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WCRX > SEC Filings for WCRX > Form 10-Q on 4-May-2012All Recent SEC Filings

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Form 10-Q for WARNER CHILCOTT PLC


4-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the "Annual Report"). This discussion 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 "Risk Factors" in our Annual Report and elsewhere in this Form 10-Q.

Summary

The following are certain significant events that occurred in 2012:

During the quarter ended March 31, 2012, we made optional prepayments in an aggregate amount of $350 million of our term loan indebtedness under our New Senior Secured Credit Facilities (as defined below);

In November 2011, we announced that our Board of Directors had authorized the redemption of up to an aggregate of $250 million of our ordinary shares (the "Redemption Program"). Pursuant to our Redemption Program, we redeemed 1.9 million ordinary shares in the quarter ended March 31, 2012 at an aggregate cost of $32 million. Following the settlement of such redemptions, we cancelled all shares redeemed;

In connection with the restructuring of our Western European operations announced in April 2011, we recorded pre-tax severance costs of $50 million in the quarter ended March 31, 2012. In addition, we recognized pension-related curtailment gains, which were offset by other restructuring costs in the quarter ended March 31, 2012. Although we do not expect to record any additional expenses relating to the Western European restructuring in future periods, as a result of the expected timing of the termination of employees, we anticipate recording approximately $10 million of additional pension-related curtailment gains during the year ending December 31, 2012; and

Our revenue for the quarter ended March 31, 2012 was $685 million and our net income was $113 million.

2011 Strategic Transactions

During 2011, we announced the following strategic transactions that impacted our results of operations in the quarter ended March 31, 2012 as compared to the prior year quarter and will 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 process of moving to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The implementation of the restructuring plan impacts approximately 500 employees in total. For a further discussion of the Western European restructuring, including severance charges recorded as a component of restructuring costs in our condensed consolidated statement of operations, see "Note 3" to the notes to our condensed consolidated financial statements.


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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 for the write-down of certain property, plant and equipment in the year ended December 31, 2011, of which $21 million was recorded in the quarter ended March 31, 2011. Additionally, we recorded severance costs of $8 million in the year ended December 31, 2011, of which $7 million was recorded in the quarter ended March 31, 2011. The severance costs relating to the Manati repurposing were settled in cash during the year ended December 31, 2011.

Redemption Program

In November 2011, we announced that our Board of Directors authorized the Redemption Program. In addition to the 2012 redemptions, pursuant to the Redemption Program, we recorded the redemption of 3.7 million ordinary shares in the quarter 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 does not obligate us to redeem any number of our ordinary shares or an aggregate of shares equal to the full $250 million authorization. The Redemption Program will terminate on the earlier of December 31, 2012 or the redemption by us of an aggregate of $250 million of our ordinary shares.

Operating Results for the quarters ended March 31, 2012 and 2011

Revenue

The following table sets forth our revenue for the quarters ended March 31, 2012 and 2011, with the corresponding dollar and percentage changes:

                                         Percent       Percent       Percent        Percent
                                            Quarter Ended
                                              March 31,              Increase (decrease)
(dollars in millions)                    2012          2011         Dollars        Percent
Women's Healthcare:
Osteoporosis
ACTONEL(1)                             $     146     $     232     $     (86 )          (37 )%
ATELVIA                                       16             1            15            n.m .%

Total Osteoporosis                           162           233           (71 )          (30 )%

Oral Contraceptives
LOESTRIN 24 FE                               108           119           (11 )           (9 )%
LO LOESTRIN FE                                28             8            20            250  %
Other Oral Contraceptives                      6            10            (4 )          (40 )%

Total Oral Contraceptives                    142           137             5              4  %

Hormone Therapy
ESTRACE Cream                                 52            35            17             49  %
Other Hormone Therapy                         14            14            -              -

Total Hormone Therapy                         66            49            17             35  %

Other Women's Healthcare Products             15            16            (1 )           (6 )%

Total Women's Healthcare                     385           435           (50 )          (11 )%

Gastroenterology:
ASACOL                                       211           187            24             13  %
Dermatology:
DORYX                                         30            66           (36 )          (55 )%
Urology:
ENABLEX                                       44            45            (1 )           (2 )%
Other:
Other products net sales                      11            17            (6 )          (35 )%
Contract manufacturing product sales           2             3            (1 )          (33 )%
Other revenue(2)                               2             4            (2 )          (50 )%

Total Revenue                          $     685     $     757     $     (72 )          (10 )%

(1) Includes "other revenue" of $15 million and $22 million for the quarters ended March 31, 2012 and 2011, respectively, as reported in our condensed consolidated statement of operations resulting from the collaboration agreement with Sanofi-Aventis U.S. LLC.

(2) Excludes "other revenue" of $15 million and $22 million for the quarters ended March 31, 2012 and 2011, respectively, reported in our condensed consolidated statement of operations and disclosed pursuant to footnote
(1) above.


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Total revenue in the quarter ended March 31, 2012 was $685 million, a decrease of $72 million, or 10%, compared to the same quarter in the prior year. For the quarter ended March 31, 2012, the decrease in revenues as compared to the prior year quarter was primarily driven by a decrease in ACTONEL revenues of $86 million, due in large part to overall declines in the U.S. oral bisphosphonate market as well as the continued declines in ACTONEL rest of world ("ROW") net sales following the 2010 loss of exclusivity in Western Europe. The decrease was offset, in part, by revenue growth in certain other products, primarily ASACOL, LO LOESTRIN FE, ESTRACE Cream and ATELVIA. Period over period changes in the net sales of our products are a function of a number of factors, including changes in: market demand, gross selling prices, sales-related deductions from gross sales to arrive at net sales and the levels of pipeline inventories of our products held by our direct and indirect customers. In addition, transactions such as product acquisitions and dispositions also impact our period over period net sales. We use IMS Health, Inc. ("IMS") estimates of filled prescriptions for our products as a proxy for market demand in the U.S. Although these estimates provide a broad indication of market trends for our products in the U.S., the relationship between IMS estimates of filled prescriptions and actual unit sales can vary, and as a result, such estimates may not always be an accurate predictor of our unit sales.

Revenues of our osteoporosis products decreased $71 million, or 30%, in the quarter ended March 31, 2012, compared with the prior year quarter. Total ACTONEL revenues were $146 million in the quarter ended March 31, 2012, a decrease of $86 million, or 37%, compared to the prior year quarter. Total ACTONEL revenues were comprised of the following components:

                                   Quarter Ended
                                     March 31,              Increase (decrease)
        (dollars in millions)     2012        2011       Dollars           Percent
        United States            $    76      $ 144     $     (68 )             (47 )%
        Non-U.S. North America        14         14            -                 -   %
        ROW                           41         52           (11 )             (21 )%

        Total net sales              131        210           (79 )             (38 )%

        ROW, other revenue            15         22            (7 )             (32 )%

        Total ACTONEL revenues   $   146      $ 232     $     (86 )             (37 )%

In the United States, ACTONEL revenues decreased $68 million, or 47%, compared to the prior year quarter primarily due to a decrease in filled prescriptions of 39% and an increase in sales-related deductions, offset, in part, by higher average selling prices as compared to the prior year quarter. In the U.S., ACTONEL filled prescriptions continue to decline due primarily to declines in prescriptions within the overall oral bisphosphonate market. ACTONEL net sales outside of North America, or ROW, were $41 million in the quarter ended March 31, 2012, down 21% from $52 million in the prior year quarter, due to the continued declines in ROW net sales following the 2010 loss of exclusivity in Western Europe. While we expect to continue to experience significant declines in total ACTONEL revenues throughout the remainder of 2012 relative to 2011, we expect revenues from our new product ATELVIA will grow and partially offset some of those declines in the U.S. market. ATELVIA, which we began to promote in the U.S. in early 2011, generated net sales of $16 million and $1 million in the quarters ended March 31, 2012 and 2011, respectively.

Net sales of our oral contraceptive products increased $5 million, or 4%, in the quarter ended March 31, 2012 compared with the prior year quarter. LOESTRIN 24 FE generated net sales of $108 million in the quarter ended March 31, 2012, a decrease of 9%, compared with $119 million in the prior year quarter. The decrease in LOESTRIN 24 FE net sales in the quarter ended March 31, 2012 as compared to the prior year quarter was primarily due to a decrease in filled prescriptions of 19% and an increase in sales-related deductions, offset, in part, by an expansion of pipeline inventories relative to the prior year period and higher average selling prices. LO LOESTRIN FE, which we began to promote in the U.S. in early 2011 and is currently the primary promotional focus of our sales efforts, generated net sales of $28 million and $8 million, in the quarters ended March 31, 2012 and 2011, respectively, an increase of 250%.

Net sales of our hormone therapy products increased $17 million, or 35%, in the quarter ended March 31, 2012 as compared with the prior year quarter. Net sales of ESTRACE Cream were $52 million in the quarter ended March 31, 2012, an increase of $17 million, or 49%, compared to net sales of $35 million in the quarter ended March 31, 2011. The increase in ESTRACE Cream net sales in the quarter ended March 31, 2012 as compared to the prior year quarter was primarily due to lower sales-related deductions, an increase in filled prescriptions of 16% and higher average selling prices.

Net sales of ASACOL were $211 million in the quarter ended March 31, 2012, an increase of 13%, compared with $187 million in the prior year quarter. ASACOL net sales in North America in the quarters ended March 31, 2012 and 2011 totaled $199 million and $178 million, respectively, including net sales in the United States of $193 million and $173 million, respectively. The increase in ASACOL net sales in the United States was primarily due to higher average selling prices and an expansion of pipeline inventories relative to the prior year quarter. ASACOL filled prescriptions decreased 4% in the quarter ended March 31, 2012 compared to the prior year quarter based on IMS estimates. Our ASACOL 400 mg product accounted for the substantial majority of our total ASACOL net sales in the quarters ended March 31, 2012 and 2011. See "Note 14" to the notes to our condensed consolidated financial statements included elsewhere in this report for a description of legal proceedings related to ASACOL.

Net sales of DORYX in the quarter ended March 31, 2012 were $30 million, a decrease of $36 million, or 55%, compared to the prior year quarter. The decrease in DORYX net sales in the quarter ended March 31, 2012 relative to the prior year quarter was primarily due to an increase in sales-related deductions relating to changes made to the terms of our loyalty card program and other rebate


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programs as well as a decrease in filled prescriptions of 4%, offset, in part, by higher average selling prices and an expansion of pipeline inventories relative to the prior year quarter. We and Mayne Pharma International Pty. Ltd., who licenses the DORYX patent to us, previously filed infringement lawsuits against Impax Laboratories, Inc. ("Impax") and Mylan Inc. (together with its affiliate Mylan Pharmaceuticals Inc., "Mylan") arising from their respective Abbreviated New Drug Applications relating to DORYX 150 mg, which today accounts for all but a de minimis amount of our DORYX net sales. Our lawsuits against Impax and Mylan relating to DORYX 150 mg were consolidated and a trial was held in early February 2012. On April 30, 2012, the United States District Court for the District of New Jersey issued its opinion upholding the validity of U.S. Patent No. 6,958,161 covering our DORYX 150 mg product (the "'161 Patent"), but determining that neither Mylan's nor Impax's proposed generic version of DORYX 150 mg infringed the '161 Patent. As a consequence of the court's ruling, we believe that Mylan has entered the market with its Food and Drug Administration ("FDA") approved generic equivalent of DORYX 150 mg. We expect the loss of exclusivity for DORYX 150 mg to result in significant declines in our future DORYX revenues and have an adverse impact on our financial condition, results of operations and cash flows in subsequent periods. See "Note 14" to the notes to our condensed consolidated financial statements included elsewhere in this report.

Net sales of ENABLEX in the quarter ended March 31, 2012 were $44 million, a decrease of 2%, compared to $45 million in the prior year quarter. The decrease in ENABLEX net sales was due primarily to a decrease in filled prescriptions of 13% offset, in part, by higher average selling prices.

Cost of Sales (excluding amortization of intangible assets)

The table below shows the calculation of cost of sales and cost of sales
percentage for the quarters ended March 31, 2012 and 2011:



                                     Quarter Ended            Quarter Ended            Dollar           Percent
(dollars in millions)                March 31, 2012           March 31, 2011           Change           Change
Product net sales                   $            669         $            731         $    (62 )              (8 )%

Cost of sales (excluding
amortization)                                     72                      123              (51 )             (41 )%

Cost of sales percentage                         11  %                    17  %

Cost of sales (excluding amortization) decreased $51 million, or 41%, in the quarter ended March 31, 2012 compared with the prior year quarter. The quarter ended March 31, 2011 included $28 million in costs related to the repurposing of our Manati facility. Excluding the impact of the repurposing, our cost of sales as a percentage of product net sales decreased in the quarter ended March 31, 2012 relative to the prior year quarter from 13% of product net sales to 11% of product net sales primarily due to the mix of products sold as well as operational savings as a result of the Manati repurposing.

Selling, General & Administrative ("SG&A") Expenses

Our SG&A expenses were comprised of the following for the quarters ended March 31, 2012 and 2011:

                                       Quarter Ended          Quarter Ended          Dollar          Percent
(dollars in millions)                  March 31, 2012         March 31, 2011         Change          Change
Advertising & Promotion ("A&P")       $             24       $             50       $    (26 )            (52 )%
Selling and Distribution                           109                    128            (19 )            (15 )%
General, Administrative and Other
("G&A")                                             65                     75            (10 )            (13 )%

Total                                 $            198       $            253       $    (55 )            (22 )%

SG&A expenses for the quarter ended March 31, 2012 were $198 million, a decrease of $55 million, or 22%, from $253 million in the prior year quarter. A&P expenses for the quarter ended March 31, 2012 relative to the prior year quarter decreased $26 million, or 52%. The quarter ended March 31, 2011 included expenses attributable to the U.S. launches of LO LOESTRIN FE and ATELVIA, including direct-to-consumer spend, which were not incurred in the quarter ended March 31, 2012. Selling and distribution expenses for the quarter ended March 31, 2012 decreased $19 million, or 15%, compared to the prior year quarter. This decrease in the quarter ended March 31, 2012 relative to the prior year quarter was primarily due to a $9 million reduction in expenses resulting from operating savings realized as a result of the Western European restructuring and the expenses in the prior year quarter relating to the launches of LO LOESTRIN FE and ATELVIA. G&A expenses in the quarter ended March 31, 2012 decreased $10 million, or 13%, as compared to the prior year quarter, primarily due to operating savings resulting from the Western European restructuring of $8 million and consulting and other professional fees relating to the Western European restructuring and the Manati repurposing incurred in the prior year quarter. We expect total SG&A expenses to continue to decline in the 2012 fiscal year relative to the 2011 fiscal year, due primarily to decreases in A&P and selling and distribution expenses in the U.S. and cost savings realized from the Western European restructuring.

Restructuring Costs

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.


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Pretax severance costs of $50 million and $43 million were recorded in the quarters ended March 31, 2012 and 2011, respectively, and were included as a component of restructuring costs in the condensed consolidated statement of operations. Also included in restructuring costs in the condensed consolidated statement of operations for the quarter ended March 31, 2012 were pension-related curtailment gains, which were offset by other restructuring costs in the quarter ended March 31, 2012. Although we do not expect to record any additional expenses relating to the Western European restructuring in future periods, as a result of the expected timing of the termination of employees, we anticipate recording approximately $10 million of additional pension-related curtailment gains during the year ending December 31, 2012.

R&D

Our research and development ("R&D") expenses were comprised of the following for the quarters ended March 31, 2012 and 2011:

                                      Quarter Ended           Quarter Ended          Dollar           Percent
(dollars in millions)                 March 31, 2012          March 31, 2011         Change           Change
Unallocated overhead expenses        $             16        $             18        $    (2 )             (11 )%
Expenses allocated to specific
projects                                            8                      12             (4 )             (33 )%
Regulatory fees                                     1                       1             -                 -  %

Total                                $             25        $             31        $    (6 )             (19 )%

Our investment in R&D decreased $6 million, or 19%, in the quarter ended March 31, 2012, as compared to the prior year quarter. The decrease was primarily due to the timing and stages of development of our various R&D projects. Our R&D expenses consist of our internal development costs, fees paid to contract development groups and license fees paid to third parties. R&D expenditures are subject to fluctuation due to the stage and timing of our R&D projects. Project related costs in the quarter ended March 31, 2012 primarily related to project spend within our women's healthcare, gastroenterology and dermatology therapeutic categories. Project related costs in the quarter ended March 31, 2011 primarily related to project spend within our urology, women's healthcare and dermatology therapeutic categories.

Amortization of Intangible Assets

Amortization of intangible assets in the quarters ended March 31, 2012 and 2011 was $130 million and $148 million, respectively. Our amortization methodology is calculated on either an economic benefit model or a straight-line basis to match the expected useful life of the asset, with identifiable assets assessed individually or by product family. The economic benefit model is based on expected future cash flows and typically results in accelerated amortization for most of our products. We continuously review the remaining useful lives of our identified intangible assets based on each product family's estimated future cash flows. In the event that we do not achieve the expected cash flows from any of our products or lose market exclusivity for any of our products as a result of the expiration of a patent, the expiration of FDA exclusivity or the launch of a competing generic product, we may accelerate amortization or record an impairment charge and write-down the value of the related intangible asset. We expect our 2012 amortization expense to decline compared to 2011 as most of our intangible assets are amortized on an accelerated basis. As a result of the loss of exclusivity for DORYX 150mg, we anticipate recording an impairment charge in the quarter ending June 30, 2012 in the range of $85 million to $103 million related to our DORYX intangible asset.

Net interest expense

Our net interest expense was comprised of the following for the quarters ended March 31, 2012 and 2011:

                                      Quarter Ended           Quarter Ended           Dollar           Percent
(dollars in millions)                 March 31, 2012          March 31, 2011          Change           Change
Interest expense on outstanding
indebtedness, net of interest
income                               $             50        $             70        $    (20 )             (29 )%
Amortization of deferred loan
costs                                               5                       8              (3 )             (38 )%
Write-off of deferred loan
costs, including refinancing
premium, resulting from debt
prepayments                                         7                      77             (70 )             (91 )%
. . .
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