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WCRX > SEC Filings for WCRX > Form 10-K on 24-Feb-2012All Recent SEC Filings

Show all filings for WARNER CHILCOTT PLC

Form 10-K for WARNER CHILCOTT PLC


24-Feb-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion together with Part II, Item 6. "Selected Financial Data" and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under Item 1A. "Risk Factors" and elsewhere in this Annual Report.

Unless otherwise noted or the context otherwise requires, references in this Form 10-K to "Warner Chilcott," "the Company," "our company," "we," "us" or "our" refer to Warner Chilcott plc and its direct and indirect subsidiaries.

Overview

We are a leading specialty pharmaceutical company currently focused on the women's healthcare, gastroenterology, dermatology and urology segments of the branded pharmaceuticals market, primarily in North America. We are a fully integrated company with internal resources dedicated to the development, manufacture and promotion of our products. Our franchises are comprised of complementary portfolios of established branded and development-stage products that we actively manage throughout their life cycle. Multiple products make up our existing sales base and several of these provide opportunities for future growth.

2011 Strategic Transactions

During 2011, we completed the following strategic transactions that impacted our results of operations and will continue to have an impact on our future operations.

Refinancing of Senior Secured Indebtedness

On March 17, 2011, our subsidiaries, Warner Chilcott Holdings Company III, Limited ("Holdings III"), WC Luxco S. r.l. (the "Luxco Borrower"), Warner Chilcott Corporation ("WCC" or the "US Borrower") and Warner Chilcott Company, LLC ("WCCL" or the "PR Borrower", and together with the Luxco Borrower and the US Borrower, the "Borrowers") entered into a new credit agreement (the "Credit Agreement") with a syndicate of lenders (the "Lenders") and Bank of America, N.A. as administrative agent in order to refinance our Prior Senior Secured Credit Facilities (as defined below). Pursuant to the Credit Agreement, the Lenders provided senior secured credit facilities (the "New Senior Secured Credit Facilities") in an aggregate amount of $3,250 million comprised of $3,000 million in aggregate term loan facilities and a $250 million revolving credit facility available to all Borrowers. At the closing, we borrowed a total of $3,000 million under the new term loan facilities and made no borrowings under the revolving credit facility. The proceeds of the new term loans, together with approximately $279 million of cash on hand, were used to make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 million in aggregate term loans outstanding under our Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest.

Western European Restructuring

In April 2011, we announced a plan to restructure our operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring did not impact our operations at our headquarters in Dublin, Ireland, our facilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or our commercial operations in the United Kingdom. We determined to proceed with the restructuring following the completion of a strategic review of our operations in our Western European markets where our product ACTONEL lost exclusivity in late 2010. ACTONEL accounted for approximately 70% of our Western European revenues in the year ended December 31, 2010. In connection with the restructuring, we are in the


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process of moving to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. We currently expect to complete the restructuring by the middle of 2012. The implementation of the restructuring plan impacts approximately 500 employees in total. Pretax severance costs of $101 million were recorded in the year ended December 31, 2011 and were included as a component of restructuring costs in our consolidated statement of operations. Also included in restructuring costs were certain pretax contract termination expenses of $3 million in the year ended December 31, 2011. We expect the restructuring costs in 2012 will be significantly less than the amounts recorded in the year ended December 31, 2011. As a result of agreements reached with certain local European works councils subsequent to December 31, 2011, we will record net expenses of approximately $30 million in our consolidated statement of operations in the year ended December 31, 2012 as a component of restructuring costs. As a result of the execution of the final agreements and the timing of the termination of employees, we anticipate that these expenses will include severance charges recorded in the quarter ended March 31, 2012 and certain contract termination expenses and pension curtailment gains recorded during the year ended December 31, 2012. The majority of the remaining severance related costs and other liabilities are expected to be settled in cash within the next twelve months.

Manati Facility

In April 2011, we announced a plan to repurpose our Manati, Puerto Rico manufacturing facility. This facility now serves primarily as a warehouse and distribution center. As a result of the repurposing, we recorded charges of $23 million relating to the write-down of certain property, plant and equipment and $8 million of severance charges in the year ended December 31, 2011. These expenses were included as a component of cost of sales. The majority of severance costs relating to the Manati repurposing were settled in cash during the quarter ended June 30, 2011.

Redemption Program

On November 9, 2011, we announced that our Board of Directors authorized the redemption of up to an aggregate of $250 million of our ordinary shares (the "Redemption Program"). Pursuant to the Redemption Program, we recorded the redemption of 3.7 million ordinary shares in the year ended December 31, 2011 at an aggregate cost of $56 million. Following the settlement of such redemptions, we cancelled all shares redeemed. The Redemption Program will terminate on the earlier to occur of December 31, 2012 or the redemption by us of an aggregate of $250 million of our ordinary shares.

2010 Strategic Transactions

During 2010, we completed three strategic transactions that impacted our results of operations and will continue to have an impact on our future operations.

Amendment of the Sanofi Collaboration Agreement

In April 2010, we and Sanofi-Aventis U.S. LLC ("Sanofi") entered into an amendment to our global collaboration agreement pursuant to which we co-develop and market ACTONEL products on a global basis, excluding Japan (as amended, the "Collaboration Agreement"). Under the terms of the amendment, we took full operational control over the promotion, marketing and research and development ("R&D") decisions for ACTONEL products, and now ATELVIA, in the United States and Puerto Rico, and assumed responsibility for all associated costs relating to those activities. Prior to the amendment, we shared such costs with Sanofi in these territories. We remained the principal in transactions with customers in the United States and Puerto Rico and continue to invoice all sales in these territories. In return, it was agreed that for the remainder of the term of the Collaboration Agreement Sanofi would receive, as part of the global collaboration agreement between the parties, payments from us which, depending on actual net sales in the United States and Puerto Rico, are based on an agreed percentage of either United States and Puerto Rico actual net sales or an agreed minimum sales threshold for the territory. For a further description of the Collaboration Agreement see "Note 8" to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.


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Special Dividend Transaction

On September 8, 2010, we paid a special cash dividend of $8.50 per share, or $2,144 million in the aggregate, to shareholders of record on August 30, 2010 (the "Special Dividend"). In order to fund the Special Dividend and pay related fees and expenses, on August 20, 2010, we incurred $1,500 million aggregate principal amount of new term loan indebtedness in connection with an amendment to our Prior Senior Secured Credit Facilities and issued $750 million aggregate principal amount of 7.75% senior notes due 2018 (the "Initial 7.75% Notes"). These transactions are referred to in this Annual Report collectively as the "Leveraged Recapitalization". The incurrence of this indebtedness and the indebtedness incurred in connection with the ENABLEX Acquisition (as defined below) impacted our interest expense during the years ended December 31, 2011 and 2010.

ENABLEX Acquisition

On October 18, 2010, we acquired the U.S. rights to Novartis Pharmaceuticals Corporation's ("Novartis") ENABLEX product for an upfront payment of $400 million in cash at closing, plus potential future milestone payments of up to $20 million in the aggregate based on 2011 and 2012 net sales of ENABLEX (the "ENABLEX Acquisition"). Concurrent with the closing of the ENABLEX Acquisition, we and Novartis terminated our existing co-promotion agreement, and we assumed full control of sales and marketing of ENABLEX in the U.S. market. We issued an additional $500 million aggregate principal amount of 7.75% senior notes due 2018 (the "Additional 7.75% Notes" and, together with the Initial 7.75% Notes, the "7.75% Notes") on September 29, 2010 in order to fund the ENABLEX Acquisition and for general corporate purposes.

2009 Strategic Transactions

During 2009, we completed two strategic transactions that impacted our results of operations during the fourth quarter of 2009 and the full years 2010 and 2011, and will continue to have an impact on our future operations.

PGP Acquisition

On October 30, 2009, pursuant to the purchase agreement dated August 24, 2009 (as amended, the "Purchase Agreement"), between us and The Procter & Gamble Company ("P&G"), we acquired P&G's global branded pharmaceuticals business ("PGP") for $2,919 million in cash and the assumption of certain liabilities (the "PGP Acquisition"). Under the terms of the purchase agreement, we acquired P&G's portfolio of branded pharmaceutical products, prescription drug pipeline, manufacturing facilities in Puerto Rico and Germany and a net receivable owed from P&G of approximately $60 million. The total purchase price of $2,919 million was allocated to the fair value of the assets acquired and liabilities assumed as of the date of the PGP Acquisition. The purchase price allocation was finalized in October 2010 and was completed based on a valuation conducted by an independent third party valuation firm. In order to fund the majority of the consideration for the PGP Acquisition, certain of our subsidiaries entered into senior secured credit facilities (the "Prior Senior Secured Credit Facilities"), initially comprised of $2,950 million in aggregate term loan facilities and a $250 million revolving credit facility. On October 30, 2009, we borrowed $2,600 million of the aggregate $2,950 million of term loan facilities to finance the PGP Acquisition. On December 16, 2009, in connection with an amendment ("Amendment No. 1") to the Prior Senior Secured Credit Facilities, (i) the committed but undrawn $350 million delayed-draw term loan facility was terminated, and (ii) the agreement was amended to create a new tranche of term loans which was borrowed on December 30, 2009 by our U.S. subsidiary, Warner Chilcott Corporation, in an aggregate principal amount of $350 million in order to finance, together with cash on hand, the repurchase and redemption of our then outstanding 8.75% senior subordinated notes (the "8.75% Notes").

The PGP Acquisition was accounted for as a business combination using the acquisition method of accounting. The results of operations of PGP since October 30, 2009 have been included in our consolidated statement of operations. The purchase price allocation presented below provides the fair values of all the net assets acquired based on the final independent valuation.


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      Purchase Price:
      Total cash consideration                                     $ 2,919


      Identifiable net assets:
      Trade accounts receivable (approximates contractual value)   $   296
      Inventories                                                      256
      Other current and long term assets                                77
      Property, plant and equipment                                     85
      Intangible Assets-intellectual property                        2,556
      In-process research and development                              248
      Other current and long term liabilities                         (669 )
      Deferred income taxes, net                                        40

      Total identifiable net assets                                  2,889

      Goodwill                                                          30

      Total                                                        $ 2,919

In connection with the closing of the PGP Acquisition and in order to facilitate the transition of the PGP business, we and P&G entered into a Transition Services Agreement, effective as of October 30, 2009 (the "Transition Services Agreement"). Pursuant to the terms of the Transition Services Agreement, P&G agreed to provide us with specified services for a limited time following the closing of the PGP Acquisition, including with respect to the following: order acquisition and management, distribution, customer service, purchasing and procurement systems, integrated supply network systems, manufacturing execution systems, IT support, sales and marketing, research and development and regulatory and certain accounting and finance related services. We agreed to pay P&G a fee for these services through the term of the Transition Services Agreement. The Transition Services Agreement expired during the fourth quarter of 2010.

LEO Transaction

On September 23, 2009, we entered into a definitive asset purchase agreement (the "LEO Transaction Agreement") with LEO Pharma A/S ("LEO") pursuant to which LEO paid us $1,000 million in cash in order to terminate our exclusive license to distribute LEO's DOVONEX and TACLONEX products (including all products in LEO's development pipeline) in the United States and to acquire certain assets related to our distribution of DOVONEX and TACLONEX products in the United States (the "LEO Transaction"). We recognized an initial pre-tax gain of $393 million on the sale of assets in the LEO Transaction. The LEO Transaction closed simultaneously with the execution of the LEO Transaction Agreement. In connection with the LEO Transaction, we entered into a distribution agreement with LEO pursuant to which we agreed to, among other things, (1) continue to distribute DOVONEX and TACLONEX on behalf of LEO, for a distribution fee, through September 23, 2010 and (2) purchase inventories of DOVONEX and TACLONEX from LEO. As a result of the distribution agreement with LEO, our gross margin percentage was negatively impacted beginning in the fourth quarter of 2009 and also in the first two quarters of 2010, as we recorded net sales and cost of sales at nominal distributor margins. In addition, we agreed to provide certain transition services for LEO for a period of up to one year after the closing. On June 30, 2010, LEO assumed responsibility for its own distribution services, and on July 15, 2010 the parties formally terminated the distribution agreement.

During the quarter ended September 30, 2009, in connection with the distribution agreement mentioned above, we recorded a deferred gain of $69 million relating to the sale of certain inventories in connection with the LEO Transaction. Pursuant to Financial Accounting Standards Board Accounting Standards Codification ("ASC") Sub Topic 605-25 "Revenue Recognition-Multiple Element Arrangements" separate contracts with the same entity that are entered into at or near the same time are presumed to have been negotiated as a package and should be evaluated as a single arrangement. The LEO Transaction and distribution agreement contained


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(i) multiple deliverables, (ii) a delivered element with stand-alone value (intangible asset), and (iii) objective and reliable evidence of the undelivered item's fair value. For the undelivered element, inventory, we retained title and the risks and rewards of ownership. The total arrangement consideration (or purchase price) of $1,000 million was allocated among the units of accounting as set forth in ASC Sub Topic 605-25 "Revenue Recognition-Multiple Element Arrangements" paragraph 30-1, and the portion of the gain in the amount of $69 million on the undelivered product inventory at fair value, was deferred as of September 30, 2009.

We subsequently sold the inventory on behalf of LEO to our trade customers in the normal course of business and recognized revenues of approximately $77 million, $63 million and $26 million, and the related cost of sales of approximately $43 million, $37 million and $17 million during the quarters ended December 31, 2009, March 31, 2010 and June 30, 2010, respectively. The amounts were recognized as sales and cost of sales in our statement of operations when the earnings process was culminated as the goods were delivered to our trade customers.

Factors Affecting Our Results of Operations

Revenue

We generate two types of revenue: revenue from product sales (including contract manufacturing) and other revenue which currently includes royalty revenue and revenue earned under co-promotion and distribution agreements. Since the PGP Acquisition on October 30, 2009, we have generated additional revenues mainly from the sale of ACTONEL, ASACOL and ENABLEX. As a result, our operating results related to the PGP-acquired products include twelve months in 2011 and 2010 as compared to only two months in the 2009 period. In addition, as a result of the LEO Transaction, beginning in October 2009 and continuing through June 2010, we recorded revenue and cost of sales of DOVONEX and TACLONEX for LEO at nominal distributor margins under the LEO distribution agreement. Subsequent to June 30, 2010, we no longer recorded revenues and cost of sales related to DOVONEX or TACLONEX.

Net Sales

We promote a portfolio of branded prescription pharmaceutical products currently focused on the women's healthcare, gastroenterology, dermatology and urology segments of the branded pharmaceuticals market, primarily in North America. To generate demand for our products, our sales representatives make face-to-face promotional and educational presentations to physicians who are potential prescribers of our products. By informing these physicians of the attributes of our products, we generate demand for our products with physicians, who then write prescriptions for their patients, who in turn go to the pharmacy where the prescription is filled. Pharmacies buy our products either through wholesale pharmaceutical distributors or directly from us (for example, retail drug store chains) in certain markets. We recognize revenue when title and risk of loss pass to our customers, net of sales-related deductions.

When our unit sales to our direct customers in any period exceeds consumer demand (as measured by filled prescriptions or its equivalent in units), our sales in excess of demand must be absorbed before our direct customers begin to order again. We refer to the estimated amount of inventory held by our direct customers and pharmacies and other organizations that purchase our product from our direct customers, which is generally measured by the number of days of demand on hand, as "pipeline inventory". Pipeline inventories expand and contract in the normal course of business. When comparing reported product sales between periods, it is important to consider whether estimated pipeline inventories increased or decreased during each period.

We generate revenue primarily from the sale of branded pharmaceutical products in the North American and Western European markets including our osteoporosis products (ACTONEL and ATELVIA), our oral contraceptives (LOESTRIN 24 FE, LO LOESTRIN FE, and others), our HT products (ESTRACE Cream, FEMHRT, and others), our gastroenterology product (ASACOL), our oral antibiotic for the adjunctive treatment of severe acne (DORYX) and our urology product (ENABLEX). Prior to the LEO Transaction in September 2009 and during the subsequent period through June 30, 2010 when we sold product for LEO under the


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distribution agreement, our revenue also included sales of LEO's psoriasis products (TACLONEX and DOVONEX). Our revenue from sales of these products consists primarily of sales invoiced less returns and other sales-related deductions (also see Critical Accounting Policies-"Revenue Recognition" for a detailed description of our sales-related deductions). In addition to the products listed above, we earn a small portion of revenues from the sale of generic products under profit-sharing supply and distribution agreements with third parties. The revenue we earn under these agreements is included with our related branded product revenue for financial reporting purposes.

Included in net sales are amounts earned under contract manufacturing agreements. Contract manufacturing is not an area of strategic focus for us as the profit margins are significantly below the margins realized on sales of our branded products.

Changes in revenue from sales of our products from period to period are affected by factors that include the following:

changes in the level of competition faced by our products, including changes due to the launch of new branded products by our competitors and the introduction of generic equivalents of our branded products or those of our competitors prior to, or following, the loss of regulatory exclusivity or patent protection. For example, we lost exclusivity for FEMCON FE and certain versions of FEMHRT in the U.S. in early 2011, ACTONEL in Canada in early 2010 and in Western European markets in late 2010;

changes in the level of promotional or marketing support for our products and the size of our sales force;

expansions or contractions of the pipeline inventories of our products held by our customers;

changes in the regulatory environment, including the impact of healthcare reforms in the U.S. and other markets we serve;

our ability to successfully develop or acquire and launch new products;

changes in the level of demand for our products, including changes based on general economic conditions in North America and Western European economies;

long-term growth or contraction of our core therapeutic markets, currently women's healthcare, gastroenterology, dermatology and urology;

price changes, which are common in the branded pharmaceutical industry and for the purposes of our period-over-period comparisons, reflect the average gross selling price billed to our customers before any sales-related deductions;

changes in the levels of sales-related deductions, including those resulting from changes in utilization levels or the terms of our customer loyalty card programs and the utilization and / or rebates paid under commercial and government rebate programs.

We and Sanofi are parties to the Collaboration Agreement pursuant to which we co-develop and market ACTONEL on a global basis, excluding Japan. ATELVIA, our new risedronate sodium delayed-release product is also currently sold in the United States pursuant to the Collaboration Agreement. As a result of ACTONEL's loss of patent exclusivity in Western Europe in late 2010 and as part of our transition to a wholesale distribution model in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom, we and/or Sanofi have reduced or discontinued our marketing and promotional efforts in certain territories covered by the Collaboration Agreement. Our and Sanofi's rights and obligations are specified by geographic market. For example, under the Collaboration Agreement, Sanofi generally has the right to elect to participate in the development of ACTONEL-related product improvements, other than product improvements specifically related to the United States and Puerto Rico, where we have full control over all product development decisions. Under the Collaboration Agreement, the ongoing global R&D costs for ACTONEL are shared equally between the parties, except for R&D costs specifically related to the United States and Puerto Rico, which are borne solely by us. In certain geographic markets, we and Sanofi share selling and advertising and promotion ("A&P") costs as


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well as product profits based on contractual percentages. In the geographic markets where we are deemed to be the principal in transactions with customers, we recognize all revenues from sales of the product along with the related product costs. Our share of selling, A&P and contractual profit sharing expenses are recognized in SG&A expenses. In geographic markets where we are not the principal in transactions with customers, revenue is recognized on a net basis, in other revenue for amounts earned based on Sanofi's sale transactions with its customers. As discussed above, in April 2010, we and Sanofi entered into an amendment to the Collaboration Agreement. Under the terms of the amendment, we took full operational control over the promotion, marketing and R&D decisions for ACTONEL, and now ATELVIA, in the United States and Puerto Rico, and assumed responsibility for all associated costs and expenses relating to those activities. Prior to the amendment, we shared such costs with Sanofi in these territories. We remained the principal in transactions with customers in the United States and Puerto Rico and continue to invoice all sales in these jurisdictions. In return, it was agreed that for the remainder of the term of the Collaboration Agreement, Sanofi would receive, as part of the global collaboration payments between the parties, payments from us which, depending on actual net sales in the United States and Puerto Rico, are based on an agreed upon percentage of either United States and Puerto Rico actual net sales or an agreed minimum threshold for the territory. We will continue to sell ACTONEL and ATELVIA products with Sanofi in accordance with our obligations under the Collaboration Agreement until the termination of the Collaboration Agreement on January 1, 2015, at which time all of Sanofi's rights under the Collaboration . . .

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