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Warner Chilcott Limited (NASDAQ:WCRX)

February 08, 2013 8:00 am ET

Executives

Paul S. Herendeen - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Roger M. Boissonneault - Chief Executive Officer, President and Director

Analysts

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Marc Goodman - UBS Investment Bank, Research Division

David Risinger - Morgan Stanley, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Warner Chilcott 2013 Financial Guidance Call. [Operator Instructions] As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Paul Herendeen, CFO. Please go ahead.

Paul S. Herendeen

Thank you, Ally. Good morning, everyone, and thanks for joining our call. I'm joined this morning by Roger Boissonneault, our President and CEO. Normally, we'd be sitting together in the same room for this call, but the weather changed those plans, so if we sound a little disjointed, please just bear with us.

This morning, we issued a press release that outlines our financial guidance for the full year 2013, which I hope you've all had a chance to review. The press release is available on our company's website on the Investor Relations tab.

I'll take a few minutes to provide some additional comments with regards to our 2013 guidance. After which, Roger and I will host a brief Q&A period. Please note that in the Q&A, we will only address questions relating to our guidance. We expect to report our Q4 and full year 2012 results in late February. During the Q&A period, we cannot and will not provide additional details with respect to our fourth quarter or full year 2012 results.

I also want to point out that 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 this morning's press release, our 2011 annual report on Form 10-K and subsequent filings with the SEC, all of which are available on the SEC's website. The forward-looking statements made during this call are made only 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 will make reference, during the course of this call, to non-GAAP financial measures as defined by the SEC. In accordance with these regulations, we have provided reconciliations to these measures in our press release issued this morning to what we believe are the most directly comparable GAAP measures.

Before I jump into details of our guidance, let me start by saying that we expect 2013 to present a number of challenges, but we expect to overcome those challenges and validate the attractiveness and sustainability of our business model. We have many important initiatives underway that, if successful, will enable Warner Chilcott to return to a growth mode in revenues, cash and income and free cash flow.

Think of 2013 as a blocking and tackling and taking care of business type of year for us. Some financial comparisons of 2013 versus 2012 will be unfavorable. That's unavoidable, but if we deliver on our key objectives in 2013, mainly the successful defense of our key product franchises, we expect our stakeholders to be rewarded.

As I take you through the specific guidance, I want to reiterate that we believe it's very important to think about Warner Chilcott as being comprised of 2 distinct pieces of value: a core business of branded products, which we have an opportunity to grow in terms of revenue and profits; and a predictable decline of the revenue and profit stream associated to the ACTONEL brand.

Let's start with our core business, which is everything other than ACTONEL. ASACOL is currently our largest and most profitable product franchise. Earlier this week, we were very pleased to announce that we'd received FDA approval for DELZICOL, a new 400-milligram mesalamine delayed-release product. We worked very closely with the FDA to formulate and gain approval for this new therapeutic option. We'll begin promotion of DELZICOL in the middle of March, and it will be the promotional priority for our roughly 95-territory gastroenterology sales force and other sales force resources that we can leverage to jumpstart this important initiative. Immediately upon receiving FDA approval for DELZICOL, we set in motion strategies to facilitate a smooth and rapid ramp-up of our DELZICOL business, including securing coverage of DELZICOL on key formularies and educating the wholesale and retail distribution channels as to our plans.

For the purposes of our guidance today and thinking about the prospects for our delayed-release mesalamine business in 2013, we've utilized current business assumptions for the ASACOL franchise and have assumed no generic competition for ASACOL 400 milligram following the expiration of the 170 and 171 Patents in July of 2013.

Important to note, we continue to believe that the regulatory pathway for the approval of generic versions of ASACOL and now DELZICOL present a high bar. However, we would not and will not rely solely on the challenging pathway in our quest to maintain leadership in the segment. With the approval of DELZICOL, another component of our plan -- plans, excuse me, is now visible to you and should give you some comfort that this important franchise can be sustained not just through 2013 but into 2014 and beyond. We assume we'll have a successful transition from ASACOL 400 to DELZICOL, and we'll do everything we can to ensure that success. As the launch progresses, we'll provide you with updates on our view of the impact of DELZICOL on the prospects for our total mesalamine franchise, the first of which will likely be on our first quarter results call in May.

Let me turn next to the LOESTRIN franchise. 2012 saw LO LOESTRIN TRxs continue to have a strong growth trajectory as result of our making it the promotional priority of our roughly 200-territory women's healthcare field force. This also resulted in a predictable decline of LOESTRIN 24 prescriptions. Our expectations for 2013 is that the LOESTRIN franchise in the aggregate will continue growing and gaining share in the marketplace, led by growth in LO LOESTRIN and taking into account the continued market share decline of LOESTRIN 24. In addition, we continue with initiatives that we believe will result in our ability to bring new oral contraceptives to market that should enable us to maintain and grow our market-leading position in the branded portion of this attractive market segment, and that's in 2013 and beyond.

We had disclosed that we have 2 NDAs for OCs on file with the FDA. We think of the hormonal contraception business as one that can be a source of revenue growth and profit growth for us for years to come.

ESTRACE CREAM. ESTRACE CREAM continues to be a great asset for us. Since we supported the product with promotional resources, it's responded nicely with solid unit and net sales growth. We expect to continue to grow ESTRACE CREAM into 2013, and we're encouraged by the long-term prospects for the brand. Looking out beyond 2013, we believe that we have an opportunity to maintain exclusivity in this space based upon the combination of the challenging regulatory pathway for potential generics and importantly, our ongoing efforts to develop and introduce improved products in the category.

The roughly 150 -- excuse me, roughly 150-territory urology sales team is focused first and foremost on growing ESTRACE CREAM. In addition, it has the promotional responsibility for ENABLEX. You'll recall that ENABLEX came to us through our acquisition of P&G Pharma initially as a co-marketing arrangement with Novartis. In late 2010, we decided to buy the U.S. rights to the product. Since that time, ENABLEX has been a steady contributor for us despite facing strong gross to net pressures primarily from managed care. As the promotional focus remains skewed towards ESTRACE CREAM in 2013, we expect that we will see some decline in ENABLEX revenue in '13 compared with '12.

Now let's move to dermatology and DORYX. We remain committed to our presence in the dermatology area in our continuing efforts to develop new products to enable us to compete and, with a bit of good fortune, return to a revenue growth mode in this attractive market segment. Despite the entry of a generic competitor in May 2012, our roughly 60-territory field sales force has been able to maintain a greater than 50% market share of filled prescriptions with DORYX 150. Based on the current market dynamics, we believe that we have found an equilibrium where we can sustain our DORYX business at a relatively low but profitable base, while we continue efforts to add new products to leverage our investment in our dermatology sales force.

Moving on to ATELVIA. During 2011 and into 2012, we made progress addressing some of the barriers we could control that we believed impeded ATELVIA's ability to continue to gain share. This included ensuring that the brand had credible coverage with managed care. Despite these efforts and our continued view that ATELVIA is a great product with clear differentiation and benefits for both patients and physicians, the prospects for growing ATELVIA are tough. We expect the U.S. market for bisphosphonates will continue to contract in 2013 at the 20%-plus rate that we've seen in the last couple of years. In light of our tempered expectations for ATELVIA, we are focused on ensuring that our promotional investments behind the brand are kept in line with those expectations. We have reduced our promotional spending and reconfigured the osteoporosis field force to be roughly 160 territories, a reduction of some 50 territories from its peak in 2012. Net-net, ATELVIA will represent a modest portion of our 2013 revenues. I think that's a good summary of the products that make up our core promoted products, and hopefully, my commentary gives you a better feel for our expectations for those products in 2013.

Finally, let me turn to ACTONEL revenues. The declines we've seen globally for this product, which were expected, were driven mainly by the significant contraction of the U.S. bisphosphonate market and the loss of exclusivity for the brand outside the U.S. beginning in 2010. I'd encourage people to think about ACTONEL the same way that we do. There's little that we can do to change trajectory of ACTONEL revenues, so we think of it an asset that, while declining at a rapid rate, throws off a lot of profit and a lot of cash.

Let me give you a couple of factoids that might help you think about the magnitude of the value of ACTONEL. LTM revenues for ACTONEL to September 30 totaled $595 million, of which $351 million was in the U.S., and the balance of $244 million was from outside the U.S. You'll get the full 2012 ACTONEL revenue numbers and breakouts when we report our full year 2012 results in a few weeks. You have to assume that the revenue stream, whatever it turns out to be for 2012, continues to decline at a rapid pace into 2013 versus 2012. Read 30%-ish. The decline could moderate in outer years if the market contraction slows, but until we see that, I'd assume the significant contraction continues. The only direct costs associated with the ACTONEL revenue stream are cost of goods, which can be estimated about 8% of ACTONEL revenue and a co-promotion payment to Sanofi. We expect the U.S. portion of the Sanofi co-pro expenses associated with ACTONEL in 2013 to be $175 million and the rest of the world portion to be roughly equivalent to 20% of outside U.S. ACTONEL revenue, not exact, but it's pretty good estimate. So if you use that math, in round numbers from the 12 months to September 30, '12, the ACTONEL franchise threw off roughly $320 million of pretax profit and $290 million of after-tax profit, which is a pretty good proxy for cash. If you pray solely to the god of high-level year-over-year growth, then ACTONEL is a major drag on Warner Chilcott. But ACTONEL has and will continue to generate a lot of cash that accrues to the benefit of all of our stakeholders. In 2014, the last year of the co-promotion expense for ACTONEL, we expect the co-promotion expense to be $125 million for the U.S. piece and 20% of o U.S. ACTONEL revenue.

Now with that, let me turn to some of the specifics that are included in our financial guidance for 2013, and again, those are detailed in our press release. But I want to call your attention to a few items.

First, we expect 2013 total revenues to be in the range of $2.3 billion to $2.4 billion. The decline versus our current revenue guidance for 2012 is primarily related to the continued decline of global ACTONEL revenue expected to be offset in part by the growth of our core promoted products.

Turning to cost of sales and our expected gross margin. We anticipate our gross margin on total revenue will be approximately 87% in 2013, which is slightly below the guidance range for 2012. Our forecast takes into account the expected mix of product sales. Our range of expected SG&A expenses for '13 is $750 million to $800 million, which is $25 million higher than the current guidance range for 2012. There are puts and takes around '13 versus '12 in SG&A, but the easiest way to think about the increase is that it's primarily due to an increase in anticipated legal expenses versus 2012 based on the number and timing of our pending legal matters. Let me also note that the selling component of SG&A includes a co-promotion payment anticipated to be paid [ph] to Sanofi for ACTONEL that I just talked about a moment ago.

Turning to R&D. We anticipate R&D spending will be in the range of $115 million to $135 million in 2013. I always like to say I wish we could spend more. We do not target a specific level of investment in R&D and we try to meet each year for -- which we would try to meet each year, for example, a percentage of revenue. Instead, we build our R&D investment plans based on the availability of projects that we believe represent good investments with appropriate levels of risk and reward, which includes a focus on improving, protecting and growing our existing product franchises.

Below the operating line, let me provide you with our current estimate of the amount of amortization of intangible assets for '13, '14 and '15. Based on our most recent estimates, our forecast for amortization expense for the next several years is $439 million in '13, $369 million in '14 and $291 million in '15. Please note the changes -- that changes to our expected amortization may occur as we progress through our normal periodic review of our intangible assets.

Our interest expense includes 2 components: our cash interest expense and the noncash write-off of amortization of deferred loan costs. In 2013, we anticipate the write-off or amortization of deferred loan costs will be roughly $24 million after tax. Our estimate of cash interest expense takes into consideration our expected prepayments of debt during 2013.

Turning to taxes. The great news that I shared with everyone at the JPMorgan Conference a few weeks ago was that in late December, we reached final agreement with the IRS on a new advanced pricing agreement or APA, related to the tax years 2011 through 2017. It was a great outcome, and the agreement is within the range of what we were hoping for. And as a result, we feel quite confident about our tax expense for the next number of years as it relates to the largest piece of our business. In addition, as you know, most of our product assets, including substantially all of our product assets acquired from PGP are owned and held in our Puerto Rican entity where we enjoy a 2% tax rate on specified income based on our agreement with the Puerto Rican taxing authorities.

In the past, we expressed our anticipated tax rate as a percentage of earnings before taxes and booked amortization or EBTA. Although there is no specific magic behind this calculation, we believe that this metric provides outside parties with a reasonably accurate means of estimating our total GAAP tax provision. We anticipate that the 2013 cash tax rate will be in the range of 11% to 12% of EBTA.

Based on the above components, our 2013 GAAP net income is expected to be in the range of $362 million to $387 million. To arrive at cash net income per share, we add back the after-tax impact to the booked amortization of intangible assets at an estimated 5% tax rate in 2013 and the after-tax impact of the amortization of write-off of deferred financing costs at an estimated tax rate of 8% in 2013. Cash net income for the full year 2013 is expected to be in the range of $805 million to $830 million. Using 251.5 million ordinary shares, the company expects cash net income per share to be in the range of $3.20 to $3.30 for the full year 2013.

Before we turn to Q&A, let me tick off certain material assumptions that are included within our 2013 guidance. 2013 financial guidance does not include the potential impact of 2013 activity under our renewed share redemption program that we announced in August 2012. It does, however, anticipate that we will continue to utilize a portion of our free cash to make additional optional prepayments of our term debt. For example, at the end of January, we made an optional prepayment of $150 million of our term debt. Such prepayments reduce our interest expense and increase our debt capacity, which expands our ability to fund future business development opportunities if and when they arise. Business development continues to be a high priority for us, and we believe that our access to debt capital to capitalize on attractive business opportunities is quite good.

We anticipate 2013 capital expenditures to be approximately $60 million, and based on current assumptions, that will be a reasonable assumption for 2014 and beyond. Our guidance does not contemplate generic competition against any of our key brands in 2013, and for the avoidance of doubt, that includes ASACOL 400, LOESTRIN 24 and ESTRACE CREAM.

Finally, I'll note that our guidance does not take into consideration the impact of any future acquisitions, new partnerships or licensing transactions, changes to our capital structure or existing business model or the potential settlement or other resolution of outstanding or future litigation. Again, for the detailed view of the company's 2013 financial guidance, please refer to the table that was included in the press release that we issued this morning.

And with that, Ally, we'll open up the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Shibani Malhotra of RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

I guess this is for Paul and Roger on DELZICOL. Can you talk about the exclusivity for the product and the patents that you expect and then also how you are positioning this versus ASACOL? And what in a worst-case scenario would be the impact if there was a generic for ASACOL in 2014 or end of '13, 2014?

Roger M. Boissonneault

I'll -- I guess, I got that one, Paul, but it's complicated. As far as exclusivity, it doesn't have any Waxman-Hatch exclusivity, so that handles that. As far as patents, there will be a patent list which is currently on the ASACOL 400 patent. And I think what we'll -- and I -- but we also have -- because we've changed the product form, that doesn't rule out adding any additional patents. That makes the product unique because it is a capsule versus a tablet. Positioning versus ASACOL is pretty easy. Actually, we stopped making any ASACOL 400, I believe in Weiterstadt in December, so it'll all be converted to DELZICOL beginning in March. We did this in concert with the FDA. The FDA did not want us to have 2 products in the marketplace because it would add to the confusion. The other thing is they supported a capsule because I think it makes it clear to the patient, so we're not -- they're not going to be confused between a tablet and a capsule. Although we'd like to remove it from the market, I think that just creates too much confusion. There is no safety issue. So we're going to have to go through a transition period where we're converting people to or patients to DELZICOL, with the ASACOL 400 still being around until we absolutely clean that out and it'll be clear. But I think you'll see a strong push in March to get everybody on DELZICOL, and that's what the FDA wants us to do. As far as the potential for a generic, I guess, in August, we truly believe that would be remote. It is a very difficult bar to get over. There's been several layers of guidance. And in our own interaction with SEDAR and we -- our interaction has been limited to SEDAR, we've seen it to be a difficult bar, but SEDAR has been very helpful in allowing us to get the improved dosage form into the marketplace.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Roger, can I just clarify why wouldn't you have 3-year exclusivity, given this is a new formulation?

Roger M. Boissonneault

You wouldn't get exclusivity, to me, if you can talk to the lawyers on formulations. Basically, you have the ability to patent. You have the ability to put a patent in the label, but you're not going to meet Waxman-Hatch because we didn't change the label as far as the -- we didn't go from 400, let's say, to 500, nor did we introduce a new indication into the label.

Operator

Our next question comes from Gary Nachman of Susquehanna Financial.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Roger, also on DELZICOL, how long do you think it'll take to make the switch over from ASACOL? What do you expect formulary coverage to look like? And will there be any barriers to switching, do you think?

Roger M. Boissonneault

Okay. Try to get this -- I don't -- as far as the time line there, Gary, those are all difficult to predict. I do think that it's going to go quite quickly because we have a pull-through strategy with the sales force to allow physicians to know that DELZICOL is indeed available. We have -- we're not introducing a lot of ACTONEL 400. We're going to control that inventory that goes into the trade part to the launch of DELZICOL, so we don't want to -- we want to minimize the potential for excess inventory. The pricing of DELZICOL will be on top of ASACOL 400 milligram, so we anticipate that we won't have any problem with formularies because we're not asking for any premium. Any other questions or I had it all?

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Well, yes. Well, just I guess, I mean, in the past, you've said switches like this might take 6 months or so. I mean, I'm assuming by the end of the year, you'd be pretty comfortable that you could switch the whole franchise over, without trying to hold you to an exact time.

Roger M. Boissonneault

Yes. I think, Gary, you got to think of it -- well, this one we're actually -- this has probably been one of our more aggressive switches. I think before, what we've had done is we've sort of -- we've let the switch occur at the pharmacy. I think we're going to be more proactive here and go directly to the physician. So we'll begin the process. We'll probably be accelerated. I generally say you need about 6 months to get perhaps 80% of the switch done, and then in some areas, it takes a longer period of time. It depends on how long we can dry up -- it takes to dry up the inventory. But we made a promise to the FDA that we'll try to be as efficient as possible and get the product switched over. So I -- generally saying, this might be a little bit more accelerated than the 6 months that we're previously used to, but I think it would be a remote possibility that you'd actually see a generic 400 in the marketplace in August.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

And then, Paul, just a couple for you. In your guidance, do you risk adjust at all for some leakage as a result of the switch to DELZICOL, maybe even to other brands? And then the SG&A guidance still seem a little high considering that the Sanofi co-promote goes down meaningfully, so what are you assuming in there that's offsetting that besides the legal fees that you said are going up?

Paul S. Herendeen

Yes, sorry, the first question for you was?

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Okay, so the first -- I know you're not assuming any generics for ASACOL, but do you risk adjust at all that as you do the switch, maybe there's some leakage that some of the product could go to other brands?

Paul S. Herendeen

Yes, thanks, Gary. I mean, as you know, we don't provide guidance on a product-by-product basis, and I think by definition our top-level range takes into consideration our assumptions about how the whole -- all of our products will play out, but certainly in a situation where we have ASACOL 400 and DELZICOL and ASACOL HD together, it certainly is taken into consideration in the development of our forecast and therefore, our guidance.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just on the SG&A guidance, it seemed a little high to me still because the Sanofi co-promote payments go down, so is there something else that's offsetting that besides the increase in legal fees?

Paul S. Herendeen

Yes, selling has some launch-related costs associated with it. Most of it is in the G&A piece that's kind of the part that's the hardest to predict, which is the aggregate legal expense. The SA piece is not down in the U.S. The decline is solely related to the o U.S. piece. The U.S. piece in 2012 was $175 million. It's $175 million again in 2013, so the delta is the 20% of the decline roughly of o U.S. sales. And then finally, not just within SG&A but also if you look at our R&D guidance it is also above what we would expect to see for the final, final in 2012 as well. So yes, there are some costs in here that may have -- I think you used the word surprised you -- where -- as you know, we run a very tight ship. We don't spend money if we don't have to, but we also have to be realistic about what things are going to cost us in '13 and that's what's incorporated into our SG&A expense guidance.

Operator

Our next question comes from Chris Schott of JPMorgan.

--

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Just to maybe switch gears a little bit here. The OC franchise, the 2 NDAs, are those approvals and launches reflected in the 2013 guidance? And maybe with that, can you also just give an update on the clearance of your warning letter? And the second question, business development, what is your willingness to use stock as part of a transaction if you were to look at a larger deal? Is that something you would ever consider doing? Or should we really just think of a -- if -- as you'll [indiscernible] BD [ph], it's more of a kind of debt finance than anything else?

Roger M. Boissonneault

Paul, you can do the stock around the -- as far as the new products, no, we don't consider that in guidance. We normally do guidance. We just don't -- when new products come in, then we would change our outlook. As far as the warning letter, I have nothing new to report on the warning letter. And Paul, stock?

Paul S. Herendeen

Yes, sure. I mean, I'll just follow on, on the warning letter just so everyone has the way to think about it. It's not like the FDA, I -- we expect the FDA to call some, say, "Okay, everything is good." We would expect to hear about that potentially in the context of some future approval of a product that would be manufactured in the Fajardo facility. Status from -- that we reported last time is we remain cautiously optimistic that we're in great shape there, and we'll just have to see how that plays out. Chris, with respect to the question about would you use stock, how many folks on the line -- probably everyone has heard me say never say never. We're certainly not in love with the way that the market values our company today and values our shares today, but if shares had to be a component of a transaction in order to conclude what we felt would be an extremely value-generative transaction for all shareholders, we would use it. I mean, I think we are probably pretty high on the list of folks who actively think about and manage our capital structure. All things equal, we love debt, but if it was absolutely necessary in order to conclude a good deal, we would not only consider it, I dare say we'd use it.

Operator

Our next question comes from Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank, Research Division

Yes, a couple of questions. First, can you come back to this issue of formulary coverage for your new product and help give us some confidence that where we are right now, how fast a process this is going to be? I remember we had a conversation about this a while back on ATELVIA, and so that didn't go as well as we had thought. So give us some confidence on that issue, please. Second of all, on R&D, obviously it's up, and we've seen you talk each year about wanting to spend more. Maybe you can give us a sense of what you're spending more. I know in the past, you've talked about this oral acne drug. Is that moving forward and pivotal studies are being planned in 2013, and maybe that's the reason you're spending more? And so maybe you could talk about that a little bit. And then the third question is can you just come back and talk about how do you think about the risk of any part of the oral contraceptive business having competition from a generic this year and how you think about that risk this year and into next year?

Roger M. Boissonneault

Okay, Marc, I think I can help you with that. You shouldn't think of formulary coverage in the context of ATELVIA. With ATELVIA, we also have ACTONEL in the marketplace. You've got to look at this as ASACOL 400 moving to DELZICOL. So anybody that was on ASACOL 400 milligram has to be switched to DELZICOL, and I think most of our managed care partners understand that. So the old products, I mean, this is -- we had to deal with ACTONEL remaining in the marketplace. ASACOL will not remain in the marketplace, so I don't -- it's not a fair comparison to make that compared [indiscernible]. ASACOL was really putting a new product on a formulary. You have to look at DELZICOL will replace ASACOL 400 milligram. As far as R&D spend, yes, we know. We'd like to spend more, and the tendency is -- and you're quite right that when you get into Phase III trials, it all depends on the timing. You asked specifically about the new tetracycline, and yes, that should be going into Phase III next year. We have completed Phase II. We'll probably share some of those results with the investor community in the future. But we plan to move into Phase III this year. As far as the risk of a competitive generic oral contraceptive in 2013, none have been approved but we remain confident with our strategies. We do have a couple of irons in the fire, and we have not included that in any forecast going forward.

Marc Goodman - UBS Investment Bank, Research Division

Just back on the R&D, so you mentioned the one product. So obviously there's an incremental spend there, but you're working on the erectile dysfunction drug. And I would assume that, that one's done and ready to file. Is that the case? And so the spending goes down there, so wouldn't one offset the other? So first answer that and then what...

Roger M. Boissonneault

Yes. But I mean -- I think you're trying -- we know what we're doing there is don't -- I mean, I wouldn't limit it to say that we completed the Phase III trial. Although we've completed Phase III, there's other trials that we have to do around the tox background for udenafil, and there's other things that we're thinking about that are not limited to erectile dysfunction.

Marc Goodman - UBS Investment Bank, Research Division

So in other words, in R&D, there's other products that are being put in, and that's why you're spending more money. You just don't want to disclose what they are?

Roger M. Boissonneault

Yes, well, and also what we're doing with the existing dose strategies around those products, and a lot of it, Marc, has to do with timing. And like you say, it's like when it hits Phase III, it tends to true up more dollars, and it's very difficult to predict. I think Paul was saying as we do have a very full portfolio with limitations of how much can we get done in any given year, and we want to make sure that we have -- we don't get people confused. We want to keep these guys focused. But we're willing to pay more. I mean, Paul is very supportive of R&D, and we have projects going on relating to all of our existing products, and we've taken on at least a couple of new chemical entities. So it's very busy, and we want to progress those as quickly as possible.

Operator

Our next question comes from David Risinger, Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

I had 2 questions. Roger, I think you had mentioned that there was no safety issue with ASACOL, so you couldn't pull it from the market. Could you just explain that a little bit more because I thought there was a safety issue given the different pregnancy category? And then second, how do you think or how are you expecting telling doctors that ASACOL no longer exists will impact ASACOL HD? Do you -- since the ASACOL HD brand will still be in the market, is there any risk to perception of ASACOL HD given the shutdown of ASACOL 400?

Roger M. Boissonneault

Okay. Thanks, David. I just want to be -- yes, it's a good point, and let's be clear. There is no safety issue associated with ASACOL 400 milligram. If there was a safety issue, we would certainly pull the product if we thought there was an imminent safety issue. But the FDA -- this is a longstanding issue with the FDA in the use of plasticizers and it not only relates to pharmaceuticals but across the category. And they've been trying to -- they would call this potential. It's not confirmed. But on, I guess, erring on the side of moving forward, they're trying to move these -- the dibutyl phthalate out of the marketplace. They've asked us to do this. We've complied with them. They said to us many times it's really up to you. We support the fact that you're going to switch the product, but there is indeed no safety risk associated to the general population. Our taking to -- I think one of the things you saw is a change in labeling as far as from a B to a C or a C to a B, and that relates to a very specific population. And indeed, I think that they're satisfied that we're moving in the right direction. I think the other issue, too, is we've been in constant contact with them with ASACOL HD. They've asked us for a plan, and there are no plans to remove HD from the marketplace as it does not -- it's not associated with a safety risk other than the fact that we're going through a period of time that eventually we'll probably take the dibutyl phthalate out of it. But it's not an imminent risk, and they're quite comfortable with our plans.

David Risinger - Morgan Stanley, Research Division

That's helpful. And then on the HD, how will that perception evolve or how will that marketing change as a result of shutting down the regular ASACOL?

Roger M. Boissonneault

I think you called it shutting, it's actually -- it's a segue. I think physicians will see DELZICOL has benefits associated with it, the capsule. I think the other factors that, in using a plasticizer in these coatings, we do a lot of special care in trying to handle the products. The capsule helps us in the handling of the product and avoiding microfractures in the coat. I think they'll see a benefit to that. They also see a benefit in the capsules are perhaps easier to swallow than tablets. And so I think that'll all go well. As far as the HD, it doesn't change our strategy in any way. We're all going to be moving forward with HD. The tablet burden, it's 800 milligrams, or I can't say it's 800 milligrams. Let's say it's more than 600 -- than the 400 milligrams in ASACOL, the 400 milligram. It's been adapted. There's a lot of -- and I don't think there's going to be any change in our promotion of the product other than the fact that now you have -- the 400 will be removed from the marketplace, and DELZICOL will take the place of the 400, and we'll continue with the promotion of the HD product.

Operator

Our next question comes from Randall Stanicky of Canaccord Genuity.

Randall Stanicky - Canaccord Genuity, Research Division

Just a couple of questions. As you -- Paul, just to follow up on the oral contraceptives, as you think about the 2 products in the pipeline, are you still confident that you can maintain for the foreseeable future a 10% market share on the brand side? And then secondly, as you think about new product additions to the portfolio, whether they come out of the pipeline or obviously some from somewhere else, is your preference -- do you have a strong preference for growers or higher IRR opportunities? And then finally, can you remind us what your comfort level from a leverage perspective is?

Paul S. Herendeen

Yes, sure. I'll take each of those. First and the easiest one is to start with the hormonal contraceptives. Can we maintain a share greater than 10%? I would sure think so. I think and now I have for years now characterized the hormonal contraception space as being one of the platforms of our company. We're very good at both the development, the design, gaining approval for and launching and commercializing oral contraceptives. We have a couple, as we noted in our prepared remarks earlier, that are sitting with the FDA. We would expect to be a player in this space for the foreseeable future. And I would say 10% market share, that was our sort of aspirational goal 7, 8 years ago. I certainly think we can do better than that. I think history would show you in a very similar sort of market that other competitors have been able to gain much more share than 10%. So I don't think we've reached the top of what we can do in oral contraceptives or hormonal contraceptives generally. So as I said in my opening remarks, we see this as an opportunity for growth not just in '13 but '14 and beyond, and that is fueled by continued innovation. Second question was kind of an interesting one. What's your preference between growers and solid IRR. I think I spoke yesterday to an investor who asked me that exact question, said, "Well, would you do a deal that was a really attractive deal but would be a drag on earnings?" I mean, my public market hat says, gee, I've done that game. I've seen how that game is played. People are so blinded by ACTONEL and what the impact of ACTONEL is on our top line and the drag on the bottom line that it just masks all of the good things that we're doing within our core business. So I have to say my preference -- and I don't think this'll surprise anybody -- would certainly be to acquire things that I would view as growers. Importantly, that's growers that we think that through our in-house ability to continue to develop and improve those products could be growers for extended periods of time. Now just like I said earlier when the question was would we use stock, that said, if someone would like to sell us an asset that's worth $2 billion for $1 billion, I think we would probably do that and take the pain of having to call it out and call people's attention to the fact that it's going to collar our overall earnings. With respect to your final question on leverage, we are a company that has utilized debt in many different ways throughout our history, even going way back to our first incarnation when we borrowed a couple of hundred million dollars when we had -- pro forma that gave us -- the deal gave us solid EBITDA. But gee, we were losing. We had $60 million of revenue and probably losing $18 million at the operating line and borrowed $200 million to do an acquisition, which worked out fabulously for us. We like debt. We go way out of our way to maintain access to debt capital because it would certainly be the highest -- or excuse me, would be the best way to continue to deliver value to our equity holders. In an environment like today, we could probably lever ourselves up to 4.5 or even more times TTM EBITDA. Remember, not all EBITDA is created equal. We're a company that does continue to enjoy an attractive overall corporate cash tax rate, and the result of that is we do throw off lots of cash, and that allows us to delever pretty quickly. So I think not just us, but I think the market at large has a degree of comfort in providing us with debt capital because we have shown that we're pretty good stewards of cash over time. So I didn't really answer specifically, but I think that 4.5x for the right deal, we'd push it.

Randall Stanicky - Canaccord Genuity, Research Division

Well -- and let me ask a follow-up, looking back at the PGP deal, obviously, you went into some new therapeutic areas. There were some, I would call it, growing pains or learning experiences that went along with that. As you look to add products or potentially companies to the current portfolio, is there a preference to add to current therapeutic areas of focus, i.e., GI, OCs, et cetera? Or would you still look to expand into new areas? And if you want to comment on your interest in the pain area, I'm more than happy to listen.

Paul S. Herendeen

Yes, I'm probably not going to comment on our willingness to go into the pain area, but -- I'm sorry, help me frame the first question again, Randall.

Randall Stanicky - Canaccord Genuity, Research Division

Just looking back at PGP, you brought in GI...

Paul S. Herendeen

Okay, I got it. Yes, thank you. Sorry. I think when people look back and say, gee, there were growing pains and you stumbled and whatever, what have we learned through PGP? Well, what we learned is we got a great deal. We paid around $3 billion for something that was worth more. We got a great franchise in ASACOL, which is now we're morphing into a mesalamine delayed-release portfolio, and we got that add tail business, which is continuing to cloud our results. The only thing that I when I look back and think about the PGP deal that would give me concern was we felt that we could do a better job with the line extension to ACTONEL, which is ATELVIA, our line extension, the improved version of ACTONEL, which is ATELVIA. That's the only thing that I would change. It wasn't that we, as a company, were not able to execute against that. It's that our belief was that we could do a better job against that. What have we learned? What we learned is that we are much more focused when we think about the overall dynamics of a market and how we value assets that we go ahead and acquire. Therapeutic categories or areas, we'd look at almost anything if we felt like that asset was a good asset that we would have the ability to drive commercially to grow from a profitability and revenue standpoint and importantly, the ability to work on and improve and extend. Those are the things that we think about. I mean, we're not limiting ourselves. We didn't -- we don't feel or I don't feel that the P&G transaction was one where we did something where we said, "Gee, why, I wish we hadn't done that." We'd do that deal 100 times out of 100. It was a great deal.

Operator

Our next question comes from Greg Gilbert of Bank of America Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

First, for Paul, did you say that you had launch costs in the guidance for this year? And if so, do those go beyond DELZICOL launch costs, i.e., products that you're spending for in your guidance, for which you don't have revenues in your guidance?

Paul S. Herendeen

Yes. They're solely related to what we know, which is that we are in the process of launching DELZICOL into that mesalamine space. And I don't want to give you the idea that this is tens of millions of dollars, but it's certainly, when people are focused in saying, "Gee, your SG&A is $25 million more than I thought it was." That's part of it. And the bigger part of it is legal expense.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Okay. Shifting over to Roger on DELZICOL, I'm not quite sure why people care so much about 3 years of Hatch-Waxman given the time it takes for a new generic to get through, but I am curious what studies you did do to get your product approved and what dialogue with the FDA you had that makes you confident that the bar is still high for the 400-milligram tablets.

Roger M. Boissonneault

That's a good question, and I agree with you, Greg. I think we've got to clarify that we weren't -- we're not -- we weren't pursuing a generic ASACOL 400 milligram or were we trying to comply with OGD's guidance. We were dealing with the SEDAR division. And our -- it's almost considered what do we have to do consistent with SUPAC to change the dosage form? As you're aware, SEDAR asked us if we could exchange the plasticizer, and we went back to SEDAR and said, "Basically what do you need us to do to make this exchange?" And what we did was solely the relationship between us and SEDAR, and there's other things that we're doing in concert with SEDAR that we haven't made public. Although, I think OGD is aware of what we were doing, but they weren't active participants in it. So whatever we did with SEDAR and all we've said is we filed the products as an equivalent product, but there wasn't any attempt to, I should say, to do this in concert with that because we're not building a generic product. We are actually supporting an NDA, and we got -- as a result we got an NDA. And I don't know how that would affect guidance for a generic product because we are the innovator. We had the basis of the efficacy studies, and we also had our own dissolution profile that -- which we knew was correct. And so we are -- and they gave us accelerated review with this within 6 months. So I think you really can't make an inference that what we achieved, if a generic company did what we did that they would ever get approved either.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Right. So you feel similarly confident that the bar is high for the generics. It's not like that confidence has changed based on what you went through to get DELZICOL approved. Is that fair?

Roger M. Boissonneault

Yes. It's fair to characterize because we've seen a couple of layers of preliminary guidance, and this is -- and I think you're -- I think people tend to focus on bioequivalence, but I think the dissolution profile [indiscernible] tried to achieve here is equally as difficult. But I don't want to lead anyone because this product got approved that, in fact, this is what guidance is going to look like. That wasn't the drill.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Right, right. We'll see if OGD cares about the confusion in the marketplace if there are generic tablets and branded capsules with the same strength, but that's, I guess, for them to figure out. Why not do an 800 capsule?

Roger M. Boissonneault

It's a possibility. But again, I don't want to say FDA's relaxed, but we are -- we have been in discussions about them, and it's really not an 800 milligram, Greg, because 2 400s don't equal an 800. It's really HD. We are in discussions with them. I think they have a confidence with us, and I think it's more of a longer-term project than an immediate project. But again, I don't want to disclose too much around that because it's got nothing to do with the generic. It's got more to do with us complying with FDA and the SEDAR division.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

All right. And then last, can you just talk about the Board of Directors' strategy as members leave the board? Any remarks you can make about goals for this year and what you're trying to achieve in terms of the size and makeup of the board?

Roger M. Boissonneault

Well, I think you're seeing now the beginning of -- with Todd leaving and certainly Steve moving along that -- and I think this has long been anticipated that there's the beginning of their membership on the board and there would be an orderly leaving of the board, I should say, or conversion. And yes, we're looking at it, and we certainly appreciate all the work that Todd and certainly Steve most recently. They've contributed significant amount to the company. I think that it's going to be orderly. I think everyone will be pleased in the configuration -- the reconfiguration of the board. But we just want to make sure that it wasn't all at once and people would be concerned. But I think people have been anticipating this, and I think over 2013 and perhaps into 2014, it'll be completed.

Operator

Our next question comes from Douglas Tsao of Barclays Capital.

Douglas D. Tsao - Barclays Capital, Research Division

Perhaps a sort of philosophical question in terms of the dermatology business and business development. Have you ever considered pursuing non-Rx products or assets that could sort of utilize that franchise on a sort of more sustained -- sort of not worry about some of the sort of IP issues that you face obviously with branded pharmaceuticals?

Roger M. Boissonneault

Doug, I'll give you my spin on it and I'll -- then Paul can speak about it. We actually do have an OTC product in dermatology called Moisturel, which we picked up from Bristol-Myers. Well, I think we look at it in a passive way. We really consider ourselves what we would call an Rx or an ethical pharmaceutical company. And moving into OTC certainly is -- would be a different marketplace. But now there could be -- I mean, there's perceived that if we're calling on a physician that we -- Warner-Lambert, we have LUBRIDERM and other products that were used by the dermatologists, but we're not actively moving in that direction. And I'll let Paul opine upon that.

Paul S. Herendeen

Yes, Doug, I think where you're going with that is, are you looking at things that might have longer duration revenue streams attached to them? We've been pretty vocal, I'd say, over the last maybe 24 months or 8 quarters or so. Back in the day, we used to say now we're strictly U.S. or mainly U.S.-centric branded specialty-type products. Over time, we've expanded the range of business development opportunities that we would look at to include either specific assets or companies that had specific assets that had longer-term revenue streams attached to them, things like devices or generics business or aesthetics business or over-the-counter and all of those things because we've seen in the marketplace the benefits of adding revenue streams that the market doesn't worry about, that have longer -- whether they're perceived longer durations or actual longer durations. The thing that's always interesting to us is those revenue streams tend to be not nearly as profitable as the prescription, branded-prescription pharma assets that we covet, but we look at them. And I dare say, over the last couple of years, we've looked at a lot of them. And it's part of what we think about, and it's -- again, it's more strategic on the business development side of being willing to entertain all forms of acquisitions that could add value to our stakeholders, mainly to our shareholders. So we think about it. We just haven't pulled the trigger on one here in the last couple of years.

Douglas D. Tsao - Barclays Capital, Research Division

Okay, great. And then just, Roger, in terms of the OC market, it certainly seems your portfolio, in particular with the Lo Loestrin franchise, you have a great 1-2 punch, I'm just curious where you see the greatest potential therapeutic need or what you've -- where you could sort of add some additional value to grow your franchise beyond where it is today?

Roger M. Boissonneault

Yes, it's a good question. And as we look forward here, what are we satisfied with? We've brought the estrogen component down. We've actually cut it in half to 10 micrograms and demonstrated that we've held an efficacious product. And we've gone what, I would call, student body right or firmly behind the 10-microgram product as we move into 2013. But that notwithstanding, we see other opportunities, and I think you've got to really focus on -- at the end of the day, you can have the safest pill in the world, but you've got to focus on compliance. And I think the compliance issue is the biggest risk of pregnancy still in this category is if you don't take the pill; and can we have a more compliant pill and still utilizing low doses of estrogen. So I wouldn't rule that avenue out, and I think there's plenty -- in answer to your question, there's plenty of area in this particular marketplace to improve the dosage form and compliance with patients.

Douglas D. Tsao - Barclays Capital, Research Division

And in particular, just in terms of -- perhaps expand a little bit in terms of opportunities for improving compliance.

Roger M. Boissonneault

Well, I think it's all about -- we've talked about different things that we've done to make the -- anywhere from packaging, and I think in FEMCON, we made the product chewable so that the patient didn't have to -- they could take it anywhere because it's an interesting product because they carry it on themselves and to remove any barriers to the patient taking the product. But I don't want to go any further than that because I don't want to give anything away either.

Operator

Our next question comes from Irina Rivkind of Cantor Fitzgerald.

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

Wanted to go back to the Fajardo, Puerto Rico issue and the plant. You said that you wouldn't really hear from the FDA unless there was a problem with the new NDAs, and I was just wondering if you have a backup facility that can assure that there's OC launches in 2013 or '14 that are timely, if there is a problem with the Fajardo plant. That's question one. And then the second question is with regard to DELZICOL and the switch-out with ASACOL, do you expect any inventory work-down in the first quarter? Any sort of disruption that we should be aware of as we model the product into the coming year?

Roger M. Boissonneault

Good -- as far as Fajardo, yes, we do have a backup so -- but we don't expect -- I don't want you to take this the way that we have -- we believe there's any issues with Fajardo. We've had pre-approval inspections at Fajardo because -- and even though we've got a warning letter. So we've been working with the compliance group. We believe we have a good relationship with them, and they want -- we all want to get this thing to the finish line, which we will. But I don't think Fajardo is an issue, but if we did, the answer is yes, we do have -- we have backup where we can make products at different facilities outside of Fajardo and also package them outside of Fajardo. As far as the ASACOL and the DELZICOL, I reassure you that we will have plenty of DELZICOL and what our assumption is that we could replace -- put everybody on DELZICOL as soon as we start launching that product in mid-March. We anticipated the work-down of inventory with ASACOL, but we -- I'm positive that we won't have any outages. We actually manufactured enough 400 milligram to take us through this time period. And we're not afraid that if we have to have returns, we will have returns on ASACOL 400 milligrams. We just want to make sure that there's adequate inventory out there, but we will indeed work it down in the trade in preparation for the March launch.

Operator

[Operator Instructions] Our next question comes from Michael Tong of Wells Fargo Securities.

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Roger and Paul, maybe just a philosophical question. With stock trading where it is now in terms of multiple, what's your appetite in trying to engineer multiple expansion by acquiring assets that are R&D driven to set you guys up for 2015 and beyond instead of an immediate accretion?

Roger M. Boissonneault

I think Paul is more of a philosopher in this area, so Paul?

Paul S. Herendeen

Yes, sure. Yes, I am the philosopher in this area. I think our appetite is we -- if you look at the evolution of our R&D spending and the types of things that we have in our R&D pipeline, I think, people continue to believe or think about us as a company that's solely working on improvements to our existing product franchises when over the last several years, we've evolved to the point where we have, as came up earlier on the call, PDE5 for erectile dysfunction, a topical for erectile dysfunction, an NCE for acne and a number of other interesting projects, which we don't necessarily disclose, in addition to all of those other sorts of projects that you expect us to undertake to protect our franchises. What's our appetite to -- I don't want to call it engineer. We would be interested in making an acquisition of a company that's solely had product rights or products that were at some later stage of development that look like they had excellent commercial potential. I've said in a number of public settings, I would hope that in 2013 we come across a transaction where we can go license rights to a product, pay $100 million, which will flow through R&D and cost us $0.40 to our expected CNI, and I think the market would like that. I would like that. I think all of us would like that. The issue is we continue to be very disciplined with respect to what we're willing to pay in order to acquire rights, in order to acquire companies, in order to acquire products. So we need to get to where the opportunity intersects with our view of value. And if we see that, whether it's an R&D situation or whether it's a product asset, we will transact. I hope that answers that, Michael.

Operator

And our final question comes from Shibani Malhotra of RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Question for Paul, and sorry if it's a long one, but it's your favorite topic. There's been a lot of questions around tax synergies for Warner Chilcott, and one of the things you were able to do with P&G is kind of gain some tax synergies. Can you just remind us how these synergies work, like what we should be looking for? And how, I guess, Warner Chilcott's structure compares to maybe Valeant's who is a company that's very good at getting tax synergies as well from acquisitions?

Paul S. Herendeen

Yes, thanks, Shibani. That's cool, too, that you're able to circle back and get the last question and the first, well played, well played. With respect to the tax, I mean, our tax structure has a lot of similarities or has similarities to Valeant. I mean both of us would have a distinct preference for acquiring products versus acquiring a U.S. of A. company. The efficiency of dropping a product acquisition, a pure asset purchase into our tax structure, that's what you saw in the Procter & Gamble situation. Even though we acquired the stock, they went through a -- I'm going to get that section wrong -- a 338(h)(10) election where it was a stock sale where they set up the basis for us. They paid the tax. We dropped those assets into our Fajardo operation, and those assets enjoy -- you could look at it as our marginal tax rate, which is a cash tax rate, in that case, call it, roughly 10%. We'd love to do that all day long, and that would be our preference. Now with respect to companies, it's a little more complicated. I mean, every deal is different. When you acquire a company, for example, that has NOLs and you can use those NOLs to offset the step-up of an asset, that works. But I mean, that works only if they have the NOLs. If you acquire a company that is profitable with no NOLs that has assets, the economics of transferring assets into an attractive tax structure like ours or anybody else's, it's difficult because you're going to end up paying a big tax to move the asset, and it does not often make sense from an economic perspective. One of the things that I think I've learned is sometimes the market turns a blind eye to the onetime tax payment in exchange for lower tax payments as you go forward, is rewarded by a multiple on that. No, it's not a factoid lost on me, but I'm also -- continue to be a fundamentally, economically driven animal looking to structure things in a way that makes economic sense not necessarily to solely appeal to the way the market will perceive it as you go forward. I don't know if that answers it, Shibani.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Yes, it does, it does.

Operator

I'd now like to turn the conference back over to Mr. Paul Herendeen for any closing remarks.

Paul S. Herendeen

Yes, great. Thank you, Ally. Thanks, everybody, for taking time out this morning. We hope we've been able to provide you with some ways to think about our 2013 and frankly, to think about '13 and beyond with respect to our more important franchises. We'll look forward to reporting to you our Q4 and 2012 results here in several weeks' time. Thanks very much.

Operator

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.

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