Watson Pharmaceuticals Q3 2010 Earnings Call Transcript

Watson Pharmaceuticals (WPI)

Q3 2010 Earnings Call

November 04, 2010 8:30 am ET

Executives

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

Siggi Olafsson -

Patricia Eisenhaur - Vice President of Investor Relations & Corporate Communications

Paul Bisaro - Chief Executive Officer, President and Director

George Wilkinson - Executive Vice President of Global Brands

Analysts

Christopher Caponetti

Ken Cacciatore - Cowen and Company, LLC

Ronny Gal - Bernstein Research

Richard Silver - Barclays Capital

Elliot Wilbur - Needham & Company, LLC

Gregory Gilbert - BofA Merrill Lynch

Timothy Chiang - CRT Capital Group LLC

Christopher Schott - JP Morgan Chase & Co

Shibani Malhotra - RBC Capital Markets Corporation

David Buck - Buckingham Research Group, Inc.

David Amsellem - Piper Jaffray Companies

Louise Chen - Collins Stewart LLC

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 Third Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Patty Eisenhaur, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Patricia Eisenhaur

Thank you, Brandy, and good morning, everyone. I'd like to welcome you to Watson's Third Quarter 2010 Earnings Conference Call.

Earlier this morning, Watson issued a press release reporting its earnings for the third quarter and year-to-date period ended September 30, 2010. 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 third quarter within our Global Generics, Global Brands and Distribution business segments; Todd Joyce, our Chief Financial Officer, will then provide additional details on the performance of our business segment, as well as our consolidated financial results for the quarter. Paul will conclude our presentation with our updated outlook for 2010. We'll then open the call up for questions and answers.

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

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, 2009, and the Form 10-Q for the period ending June 30, 2010.

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

Paul Bisaro

Thank you, Patty, and good morning, everyone, and thank you for joining us today. I am pleased to report yet another very strong quarter for Watson. Net revenue for the third quarter increased 33% to $882 million. Adjusted net income for the third quarter increased 18% to $106 million or $0.85 per share and adjusted EBITDA for the third quarter increased 18% to $211 million.

Our performance in the third quarter was driven by a number of factors. In our Global Generics business, we continue to see strong sales of new and existing products in the U.S., particularly from our extended-release product portfolio; the addition of product sales for our international markets; and of course, better-than-expected pricing in the U.S. These factors resulted in adjusted generic gross margin of over 50%.

In our Global Brands business, we acquired the Progesterone business from Columbia in July and expanded Columbia's previous promotional efforts for Crinone, a treatment for infertility by adding it to the products offered by our OB/GYN sales and marketing team. Crinone has been well received by doctors and their patients, and we expect sales of Crinone to continue to increase over the next couple of quarters as our efforts begin to yield results.

Overall, brand revenue was lower than anticipated in the third quarter due to the two factors: one, the delay of approval of our value brand of Ferrlecit; and second, an issue that affected sales of our TRELSTAR product. The majority of TRELSTAR sales are reimbursed under the least costly alternative program administered by CMS [Centers for Medicare & Medicaid Services], and TRELSTAR has historically been the lowest-priced alternative. Earlier this year, a U.S. federal district court struck down this program which, along with other products, disadvantaged TRELSTAR from the physician reimbursement standpoint. In short, following the decision, physicians received lower reimbursement using TRELSTAR than Lupron and Eligard. We are currently pursuing all available options to re-establish a relatively level reimbursement environment. Finally, our ANDA Distribution business had another great quarter, with our third-party sales up 35% due primarily to the launch of generic Effexor XR and continued sales of products launched in prior quarters.

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