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Warner Chilcott Limited (NASDAQ:WCRX)

February 26, 2013 1:30 pm ET

Executives

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

Unknown Analyst

[Audio Gap] to be here today with Warner Chilcott and here with us, Paul Herendeen, Senior Vice President and CFO of Chilcott. You want to start off with a few words and then we'll delve into some...

Paul S. Herendeen

Yes, thank you. I'll actually start off with just a real quick slide show for anybody who may not know a lot about our company, starting here.

We were spun out of Warner-Lambert back in 1996. A couple of important things about our company, we're headquartered in Ireland. We have significant operations in the United States, Canada and the U.K. and parts of Western Europe. Importantly, we are a fully integrated pharmaceutical company with a broad portfolio of products that are currently marketed.

I want to talk to you about kind of where we came from, I said we started in '96 as a spin-out. At that time, we had roughly 60 employees, revenue of about $60 million. Lost $12 million at the operating line and last year, 2012, we posted revenue of greater than $2.5 billion, EBITDA of greater than $1.4 billion and cash and income of greater than $1 billion. So it's been quite a period of time for us, and it's the same group of folks that continue to manage the company.

This is just a slide that's meant to show you that we are, as I said, a fully integrated and scalable participant in the pharmaceutical business. We do take a very disciplined approach to value creation. What that means is we're very focused on investing our money and our capital in places where we think it earns an adequate return. It also means when we think we're not getting an adequate return, that we stop that investment. So we tend to be -- if you look at the top of that chart, I call it nimble, dynamic and a flexible sort of pharmaceutical company.

One of the hallmarks of that is in our R&D. We've had a very productive run within our internal R&D group. We do develop products, gain approval for them and then commercialize them through our structure, and I think one of our great successes over the history of the company has been the ability to keep our portfolio fresh by developing products and getting them approved and getting them out into the marketplace.

This is just a quick snapshot of the spaces in which we compete today: gastroenterology, women's healthcare, urology and dermatology. And I'll point out that in each one of these segments, we have what we would characterize as a leading product in each one of those very attractive segments.

This chart is just meant to show the evolving product portfolio. We compete in a very, very competitive arena. All the -- pharmaceutical business gets tougher and tougher as every year goes by. And if you're unable to add to your portfolio through self-development, acquisition and licensing, et cetera, you will perish. And what this is meant to show is a little bit of the evolution of our company over the last x years, where we start off with a portfolio of company -- excuse me, products, and those products are over time replaced with products that we self-develop, products that we acquire, products that we in-license.

This shows you over the last 6 years how we've been able to grow what I'll call our core business, which is all of our business other than acting out or some assets that we sold off back several years ago.

We're able to continue to grow that top line of our core business through the active management of that product portfolio that I just showed you on the prior slide. This is one of my favorite slides because you can't make it up, you have to actually put it on the board. It shows the trajectory of the company both from a revenue and a profit perspective. The key profit metric for us being adjusted cash net income. And importantly, we've grown revenues over the years. But even more importantly, we've grown our profits over the course of the last x years. Again, greater than $1 billion of cash and income in 2012.

One other thing about our company is because we tend to be very efficient with the dollars we invest in promotion, the dollars we invest in R&D, we do produce very high operating margins, EBITDA divided by revenue.

Then below the line, we have -- we enjoy a very attractive golden tax rate, which is in the neighborhood of 11% to 12% on a cash basis. The net result of that is we are a company that generates a lot of cash. Now over the years, we've used that cash to invest back into our business. We've used it to attract debt capital. We've used that debt capital to make acquisitions and to pay moneys out to our shareholders. So I think of us leveraging our ability to generate cash to ways that we can deliver value to our shareholders.

So in summary, just think of us as a fully integrated, specialty pharmaceutical company that's highly profitable and standing here in 2013, I'll wait for the questions to come, but yes, facing some challenges in '13. But certainly, challenges that we as a team, believe we are up to. And I'll leave it at that.

Question-and-Answer Session

Unknown Analyst

Thanks very much, Paul. Perhaps, I'll kick it off with some questions and feel free -- if anyone in the audience has questions at any time, please feel free to just raise your hand. You mentioned some challenges that you see ahead in 2013. Perhaps, I can actually start with the opportunities. What opportunities do you see over the upcoming 12 to 24 months of the company? You've got some exciting things going on. And then perhaps you can follow that up with what do you see as the challenges?

Paul S. Herendeen

Sure. I mean, thank you for letting me speak about the opportunities first because I think we do have a lot of opportunities in 2013. As I said in my opening remarks, this business is very challenging. It's challenging from the perspective of the generics companies coming to knock us off. It's challenging from the perspective of the FDA seemingly on the side of generics to try and knock us off. Intellectual property is challenged all the time. I say that all the time. But yes, you need to be nimble and you need to keep moving in order to protect what you have and then to add to that and grow. Now in '13, I'd say that we started the year with nearly 3 opportunities. One is we have ASACOL 400. It's delayed-release mesalamine 400 milligrams, where we just recently announced couple weeks back that we had approval of an improved version of that called -- which we're calling DELZICOL. That conversion is both a risk and an opportunity for us. I think we are certainly up to the challenge. But if we are successful in converting that over, I think it will give us the prospect to be able to sustain that franchise over time. Second, in one of our other very important areas is hormonal contraception. We look at the latter part of the year, where we might face an at-risk launch. And certainly, beginning of 2014, a date certain launch against one of our key products, LOESTRIN 24. So the challenge is, how do we overcome that? The opportunity is as we talked about on our most recent teleconference is we have several OCs that are sitting with the FDA that we hope to gain approval for, which would enable us to expand that portfolio and hopefully protect what is currently the market-leading position amongst branded hormonal contraception products. The other opportunity for us is in the course of 2012, we face generic competition for a product called DORYX 150 used for acne. Now there's a couple pieces of good news. I think our sales force have done an exceptional job of being able to maintain pretty good share, a greater than 60% share of the Rxs. And if I get something wrong, Rochelle will nod. No, you have to correct that. But greater than 60% of the prescription share for the total of the brand plus the generic, and that's pretty darn good. And as I said on the call the other day, comes at a price, we get lower gross to net. Nets -- we get lower net selling price on those Rxs. But I'd tell you what, the DORYX franchise as it stands right now is profitable and supports the investment in the field resources that we have committed against that brand. The opportunity is it's highly unlikely that we would sit there and just say "Oh, DORYX 150 is our product for dermatology, and we're happy with that." It's more likely that we think about ways that we can leverage that investment in those field resources and the relationships that have been developed over more than a decade by our derm sales force with dermatologists. And so we look to potentially hope for maybe a product that will come out of our pipeline, opportunity to maybe acquire a product or license a product or add something to it. Why that's so powerful is we already have all that investment in place. It's all accounted for within our P&L. So to the extent that we can add something to it, obviously, we've got a lot of leverage on that. I think those are the key opportunities and some of them -- some present some risks as well, primary risk. This market, as I said, it is increasingly challenging to do business as a branded pharma company in the U.S. And so we need to continually evolve the way we think about protecting our franchise. That's what we're supposed to do as a commercial entity is we try to build share or we try to protect that share. And it gets tougher. But if you evolve, as I think we have, I think we have the prospect to be able to retain it, and I'm proud, we're going for the long time there. So...

Unknown Analyst

You touched on a number of points there, both from product's perspective, company's perspective as well as from a mathematic industry's perspective. Perhaps if we take a step back for a minute and the theme of this conference is the value imperative. I'd just be interested before we delve back into some of the specifics surrounding Warner. In terms of the value proposition of the company, how much time do you, as an organization, think about the evolving dynamics in the industry and the payer landscape? And how does -- does this determine your strategy going forward? And how do you think that value proposition, how do you foresee that changing over the next 24, 36, 5, 10 years going forward?

Paul S. Herendeen

Sure. I mean, I wouldn't just limit it to the payers. I mean, as I said in my earlier remarks, it's payers, it's competition. And mainly for us, it's -- that's competition coming from potential generics, and it's the overall regulatory environment in which we compete that forces us to think about the world in a different way. I say -- I daresay, if we went back 10 years ago, that this was -- this business was a lot easier. And the way it's changed the way we think about things as we've extended our time lines, we typically say that like the Navy SEALs when you -- if you have -- if you're approaching a project, if you have one, that's like none because you need redundancy. You need 2. One is none. Two is one. You have to go down multiple avenues because there's some likelihood that somewhere along the line, you're going to get caught. It wasn't as much like that 10 years ago. And then certainly, just specific on goals because you mentioned a couple of times about the payers, just the environment is such now that the payers have become increasingly aggressive and wanting to force, if you want to use that word, force their covered folks to what they view as the most cost-effective therapy. It certainly changes the way we think about the potential for new products or products that we would acquire, that we might think about building share for, it has certainly been a challenge. I mean, I think everybody in the room who's followed us has -- they have seen how things have worked out for us with ATELVIA. And we're -- it depends on who you ask, I think that certainly the behavior of the payers was a big factor in us getting off to a slow start that resulted in not just a slow start but a slower ramp of that product than I think we would have had in another environment. That's -- I think that might cover a couple of point, but you want to pick one out, dive in on it.

Unknown Analyst

Well, from the other -- you mentioned ATELVIA. But yet on the other side of the spectrum, perhaps maybe you want to comment on the OC franchise where you have, as you said, a market-leading position in a market which is under -- contains a lot of generic options. And perhaps you want to talk about your strategy there.

Paul S. Herendeen

Sure. I mean, it's funny because with the OC space, I mean, people look at the overall market, say, "Gee, it's dominated by generics." And what's fascinating is those generic products are all written as brands by physicians. It starts with a physician writing, insert old product here, that's been generic for 10 years, writes that brand because he or she believes in that particular brand. And so it starts with brands. If you think about the way they're written, they're written as brands. Now that alone would not have been enough. I think you asked about the value proposition and thinking about payers and the environment and the FDA. With us, the OC space is a really good example to take a look at. If you go back 6, 7 years ago, the OC space was dominated by OCs that were in the configuration of 21 days on, 7 days placebo run, start again. So a 28-day regimen, 21 inset. And we came out with LOESTRIN 24. The first 24-day, 4-day placebo intervals. It had a nice profile with that. I mean, the thesis originally was that you'd have better efficacy because the most dangerous part of the cycle is at the end and the beginning. So you've got better efficacy because of the shortened pill-free interval. Even though that doesn't sound like a lot, that was a major change in the way OCs are prescribed. And today, I daresay that 24 and 4 configuration is the favored configuration, so a configuration. So that was real innovation, and that's what allows you to want to be successful in gaining approval. It's what allows you to be successful in gaining coverage where you need it, and it allows you to be successful in making a pitch to physicians that this product has a real point of difference and it's truly, truly different. Similarly, we launched LO LO, which is the lowest daily dose of estrogen of OCs that are out there. It's 10 micrograms per day. Now again, for the longest time, low dose was 20 micrograms, and we cut that in half and went to 10. It's a product that is resonated, particularly with some segments of the OB/GYN universe that we've actually picked up share. I mean, the OC trajectories are very predictable. You start off, like you double and you double again. And it's following that sort of a launch trajectory. But again, what was important about that was it wasn't a minor change. This was a significant, although they're not earth-shattering technology, but a significant change in the way the OC was formulated and it's really worked for us across all the dimensions of approval, acceptance, promotion, et cetera.

Unknown Analyst

And you are able to maintain share in a competitive environment. Perhaps, just remind us of the market share that you do have in this...

Paul S. Herendeen

Yes, it's a bit more than 10%. And I go back and I -- when we started this, this market back in 2000, we said, "Gee, if we could get 4% or 5% of this market, we'd be very happy." It's a $0.5 billion franchise. That's $0.5 billion franchise in a segment that is dominated in unit terms by generics, again, that are written as brands that gets filled as generics. I used to say and I'll say it again, in the hormonal contraception space, the only thing that will derail the growth trajectory of an OC that's being effectively promoted by a pharma company is the entrance of a direct generic competitor. The only thing that will stop the growth, if -- they've been proven to be promotional sensitive over many, many, many years, and 10% is by no means the upper bound of what we should be able to achieve in market share.

Unknown Analyst

Moving on to possibly one of the most interesting opportunities in the near term, and that is in your GI franchise. You mentioned in your earlier remarks that you're in the process of -- which is about to launch a new formulation, a new version of your market-leading ASACOL called the DELZICOL. Perhaps you just want to -- you'd like to delve into that a little bit more. Just your thoughts around the DELZICOL strategy and how you plan on switching patients over from ASACOL to DELZICOL, the time frame and the value proposition. What does DELZICOL offer over ASACOL?

Paul S. Herendeen

Yes. Let's start with what does it offer over ASACOL. I mean, we developed DELZICOL and we're able to get approval of DELZICOL, basically working together with the FDA to remove the phthalates from the formulation of ASACOL 400. This was something that was of interest to the FDA, and we are fortunate that we were able to work with Cedar in gaining approval of the product. And then secondarily, it's a product that's just now in a capsule, which provides some benefits, which I am the wrong person to try to articulate. But essentially, this is a replacement for not an addition to the portfolio of delayed-release mesalamine. It's a replacement for ASACOL 400. And so when we start promotion here in the middle of March, at some point in time here, we will no longer ship ASACOL 400. Our objective will be to educate the marketplace, and that includes the physicians, it includes the wholesalers, it includes the retailers and pharmacists, that this is the replacement product for ASACOL 400. And then even ahead of that, our work with managed care to ensure that the coverage -- there will be a coverage gap, so that it would be -- would facilitate the switch from the, call it, ASACOL 400 over to the new DELZICOL product. That -- we articulate that both as an opportunity and as a challenge. Anytime you go through a product change like this, there is risk that you could see some leakage on the play. Our goal is to have a clean conversion of this, pass it over, and we're hopeful that we can do that. We're certainly committing every resource that we can within the company to ensure that it goes smoothly, and we're looking forward to kicking off the promotion again in the middle of March. And I am highly confident that we'll get lots and lots and lots of questions about it on our first quarter call, which will be in May, sometime in May. And at that point, we'll have some data to start sharing with people and talk about some of our experiences out there in the marketplace.

Unknown Analyst

You don't anticipate any issues in terms of managed care, in terms of getting formulary access, reimbursement?

Paul S. Herendeen

We're not anticipating any issues. As I say, as we say, you'll never know. We got the -- right after -- as soon as we got the approval, we're all teed up and of course ready to go -- to go out and have those discussions. But those are discussions and they're third parties and they go how they go. We feel pretty good about the prospects of being able to execute on this.

Unknown Analyst

And one of the -- apart from DELZICOL being an improved product over ASACOL. It will help protect your franchise or your mesalamine franchise against the generics. And for those of you not aware, ASACOL 400 does lose patent protection later this year. Can you talk a little bit about your perception regarding the hurdles of getting a generic mesalamine approved? Some people are concerned about this. Perhaps, give your views on how you think about this as a company?

Paul S. Herendeen

Sure. And I'll give you the company perspective and then you'll have to overlay on top of that. Again going back to some of your opening remarks, the environment in which we compete today. Yes, I think that first, our opinion is that there is certainly a pathway for somebody to potentially demonstrate if they are an A, B rated generic equivalent to a product like an ASACOL 400 or an ASACOL HD, and there are other mesalamine products as well. We continue to believe that, that presents a pretty high bar, as it's not just the PK studies, it's a combination of PK studies and matching the dissolution profile, and that presents some challenges. Does that say that it's impossible? No. And that's part of the reasons why we talk about what we talk about protecting our franchise, we say, we would not realize solely on that difficult -- what we view as a difficult regulatory pathway to protect that franchise. And you'd expect us to be working on next-gen versions of not just ASACOL, but really, frankly, that applies to all of our key brands as well.

Unknown Analyst

Fair enough. I mean, so just in your assumptions, are you assuming an ASACOL generic on the market any time soon?

Paul S. Herendeen

We're not. We were actually fairly explicit in our guidance call. See, our guidance does not contemplate direct generic competition for any of our key brands in 2013. And before you ask the question, is it possible? Sure, it's possible. Back -- going back to the prior question, the overlay that sort of regulatory environment on top, I think a lot of you folks may have seen recently or maybe you follow a company called Endo, Endo has had situations where you say, "Gee, the difficult regulatory pathways. And it ended up where the FDA started a pathway, and that was to the detriment of Endo. I think we see -- I think it was just at the beginning of this week, you saw a similar situation with Reckitt Benckiser in a pretty large product that, again, you wouldn't ask a question if that's a difficult regulatory pathway. I think it's all possible, and that goes back to my original saying and say, if you stand still in this business, if you rely on things the way they are, you will lose. You need to continually move in order to be able to protect your flanks in this very somewhat hostile environment.

Unknown Analyst

Perhaps shifting gears. In your opening remarks, you put up a slide which you mentioned shows the fact that cash flow and I think with pop with some cash flow, you guys generated a lot of cash. You have a history of doing business development and executing effectively in that regard. Can you just talk us through some of your thoughts around capital allocation. How you think about acquisitions versus product in-licensing, share buybacks, et cetera?

Paul S. Herendeen

Sure, yes. And I'd say first, in the highest, highest, highest use of our capital, it would be to invest it back in our own business in the form of additional development projects. I think of R&D and this development as being highly related. I think about R&D, if you can develop a product or you can buy it, it's always going to be a better opportunity for you from a capital perspective. If you can develop it yourself, get it approved and commercialize it yourself without paying a third party who brings it all the way in the fish lens. That first and foremost, and I talked about how we're efficient with our R&D dollars. I often say as well, I wish I could spend $100 million more in R&D in 2013 than is currently shown in our 2013 guidance because I believe and if Roger and the team get behind the investment of the additional $100 million that would be $100 million of return, an enormous amount of value to our company. So first and foremost, invest back into the company. Second and related is on the BD front, to the extent that you can in-license something at an earlier stage and leverage our competency in bringing things to the clinic, that's pretty good as well. Then it's the acquisition of assets. Then it would be the acquisition of companies that have assets, meaning marketed products. And you can take that all the way to the extreme, it's companies that are not necessarily pure-play pharma. We think about all of these things. As I said in my opening remarks, we are a very disciplined company when it comes to thinking it out, deploying capital against an investment opportunity. I daresay, we've not seen deals done away from us in the last several years that we said, "Gee, we wish we had done that." Rochelle will tell you that we keep a running log of deals that do get away -- get done away from us, and we look and say, "How did it turnout out relative to our expectations? Were pretty good. That's not being a braggadocio. That's more saying we have a fairly realistic view of what assets can do, whether it's under somebody else's control or under our control, where to make an acquisition or an investment that provides the near-term pop of accretion, but falls short on the value spectrum.

Unknown Analyst

That really just leads me into my next question.

Paul S. Herendeen

I did that on purpose.

Unknown Analyst

Thank you. What is then the ideal target acquisition for you guys?

Paul S. Herendeen

Oh boy, the is the best -- the dream scenario is company has assets in the U.S. that are highly productive assets that they want to sell the asset. Why is that so attractive to us? First of all, because anything that is actionable is cool right of the bat. But secondarily, I talked very briefly about our a tax structure. We're an Irish plc, with -- so we have operations in Puerto Rico, where we house most of our intellectual property. We'd acquired those assets right and drop right into that structure and from day 1 enjoyed the benefits of the profits from that being taxed that are relatively low and attractive rate. So that's easy. Fast acquisition, U.S.-centric asset.

Unknown Analyst

And how should we think about your tax rate going forward? What's one of the benefits and certainly help your bottom line and your cash flow. How sustainable is that?

Paul S. Herendeen

Yes. I know we talked about this a little bit in both our Q4 call and a little bit on -- that's sort of talked about the last couple of public appearances we've made. We've had the opportunity several times now that are tax structured through something call the Advanced Pricing Agreement Program with the IRS. Essentially what that is you agree to go in and show them everything they want to see, and they look at you and say, "Okay." And you come to an agreement as to the economics of how you price products that are offshore into the U.S. and how much profit needs to end up in the U.S.. So we have been very, very fortunate that we just recently, at the end of December or in December, got our second Advanced Pricing Agreement with the IRS. And getting 2 of those in 6 years is quite an accomplishment. Because as part of that process, you really do have to show everything, and it's not an easy process. There are many, many companies out there who would like an APA, but didn't get one. We just got our second one. So what that does for us is it gives us the comfort that we've had people whose job it is, to see us pay more taxes, who look at our structure and concluded that one, the structure has integrity. Secondarily, that the agreement, basically that you agree on what the economics are by which you transfer price, and that goes out to 2017. So yes, it covers 7 years, really, which is also awesome, where we have great certainty that the way we forecast our taxes, the way we actually report our taxes will be consistent with the way it's been the last several years. So we feel quite good about it. Again, I always get a copy. Things can always change. But the way the world is today, we feel very good about the integrity of our structure.

Unknown Analyst

Any questions from the audience? If not, then perhaps what I wanted to ask you to touch on next is perhaps talk a little bit about your sales force and how that's structured and how we -- you've gone through some changes over the past couple of years. So how that's configured to address your growth opportunities going forward?

Paul S. Herendeen

Sure. And I will not be able to, from memory, recite the breakdown. We're configured in the U.S., which is what people mostly want to focus on. We have 700 territories in the U.S. this year. That's down a little bit. We are configured about 730 in 2012, and where we primarily reduced our commitment was against ATELVIA. Again, this is consistent with the theme that I talked about at the beginning, we're not afraid when we see investment, if it's not producing a return, to pull back on that investment. So we reduced a number of territories and resources committed against the ATELVIA brand. With 7 other territories in the U.S., we feel that's adequate to promote our existing portfolio of key brands. But importantly, I would suggest that if this were not a year and we double [indiscernible]. We kept the number of territories higher than we might have otherwise because we want to leverage some of those resources that are not directly related to DELZICOL, but to help at the very outset of that DELZICOL launch, so that ensure that we have the best prospect of an orderly transition of ASACOL 400 to DELZICOL. So 700 territories could have been less. It might have been less. But with the fact that we are gearing up for and anticipating the DELZICOL launch in the early part of the year. And; honestly, well, if we are fortunate, we'll have other opportunities throughout the year.

Unknown Analyst

You touched on some of your products. You touched on capital allocation, perhaps just talk a little bit about R&D where you guys already said very efficient and you have -- you don't disclose too much to the public. But you have disclosed a number of opportunities recently to the investment community. Perhaps, you just want to summarize those -- ones that I have on my list. There are udenafil, some in your derm space, oral contraceptives. Perhaps, you just want to touch on those?

Paul S. Herendeen

Sure. And again, it goes back to one of the early parts of the discussion about how does your business change as a result of the environment. If you went back in time, we started our R&D activities were mainly around improvements to our existing brands. But in our portfolio today, we actually have what many of you might characterize as bona fide R&D. Those air quotes for those on the webcast. Bona fide R&D-type projects like udenafil, a PDE5 for erectile dysfunction, which ultimately will also be developed for BPH. Like the NCE for acne, which we're developing, which we'd get our Phase II data. We'd look to get going and get that product into Phase III. Like a topical alprostadil that we have for erectile dysfunction, where we continue to look for that regulatory pathway to get it approved. And of course, there'll always have a non-disclosed things that go on. But the reason I bring up those, the udenafil, the NCE and -- for acne and also the topical alprostadil is those are the sorts of things that I would like to do more of and we would like to do more of. Because in this world, you want to evolve so that you're generating and self-developing our products that are not necessarily just the ones that protect your current franchises. That, I think, evidence of our evolution is that we currently have those 3 ongoing. And of course, we're working on some other things that we don't typically disclose.

Unknown Analyst

And in terms of your novel derm product. Just to be clear, you do have Phase -- Phase III -- or Phase II data for that?

Paul S. Herendeen

It's wrapping up, yes. I mean, you would expect to see something about that here in maybe the mid part of 2013.

Unknown Analyst

So we can expect that to, based on what -- the data you have to hand, we should expect that to be progressing forward into a pivotal trial perhaps towards the end of the year?

Paul S. Herendeen

Yes. But perhaps kicking off. And I'm looking at Rochelle to make sure that it's the latter part of this year, yes.

Unknown Analyst

Great. Perhaps your thoughts around what we haven't spoken about, and it's still a big chunk of your business although declining, ACTONEL and the bisphosphonate market and how -- I know you're not aggressively pursuing that going forward and it is falling away. But perhaps your thoughts on how you think about strategically that part of your business within your portfolio?

Paul S. Herendeen

Yes. I mean, the way we thought about ACTONEL is when we first acquired it, it was part of the Procter & Gamble pharma business that we acquired. And we looked and what was intriguing to us was ATELVIA, which was -- ATELVIA being what we view as a better differentiated product that we were very excited about having the prospect to launch. And looking at ACTONEL, I daresay, I don't know there was anybody out there that would have bought ACTONEL on a stand-alone basis. It was a product that was a -- not the brand market leader. Saw the market leader, FOSAMAX go generic. We saw our managed care very aggressively force the market over to generic versions of the prior market leader, which makes some sense. You had a stream of bad news, and I put that in a category. There was bad news that maybe -- sometimes you had a bad news, then you hear the good news, then we want to hear the good news, they only remember the bad news. That market has been shrinking dramatically over the course of the last several years. One because it's no longer the market leader in their aggressively promoting, FOSAMAX. But also because of this steady drip of concerns around the use of bisphosphonate. For us, we -- I would suggest and you could look at a resource that we had against ACTONEL and then ATELVIA. We started with 400 reps. What we found out was that the 400 reps didn't change the trajectory of that line when I own it. They could do a great job, and it just didn't change the trajectory lines, so we pulled back on that. We used those reps to launch ATELVIA. But with respect to ACTONEL, it's an asset that we simply are watching decline at a very rapid rate. And as I said I think on our most recent call, the fourth quarter call, I mean, declines in the -- you should expect a kind of a mid-30s decline in '13 v '12, and again in '14 v '13.

Unknown Analyst

Yet the story is very important to generate cash flow?

Paul S. Herendeen

Yes. I mean, and that's the piece that I think is lost in [indiscernible]. People do look at our top line and say: "Wow, they're not growing at the top line." I don't care what we do. We're not going to grow ACTONEL. But what ACTONEL is doing is generating a large amount, hundreds of millions of dollars of pretax profit and for us, the pretax profit converts at a very efficient rate into after-tax profit and cash net income. And so it's been a great contributor for us in terms of the value of that franchise, and I would submit that the value of the expected cash flows from the ACTONEL franchise over the next 5 years, even beyond the patent expiry in '14, is a pretty sizable number. And I think all of us in this room would like to own that and have a claim on that future cash flow. But buried within our results, it produces a revenue drag, a profit drag from a growth perspective. And so for us, we are just trying to maximize the after-tax cash that we can garner from that brand, but there's nothing we can do about that trajectory. Important though, once we get past '14, the co agreement with Sanofi will go away. And so the profitability, while it's actually down, it actually will bump up in '15 and continues on because the tail of that brand especially outside the U.S. actually is pretty nice.

Unknown Analyst

We just have a couple of minutes left. And my final question is just around some morale within the company. Last year, you're going under a strategic review. You made the decision to not to get -- not to sell yourselves, remain a standalone company. Just your thoughts around -- I would imagine the morale in the company is improved now and how that's just translating into the way that you see your business in the next -- in the foreseeable future?

Paul S. Herendeen

The first half of 2012 was pretty rough. I mean, that's not something that any company wants to go through is to see unwillingly have you cast to the limelight, "Oh, we're undergoing a strategic review." That was an artifact -- not an artifact, that's a fact of life for an Irish company, where there's a rumor, we were called. We were compelled to make that public information. I think if we we're a good old U.S.A. company that would have been kept confidential, and nobody would have ever known and the outcome would have been exactly the same. But during the first half of last year, yes, it was tough. It was tough to recruit. It was tough to retain because people just didn't know what was going to happen. And so I think as we entered '13, I think where job has much better morale, especially now where you're gearing up for some of these important activities that we've already touched on, the launch of DELZICOL, other things that may accrue through the balance of the year. So I think the morale is much, much, much better in '13 than in '12.

Unknown Analyst

Okay. Thanks so much, Paul. We're out of time, but we really appreciate you stopping by and sharing your thoughts with us.

Paul S. Herendeen

Thank you for having us.

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