Enact Holdings, Inc. (ACT) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Brandy, and I will be a conference operator today. At this time, I would like to welcome everyone to the Actavis Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Lisa Defrancesco, you may begin your conference.

Thank you, Brandy, and good morning, everyone. I'd like to welcome you to the Actavis Second Quarter 2013 Earnings Conference Call. Earlier this morning, Actavis issued a press release reporting its earnings for the second quarter ended June 30, 2013. The press release, together with additional materials reconciling our GAAP and non-GAAP financial results and forecast, are available on our website at www.actavis.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 business highlights. Todd Joyce, our Chief Financial Officer, will then provide additional details on the performance of our business segments, as well as our consolidated financial results for the quarter. Paul will conclude our presentation with an update on our outlook for 2013. 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 Actavis Pharma; Fred Wilkinson, President of Actavis Specialty Brands; Bob Stewart, President of Global Operations; and David Buchen, our Global Chief Legal Officer. Please note that today's call is copyrighted material of Actavis, 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 Actavis results, prospects or other nonhistorical facts are forward-looking statements and reflect our current perspective of existing trends and information as of today's date. Actavis disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. Actual results may differ materially from our current expectations and projections, depending on a number of factors affecting the Actavis business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission, including, but not limited to, the Actavis Form 10-K for the period ended December 31, 2012, and the Actavis Form 10-Q for the period ended March 30, 2013. With that, I'll turn the call over to Paul.

Thank you, Lisa, and good morning, everyone. And thanks for joining the call today. We are pleased to announce another exceptional quarter for Actavis, driven by strong profitable growth across each of our 3 businesses and highlighted by the announcement of our proposed acquisition of Warner Chilcott, which I will address further in a moment. Let's begin first with our financial results. Second quarter net revenues increased 47% to $1.99 billion. Non-GAAP earnings per diluted share were up 42% to $2.01. And adjusted EBITDA increased 42% to $475 million. In our Actavis Pharma segment, net revenues increased 58% over the prior year period with U.S. highlights including the launch of an authorized generic version of Zovirax ointment and relaunch of Vestura, our generic version of Yaz. Outside the U.S., we delivered broad multicountry launches of generic Viagra and Zometa across Europe, a successful launch of generic Crestor in Australia and we continue to launch our oncology injectable products around the world with our latest launch of Docetaxel in Japan. We recently announced settlements of several patent challenges, providing for date certain launches of generic versions of OxyContin and Intuniv in 2014, Ziana in 2016 and Zyclara in 2019. And we continue to strengthen our pipeline, announcing patent challenges on a number of products, including generic Safyral, Diprivan and AndroGel 1.62%. In the first half of this year, Actavis has submitted more than 20 new filings in the U.S., many of them additional First-to-File opportunities. As of the close of the second quarter, we had more than 190 filings pending at the FDA, 56 are First-to-Files, including 38 exclusive First-to-Files. In our Actavis Specialty Brands business, we experienced continued growth in key promoted products, including Rapaflo, Generess Fe and Crinone and had 2 million prescription since launch for Rapaflo and 1 million prescriptions since launch for Generess Fe. We announced a strategic agreement with Valeant to license in Metronidazole 1.3% Vaginal Gel. And we announced the partnership with Medicines360, providing Actavis with U.S. and Canadian commercial rights to the Levosert IUD. Both products are at the registration stage, and if approved, could be launched as early as 2014. Also in the quarter, Health Canada approved FIBRISTAL, formerly called Esmya, for the treatment of moderate to severe signs and symptoms of uterine fibroids in adult women of reproductive age, who are eligible for surgery. This product was licensed from PregLem Gedeon Richter, who are currently having a successful launch of the product in Europe. We are launching FIBRISTAL in Canada this quarter. As I mentioned, however, the most significant news came in May, when we announced our intention to acquire Warner Chilcott plc, a transaction that will create a leading global specialty pharmaceutical company with approximately $11 billion in combined annual revenue. We are aggressively planning for the integration of Warner Chilcott on day 1, working with the Federal Trade Commission and other regulators to receive approvals for the transaction and anticipate that we could close this acquisition as early as the beginning of the fourth quarter. With that, I'll turn the call over to Todd to take us through the financial results in more detail.

Thanks, Paul. I will now review our results on a consolidated and divisional basis. GAAP net revenues for the second quarter were $1,990,000,000, an increase of 47% over the prior year, reflecting strong growth in all 3 of our business segments. Net revenues in our Actavis Pharma division was $1,569,000,000, up 58% year-over-year as a result of the acquisition of the Actavis Group and new product sales in key markets, offset in part by the impact of competition on our authorized generic versions of Concerta and LIPITOR. x U.S. net revenues were $649.8 million, up 209% from the second quarter of 2012, primarily due to the inclusion of legacy Actavis. Actavis Pharma net revenues of $1.57 billion during the second quarter of 2013 consisted of net revenues of $957.5 million in the Americas, $518.2 million in Europe, which includes Medis, and $94.3 million in MEAAP. Actavis Pharma adjusted gross margin was 51.9%, which was favorably impacted by Anda's distribution of Lidoderm and increased margins on our generic version of Concerta as a result of our contractual arrangement with Ortho-McNeil-Janssen. Moving to Actavis Specialty Brands. Net revenues were $144.8 million, up 21% on a higher sales of promoted products, including Rapaflo, Generess Fe, Crinone and the addition of Kadian. Gross margin increased to 76.2%. Finally, net revenues from our Anda Distribution segment were $276 million, up 14% due to increased sales of third-party brand product launches and higher sales to chain customers. Anda's gross margin for the quarter was 13.4%. Consolidated operating expenses have increased significantly year-over-year as a result of the addition of legacy Actavis. Consolidated GAAP R&D for the second quarter was $135.6 million, up 70% year-over-year. We expect R&D investment to increase in the second half for both our Actavis Pharma and our Specialty Brand divisions, which includes our biosimilar development programs. For the full year, we still expect GAAP R&D expense in the range of $550 million to $600 million. Consolidated GAAP SG&A for the second quarter was up $461.4 million, up 92% over the prior year. For the full year, we currently expect SG&A in the range of $1.65 billion to $1.7 billion as a result of higher acquisition, integration and restructuring charges. Amortization expense for the second quarter was $149.8 million. On a non-GAAP basis, our income tax rate was 26.9% in the second quarter, down from 35.5% in the prior year period as a result of the acquisition of the Actavis Group. For the full year, we still expect our non-GAAP tax rate to be in the range of 27% to 29%. On a non-GAAP basis, which excludes amortization expense, acquisition cost and impairment charges, as well as other items detailed in Table 4 of our earnings press release, earnings for the second quarter were $2.01 per diluted share, up 42% year-over-year as a result of growth across our Actavis Pharma and Actavis Specialty Brand segments. The current quarter GAAP result includes an impairment charge following our routine annual impairment testing. This accounting-related, noncash charge resulted from combining the company's legacy Arrow business, which was acquired in 2009, with the legacy Actavis Group business acquired late last year. Following the Actavis Group acquisition and the appointment of the management team to run the combined company, the company was required to establish multiple reporting units that must be tested for goodwill impairment. This restructuring and the multiple reporting entities resulted in an impairment of the goodwill within our newly formed European unit. This charge does not impact our forecast for the legacy Actavis business or our consolidated outlook, as this reporting unit is trending in line with our current year forecast. The restructuring charges are also not directly related to our recent decision to explore the restructuring or possible divestiture of certain European businesses. Adjusted EBITDA for the second quarter was $475 million compared to $333 million as a result of the addition of legacy Actavis and growth across the business. Cash flow from operations for the second quarter was $72.4 million and cash from marketable securities were $235 million at the end of the second quarter. Cash flow from operations was slightly lower this quarter, due to the timing of our corporate estimated tax payments and an inventory build related to planned product launches in the second half of the year. Our total debt at quarter end was $6.35 billion and our leverage ratios on a pro forma basis was 3.66x. After another strong quarter, we continue our focus on deleveraging and maintaining a strong financial foundation to support strategic growth initiatives within our global businesses. With that, I'll turn the call back over to Paul for an update on our 2013 forecast and concluding remarks.

Thanks, Todd. I'll now provide an update on Actavis' 2013 forecast, excluding Warner Chilcott. For Actavis Pharma, our forecast includes a launch of generic Pulmicort and generic Exalgo in the fourth quarter; no change in our generic Concerta estimates from the previous forecast, which includes an additional competitor in the third quarter; an exclusive launch of generic Lidoderm; no additional competition in 2013 for generic ADDERALL XR; and no additional competitors on generic Zovirax. For Actavis Specialty Brands, our forecast includes no material Specialty Brand launches in the second half of the year. So our updated 2013 forecast is as follows. Our estimate for full year net revenue is unchanged at approximately $8.1 billion. We continue to expect Actavis Pharma revenue to be between $6.3 billion to $6.5 billion. For Actavis Specialty Brands, we continue to expect net revenue of between $550 million to $600 million. For our Anda Distribution business, we continue to anticipate revenue to be between $1 billion and $1.2 billion. We now expect to adjusted EBITDA of between $1.96 billion to $2.03 billion. We continue to expect our non-GAAP effective tax rate to be between 27% and 29%. And we are now increasing the low end of our forecast of non-GAAP EPS range by $0.05 and now expect non-GAAP earnings per diluted share in the range of $8.15 and $8.50 per share, reflecting a full year estimated shares outstanding of approximately 134 million shares. In summary, we expect the momentum from the exceptional second quarter to carry forward into the remainder of this year as we continue to prepare for the integration of Warner Chilcott, and we will continue execute effectively and deliver results across all of our business segments. Again, I would like to thank all our employees around the world for their hard work and dedication to the growth of our global organization. With that, I'll turn the call back to Lisa for Q&A. Lisa?

We'll now take Q&A, Brandy.

[Operator Instructions] Your first question comes from Ronny Gal with Sanford Bernstein.

Two questions. The first one is about the discussion regarding divesting U.S. and European business. Obviously, I understand that financially, it might not be the most profitable business. But strategically, Paul, if you want to be a global generic company, it feels like you need to scale and you need presence in all those markets, and you probably need some of that, too, as an infrastructure for selling branded products in Europe as well. Can you just give us your thought about where you're taking this business in terms of what's going to be the focus going forward?

Well, sure, Ronny. I mean, I think one of the things we're thinking about is a range of strategic alternatives for these businesses. You did highlight several things we want to make sure we consider. One is the -- particularly, the Specialty Brands business in those regions, and that's part of the overall analysis as we look at the strategic alternatives for some of these businesses. Second of all, I would remind you that we're not really leaving these markets, even though we would be exiting some of the commercial activities within those markets because we would continue to supply the products, of course, through not just our Medis business but also to whoever might be the potential acquirer of some of those commercial operations. But I'll turn it over to Siggi for a little bit more color on those franchises.

Yes. I think, Ronny, the situation for us is these 6 or 7 markets we are considering have that in common that the health care environment has changed. These are INN and [indiscernible] business market, clearly there's a lot of volume coming from these markets. We feel we are very well covered with the Medis business. We supply significant amount of volume through Medis. But remember, we're exploring possible restructuring, which could include that we leave some of the businesses up and running. Because in all these markets, we have both Rx, we have OTC business and we have injectable hospital business, and you mentioned the Specialty Brand business, which we are building up in Europe. So even though we are exploring -- one of the options we are exploring is possible divestiture, I think restructuring is also higher on our list of things to explore exactly for the reasons you mentioned. But clearly, we are not leaving these markets. These markets have to be part of a global leading specialty company like we are today.

And a follow-on, Paul. Considering the thoughts about Western Europe and the big restructuring charges kind of begs the question with hindsight -- and I know hindsight is 20/20. If you look at your Arrow acquisition and your Actavis acquisition, what do you think are the areas where the business surprised you positively, the acquired business that surprised you positively? And where did they underperform what you would expect them to do?

Well, I mean, I think that's a great question, Ronny. As we look back, and you're right, hindsight is 20/20, there are parts of every acquisition that you wish would perform better than other parts. As I look at the Arrow acquisition, for example, I think for Actavis, or at that point, Watson, it was a incredibly strategic acquisition that allowed us to build the infrastructure to be able to do the Actavis acquisition in 2012. I mean, that was -- without that first step, we just wouldn't have been able to be ready to do such a magnitude of an acquisition and then do it as well as we were able to do it, integrate it, build it and get value for our shareholders. The second thing to remember is also about Arrow is while the markets in Europe were underperforming our expectation, the U.S. business outperformed our expectation on Arrow. So look, one of the problems you have when you do these kinds of impairment tests is you're looking at discrete units as opposed to the whole. And if you look at it as a whole, we would do the transaction over again because on the basis of the whole, we did extraordinarily well. Remember Crestor came from Arrow and LIPITOR came from Arrow and all these assets in the U.S. came from Arrow. So I just want to remind everybody that we'd still do the deal over again. This exercise of goodwill and impairment, I don't know, to me, it's a little mystical.

Your next question is from David Amsellem with Piper Jaffray.

Just a couple. On the Warner deal, bearing in mind that you cited the $400 million in potential savings, I guess, question here is should we view that, I guess, as a bare minimum of savings, given that Warner itself is spending well north of $800 million in SG&A alone and there's obviously a lot of overlap in the therapeutic areas between legacy Actavis and Warner? How should we think about that going forward?

Yes, sure, David. I probably should've started with this. Just to remind everyone, we are still subject to the Irish Takeover Rule, so we're very limited on what we can say about our -- the details surrounding the Warner Chilcott acquisition, as well as our activities related to the integration preparation. But I would say we have not seen any surprises. The $400 million that we talked about, which included operational synergies, remind -- just as a reminder, operational synergies, which were a majority of those, and then some tax synergies were in there. We didn't include manufacturing synergies, we didn't include revenue synergies, we didn't include interest rate synergies. So just think about that as you do the math in your head about what is an opportunity. And we will be giving more color at the close, hopefully, on what we think potential upside opportunities are with respect to the Chilcott acquisition.

Okay, that's helpful. And then just a product-specific question. This is on RESTASIS. Given the recent FDA draft guidance, what's your view on how difficult it will be to show prevalence on a product like that? And is that a product that you have the ability and, I guess, the inclination to pursue?

David, it's Siggi here. I think on -- as you have seen in our portfolio, we have a significant portfolio of ophthalmology products. We have seen the guidance. Like the rest of the world, we think a development can be done. It's a high hurdle to overcome, but we don't comment on individual products. But this is right at our expertise in developing ophthalmology products.

Your next question is from Tim Chiang with CRT Capital.

I wanted to follow up on the RESTASIS question. Just really [indiscernible] you guys have [indiscernible] technology?

Tim, can you come a little closer to the phone?

I was just for asking a follow-up on the RESTASIS question in terms of capability with [indiscernible]. Do you guys have that in-house?

We have a partnership. We don't have the manufacturing capabilities. But we have a fine partnership with a partner that has that capability.

Okay. And then maybe one follow-up question. On the gross margins on the generic side, it looked like those margins benefited from your Concerta relationship. And I was sort of trying to think about how are those margins going to change when you launch Lidoderm later this year. Are those margins going to continue to benefit?

I think if I take the first round, I think Lidoderm, this shouldn't affect it. It should be flat as we see it going forward. You should look at it as flat. There's an up and down because also we build in a price erosion every year. The new launches, Lidoderm, clearly being the biggest one for the rest of the year. But we assume for the remaining of the year, it should be around flat.

Your next question comes from Marc Goodman with UBS.

Could you give us an update on the synergies that you're doing with Actavis and the Watson transaction? Just give us a sense of how that's going and where we are relative to your expectations and if you have any updates on how that's doing. And then second of all, can you update us on the branded pipeline and biosimilars work that you're doing? Has there been progress in the past 3 months?

Marc, it's Siggi here. I think on the Actavis synergies, on the Actavis integration, we are doing very well. I think what we can say is that the integration in the U.S. is done. We have restructured the company. We have one phased to the customers. Basically, the people leaving the organization have already left the organization. With regard to the other overlapping markets, remember, we have 7 other overlapping markets: U.K., France, Poland, Nordics, Australia, as an example, and Germany. In these markets, we have done a full integration. Due to legal situations in -- employment legal situation in some of the European countries, the full synergies have not been realized. But we are working very hard on that and we have done a great job and the team has done a great job in integrating the 2 businesses. With regard to the operation synergies, the procurement synergies, we are well on track to achieve those. Remember, when we announced the deal, we told you that we would be the largest single purchaser of API from a third party due to the fact that others have so much of their own manufacturing. That really is coming true. We feel confident on our operational synergies. With regard to the R&D synergies, the first synergies we captured was on the overlapping products. There was about probably between 10% and 20% overlap on significant products, where we could get some savings, which we captured already starting 2012, end of 2012 and into 2013. And then since then we have announced closure of 2 development sites, 1 in Greece and another 1 in Malta, as part of the synergy captures within the new company. So I think overall, Marc, this is on the cost side. We are well on track, we feel good about it. We are operating as one company, and I feel really good about the business as it's going. With regard to the revenue synergies, which we didn't include in our $300 million over 3 years number, that's coming, too. It's much slower as we knew because we need to get registrations in international markets. That usually takes about 2 years. But we're straightaway getting some benefit from our Anda business, distribution business in the U.S. That clearly is benefiting us. And we also think that when the Specialty Brand business will launch in Europe, we have an infrastructure in most of the countries already in place that will give us synergies later on when we launch the Specialty Brand products.

On the R&D front -- this is Fred Wilkinson. Marc, yes, we have progressed very nicely on both the biologics front and the small molecule business. FSH has completed its Phase I, moving into Phase III by the end of the year. Amgen will comment, I think in 2 weeks, on the progress of the biosimilars, but we're very, very pleased with that partnership and the approach that's being taken there and think we're very nicely positioned on the monoclonals that are in that partnership. On our own front, I think we've had some really nice progress. Obviously, FIBRISTAL got approved and is in a launch mode up in Canada. We're progressing the Esmya program nicely for the U.S. We're evaluating and we'll be filing Generess in Canada. Levosert, we've received 10 approvals now throughout Europe, 2 of them in our territory, 8 in the Gedeon Richter territories. Diafert is progressing very nicely through its pivotal trial and should have results here during this quarter. And then finally, to remind you, we've got a progestin-only PDUFA date of December 26 that we'll be watching very closely. So a lot going on, and that's before we bring in the portfolio from Warner Chilcott.

Your next question is from David Risinger with Morgan Stanley.

I have a number of questions. I'll just rattle them off, if that's okay. Well, actually, why don't I just go one-by-one? So first, could you just comment on whether you're going to have any capacity or supply constraints on Lidoderm when you launch it September 15?

Yes. This is Bob Stewart, David. What I'd say is that absolutely not. We have built onto our Salt Lake City facility a couple of years ago and we have been steadily building our launch quantities and launch build, which is significantly completed. So we're ready to launch, just waiting for the September 15 date to put the product in distribution. And we've assumed very high generic conversion rates there. And so we're able to launch the product and keep the product in supply and no capacity constraints.

Great. And I know that you're typically pretty conservative with your assumptions. Can you just remind us when you assume another competitor enters the market, even though there's a lack of clarity on another generic competitor entering?

So it's Siggi here, David. We assume that another competitor will come end of first quarter in 2014.

Great. And then with respect to management's interest and capacity to pursue additional acquisitions in 2014, can you help us understand how we should be thinking about additional deals going forward?

Sure. One of the things we are looking at all the time, David, as you know, is ways to continue to invest in our businesses, both our Actavis Pharma business, as well as our Specialty Brand franchise. We have targeted and continue to target those areas where we think we can get the highest growth rates. And so for Actavis Pharma, we're actively pursuing and looking at opportunities across Central and Eastern Europe, Russia, Southeast Asia, also Australia, Japan, those areas where we believe we have the highest likelihood of fast growth. We've also continued -- we also continue to look for opportunities in Central and South America because those areas have high-growth potential and we have -- with the exception of Brazil and Mexico, as you know, we don't have a lot of coverage in that region. With respect to Specialty Brands, I think we've got to get through the close of Warner Chilcott. But Warner Chilcott brings to us the 2 things -- the 2 new therapeutic categories that I think will give us some exciting opportunities. We have done -- if you look at the pipeline that we -- the combined entity we'll have in Women's Health, I believe it's second to none really, not just in oral contraception but on a vast array of female health issues. We'll be covering that and have a great opportunity there. I think that GI and derm give us new opportunities to look for products, not just for the North American markets, where we have now commercial infrastructure, a strong commercial infrastructure on a combined basis in the U.S. and Canada, but be able to roll out some of these assets into those infrastructures that we have through Actavis Pharma in Central and Eastern Europe, Russia, Southeast Asia and those markets. So we're looking to find assets that we can synergize across our network. And we're actively looking that.

That's very helpful. And then a high-level question, does the FDA ever give draft guidance before generic applications have been filed?

It's difficult for us to say anything about it. But we know they give draft guidelines after an application has been filed at least.

Got it. Okay. And then finally, just a tidbit. On the other generics line, that was stronger than we expected this quarter. Could you just provide some color on what's in there and why it was so strong?

Yes. On other revenue, the reason why it's stronger than expected, Dave, is because we account for the Zovirax AG in the other revenue line. It's because it's not in our brand packaging yet. When we transfer over to the Actavis packaging, we will account it as a product revenue. But up until then, we account it in other revenue.

Your next question is from Randall Stanicky with Canaccord Genuity.

It may pretty obvious, but given that I didn't hear you talk about the pro forma accretion updates, should we still assume that better than 30% is the working target until we get a better update in October?

Yes, Randall, that is the -- we haven't changed any of those assumptions that we gave at the close. So that is the current. And we haven't really seen any surprises, so we feel very comfortable with where we're at and we'll hopefully give you more color at close.

Okay, great. And then Siggi, just a question on the injectables market. Can you talk about your build-out there and how you see competitively that market playing out and your interest in getting a little bit more aggressive in broadening your franchise there?

Yes. Randall, I think the injectables market is still appealing. You never know what will happen when more players come in and the competitors will fix their compliance situation with the FDA. What we have done is, as already, we have told about this, we have reached agreement with Sagent, where we get back rights to the oncology products they are distributing for us at the moment. We will get them back by the end of 2014. But as you can see also from our Paragraph IV filings, which have been announced, we are constantly developing significant numbers of injectable products to expand the line. So we hope that by the end of '14, when we have our own injectable business unit, we will be probably between 20 and 30 products ready on the market. We have 2 manufacturing sites ourselves both in Romania and in Italy, but we also work with multiple partners. We have taken the approach of focusing on the harder injectables, both oncology but also quite tough, difficult products to develop. We haven't shied away from 505(b)(2)s because it's easier to introduce a 505(b)(2) into the injectable space because the switching takes place in the clinics or the hospitals, so the decision of the hospitals gives us opportunity there. So I think overall, we are excited about it. We still don't want to go into the everyday injectables, the antibiotics, the large-volume parentals or anything like that. We want to keep it at the more complex level. Not only on oncology, we might going into CNS and other therapeutic areas. But what we try to have for our portfolio is a complex injectable portfolio, not the biggest one on the market, but hopefully the best one.

That's helpful color. And maybe just a really quick follow-up for Paul. The Pulmicort appeal date, that's August 13. Is that correct? And then how quickly could we get a decision there?

Well, I think that you're correct. That is the appeal date. And we hope a quick turnaround. But again, judges do seem to work on their own time schedule. We have anticipated -- I'm sorry, it's August 12. Sorry, I misspoke about that. Also as we mentioned in the prepared remarks, we have included Pulmicort in the fourth quarter.

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

I have a couple. First, I think they're all Siggi, we'll see. First, are you on track for approval and the launch of the relevant strengths of generic Exalgo in November and May, respectively? Or could they get gummed up with abuse-deterrent debate and all that.

Yes. I think we feel very good about the approval process. I think what we are working on now is the REMS program, what is the requirement of the REMS program the FDA wants us to do. I think that should be easily resolved before the November date. We feel comfortable around that. There's no other technical issue we see outstanding with the application. And then the 32 milligram is in 2014, and it's the same situation. We feel very good about the dosage itself, but we need to get to a conclusion what kind of REMS program the FDA will request us to do.

And no other filers on that drug, right, that you know of?

I can't -- I don't know exactly. I know we are launching first on everything except the 32 milligram in November.

Okay. And then on Opana ER, I thought that was an interesting press release you put out. Can you give us your latest thinking on what you plan to do there or what you're watching and waiting for?

So what we are doing there is basically we are watching the space. So currently -- and you see this yourself, Greg, currently, Impax has between 6% and 10% market share of the Opana market. I think as of this week, they're at 7.8%. They've been going down over the last few weeks. I think we feel we probably -- we don't know what the opportunity is. But I think, overall, we expect to launch by the end of third quarter. We are building inventory now. I think it's worth launching. But it's difficult to for us to say how big the market is because Impax haven't been so successful in the market so far. But I intend to launch this product probably by the end of third quarter this year.

And last thing, on generic Suboxone, I imagine that's been a pretty stable market. But do you still think there's the potential for chipping away at the some of the film business with some of the payor actions we start to hear about?

Yes. I think, Greg, we saw the Caremark announcement about not having the thin film of Suboxone on their reimbursement list. That could be a small opportunity. Obviously, Caremark is probably 5% to 10% of the overall brand, so it's not a huge upside overall. I think the bigger opportunity, as I've mentioned before, on the thin film is many of the patients that get the thin film, they pay out-of-pocket, they don't have a health care insurance. And I think those are the patient we want to introduce of the generics because with no couponing, the generics are still a less expensive alternative for this product. So I think that could be a bigger opportunity for us going forward than maybe the Caremark having the thin film not reimbursed.

I'll ask one last one because I have to get Paul in the mix here. Paul, I'll ask you sort of an ambiguous question. What do you think of the sort of tax rate landgrab that's going on in the industry?

Well, I'm not sure what you mean by landgrab. But no, I think everybody recognizes, and unfortunately, we have a tax structure in the United States that's putting companies in the U.S. at a disadvantage. And I think we were able to -- hopefully, assuming the transaction goes through and we're able to complete the merger and complete the restructuring and inversion, then we won't be at a disadvantage anymore. And I think other companies have to take a look at that. It just makes economic sense.

Your next question is from Chris Schott with JPMorgan.

First question, I just was wondering if you'd be willing to discuss Actavis' projections for Warner Chilcott that were released in your S-4 in June? I knew those numbers were well below street expectations. I was just wondering if there's any color or commentary you can provide on this.

Well, Chris, I think that probably the best way to think about this is that those were what were used during the evaluation process. Obviously, things change over time, more information. We learn more through the integration process. And I think what I would prefer to do is wait until we close and can give you 2014 combined guidance and be a bit more thoughtful about how we do that and not be sort of limited by the constraints of the Irish Takeover Law.

Okay, sure. The second question was combined company obviously is going to have a very significant cash flow. It seems like some of the acquisitions or the business development targets don't imply very large deals. I guess, my question is do you see an ability to deploy a majority of the company's cash flow into business development going forward? Or can we think about the company looking at things like dividend or larger share repo over time?

Chris, I think sort of our first and foremost, we're going to be looking at paying down additional debt, keeping ourselves and the ability to move quickly on large transactions, should they present themselves, because we would have paid down our debt and to have the flexibility to do so. So that's sort of number one. Second of all, we will deploy cash as we can. And you're right, there may be a series of smaller transactions first before anything of substance or of the magnitude like a Warner Chilcott or an Actavis deal is done. But we, of course, will evaluate all of those options as we go forward. Should we get into a position though, where cash flow and we've maintained the right debt levels and we're doing all the deployment of cash to support the businesses that we feel is necessary, we would, at that point, look at other alternatives, including potential dividends. But that, I think, is some time away.

Great. And then just one final question. Lonza, Teva today announcing they're kind of formally dissolving their partnership on biosimilars. Just any thoughts you have on that would imply about the difficulties or competitiveness of these markets going forward?

I wouldn't actually read too much into it. If you look at the Teva biosimilar program, they, at some point, had bought enough different companies that they had multiple projects going on the same product. And so I think what they've done is probably very efficiently pruned their product line down to the leading entities within their biosimilar portfolio. Lonza for the last year has been out selling or trying to solicit use of space, so it's been obvious that the Lonza-Teva relationship was not going to be as deep as it originally was.

Your next question is from Douglas Tsao with Barclays.

Just first question for Paul on a topic that I know you feel passionately about. I was just curious to get your perspective on the Supreme Court decision regarding settlements.

Well, I mean, I think the first point I would make is that we're very pleased that FTC's position was rejected by the Supreme Court. We always thought it was wrongheaded, and at least the Supreme Court agreed with us on that approach. I think the Supreme Court has delivered us a workable solution, a workable opportunity. We will continue to pursue patent settlements as part of bringing products to market prior to patent expiry. Notwithstanding, I would say the political noise that people raised because they think that the words pay-for-delay actually mean that, and they don't. Again it's always about the patent, it's about patent, it's about the patent. Look at our Pulmicort case. We win the district court level, and then get enjoined from shipping. So somebody needs to explain to the FTC, as well as Congress, that it's about the patent office, it's about the way judges rule. And at some point, we'll get that message through. Again with respect to the Supreme Court case, I think we're satisfied that we can move forward. We plan to move forward. I'm a little disappointed that they didn't -- that they chose to try to split the baby. But I think we can live with it and we will going forward.

So ultimately, you don't think this is going to have a meaningful impact on how you're able to negotiate settlements with innovator companies?

No, I don't think so. I think we'll have to take a second step. We will require us to go to in front of judges and explain the settlement. It's also possible this could be -- ultimately, turn out to be somewhat of a positive because we would or could potentially receive Noerr-Pennington protection on settlements once the district court has ruled that these things are procompetitive. And that may make it easier actually to do a settlement and at least get certainty around it and at least put to bed some of the ancillary litigation that follows this crazy pay-for-delay thing.

Okay. And then just one follow-up probably for Siggi on Suboxone in terms of your comments trying to go after cash-paying customers. I was just curious in terms of your plan to execute upon that or sort of operationally how you would go about marketing or targeting that patient population.

Yes. What we have to do, Doug, is basically we have to educate doctors in terms -- we don't have a sales force. The total sales force of the U.S. [indiscernible] organization is about 5 people. So we are not going to visit doctors, but there will be mailing out, informing them about this opportunity to save a significant amount of money for the patients they are treating. So I think that's one thing. Second thing is the market of the drug abuse clinics or the methadone clinics, they use a significant amount of Suboxone. By introducing it there, also we get the knowledge to the patients that need this drug going forward. So I think with these 2 approaches, relatively inexpensive sales and marketing approach. But also looking at the clinics, I think that would help us to get some of that market.

Your next question is from Jami Rubin with Goldman Sachs.

Most of the questions were already asked. But if you could just talk about the -- what you see is the biggest variables to your forecast at this point. My guess is that it would be Pulmicort and Concerta. But I'd be interested in your views on that. And secondly, do you view the Pulmicort opportunity as similar-sized as you did earlier in the year now that time has passed? Or should we think of it differently going forward if you win the appeals process?

Jami, it's Siggi here. Let me take this one. I think you're absolutely right. The biggest change to our forecast is the Pulmicort. We have built that into an April launch. Remember, we guided you to Pulmicort launch in the second quarter with a competition. We don't know if that competition -- we felt that competition probably wasn't ready at a time when we got the judgment down. But they could have caught up whenever the decision of the next court stage comes through. We still feel good about the market. The market is enormous. There's only 2 players in the market, AstraZeneca and Teva. So we still feel extremely good about the opportunity. There's still been no other approval, it's only us and Apotex. We feel good. We have enough supply. We have a good supply chain. So I think we feel extremely good about the situation as it is. But who knows, every month that passes allows the competitors to catch up. So we have to evaluate the situation of whenever the judge makes a ruling on the case later on. I think with regard to Concerta, you said that would be our biggest difference to our forecast. I think, overall, we are just in line with our forecast. We said in the beginning of the year that Mallinckrodt would launch the product. They've more or less did that on time. We also highlighted to the market that there would be a slower take. I think that has come true. We are still at about 75% market share with Mallinckrodt about 22% market share. So it takes time to build up market share for generic Concerta. It's both a very complex products. But you need to have a quota and secured quota from the DEA. So overall, I think the generic Concerta situation has not surprised us. It more or less has confirmed and validated our assumptions we gave in the beginning of the year.

Your next question comes from David Maris with BMO.

Two questions for you, Paul. First, on the Supreme Court, just more specifically, do you think that investors should be at all concerned any of your existing deals would be challenged by payors or state attorney generals? I know you can't predict that. But do you -- internally, do you think that, that's a risk? And then separately, one of your competitors -- one of your more loquacious competitors at a recent investor conference mentioned Actavis more than 10 times in its half-hour presentation, kind of implying in a couple of different spots that the Warner Chilcott deal is a deal out of weakness and that you don't have the growth prospects in generics. That's why you're moving more to brands. So first, related to that, at a jump-off situation, do you feel comfortable when you're going up against other generics that your relationships with the retailers are strong as ever? Are you seeing increased market share in the U.S, less market share globally? And then separately, any other feeling about deals and brands versus more in generics and what the outlook is on the generics side?

Sure. Well, let me first say that we don't feel any weakness with respect to ourselves and other competitors. But Siggi, why don't you take what you're seeing in the marketplace and explain that first?

Yes. I think, overall, David, it's worth mentioning if you look at the IMS data, we haven't seen it for the second quarter, but for first quarter for the first time, Actavis was the largest generic company in terms of dollars in the U.S. We were about $30 million larger than Teva and about $200 million larger than Mylan. So I think we have seen strength in the market. We are still growing. Also just look at the pipeline, do the comparison of the pipeline. We are about 190 ANDAs pending. I think that's a good indication of our growth prospect. We have 56 First-to-Files, 38 of those are exclusive First-to-Files. And I think that's a good indication. I think if you do your homework and compared to some of the other more talkative companies, I think we are in a quite a good situation in the U.S. market. So we don't feel any weakness in the generic business. We really feel that the wind is with us now and we are investing more in R&D than ever before.

Yes. And I would only add to that, that we look at the pharmaceutical space holistically. Maybe that's the way to think about it. We believe that we are a pharmaceutical company and we will provide those products that the markets that we operate in need. And those will include OTC, injectable, hospital, branded pharmaceutical, branded generic pharmaceuticals and generic INN pharmaceuticals, depending on the market need. Each market will be in a different stage of development that we operate in. And we want to be prepared to do whatever makes sense in that market for us to be able to grow the fastest as possible. So I don't want to -- I don't apologize for our business model. I think it's the right business model. I think it's certainly preparing us for what we hope is the brass ring, which is biosimilars, in the end of this decade and into the next decade. Returning to your question about the Supreme Court, unfortunately, there is the possibility, and I think people should recognize there is the possibility, that we could see additional ancillary litigation from the Supreme Court decision. It is unfortunate what sometimes the Supreme Court creates opportunities for those kinds of things to occur. We will, of course, defend that litigation if it does come up. We don't feel like there's a concern with any of the past settlements that we've done, although only time will tell as to whether or not we run into any additional problems. I think there's one thing to always remember. When the Supreme Court brings a new Rule of Reason tests, it's pretty accurate to say that consumers lose and the lawyers win. And being a former lawyer, I can say that might be a good thing, but it isn't really good for consumers. Also I would say that we have not, in any way, lessened our commitment of challenging patents and bringing products to market earlier than they would have otherwise but for the patent. Siggi gave you the statistics. I think right now, we are either #1 or very close to being #1 in the U.S. with a number of patent challenges. So clearly, we believe that is a very good way to continue to grow our business and provide value to consumers and our customers.

Your next question is from Elliot Wilbur with Needham & Company.

Just want to follow up on some of your early commentary or Siggi's early commentary really around manufacturing synergies. You guys have been very explicit in talking about the operational synergies you expected to arrive from Actavis and then Warner Chilcott as well, and have suggested there could be substantial manufacturing synergies, particularly around the Actavis acquisition and integration of those operations. But we really haven't sort of quantified that to any great extent. And just attempting to do that in some form or fashion here, I mean, if I look at sort of your cost of sales line coming out of the most recent quarter, I mean, you're roughly at $4 billion. And I would think it would be quite reasonable to assume that several years out upon integration or completion and integration activities, we could be looking at cost savings somewhere in the order of 10% to 15% of that number. And I just want to make sure that, that assumption is kind of in the right ballpark.

Well, I'm going to turn that over to the operations guy.

So Elliot, it's Bob Stewart. We're not going to guide you to a specific percentage or a number at this point other than to just say that we constantly look at our manufacturing network, and that's both internal as well as external contract manufacturing organizations that do supply us products around the world. We're always looking at opportunities to lower our cost and benefit from low-cost manufacturing locations. With the Actavis transaction, we picked up a number of them, such as our facility in Bulgaria, which is a very low-cost manufacturing location for both Europe and will ultimately become a supplier for the U.S. as well. After the Warner Chilcott transaction, we will reevaluate the manufacturing network again. And you're absolutely right, there's manufacturing synergies that are out there, both in terms of conversion synergies, as well as additional procurement synergies. And we'll continue to work through that. And then as Paul mentioned before, that when we close and we can become a little bit clearer in terms of what the longer-term synergy numbers are, we would probably look to include some direction around manufacturing synergies at that point.

I would add one other thing, Elliot, and that is capital spending avoidance. Because of the way that we are, we are constantly -- Bob and his team are constantly evaluating what the future pipeline looks like and what our needs are going to be. And we're already moving to -- or to move our manufacturing network to support even a different style of product development than we do today. For example, we have mostly solid oral dosage forms today. But as we look out over the next few years, we're going to be moving into other dosage forms. We have programs in place now to make sure that we've maximized the solid oral dose facilities, but we can move into -- but also maximize the nonsolid oral dose facilities and not have to face huge CapEx adjustments later on to build that capacity. So the process is already underway. And so there is a capital avoidance piece to this as well. And if you look at our CapEx spending, I'm pretty pleased that we were able to keep that very, very nicely under control this year.

Okay. Then just one quick follow-up here as well for Siggi. I mean, you've already commented a couple of times on the generic methylphenidate or Concerta market here. But just want to maybe ask a couple of additional questions here. I mean, is it fair to say that things have basically shaken out exactly as expected, and specifically thinking about price with Mallinckrodt's entry and then ultimately, Kremers Urban launch here? And have you learned anything about potential additional competition? I know it's embedded in guidance for the year. There's a couple of other applications pending, I think Impax's travails are fairly well-known. But this has been a market where historically, at least on one occasion, we've been surprised by a filer and an entrant. I'm just wondering if there were anything new about the competitive landscape there in terms of competitors, who might emerge under other than potentially, say, Impax in 2014?

Yes, Elliot. I think with regard to the market itself, it has been very, very close to our assumptions beginning of the year. Mallinckrodt and us, it takes time to build up market share. Obviously, in the beginning, Mallinckrodt only launched the 27 milligram, then they brought the 2 higher strengths to the market. We are still alone on the 18 milligram. Kremers basically, the [indiscernible] is coming to the market. We are expecting them any day now. They have not launched yesterday, but we think they should be launching any day with the 18 and the 27 milligram. And then we expect them to come with the 2 higher strength probably at the end, 180 days after the launch for Mallinckrodt in the first quarter. So I think overall, it's a stable market. It takes time to build up inventory. It's not a big movement in the market, a 3-player market is still a very good generic market. Obviously, there's a price erosion in the market whenever a new company comes to the market. But overall, it's exactly as per our expectation. With regards to other competitors, just like you said, we have been monitoring Impax's application for a number of years. We don't know when that comes. We have said we don't expect other competitors this year. Next year, we haven't heard anything new in terms of competition. But keep in mind, there could be a Paragraph III filers out there because of the patent situation. So we don't necessarily have to know where it is. But overall, we will update the guidance for 2014 later. But there are probably 1, 2, 3 out there. But we don't expect any new competition this year.

Your final question comes from Jason Gerberry with Leerink Swann.

Paul or Siggi, on ADVAIR -- and correct me if I'm wrong, but it seems like if I had to characterize Actavis, you guys seem to be in sort of a watch-and-wait mode regarding the U.S. draft guidance here. And I'm just wondering if you can talk a little bit about what you're looking for in terms of competitor development in the next 12 months and when you guys think you might need to get in the game, if you want to be there, that market formation in the 2016 timeframe. That's my first question.

Yes. Jason, I think the first challenge of developing a generic ADVAIR is clearly on the device. There's quite a few devices out there, but what you have to do in the U.S. is you have to be able to use the patient leaflet instructions in the same way as for the brand. And what the brand has done extremely well is they have trademarked the device very well. So that's the first challenge to go through. Then the second challenge is to get the right PK out of the device and out of the formulation. And then the third challenge is the pharmacodynamic, to show the clinical equivalent between the brand and the generic. So these are 3, in a way, linked challenges but individual challenges we are all facing, all the generic companies. What I can say is we are in good dialogue with the regulatory agencies, what requirements will be -- what requirements could be later on. There's no draft guidance, but we are not sitting and waiting for guidance. We are working actively on development of respiratory products. Challenging, as I said. What needs to happen to be there in 2016, market formation, obviously it would help to get the guidance out. But also at the same time, I don't think any of the companies is developing respiratory generics or arthro generics are sitting and waiting. As one of the previous questions was sometimes when you have filed an application, that leads the FDA to give out a draft guidance. So follow this space, it's a very high hurdle. I think a very complex development, especially on the U.S. side. Some of the other regulatory agencies have been more open to take a PK data instead of a PD data. Hopefully, the FDA will lean towards that later on. But the device complication and the PK profiling is quite a lot of challenge to overcome even before you get the endpoints that the FDA would guide you to.

Okay. And if I could just squeeze one quick one in on Concerta. Just where do you guys stand with your own ANDA product? It's my recollection you guys, I think, amended your ANDA back in 2010 to conform with what the FDA was looking for? I'm just kind of curious where you're at in the review cycle there and if you're confident you can get an ANDA approval before the contract for J&J comes to an end?

Yes. Jason, we're very comfortable that our approval will come before that time is -- before it's needed. Everything is on track for us. Again, it's not been an application we've been actively pushing with the FDA. If we can have any say on what applications are working on, that's going to be first on the list for us. We have other things that we'd rather get first.

And there are no further questions at this time.

Thank you, everyone.

Thank you. This does conclude today's conference call. You may now disconnect your lines.