Watson Pharmaceuticals (WPI)

Q2 2011 Earnings Call

July 26, 2011 8:30 am ET

Executives

Patricia Eisenhaur - Vice President of Investor Relations & Corporate Communications

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

Paul Bisaro - Chief Executive Officer, President and Director

George Wilkinson - Executive Vice President of Global Brands

David Buchen - Executive Vice President, Secretary and General Counsel

Sigurdur Olafsson - Executive Vice President of Global Generics

Analysts

Ken Cacciatore - Cowen and Company, LLC

David Risinger - Morgan Stanley

Ronny Gal - Sanford C. Bernstein & Co., Inc.

David Maris - Credit Agricole Securities (USA) Inc.

John Boris - Citigroup Inc

Michael Faerm - Crédit Suisse AG

Elliot Wilbur - Needham & Company, LLC

Michael Tong - Wells Fargo Securities, LLC

Shibani Malhotra - RBC Capital Markets, LLC

Timothy Chiang - CRT Capital Group LLC

Gregory Gilbert - BofA Merrill Lynch

Christopher Schott - JP Morgan Chase & Co

David Buck - Buckingham Research Group, Inc.

David Amsellem - Piper Jaffray Companies

Marc Goodman - UBS Investment Bank

Presentation

Operator

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Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watson Pharmaceuticals Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Patty Eisenhaur, Vice President, Investor Relations. Please go ahead.

Patricia Eisenhaur

Thank you, Brandy, and good morning, everyone. I'd like to welcome you to Watson's second quarter 2011 earnings conference call.

Earlier this morning, Watson issued a press release reporting its earnings for the second quarter ended June 30, 2011. The press release, together with additional materials reconciling our GAAP and adjusted financial results and forecast, are available on our website at www.watson.com. Additionally, we are conducting a live webcast of this call, which will also be available on our website after the call's conclusion.

With us on today's call are Paul Bisaro, our President and CEO, who will provide an overview of the second quarter within our Global Generics, Global Brands and Distribution business segments; Todd Joyce, our 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 2011. We'll then open the call up for questions and answers.

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

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

I’d also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or 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 ended December 31, 2010, and Form 10-Q for the period ended March 31, 2010.

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

Paul Bisaro

Thanks, Patty, and good morning, everyone, and thanks for joining us today. Watson reached a new milestone in the second quarter, reporting a record $1.1 billion in net revenues, a 24% increase over last year. While all 3 of our business segments, Global Generics, Global Brands and ANDA distribution performed well in the quarter, Global Generics was particularly strong with revenue increasing 39%. The launch of the generic version of Concerta was the main driver for revenue and earnings in the second quarter, and generic Concerta will become even more significant in the second half of 2011 and into next year.

Non-GAAP net income also increased 24%, resulting in record earnings of $1.01 per share, and adjusted EBITDA came in at $243 million, increasing 17%.

We achieved these results while continuing to invest heavily in R&D sales and marketing. Spending for research and development increased 30% as we continued to invest globally to grow our Global Generics and Global Brand businesses. Spending on sales and marketing was up 26%, and reflects our investment to grow sales internationally and our commitment to grow our U.S. brand presence to our target audiences.

Now I would like to highlight a few of our accomplishments for the quarter. We launched generic Concerta in May and generic substitution was faster than expected in the second quarter. We ended the quarter with a market share of roughly 73%. Since the end of the quarter, market share has continued to increase and is now slightly above 75%. Remember that Concerta does have seasonality associated with it. And therefore, we expect overall prescription trends for the product to decline in the third quarter with a return to second quarter levels in the fourth quarter.

Overall, we're extremely pleased with the launch, and we believe that generic Concerta will be a significant long-term driver of Watson's profitability.

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