Enact Holdings, Inc. (ACT) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Cassandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Actavis Third Quarter 2013 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Lisa Defrancesco. You may begin.

Thank you, Cassandra. And good morning, everyone. I'd like to welcome you to the Actavis Third Quarter 2013 Earnings Conference Call. Earlier this morning, we issued a press release reporting Actavis' earnings for the first quarter ended September 30, 2013. The press release, together with additional new materials, including slides to accompany today's presentation and reconciliations of 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, a replay of which will also available on our website after its conclusion. With us on today's call are Paul Bisaro, Chairman and CEO, who'll provide an overview of the third quarter business highlights. Todd Joyce, our Global 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 with our updated outlook for 2013, which will now include Warner Chilcott results for the fourth quarter, and also provide a preliminary outlook for 2014. 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 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'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 current projections -- from 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 Inc. and Warner Chilcott Form 10-Ks for the period ended December 31, 2012, and Form 10-Q for the period ended June 30, 2013. With that, I'll turn the call over to Paul.

Thanks, Lisa, and good morning, everyone. We're pleased to announce another strong quarter for Actavis, driven by strong growth across each of our 3 businesses. At the close of the quarter, we also completed the acquisition of Warner Chilcott, which I will address later. Turning to Slide 5. Let's begin first with our financial results. Third quarter net revenues, reflecting standalone Actavis only, increased 57% to just over $2 billion. Non-GAAP earnings per diluted share were up 55% to $2.09, and adjusted EBITDA increased 61% to $489 million. Our Actavis Pharma segment, shown on Slide 6, had another strong quarter, highlighted by the U.S. launch of the generic version of Lidoderm on September 15 and the generic version of Lynlor oxycodone capsules for the U.K. market in September. We also continued to strengthen our pipeline, announcing patent challenges on a number of products, including First-to-File opportunities on generic Nucynta ER and Suboxone thin film. For the 9 months ended September 30, Actavis submitted 32 new filings in the U.S., 16 of which are potential First-to-File opportunities. Globally, we launched 509 products and filed more than 980 market authorization applications over the same 9-month period. Finally, integration of legacy Watson and legacy Actavis is now essentially complete, and the annual run rate of synergies is in line with our previously disclosed targets. Turning to Slide 7. In our Actavis Specialty Brands business, we experienced continued growth in key promoted products, including Rapaflo, Generess Fe -- and Generess Fe. Generess Fe hit a milestone of over 100,000 total prescriptions. ANDRODERM 2 and 4 milligram, Crinone 8% and Trelstar also showed growth over the third quarter of 2012. We continue to expand our Women's Health pipeline with the acquisition of worldwide rights for albaconazole, a novel oral antifungal agent in the development -- in development for the treatment of candinitis (sic) [candidiasis]. These rights were acquired from Palau Pharma. We also received approval in a number of countries for Levosert, and we secured approval for Rapaflo in Brazil. We continue to expand in North America with our Canadian launch of FIBRISTAL, which is also known as Esmya. We closed the acquisition of Warner Chilcott on October 1, and are now in the process of actively integrating Warner Chilcott into our Specialty Brands business. Turning now to Slide 8. Warner Chilcott also had a strong third quarter and year-to-date performance. Warner Chilcott posted revenue of $1.8 billion in the first 9 months of 2013 and third quarter revenues of $601 million, a decrease of 1% over the prior year period. The oral contraceptives franchise posted 10% revenue growth for the first 9 months of the year, driven by strong sales of Lo Loestrin Fe and recently launched Minastrin 24 Fe. The ESTRACE Cream revenue increased 13% over the first 9 months of 2012, and Doryx franchise revenue increased 40% over the same period, driven by a successful launch of Doryx 200 milligram in July of this year. In the GI franchise, Warner Chilcott successfully launched Delzicol and expanded Asacol HD. The franchise has retained 90% of the revenue following the launch of Delzicol in March. As expected, Warner Chilcott's bisphosphonate franchise decreased 24% in the first 9 months of the year, as the entire category continues to contract. Warner Chilcott also received approval for Lo Loestrin in Canada, with a launch planned in 2014. I'll now turn the call over to Todd to take us through the third quarter financial results in more detail.

Thanks, Paul. Turning to Slide 9, I will now review our results on a consolidated and divisional basis for standalone Actavis. GAAP net revenues for the third quarter were $2,013,000,000, an increase of 57% over the prior year, reflecting strong growth in all 3 of our business segments. Net revenues in our Actavis Pharma division was $1,552,000,000, up 69% year-over-year as a result of the acquisition of legacy Actavis Group and new product sales in key markets, offset in part by the impact of competition on our authorized generic version of Concerta. X U.S. net revenues were $609 million, up from $198 million in the third quarter of 2012, primarily due to the inclusion of legacy Actavis. Actavis Pharma net revenues of $1,552,000,000 during the third quarter of 2013 consisted of net revenues of $981 million in the Americas; $487 million in Europe, which includes Medis; and $84 million in MEAAP. Actavis Pharma adjusted gross margin was 51.5%, primarily due to increased margins on our generic version of Concerta as a result of our contractual arrangement with Ortho-McNeil-Janssen and sales of our lidocaine patch products. Turning to Slide 10. Actavis Specialty Brands net revenues were $154 million, up 27% on higher sales of promoted products, including Rapaflo and Generess Fe. GAAP R&D investment declined 17%. On a non-GAAP basis, R&D investment is higher over prior year investment as a result of a number of pipeline products entering Phase III development. Specialty Brands' adjusted gross margin increased to 76.1%. Turning to Slide 11. Net revenues from our Anda Distribution segment were $307 million, up 26%, driven by increased sales of brand products and higher sales to chain customers. Anda's gross margin for the quarter was 13%, lower than the prior year period, due to increased sales of brand products in the quarter. Turning to Slide 12. Consolidated operating expenses have increased significantly year-over-year as a result of the addition of legacy Actavis. Consolidated GAAP research and development for the third quarter was $158.8 million, up 41% year-over-year. Consolidated GAAP SG&A for the third quarter was $455.7 million, up 130% over the prior year. Amortization expense for the third quarter was $146.3 million. On a non-GAAP basis, our income tax rate was 27.2% in the third quarter, down from 33.8% in the prior year period as a result of the acquisition of the Actavis Group. On a non-GAAP basis, which excludes amortization, acquisition-related and impairment charges, as well as other items detailed in Table 4 of our earnings press release, earnings for the third quarter were $2.09 per diluted share, up 55% year-over-year as a result of growth across our Actavis Pharma and Actavis Specialty Brands segments. Adjusted EBITDA for the third quarter was $489 million, compared to $305 million in the prior year, as a result of the addition of legacy Actavis and growth across the business. Cash flow from operations for the third quarter was strong at $271 million, and cash marketable securities were $374 million at the end of the third quarter. Turning to Slide 13. We began the fourth quarter in a favorable debt position, with a leverage ratio on October 1, 2013, following the close of Warner Chilcott acquisition, of approximately 3x. Assuming no additional investments, we expect to be at or below approximately 2.8x pro forma leverage by year end 2013. We also announced our intentions to call our legacy Watson $450 million notes due in 2014, which will generate interest savings in the fourth quarter and into next year. With that, I'll turn the call back over to Paul for an update on our 2013 forecast and on expectations for 2014 and concluding remarks.

Thanks, Todd. Beginning on Slide 15. As most of you know, our business now consists of Actavis Pharma, Actavis Specialty Brands and the Anda Distribution. These 3 groups are supported by an industry-leading global supply chain and exceptional shared service team. We believe that this model provides us with significant opportunities for continued growth. Moving to Slide 16. With the addition of Warner Chilcott, Actavis Specialty Brands now has a strong combined presence in 4 key therapeutic areas: women's health, urology, gastroenterology and dermatology. Turning to Slide 17. We are actively integrating Warner Chilcott into the Actavis Specialty Brands business and aggressively implementing defined integration activities. We remain on track to achieve more than $400 million in after-tax operational and tax synergies and an additional $50 million in pretax interest rate savings related to the replacement of $2 billion in Warner Chilcott term loans at the close of the acquisition. We anticipate announcing additional updates related to our synergy progress, including the future sales force structure, by the end of the year. Turning to Slide 18. Following the close, we are in the process of actively evaluating all projects in the pipeline. We may have the ability to accelerate some of the projects and have identified a few low-value projects from the combined portfolio that we intend to eliminate. We anticipate providing you with an updated combined pipeline including these changes at our Investor Day in January. We did, however, want to provide you with an update on some of the nearer-term and late-stage development opportunities that will impact the business over the next 12 to 18 months. We have a December 27 PDUFA date for our progestin patch and anticipate launching that product in the second half of 2014. Levosert is now approved in 11 countries, and Actavis expects to launch in the U.K. in 2014. Our partner, Gedeon Richter, is also expected to launch in its Central European territories around the same time. We expect to gain European CE mark approval for Diafert in early 2014 and 510K clearance in the U.S. in the -- in late 2014. And we look forward to publishing the data on Diafert following the CE mark approval. The PDUFA date for Metronidazole gel, licensed from Valeant, is March 24, 2014. And we expect to launch the product immediately following FDA approval. We have several programs already in or about to enter Phase III by the end of the year. Esmya, which we licensed in from Gedeon Richter, for uterine fibroids; and udenafil for erectile dysfunction; along with our biosimilar programs for rFSH, Herceptin and Avastin. Likewise, we expect our E4 combination oral contraceptive and sarecycline to enter Phase III development in 2014. With the close of the Warner Chilcott transaction, we are updating our fourth quarter and full year 2013 forecast and providing an initial 2014 outlook. We plan to give a more detailed 2014 forecast early next year. Slide 20 provides the forecast for the fourth quarter, including a full contribution of Warner Chilcott following the close on October 1. We now expect the combined business to post non-GAAP earnings of between $2.95 and $3.05 per share for the fourth quarter, with approximately 175 million shares outstanding. On Slide 21, we now expect 2013 revenue of approximately $8.6 billion, adjusted EBITDA of between $2.22 billion and $2.24 billion, a full year fully diluted share count of approximately 144 million shares and full year 2013 non-GAAP earnings per share between $9.26 and $9.39. Slide 22 provides our assumptions for 2014. Our forecast for the Actavis Pharma business assumes additional competition on our generic extended-release portfolio, generic oral contraceptives and generics for Concerta and Lidoderm during the year. We assumed date-certain launches for generic versions of Intuniv and OxyContin TR. We also include additional undisclosed product launches and select risk-adjusted Paragraph IV opportunities. In terms of generic pricing, we assume mid-single-digit price erosion in the U.S. and high single-digit price erosion in markets outside the U.S. Moving to Slide 23. In our Specialty Brands business, we assume growth in key promoted products such as Delzicol, Lo Loestrin, Minastrin, Doryx, ESTRACE Cream, Rapaflo and Generess Fe. In addition, we assume several key product launches, such as Lo Loestrin in Canada, our progestin-only patch in the U.S., Diafert and Levosert in several markets and Metronidazole in the U.S. We also expect continued significant declines in the bisphosphonate business in 2014, with generics expected for Actonel mid-year. Our forecast also assumes the elimination of the co-promotion agreement for Actonel and Atelvia with Sanofi in the U.S. market. Turning now to Slide 24. We expect non-GAAP EPS for full year 2014 to be between $12.25 and $13 per share. This assumes a full year tax rate of between 16% and 18% and approximately 176 million shares outstanding for the year. Turning to Slide 25. In summary, we believe Actavis, combined with Warner Chilcott, has a number of opportunities for strong growth in 2014. And we expect to generate significant cash flow, which will permit us to continue to invest in opportunities that will further generate growth. Lastly, 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, let's turn it back to Lisa for Q&A.

Okay. Cassandra, I think we're ready to open it up for questions.

[Operator Instructions] Your first question comes from the line of Marc Goodman from UBS.

2 things. One, can you talk about the generics gross margin in the quarter and the push-pulls and how to think about just kind of the base gross margin, what's going on there? And then second, tax rate. Interesting that you've kind of expanded the guidance range a little bit down further. Can you talk about the tax rate going forward and how we should think about it?

Marc, this is Todd. I'll cover both the margin and the tax rate question. As we look out at the margin, the margin essentially was, sequentially, was roughly in line with the second quarter. And so we did see some pushes -- some push and pull in the components of the gross margin. We saw some higher margins on generic Concerta as a result of the contractual arrangement we have with J&J. Lidoderm came in, price came in favorable on our launch of that generic product, so that's going well. We did see some lower pricing on a handful of generics, but roughly in line with what we've been seeing through the first 6 months of the year, first 9 months of the year have been fairly consistent. On the tax rate side, we've expanded the range a little bit. We think there may be some additional opportunities that we'll realize in 2014 related to manufacturing that may be able to help our tax rate, lower that tax rate from our original guidance of 17%. Still early in the process. The planning's going well. We've had some ups and downs in our estimates, but we still feel very comfortable around the midpoint of that range at 17%, and we're exploring opportunities to bring the tax rate and do better than 17% in '14.

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

I have 2 questions, please. The first is, I'm assuming that your guidance, both in terms of your '14 outlook and your long-term targets for double-digit organic earnings growth, incorporates generic pricing pressure from buyer consolidation between the retailers and distributors globally. If you could just confirm that. And then, if you have any additional comments to offer on the generic pricing outlook, that would be helpful. And then second, Siggi, I was hoping that you could talk about your outlook for Western Europe and how you're thinking about potential divestitures in certain countries and what you're reflecting in the 2014 outlook at this time.

Thanks, David. So with regard to the pricing assumptions in the U.S., you're right, we assume the consolidation that is happening, obviously, with Walgreens, Alliance Boots and then ABC on one hand, and obviously, McKesson and Celesio. All these companies are big customers of ours, and we work very closely with them. This has been built into our forecast for 2014 and onwards. I think the good thing is we have met with all the parties. We had a very good meeting with Walgreens, Alliance Boots and ABC last week. So we feel we are starting to understand the situation much better. I think we have built it into our pricing assumptions appropriately. With regards to the generic pricing outlook, at the high level, what has happened probably over the last 2 years is it has been more common that, obviously, there's a price erosion in the market due to the consolidation. But there's opportunities to take pricing increases, and that is what has changed since maybe 5 years ago when there wasn't an opportunity. These pricing increases have been in products which -- where there has been manufacturing problems or stockouts situation. So I think that has been a fact in the U.S. generic market that there's an opportunity to take price increases but also, at the same time, with the environment and the consolidation of the customers, clearly, there's a pricing pressure overall in the market. With regard to Western Europe, as we said, as Paul mentioned, we assume high single-digit price erosion overall in Western Europe. We are very happy with our businesses in U.K. and Nordics. Those continue to grow. We mentioned the oxycodone launch in U.K., but also, a significant opportunity has been in the U.K. due to the quality problems some of our competitors in that country have had. And the same applies to the Nordics, where we are growing the business well. With regards to the Western European countries, which we announced we are looking for either restructuring or divesting, that process is going well. We feel that we fully understand the business. We assume that we keep that in our books for 2013 fourth quarter, but we assume to take that out in the revenue forecast and in the overall forecast for 2014. So that's how we built up our assumptions. We expect to know the outcome of any divestiture or restructuring by the end of fourth quarter of this year.

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

It's on the branded business, I guess, for Paul, and Siggi perhaps as well. Can you talk about the expectation for the OC market when potentially you can have Loestrin 24 generics? And can you talk a little bit about, maybe Siggi can add, what you've learned about the mesalamine market and the potential for legacy Asacol generic competition and how difficult is it, in fact, to formulate generics of these products, the Asacol and your own Lialda ANDA?

This is Fred Wilkinson. We are very excited about the oral contraceptive franchise. We've -- Warner Chilcott just launched the Minastrin 24. It's going extremely well. That's following the launch of Generess, which we did several years ago. I think the combination now between the companies, it's around a 10% market share and growing. Lo Loe, we do not anticipate launching a generic -- or launch of a generic to Lo Loe. So that will be the core staple of our promotional activities in 2014. We think we got 3 nice brands that we can work with throughout 2014 to continue to grow this franchise.

Yes. I think, David, if I take a little bit about the mesalamine generic franchise, we have said that previously, we feel very good about our ANDA Lialda application. Obviously, we submitted a year ahead of the guidance document coming out, but we have looked at the data and we feel very good about the application. Obviously, we are working very closely with the FDA to secure approval. Also, a hearing on that product will be in the first week of December, so it has been announced on the appeal. So we are looking forward to the outcome of Lialda, but we feel good about that product. With regards to the opportunity of development of Asacol, I have stated previously it can be developed, as we have shown on Lialda. These are products that have a low bioavailability and are challenging to develop, no question about it. But with the generics companies today, the technical ability to develop this product is there. And obviously, the limit of detections and how science has taken us forward has allowed the generic companies to develop these products today. So overall, I think it's possible. It's very challenging for sure. But I think our Lialda development speaks volume about the opportunity that it is possible.

Just a follow-up. Any -- for Fred, I guess. Any thoughts on whether an actual generic Asacol may be on the market in 2014, and do you expect the overall OC franchise to grow in 2014?

We do expect the overall OC franchise to grow. We've modeled it that way with the lineup of products we have. And regarding Asacol, if you've noticed, I mean, we've kind of split the business now between Asacol HD and Delzicol. Delzicol is a primary focus of the activities out there. We intend to continue to grow that.

Your next question comes from the line of Liav Abraham from Citi.

Could you talk a little about your expectations for longer-term double-digit earnings growth? I'd be interested in additional color around where your assumptions are coming from. Is it from top line growth, cost controls, tax? If you can give some color on that, that would be helpful.

Sure. I think it's fair to say that we see growth coming from really sort of 3 areas. Certainly, we've maintained and continue to maintain our objective of achieving organic double-digit growth. And that organic growth will come from executing on the value of our R&D pipeline, both on the generic side as well as the brand side, and taking those products, those product approvals and launching them in markets around the world and driving additional value from those assets. So it comes from R&D and then the sales expansion. And then finally, we have probably the strongest Paragraph IV franchise in the country today. And it's -- a lot of that growth, a lot of growth is driven out of that Paragraph IV franchise. So we would expect to see those assets coming to fruition, some in '14, some in '15 and, of course, some in '16 and beyond. In addition to that organic growth, we would also expect growth from operational synergies. We'll continue to drive operational excellence programs. We're going to continue to get the synergies from many of the acquisitions that we've done. We continue to rationalize our global supply chain. We use our purchasing power to improve our purchasing efforts. So that -- there will also be growth driven from reduction in COGS and just overall rationalization of the business. And then finally, on top of all of that, we would expect to allocate our cash to continue to help drive growth. That growth, we will continue to look for opportunities that are in the generic sector, certainly, around the world. We want to improve some of our -- in some of our commercial markets. We've talked about this a lot. Looking in areas like Southeast Asia and Russia and sort of those markets that have potential for significant double-digit growth. As well as, on the brand side, we now have opportunities that we're looking at in the GI and dermatology side. We have a very, very strong women's health care pipeline. Doesn't mean we won't look for other opportunities there, but it's a very strong women's health care pipeline. We've got a good urology pipeline with the udenafil product and a number of other opportunities as we look at things in urology. So it's really a combination of those 3 things. Organic growth, operational synergies and then allocation of our cash will help us drive significant growth over the next 3 years.

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

I just wanted to drill down on a couple of items on the guidance for 2014. On Concerta, when you talk about additional competition, does that include competition from the Impax generic in 2014? And then, to be clear on the guidance, does that reflect any impact from a generic on Asacol 400? And then if you can -- are there any possibility of disclosing some of these risk-adjusted Paragraph IV opportunities that you put into the '14 guide?

David, let me start at least. So with regard to the guidance, we said we have built in additional competition on Concerta for 2014. We haven't gone so far to say who is going to get approval. I think that probably isn't where we are. But overall, we feel that there could be approval that year, and we have built that into our guidance. With regard to the Paragraph IVs, we are not going to disclose that at this point in time. The reason is simply that they are ongoing cases. We are working with the FDA. The closer we get to our Investor Day, we will have more visibility. We are going to show you more into the guidance on what is included at our Investor Day in January of next year. But overall, at this point in time, we are not going to give you any more details on the Paragraph IV and the risk adjustments.

Okay. And the Asacol question?

I mean, actually, the Asacol franchise, we're focusing ourselves on Delzicol 400 and Asacol HD. Those are the 2 growth items. And so that's entirely the focus of the promotional pieces. The promotional emphasis is to grow those 2 products. We're not done with the franchise yet. There are some expansion opportunities that are in the R&D portfolio. But that's the approach that we're taking today.

Yes, I mean, and I would just take it one step further and say that would assume, if there is a generic Asacol 400, that would be part of the -- that would be built in.

Your next question comes from the line of Louise Chen from Guggenheim.

The first question I had was on the -- your guidance for 2014, the preliminary guidance. You obviously gave a wide range. I know you gave a lot of detail on the pieces, but I was wondering if you could highlight the key swing factors to that range. And then the second was just if you can provide an update on your generic ADVAIR program and the timing around when you think that generic could come to the market because I know there's some debate out there between the different companies.

There's a lot of debate about that, I think. With respect to 2014, I think some of the swing items, of course, will be the extent to which we are successful in some of our Paragraph IV challenges. We obviously risk-adjusted some, put some in less amount. And if we're successful at a higher rate than we've expected, then we would, obviously, hit either the high end or exceed the guidance that we provided. I think the other -- some of the other areas would be tax rate. As we -- as Todd talked about earlier, as we think about and implement some of the tax strategies we have, we hope to be able to bring down our tax rate. And as that happens, on the EBITDA numbers we're talking about, it should have a significant impact on the overall earnings. So those are probably the 2 big swing factors. And I'll let Siggi talk about the ADVAIR.

Yes, Louise, on generic ADVAIR, we're doing fine. We have identified our device. We are working on the PK of the device at the moment and hope to be getting into Phase III soon, although we don't know the exact timing of that. With regard to the overall timing, I think the difference is how we assume the FDA is going to improve on the approval time. I think we are not sure that the FDA is able to go down to 9 months approval time by 2015. Based on the current 33 months average approval time, I think it's fair to say we would assume that generic ADVAIR would be on the market at 2018. But if suddenly, the PDUFA kicks in, I think there could be a generic competition in 2016. But I think that's where the differences between companies lies. My overall opinion is that at least 3 companies are at a similar place in the development of generic ADVAIR.

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

Paul, when you were talking about the pipeline, you sort of passed over, in terms of discussion, but it's on the slide, comments around development of additional mesalamine products. I was just curious if you could provide a little bit more detail around that program and where -- when we could hear more about the timing and sort of strategy that you're taking in terms of that market.

Yes, this is Fred. There are several projects that we're inheriting from the Warner Chilcott development group. We've had a series of meetings as we start to rationalize the R&D portfolio. Obviously, the GI line and the mesalamine line are critical to continue the development on. They have 3 or 4 ideas that we are working on, but I don't think at this particular time we are prepared to really identify what those are and the timing. Suffice it to say that it's a critical franchise. There are some opportunities for product improvements that we're chasing very, very aggressively, and this is one of the areas where we intend to accelerate the good work that Warner Chilcott was already doing.

Okay, great. And then one final question on -- in terms of the opportunity to optimize the tax rate on your pipeline of products. When we think about what the -- your legacy Actavis Phase III assets, are you going to be able to sort of maximize the tax synergies with the Warner Chilcott platform now?

Yes, we will. One of the advantages of being -- of now being an Irish company or having an Irish parent is that we avoid a lot of the restrictive U.S. tax rules, the Subpart F rules, that limit our ability to put IP offshore in certain circumstances. We've been employing a strategy over the past few years to develop IP offshore in locations where we would also be manufacturing that IP. And that strategy will continue, but the new platform being -- having a foreign parent gives us a lot more flexibility going forward to keep that IP offshore and to have it permanently generate those profits permanently offshore.

Your next question comes from the line of Greg Gilbert from Bank of America.

I'm sorry if you've covered some of this, Paul, already, but I wanted to pin you a down a bit more on the renewed commitment to the long-term double-digit organic growth off the new base. Obviously, that's impressive, given the size of the company now. Is that aspirational, or does your long-term plan that you share with the board actually include double-digit EPS growth? And if so, for how many years? And then my follow-up, I'll ask up front, can you talk about your confidence in Estrace exclusivity, whether that relates to technical barriers or the follow-on program or some combination of those things? It's obviously a very significant EPS contributor, so curious if you could share some confidence-building comments there.

Sure. You're trying to pin me down for multiple years, right? So I think right now, we are looking at double-digit growth for 2015 organically. We have shared that goal with the board, so they do know that, that is our goal. I think we can get there, provided that we can execute on the Paragraph IV challenges, that we continue to grow our -- now our much-expanded Specialty Brands franchise and we continue to drive growth in our x U.S. markets as well. So I do think that's what -- that is our intention, is to hit double-digit growth. If you want to call it aspirational, I guess that would be one way to say it. But it is a number that we have consistently hit and consistently striven -- strived for throughout the time that I've been here. As we look out over 2015, or beyond 2015 into 2016, it's going to get a little -- it gets a little cloudy because we know we're going to be allocating our cash to new things, to new business opportunities, to new business development opportunities. So otherwise, we will have no debt and a mountain of cash. So we're going to find ways to put that cash to work. So I think that will help support that growth rate in the out-years, as well as the organic stuff. Fred, I'll let you take the Estrace.

Sure. I think now you've hit on, Paul, the core areas where we've spent a lot of time looking how to accelerate a couple of the projects and emphasize them a little more. Obviously, Estrace Cream is an important asset. There are, again, several product improvement opportunities within that line. There has not been much done in that category in a while, and so we've focused ourselves on a couple of those product improvements. So I think the confidence that we have on the line is really a combination of both the difficulty of generics and the opportunities that we have through line extensions.

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

Paul, I know you've highlighted the launches of Intuniv and OxyContin for 2014. Are those both basically targeted for the fourth quarter of next year?

Intuniv is fourth quarter for sure. OxyContin, I think, is a little bit earlier.

And maybe just a follow-up, Paul. I noticed that you guys issued an 8-K sort of amending one of Warner Chilcott's arrangements with Sanofi. Could you talk a little bit about the significance of that? Because it looks like you guys are -- or Warner Chilcott is basically paying about $125 million to Sanofi. But does that basically effectively lower your SG&A costs for next year?

Yes, it does. It would take out the royalty payment to Sanofi for 2014 that would've been in SG&A.

And after that, you don't -- there's no more payments to Sanofi, is that right?

No, the agreement expires at the end of 2014. Just to be clear, the agreement is still in place for x U.S. markets, and that will also expire at the end of 2014.

Your next question comes from the line of Andrew Finkelstein from Susquehanna Financial.

I was hoping you could talk a little bit about how we can look at the performance of some of the brand products, where you're most focused on driving volume growth and any factors we might think about in terms of changes in net pricing as you've transferred the franchises over and we've gotten through some of these product transitions. And then, on the generics business, how we might think about the new ANDA filing activity over the next couple of years, noting you've been in the lead recently and have the strongest Paragraph IV portfolio. And then one specific product, if you could talk about the potential to launch an authorized generic to Neupogen under your deal with Amgen in 2014?

So let me start with the brands and, I guess, start with the legacy Actavis Brands obviously had a nice year, with growth of just about everything that we're promoting. We're real pleased with the growth -- continued growth of Rapaflo in year 5 after launch. That's got still a long life to it. We intend to grow this brand and continue to accelerate the trajectory in the urology space. Generess Fe continues to be one of the fastest-growing oral contraceptives out there and actually makes a nice combination in our promotional activities with the Warner Chilcott line because it was one of the most actively promoted chewable products out there. And that's a line that we're going to be bringing Minastrin into and -- to help to accentuate the benefits of that attribute of the OC. ANDRODERM is growing now with the 24 introduction and conversion, so we're pleased with that. Crinone continues to grow. And Trelstar, even though there's some difficult pricing arrangements, also continues to grow in units. So we've had a nice positive growth position out of what we think is probably one of the more effective sales groups out there in the industry. With the addition of the Chilcott line, obviously, we take a leadership role in the contraceptives space, and we intend to kind of build on that so that we've got 3 good brands that we can grow. The urology space expands, again, through the projects that are coming in from Warner Chilcott, so this will be a primary focus. It builds to where we were already -- we already had a nice market presence. And then picking up GI and derm will be good for us because these are 2 new therapeutic categories that have nice growth potential. It's an area that Actavis or previous Watson has been in, in the derm space. And so I think you're going to see a little more activity from us in those areas as we go forward.

So particularly, in the oral contraceptives, is that something where we can see renewed volume growth in some of the Warner Chilcott franchises?

We believe so. I mean, they've been working through some product introductions. Those product introductions, in some cases, will cause kind of a diminution of the overall franchise. I think they're through those now. It's a nice opportunity for us to pick it up and now start to grow volume and help build out the whole franchise. So that's really the goal for 2014 is to focus now on growth in units and growth in overall revenue.

So Andrew, if I take the ANDA thing. As we mentioned earlier, we are over 190 ANDA pending at the FDA, and we have filed 32 ANDA this year, with 16 of those 32 as possible First-to-File. So I think we're firing on all cylinders. We have never chosen as many products into development. People have been talking about the patent cliff and the pipeline of generics is declining. So far, we haven't seen that. We are working very actively on the pipeline, both in the U.S. and also for the emerging markets, where we are branding our pipeline. That is a key thing, is to grow our pipeline in Russia, Southeast Asia. We are doing more filings in Japan than ever before. We are spending more money on Japanese development because that's a special development. We're doing the same in Brazil in preparation to have a sales platform in Brazil. So overall, we are spending more time, money and resources on generic development than ever before. So going forward, I don't see it, short term, changing. I think maybe in 3 to 5 years, there might be fewer opportunities, but there will be more challenging opportunities. Also, I think we might not have 40 ANDAs per year that we submit, but they might be in the 20s, but they would be much more available and basically products that our competitors are unable to develop. So I think that will be the shift in the generic R&D pipeline would be, it's not how many products, it's how challenging and the return on that investment. With regard to the Neupogen AG, we obviously think this could be a great opportunity. We have mentioned this to Amgen. No agreement has been reached. But keep in mind, we have a very strong infrastructure in the hospital setting outside of the U.S., so this could be an opportunity going forward, but nothing is agreed.

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

First question is on the ADVAIR front. I know that there's some language in the FDA guidance on ADVAIR about submitting a device to the FDA in advance, you get a termination [ph] on 505(j) eligibility. I'm just wondering if you guys have had those discussions with the agency and, if not, sort of when in the process do you think applicants will have that discussion and know that their product is 505(j) eligible. And then, this is my second question, thinking about '14 guidance, are you baking in distribution agreements, something in line with maybe what you had with Amphastar in the past?

So let me take the ADVAIR. Basically, we have had interactions with the FDA. We have gone through -- this has been a longtime development for Watson and then Actavis and now, again, Actavis. So it's not like we started this year or last year. This has been a long development. We have a lot of knowledge in-house on this development. I think for the final evaluation of the device, we feel it's important to have some PK data to show the FDA. So the final meeting to evaluate the device would need to be supported with some PK data at that point in time. So we are not at that point yet. As I mentioned, we are working on the PK parameters of the device. So, so far, we are not there, but we have had multiple interactions with the FDA and other advisers on our development program.

Yes, and Jason, as to the distribution agreements you've talked about, we don't have, built in, any sort of aspirational agreements. We either have identified agreements that exist and we put them in, or it's our own product launches that affect 2014.

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

2 questions. First, regarding 2014 guidance, is Pulmicort in there? Or, if it is, roughly what probability are you putting on it? And on mesalamine and Estrace, should we be able to see some development on ClinicalTrials.gov in the next 12 months? And separately, on the branded side, you got a few nice new launches in 2014: Diafert, Levosert, progestin patch and metronidazole. I was wondering, if you kind of look 3 to 5 years out, if you can ballpark to us what will be a good target revenue for you guys. Essentially, is this like, altogether, $200 million, $500 million, $1 billion? Just so we kind of know, ballpark, what do you think those parts would do.

I hope it's $1 billion, Ronny. We haven't actually done that work, but I'll let Fred take that.

What are going to hold Fred to?

Maybe $1 billion. Maybe that's the answer. With respect to 2014, we're going to decline talking about product opportunities for 2014. Suffice it to say, we have, as I said -- I know this is not optimum for you guys, but the reality is, there are a number of patent cases that we have risk adjusted and put in the numbers for 2014. We feel comfortable with those, and we hope to be able to exceed that risk-adjusted contribution. But we're going to refrain from getting into what's in and what's out. So Fred, I'll turn it over to you for mesalamine and Estrace.

So Ronny, thanks for the commercial. I think the R&D portfolio is kind of maturing nicely with a lot of launches, reminding us that some of these came out of the Uteron transaction at, actually, the beginning of this last year. Estrace, I think there is some information on the .gov website. There were some Phase IIIs that were completed in 2012 and '13. So I think there is information out there. That is not the complete program, so there will probably be some more things that will be placed on the website as we go forward. And mesalamine, those projects may not be visible on the clinical -- the .gov website, but we'll follow that up again and check on that. But they're very, very active projects. We intend to accelerate those so we make sure we take advantage of some of the good foundational work that Chilcott has already done.

And then, seriously, on the guidance for the brand franchise, we're going to save the revenue guidance for our investor meeting in January. We'll have a lot more visibility on timing, and so we think that makes a bit more sense to do it then.

Your next question comes from the line of Chris Schott from JPMorgan.

Just 2 questions here. First is on the biz dev side. Can you just talk about just, with Warner having recently closed, how active is your business development activity at this point? And what size of transaction would be your sweet spot at this point? I guess I'm just wondering, following this deal, should we anticipate a period of digestion as you integrate Warner before the company would be in a position to, for example, consider another larger branded deal? The second question I had was coming back to -- one of your competitors announced a JV with a major pharma company in Japan last year, seems to leverage the branded company's market presence to generic manufacturers product portfolio. Do you think that type of structure makes sense, and do you see an opportunity for Actavis to look at these type of JVs as we think about some of the emerging market opportunities?

Sure, Chris. Let me start with the business development piece. We are very active on the business development front, and we remain -- we haven't really stopped. We continue to keep looking for new opportunities. With respect to the size of the transaction, I don't think we're limited by size right now. I think our -- as I mentioned in my prepared remarks, we're sort of complete with the legacy Actavis, legacy Watson integration. And the Warner Chilcott integration is going very smoothly, and we expect to be not hampered by that integration effort in looking for new -- and potentially digesting new business development opportunities. I think really the question is what's available and what makes strategic sense. I think we've been very clear that we look at strategic transactions that help grow our business in markets that we want to operate in and in categories, therapeutic categories, that we are in. And so it's a question of finding the right opportunity and then negotiating that kind of arrangement that takes time and will lead to, hopefully, a successful conclusion. But we are, I would say, very active on the business development front even today. Siggi, do you want to take the Japanese...

Yes. I think, Chris, we're doing exactly the same. We have a great joint venture with a Japanese company called ASKA. This has been a joint venture in place for about 3 years. I think the reason why companies are doing it through a joint venture is simply that, to come in as a Western company in Japan, you need the local regulatory experience. But also, a key to the Japanese market is the relationship with the wholesalers. So overall, our partner is absolutely fantastic. We have been working very closely with them. We also have a little bit of our oncology franchise ourselves in the Japanese market. But overall, we feel that it's important to have a strong JV when you take your first step into the Japanese market.

Just to follow up on that, I was thinking actually more broadly than Japan. Does that type of structure, as we think about other markets globally, make sense? Or is that something that's very Japan-specific, in your view?

My personal opinion is it's more Japan-specific because, overall joint venture, there's a lot of time you need to manage a joint venture to make it work, a joint steering committee. We have had great success in joint venture. Obviously, let's talk about our biosimilars joint venture with Amgen has been a great success. But overall, marketing entry -- where you're entering a market where you have the knowledge, you have the experience, you have the supply, you have the regulatory knowledge, usually, we don't rely very heavily on joint ventures except in cases where you -- basically, the partners need each other. So how we see it in Japan is we really need the local knowledge and regulatory affairs, reimbursement, distribution, wholesaling, et cetera. What we bring to the table is our extremely strong pipelines, strong R&D, strong supply chain. And together, we are much stronger than separately in the Japanese market. If the case comes up in other markets where this -- we could build this win-win, there's nothing against joint ventures. But there has to be a win-win for both parties.

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

Maybe if I could just follow up on that last question, Paul and Siggi. Paul, you've talked about legacy pharma as an area of interest with respect to M&A activities. I'm just wondering if you could elaborate a bit further on that. Are you talking about creating partnerships with established products or legacy pharma companies? What kind of form would that take, and what are you thinking in terms of timing?

Well, I mean, we have talked about this in the past. One issue for, I think, legacy pharma has been what to do with those legacy brands as those brand products decline over time. And our argument has been, if they're put into the hands of companies like us, we can help drive the overall growth of the franchise because we will -- we have the R&D engine that continues to supply new products to that market, grow them and have an opportunity to grow those products across -- and then sort of turn the tide on them and make them grow. We know, obviously, that kind of deal would require some creative discussions and creative activity, and those kinds of things do take time. But we're open to consider that, and we've got to find the right partner to do it with.

Your next question comes from the line of David Maris from BMO Capital Markets.

Paul, can you talk a little bit about the complexity of the supply chain and the overall business as you're growing relative to where it was 2 or 3 years ago and how you've minimize risk in that environment? And how does that play into how you look at deals in Eastern Europe, Southeast Asia? As you know, one of your competitors has tripped up, acquisition wise, from a complex manufacturing problem. Give us a sense -- investors are asking us, give us a sense of what you're doing to minimize that type of risk.

I'm going to let Bob Stewart, who runs our operations team, answer that. But I think the single most important thing we have to deal with, on a daily basis, is quality and execution of our supply chain. And it often gets overlooked, but it doesn't get overlooked by the people that are in this room because we think about it every day and we deal with it every day. Bob?

Yes, so we obviously operate a lot of plants around the globe, very highly utilized manufacturing facilities that can produce all of the myriad of pharmaceutical dosage forms and their complex operations. It's a complex supply chain when you look at the 60 different markets that we're serving and look at just the sheer volume of product that we're moving around the globe. We've spent a lot of time on this, managing it day in and day out. We've spent a lot of time kind of asking the question around acquisitions and how has that kind of either challenged us or complicated us. What I would say is that all of the transactions that we've done have created complementary manufacturing strategies and supply chain strategies to what we were trying to accomplish. And so what I would say is that we spent a lot of time doing due diligence, making sure that we're not walking into the same type of a trap that some of our competitors have with recent acquisitions where they acquire something with a facility that, a week later, has a warning letter. We spend a lot of time doing due diligence and quality, making sure that the assets that we are acquiring fit strategically, as well as can run compliant operations. And I would say that the team that we have within our Global Operations group, is really, really strong in terms of running and managing the supply chain.

And maybe, David, one data point for you to consider. The complexity in the supply chain prior to 2009, prior to the Arrow acquisition, we were dealing with between 1,000 and 1,500 SKUs in the overall company. We are now over 15,000 SKUs. So Bob is talking about complexity, but it's tenfold in 3 years, and it is so important. We could never deliver the results in the markets without a rock-solid supply chain like we have.

Ladies and gentlemen, we've reached the allotted time for questions. Lisa, do you have any closing remarks?

Just thank you very much, and we hope to speak to you all soon. Thanks.

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