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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

Sigurdur Oli Olafsson - President of Global Generics

Robert A. Stewart - President of Global Operations

George Frederick Wilkinson - President of Global Brands and Biosimilars

Analysts

Christopher Schott - JP Morgan Chase & Co, Research Division

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Michael Faerm - Crédit Suisse AG, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Jason M. Gerberry - Leerink Swann LLC, Research Division

David Amsellem - Piper Jaffray Companies, Research Division

David G. Buck - The Buckingham Research Group Incorporated

Jami Rubin - Goldman Sachs Group Inc., Research Division

Randall Stanicky - Canaccord Genuity, Research Division

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

Watson Pharmaceuticals (WPI) Q3 2012 Earnings Call November 1, 2012 8:30 AM ET

Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Call. [Operator Instructions] I would like to now turn the call over to Ms. Lisa Defrancesco, Vice President of Global Investor Relations. You may begin.

Lisa M. Defrancesco

Thank you, Andrea, and good morning, everyone. I'd like to welcome you to the Watson Third Quarter 2012 Earnings Conference Call where we will also discuss our acquisition of Actavis. Earlier this morning, Watson issued a press release reporting its earnings for the third quarter ended September 30, 2012. We also announced last evening that we have successfully closed the acquisition of Actavis. These press releases 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 Watson's third 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 an update following yesterday's official close of the acquisition of Actavis, our updated outlook for 2012, which now includes Actavis results as of today and our preliminary outlook for 2013. We'll then open up the call for questions and answers.

Also on today's 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 express 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 is important to note that such statements about estimated or anticipated Watson results, prospects or other non-historical facts are forward-looking statements and reflect our current perspective of existing trends and information as of today’s date. Watson disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Actual results may differ materially from current expectations and projections depending on a number of factors affecting the Watson business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission, including but not limited to, the Watson Form 10-K for the period ended December 31, 2011 and the Watson Form 10-Q for the period ended June 30, 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 today. First, I would like to say to all those impacted by Hurricane Sandy, including our employees, families and friends, we hope that everyone was able to weather the storm safely. Our thoughts and prayers are with everyone, and we hope that we will all be able to return to normal very quickly.

Today is a historic day for Watson. We have closed the acquisition of Actavis and are truly a larger, more powerful global company. Today also represents the last time we will report Watson earnings as a stand-alone company. And I'm very pleased to announce that our exceptional third quarter 2012 performance demonstrates that we begin as a new company on a solid and growing financial foundation.

This morning, we'll focus on 2 things during the call: First, Todd and I will review the highlights of the third quarter; then, we will provide an update on the completion of the acquisition and provide you with some guidance regarding what we expect for the new company on a combined basis for the remainder of this year and our preliminary view of our expectations for 2013.

So as we get started, I want to welcome all of our new colleagues from Actavis to our team. Our company is uniquely positioned with a strong foundation for continued success. And working together, I'm very confident of a bright and profitable future.

Let's look at Watson's stand-alone third quarter results, which included another quarter of double-digit revenue, adjusted EBITDA and earnings growth. Net revenues increased 19% to $1.3 billion. Non-GAAP earnings were up 24% to $1.35 per diluted share. Adjusted EBITDA increased 18% to $305 million in the quarter. Cash flow from operations were approximately $146 million for the quarter.

We had a number of highlights in each business segment. In our Global Generics business, we received a final FDA approval for our generic version of Lidoderm. With the final approval in place, our agreement with Endo allows for a date certain launch of our generic version of Lidoderm in September of 2013. We launched a number of new products, including generic Vancocin; generic Arthrotec; Next Choice ONE DOSE, our generic version of Plan B One-Step; and an authorized generic version of Xopenex inhalation solution. We received final FDA approval for generic Pulmicort Respules. Since the end of the third quarter, we received FDA approval for our generic versions of Sanctura XR and Actos and began shipping both products.

Our international business generated over $198 million in revenue. The increase resulted from the acquisition of Ascent as well as organic growth driven by new product launches in key markets.

In our Global Brands business, we experienced continued strength in sales of key promoted products including Rapaflo, Generess Fe and Crinone. In July, we licensed in a biosimilar to Herceptin from Synthon and contributed to our Amgen collaboration. This transaction demonstrates the flexibility of this partnership to capitalize on opportunities to develop quality assets for introduction at market formation.

On September 27, we priced $3.9 billion in aggregate of senior unsecured notes at very favorable interest rates, completing the necessary financing to fund the acquisition of Actavis.

With that, I will now turn the call over to Todd to review our third quarter financial results. 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 third quarter were $1,285,000,000, an increase of 19% over the prior year period. In our Global Generics division, net revenues were $921 million, up 15% year-over-year, which includes the generic version of Lovenox launched in January, the generic version of Vancocin launched in April and an authorized generic version of Xopenex launched in August. Higher international net revenue from the addition of Ascent also contributed to the year-over-year revenue growth. This growth was partially offset by lower sales of generic oral contraceptives. Sales of extended-release products were $339 million, down 1% on stronger sales of generic Concerta, offset by lower sales of generic Toprol XL and Micro K as a result of competition. Sales of oral contraceptive products were $103 million, down 10% compared to the prior year primarily due to competition on our base oral contraceptive franchise. X U.S. net revenues were $198 million, up 37% from the third quarter of 2011. International net revenue increased as a result of the acquisition of Ascent Pharmaceuticals in January of 2012 and higher sales in key markets including the U.K., Canada and France. Global Generics adjusted gross margin was 47.2%, up 70 basis 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 increased year-over-year. Our share of profit will increase further if a competitor enters the market. This was offset in part by an increase in certain x U.S. sales at lower margins.

Moving to our Global Brands division, net revenues were $121.3 million, up 10% on higher sales of promoted products, including Generess Fe, Crinone and Rapaflo. Global Brands adjusted gross margin was 75%, down 2.5 percentage points as a result of higher manufacturing costs and a more favorable product mix in the prior year period.

Finally, net revenues from our Anda distribution division were $243 million, up 44% on third-party product launches. Anda's gross margin for the quarter was 15.1%, down 1.9 percentage points year-over-year as a result of lower margins on certain sales to chain customers.

Turning now to operating expenses. Consolidated GAAP research and development for the third quarter increased 53% to $113 million from $73 million in the prior year period, primarily due to higher upfront and third-party development milestone costs for biosimilar development, including the in-licensing agreement with Synthon for a biosimilar to Herceptin, which was contributed to our biosimilars collaboration with Amgen. Our biosimilar investment for the quarter was $44 million, which included $34 million in licensing and milestone payments.

SG&A on a GAAP basis was $225 million, up 19% year-over-year. The current year period includes $13.9 million in acquisition and integration costs related to the acquisition of Actavis. The current year period also included SG&A costs associated with the Ascent business acquired in January.

Amortization expense for the third quarter was $95 million, which includes $15 million of amortization related to our generic Xopenex product rights. Our income tax rate on a GAAP basis was 31.3%, down 11.6 percentage points from 42.9% in the prior year period as a result of certain non-taxable foreign exchange gain recognized in the current year period. On a non-GAAP basis, our income tax rate was 33.8% in the third quarter, down 1.2 percentage points from 35% in the prior year period. The non-GAAP rate was favorably impacted by the settlement of certain federal tax liabilities for tax years under audit. The non-GAAP rate was also favorably impacted by the sale of Moksha8, as tax benefits associated with prior equity losses could be recorded in the current year period. 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 third quarter are $1.35 per share, up 24% year-over-year. On a GAAP basis, earnings income [indiscernible] 11% to $0.60 per share for the third quarter, which includes foreign exchange gains of $53 million on derivatives used to hedge the company's euro-denominated Actavis acquisition price. An impairment charge of $32 million net of tax related to a manufacturing facility located in Greece, and amortization of our bridge loan financing fees of $7.1 million net of tax related to the acquisition of Actavis.

Our adjusted EBITDA for the third quarter was $304 million, an increase of 18%. Cash flow from operations for the third quarter was $146 million, and cash and marketable securities were $234 million at quarter end.

Our existing capital structure has allowed us to take advantage of a very favorable interest rate environment and complete financing of -- for the acquisition of Actavis during the quarter. As Paul mentioned, we priced $3.9 billion in aggregate of senior unsecured notes in an average effective rate of 3.36% and an average tenor of 14 years. This includes $1.2 billion of 5-year notes, $1.7 billion of 10-year notes and $1 billion of 30-year notes. At close, this brings our total borrowings to $6.7 billion. By year end, we expect our leverage ratio to be approximately 3.6x based upon pro forma adjusted EBITDA for 2012. The strong anticipated future cash flows generated from the combined business will enable us to delever quickly, and we continue to expect to achieve a leverage ratio of approximately 3x debt to adjusted EBITDA by the end of 2013.

With that, I'll turn the call back over to Paul for an update on our 2012 forecast and our initial outlook for 2013 and concluding remarks.

Paul M. Bisaro

Thanks, Todd. Last evening, we successfully closed the acquisition of Actavis. This combination is truly transformative for our company, creating the third largest global generics company. We also announced our intention to adopt a new global name, Actavis, for the combined entity. We will begin using Actavis as our global name in 2013. When Watson began its global expansion in 2009, it became clear that we could not establish a single, unified global market presence under the Watson name. When we announced the proposed acquisition of Actavis in April, we immediately instituted an extensive and accelerated review of our global brand position and naming equities. We recognized there were many benefits presenting a single name to all stakeholders: customers, consumers, payers, institutions and shareholders and potential shareholders. As this process progressed, it became clear that one of the many assets within this acquisition was the Actavis name, which is not only a dynamic and exciting name but also is trademarked and protected around the world. It invokes powerful words, action, vision and strength, time-honored attributes of both Watson and Actavis. Adopting this name on a global basis for all our Generics Brands and Biosimilars business was a logical and cost-effective solution. We will begin to use our new name in 2013 and trade under a new symbol. In the interim, the combined company will continue to be referred to as Watson and will trade under the symbol WPI.

The acquisition combines 2 successful, profitable and growing companies into a leading global generics player operating in more than 60 countries. The company has a core leadership position in modified-release products, solid oral doses, transdermals, semisolids, liquids and injectables, and features an industry leading global product portfolio of over 750 molecules offered in more than 1,700 different combinations and dosage forms.

The U.S. pipeline is among the strongest in the industry with 180 unique ANDAs pending at the FDA, including 47 First-to-Files, of which over 30 are exclusive. Outside of the U.S., the pipeline includes more than 2,000 marketing authorizations pending approval. Globally, there are an additional 600 new products currently in development covering multiple dosage forms.

We have worked very hard to plan the integration of Actavis. We have already announced the new global management structure of the combined company. And I can state with confidence that today, on day 1, we begin to execute a seamless integration with a focus on rapidly achieving our synergy targets of $300 million within the first 3 years.

I would like to discuss -- now I'd like to discuss our updated forecast for 2012. First, on a stand-alone basis, which excludes an additional 5.5 million shares and interest expense associated with the acquisition of Actavis, Watson's Global Generics revenue would have been at the high end of the forecasted range we provided in July of 2012. Global Brands revenue would have been slightly below its forecasted range, and Anda Distribution is expected to be at or above the top end of its forecasted range. Non-GAAP earnings per diluted share for the full year would have been expected to be slightly above the midpoint of the July forecasted range of $5.65 to $5.85 per share.

Moving now to a combined basis, our updated forecast for 2012 and preliminary outlook for 2013 is as follows: First, the assumptions. The results include Actavis as of today's close. There are no major product launches contemplated for the remainder of 2012. We have removed all impact from the divested products for the last 2 months of 2012 and going forward. Our forecast includes certain assumptions for increased competition on our oral contraceptives and extended-release products, including a competitive entrant on generic Concerta in the first quarter of 2013. We have included no major patent challenges in our forecast for 2013, with the exception of generic Pulmicort, which has FDA approval, and the generic Mucinex products, which are awaiting FDA approval. We do not assume any additional competitors on generic Adderall XR for 2013.

So for the full year of 2012, we estimate for total net -- our total net revenue to be $5.9 billion, and we expect adjusted EBITDA of $1,360,000,000 to approximately $1.4 billion. We expect non-GAAP earnings per diluted share in the range of $5.85 and $5.95 per share.

Moving on to our initial outlook for 2013. We expect our non-GAAP earnings to grow 30% to 40% over the high end of our estimated combined range for 2012. There are no major changes to our assumptions of approximately $300 million in annual cost synergies to be achieved over 3 years. This forecast includes the achievement of synergies beginning in the first quarter of 2013 with a gradual increase each quarter thereafter.

Given the strong performance of the Actavis business for year-to-date 2012 and our expectations for the remainder of the year, we expect Actavis to achieve the full value of the earnout, resulting in the issuance of 5.5 million shares of Watson's common stock as incremental consideration for the acquisition. Therefore, we expect a fully diluted share count of approximately 137.7 million fully diluted shares outstanding for 2013 -- I'm sorry, 134.7 million. I'm sorry, misspoke that. For accounting purposes, the additional shares will appear on the income statement beginning immediately. This is contemplated in the updated forecast for 2012.

Finally, we plan to hold an Investor Day for 2013 in New York in January, where we intend to provide a more comprehensive review of the combined business and further detail our expectations for 2013.

In closing, our strong results for the third quarter of 2012 demonstrates that we enter this powerful combination with solid, profitable and a growing foundation. Combined with significantly enhanced -- combined, we significantly enhance the growth potential of our organization and ability to continue to drive long-term shareholder value.

As I mentioned previously, we start today the execution of a seamless integration with an unwavering focus on rapidly capturing the tremendous value of this transformative combination. I would like to thank all of our employees, both Actavis and Watson, around the world for their hard work in helping to achieve a successful close of this acquisition and very strong results for year-to-date 2012. I hope that all the shareholders share our excitement in the potential for our company, as we continue our strong growth in 2013 and beyond. With that, we can now take questions. Lisa?

Lisa M. Defrancesco

Andrea, we'll go ahead and take our questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Schott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co, Research Division

Maybe first, as you look at that Actavis ANDA portfolio, what are some of the highlights you'd point us to there? And as we're thinking about that, can you talk about Actavis' approach toward settlement? I know this is something, obviously, Watson has been very effective with. Do you see any settlement opportunities as you look at your new pipeline here? And my second question was on the 2013 preliminary guidance. It looks like it's fairly in line with some of the original comments you made back in April, but we've had quite a bit of good news for the company. We've had lower financing costs. We've had Lidoderm. We've had Adderall XR. Yet, in that context, has there been any kind of negative offsets we should be thinking about here? Was this all just incorporated in the original range? Or should we just be thinking about these targets as being conservative?

Sigurdur Oli Olafsson

Chris, it's Siggi. Maybe I start on the pipeline and Paul takes the settlement and the guidance. I think what Actavis has to offer in the U.S. is they have 3 development centers in the U.S. And the focus from them has been, as for us, on the slow-release, modified-release product, solid oral. But also, they have an extensive semisolid development in Owings Mills in Maryland. They have First-to-Files of creams and ointments, which is an addition to our pipeline. On top of that, Actavis has a pipeline of injectable products, which are developed both in Romania and in Italy, which will be addition to our pipeline. So the combined 180 pending ANDAs has, in fact, from all dosage form: injectables, semisolid, liquids, tablets and respiratory product, so we cover now all the doses form we really want to be in. Paul?

Paul M. Bisaro

Yes, I'll just touch on -- the other part of that question had to do with settlement. We've -- we are always willing and will continue to be willing to talk to parties to find ways to resolve litigation, particularly things that -- well, any kind of litigation, specifically patent litigation, where it's always problematic as to whether or not you're going to win or not. So we remain open to those opportunities, Chris. We'll keep working on that. Regarding our 2013 guidance, I appreciate the fact that you recognize we're spot on with what we gave at the beginning. And yes, there is some upsides that we've experienced over the last few months, but there's also been negatives, as you would expect in any business. There are ups and downs. And some of the things that we saw that didn't go the way we had hoped was the esomeprazole in Europe did not go as well as we had hoped it would go. We also had a bit of the Actos issue as I'm sure you're aware. That didn't go the way we like. Although we ultimately received final approval by not being there at market formation, it certainly affected our income for '12 and for '13. There's a bit of the third-party business not growing as rapidly as we had originally hoped, and that's due to some of the austerity measures in Europe. Siggi can talk more about that later on. And finally, as we begin this process, as we look at the first day of having a combined company, one of the things we have to do is look toward the future. And you know I've always said that investing in R&D is our primary -- one of our primary objectives. We need to look very hard at how we allocate some of the value that we're getting by the positives that are going on and redirecting some of those positives not just back to the bottom line for the shareholders but also investing for the future. And that includes investing in more clinical endpoint studies for our Generics business, getting more interesting product portfolios for our international business as well as our Brands and Biosimilars business. By accelerating some of the things we've been doing with the Amgen -- with Amgen and with the Herceptin arrangement, we will be spending more in the short term than we had originally forecasted, but that's a good thing. That's not a bad thing. So I am very pleased to be able to redirect some of these funds to build for the future because I think, for our shareholders, that's the important thing to do.

Christopher Schott - JP Morgan Chase & Co, Research Division

Great. And just a quick follow-up to that. If you continue -- if we do see more fall -- I mean, should we continue to think about that cost trend that there is maybe even more opportunity as we get into '13 that, that might be a year that we should think about more reinvestment as compared to a potential kind of earnings upside as the year progresses. Or just...

Paul M. Bisaro

Well, yes, Chris, I don't know if I would say that because first of all, it's still very early. We -- there is still plenty of upside opportunities. As I articulated in our forecast, we have no patent challenge upside for any of the existing cases, including Intuniv and some of the other things that are coming -- that could come in 2013. Also, if we capture -- if we're able to accelerate the capture of synergies, both cost synergies and revenue synergies, that's a potential upside. So there's always potential upside for the business, but we have to always recognize that in our business there's some potential downsides, and we've got to be prepared for those. So for us, it seemed like a very prudent thing to do to say that we're going to be 30% growth over the combined results for 2012. I think our shareholders, frankly, should be pleased with that number. That's a very significant number. It's very hard to imagine any other company posting that kind of growth. And we're proud of it, and we'll continue to focus on double-digit growth. As we've said over the last 5 years, we've been very focused on it. We'll remain focused on it.

Operator

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

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Couple of questions. First, Siggi, what's the overall environment in Europe from government austerity measures? Is increased generic utilization offsetting pricing pressures? Or is it the reverse? And then I'll ask another one to Paul.

Sigurdur Oli Olafsson

Gary, yes. We see it's different -- a little different between different markets. We see the markets like in France, there's an increased utilization for sure. We see -- I think all the generic companies are showing a better top line. I'm not sure if that is delivering in the same amount to the bottom line because there's a very severe competition between all the companies in France, but clearly, we are seeing an upside there. All the countries are trying to do the same. We see it in Greece. I mentioned before in our conference calls, Greece has around 21st generic penetration, and for to get any benefit from price decrease on generics, they need to increase the utilization much, much more before they -- to start to get the benefit from the price decrease. I think the Greek government is recognizing that. They are finding way to increase generic utilizations, and hopefully, over the next few months, we will see that picking up. We feel that the U.K. market now in the combined company -- the combined company will be #2 in U.K. Clearly, there's a significant saving going on. And for the prescription business in U.K., it's a tough market to operate in. But overall, the -- I think that size matters in U.K., we have a very significant portfolio to offer. It has benefited us in the bottom line. And last but not least, maybe if I talk about the Nordics. We will be the largest generic company in the Nordics, #1 in Sweden, Norway and Iceland, #3 in Denmark and #5 in Finland. Yes, there are austerity measures in place, but due to our size and offering both prescription drugs, OTC drugs and hospital drugs, we feel that we are doing well in these markets, and the size of the portfolio in the company is helping us. The markets which I'm still negative on is probably the tender [ph] markets in Germany and Holland as an example. Utilization there is very high. We are talking about between 70 and 81st utilization of generics in this markets. But overall, the prices are very, very low. It's a volume game in these markets today and probably will be going forward.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Okay. That's very helpful. And then, Paul, just a few more on the 2013 guidance. What have you assumed for the estimated impact from Lidoderm? Will that be an exclusive situation when you launch in September of next year? Tax rate assumptions, if you could give us that? And also just plans with consolidation of manufacturing facilities and how that may be able to improve gross margin?

Paul M. Bisaro

Sure. I think I'll start with Lidoderm. Then, I'll turn over the tax and then -- to Todd, and then Bob will take the manufacturing bit. On the Lidoderm, we have no reason to expect that we will not have exclusivity when we launch in September, and we would expect that exclusivity to continue through into 2014. So our expectation has not changed. We've not had any indication otherwise. And we firmly believe that's our position. So Todd?

R. Todd Joyce

Concerning the tax rate, our initial guidance was around -- was approximately 28%. Based upon our current review, we still feel comfortable with that estimate. We'll start to realize that beginning in the fourth quarter, and we expect to be able to achieve that tax rate throughout 2013.

Robert A. Stewart

Yes. And on the manufacturing side, I think as Paul's mentioned in prior meetings, that we really have not included a large manufacturing synergy component in our $300 million target. We will have quite an extensive manufacturing network with over 30 plants around the world. Clearly, there's going to be an opportunity to streamline manufacturing and find more efficient ways to move product through our supply chain. And as we do that, we'll communicate different decisions, but no question about it. There'll be opportunities in the longer term because it takes a long time to move products around the network. It takes a long time to shut down manufacturing facilities. And so you'd see us continuing our global supply chain initiative going forward. And as we make those decisions, communicate what the impact would be.

Operator

[Operator Instructions] Your next question comes from the line of Shibani Malhotra with RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

On Lidoderm, Paul, we understand that you'd probably keep First-to-File exclusivity, but just looking at the science behind the FDA's approval of your batch, what do you think are the chances of Mylan getting their Lidoderm approved as well given that it's a different formulation? And then second, on Pulmicort, can you just expand on what your assumptions are in terms of entering the market? Is it just Watson that you're assuming? Or are you assuming Sandoz and Apotex? And how risk adjusted is this?

Paul M. Bisaro

On the Lidoderm question, I think we'll sort of defer that question to the fight between Endo and Mylan about whether or not these 2 products are equivalent. I think our position is our product is approvable. We have an approval. We will launch the product in September, and we have exclusivity. We are guiding toward that, and we are forecasting for that result. So we have the $96 million of brand product that we'll be distributing the first half of 2013, we will launch our generic version in September, and we'll carry that 6-month period through 2014. That's the way we're forecasting it for both '13 and '14, and we would then expect -- we are then forecasting competition at the end of the 180-day period. Siggi?

Sigurdur Oli Olafsson

Yes, so on Pulmicort, as you know, we have the FDA approval. The court starts on November 7, and we assume approval sometime early in 2013 but with a competition. So we don't assume to be alone in the market.

Operator

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

Michael Faerm - Crédit Suisse AG, Research Division

I have 2. First one is regarding the 2013 guidance. Could you give some sense of the major swing factors between the low end of the range and high end of the range? And secondly, regarding the synergies for the $300 million guidance, could you give some sense of the relative weighting between cost of goods, R&D and SG&A of that $300 million and the extent to which any of those could have potential upside?

Paul M. Bisaro

Well, I think the swing factors would really be synergy capture and our ability to launch certain products around the world on time. And then the other factor, I think, would be what is the competitive environment going to look like in the U.S. for some of our existing products. We have forecasted, I think, appropriately, but we forecasted certain competition on oral contraceptives. There are certain -- in certain competition on extended-release products. If that stuff -- if that competition doesn't materialize or the pricing impact is lower than we expect, that would be one of the swing factors. I would also say that some of the products like Pulmicort that we just talked about is also a potential swing factor. If there is less competition than we expect at the time we launch the product, we could of course see a bigger impact from Pulmicort. Then on -- and then on the other hand, if we lose the litigation, we would have potentially a negative impact on our overall forecast. So we've got -- as with everything, we've got things moving in both directions. Again, I would remind you, we do not include any of the other patent challenges in here. So if we think about our forecast, we're comfortable with it. We understand that it's early. It's preliminary. It's a bit wide. We would expect that in January we'll have more visibility, and we'll try to give you more -- a lot more clarity at that time. Todd? Do you want to take a...

R. Todd Joyce

No. And as part of that January meeting, we'll also provide some additional details around all the operating expenses, R&D expectations for 2013, SG&A, as well as what our expectations are for synergy capture during the year, as well as the timing. We'll be a little more specific on the timing.

Michael Faerm - Crédit Suisse AG, Research Division

And the second question on the synergies, could you provide any color on the weighting between the expense lines and potential for any upside on any of those?

Sigurdur Oli Olafsson

Yes, we don't close -- it's Siggi here. We don't go through the details, but the synergies that we capture the first, there's a little of the R&D overlapping synergies that we will capture quite soon based on overlapping projects that both companies are working on, and we only have to go forward with one of the projects. There's also -- because we are overlapping in 7 countries, there is a quick SG&A synergies in those countries, which we will start to realize sometime in the first quarter but more throughout the year. The cost synergies are a little bit more difficult to realize because we have agreements in place on our API purchasing. We are obviously working very hard on lowering our cost of goods, but that will be later in the year for sure because we both have inventory of API, and it's slated to materialize in our numbers. So without going into the details between the 3, I think that's how we can explain it.

Operator

Our next question comes from the line of Douglas Tsao with Barclays.

Douglas D. Tsao - Barclays Capital, Research Division

Just curious if you could provide an update on your current thoughts in terms of development approaches. Obviously, you disclosed the resolution of the appeal to the FDA.

George Frederick Wilkinson

This is Fred Wilkinson. Yes, obviously, we did announce that the appeal was denied. As kind of a reminder, the appeal was based on focusing on the 1998 guidance, which allows for approval on a single well-controlled study as well as back-up data from the literature. We did offer up additional analysis on -- to answer some of the questions the FDA and the ad board had as we went through the process over the last year. We also committed to a very large Phase IV program that would have actually provided one of the larger databases on preterm birth. But as you saw, this appeal was denied. There are still a few avenues, but I think it's unlikely that we will pursue those avenues at this particular time.

Douglas D. Tsao - Barclays Capital, Research Division

Okay, great. And then perhaps this is for Paul or Siggi. I was just curious if you had any sort of initial impressions or thoughts in terms of some of the controversy regarding competitors' products for Wellbutrin and other generic versions of Wellbutrin. And I'm less curious about that specific product, but what you think that might mean for extended-release products and your positioning in that segment of the market where has always been a particular strength of Watson and also seems to be a strength of Actavis, and how your capabilities in that field might increase?

Sigurdur Oli Olafsson

Douglas, it's Siggi. Maybe I'll take that. I think the Wellbutrin example is something that came up with the Impax product. We have Wellbutrin XL both in the Actavis portfolio and in the Watson portfolio. We are running the new bio study as requested, as we speak, and we feel very comfortable on our formulation of Wellbutrin for sure. With regards to how this impacts the whole portfolio, I think Wellbutrin was a special case because we run a very significant bio study programs on all our slow-release formulations on different strengths, both single dose and multiple dose, fed [ph] and half fed [ph]. So there's a significant clinical program behind it. So I don't think this will affect the whole of the modified-release, slow-release formulation development going forward. But it's critical to have in mind that this is something that we need to monitor, but that's what the development process is about, it's to show that there is a bioequivalence between the brand and the generic that we are introducing to the market.

Douglas D. Tsao - Barclays Capital, Research Division

Do you think that this could potentially erect some additional barriers to entry for additional competitors interested in that -- in those types of products?

Paul M. Bisaro

Well, I think what I would say, Doug, is that it's possible, but I think those barriers already existed. I believe the FDA had been taking a very -- a much more aggressive view on extended-release products. We saw that with our metoprolol XL product where they -- where we delivered 3 validation batches and the number of extended-release products we actually delivered even production batch data prior to gaining final approval. Assuming that the FDA is applying those standards across the board, I think that, that's appropriate. And again, as long as everybody lives to the same standard, Watson, now Actavis, is more than happy to meet them.

Operator

Your next question comes from the line of Jason Gerberry with Leerink Swann.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Paul, can you just confirm that for 2013 guidance that some of that upside was in fact due to reinvestment in the business? Second question, any additional learning since the April announcement on the deal that maybe there's a better long-term tax rate? And then, Paul, just lastly, on the FTC push for review of the pay-for-delay at the Supreme Court level, can you just talk maybe a little bit about how that might impact settlement structures going forward if the FTC were to get a positive outcome there?

Paul M. Bisaro

Sure. Yes, on 2013, one of the things I did discuss was that we would expect to invest more in R&D, both in biologics and generics as well as brands, in 2013, than I think most -- to use a point of reference, than I think most analysts have projected and which, of course, makes sense. As we look at the biosimilar opportunities, we were able to accelerate the Herceptin product. That, of course, means that we're going to spend more in the first year. The good news is we have the ability to do that reallocation and still provide, I think, a terrific return to our shareholders with upside. And we've kind of walked through that. I think the long-term -- I forget what that was exactly.

Sigurdur Oli Olafsson

Learning from [indiscernible] .

Paul M. Bisaro

Oh, well, I'll let you take that one, Siggi, and then I'll come back for pay-for-delay.

Sigurdur Oli Olafsson

Yes, I think since we signed on April 25, we have learned much more about the business. Due diligence is one thing, but we have been working hand in hand with the Actavis management and employees in preparing for the integration. So I think the positive thing is we feel that they have even a stronger pipeline than we expected during due diligence. They have had extremely strong R&D, both internationally but also in the U.S., which we have seen. We have also been impressed with their management team and employees. We -- as you saw probably in our announcement yesterday, a significant portion of the Actavis management team will be management team of the new combined company and we are really, really pleased about that, how we have been able to build a combined management team of the best people in the industry. Those are probably the big 2 learnings.

R. Todd Joyce

So in terms of the tax rate, there was a -- most of our focus has been on the acquisition structure, so a lot of time went into all the planning that had to take place in order to achieve that 28% at the outset. As we move forward, we will continue to focus on ways in which we can bring down that effective tax rate on a longer-term basis.

Paul M. Bisaro

Right. And I think your last question was about the -- taking the so-called pay-for-delay to the Supreme Court. I like to call the Third Circuit decision an outlier, not a split in the circuits. Remember, most of the circuits that have ruled on this have found what you would expect they would find, that because there's a patent in place, people are allowed to settle patent cases. Continually, I've said I think the FTC has been wrongheaded about his. They've just refused to acknowledge that isn't about the case. It's about the patent. If they don't like the patent system, they should work on changing the patent system, not the cases. Their changing the law doesn't make sense in this case. But with that said, should they be successful, then we would have to reevaluate the way we approach these cases. I am personally of the belief that I think it's a long shot that the Supreme Court would overturn, I don't know, 300 years of jurisprudence that says that people can settle cases, but you know what, I could be wrong.

Operator

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

David Amsellem - Piper Jaffray Companies, Research Division

So first question is on Adderall XR. I know you're guiding to no additional competition in 2013. I'm actually interested what your thoughts on 2014, given that the AGs are going to expire for both Teva and Impax. And do you think it's going to be a 2-way market between essentially you and Shire in '14?

Sigurdur Oli Olafsson

David, it's Siggi. I think it's difficult to say. We have said there is a potential that in 2014 if there's no further approvals of Adderall, generic Adderall XRs in the market, but when the AGs expire that this would end up being a 2-player market maybe with another company getting an AG. There's also -- we know that there's at least 2 companies that are working very hard to get approvals. They are some way back to our belief. But you're absolutely right. There could be a scenario in 2014 where we essentially would be in a less competition. We, so far, have not modeled it like that. We need to understand a little bit more about the competition, how others are doing and -- but we will monitor that throughout 2013 how 2014 will look.

David Amsellem - Piper Jaffray Companies, Research Division

Okay. And then switching gears to Concerta. I know you're expecting a competitor in the first quarter of '13, but considering that KUDCo doesn't have an approval, they could have launched several months ago and Impax could not launch until July of '13 per their settlement, is it possible that you're just plainly being conservative here on Concerta and that we could see some period in '13 where you're still the only generic?

Paul M. Bisaro

Well, that's always a possibility. I think it's prudent for us to model it the way we did, which is a January launch -- or I'm sorry, mid-quarter launch of the first quarter. The -- I think that's the right place to be. Should they come -- should UCB come earlier, we still have that anomaly where we do believe it will take time for any competitor, no matter who it is, to gain market share simply because of the time that it takes to ramp up production, ramp up the Schedule II product and get product into the marketplace. And then we also have that switchover of the royalty stream. So I think we've, I think, appropriately modeled 2013. Should that change, should there be a further delay, then we'll communicate what that means at the time. But right now, I think this is the right way to go.

Operator

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

David G. Buck - The Buckingham Research Group Incorporated

Just wanted to touch base on a couple of quick questions. First on the synergies, can you talk a little bit about where the synergies are likely to come from? Is it going to be more from R&D? It looked like Actavis outspent Watson at least in 2012's first half. Is there going to be more from consolidation of plants? And can you give us just an update on the current thoughts, if you did not, on Intuniv entry and Lidoderm number of competitors in 2013?

Sigurdur Oli Olafsson

So let me, David, take the R&D and the -- on the synergies. I think, as I mentioned, the first synergies that will come will be in the overlapping projects. As you know, especially on the U.S. side, we're all going after the same molecules. So there is some overlap and there low-hanging fruits where we can capture synergies of not spending on clinical studies for both products or projects, API, et cetera. So clearly, there is an early synergy there. But also in the SG&A, in the overlapping sales and marketing structure, especially in the U.S. where you have a key account management with a small sales and marketing team, Actavis has a full team. We have a full team, so there's clearly a synergy there. Same applies to U.K., France, a little bit in the Nordics, Germany, Poland and Australia. So there's an opportunity there. With regards to the significant spend on R&D in Actavis and Watson, as Paul mentioned in his answer to the first question, we want to reinvest half of the synergies into new projects, especially focusing maybe on respiratory products, on creams and ointments where we need to do a clinical endpoint studies. The average cost of these development projects is about 5x more than the average cost of a tablet development. So to talk about significant synergy in R&D, yes, there is clearly an opportunity, which we will capture early, but we also want to go into the harder-to-develop products and reinvest some of the synergies into the future growth of the company.

Paul M. Bisaro

Yes, I would also add there's probably one other area. It is procurement. And Bob, do you want to take that?

Robert A. Stewart

Yes, so we're going to be the largest procurer of API or purchasers of API in the entire generic industry. So we think that there's clear opportunities there to reduce our cost. As Siggi mentioned, we have to bleed off inventory levels. We have to change suppliers in certain cases, and so that's another area of synergy that we expect to capitalize on over the next several years.

Paul M. Bisaro

And then I think, David, you asked about Intuniv and then Lidoderm. On Intuniv, we did not include Intuniv in our 2013 forecast. We have to evaluate that. The case is still pending, and we'll have to wait and see what happens there. On Lidoderm, we've -- we do not have -- we have not forecasted any competition for 2013 as I mentioned earlier. 2014, we would expect to see one competitor at the end of the 180 days. And then we know of, I think, a couple of additional filers, but they would be very early on in the process, and whether they would be able to join us in 2014 is probably still too early to tell. But I would -- probably, it would be a bit of a long shot to see them in 2014.

David G. Buck - The Buckingham Research Group Incorporated

Great. And just one -- if can stick in one more. Paul, did you talk about the outlook for growth at all in 2014? Obviously, the 30% to 40% adjusted EPS growth for '13 was given. But the comment I think in the past was hoping to grow double digits going forward after '13. Was that talked about or if not, what's the outlook?

Paul M. Bisaro

Well, David, we haven't given formal guidance, but I would say that and I will continue to say that it is the company's stated objective that we continue to grow at a double-digit rate. We have grown at a double-digit rate the last 5 years, and we would look to do that in 2013, 2014. Obviously 2013, we've given you double-digit growth, but also, we would look to do that in '14. Hopefully in January, we can give you a little bit more color around 2014 as well as 2013.

Operator

Your next question comes from the line of Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

I don't know if you called on me earlier, but I've been hopping between conference calls, so I don't know if my question has been asked. So just was wondering, Paul, did you comment on, again referring to 2013 guidance, how many generic Concertas -- additional generic Concertas are you assuming in your guidance for 2013?

Paul M. Bisaro

In 2013, we're only assuming one additional competitor in 2013.

Jami Rubin - Goldman Sachs Group Inc., Research Division

Just assuming one. Okay. And do you assume -- or what -- how do you think about the probabilities of Pulmicort in your 2013 numbers?

Paul M. Bisaro

Well, we've included a successful patent challenge and launch of generic Pulmicort in our 2013 guidance, and we've had -- and we've included competition as well. So there are upsides and downsides associated with that, Jami. If we're successful in launching the product and we're one of the only ones that are able to do that, then there could be upside to the number. Should we be unsuccessful, of course, we would not be able to include the gross profit, and there would be a bit of a challenge then to the number. But that's why I think the 30% to 40% growth was cognizant of that risk.

Jami Rubin - Goldman Sachs Group Inc., Research Division

And then just one last question, Paul, if I may. The branded business has been sort of the weak link of the story over the past, I guess, 6 to 8 quarters or so, and I'm just wondering if you could comment on that. Obviously, the focus has been on Actavis and the synergies and the generic business, which has outperformed expectations, but can you just talk to us about your views on the brand business and your commitment to further growth in that business? And it would seem to me then in order to really accelerate the pace of that growth that you would need to do a branded acquisition.

Paul M. Bisaro

Well, Jami, I -- first of all, I think I wouldn't describe the brand business as a weak link. I think they have done an extraordinary job with the brands that we have. We have worked very diligently to try to find as many opportunities as possible. I will say it's been a challenging road. There is a lot of money chasing very limited assets on the brand side of the business, and I think our team has done a great job at trying to find those that are out there. I have to say, I think, we would all -- it would be terrible -- I'm sure you can imagine the entire management team has been disappointed and a bit frustrated with the FDA on the PROCHIEVE decisions, but that's the way it goes in the brand business from time to time. But we'll pick ourselves up and dust ourselves off and keep going. We are definitely committed to a long-term brand strategy. We are committed to women's health. We're committed to urology, and we're committed to a biosimilar franchise. So we will continue to look for business development opportunities. I would expect that you'll see some from us over the next few months, as we can bring home some of the deals we're currently working on. But we have not wavered in our commitment to our brand franchise. Fred, did you want to say anything [ph]?

George Frederick Wilkinson

No, I mean, I think the only thing to add to that is that, I mean, we've got good solid growth going on Rapaflo, good solid growth continuing on Crinone, launched Generess extremely successfully in a very, very crowded market and now continue to focus ourselves on the urology and women's health care space very aggressively. We do hope to bring home an acquisition of either product or an organization in the very near future and are continuing to search for the right mix.

Operator

Your next question comes from the line of Randall Stanicky with Canccord.

Randall Stanicky - Canaccord Genuity, Research Division

... brand side and I won't ask you what your 2015 guidance is, but as people kind of look past what is going to be a really good growth rate for the next couple of years and we think about some of the moving parts in sort of the medium term, what areas in the brand space are you focused on? And then Paul, can you talk about the biogeneric opportunity? There's kind of 2 aspects to this: One, when we're going to start to see some conversion from the Amgen deal? And then the other part of that is the R&D commitments. Can you kind of talk about how those will play out as we think about the next couple of years?

Paul M. Bisaro

Sure. Randall, I'm sorry, we missed a little bit of -- in the first part of your question, you were kind of cut off. I think what you were focused on there was our brand commitment. Is that what it was? Or did I just not get....

Randall Stanicky - Canaccord Genuity, Research Division

Yes. Just very specifically, I mean what area in the brand side are you looking at? What therapeutic classes?

Paul M. Bisaro

Yes, we're continuing to focus our development efforts around women's health, and this is widespread women's health, not just contraception, but we will continue to look for opportunities of underserved needs in women's health care. And there are those areas. We're looking at new therapies. We're looking at NCEs. We're looking at new delivery devices, new delivery systems. We're looking across the board at all of the options we have presented -- we have available to ourselves. On the urology front, we continue to be focused on that. As we think about going forward, we will continue to look for opportunities to maybe add on perhaps an additional therapeutic category. We have to be careful about how we approach that. That's a challenging effort, and we would probably need to do a substantial acquisition to get ourselves into another category, but we haven't certainly said we wouldn't do that. So we are focused on all of those categories. On the biogeneric opportunity, I think both Watson and Amgen will be speaking a bit more about these opportunities over the next few months. It turns out that Watson and Amgen both have investor days very close to one another in January and February, and we would expect that both of us will talk about that, and you'll be able to get a lot more clarity around kind of what we're working on and the timing of those products. But that's just the Watson-Amgen collaboration. As to FSH, we continue to believe that, that will be our first biosimilar that comes to market. As you know, it fits very nicely with our ability to sell products in the U.S. because of the woman's health care franchise. So I think we're well positioned to deal with that. Although we wouldn't expect to see any major contribution from any of these products truly until late 2015 and early 2016. And then finally, the R&D commitment, it is a significant commitment. Nothing comes without a price, and biosimilars are going to come with a big price. And that's why I think the assets are so valuable. Many people have talked about biosimilars. Many people have talked about wanting to be in this space, but when it comes down to spending the money, there's very few companies who are willing to take the P&L hit or willing able to do -- to spend the P&L money to invest in these products. And they are -- it is an extraordinary investment, $50 million to $100 million per product. If you're partnered with somebody, you can obviously -- you can defer some of that or offset some of that cost. But to believe that there's going to be 12 competitors on monoclonal antibodies in the U.S. is just mind-boggling to me. I just don't see that. There's just not enough people who can spend that kind of money to get to that point. There's going to be a handful of players. I think that makes these products extremely valuable. And we're committed to them for the future.

Randall Stanicky - Canaccord Genuity, Research Division

And Paul, do you feel like your current relationships and pipeline assets give you enough breadth to -- so that you don't need to do any more deals in that area right now?

Paul M. Bisaro

Well, I don't think we need to do anything immediately, but we will continue to look at additional product opportunities. We want to be selective on the biosimilar side because of the magnitude of the cost. If we find things -- and I'll use FSH as the example -- that fit nicely within our portfolio of things that we can manage ourselves, that would be good. If we work with Amgen as well as it's been going, we may do additional things with them. There are multiple opportunities. I don't think we're at the end of our biosimilar development line. We're just not at the stage right now where we need to anything.

Operator

And your final question comes from the line of Ronny Gal with Sanford Bernstein.

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

Yes, I have also been juggling calls. Two questions on the branded side. The first one, the respiratory side, I guess, the -- I don't know if you mentioned it before, but do you expect to be in the U.S. market with a lot of ICS products in mid-2015 when the ADVAIR and Symbicort patent expire -- composition patent expire? And second, you have not mentioned your biosimilar insulin. And I know this is a program you're inheriting, and it's kind of interesting because very few people are developing this for commercial reasons. And I don't know if you actually got a chance to wrap your head around this yet and decided what you're going to do with the program.

Sigurdur Oli Olafsson

Ronny, it's Siggi. I take the first one on the respiratory side. So we have a program, a significant program in respiratory. We announced that we filed the Xopenox HFA product recently. We are building a group of people to focus on the development. We have had co-development on some of these products. Will we be in place with the big respiratory products in 2015? It's way too early to say. We are working very hard on this as I think that all the big 4 generic companies are doing. And we are investing a significant amount of money in the respiratory development today and probably growing going forward maybe on the insulin front.

George Frederick Wilkinson

Yes, on insulin, obviously, we're just with day 1 of the -- post the acquisition. The insulin projects do come to us through a joint venture with Bioton and Actavis. We are -- we have met with management team. We're meeting with them again over the next couple of weeks, and we'll be evaluating that situation. Obviously, there's not been a lot of success in people developing generics to insulin and to the insulin analogs. The market is also very well controlled by the current innovators of the product line. And we'll be evaluating as we go forward. This is a unique opportunity, but one that comes with some reasonable risks and some pretty good competitive control there. And my answer is it's way too early for us to predict whether this is an asset that will be a strong contributor or an asset that we'll be evaluating its future, Ron.

Operator

I would now like to turn the call back over to Ms. Lisa Defrancesco.

Lisa M. Defrancesco

1

Thank you, everyone, for joining us. We're going to end the call. There's quite a few of you in the queue that we'll try to follow up with directly. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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