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Executives

Paul Herendeen – EVP and CFO

Roger Boissonneault – President and CEO

Analysts

David Buck – Buckingham Research

Gary Nachman – Leerink Swann

Ken Trbovich – RBC Capital Markets

Marc Goodman – UBS

Chris Scott – JPMorgan

Shivani Malhotra – Goldman Sachs

Scott Hirsch – Credit Suisse

Dave Windley – Jefferies & Company

Warner Chilcott Limited (WCRX) 2009 Financial Guidance Call Transcript January 27, 2009 4:30 PM ET

Operator

Good afternoon. My name is Kevin and I will be your conference operator today. At this time I would like to welcome everyone to Warner Chilcott's 2009 Guidance 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 to turn the call over to Mr. Paul Herendeen, Executive Vice President and Chief Financial Officer of Warner Chilcott. Please go ahead, sir.

Paul Herendeen

Thank you, Kevin. And good afternoon everyone and thank you for joining the call. At the market close today, we issued a press release that outlines our financial guidance for the full year 2009, which I hope you got a chance to review. Copies of that press release are available on our Web site under the Investor Relations tab.

I’d like to take a few moments to provide some additional comments with regards to our guidance, followed by a brief Q&A period. Please note that in the Q&A, Roger and I will only address questions regarding our guidance for 2009 and cannot and will not provide any details with respect to our fourth quarter and full year 2008 results.

We expect to report our Q4 and the full year 2008 results in late February. 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 discussed in this mornings press release in our 2007 Annual Report on Form 10-K and subsequent filings with the SEC, all of which are available on the SEC's Web site.

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'll make certain references during this call to certain non-GAAP financial measures that’s defined by SEC Regulations. In accordance with these regulations, we have provided reconciliations of these measures in our press release issued, to what we believe are the most directly comparable GAAP measures.

With that, let me get started by reviewing our revenue expectations for 2009. We expect total 2009 revenues to be in the range of $1.015 to $1.025 billion with our growth versus 2008 primarily being driven by increased sales of Loestrin 24, DORYX and Taclonex. This represents an increase of approximately of 8.5% to 9.5%, when compared with the bottom end of our revenue guidance for the full year 2008.

Let me talk in more detail about the revenue drivers for 2009. Our recent settlements of the patent challenges for both Loestrin 24 and FEMCON provide us with greater comfort around our activities in the hormonal contraception field. The combination of our existing portfolio of proprietary brands and our ongoing product development activities should enable us to continue to be a major player in this large and attractive market segment.

With greater clarity around the proposition of our OC portfolio, our focus and yours too, should center on our sales and marketing execution. In the near-term our top priority is Loestrin 24 brand. We have noted in the past, the market share gains in Loestrin 24 have come at a slower pace than we think is possible.

But we did drive the growth of Loestrin 24 throughout 2008. New prescriptions for Loestrin 24 grew approximately 21%, for the full year 2008 as compared to 2007 and total prescriptions grew nearly 29%. The brand finished 2008 with approximately 5% market share of new prescriptions in the hormonal contraception market.

Let me now turn to our dermatology franchise and our expectations for DORYX, Taclonex and Dovonex in 2009. We've been extremely pleased with the growth trajectory of DORYX during 2008. Our renewed promotional focus on the product, as well as the launch of the 150 milligram strength, resulted in total prescriptions for the product increasing almost 11% in 2008 compared to 2007. In the fourth quarter of 2008, new prescriptions for DORYX increased nearly 24%, compared to Q4, '07 with DORYX 150 accounting for over 37% of new prescriptions as of the end of 2008.

Due to other higher economic value of 150 milligrams scripts relative to 100 milligram strength, we believe that the 150 milligram product now accounts for an even higher percentage of revenues of DORYX than the 37% of total prescriptions.

We expect DORYX will continue to grow led by continued success with DORYX 150. As most of you are aware as result of legislation enacted in the fourth quarter of 2008, we listed the patent related to DORYX in the orange book. This resulted in the recede of several paragraph for filing against the patent for the 75 and 100 milligram strengths of DORYX.

We intend to vigorously defend the DORYX patent and have filed 4 infringement lawsuits to date. There was a lack of clarity regarding the impact of the new legislation. Our guidance for 2009, assumes no generic competition for any of the strengths within the DORYX franchise.

We expect Taclonex including the Taclonex Scalp product, to deliver revenue growth in 2009 versus 2008. As we stated during our past earnings calls, we expect the growth of Taclonex will come more from the GP/FP community than from dermatologist as we have already done a very good job in achieving a high penetration rate for the Taclonex products amongst dermatologists.

We intend to continue the sample Dovonex Cream. However we continue to see softness in Dovonex which decreased approximately 23% during 2008 as compared to 2007. We anticipate a similar percentage decrease during 2009, just due to continued declines in demand. However we expect a part of the decline to be offset by price increases.

The expected decline in Dovonex revenues will be one of the primary offsets to our revenue growth during 2009 as compared to 2008. Within our hormone therapy or HT portfolio, we expect that increased sampling of ESTRACE Cream should have a positive impact on that products prescriptions and revenues in 2009.

Last on the revenue front, I'd like to remind you that sales of ESTROSTEP and OVCON 35 are expected to decline as they predictably continue to loose share to the available generic versions.

Turning to cost of sales and our expected gross profit margin, we anticipate our gross profit margin in 2009, will approximate our 2008 guidance based on our forecasted product mix. Our 2009 gross profit margin on total revenue is expected to be in the range of 79% to 80%.

Let me now spend a minute on 2009 expected SG&A expenses. Total SG&A expenses are anticipated to be in the range of $199 million to $208 million which represents a slight increase compared with our guidance in 2008. Our SG&A expenses are made up of three components: selling and distribution, advertising and promotion and general and administrative expenses. Let me discuss each of these individually.

Selling and distribution expenses which are comprised mainly of cost of our field sales forces are guesstimated to be in the range of 91 million to 94 million in 2009, a slight increase as compared to our 2008 guidance. This estimate takes into account the anticipated field sales force size and configuration required to enable us to deliver revenue growth for our key brands in 2009, as well as the cost associated with the co-promotion agreement of Femring under an agreement with Watson.

The next component of SG&A that I want to cover is advertising and promotion or A&P. For A&P we are guiding in the range of $44 million to $47 million in 2009, just slightly less than the guidance range for 2008. You want to know we do not anticipate any meaningful spending on DTC during the course of 2009.

We expect 2009 general and administrative expenses to be in the range of $64 million to $67 million. The increase in our year-over-year guidance for G&A expense primary leads to normal inflationary increases, such as increases in salary and stock compensation expense and our current estimates for legal expenses for the year. I'll remind you that a large component of our G&A spend relates to legal expenses which can be difficult to forecast both adds to the timing and amount.

We anticipate R&D spending to be in the range of $77 million to $80 million which represents an increase of approximately $27 million to $30 million from the low end of our R&D guidance for 2008. We believe that the investments that we are looking to make in R&D are sound; they will benefit us over the long-term.

We have said in the past, we do not have a specific level of investment in R&D that we try to meet each year. Instead we focus on project that we believe represent good investments with appropriate levels of risk and reward.

The expected increase in R&D in 2009 is driven by both internal R&D spending and anticipated milestone costs associated with our various product license agreements. Internal R&D is expected to be in the range of $61.5 to $64.5 million. Anticipated potential milestone payments to third parties are expected to total $15.5 million in 2009, more than half of which relate to our recently signed agreement with Dong-A's for the udenafil ED product.

The total 2009 R&D costs are fairly equally weighted between projects focused on women's healthcare, dermatology and urology products. I want to provide you with the current estimate the amount of amortization of intangible assets for 2009, 2010 and 2011.

Please recall that we are in LBO back in January 2005, a result of accounting for that private transaction. We recorded roughly 1.7 billion of finite locked intangible assets. Each quarter we perform review of the remaining carrying values of these intangible assets to determine if there is an impairment of any of the specific assets as of the period end an to evaluate the pace at which the assets are being amortized.

Based on our most recent review of our portfolio of intangible assets, we've updated our forecast for amortization, expense for the next several years. Our updated forecast for amortization expense for 2009 is 228 million reducing to 161 million in 2010 and 131 million in 2011. Please not that these changes to our expected amortization from prior estimates do not impact our expectations for cash and income per share as we add back the after tax impact of amortization of intangible assets to arrive at cash net income per share.

The marginal tax rate associated with the amortization of intangibles is estimated to be 8.4% for 2009. Let me spend a minute on de-leveraging. And as we said in the past in the absence of some other compelling call on our cash, we expect to continue to use our free cash flow to reduce debt in 2009. At the end of the third quarter of 2008, our net debt was approximately 1 billion and our net debt to trailing 12 months adjusted EBITDA was 2.0 times.

Note that our interest expense includes the amortization of deferred financing fees, related to the debt used to complete the LBO with the company in January 2005. As this is a non-cash artifact to the LBO we add back the after-tax impact of the deferred financing fees to arrive at a cash net income. And the absence of optional prepayments of debt this amortization would be anticipated to be roughly $5 million in 2009.

We expect to use available excess cash flow to prepay debt in 2009 thereby triggering the write-off of an additional $3 million of deferred financing cost to interest expense in 2009. We anticipate that the marginal tax rate associated with deferred financing cost will be approximately 17.4% for 2009.

Turning to taxes, in the past we've expressed our anticipated tax rate as a percentage of earnings before taxes and book amortization of intangibles or EBITDA. It provided outside poise with a reasonable accurate means of estimating our total tax provision. Going forward we believe that we are now able to express our full year tax provision, by guiding on what we expect the estimated effective gap tax rate will be. And we believe that will be in the mid to high teens for 2009. We continue to enjoy an attractive effective tax rate and have confidence around the sustainability of our tax rate.

Based on the above guidance, our 2009 GAAP net income is expected to be in the range of $174 to $186 million. Cash net income, which adds back the after-tax impact of book amortization or intangibles, and the amortization and write-off of deferred financing cost, is expected to be in the range of $390 million to $402 million. Using $251.4 million Class A common shares, the Company expects cash net income per share to be in the range of $1.55 to $1.60 for the full year 2009.

Just to be clear let me tick of certain assumptions that are included in our 2009 guidance. We expect our products OVCON 35, ESTROSTEP and Sarafem to continue to be impacted by generic competition in 2009. Our guidance does not take into consideration the impact to reported earnings of new licensing agreements with third parties, which could be included in our reported R&D expense. Only estimated milestones under our existing agreements are included in our guidance at this time.

Finally, note that our guidance does not include the impact of any non-recurring items such as amounts that may be comparable in connection with potential settlements of outstanding legal actions. Again, for a detailed view of the Company's 2009 financial guidance, please refer to the table that was included in the press release that we just issued.

With that Roger and I will take your questions. Kevin.

Question-and-Answer Session

Operator

(Operator instructions) We'll go first to David Buck with Buckingham Research.

David Buck – Buckingham Research

Hi, guys. Thanks. First question is on the revenue projections and the expectation for Taclonex. Paul, you mentioned that you expect most of the growth to come from the GP and FP community. Can you talk about whether you had initiatives in terms of a co-promote and primary care or how do you expect to continue to grow that line item after the Scalp indication. Can you talk a little bit about how the R&D for the erectile dysfunction product is going to be handled? Is it mainly a milestone you're going to be paying or are you carrying on with the internal costs yourself? Thanks.

Roger Boissonneault

David, it's Roger. Let me just work that backwards. We haven’t disclosed the terms of the development agreement on udenafil. We have disclosed that it’s probably the clinical development probably will go over 30 months period and probably in an investment of $30 million to $40 million which will occur over that time period, which is baked into the '09 number which will be the initiation of those clinicals. Now your question was it around Taclonex or Dovonex?

David Buck – Buckingham Research

Taclonex.

Paul Herendeen

The Taclonex, so we're talking about how the scripts find their way into the GP/FP offices. Just kind of the we’ll call the same story we've been telling for quite sometime is there is a great pickup both Taclonex utilization within the dermatologist office. As patients then go to their GP and FP and they need to have their Taclonex quickly filled, they're carrying that meshes to the GPs and the FPs and what we see when we look at our data that when we look at prescribing by specialties as we see continued growth of our access for Taclonex in the GP/FP community. We've been asked many, many times say will allow there some initiatives that you could go forward with that could make that go any faster. And the answer is you are looking at a large, large numbers of docs that we cannot get at efficiently and so that the growth in that segment is something that sort of occurs naturally and at a relatively modest space, but it's certainly not immaterial. Does that answer your question, David?

David Buck – Buckingham Research

I think so. There is really no sales force expansion of co-promotion plant.

Paul Herendeen

Not for Taclonex.

David Buck – Buckingham Research

Okay. Thank you.

Operator

We'll go next to Gary Nachman with Leerink Swann

Gary Nachman – Leerink Swann

Hi, good afternoon. First just a follow up on that last question. So in SG&A are you assuming any type of sales force expansion maybe with some of the other products?

Paul Herendeen

No, within the selling line while we've provided for in our guidance is that we expect the sales force to be – it's configured the way it's configured and that we've also added in the cost associated with the Watson Co-Promotion Agreement with respect to Femring.

Gary Nachman – Leerink Swann

Alright. And on the revenue guidance are you factoring in any new products like the new OC or new form of Doryx. How much price increases are you assuming for the inline product if you could give us bit of a range there?

Paul Herendeen

Yes. Well first let me cover the OC, no, we've not included revenues for our new OC I think for any new products. What we've at this stage we have focused on the new OC what we said is we are anticipating filing an NDA for the low dose product in the first half of this year. So when that gets approved or is it that gets approved that'll be when that starts to appear within our guidance. And the second question was what?

Gary Nachman – Leerink Swann

Price increases, that’s what the range there?

Paul Herendeen

It's 4% to 5%. I mean and again in those particular products where we have an opportunity to take greater price increases, we have in the past and you should expect us to do that in the future again.

Roger Boissonneault

But generally it's all of the market.

Paul Herendeen

Yes, specially for the hormone therapy products.

Gary Nachman – Leerink Swann

Okay. And then just on those new OCs you reiterated the timeline for the first one, the second one now that Watson has picked that up, could you just explain how the cost works before approval, are you booking those or does Watson pick that up, I guess going forward?

Roger Boissonneault

No we book those cost.

Paul Herendeen

Gary, it's our responsibility to bring that product through the clinical trials and then through the FDA.

Roger Boissonneault

But a lot of that heavy lifting is over with because most of those clinicals have been completed. In fact the last patient is out.

Gary Nachman – Leerink Swann

Okay. Great. And then just lastly on the gross margin, as Loestrin 24 and DORYX 150 grow, should those impact gross margin favorably, I guess I am just trying to gauge why your gross margin couldn’t be higher in 2009 versus 2008. Thanks.

Paul Herendeen

Yes in the gross profit margin there is a lot of plusses and minuses within there but you hit on a couple of interesting points. Our OC portfolio enjoys a very high gross profit margin, the high 90's and certain of our other products enjoy that very high gross profit margin as well. DORYX is not as good and at the low end of the talent pool are Taclonex and Dovonex products and they are based on the mix, it just looks like it'll be a similar range of 79% to 80% gross profit margin as a percentage of total revenues in 2009.

Gary Nachman – Leerink Swann

Okay, thanks guys.

Paul Herendeen

If we could get it higher, we would.

Operator

We'll go next to Ken Trbovich with RBC Capital Markets.

Ken Trbovich – RBC Capital Markets

Thanks for taking the question. I guess Paul I would ask you if you wouldn’t mind going back on the amortization of the intangibles.

Paul Herendeen

Yes. What to just restate –

Ken Trbovich – RBC Capital Markets

Yes. If you could restate it. I wrote them down, but I'm not certain I wrote them down correctly.

Paul Herendeen

Okay. Hold on. Let me get you the specific numbers. It’s 228 for 2009, 161 for 2010 and 131 in 2011.

Ken Trbovich – RBC Capital Markets

Okay. And that 228, I'm just trying to reconcile this to the press release, the note on five that’s 209?

Paul Herendeen

That’s net of tax.

Ken Trbovich – RBC Capital Markets

That’s net of tax. Okay. Thank you.

Paul Herendeen

And again, we make our best calculation of what we think the marginal tax rate is associated with that amortization and tell you what it is and then we use that to arrive at adjusted cash net income.

Ken Trbovich – RBC Capital Markets

Okay. And you mentioned sort of the additional after-tax impacts of additional de-leveraging. Can you give us a sense as to what that’s going to correlate to in terms of your expectation of debt pay down during the year?

Paul Herendeen

No, I think if you are going back and using the old EBTA method that we provided, that we've used up till now to guide people as to what our total tax provision would be, it's not changing a whole lot, it's just that we have not got into the stage where we're forecasting it 2009, we're going to have a pre-tax book profit of some size and it starts to be easier I think for at least it seems like it is easier for some of the sell side folks to simply look at what is your GAAP corporate effective tax rate and if I said it was in the mid to high-teens, it seems to make it easier for people to model and we're reaching at stage where it is appropriate to look at it that way. On a cash basis, our tax rate has not migrated upward or downward, it stayed pretty stable.

Ken Trbovich – RBC Capital Markets

Sure. But I guess what I am trying to get out is the assumption you guys have in your numbers for debt pay down during the year. Is there some number that you've modeled that goes beyond the sort of the minimum payments that are required?

Paul Herendeen

Well, yes. By definition because I said, when we said we were modeling that we got $3 million of write-off of deferred financing cost tells you that yes indeed we have modeled pay off but we're not providing guidance as to exactly what amount that would be. I think you go back and look at how much cash we throw off in a quarter in the absence of some other use for we tend to use most if not all of that cash to retire debt.

Ken Trbovich – RBC Capital Markets

Okay and then as it relates to the milestone payments is any of that associated with the Dovonex Cream NDA filing?

Paul Herendeen

Dovonex Cream?

Ken Trbovich – RBC Capital Markets

I'm sorry Taclonex Cream. The psoriasis NDA, I think at some point there was an expectation there would be another Taclonex filing this year.

Roger Boissonneault

There's nothing there. I'm sorry Ken I know I understand what you are talking about.

Paul Herendeen

No that one that which we have been talking about for sometime and actually had in it baked into our own internal forecast and include in our guidance it slipped and slipped and it is now pushed out beyond 2009.

Ken Trbovich – RBC Capital Markets

Okay. So you have milestones payments even though you don't assume new products. So these are some form of clinical development without an approval milestone.

Paul Herendeen

Right. And if you think of it this way and I sort of said it in the discussion within that $15.5 million there's a good chunk of that money that is associated with the ED product, udenafil that we just licensed from Dong-A. We continue to do work on our molecule with Paratek. We offer for a novel tetracycline and that's and then other things that we have there that are ongoing.

Ken Trbovich – RBC Capital Markets

Okay.

Paul Herendeen

Smaller stuff.

Ken Trbovich – RBC Capital Markets

And then just final question, in terms of the overall business, you mentioned that you don't have any meaningful DTC in the numbers for the A&P this year. Are there any pre-launch cost that all associated with the new OC?

Roger Boissonneault

No, we guided as we – as Paul said we just keep new products out of the number.

Ken Trbovich – RBC Capital Markets

Right. Completely both on revenue and expense side?

Roger Boissonneault

Fully, yes.

Ken Trbovich – RBC Capital Markets

Okay. Thank you.

Operator

We'll go next to Marc Goodman with UBS

Marc Goodman – UBS

There are two questions, first of all why is the G&A up so much, year-over-year, I mean you mentioned legal expenses, but I assume that there were a lot of legal expenses in '08. So what are the incremental legal expenses you are expecting in '09? And then second question is if you think about the different sales for the products, what do you think the biggest disconnect between your forecast are and Street forecast?

Paul Herendeen

Well in the G&A, if you think about it last year, we had originally – we started the year with the expectation that we were going to spend an awful lot of money in legal expense, right? And as the year developed those cases progressed very slowly and therefore we did not spend as much money as we surely thought we would at the beginning of the year. Okay. So if you are thinking about our 2008, when we do provide our results here at the end of February and you look at G&A that includes what I call a modest dose of legal expense. Looking ahead as we concluded our remarks, we launched suits against so far four parties with respect to the DORYX product and that case is what it’s a complicated case, there is a lot going on and we’re going to spend money against it and that’s included in our G&A guidance. Does that answer it, Marc?

Marc Goodman – UBS

Yes I suppose so. I mean I guess I would have thought you were spending a lot of money on maybe Loestrin this past year, but now that you settled, that goes away, so I was just thinking that?

Paul Herendeen

Remember what we said in a number of meetings as that it's started afterward. We thought we were going to spend at a pretty good clip, but for a good long period of time we were fighting about whether we should disqualify or whether accountant should be disqualified, everything was on hold, and so the spending was nominal. And so, it was not a big spending year for us on the legal side which is a good thing. And but looking ahead, we certainly budget amounts, appropriate amounts to aggressively defend our position. I'm sorry, your second question?

Marc Goodman – UBS

The biggest disconnect between Street forecast and what you're forecasting with respect to sales and the products.

Paul Herendeen

We’re not going to get into specific products.

Marc Goodman – UBS

Okay.

Paul Herendeen

I will say though I think one of the biggest disconnects that since you gave me the opening was on the R&D side. I mean by now we just recently announced the agreement with Dong-A and we have pretty significantly ramped up our activities inside. I think the biggest disconnect was really on the amount of money that we've been investing in R&D in 2009. And we think that’s a good thing. We see good opportunities there and we think it’s a good thing.

Operator

And we'll go next to Chris Scott with JPMorgan.

Chris Scott – JPMorgan

Great, thanks. Just a first question is, could you just talk a little bit about as you think about your outlook for 2009. How you factored the current economic environment into your sales assumptions. Are you assuming any impact to your business that you've done pretty comfortable where you are at this point? And then secondly, when we kind of think about the DORYX 150, obviously that seems to be going pretty well here. What are you thinking about as we move through 2009? Is that something could we see that getting up until like let's say 50%, 60%, 70% of your DORYX business overtime. Just any comments around that would be great. Thanks.

Roger Boissonneault

Okay, thanks Chris, it's Roger. I think the economic environment is interesting. I do point out to people that when you look at our portfolio, it's probably skewed to more under 65 so we don’t have the Medicare group and that’s perhaps more probably sensitive than this. It’s interesting, somebody came out and said that the market for all contraceptive should increase because people would be postponing, putting, starting families and then most recently I think we heard the Obama factor to talk about Medicaid and discriminating against lower socio-economic women which was kind of interesting. So may be one offsets the other and who knows where we are going to end up with that but I do think when we look at the Rxs, be that the doxycycline and minocycline market or the oral contraceptive market or even the psoriasis market we have seen no market effecting a downturn in our excess so we expect that to continue on par and we don't expect to see the downturn. As far as the 150, yes, the promotion basically is all on 150 right now and I think that what we are looking at is about 40% of all the new Rxs are in the 150 and I would expect that to increase as that will be the focus of our promotion going into '09.

Chris Scott – JPMorgan

Great. Thanks.

Operator

(Operator instructions) We'll go next to Shivani Malhotra from Goldman Sachs.

Shivani Malhotra – Goldman Sachs

Hi, guys. I just had a quick follow-up on DORYX actually. Paul, I was interested in seeing that your guidance does not include the possibilities of generic and I was just wondering if we could read into that. I know this is a fluid situation but how confident are you that you won't see a generic on the 75 milligram and 100 milligram dose and separately what plans do you have without getting into specifics or dealing with that situation should we see an early than expected generic for DORYX?

Roger Boissonneault

It's Roger. If we did risk adjust that then we would assume that we knew something. Since we don't know anything the fact is we can't put any risk around that, so the assumption going forward is the status quo we did say that we'd say probably see a change in mix that would be more heavily weighted to the 150 product. And as we've said we know the paragraph force have then limited to the 75 and 100.

Shivani Malhotra – Goldman Sachs

But can we take it that you have continuity plans in case we do see an early – I mean how should we be thinking about it when we’re looking pre model revenues?

Roger Boissonneault

(inaudible) without the, I mean those were going on despite the fact that before we listed the patent. In other words, the legal environment has changed in which we can now list upon, we don’t read the paragraph profilers are, in the absence of that we’ve had community programs going on. So that’s not going to change our strategies whatsoever. We just have perhaps an upside in this that we just did before.

Shivani Malhotra – Goldman Sachs

All right, great. Can I get a follow-up as well on just the pricing assumptions, again I mean just that you said 4% to 5% but I think if I look at my numbers historically, you have been able to take higher price increases, has anything changed in terms of the pricing environment that is making you project 4 to 5 or are you being conservative and we could actually see much greater price increases than your guidance?

Paul Herendeen

It's Paul, Shivani and it is more reflective of over the past several years, we’ve added product and particularly if you are looking at Dovonex and then you look at DORYX, we had very unusual circumstances, one is where we brought a product that we believed was substantially under priced in the market as marketed by our friends at another company that we bought it from. And so we took the opportunity as was appropriate to increase the price of that product pretty dramatically. We also had a situation with our product DORYX where a competitor came in the market and basically raised the bar and that provided us with an opportunity to take what I call above average price increases in operated product DORYX. As we have seen a write-down, I don’t think you have the same opportunity to take outsized price increases for our product lines, for example, our oral contraceptives, we are in the band with all of the other promoted branded OCs that are out there. And we're not going to get too far outside that band and so that typically is a 4% to 5%, it's part of the annual price increase market. In the hormone therapy space, we’ve been fortunate in that, our friends at Wyeth have been taking above average price increases and we follow. With respect to DORYX, I think we did get our product price to where it is probably properly priced and we've been growing units and while you're growing units price is not what we're focused on right there.

Shivani Malhotra – Goldman Sachs

Okay. Great. Thank you.

Operator

We'll go next to Scott Hirsch with Credit Suisse.

Scott Hirsch – Credit Suisse

Yes. Hi. Two questions. First, Paul, I know you mentioned that you are not going to give too much on the debt pay down but the model is highly sensitive to interest expense and I was wondering if it's fair to say that we should assume cash balances stay at this level and the remaining kind of goes to debt pay down or is there any reason to think that you guys would want to accrue some cash for a larger licensing deal. And then secondly, you did bring A&P in a little bit and mentioned that there really isn’t any DTC plan for '09. But I was curious if there's additional flexibility in that A&P number for you.

Paul Herendeen

Let me deal with the cash first because that’s the statement that we're making and I know everybody is tired of hearing us say it, but unless we see an acquisition or some acquisition by the product rights or something else, we will use cash to pay off debt. The model is very sensitive to, it’s a very good thing for us to take out debt that has a tax yield of 2% in Puerto Rico. So if that continues to be the top priority for us provided that they aren’t other uses for that cash. So, I think the way you started was correct. You've got a relatively modest, assume some modest amount of cash on the balance sheet because we can’t sweep at the zero and everything else goes to pay up debt. With respect to A&P that A&P guidance is that's what we're are expecting to spend in the range of for over the course of 2009, it's neither short nor high that's what we expect to spend.

Scott Hirsch – Credit Suisse

Okay. Thank you.

Operator

We'll go next to Dave Windley with Jefferies & Company.

Dave Windley – Jefferies & Company

Hi, thanks for taking the questions. Wondered if and going back to the gross margin topic are the recent settlements one of the factors in the give and take on the plusses and minuses that you mentioned earlier on the gross margin movement or lack of movement?

Paul Herendeen

No, it does not impact our gross profit margin as we look forward.

Dave Windley – Jefferies & Company

And there also in the case of the Co-promo well those related fees flow through SG&A instead?

Paul Herendeen

Yes I'm sorry I just have to be triple clear on that. The Co-promotion expense associated with Watson's promotion of our product Femring is included in our selling expense line. So it’s in there.

Dave Windley – Jefferies & Company

And on DORYX in relation to these paragraph four challenges, is it your understanding that 30 month stay is available or is not available as a result of your lawsuits?

Roger Boissonneault

That's still unclear, Dave.

Paul Herendeen

That's there, it's unclear on both sides; I think people out there are giving both sides of that.

Dave Windley – Jefferies & Company

Will we achieve clarity through the course is that the likely outcome on that?

Roger Boissonneault

It probably doesn't have to be. It is a law, and we have a change in administration and it's interpretation of law, so either there is going to be greater clarity on the law and somebody will come forward with that but, that is still unclear to us. I mean we don’t how this thing is going to resolve itself and that’s why we just haven’t taken a position either way.

Dave Windley – Jefferies & Company

Okay. All right, thanks for the clarity. Thanks.

Operator

We have no additional questions at this time. I'd like to turn the call back over to Mr. Herendeen for any additional or closing remarks.

Paul Herendeen

Yes. Thank you, Kevin, and again thanks to everybody for joining us on this call. We hope that once again we provided you with enough details so that you can all draw your conclusions about our strength and we look forward to reporting our 2008 results fourth quarter and full year 2008 at the end of February. Thank you.

Operator

And again, that does conclude today's call. We do appreciate everyone's participation. You may disconnect at this time.

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Source: Warner Chilcott Limited 2009 Financial Guidance Call Transcript
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