenue growth.

Sales of extended release products were $349 million, down 8% on slightly lower sales of generic Concerta, as the prior year launch included initial customer stocking. Sales of generic Toprol XL and Micro K also declined as a result of competition.

Sales of oral contraceptives were $94.6 million, down 1.8% compared to the prior year, as competition on our base oral contraceptive franchise was largely offset by sales of generic Seasonique.

x U.S. net revenues were $210.7 million, up 77% from the second quarter of 2011. International net revenue increased as a result of the acquisition of Specifar in May of 2011 and Ascent in January of 2012 and new product launches in key markets.

Global Generics adjusted gross margin was 47.6%, up 2.4 percentage points year-over-year due to higher margins on sales of our authorized generic version of Concerta. Under our agreement with J&J, our share of profit from this product has increased each quarter since launch. Our share of profit will increase further if a competitor enters the market. The increase in adjusted gross margin was partially offset by lower margins on our authorized generic version of LIPITOR.

Moving to our Global Brands division. Net revenues were $119.3 million, up 6% on higher sales of promoted products, including RAPAFLO and CRINONE, and the addition of new products, including Generess Fe, partially offset by lower sales of ANDRODERM as a result of the sales transition period following the launch of the 2 new strains. We anticipate ANDRODERM sales will grow sequentially.

Global Brands gross margin was 75.9%, down 1.9 percentage points due to a more favorable product mix in the prior-year period.

Finally, net revenues from our Anda Distribution division were $241 million, up 37% on higher new product launches and higher sales to certain chain customers. Anda's gross margin for the quarter was 13.7%, down 1.7 percentage points year-over-year on a higher chain sales.

Turning now to operating expenses. Consolidated GAAP research and development for the second quarter was $79.7 million, down 1% year-over-year. For the full year, on a standalone basis excluding any impact from the pending acquisition of Actavis, we expect GAAP R&D spending of approximately $400 million, which includes approximately $39 million of brand and biosimilar licensing and development costs for the rest of the year.

SG&A on a GAAP basis was $240 million, up 28% year-over-year. The current year period includes $28 million in acquisition costs related to the pending acquisition of Actavis. On a standalone basis, we expect SG&A for the full year on a GAAP basis to be approximately $1 billion. This includes approximately $25 million of additional acquisition-related SG&A cost for the rest of the year.

Amortization for the second quarter was $105.8 million. For 2012, we expect amortization expense on a standalone basis to be approximately $445 million.

On a non-GAAP basis, our income tax rate was 36.6% in the second quarter, up from 35.7% in the prior-year period. Our income tax rate on a GAAP basis was 23.1% due to nondeductibility of the loss from foreign exchange derivatives, partially offset by the reversal of deferred tax liabilities related to the Ascent acquisition.

On a non-GAAP basis, which excludes amortization and impairment charges and other charges detailed in Table 4 of our press release, earnings for the second quarter were $1.42 per share, up 41% year-over-year. Non-GAAP earnings for the second quarter include $0.21 per share contribution from generic LIPITOR.

For GAAP purposes, we reported a loss of $0.49 per share for the second quarter, which includes foreign exchange hedging losses of $142.7 million. These hedging losses relate to the Actavis acquisition. And also, we recorded during the quarter a net impairment charge related to IP R&D acquired in the Specifar acquisition of $79.7 million.

As Paul mentioned earlier, the hedging losses relate to a euro option contract that we purchased shortly after the Actavis acquisition announcement. The option hedge was purchased at a dollar to euro to strike price of $1.33. We have unwound EUR 2.25 billion of that option and entered into forward contracts at an average rate of $1.26 to the euro, translating to approximately $157 million in savings for the transaction to date.

Our adjusted EBITDA for the second quarter was $333 million, an increase of 37%. Cash flow from operations were strong for the second quarter, reaching $199.7 million, and cash and marketable securities were $225 million at quarter end. We paid down $65 million in the revolving credit facility borrowings, bringing the drawn balance at quarter end to $250 million.

Our existing capital structure will enable us to finance the acquisition of Actavis at favorable rates. As Paul mentioned, we secured a new $1.8 billion senior unsecured term loan facility at very attractive rates equal to LIBOR plus an expected margin of 150 basis points. This new 5-year loan is fully prepayable.

During the quarter, we also amended our revolving credit facility, increased the borrowing capacity by $250 million to $750 million. Future cash flows generated from the combined business will enable us to de-lever quickly as Watson has done with the 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 to our 2012 forecast.

Our forecast includes certain assumptions for increased competition on oral contraceptives and extended-release products.

We have also determined that a competitive entrant on our generic Concerta in the fourth quarter of 2012 would not have any impact on our current earnings forecast, including our ability to potentially deliver results at the high end of the range.

Product launches included in the forecast are generic versions of Actos, Xopenex and ARTHROTEC, as well as other undisclosed launches.

Excluding the impact of LIPITOR, we expect seasonalities similar to last year, where the fourth quarter will be higher than the third quarter, driven by lower sales during the summer of our methylphenidate product and higher sales in the fourth quarter of our international business.

Watson's non-GAAP earnings forecast for 2012 excludes any pre-acquisition costs or post-acquisition earnings from Actavis. So with that, our updated forecast is as follows: our estimate for full year net revenue remains at $5.5 billion. We expect Global Generics revenue of $3.9 billion to $4.1 billion, Global Brands net revenue of $500 million to $525 million and revenue at our Anda Distribution business of $950 million to $1 billion. We expect adjusted EBITDA of $1,325,000,000 to $1,380,000,000. Based on our strong first half results, we now expect non-GAAP earnings per share in the range of $5.65 to $5.85 per share.

Our record results in the first half of 2012 demonstrate our focus to continue to execute on the long-term objectives of our company. We do have a busy second half of 2012 ahead of us. In our Global Generics business, we expect to complete the acquisition of Actavis and quickly integrate this asset into our company. In Global Brands, we will continue to pursue development of new products and will focus on furthering our brands and biosimilars pipeline. And in Anda, we are taking steps to expand this asset to best support our vision for future growth, which is in the area of specialty distribution.

I would like to thank all of our employees around the world for their hard work in helping us achieve a very successful first half of 2012. I look forward to the continued growth and evolution of our company in the remainder of 2012.

And with that, we'll take questions. Lisa?

Lisa M. Defrancesco

Cassandra, you can open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Greg Gilbert from Bank of America Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

A couple of obvious ones and get back in queue. First on the Concerta front, can you talk about the status of your application and whether -- can you speak to the recent CP ruling and whether you have data in hand or have to do any more work that seems to be required on that one? And instead of asking about a Lidoderm update, let me ask about PROCHIEVE, any steps forward there you can share with us?

Paul M. Bisaro

Sure. Let me start with Concerta. And we believe our application is approvable and remains approvable based on the results of the Concerta citizen's petition. As you -- as we've said in the past, it has not been a high priority item for us at the moment. We don't need approval until the end of 2014. And so with that, we will expect to get the approval in due course. But we're not pushing to get that done anytime soon. So we're pleased with the way things are looking on Concerta. As I mentioned in my prepared remarks, we have evaluated the situation. And, of course, we don't know if there will be an entrant in 2012. But if one does come, as I said in the prepared remarks, we don't expect to have any major impact on our guidance. Fred, I'll let you handle the [indiscernible].

George Frederick Wilkinson

Sure, thanks. Firstly, obviously, we're working with the agency to explore all the avenues for seeking approval. We've communicated, I think, on previous calls as a [indiscernible] you that we're not going to adjudicate this publicly. We've got a good ongoing discussion with the agency. And we hope to resolve the issues as soon as possible.

Operator

Your next question comes from the line of David Amsellem from Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

Just a couple. Following up on Concerta. Can you talk about what happens to your royalty if there is a second entrant down the road? And then on Lidoderm, what's your assumption regarding competition in September 2013? Are you expecting that you'll be there alone or with Mylan?

Paul M. Bisaro

Sure. On Concerta, as we've mentioned, our royalty increases -- the flow of the royalty to us increases when a second entrant hits the market. We've not said what that number is, but it is not an insignificant increase in royalty. That accounts for the earlier comment or answer to Gregg's question. Regarding Lidoderm, we believe we've maintained our exclusivity and have exclusivity, so we wouldn't expect to see an entrant until at least 6 months after we launch our product in 2013. So we wouldn't expect to see any generic competition in 2013.

Operator

Our next question comes from the line of Marc Goodman from UBS.

Marc Goodman - UBS Investment Bank, Research Division

Two things. Well, can you give us a little more color on what's happening in Europe with respect to your business and maybe a little more broadly just as you're getting ready to acquire a business that's bigger in Europe? And second, can you just repeat your comments about Concerta and the revenues? Did you say they were down from the second quarter of last year, and can you give a little bit more color on that? Is there any pricing issues going on? I mean, there's nobody new, so I'm just a little curious why the numbers would be down just given the scripts.

Sigurdur Oli Olafsson

Marc, it's Siggi here. Let's start on the Concerta. One of the reason is basically that we launched Concerta in May of last year. And that's the reason, when you launch a product, you have active sale in the quarter. That's why the comparison is a little bit down from second quarter of last year. But overall, the business is going well. We have about 87% market share in the market share. We have a good and steady supply. So it's only due to the reason that the product was launched last year in the second quarter.

Marc Goodman - UBS Investment Bank, Research Division

And the price increase flowed right through just like everybody expected?

Sigurdur Oli Olafsson

As we expected, the price has been as we have talked about on the price increase earlier this year. Yes. With regard to euro, second quarter has been quite good for us. We have been happy with our market in Greece. Obviously, Greece has been a challenge with regards to -- there has been strikes both in pharmacies and by doctors. But as we all know, people tend to be sick anyway even though that doctors and pharmacies are on strike. So we have had a good business off the local -- in the local Greek market, and we continue to grow that. We have a significant number of new launches in that market. And even though Greece is having a tough time economically, the generic penetration is increasing, and we are happy with our Greek market going forward. U.K. is -- has been good, has been delivering quite a few new launches. France, the price erosion has been bad, as I talked about in the previous calls. We have cut down some of our portfolio because we are focused on being profitable in France. We had 8 new launches in France in the second quarter, which helped us enormously in the market. With regard to Europe as an overall, in the combined company with Actavis going forward, we think we're -- we will be very strong in Europe. The exposure may be to West Europe and the euro is not that much. Pro forma, the EBITDA exposure of the combined company in Western Europe and the markets where it has the lowest price is only about 5%. But overall, we think the market, especially in Eastern Europe, is growing well, and we look forward to take on that challenge when the transaction closes.

Operator

Our next question comes from the line of David Buck from Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

Just a couple of quick ones. First, can you comment on -- I know you have a generic OxyContin control release in the queue of filings. Can you talk a little bit about the CP from Purdue Frederick, and what you think some of the hurdles may be in terms of showing bioequivalence there? Secondly, as you look to close Actavis, can you talk a little about your ability to settle cases that may be pending such as Intuniv? And then finally, Paul, you talked about in the past, if you had not gotten the Lidoderm approval, it might be difficult to have double-digit growth on a standalone basis. With the settlement as entered with Endo and the compensation you're getting with free product, would you still be making that comment or do you think you have more flexibility to make that double-digit on standalone basis in '13?

Paul M. Bisaro

Sure. Let's start with the OxyContin issue. We've -- we did see the citizen's petition. We're obviously looking at it, evaluating it. To date or at least at the moment, we don't see that as a hurdle to our existing application. We're still sort of waiting for the agency to give more guidance on this. If they -- frankly, they don't have to. They can leave things as they are, and we would then expect our application to proceed through the queue and be approved in the normal course. If there is additional guidance from the agency, of course, we'll react accordingly. But right now, we stand by the -- our application. We believe we have an equivalent tamper-resistant product, so we feel comfortable with that. Regarding our ability to settle cases, certainly there is no impact on Watson's ability to settle its own litigation cases, and Actavis, as a standalone company, is certainly able to settle its cases. There are, of course, provisions within the agreement that we have to acquire the company that there has to be some limitations on things they can and cannot do, but that is not one of the limitations. So if an appropriate settlement were available, we would expect that Actavis would be able to enter -- would take the opportunity to enter into them. And your third question was about growth for 2013. I think it's important -- first of all, on a standalone basis, our target was and we maintain that target of double-digit growth. I would say we feel comfortable with that still. Certainly, the way things have developed with Lidoderm, we believe that is a comfortable position for us on a standalone basis. And I think on an overall basis, on a combined basis, we stand by our comments that we made at the time we signed the deal with Actavis that for 2013 on a combined basis, we would expect greater than 30% accretion to 2013 Watson standalone. As I've said and committed that we will give you more guidance at the time of the close of the transaction. And hopefully, we'll be able to also provide specific guidance on a pro forma basis for 2013 at that time. So we're very pleased with the way our business has been running. We've watched how the Actavis business is running, and it has been doing quite well. So overall, we couldn't be more happy with where we sit.

Operator

Our next question comes from the line of Tim Chiang with CRT Capital.

Timothy Chiang - CRT Capital Group LLC, Research Division

I had 2 questions. One is financial. It looked like your gross margins actually were pretty strong sequentially, around 44%. And you stated in the press release that you benefited on the Generics side from contractual step up and the profit margin with Concerta, does that step up continue on a quarterly basis going forward? I'm just wondering about Concerta.

Paul M. Bisaro

Well, our margins on our Generics business is going to be flat with Q2 for the rest of the year. We do pick up a little bit just with the fall off of LIPITOR because those sales are declining. That was a slightly lower margin. On the other side is we have some slightly higher cost, manufacturing cost, some of that's driven out of Salt Lake City because of the settlement with Endo on Lidoderm. So we have some slightly higher manufacturing cost, but we expect to maintain the kind of Q2 margin levels through Q3 and Q4 on the Generics side. And that really drives your consolidated margin.

Timothy Chiang - CRT Capital Group LLC, Research Division

Okay. And just 1 follow-up. I think in your Analyst Day early this year, you highlighted the fact that you expected around a 16% decline in oral contraceptives for the year. Is that a target that you still maintain or -- it seems like you did slightly better in the quarter on your OC business.

Sigurdur Oli Olafsson

Tim, it's Siggi here. Yes, there has been a competition on the oral contraceptives. There have been approval coming through from Lupin, Glenmark, [indiscernible], Sandoz to name a few. But really the competition hasn't been as much as we expected. There are still companies out there that are talking about a significant number of approval of OCs. But so far this year, we have had a scattered competition on OCs. And so, year-to-date, we are a little better than we expected.

Timothy Chiang - CRT Capital Group LLC, Research Division

Siggi, is that also in part because you're able to take prices up some in that market?

Sigurdur Oli Olafsson

No. Really, the competition is that hot [ph] in the OC market, but it doesn't allow the opportunity for price increases. There that many players in the market that price increases in -- on OCs are very rare or impossible.

Operator

Your next question comes from the line of Chris Schott from JP Morgan.

Christopher Schott - JP Morgan Chase & Co, Research Division

Just a couple of quick ones here. Maybe first, coming back to the 2013 guidance. Do you feel you need to get an approval on Lidoderm to get comfortable with that number? Or is the product provided in the settlement enough to get you comfortable with that double-digit growth? The second question, on Concerta. When you think about the dynamics of the lower royalty if the product -- if you have another competitor, is it possible you could actually be more profitable on Concerta if a competitor were approved? Or is that not something we should be thinking about? And then finally, on Adderall, do you think you're going to be able to keep your filing with the Actavis product now approved?

Paul M. Bisaro

Let me start. I'll go backwards on this one. On the Adderall filing, we'll be speaking with the agency, the FTC, on this. They, of course, have an opinion, and we'll let you know where we end up. So it's a little premature to know what's going to happen with all of our pending products. Regarding -- I'm sorry, on the guidance, you asked whether if we don't get the approval, I would say it would certainly be a bit more challenging to achieve the double-digit growth if we don't have approval for our own product in 2013. Certainly, having it would be -- make it a lot easier to get there. And then, I forgot what the Concerta question was.

Sigurdur Oli Olafsson

Concerta is going to be more profitable?

Paul M. Bisaro

Oh, well, it is possible. It would depend on the market dynamics of the product, what the competitor that enters, how much product they have, what the market dynamics on the pricing ultimately turn out to be. But it's probably -- I wouldn't expect it.

Operator

[Operator Instructions] Your next question comes from the line of Jami Rubin from Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

Paul, just a follow-up on Lidoderm. I think before, you had stated your confidence that you expected an ANDA approval this summer. Is there anything that would -- anything out there that you're aware of that would prevent that from happening? What are the steps that are still in place for that ANDA approval? And forgive me, but I will ask a second question. Paul, I think the investors clearly recognize the near-term visibility of Watson's growth drivers, particularly with the Actavis deal. But I think many still struggle with the company's ability to drive organic growth beyond 2015. If you could just remind us, what are the key growth drivers beyond sort of the near-term synergies from Actavis, the P4 [ph] pipeline and the U.S. Generics business's expansion overseas? I think that would allay some of the concerns.

Paul M. Bisaro

Sure. On the Lidoderm, we do expect approval. We do expect to get approval certainly prior to the time of the launch of the product. Predicting exactly when that's going occur is challenging. The agency has got its own issues to overcome, including lack of resources and the like. But we are working actively with them to try to get the approval done as quickly as possible. So we still are confident that, that will happen. Regarding the longer-term growth potential of the company, I've stated on a number of occasions that while we do believe there is still a lot of growth available to Watson and its Generic franchises around the world, even past 2014 and 2015 and 2016, we also would be looking at that timeframe for larger contributions from our Brand franchise. We should see at that point some very important products coming to market like Esmya, additional contraceptive products, plus deploying other assets that we have -- cash assets that we have to get ourselves more product opportunities for our Brand business. And then in 2015, 2016 timeframe, we're also talking about the launch of biosimilars at that point. FSH should be in the -- in certain markets around the world. And potentially, our first product out of the Amgen collaboration would also be hitting around that time. So from my perspective, we have lots of levers to pull to get those -- to get that growth. And it isn't just Generics at that point. It is brands and biosimilars certainly contributing significantly to our growth.

Operator

Your next question comes from the line of Ronny Gal from Sanford Bernstein.

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

Just to follow up, ducktailing on Jami's questions, I think -- a 2-part question. The first is around Herceptin. I think you've mentioned that you'll be at market formation with the Synthon product. Can you give us a little bit more granularity, when you think about market formation, what year and what geography? And second, would you be able to comment on the Third Circuit decision on reverse payments, especially as it relates to AndroGel? Do you expect a third [ph] petition on AndroGel by the FTC?

R. Todd Joyce

All right. So let me jump in on the Herceptin and the Amgen relationship. Obviously, we were very pleased. I think both parties were pleased that collectively, we could move forward, identify an asset, but it was ahead of the development program that was in our hands with -- between Amgen and Watson. We did an extensive diligence, liked the quality of the product. And what we believe it does is it catapults us in the position where we could be very early in the development of the biosimilar Herceptin market outside of the United States. Our plan was always to be on time or ahead of on time for the U.S. market. This allows us to participate very effectively in the x U.S. marketplace.

Paul M. Bisaro

And then, Ronny, I think you asked about the recent Third Circuit decision. People have -- has called it a split. I think I would call it more of an outlier. There's been 3 other Circuits that have ruled appropriately on this matter. I would expect that the FTC will try to take this up to the Supreme Court. I think that was the purpose of shopping around and finding a Circuit to actually do what the Third Circuit did for them. So we would expect to see at least a petition to the Supreme Court. And whether it would be the 11th Circuit decision around AndroGel as -- obviously there's been some speculation on that. We'll wait and see. Of course, we're actively engaged along with our trade association at trying to get this thing put to bed once and for all.

Operator

Your next question comes from the line of Elliot Wilbur from Needham & Company.

Elliot Wilbur - Needham & Company, LLC, Research Division

First question for Fred. I guess in just sort of thinking about full year brand and segment guidance and kind of year-to-date performance, even kind of the low end of the range would have you generating roughly 30% incremental growth versus first half performance. I'm just sort of wondering kind of what -- how do you get there? What has to happen in order to hit the low end of -- at least the low end of the range there? And then for you Paul, bigger picture question, thinking about Actavis and some of the capabilities that brings to you longer-term and -- in some of the alternative dosage forms, injectables and topicals and liquids. Seems like a lot of times, what happens when a big company buys assets or capabilities and in some of these areas, over the long-term, they go after 1 or 2 big products, but then the business just seems to kind of fall by the wayside. And if you just look at sort of the leaders in each of those categories, injectable guys have around $1 billion in sales; and topicals can be a $200 million business or $400 million business; and liquids, maybe $200 million. I mean, that would seem to potentially add a lot of long-term growth to the overall platform. And I'm just sort of wondering, what should we be thinking about in terms of how deep you actually plan to go in some of this alternative dosage form categories?

George Frederick Wilkinson

Let me answer Brand business, and I think it's a terrific question. It kind of spotlights the 3 core products that are the focus of our 3 different selling groups out there. I mean you got RAPAFLO right now on its third year after launch. It's still growing at close to a 50% year-over-year pace. So I think that's -- we're pleased with the growth pattern. It seems to be very consistently growing at somewhere between 8% and 12% quarter-over-quarter. Generess, we're in our 15th month of launch and growing at over 500% as you would expect. We've passed the 1% market share in an incredibly crowded marketplace. We're pretty pleased with the growth there. And CRINONE, we've become the largest progesterone used in infertility, now kind of going head and toe to the injectable piece, and still growing at close to 40% growth year-over-year. So pleased with the real movers that we have there because those are the promotional items. Sometimes, we get dragged just a little bit with some of the legacy products as they decline in unit use, so we're focusing a lot of attention on those products in the second half of the year. But we're very confident with hitting the guidance numbers that have been laid out at the beginning of the year and reiterated today.

Paul M. Bisaro

And Elliott on your question, I think I'd start with a discussion -- a quick discussion on R&D dollar allocation. As we look forward into 2013 and 2014, one of the things we will be doing is allocating our generic R&D dollars to the categories' development you're talking about. We do see opportunities in injectables. We do see a large opportunity in topicals and in liquids, with the assets that the Actavis acquisition brings to the combined group. I would add that we have both been involved in inhalation developments, so that's a -- an area that we would also be focusing R&D money on. And of course, Watson and Actavis have both been active in the patch development area. So I think all of those -- maybe they are alternative dosage forms, if you will, will be areas that we will focus on to help drive growth, not just in the U.S. market, but also in markets around the world. Those -- we do think there are significant opportunities that still remain within those areas for us, and we will be allocating more of our R&D dollars to those kinds of development programs.

Operator

Your next question comes from the line of Michael Faerm with Credit Suisse.

Michael Faerm - Crédit Suisse AG, Research Division

I have another question on Concerta. So if and when a competitor enters, how do you expect the market to develop with respect to share and price? And really, what I'm wondering is to what extent do you think what would otherwise be a normal market situation might be constrained by supply constraints?

Sigurdur Oli Olafsson

Yes, Michael, it's Siggi here. I think the issue with Concerta is obviously what will affect the market in the beginning is you need the DA quota for the methylphenidate to be able to launch the product. So usually when it comes in with a new C2 [ph] product, it's not like that the market changes overnight. It changes slowly. And with a 2-player market, the prices are more stable than when you get a lot of competition at once. So I think overall, the change in our market share and in the market share will be, over time, much more than quickly on day 1 due to the quota issue. And secondly, the Concerta tablets are very complex tablets to manufacture. So you need to build up quite a lot of inventory to be able to launch into the market. I think that will also affect how the new entrants will enter the market when a competition comes.

Operator

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

Ken Cacciatore - Cowen and Company, LLC, Research Division

Paul, you've been pretty clear. It sounds at least pretty clear directionally in the long-term about where you want to go with brand. And you've said in the past, and I don't want to misquote you, that deals are done sometimes when assets are available. So as you look at your debt paydown schedule, how soon do you think you'd be in a position to act on a brand asset of size? And then also, if you could give a little bit of nuance on how you think the Adderall XR marketplace is going to play out from the [Audio Gap] there and clearly trying to take into account your own filing and maybe where that filing goes?

Paul M. Bisaro

Sure. As to -- I would say, doing another deal of size, it will, of course, take us a little while to bring our debt load down to where we feel comfortable to be able to enter into another sizable transaction. We are benefiting, at least at the moment, from the weaker euro as we've talked about in our prepared remarks. That is, of course, helping us in the long-term. We've got some great favorable rates on our term loan. And as we move into the bond issuing -- issuance, a lot of that will, of course, help us pay down that debt faster than we had originally planned. And that will allow us to move more quickly to deploy additional assets in other areas. So -- but I do think it will take us a little time to be in a position to do a sizable transaction as we've discussed, but it will take at least through the end of probably '13. That would be challenging for us to do something of significance probably in '13. I think you asked about the Adderall marketplace. I don't want to speculate too much on this because I'm not -- it's not quite clear what the FTC and how we're going to work through the situation on Adderall with the FTC, so it is a little challenging to answer that question at the moment. It might be better to wait and see what happens with that application, what the FTC's ultimate decision is and how we move forward with Adderall before I further comment on the situation. Right now, of course, Actavis is in a good position there. From what we can see, they're doing well with the product. And, of course, that's good for the combined entity.

Operator

Your next question comes from the line of Gary Nachman from Susquehanna Financial.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Paul, as you're starting with the integration meetings on Actavis, do you still feel good about your initial synergy targets you have laid out? Could it end up being greater than what you initially thought? Some color on that would be helpful.

Paul M. Bisaro

Well, first of all, I think we feel very comfortable with the synergy targets we laid out. I think we should be able to achieve the synergies that we talked about that which as a reminder was $300 million over 3 years. We said roughly -- we'd get those in roughly equal parts. I think it's possible we could achieve some of those synergies faster than we originally expected. The integration meetings have gone extremely well. Both sides have worked very hard and continue to work very hard in preparation. We've got a good team in place, and the -- our IMO office is in full steam and in full gear. And I think we're -- we've already made some very significant decisions on leadership and we'll be making more of those decisions and communicating those to our internal folks here. So lots of things are moving, but I do feel very comfortable on achieving that synergy target. Whether we'll be able to achieve more, I think a lot of it will depend on the out-years as we look at the facilities and what those facilities -- where we need to build additional capacity and where we need to move capacity around. But certainly, the $300 million is achievable.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Okay. And then a quick one for Siggi. What are you assuming for price erosion in Europe? I think you had previously baked in 10% in 2012. Just an update there if you could quantify that.

R. Todd Joyce

Yes. We have seen between 8% to 10% currently the run rate for the year, so we are not moving from that. We see what is helping us on the new product launches, but the underlying price erosion on the base business is between 8% and 10%. It's different between different markets, but that would be about the average.

Operator

The next question comes from the line of Michael Tong with Wells Fargo Securities.

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Just a quick follow-up question on Concerta. As the royalty step flows to you goes up, does the supply from J&J contractually go down?

Sigurdur Oli Olafsson

The short answer is no.

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Good. And then as my follow-up, maybe this is for Todd. I see in your reconciliation table about $101 million in non-cash impairment charge related to the Specifar acquisition, which is not an insignificant amount relative to the purchase price. Can you provide a little bit more color as to what those charges are stemming from other than just in process R&D?

R. Todd Joyce

Well, part of it is esomeprazole. We had much greater expectations at the time of the acquisition for that product, and we've revised our forecast down significantly on that. So the gross number was $101 million. The net number, as I said in my prepared remarks, was closer to $80 million. And that there was a liability that we had also established as part of the acquisition, accounting for $20 million, that would've been -- this was the earn-out on esomeprazole that would have gone to the selling shareholders. So it's roughly, it's 3 significant products that have had either development or -- development delays or changes in the marketplace that have impacted the valuation of that IP R&D. The biggest being esomeprazole.

Operator

Your next question comes from the line of David Risinger with Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

It's Dave Risinger from Morgan Stanley. I just was hoping that you could provide some commentary on the outlook for your European business. So how should we think about growth going forward? Could you talk about Nexium on the positive side? And on the negative side, potential renegotiation of Specifar contracts?

Sigurdur Oli Olafsson

David, this is Siggi here. I think the answer for Europe -- for the combined company, we are quite excited about it. We have said that for the rest of the European business, we expect a low single-digit growth in those markets. The combined company will have a strong presence in quite a few countries. We'll be in the top 3 in 11 markets around the world, including U.K., which is a very good market for Actavis, and we feel strongly in that market. On the other hand, tough markets like Germany and Holland and some of the Nordic countries are tougher. But what Actavis has there, which is growing quite well is the OTC business. On the other hand, when you move to the Eastern Europe, there's a significant growth in Eastern Europe, both the markets are growing, like in Russia, the market is going 14%. And Actavis is growing extremely well in that market. And hopefully, the -- on the closing, we can explain that better to all of you, how we see that down to the details. I mentioned Greece before. The Greek market is growing. The prices are going down, but we knew that when the Generics penetration asset was in Greece was only 16%, to increase that significantly, the prices will go down. But we still think the Greek market is good going forward. With regard to esomeprazole and Nexium, there was a delay in that launch. We have hoped to launch that in third to fourth quarter last year, and that's the reason what Todd was mentioning why we took the impairment charge. We have now launched that product in Spain and in Switzerland. And we are hoping to launch in France in -- we are not hoping, we know we will launch in France in the third quarter of this year, and then take it into other markets. The launch is much slower due to manufacturing challenges we had. We have overcome these challenges, and we are getting the products onto the market now. There is still a good opportunity for this product, but maybe what changed the most was that for example in the French market, the esomeprazole capsules were launched, generic capsules were launched, the hepto [ph] of the tablets and the capsules managed to get about 60% market share. The tablets are still the preferred dosage form, but it's a challenge to go in to the French market. And the prices in the market are much lower than if you would have launched a generic esomeprazole tablet in third quarter of last year. So that's the main reason for the write-off [ph]. But also we think there's still a lot of good value in that product, the more markets you take it into. There are not that many that have this product available. We still see interest in different markets. So we definitely have not given up on esomeprazole going forward.

Operator

Your next question comes from the line of Randall Stanicky from Canaccord Genuity.

Randall Stanicky - Canaccord Genuity, Research Division

Paul, I just really have just 1 follow-up. If you look at the results, you raised guidance in the core business, you've reaffirmed your 2013 core standalone guidance, you reaffirmed your better than 30% accretion from Actavis. And the 3 big swing factors we talked about in Q1 were Adderall XR, Lidoderm and Concerta, which we now have better visibility around I would argue on all 3. What should we be thinking about in terms of the bigger swing factors for 2013 with the combined business going forward?

Paul M. Bisaro

Well, I mean, I think you'd -- it was a good summary. I think that was exactly what we did do. And I think for us on '13, the other swing factor that wasn't mentioned would probably be the synergy capture, integration and synergy capture. And, of course, we don't take that lightly. We know that we have to focus on integration. We have to make sure that on a combined basis, both businesses once combined continue to grow. And we are -- I can assure you, we are exercising all the efforts we possibly can to make sure that on a combined basis both businesses continue to grow and we hit the ground running in all of the markets around the world with clear leadership, clear commercial decision making, clear quality decision making, clear manufacturing decision making, so we don't stumble out of the blocks. So if we can execute, I think, we're going to be very pleased with the results for '13. And, of course, that will carry us into 2014 and then beyond. So very happy with the way things are developing. Certainly, the approvals that Actavis -- the approval that Actavis got on Adderall was a very nice upside, nice surprise. And we'll carry that momentum into 2013 from them. And with, hopefully, getting our Lidoderm approval, carry that momentum into 2013 from the Watson perspective. So hopefully, Randall, that helps.

Randall Stanicky - Canaccord Genuity, Research Division

Well, let me try -- yes, let me try and ask 1 more question which, hopefully, directionally maybe you can help with. You talked before about the $300 million in synergies coming, I think $100 million per year on the call. Sounds like you're a little bit more, I'd say, optimistic on earlier capture. Are you willing to kind of -- how much optimistic or how much more optimistic are you? And if you can help quantify what that number could be in '13?

Paul M. Bisaro

Yes, I don't really -- I would rather not do that at the moment. I mean, we will try to provide additional clarity at close. Of course, as every month goes by and as we understand more and more about what the combined company is going to look like and how we will capture some of the synergies, and frankly, will we be able to capture revenues synergies faster than we anticipate, which really aren't included in the $300 million. So a lot of that visibility -- more of that visibility will be given around close. So I think right now, I'll stick with the $300 million with $100 million -- roughly $100 million a year. I think that's a good spot for us to be. And I don't want to get beyond that at the moment.

Operator

Your next question comes from the line of Douglas Tsao from Barclays.

Douglas D. Tsao - Barclays Capital, Research Division

Obviously, in terms of your expectations for guidance -- or for Actavis next year, I was curious if you would factor it in the company getting approval for Adderall XR when it did and how that might affect your outlook.

Paul M. Bisaro

Yes, I would say certainly, the Actavis folks believe they were going to get approval in 2012, and in fact, they did. So we have -- as we built our own model of what the company looked like, we had to make some call around that. And we did have some expectation they were going to get the approval in '12. So things did sort of work the way we thought they were, and so, it is baked in to what our projections have been.

Douglas D. Tsao - Barclays Capital, Research Division

So that was -- so that was done on some kind of weighted probability basis?

Paul M. Bisaro

Yes, it was.

Douglas D. Tsao - Barclays Capital, Research Division

Okay, great. And then just, Siggi, if you could just provide some update on how you see things progressing in the LOVENOX market right now?

Sigurdur Oli Olafsson

Yes. So the LOVENOX market, so we have grown from about 2% market share in the beginning of the quarter to about 10% market share now. As you know, we are only operating in the retail space. We now have a good supply and steady supplies from Ambernath. And then -- so the market has been growing. The price erosion has been significantly more than we expected. There has been a very hectic competition in that market with the AG and also from Sandoz. But overall, we are pleased. We have seen a good growth in the quarter, and we will continue to compete in this space going forward.

Operator

Your next question comes from the line of Shibani Malhotra with RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

First on Concerta, Paul, I know you'd said that you believe that you of an approvable filing, et cetera, but if -- can you just comment on the fact that the FDA did not approve any generic at the same time as responding to the CP. And if a company -- theoretically, if a company had to do the studies required by the agency, how long would that take? So that's one. And then second, on Lidoderm, can you confirm that -- or rather can you just talk us through why you remain confident that you maintain for us to file status for the product? And have you had any back-and-forth with the agency since your last update?

Paul M. Bisaro

Sure. On Concerta, I guess. It would be -- it's pure speculation on our part. But if the citizen's petition is slightly different than what, I think, people might have thought the agency was going to rule on. What you'd have to do is calculate the area under the curve statistics and see how you stack up against what the agency ultimately said they wanted to see for this product. That calculation work could be done reasonably quickly and filed if the data was available. If the data wasn't available, then you have to either run a new study, and that could take you several months to get the study done, get the data generated and get it filed, and then the agency, of course, would need to review it. So that would take you significant amount of time if you didn't already have the data in a form that you could sort of recut in the new form. So it would take people time to do that. Of course, in the worst case, you run the study and you find out you don't meet the requirements, so you got to reformulate. So that would be the -- possibly the worst possible case. And that is clearly a long period of time to get to. So again, pure speculation on our part. We just don't know. We've heard what some people have reported that UCB has said or Comco [ph] has said. And all we can do is stay tuned and be ready to respond to the commercial situation when it occurs. On Lidoderm, I think our application -- our situation is such that it hasn't really changed from the last time we updated you. We believe we've maintained our exclusivity because the product was approvable in the -- in time for meeting the timeline, for getting a tentative approval. The citizen's petition was the only outstanding issue. We believe that the citizen's petition remains the only outstanding issue with respect to our application. So from our perspective, under the law, we have the exclusivity. And we will -- we won't know with absolute certainty until the agency grants our final approval and tells us that we have the exclusivity, but right now, we have no reason to believe we don't have it. And so we will defend that position.

Operator

Ladies and gentlemen, we've reached the allotted time for questions. Thank you for your participation. I would now like to turn the call over to Lisa.

Lisa M. Defrancesco

Thank you for joining us today. There's still a number of questions in the queue that we didn't get to, but we look forward to following up with you directly.

Operator

This concludes today's conference call. You may now disconnect.

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