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WCRX > SEC Filings for WCRX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for WARNER CHILCOTT PLC

Form 10-Q for WARNER CHILCOTT PLC


9-Nov-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 ("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 the nine months ended September 30, 2012:

During the nine months ended September 30, 2012, we made optional prepayments in an aggregate amount of $350 million of our term loan indebtedness under our 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 "Prior Redemption Program"). Pursuant to our Prior Redemption Program, we redeemed 1.9 million ordinary shares in the nine months ended September 30, 2012 at an aggregate cost of $32 million. Following the settlement of such redemptions, we cancelled all shares redeemed. In August 2012, we announced that our Board of Directors had authorized the renewal of our Prior Redemption Program. The renewed program (the "Current Redemption Program") replaces our Prior Redemption Program and allows us to redeem up to an aggregate of $250 million of our ordinary shares in addition to those redeemed under our Prior Redemption Program. The Current Redemption Program will terminate on the earlier of December 31, 2013 or the redemption of an aggregate of $250 million of our ordinary shares;

In connection with the restructuring of our Western European operations announced in April 2011, we recorded restructuring costs of $50 million in the nine months ended September 30, 2012, which were comprised of pretax severance costs of $57 million and other restructuring costs of $2 million offset, in part, by pension-related curtailment gains of $9 million. We do not expect to record any material expenses relating to the Western European restructuring in future periods;

We recorded an impairment charge relating to our intangible assets of $106 million in the nine months ended September 30, 2012, $101 million of which was attributable to the impairment of our DORYX intangible asset following the April 30, 2012 decision of the United States District Court for the District of New Jersey holding that neither Mylan Pharmaceuticals Inc.'s ("Mylan") nor Impax Laboratories, Inc.'s ("Impax") proposed generic version of DORYX 150 mg product ("DORYX 150") infringed U.S. Patent No. 6,958,161 covering DORYX 150 (the "'161 Patent") and Mylan's subsequent introduction of a generic product in May 2012;

We recorded a gain of $20 million in the nine months ended September 30, 2012, as a reduction of selling, general and administrative ("SG&A") expenses, based on the determination that it was no longer probable that the contingent milestone payments to Novartis Pharmaceuticals Corporation ("Novartis") in connection with our acquisition of the U.S. rights to ENABLEX in October 2010 ("the ENABLEX Acquisition") would be required to be paid;

In August 2012, certain of our subsidiaries entered into an amendment to the credit agreement governing our Initial Senior Secured Credit Facilities (as defined below), pursuant to which the lenders thereunder provided additional term loans in an aggregate principal amount of $600 million (the "Additional Term Loan Facilities" and, together with the Initial Senior Secured Credit Facilities, the "Senior Secured Credit Facilities"), which, together with cash on hand, were used to fund the 2012 Special Dividend (as defined below) and to pay related fees and expenses;

In August 2012, we declared a special cash dividend of $4.00 per share, or $1,002 million in the aggregate (the "2012 Special Dividend");

In August 2012, we announced a new dividend policy (the "Dividend Policy") under which we expect to pay a total annual cash dividend to our ordinary shareholders of $0.50 per share in equal semi-annual installments of $0.25 per share. Any declaration by the Board of Directors to pay future cash dividends, however, will depend on our earnings and financial condition and other relevant factors at such time;

Our revenue for the quarter ended September 30, 2012 was $606 million and our net income was $113 million; and

Our revenue for the nine months ended September 30, 2012 was $1,929 million and our net income was $279 million.


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2012 Strategic Transactions

During 2012, we announced the following strategic transactions that impacted our results of operations in the quarter and nine months ended September 30, 2012 as compared to the prior year periods.

Current Redemption Program

On August 7, 2012, we announced that our Board of Directors had authorized our Current Redemption Program, which replaces our Prior Redemption Program and allows us to redeem up to an aggregate of $250 million of our ordinary shares in addition to those redeemed under the Prior Redemption Program. The Current Redemption Program will terminate on the earlier of December 31, 2013 or the redemption by us of an aggregate of $250 million of our ordinary shares. We did not redeem any ordinary shares in the quarter ended September 30, 2012, and consequently $250 million remained available for redemption under the Current Redemption Program as of September 30, 2012. The Current Redemption Program does not obligate us to redeem any number of ordinary shares or an aggregate of ordinary shares equal to the full $250 million authorization and may be suspended at any time or from time to time.

2012 Special Dividend Transaction and Related Financing

On August 21, 2012, we declared the 2012 Special Dividend. The 2012 Special Dividend reduced our additional paid-in-capital from $63 million to zero as of August 31, 2012 and increased our accumulated deficit by $939 million. The 2012 Special Dividend was funded, in part, by $600 million of additional term loan borrowings under our Senior Secured Credit Facilities.

New Dividend Policy

On November 6, 2012, we declared our first semi-annual cash dividend under the Dividend Policy in the amount of $0.25 per share, payable December 14, 2012 to our shareholders of record on November 30, 2012. Under the Dividend Policy, we expect to pay a total annual cash dividend to our ordinary shareholders of $0.50 per share in equal semi-annual installments of $0.25 per share. Any declaration by the Board of Directors to pay future cash dividends, however, will depend on our earnings and financial condition and other relevant factors at such time.

2011 Strategic Transactions

During 2011, we announced the following strategic transactions that impacted our results of operations in the quarter and nine months ended September 30, 2012 as compared to the prior year periods.

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 "Initial 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 term loan facilities and made no borrowings under the revolving credit facility. The proceeds of the 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 moved to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The implementation of the restructuring plan impacted approximately 500 employees. 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 and severance costs of $8 million in the nine months ended September 30, 2011. These severance costs relating to the Manati repurposing were settled in cash during the year ended December 31, 2011. The expenses relating to the Manati repurposing were recorded as a component of cost of sales in our condensed consolidated statement of operations.

Prior Redemption Program

In November 2011, we announced that our Board of Directors had authorized the Prior Redemption Program. Pursuant to the Prior 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. During the nine months ended September 30, 2012, pursuant to the Prior Redemption Program, we recorded the redemption of 1.9 million ordinary shares at an aggregate cost of $32 million. Following the settlement of such redemptions, we cancelled all shares redeemed. As a result of the redemptions recorded during the nine months ended September 30, 2012, in accordance with Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 505 "Equity", we recorded a decrease in ordinary shares at par value of $0.01 per share, and an increase in an amount equal to the aggregate purchase price above par value in accumulated deficit of approximately $32 million. The Prior Redemption Program allowed us to redeem up to an aggregate of $250 million of our ordinary shares and was to terminate on the earlier of December 31, 2012 or the redemption by us of an aggregate of $250 million of our ordinary shares.


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Operating Results for the quarters and nine months ended September 30, 2012 and 2011

Revenue

The following table sets forth our revenue for the quarters and nine months
ended September 30, 2012 and 2011, with the corresponding dollar and percentage
changes:



                                             Quarter Ended                                            Nine Months Ended
                                             September 30,            Increase (decrease)               September 30,              Increase (decrease)
(dollars in millions)                       2012        2011       Dollars           Percent           2012         2011        Dollars            Percent
Women's Healthcare:
Osteoporosis
ACTONEL(1)                                 $   119      $ 166     $     (47 )             (28 )%    $      415     $   591     $     (176 )             (30 )%
ATELVIA                                         19         11             8                73 %             51          20             31               155 %

Total Osteoporosis                             138        177           (39 )             (22 )%           466         611           (145 )             (24 )%

Oral Contraceptives
LOESTRIN 24 FE                                  95        104            (9 )              (9 )%           300         325            (25 )              (8 )%
LO LOESTRIN FE                                  33         23            10                43 %             95          42             53               126 %
Other Oral Contraceptives                        3          3            -                 -  %             13          15             (2 )             (13 )%

Total Oral Contraceptives                      131        130             1                1  %            408         382             26                 7 %

Hormone Therapy
ESTRACE Cream                                   45         42             3                 7 %            143         115             28                24 %
Other Hormone Therapy                           11          9             2                22 %             32          34             (2 )              (6 )%

Total Hormone Therapy                           56         51             5               10  %            175         149             26                17 %

Other Women's Healthcare Products               12         15            (3 )             (20 )%            41          50             (9 )             (18 )%

Total Women's Healthcare                       337        373           (36 )             (10 )%         1,090       1,192           (102 )              (9 )%

Gastroenterology:
ASACOL                                         191        190             1                 1 %            589         565             24                 4 %

Urology:
ENABLEX                                         45         45            -                 -  %            130         130             -                 -  %

Dermatology:
DORYX                                           20         29            (9 )             (31 )%            73         127            (54 )             (43 )%

Other:
Other products net sales                         8         11            (3 )             (27 )%            32          44            (12 )             (27 )%
Contract manufacturing product sales             2          5            (3 )             (60 )%             8          15             (7 )             (47 )%
Other revenue(2)                                 3          2             1                50 %              7           9             (2 )             (22 )%

Total Revenue                              $   606      $ 655     $     (49 )              (7 )%    $    1,929     $ 2,082     $     (153 )              (7 )%

(1) Includes "other revenue" of $12 million and $18 million for the quarters ended September 30, 2012 and 2011, respectively, and $43 million and $59 million for the nine months ended September 30, 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 $12 million and $18 million for the quarters ended September 30, 2012 and 2011, respectively, and $43 million and $59 million for the nine months ended September 30, 2012 and 2011, respectively, as reported in our condensed consolidated statement of operations, resulting from the Collaboration Agreement with Sanofi-Aventis U.S. LLC.

Total revenue in the quarter ended September 30, 2012 was $606 million, a decrease of $49 million, or 7%, compared to the same quarter in the prior year. Total revenue in the nine months ended September 30, 2012 was $1,929 million, a decrease of $153 million, or 7%, compared to the same period in the prior year. For the quarter ended September 30, 2012, the decrease in revenues as compared to the prior year quarter was primarily driven by a decline in ACTONEL revenues of $47 million, due in large part to continuing declines in ACTONEL rest of world ("ROW") and Canadian net sales following the 2010 loss of exclusivity in Western Europe and Canada, as well as the overall declines in the U.S. oral bisphosphonate market, offset, in part, by net sales growth in certain promoted products, primarily LO LOESTRIN FE, ATELVIA and ESTRACE Cream. For the nine months ended September 30, 2012, the decrease was primarily attributable to a decline in ACTONEL revenues of $176 million, due in large part to the overall declines in the U.S. oral bisphosphonate market, as well as continuing declines in ACTONEL ROW and Canadian net sales following the 2010 loss of exclusivity in Western Europe and Canada and a decline in DORYX net sales of $54 million, which was offset, in part, by net sales growth in certain promoted products, primarily LO LOESTRIN FE, ATELVIA, ESTRACE Cream and ASACOL as compared to the prior year period.

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, the launch of new products, the loss of exclusivity for our products and transactions such as product acquisitions and dispositions may also, from time to time, 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 United States. Although these estimates provide a broad indication of market trends for our products in the United States, 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. When our unit sales to our direct customers in any period exceed market demand for our products by end-users (as measured by


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estimates of filled prescriptions or its equivalent in units), our sales in excess of demand must be absorbed before our direct customers begin to order again, thus potentially reducing our expected future unit sales. Conversely, when market demand by end-users of our products exceeds unit sales to our direct customers in any period, our expected future unit sales to our direct customers may increase. 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 estimated number of days of end-user demand on hand, as "pipeline inventory". Pipeline inventories expand and contract in the normal course of business. As a result, our unit sales to our direct customers in any period may exceed or be less than actual market demand for our products by end-users (as measured by estimates of filled prescriptions). When comparing reported product sales between periods, it is important to not only consider market demand by end-users, but also consider whether estimated pipeline inventories increased or decreased during each period.

Revenues of our osteoporosis products decreased $39 million, or 22%, in the quarter ended September 30, 2012, and $145 million, or 24%, in the nine months ended September 30, 2012, compared with the prior year periods. Total revenues of ACTONEL were $119 million and $415 million, in the quarter and nine months ended September 30, 2012, respectively, compared to $166 million and $591 million, respectively, in the prior year periods. Total ACTONEL revenues were comprised of the following components:

                                            Quarter Ended                                            Nine Months Ended
                                            September 30,            Increase (decrease)               September 30,              Increase (decrease)
(dollars in millions)                      2012        2011       Dollars           Percent          2012           2011       Dollars            Percent
United States                             $    77      $  83     $      (6 )              (7 )%    $     243          333     $      (90 )             (27 )%
Non-U.S. North America                          5         17           (12 )             (71 )%           31           47            (16 )             (34 )%
ROW                                            25         48           (23 )             (48 )%           98          152            (54 )             (36 )%

Total net sales                               107        148           (41 )             (28 )%          372          532           (160 )             (30 )%

ROW, other revenue                             12         18            (6 )             (33 )%           43           59            (16 )             (27 )%

Total ACTONEL revenues                    $   119      $ 166     $     (47 )             (28 )%    $     415       $  591     $     (176 )             (30 )%

In the United States, ACTONEL net sales decreased $6 million, or 7%, in the quarter ended September 30, 2012 compared with the prior year quarter, primarily due to a decrease in filled prescriptions of 36%, offset, in part, by a decrease in sales-related deductions, an expansion of pipeline inventories, and higher average selling prices. In the nine months ended September 30, 2012, ACTONEL net sales in the United States decreased $90 million, or 27%, compared with the prior year period, primarily due to a decrease in filled prescriptions of 37%, offset, in part, by higher average selling prices and an expansion of pipeline inventories as compared to the prior year period. In the United States, ACTONEL filled prescriptions continue to decline due primarily to declines in prescriptions within the overall oral bisphosphonate market. ACTONEL ROW net sales were $25 million in the quarter ended September 30, 2012, down 48% from $48 million in the prior year quarter. In the nine months ended September 30, 2012, ACTONEL ROW net sales were $98 million, down 36% from $152 million in the prior year period. The decline in ACTONEL ROW net sales in the quarter and nine months ended September 30, 2012 was due to the continued declines in ROW net sales following the 2010 loss of exclusivity in Western Europe. Non-U.S. North American revenues were $5 million and $17 million in the quarters ended September 30, 2012 and 2011, respectively, and were $31 million and $47 million in the nine months ended September 30, 2012, respectively. The declines in the Non-U.S. North American revenues in both periods were due to the impact of generic competition following the loss of exclusivity in Canada at the end of 2010. While we expect to continue to experience significant declines in total ACTONEL revenues in future periods, we expect net sales from our new product ATELVIA will grow and partially offset some of those declines in the U.S. and Canadian markets. ATELVIA, which we began to promote in the United States in early 2011 and in Canada in early 2012, generated net sales of $19 million and $11 million in the quarters ended September 30, 2012 and 2011, respectively, and $51 million and $20 million in the nine months ended September 30, 2012 and 2011, respectively. The increase in ATELVIA net sales in the United States primarily relates to an increase in filled prescriptions of 51% and 124% in the quarter and nine months ended September 30, 2012, respectively, offset, in part, by an increase in sales-related deductions as compared to the prior year periods.

Net sales of our oral contraceptive products increased $1 million, or 1%, in the quarter ended September 30, 2012 and $26 million, or 7%, in the nine months ended September 30, 2012, compared with the prior year periods. LOESTRIN 24 FE generated net sales of $95 million in the quarter ended September 30, 2012, a decrease of 9%, compared with $104 million in the prior year quarter. During the nine months ended September 30, 2012, LOESTRIN 24 FE generated net sales of $300 million, a decrease of 8%, compared with $325 million in the prior year period. LOESTRIN 24 FE filled prescriptions were negatively impacted by our shift in promotional focus to LO LOESTRIN FE beginning in early 2011. More specifically, the decrease in LOESTRIN 24 FE net sales in the quarter and nine months ended September 30, 2012 as compared to the prior year periods was primarily due to a decrease in filled prescriptions of 15% and 16%, respectively, and an increase in sales-related deductions, offset, in part, by higher average selling prices and an expansion of pipeline inventories relative to the prior year periods. LO LOESTRIN FE, which we began to promote in the United States in early 2011 and is currently the primary promotional focus of our women's healthcare sales force efforts, generated net sales of $33 million and $23 million, in the quarters ended September 30, 2012 and 2011, respectively, an increase of 43%. Additionally, LO LOESTRIN FE generated net sales of $95 million


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and $42 million in the nine months ended September 30, 2012 and 2011, respectively, an increase of 126%. The increase in LO LOESTRIN FE net sales primarily relates to an increase in filled prescriptions of 127% and 258% in the quarter and nine months ended September 30, 2012, respectively, offset, in part, by an increase in sales-related deductions as compared to the prior year periods, as well as a contraction in pipeline inventories in the quarter ended September 30, 2012 as compared to the prior year quarter.

Net sales of our hormone therapy products increased $5 million, or 10%, in the quarter ended September 30, 2012 and $26 million, or 17%, in the nine months ended September 30, 2012, as compared with the prior year periods. Net sales of ESTRACE Cream increased $3 million, or 7%, and $28 million, or 24%, in the quarter and nine months ended September 30, 2012, respectively, as compared to the prior year periods. The increase in ESTRACE Cream net sales in the quarter ended September 30, 2012 compared to the prior year quarter was primarily due to an increase in filled prescriptions of 13% and higher average selling prices, offset, in part, by a contraction of pipeline inventories relative to the prior year quarter. The increase in ESTRACE Cream net sales in the nine months ended September 30, 2012 compared to the prior year period was due primarily to an increase in filled prescriptions of 15%, higher average selling prices and a . . .

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