Warner Chilcott Limited Q3 2008 Earnings Call Transcript

Nov.10.08 | About: Warner Chilcott (WCRX)

Warner Chilcott Limited (NASDAQ:WCRX)

Q3 2008 Earnings Call

November 10, 2008 8:00 am ET

Executives

Paul Herendeen - EVP and CFO

Roger Boissonneault - President and CEO

Analysts

Scott Henry - Roth Capital Partners

David Buck - Buckingham Research

Ken Trbovich - RBC Capital Markets

Chris Scott - JPMorgan

Michael Tong - Wachovia Capital

David Windley - Jeffries & Company

David Buck - Buckingham Research

Greg Gilbert - Merrill Lynch

Operator

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to Warner Chilcott's Operating Results for the Third Quarter Ended September 30, 2008, Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session (Operator Instructions).

I would now like the turn the call over to Paul Herendeen, Executive Vice President and Chief Financial Officer of Warner Chilcott. Mr. Herendeen?

Paul Herendeen

Thank you, Lisa. Good morning and thank you for joining our call. Early this morning, we issued a press release that provides details of our third quarter results which I hope you all had a chance to review. The copies of that press release are available on our website.

Roger and I would like to take a few moments to provide some initial comments with regard to our third quarter results which will be followed by a Q&A period.

Before doing that, let me point out this call will include forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause the company's actual results to differ materially from such statements. These risks and uncertainties are discussed in our 2007 Annual Report on Form 10-K which is available on the SEC's website.

The forward-looking statements made during the call are made only during as of the date of this call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.

In addition, we may make reference to during the course of the call to non-GAAP financial measures as defined by the SEC regulations. In accordance with these regulations, we have provided reconciliations of these measures in our press release issued this morning to what we believe are the most directly comparable GAAP measures.

With that let me turn the things over to Roger Boissonneault, our President and CEO.

Roger Boissonneault

Good morning everyone and thanks for joining us. I will give you a brief overview of our performance for the third quarter; provide an update on resulting activities before turning the presentation back to Paul for additional details about our financial results.

We saw solid financial results in the third quarter. We posted GAAP net income for the quarter of $40.1 million cash net income for the quarter was $96.5 million or $0.39 per share, compared to $69.3 million in the third quarter of 2007 that is a 39% increase in adjusted cash net income year-over-year.

Our third quarter revenue was $231.9 million, an increase of 2.4% compared to the third quarter of 2007. This increase was led by the sales of our key promoted products; DORYX, Loestrin 24, Taclonex, and Femcon, which continued to deliver year-over-year growth.

The growth in the quarter was partially offset by the impact of generic competition for several of our brands, particularly Estrostep. A positive end during the quarter was launch of DORYX 150. Our dermatology sales force began actively promoting the new strength in the July and today 150 milligram accounts for nearly 25% of new prescriptions for DORYX.

The DORYX has been growing nicely in unit terms and the addition of DORYX 150 allowed us to accelerate that growth. DORYX remains a high priority for us with dermatology.

Before turning things back over to Paul, let me provide a progress report on our product development activities. The clinical trials for two new oral contraceptives continue on track. The clinical trial for the first products which we have referred to as low dose OC, completed the treatment phase of the clinical study during the quarter. We currently anticipate that we will be in a position to file an NDA for that product in the first half of '09.

The second trial is for new oral contraceptives, the characteristics of which we have not disclosed. That trial completed enrollment in 2007 and is progressing on a timeline that is approximately six months behind the low dose OC trial.

Now let me turn it over to Paul.

Paul Herendeen

Thanks Roger. Okay. Another good quarter for us. As Roger said, revenue increased 2.4% compared to Q3 of '07 and that was driven by the growth of our key promoted assets, DORYX, Loestrin 24, Taclonex, and Femcon.

We had to overcome sales decline for several of our products to face share of competition specifically Estrostep, OVCON, Sarafem and Dovonex solution which held back our growth rate compared with the prior year.

We benefited from lower SG&A costs in the quarter mainly lower A&P and legal expenses and lower investment in R&D due mainly to the timing of milestone payments made in the prior year quarter, which allowed us to post a solid 39% increase in adjusted cash net income per share for the quarter compared to Q3 of last year.

Let me give you a little more color around our revenue. Overall, our oral contraceptive sales were off slightly compared with Q3 of 2007, as the growth of the Loestrin 24 and Femcon sales could not quite overcome the declines in Estrostep and OVCON which faced generic competition.

Loestrin 24 continues to be a top priority for us within our company and we continue to gain share and grow sales with this brand. Couple of factoids for you around Loestrin 24: sales were up 33% compared to the prior year quarter, driven by a 22% increase in filled prescriptions and higher average selling prices. Our share of new prescriptions in the quarter was 4.7%, up 50 basis points from Q3 of '07. Loestrin 24 share of new Rxs in recent weekly data was north of 4.8%.

Femcon is our top priority in our Chilcott sales force and continues to gain share and increase sales. Sales were up 22% from the year quarter on increased filled prescriptions, and higher average selling prices. Femcon new prescription market share was 1.3% at the end of the third quarter, up 30 basis pints from Q3 of '07 and then recently weekly data was 1.4% share for new Rxs.

Both of our promoted OCs have plenty of room to continue to grow. Sales of our dermatology products grew nearly 16% compared to Q3 of '07 with DORYX leading the way. We began sales of DORYX 150 in the quarter which included approximately $5million to $7 million of estimated initial loading of the product into the trade.

I want to point out that the amount of the initial inventory stocking of DORYX 150 was appropriate to enable the channel to provide an adequate service level to their customers based on expected demand. Excluding the high end of the estimated initial load of DORYX 150, total sales of DORYX were up 29% compared with the prior year quarter, due mainly to increase in per filled prescriptions and higher prices.

The launch of DORYX 150 had the affect of reducing filled prescriptions for the other strengths, but overall DORYX filled prescriptions were up 13% in the third quarter. It is worth noting that the economic value of the DORYX 150 prescription is almost one-third higher than for a DORYX 100 prescription and that based on weekly data 25% of new Rxs for DORYX are in the 150 milligram strength.

Sales of Taclonex increased $5.1 million in the quarter or 15.3% as compared to the third quarter of 2007. The increase was due to the introduction of Taclonex Scalp which was launched in June of '08, higher average selling prices and an increase in average grams per filled prescription.

Let me take a minute to remind you that in August of 2007, we introduced a 100 gram tube size of Taclonex which augmented the 60 gram tube that was already on the market. The result was an increase in average grams per filled prescription which was not visible when you looked only at filled prescription data. For example, the filled Rxs for Taclonex were flat in Q3 of '08 compared to Q3 of '07. However, average grams per Rx were up 7.5% during that same period.

Sales of Dovonex increased $5.6 million in the third quarter of '08 compared to the prior year quarter primarily due to reduction in filled prescriptions due to increased generic competition for Dovonex solution which began in the second quarter of 2008. The decrease was partially offset by higher average selling prices; Dovonex sales decreased $5.6 million.

Sales of our hormone therapy products were essentially flat in Q3 of '08 compared to the prior year quarter. Sales of ESTRACE Cream increased 9.5% due to a modest 2% increase in filled Rxs and higher average selling prices. Net sales of femhrt decreased $2.2 million in the third quarter of 2008, so 15% decline in femhrt filled prescriptions was partially offset by the impact of higher average selling prices.

Turning to expenses, reported SG&A expenses for the quarter were $45.9 million, a decrease of $14.9 million or 24.4% compared with the prior year quarter. There are three types of expenses that roll up into our SG&A. Selling and distribution costs, advertising costs and promotion costs, and general administrative expenses.

Selling and distribution expenses which were mainly the cost of our field sales forces were essentially flat in the third quarter of '08 compared to the prior year quarter. Advertising and promotion expenses decreased $2.1 million or 17.8% in the quarter compared to the prior year quarter due mainly the reduction in our use of direct consumer advertising.

General administrative expenses decreased $12.1 million or 45.9% in the third quarter of '08 as compared to prior year quarter. I point out that the prior year quarter included a $9 million charge for the settlement of a portion of the company's OVCON 35 litigation. The remaining decrease is due to lower legal fees period-over-period.

External legal fees are a large component of our G&A expense. At this point, most of our ongoing external legal expenses are associated with the paragraph 4 of patent challenges for our Loestrin 24 and Femcon products.

R&D expense in the quarter was $10 million, a decrease of $14.1 million compared to the prior year quarter. In Q3 of '07, our R&D expenses included a total of $14 million in milestone payments. $4 million to Paratek related to the development of novel tetracyclines and a $10 million payment to LEO Pharma upon the FDA's acceptance of the NDA for Taclonex Scalp.

Excluding these milestones from the prior year quarter, R&D expense was flat compared with the prior year. We continue work on the ongoing clinical trials for the oral contraceptives that Roger mentioned during his remarks as well as other ongoing product development projects.

Amortization expense totaled $59.1 million in the third quarter of 2008, which represents a $6 million increase sequentially from the second quarter. During the normal review of our amortization of intangible assets, we determined it was appropriate to accelerate the amortization of the intangible assets associated with certain of our non-core products.

The majority of the intangible assets on our balance sheet are the result of the accounting requirements related to the company being taken private in early 2005. Please note, that this change to amortization does not impact the computation of cash net income per share as we have always added back the after-tax impact of amortization of intangible assets.

Our updated forecast for aggregate scheduled amortization for 2008 based on current assumptions is $224 million, reducing to $203 million in 2009 and $158 million in 2010.

Net interest expense for the third quarter was $26.3 million. This includes a $1.3 million write-off of deferred loan cost associated with the optional prepayment of $90 million of debt under our credit agreement on September 30th, '08.

As of the end of the third quarter, our debt balance, net of cash on hand was $1 billion. Our net debt to trailing 12 months adjusted EBITDA was 2.0 times as of September 30th. In the absence of compelling opportunities to invest our free cash low in strategic initiatives, such as in licensing, acquisitions or other internal product development activities, we currently expect to continue to utilize available excess cash flow for deleveraging purposes.

Our reported GAAP net income in the third quarter of '08 was $40.1 million and arriving at cash net income we add back the after-tax impact of two expense items, both the book amortization of intangibles and the amortization of deferred financing fees. We add these items back at a marginal tax rate specific to each item and each variant.

For Q3 of '08 the marginal tax rate for amortization of intangibles was 8.4% and the rate for deferred financing fees was 16.4%. Cash net income for the quarter was 96.5 million or $0.39 per share based on 250.6 million fully diluted Class A shares outstanding.

Turning to liquidity, in the third quarter we generated $90 million of cash from operating activities. We prepaid $90 million under our senior secured credit facility and ended the quarter with a balance of cash and cash equivalents of $13.2 million.

With our free cash flow over the past seven quarters, we have been able to prepay $500 million in debt. Since our IPO in September 2006, we have decreased our total outstanding debt by nearly $1.2 billion.

Before turning to the Q&A, let me update you on our financial guidance for the full year of 2008. Based on the actual results year-to-date through the third quarter and the current outlook for the remainder of 2008, we expect total revenue to be at the lower end of the range previously communicated which is $935 million to $945 million.

Gross profit margin as a percentage of total revenue is expected to be in the range of 79% to 80%, slightly below our previously communicated guidance. We now expect the total SG&A for the year will be in a range of $192 million to $201 million. The $16 million decrease from our previous guidance relates primarily to our most current view of the expected spending across all three of our SG&A categories.

In A&P, this includes less than anticipated promotional spend on certain programs, in G&A it is the result of a reduction in our expected legal fees for the full year. As I said in the past and let me say it again, it can be very difficult to forecast both the level and timing of our future legal expenses.

Where in R&D, we now expect that to fall in the range of $50 million to $53 million for the full year 2008, a decrease of $14 million, which reflects our current spending trajectory and the exclusion of $10 million potential milestone payment based on our expectations for the balance of 2008.

We now anticipate that our income tax provision for 2008 will be at the lower end of the previously communicated range of 7.5% to 8.5% of earnings before taxes and book amortization or EBITDA.

The result of these revisions to our outlook is an increase to both GAAP net income, which is expected to be in the range of $133 million to $146 million and cash net income, which is expected to be in the range of $346 million to $359 million. Using 251 million Class A common shares the company expects cash net income per share to be in the range of $1.38 for $1.43 for the full year 2008.

Let me be clear about the assumptions that are included in the updated guidance. The guidance does not include the impact to reported earnings of any new licensing agreements with third parties, which could be included in our reported R&D expense.

Also only R&D milestones expected in 2008 under existing agreements are included in our guidance at this time. As always, included in the press release, at the back of the press release is a table that outlines all of the elements of the guidance, because I know that makes it a lot easier for everybody to digest.

With that Lisa, we are ready for our Q&A period.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we'll take our first question from Scott Henry with Roth Capital.

Scott Henry - Roth Capital Partners

Thank you. Just two quick questions. First with regards to the 10 million pipeline mile stone, that I believe you will not take down. I didn't hear, but did you disclose the reason that that is getting pushed out?

Paul Herendeen

It's Paul. No we did not and just be aware we're now not expecting it to occur in Q4. Just as Scott (inaudible) bringing up. This is one of the challenges for us with the agreements that we have in place, plus the agreements we hope to have in place to enhance our pipeline of products under development. The issue is we don't control the timing of those milestone payments. We do our best to estimate when we expect them to occur, and when they do hit its 10 million in this particular case. And that could have been on December 29th or January 4th and under accounting convention that would be either Q4 or Q1. No, we didn't disclose why it flipped, but we don't believe it will occur in Q4.

Scott Henry - Roth Capital Partners

Okay, thank you. Just the final question if I could. With regards to Loestrin 24 there are some events outside of you control, such as the potential for an at-risk launch in 2009. My question is just how you plan for that from a contingency standpoint. Is there anything new on that front and just trying to get your sense around that issue?

Roger Boissonneault

Scott it is Roger, the simple answer which isn’t so simple, we plan for all contingencies. As you know it is not a clear situation. There's lot of things that can happen between now and launch and including not a launch. So we just have to be ready for anything that might happen. And try to do our best.

Scott Henry - Roth Capital Partners

Okay. Fair enough. Thank you for taking the questions.

Operator

Our next question comes from David Buck with Buckingham Research. Please go ahead.

David Buck - Buckingham Research

Yes thanks, three quick questions. First Paul can you give a little bit more detail on the sales related items that impacted the revenues of a couple of products and would you expect those to continue I think Loestrin 24 and Dovonex or two they were called out. Second for Roger, have you had any dialogue with all the FDA on the citizen petitions that were posted in the past few months for DORYX and also for Loestrin 24 and can you talk a little bit about the business development opportunities that you're seeing currently? Thanks.

Paul Herendeen

Hey, David, its Paul. First I am sorry. Could you, the question was around Loestrin 24 and Dovonex. Is there something specific you were looking for there?

David Buck - Buckingham Research

Yeah, the revenues I guess were impacted by some sales related deductions. Was there a change there or change in trend, and just wanted to see if there was any increase in deductions that will be effecting gross to net?

Paul Herendeen

I think that we like many of our competitors were seeing there has been a change in the way our inventory is held in the channel. One of the things that affects is how and when you get returns. And what we like many of our competitors I think are seeing that, we have to ratchet it up a little bit are and adjust our expectations for returns across our portfolio, by the way not specifically limited to Loestrin 24 and Dovonex, but across our portfolio.

I point out that has the effect not only of reducing or increase the degradation I guess as a couple something rather than make it simpler. It causes gross to degrade more to net but also has the impact of affecting our reported gross profit margins. And we're seeing that really across the board.

David Buck - Buckingham Research

So this is a one time item or this is sort of a new level you're at?

Paul Herendeen

Well, when you adjust your exceptions for the future you have to kind of reset the bar so it may have a greater impact in the current period than you would expect over the continuing period.

David Buck - Buckingham Research

Okay.

Roger Boissonneault

Okay, David, as far as citizen petitions. Unfortunately you really don't have much of a dialogue with the FDA. FDA has filed the citizens’ petition. Sometimes you never really know what happens, other than maybe the product doesn't get approved. Or if the product does get approved, then you get the response from the FDA guys, with the status of your petition.

So, no we really don't get much guidance around it, so we try to do the best we can with the petition, thus what the petition as far as the quality document. On the business development side, there are a lot of potential things, as you can imagine with the financial markets the way they are. There area lot of companies out there looking for help with their ideas and we remain very active, and we do anything material, we'll certainly let the market know.

David Buck - Buckingham Research

Okay, thank you.

Operator

And we'll take our next question from Ken Trbovich with RBC Capital Markets.

Ken Trbovich - RBC Capital Markets

Thanks for taking the questions gentlemen, congratulations on the nice quarter. I guess I wanted to follow up on Scott's question earlier. Can we at least rule out these milestones or the $10 million in milestones that you're not paying as being associated with all with the NexMed transaction?

Roger Boissonneault

Can you illuminate that?

Ken Trbovich - RBC Capital Markets

In other words, I'm assuming that decision was in the third quarter. So I'm assuming that this adjustment isn’t directly related to that outcome?

Roger Boissonneault

You can make that assumption.

Ken Trbovich - RBC Capital Markets

Okay. And then back to the question on the business development side, I'm not certain that I heard a response in the earlier question about your view in terms of opportunities either of your licensing or acquisition of late stage products.

I mean certainly we are seeing some creative structures around folks even taking an option to license with minimal payments. Can you give us some more detail on what you see specifically within women's health and dermatology, and then to what extent you would consider areas outside of those two focused groups?

Roger Boissonneault

Ken, it is very difficult to tell you that this is what the deal would look like. Do the deals look more favorable? Again your deal is that constant how much money do we want to put into it and with us, it's really how much what are we developing internally, what we would we pursue externally, and what is the opportunity cost. So that continues as a dynamic.

But you're right. I mean the background of this is this is being of lack of capital out there. Doesn’t make those products look prettier now; we tend to look at it more in the long-term. We're really concerned about an about an asset that we grow over a longer period of time. It's an interesting environment but as soon as we find something, we'll work on it and we will let the investment community know.

Ken Trbovich - RBC Capital Markets

But are there limitations, are there areas we just feel like the investment is so fast that you just wouldn’t want to take on whether it's aesthetic dermatology, or perhaps there is just so much consolidation within clinical derm that you feel like the premium being paid is can't justify for the investments in pipeline opportunities in those area?

Roger Boissonneault

Ken, what the fact is, there isn't a lot going on and I don't think we're constrained in the idea that there is, if that year is good enough, we have plenty of fire power. It all depends upon the idea.

Ken Trbovich - RBC Capital Markets

Okay.

Roger Boissonneault

So, if it looks to be transforming, we'll go after it, but we just haven’t seen that type of big idea out there.

Ken Trbovich - RBC Capital Markets

Okay. So apart from that we should just continue to factor in debt repayment?

Roger Boissonneault

Right, exactly.

Ken Trbovich - RBC Capital Markets

Okay, thanks again.

Operator

And our next question comes from Chris Scott from JPMorgan. Please go ahead.

Chris Scott - JPMorgan

With your SG&A guidance, the reduction of spending, can you press a little more granularity as to how much of that's driven by lower legal fees versus lower promotion? And maybe on the promotion spending, should we read this commentary as in the commentary on proving competitive dynamics or are you just not seeing a return on the DTCs you'd like to from here a head loan fall out from there?

Paul Herendeen

To answer it, it's Paul. I'll give you the answer on the DTC first. We set for a while now, we think the use of the DTC was an important element in the launch or Loestrin 24 and helped us get off to a good start. As we progress with the spending of DTC, we've found that we weren't getting what we believe was a good return on our investment and so we've essentially curtailed that activity.

We did a modest amount in the first quarter of this year, and we did some print advertising in the first half of this year. But we've really reduced both our expectations for what we intend to use with DTC, pretty dramatically in the absence of a launch, I would say it's a very small part of our plans going forward.

On the G&A front, approximately, $4 million of the reduction of our expected G&A spend is related to the expectation of lower legal costs for the full year.

Chris Scott - JPMorgan

Picking up to next year, should we just assume these are kind of just costs are being deferred into costs that are into the patent case, is that way to think about that?

Roger Boissonneault

It is a little bit both of deferral but also a bit of our now maybe some better optimism about what we'll spend against those cases. As I said even in my prepared remarks earlier, it's very difficult to forecast the amount and timing of these costs. It can really operate in a wide band. From our perspective, when we look and say what our expectations are for it, we want to be sure that we are covered for the high end of that range when we express it to you in the form of guidance.

As we get deeper into the year, it becomes a little easier for us to say we're not going to get there. I will tell you that as I look at 2009, it's likely that we would expect that we would spend towards the high end of that band, with both of those cases are progressing and we continue to spend against them. It's just been during Q3 and looking ahead to the balance of the year, it's less than what we have previously communicated. As we get to the point sometime in January, when we would expect to give guidance for next year, it will be an important component of the G&A number.

Chris Scott - JPMorgan

Not to tend to beat the dead horse on the in licensing thing, any incremental opportunities you see; I know Wyeth recently announced their stopping development of some of their earlier stage in [health] products that do we have any potential opportunities on that front?

Roger Boissonneault

In short, no, we really haven't looked at that. I know they made the decision to move out of women's healthcare specific I guess to hormonal products. And I can't say that that now that that we are looking at anything that they might have that we would take over.

Chris Scott - JPMorgan

Great, thank you.

Operator

And our next question comes from Michael Tong with Wachovia Capital.

Michael Tong - Wachovia Capital

Just one question, you talk about the decline in Dovonex prescriptions and part of that is due to patients switching to other therapy. So what are some of those other therapies and of the patients who have switched out of Dovonex, how much were you able to recapture through Taclonex?

Roger Boissonneault

Okay. Michael, it's Roger. We actually do have a switching matrix and most of that that you see moving out of Dovonex,, most of the movement is going to be Taclonex and actually it moves all over the place. But that would be the major movement. If you lose Dovonex you will probably pick it up on a Taclonex side and where do you pick it up, it's four points. Somebody goes to the 60 gram tube or the 100 milligram tube. Some of it you'll lose to cortical steroids.

So, there is a dynamic there and you've got people that move across the market. You even have people that will move from Taclonex back into Dovonex, because what will happens is it will get a flare, control the flare and then I'll use the Dovonex as maintenance, but overall we're seeing a movement away from Dovonex, majority of which would go to Taclonex and then some would even go back to cortical steroids.

Michael Tong - Wachovia Capital

Okay. And just to make sure, I heard you correctly, when you say majority I can safely assume over 50%.

Roger Boissonneault

I wouldn't try to quantify but when you look at a matrix some of it makes sense, some of it doesn't make sense, but it would be the biggest product that matrix it couldn't see that ?kind of dynamic going forward some you'd lose to cortical steroid, because some of this activity as we see it going down as with Dovonex, we have a lot of business in primary care. With Taclonex, that Taclonex business is now moving into primary care. So the clinician is seeing the presence of Taclonex and they're replacing some of their Dovonex with the Taclonex.

Michael Tong - Wachovia Capital

Great, thank you.

Paul Herendeen

Hey Michael, it is Paul. Just to be clear too on Dovonex, if you look at the Rxs in the quarter versus prior year quarter, you take the whole franchise is down 25%. A good chunk of that is because of the solution going generic. If you strip that back and you really look at just the cream-only, we're down 11%-12% year-over-year. It is a seasonal product, so you really do need to look back at the same quarter prior year. Just to point out that Dovonex is not as a product, Dovonex itself, you strip it out and look on a standalone basis is not a growth driver for us in terms of units.

Michael Tong - Wachovia Capital

Thank you.

Operator

Our next question comes from David Windley with Jeffries & Company.

David Windley - Jeffries & Company

Hi, thanks. I was just wondering Paul if you could remind me of what your debt amortization minimum requirements are?

Paul Herendeen

I have to look it up because we prepaid so much. I got to see what it is currently. We just flip into it right now.

David Windley - Jeffries & Company

And that kind of drives it to the question, the second question that I have which is, you are more aggressive pay down payments that you have taken, it's fact that schedule in other words are you able to kind of borrow against the future by paying down early?

Paul Herendeen

We don't borrow against future. What happens is it reduces the amount of scheduled prepayments. As we speak right now, our annual requirements of the term debt are $6.6 million per year.

David Windley - Jeffries & Company

Okay.

Paul Herendeen

It's brought at way, way down and we're pretty far ahead on the debt repayment side.

David Windley - Jeffries & Company

And on the question earlier, there is a question about the licensing activity ounce, both inside and outside. I didn't get the answer to the outside of your current therapeutic areas. Is there a willingness or an interest in expanding the therapeutic area that you are currently in?

Roger Boissonneault

Absolutely. We do look outside of our therapeutic. I mean there are some areas that we have to be absolutely careful [about that]. But we're not really actively looking at anti-cancer products; we are not looking at products perhaps that are primarily primary care. But we'll look nearly at anything that comes across, and obviously if we already have a presence in that therapeutic area, it's going to look more compelling to us. But that's not the only reason that we'll pursue an asset.

David Windley - Jeffries & Company

My final question. In terms of your sales force in the field today, are you comfortable with sizing? Are you increasing size or perhaps, based on responses, some of your growth products, are you starting to normalize or rationalize that size for a more mature growth trajectory?

Roger Boissonneault

Well sometimes that would be a self-fulfilling prophecy, but what we're looking at is more of the quality of the sales force. Now there is more of concentration, I think we are comfortable with the size of the sales force, right now. We've been doing a lot to improve the quality and particularly the management of the sales force. District sales managers and upgrading that line management team and then part and parcel that would be the regional sales directors.

It really isn't the size at this particular juncture, its more of the execution. The execution on the derm side has been very good. We're still concerned and working on the woman's healthcare side, because we think we can do a better job with that.

David Windley - Jeffries & Company

Okay, great, thank you.

Operator

(Operator Instructions) And we have a follow up question with David Buck with Buckingham Research.

David Buck - Buckingham Research

Yes, thanks, just a couple of quick ones. First on the Taclonex Scalp, can you give a sense as to how much revenue there was in the quarter and what you see in the current market opportunity for that product in terms of net percentage of total franchise or peak sales? Secondly can you just review any price increases that you took either during the quarter or after the quarter? Thanks.

Roger Boissonneault

The Taclonex Scalp, I'll let Paul handle that as far as price. Paul, I would also, I just want to point out to you in Taclonex Scalp that we haven't really hit the season. So what we are seeing in Taclonex Scalp, we'll get a better idea what the run rate is going to be once we hit through the winter months. Paul you want to handle rest of that?

Paul Herendeen

On the Taclonex Scalp, we really don’t like to breakout the specific pieces, but to give you a rough idea year-to-date sales of that product are something around $5 million, David. If you recall on the TRx side, I think that what we have talked about was we felt like that the Dovonex Scalp solution wasn't called a scalp solution, but the solution which was used mainly in the scalp represented about 15% of that franchise, and felt that the Rx opportunity for Taclonex Scalp, is somewhere in that neighborhood, if you are looking at from an Rx perspective. On the pricing question there have been no price increases since May of 2008.

David Buck - Buckingham Research

Okay. Thanks.

Operator

And our next question comes from Greg Gilbert with Merrill Lynch.

Greg Gilbert - Merrill Lynch

Thanks, good morning. Paul, can you expound a bit on that recurrence issue that you said is effecting growth in that. I'm assuming it relates to some belt tightening that may be occurring at wholesalers, but you mentioned that perhaps your expectations for go forward period need to be a bit different. Can you expound on that a bit?

Paul Herendeen

We're seeing little bit higher returns as a percent of sales and have had to increase our estimate. So what we think those returns will be. So at the moment in time when we ship it we record an appropriate reserve. And as we continue to sell the product we record an appropriate reserve.

I think what's going on here Greg over the course of last couple of years, as most folks have entered into agreements where the distributors where they get either, while they get a little above direct visibility and what sort of inventory they are holding an agreement with those wholesalers that they wouldn't expect and hold more inventory than they need.

What was interesting was that the initial belief on our part, was that that would help us actually reduce the amount of returns you would see, because they wouldn’t have inventory sitting in the corners of their of warehouse simply waiting to be returned at a higher price. What we have found was that it got pushed out down to the retailers. And there are retailers who are now engaged in that activity and some of them pretty aggressively.

So we have just had to adjust over the course of 2008 our expectations for the level of returns, again, across our portfolio, its higher in some products than others. But across our portfolio and that had the effect of reducing or increasing the degradation gross to net and again it also impacts on the kind of little bit of the downward pressure that you see on our gross profit margin.

Greg Gilbert - Merrill Lynch

So the degradation in gross profit margin is sort of artificially high this quarter due to that issue and it should be modest negative effective going forward or wholesale and gross margin?

Paul Herendeen

Presuming that we had very sharp pencils and were able to figure out exactly where we needed to be, there is a little bit of art here and a little less science than you might think about trying to land on that number. But we did have some items that impacted this quarter that are above and beyond what you were to expect to see in a normal quarter.

Greg Gilbert - Merrill Lynch

Okay, and then one more at a higher level, for both of you. How are you seeing the slowing economy affecting your businesses, if at all? Thanks.

Roger Boissonneault

Good question. Looking at the total Rx's, and we look at it weekly in both oral contraceptives and the antibiotic market. It will be tough for anyone to figure out that there is any contraction going on. Actually the total Rx's within oral contraceptives and indeed antibiotics continue to show that we would see perhaps some seasonality in antibiotics. But as far as oral contraceptives, it looks pretty consistent. We can't, I would be hard pressed to say that we see anything that is happening that’s different because of the economic crisis, at this moment anyway.

Greg Gilbert - Merrill Lynch

Thanks.

Operator

(Operator Instructions). There are no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Roger Boissonneault

Yeah, thank you Lisa. Again thanks all of you for attending our conference call. We look forward to speaking with you and reporting our Q4 results in late February. Okay? That is it.

Operator

And that concludes today's teleconference. Thank you for your participation. Have a good day.

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