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ACT > SEC Filings for ACT > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for ACTAVIS, INC.


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and the results of operations should be read in conjunction with the "Condensed Consolidated Financial Statements" and notes thereto included elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report"). This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under "Cautionary Note Regarding Forward-Looking Statements" in our Annual Report on Form 10-K for the year ended December 31, 2012, and elsewhere in this Quarterly Report.

Overview of Actavis, Inc.

Actavis, Inc. is an integrated global specialty pharmaceutical company engaged in the development, manufacturing, marketing, sale and distribution of generic and brand pharmaceutical products. Through its third-party business within the Actavis Pharma segment, Actavis out-licenses generic pharmaceutical products rights developed or acquired by the Company, primarily in Europe. Actavis is also developing biosimilar products within the Actavis Specialty Brands segment. Additionally, we distribute generic and certain select brand pharmaceutical products manufactured by third parties through our Anda Distribution segment. Our largest market is the United States of America ("U.S."), followed by our key international markets including Europe, Canada, Australia, Southeast Asia, South America and South Africa.

Acquisitions

Acquisition of Uteron Pharma, SA

On January 23, 2013, the Company completed the acquisition of Belgium-based Uteron Pharma, SA. The acquisition was consummated for a cash payment of $142.0 million, plus assumption of debt and other liabilities of $7.7 million and up to $155.0 million in potential future milestone payments. The acquisition expands our Specialty Brands' pipeline of Women's Health products including two potential near term commercial opportunities in contraception and infertility, and one oral contraceptive project projected to launch by 2018. Several additional products in earlier stages of development are also included in the acquisition.

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Acquisition of Actavis Group

On October 31, 2012, Watson Pharmaceuticals, Inc. completed the acquisition of the Actavis Group. The acquisition was consummated for a cash payment of €4.2 billion, or approximately $5.5 billion, and a contingent consideration payment in the form of up to 5.5 million newly issued shares of Actavis, Inc. common stock. Actavis Group was a privately held generic pharmaceutical company specializing in the development, manufacture and sale of generic pharmaceuticals. On January 24, 2013, the Company was renamed Actavis, Inc.

Segments

Actavis, Inc. has three reportable segments: Actavis Pharma, Actavis Specialty Brands, and Anda Distribution. The Actavis Pharma segment includes off-patent pharmaceutical products that are therapeutically equivalent to proprietary products. The Actavis Specialty Brands segment includes patent-protected products and certain trademarked off-patent products that Actavis sells and markets as brand pharmaceutical products. The Anda Distribution segment mainly distributes generic pharmaceutical products manufactured by third parties, as well as by Actavis, primarily to independent pharmacies, pharmacy chains, pharmacy buying groups and physicians' offices. The Anda Distribution segment operating results exclude sales by Anda of products developed, acquired, or licensed by Actavis Pharma and Actavis Specialty Brands segments.

The Company evaluates segment performance based on segment net revenues and segment contribution. Segment contribution represents segment net revenues less cost of sales (excludes amortization), R&D expenses and selling and marketing expenses. The Company does not report total assets, capital expenditures, corporate general and administrative expenses, amortization, gains or losses on asset sales or disposal and impairments by segment as not all such information is accounted for at the segment level, nor is such information used by all segments.

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Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Results of operations, including segment net revenues, segment operating
expenses and segment contribution information for the Company's Actavis Pharma,
Actavis Specialty Brands and Anda Distribution segments, consisted of the
following (in millions):



                                                   Three Months Ended March 31, 2013                                    Three Months Ended March 31, 2012
                                     Actavis            Actavis            Anda                             Actavis        Actavis           Anda
                                      Pharma           Specialty       Distribution         Total           Pharma        Specialty      Distribution         Total
                                                        Brands                                                              Brands



Product sales                        $ 1,524.1          $   116.2       $    231.0      $    1,871.3      $  1,108.0      $    92.9       $    298.6      $    1,499.5
Other                                      9.7               14.5               -               24.2             8.1           16.7               -               24.8

Net revenues                           1,533.8              130.7            231.0           1,895.5         1,116.1          109.6            298.6           1,524.3
Operating expenses:
Cost of sales(1)                         861.9               29.8            194.5           1,086.2           614.2           25.8            264.3             904.3
Research and development                  98.8               33.3               -              132.1            56.1           32.4               -               88.5
Selling and marketing                    159.3               43.6             24.3             227.2            47.5           47.7             22.9             118.1

Contribution                         $   413.8          $    24.0       $     12.2      $      450.0      $    398.3      $     3.7       $     11.4      $      413.4

Contribution margin                        27.0%              18.4%             5.3%             23.7%           35.7%           3.4%             3.8%             27.1%

General and administrative                                                                     185.8                                                             164.4
Amortization                                                                                   158.4                                                             131.9
Loss on asset sales, impairments, and contingent consideration adjustment, net                 148.0                                                               0.2

Operating income (loss)                                                                 $      (42.2)                                                     $      116.9

Operating margin                                                                                 -2.2%                                                              7.7%


(1)  Excludes amortization of acquired intangibles including product rights.

Actavis Pharma Segment

Net Revenues

Our Actavis Pharma segment develops, manufactures, markets, sells and
distributes generic, branded generic and OTC products. Generic products are the
therapeutic equivalent to their brand name counterparts and are generally sold
at prices significantly less than the brand product. As such, generic products
provide an effective and cost-efficient alternative to brand products. When
patents or other regulatory exclusivity no longer protect a brand product, or if
we are successful in developing a bioequivalent, non-infringing version of a
brand product, opportunities exist to introduce off-patent or generic
counterparts to the brand product. Additionally, we distribute generic versions
of third parties' brand products (sometimes known as "authorized generics") to
the extent such arrangements are complementary to our core business. Our
portfolio of generic products includes products we have internally developed,
products we have licensed from third parties, and products we distribute for
third parties.

Net revenues in our Actavis Pharma segment include product sales and other
revenue. Our Actavis Pharma segment product line includes a variety of products
and dosage forms. Indications for this line include pregnancy prevention, pain
management, depression, hypertension, attention-deficit/hyperactivity disorder
and smoking cessation. Dosage forms include oral solids, semi-solids, liquids,
gels transdermals, injectables, inhalation and oral transmucosals.

Other revenues consist primarily of royalties, milestone receipts, commission
income and revenue from licensing arrangements.

Net revenues within our Actavis Pharma segment increased 37.4% or $417.7 million
to $1,533.8 million for the three months ended March 31, 2013 compared to net
revenues of $1,116.1 million in the prior year period. The increase in net
revenues is primarily due to international sales ($432.6 million) offset by a
reduction in U.S. sales ($16.5 million). The increase in international sales was
primarily due to the Actavis Group acquisition in

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October 2012. The decrease in U.S. sales was primarily due to lower unit sales of the authorized generic version of Lipitor® (atorvastatin) offset by product sales attributable to the Actavis Group acquisition and the launch of new products.

Cost of Sales

Cost of sales includes production and packaging costs for the products we manufacture, third party acquisition costs for products manufactured by others, profit-sharing or royalty payments for products sold pursuant to licensing agreements, inventory reserve charges and excess capacity utilization charges, where applicable. Cost of sales does not include amortization costs for acquired product rights or other acquired intangibles.

Cost of sales within our Actavis Pharma segment increased 40.3% or $247.7 million to $861.9 million for the three months ended March 31, 2013 compared to $614.2 million in the prior year period. The increase was driven mainly by increased international sales as a result of the Actavis Group acquisition ($308.3 million) offset by a reduction in U.S. cost of sales ($60.6 million) due to lower sales of atorvastatin offset by product sales attributable to the Actavis Group acquisition. Costs of sales as a percentage of net revenue increased to 56.2% as compared to 55.0% in the prior year period.

Research and Development Expenses

R&D expenses consist predominantly of personnel-related costs, active pharmaceutical ingredient ("API") costs, contract research, biostudy and facilities costs associated with product development.

R&D expenses within our Actavis Pharma segment increased 76.1% or $42.7 million to $98.8 million for the three months ended March 31, 2013 compared to $56.1 million in the prior year period primarily attributable to the Actavis Group acquisition.

Selling and Marketing Expenses

Selling and marketing expenses consist mainly of personnel-related costs, distribution costs, professional services costs, insurance, depreciation and travel costs.

Selling and marketing expenses within our Actavis Pharma segment increased 235.4% or $111.8 million to $159.3 million for the three months ended March 31, 2013 compared to $47.5 million in the prior year period mainly due to the Actavis Group acquisition.

Actavis Specialty Brands Segment

Net Revenues

Our Actavis Specialty Brands segment includes our promoted products such as Rapaflo ®, Gelnique®, Crinone®, Trelstar ®, GeneressTM Fe, Androderm® and a number of non-promoted products.

Other revenues in the Actavis Specialty Brands segment consist primarily of co-promotion revenue, royalties and the recognition of deferred revenue relating to our obligation to manufacture and supply brand products to third parties. Other revenues also include revenue recognized from R&D and licensing agreements.

Net revenues within our Actavis Specialty Brands segment increased 19.3% or $21.1 million to $130.7 million for the three months ended March 31, 2013 compared to net revenues of $109.6 million in the prior year period. The increase in net revenues was primarily due to increased sales of, GeneressTM Fe, Rapaflo®, Crinone®, Androderm ® and Kadian®, which was acquired through the Actavis Group acquisition.

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Cost of Sales

Cost of sales includes production and packaging costs for the products we manufacture, third party acquisition costs for products manufactured by others, profit-sharing or royalty payments for products sold pursuant to licensing agreements, inventory reserve charges and excess capacity utilization charges, where applicable. Cost of sales does not include amortization costs for acquired product rights or other acquired intangibles.

Cost of sales within our Actavis Specialty Brands segment increased 15.5% or $4.0 million to $29.8 million for the three months ended March 31, 2013 compared to $25.8 million in the prior year period. The increase was driven mainly by increased sales. Cost of sales as a percentage of net revenue decreased to 22.8% as compared to 23.5% in the prior year period due to product mix.

Research and Development Expenses

R&D expenses consist mainly of personnel-related costs, contract research, clinical and facilities costs associated with the development of our products.

R&D expenses within our Actavis Specialty Brands segment increased 2.8% or $0.9 million to $33.3 million for the three months ended March 31, 2013 compared to $32.4 million in the prior year period. The prior year period includes higher contractual milestones ($10.0 million) and the current year period includes higher expenditures associated with biosimilar product development ($7.3 million) and other R&D expenses inclusive of the Uteron acquisition.

Selling and Marketing Expenses

Selling and marketing expenses consist mainly of personnel-related costs, product promotion costs, distribution costs, professional services costs, insurance and depreciation.

Selling and marketing expenses within our Actavis Specialty Brands segment decreased 8.6% or $4.1 million to $43.6 million for the three months ended March 31, 2013 compared to $47.7 million in the prior year period. The decrease related to lower promotional spending and sales force support costs.

Anda Distribution Segment

Net Revenues

Our Anda Distribution segment distributes generic and brand pharmaceutical products manufactured by third parties, as well as by Actavis, primarily to independent pharmacies, pharmacy chains, pharmacy buying groups and physicians' offices. Sales are principally generated through an in-house telemarketing staff and through internally developed ordering systems. The Anda Distribution segment operating results exclude sales by Anda of products developed, acquired, or licensed by Actavis Pharma and Actavis Specialty Brand segments.

Net revenues within our Anda Distribution segment decreased 22.6% or $67.6 million to $231.0 million for the three months ended March 31, 2013 compared to net revenues of $298.6 million in the prior year period. The decrease was primarily due to lower chain and base sales ($38.3 million) and lower new launches ($31.0 million).

Cost of Sales

Cost of sales includes third party acquisition costs, profit-sharing or royalty payments for products sold pursuant to licensing agreements and inventory reserve charges, where applicable. Cost of sales does not include amortization costs for acquired product rights or other acquired intangibles.

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Cost of sales within our Anda Distribution segment decreased 26.4% or $69.8 million to $194.5 million for the three months ended March 31, 2013 compared to $264.3 million in the prior year period due to lower product sales. Cost of sales as a percentage of net revenue decreased to 84.2% compared to 88.5% in the prior year period primarily due to lower margins on certain sales to chain customers in the prior year period.

Selling and Marketing Expenses

Selling and marketing expenses consist mainly of personnel costs, facilities costs, insurance and freight costs, which support the Anda Distribution segment sales and marketing functions.

Selling and marketing expenses within our Anda Distribution segment increased 6.1% or $1.4 million to $24.3 million for the three months ended March 31, 2013 compared to $22.9 million in the prior year period.

General and Administrative Expenses



                                                    Three Months Ended March 31,               Change
              ($ in millions):                        2013                 2012          Dollars       %

General and administrative expenses             $          185.8     $          164.4    $  21.4     13.0%
as a % of net revenues                                      9.8%                10.8%

General and administrative expenses consist mainly of personnel-related costs, facilities costs, insurance, depreciation, litigation and settlement costs and professional services costs which are general in nature and not directly related to specific segment operations.

Corporate general and administrative expenses increased 13.0% or $21.4 million to $185.8 million for the three months March 31, 2013 compared to $164.4 million in the prior year period primarily due to higher costs resulting primarily from the Actavis Group acquisition ($66.7 million), higher domestic costs as a result of personnel, legal fees, and other costs ($9.0 million), partially offset by lower accruals for legal matters ($54.5 million).

Amortization



                                Three Months Ended March 31,             Change
      ($ in millions):            2013                2012         Dollars       %

   Amortization                $      158.4        $      131.9    $  26.5     20.1%
   as a % of net revenues              8.4%                8.7%

The Company's amortizable assets consist primarily of acquired product rights. Amortization for the three months ended March 31, 2013 increased from the prior year period primarily as a result of amortization of identifiable intangible assets acquired in the Actavis Group acquisition ($66.5 million) partially offset by product rights and other intangible assets, which were fully amortized subsequent to the prior year period, including atorvastatin product rights.

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Loss on Asset Sales, Impairments and Contingent Consideration Fair Value
Adjustment, net



                                                    Three Months Ended March 31,                   Change
              ($ in millions):                        2013                 2012             Dollars            %

Asset sales, impairments and contingent
consideration adjustment, net                    $        148.0         $       0.2       $     147.8         NM

Loss on asset sales, impairments and contingent consideration fair value adjustment, net for the three months ended March 31, 2013 includes a non-cash fair value adjustment for contingent consideration as a result of the decision to award the remaining 1,650,000 contingent shares in connection with the Actavis Group acquisition ($150.3 million) partially offset by net gains on miscellaneous asset sales.

Interest Income



                          Three Months Ended March 31,                  Change
     ($ in millions):       2013                2012             Dollars            %

     Interest income     $       0.8         $       0.4       $       0.4         NM


Interest Expense



                                                   Three Months Ended March 31,                   Change
              ($ in millions):                       2013                 2012             Dollars            %

Interest expense - 2009 Senior Notes             $       12.3         $       12.3                -
Interest expense - 2012 Senior Notes                     31.8                   -               31.8
Interest expense - Term Loan                              8.2                   -                8.2
Revolving Credit Facility                                 0.6                  1.4             (0.8)
Interest expense - Mandatorily Redeemable
Preferred Stock                                            -                   4.4             (4.4)
Interest expense - Contingent liability
accretion                                                 0.4                  3.5             (3.1)
Interest expense - Other                                  1.2                  0.1               1.1

Total Interest Expense                           $       54.5         $       21.7       $      32.8         NM

Other Income



                                                   Three Months Ended March 31,                   Change
              ($ in millions):                       2013                 2012             Dollars            %

Earnings on equity method investments            $         0.9         $       0.3       $       0.6
Other income                                              19.7                 1.2              18.5

                                                 $        20.6         $       1.5       $      19.1         NM

Other Income

In connection with the Arrow acquisition in December 2009, and pursuant to the purchase and sale agreement, an amount had been maintained in escrow pending the settlement of certain post-closing matters. In January 2013, the Company received $15.0 million from the escrow account.

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Provision (Benefit) for Income Taxes



                                         Three Months Ended March 31,          Change
          ($ in millions):                   2013                2012

Provision (benefit) for income taxes    $         28.2         $   42.3       $  (14.1)

Effective tax rate                              (37.5)%            43.6%

The provision (benefit) for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate primarily due to the inability to tax benefit losses incurred in certain foreign jurisdictions and amortization of foreign intangible being tax benefited at a lower rate than the U.S. federal tax rate as well as certain one-time items described below.

The Company's effective tax rate for the three months ended March 31, 2013 was (37.5%) compared to 43.6% for the three months ended March 31, 2012. The negative effective tax rate for the three months ended March 31, 2013 was due to certain one-time non-deductible pre-tax expenses including consideration due to the former Actavis stakeholders of $150.3 million. This was partially offset by non-taxable pre-tax income of $15.0 million related to the Arrow acquisition. In addition, during the quarter the Company recorded a charge of $11.5 million relating to tax rate changes and a tax benefit of $5.0 million relating to the 2012 research credit. The Company's effective rate is also impacted by losses in certain foreign jurisdictions for which no tax benefit is provided and the amortization of intangible assets being tax benefited at a lower rate than the U.S. federal tax rate.

Liquidity and Capital Resources

Working capital at March 31, 2013 and December 31, 2012 is summarized as follows
(in millions):



                                                           March 31,          December 31,          Increase
                                                             2013                 2012             (Decrease)
                                                                               (Revised)
Current Assets:
Cash and cash equivalents                                $       328.4       $        319.0       $        9.4
Marketable securities                                              9.0                  9.0                 -
Accounts receivable, net of allowances                         1,275.5              1,330.9             (55.4)
Inventories, net                                               1,544.3              1,546.5              (2.2)
Prepaid expenses and other current assets                        322.9                323.6              (0.7)
Deferred tax assets                                              355.7                309.3               46.4

Total current assets                                           3,835.8              3,838.3              (2.5)

Current liabilities:
Accounts payable and accrued liabilities                       2,517.9              2,467.9               50.0
Short-term debt and current portion of long-term debt            178.3                176.2                2.1
Income taxes payable                                             151.7                 68.1               83.6
Other                                                             87.0                 37.1               49.9

Total current liabilities                                      2,934.9              2,749.3              185.6

Working Capital                                          $       900.9       $      1,089.0       $    (188.1)

Current Ratio                                                     1.31                 1.40

Working Capital decreased $188.1 million to $900.9 million at March 31, 2013 compared to $1,089.0 million at December 31, 2012. The decrease in working capital was primarily due to an increase in income taxes payable primarily as a result of the timing of tax payments and an increase in accruals for certain IRS

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settlements ($83.6 million), an increase in accounts payable and accrued liabilities attributable to adjustment to the contingent consideration to Actavis shareholders offset by decreases in other payable accounts ($50.0 million) and a decrease in accounts receivable as a result of both timing . . .

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