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Executives

Paul Herendeen – Chief Financial Officer

Roger Boissonneault – President and Chief Executive Officer

Analysts

Gary Nachman – Leerink Swann

David Buck – Buckingham Research

Michael Tong – Wachovia Capital

Ken Trbovich – RBC Capital Markets

Mark Goodman – UBS

Scott Henry – Roth Capital Partners

David Windley – Jeffries & Company

Warner Chilcott Ltd. (WCRX) Q4 2008 Earnings Call February 27, 2009 8:00 AM ET

Operator

At this time, I would like to welcome everyone to Warner Chilcott's operating results for the fourth quarter and full year 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions).

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

Paul Herendeen

Good morning everyone and thank you for joining the call. Earlier this morning, we issued our press release that details our fourth quarter and full-year 2008 results which I hope you’ve all had a chance to review. Copies of the press release are available on our website.

Unfortunately, Roger is not able to join me on the call today. He’d have liked to have joined us, but due to an immovable logistical issue, he is not able to be on the call, so I’ll be providing the commentary with regard to our fourth quarter and full year 2008 results, and we’ll follow up with a Q&A period.

Before doing that, let me 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 our 2008 Form 10-K which we will file today and we expect it will be available on the SEC's website.

The forward-looking statements made during the call are made only during as of the date of this call, and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances. In addition, I will make reference to certain non-GAAP financial measures as defined by SEC regulations. In accordance with these regulations, we have provided reconciliations of these measures in our press release issued this morning to what we believe are the most directly comparable GAAP measures.

Before I get into the specifics of our results, let me just highlight a number of events that have occurred since our last earnings call. At the top of the list, we acquired rights to two products for erectile dysfunction, a topical Alprostadil cream from NexMed and a PDE-5 inhibitor from Dong-A. With these two transactions, we continue to add to a product development pipeline leveraging what we believe is our competency in shepherding new products through phase 3 clinical trials.

Also, we were able to settle the patent challenge with respect to Loestrin 24 by agreeing to allow Watson into the market with a generic version of the product six months before the expiry of our patent. We think this was a good outcome, and it removed what had been viewed by those outside of the company as a significant risk factor.

Next, we were also able to settle the patent challenges with respect to Femcon with the result being that we agree to allow Teva into the market with a generic version in July 2012 or earlier under certain circumstances. We also outlicensed to Watson rights to a second oral contraceptive we had under development. All of these events together, that should provide you with increased visibility around our priorities within hormonal contraception for the next few years. We continue to expect to file the NDA for our so-called low-dose oral contraceptive in the first half of this year, which points to a possible launch in the first half of 2010.

Finally, since our last earnings call, we provided financial guidance for the full year 2009. Based on the results that we’re releasing today, which I’ll review in a moment, our guidance for 2009 remains unchanged and points towards revenue growth in the range of 8.2-9.3% and cash net income growth of 7.1% to 10.4%. The CNI growth in particular we think will represent a strong year in light of the significant increases in our expected investment in R&D in 2009 as compared with 2008. We continue to evolve as a company, particularly in the level of our commitment to internally develop new products to sustain our topline growth over the long term. With that, let me turn to our results for the fourth quarter and the full year 2008.

Our fourth quarter revenue increased 6.5% to $242.5 million as compared to the fourth quarter of 2007. For the full year of 2008, revenue increased 4.3% over the prior year to $938.1 million. The increases in both periods were led by increased sales DORYX, Taclonex, Loestrin 24, and Femcon.

Sales of our OCs increased 6.3% this quarter versus the fourth quarter of 200y primarily driven by sales of Loestrin 24. Loestrin 24 contributed $49.3 million of net sales in the fourth quarter, primarily due to a 15.7% increase in filled prescriptions in Q4 2008 compared with Q4 2007 and to a lesser extent higher average selling prices. For the full year 2008, Loestrin 24 increased $48.3 million or 32.4% compared to 2007, with filled prescriptions increasing nearly 29%. Loestrin 24 continues to be a top priority within our company, ending the year with a 5.0% share of new prescriptions in the hormonal contraception market.

Femcon generated net sales of $12.9 million in the fourth quarter of 2008, representing an increase over the prior year primarily due to 30.2% increase in filled prescriptions which was partially offset by a contraction in pipeline inventories and the impact of higher sales related deductions as compared to the prior year quarter.

When we initially set guidance for 2008, we noted it will be a challenging year from a topline growth perspective due to the impact of generic competition. The majority of that impact was felt in the OC portfolio with a net sales growth delivered by Loestrin 24 and Femcon were partially offset by the impact of sales of generic versions of Estrastep. Sales of Estrastep decreased $4.6 million or 45% in the fourth quarter of 2008 compared to the prior year quarter. For the full year 2008, Estrastep net sales decreased $49.4 million, or 70.3% compared to the prior year.

Turning to our dermatology portfolio, revenues of our dermatology products increased 17.9% or $17.7 million in the fourth quarter of 2008 compared to the prior year quarter and 12.2% or $47.2 million for the full year 2008 compared with 2007. The growth was led mainly by increased sales of Doryx. We have seen positive results for Doryx from both increased promotional emphasis and the July 2008 launch of Doryx 150 mg.

Net sales of Doryx increased $15.7 million or 50% in the fourth quarter compared to the prior year quarter primarily due to an 18.8% increase in filled prescriptions and expansion of pipeline inventories related to Doryx 150 mg sales and the greater economic value of Doryx 150 mg prescriptions as compared to the 75 and the 100. Based on this weeks’ IMS data, Doryx 150 mg represented 60% of the new prescriptions in the Doryx franchise and as we stated previously an even greater percentage of the revenues for the franchise.

Taclonex net sales increased $9.5 million or 32.1% in the fourth quarter as compared to the fourth quarter of 2007. We continue to believe the growth prospects for Taclonex are with the GP/FP community as we have done a good job in achieving a high penetration rate for Taclonex amongst dermatologists. We don’t directly promote the GP/FP community, but rather the message of Taclonex is often delivered to these doctors by patients who are currently using the product.

Net sales of Dovonex decreased 19.9% in the fourth quarter of 2008 compared to the prior year quarter primarily due to a 23.4% reduction in filled prescriptions and increases in sales-related deductions. The decline which is anticipated to continue in 2009 is attributable to the introduction of generic versions of Dovonex solution as well as competition from other therapies.

Sales of our hormone therapy products increased $0.5 million in Q4 as compared to the prior year quarter. The increase is primarily due to an increase in sales of ESTRACE Cream of $3.3 million or 16.4% resulting from higher average selling prices and a 4.7% increased in filled prescriptions in Q4 2008 compared to Q4 ’07. Net sales of FEMHRT in the fourth quarter of ’08 declined modestly compared to the prior year quarter due to a 14.9% decline in prescriptions. The impact of which was partially offset by price increases.

Our gross profit margin as a percentage of total revenue was 78.1% in the fourth quarter which represents a decrease from 80.8% in the prior year quarter. The decrease was due primarily to higher inventory reserves during the current year quarter as compared to the prior year quarter. As discussed on last month’s guidance call, we believe our 2009 gross profit margin will be in the range of 79-80% of total revenue.

Reported SG&A expenses for the quarter were $44.4 million, a decrease of $12.6 million or 22.1% compared with Q4 of ’07. Let me walk you through the three specific areas of SG&A—selling and distribution, advertising and promotion, and general and administrative expenses.

Selling and distribution expenses decreased $1.5 million or 6.2% due primarily to a lower average headcount during the quarter compared to the prior year quarter. Advertising and promotion expenses decreased $5.5 million or 35.5% in the quarter compared to the prior year quarter primarily due to decreased DTC spending. General and administrative expenses decreased by $5.6 million or 30.4% in the fourth quarter as compared to the prior year primarily as a result of reduced external legal costs.

R&D expense in the quarter was $15.2 million, which includes a $2 million expense to acquire certain rights from Dong-A to develop and market its erectile dysfunction product Udenafil. Note that the $2.5 million expense associated with the purchase of the US rights to NexMed’s topical ED product will be a first quarter 2009 expense and did not impact our 2009 guidance. As a reminder, our 2009 guidance anticipates R&D expenses in the range of $77 to $80 million which includes $15.5 million of anticipated milestone payments. We include the $2.5 million payment to NexMed as a part of that $15.5 million of interest paid as milestone payments.

Turning to amortization, in connection with the company’s annual review of its intangible assets in Q4 ’08, we booked a non-cash impairment charge related to the Ovcon/Femcon product family totaling $163.3 million. The charges are a result of our normal quarterly review of the carrying value of all of our identified intangible assets and a reflects a revised view of the projected future revenue and cash flows of the Ovcon/Femcon product family compared to our previous forecast. Normal amortization totaled $59.1 million in the fourth quarter of 2008 and $223.9 million for the full year 2008. As we’ve noted in the past, in computing cash net income per share, we add back the after-tax impact of amortization. Our forecast for aggregate scheduled amortization for 2009 based on current assumptions is $228 million reducing to $161 million in 2010 and $131 million in 2011.

Net interest expense for the fourth quarter was $20.9 million. During the quarter, we made an optional prepayment of $60 million under our senior secured credit facility and we purchased and retired $10 million aggregate principal amount of our senior subordinated notes at a discount. Including in the fourth quarter’s net interest expense was a $1.1 million gain on the repurchase of those senior subordinated notes purchase and retirement. Over the course of 2008, we retired a principal amount of debt totaling $238 million using free cash flow and cash on hand. We ended the year with a debt balance of $962.6 million.

Our reported GAAP net income in the fourth quarter of 2008 was a loss of $115.7 million. In arriving at cash net income, we add back the after-tax impact of booked amortization of intangible assets and the amortization of deferred financing fees. In addition, we’ve added back the after-tax impact of the impairment charge we booked in the fourth quarter. We add these items back at the marginal tax rate specific to each item in each period. For Q4 ’08, the marginal rate for amortization of impairment was 3.7%, and the rate for deferred financing fees was 19.3%.

Cash net income for the quarter was $100.5 million or $0.40 per share based on 250.6 million fully diluted Class A shares outstanding. For the full year 2008, our reported GAAP net income was a loss of $8.4 million. Using the same methodology that I just walked through including adding back the after-tax impact of impairment charge for intangible assets, we generated adjusted cash net income of $364.1 million or $1.45 per share based on 250.5 million fully diluted Class A shared outstanding. The reconciliation from GAAP net income to cash net income is included in the press release.

Turning to liquidity, we generated $103.1 million of cash from operating activities in the fourth quarter and ended the year with a balance in cash and cash equivalents of $35.9 million. As we’ve previously stated, in the absence of compelling opportunities to invest our free cash flow in strategic initiatives such as in licensing opportunities, acquisitions, or other internal product development activities, we expect to continue to use excess cash flow for de-leveraging purposes.

For the full year, our cash generated from operations was roughly $313.3 million. I’ll point out that during 2008 we made significant tax related payments of $99.5 million that was in the first quarter, related primarily to pre-LBO tax accruals. The remaining free cash flow plus some cash on hand was utilized towards debt payments of $228 million of term debt and $10 million face amount of senior subordinated notes which we acquired at a discount.

We ended the year net debt of $926.7 million. For those model builders on the line, we expect our total capital expenditures in 2009 to be roughly $50 million. For those debt holders on the call, we included a reconciliation of GAAP net income to adjusted EBITDA in our press release. Adjusted EBITDA using the bank bond definition for Q4 ’08 was $135.8 million and $517.9 million for the full year of 2008.

Before taking your question, let me provide you with a few updates on our product development activities. The low-dose OC has finished the treatment phase in its clinical study, and we plan to file an NDA for that product in the first half of this year. We do have other development projects underway or beginning in 2009 including beginning phase 3 work in the second half of 2009 on the erectile dysfunction product Udenafil that we licensed from Dong-A. Work with Paratek on a new chemical entity, anti-infective for dermatological uses, continues to progress, although we are still in the preclinical phase. Lastly, we’re viewing the appropriate next steps to take related to the topical Alprostadil product which recently purchased the US rights to from NexMed.

In summary, we had a very solid fourth quarter of 2008 and a solid full year of 2008. Our results for the quarter and the full year support the financial guidance that we provided for 2009, which we provided you on our January call. You can access the 2009 guidance call through our IR web site under the Events and Presentations tab.

With that, we could open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Gary Nachman with Leerink Swann.

Gary Nachman – Leerink Swann

My first question is on the Doryx inventory levels. I hopped on late, so I apologize if you addressed this, but where are they at this point? It sounds like they came up in the fourth quarter, and will those have to come down in the first half of this year?

Paul Herendeen

For all those model builders out there, and there are plenty, any time you have a product that is growing, the trade essentially readjust their inventory levels, so you have a natural expansion of pipeline inventories. That’s certainly helped our sales of Doryx during Q4; however, I would not characterize it as something that is going to turn around in Q1 or Q2 or 2009 particularly provided that the Doryx 150 brand continues to grow.

Gary Nachman – Leerink Swann

Did that play into the increase inventory reserves, the returns reserve that booked in the cost of goods? Is that correlated?

Paul Herendeen

It did not. The fact of the pipeline inventories out there for Doryx was not the root cause of our increases in reserves. We manufacture lots of products as you know, and we also have a number of products which are contract manufactures by third parties, and we have a philosophy of never ever running out of inventory, and so from time to time, we end up with inventory that we purchased at risk and is not usable.

Gary Nachman – Leerink Swann

What’s your feeling about the process for the FDA review in the citizen’s petitions on the 30-month stay for generic Doryx? How long do you think it will take the FDA to review that? I’m bringing this up because Medicis said on their call at least 6 months. Do you agree with that timeframe? Could you give us any commentary on that?

Paul Herendeen

No. We’re not going to speculate on what the timing would be. With respect to the Doryx situation, quite obviously based on the citizens’ petition that we filed, we believe that we’re entitled to the 30 months. In a stunning development, there are others out there with an opposing point of view which they’ve articulated in answer to our CP, and I think that that process will play out. We just have to wait and see, and in the interim, we’re not going to speculate on it. For us as a company, the more important aspect is focusing on Doryx 150 for which there is not presently an ANDA filing which continues to grow both in terms of actual units, share of prescriptions because of the higher economic value is now, let’s call it, somewhere between 60-70% of the franchise in dollar terms.

Gary Nachman – Leerink Swann

On the SG&A, it looked like there were some cost savings in the fourth quarter, and you highlighted some of those things. Could you just tell us how much of that is really going to spill over into 2009 and are there incremental cost savings you would expect to get at some point during this year?

Paul Herendeen

We’ve said in the past that one of the hardest things for us to forecast particularly within G&A is the timing and the amount of legal expenses and when they’re incurred. I think we were fortunate through the course of the entirety of 2008 that we were able to keep our external legal costs under control and ended up with a good outcome with respect to those open cases, particularly the paragraph 4 challenges. With those now behind us, I think that you should point towards our guidance for G&A for 2009 which is the range of $64 to $67 million, and that includes whatever savings that we might anticipate at this time, and I think as I pointed out during the January call, it also includes a budget associated with our expected activities around Doryx.

Operator

Your next question comes from the line of David Buck with Buckingham Research.

David Buck - Buckingham Research

My first question is on Doryx and the 30-month issue. You have some uncertainty obviously over the citizen petitions outstanding and what the FDA decides on the 20 months, but is there an opportunity for settlement activity? You’ve been obviously cleaning up some of the overhangs with Loestrin and Femcon, but Doryx is now smaller and you have obviously a patent in litigation, so what are your views there?

Paul Herendeen

We have 5 filers against 75 and 100. Again, our point of view is that we’re entitled to the 30 months. That will play out as it plays out, and in the interim of course we are very pleased with the way that the Doryx 150 is performing, and lastly, as we always say, we’re out there, but with respect to Doryx, we’re not going to sit still.

David Buck - Buckingham Research

In terms of the use of cash going forward, obviously you’ve reduced debt quite a bit and made some smaller en-licensing, but what is the outlook for 2009 in terms of en-licensing activity? Is that opportunity there to increase as well?

Paul Herendeen

The relatively slow flow of end-licensing activity on the part of our company has not been for want of trying. I say it pretty much every time when we talk about our available cash flow, if we saw an opportunity, we would seize it. Tony Bruno who heads up our BD activity is very active, and we look at lots and lots of things. It just turned out that here over the course of the last several months, we’re fortunate enough to be able to bring in both of those ED products, the NexMed product as well as the Dong-A product. We’re very excited about those types of opportunities and, for us, that is our first purvey perhaps into the urology space. We’re encouraged by the volume of opportunities that is out there. That said, we maintain a very tight screen, and it would have to be a project that we felt was a good solid project to bring in, but I would say we’ve provided our guidance this year, and for total R&D expense, we said that for 2009 we’re looking at $77 to $80 of R&D, and I’d be happiest guy in the world if we came up with an opportunity to en-license something, and it costs us $10 to $15 to $20 million and have to come back and tell you that my R&D expense is going to be a little bit higher, if it were the right opportunity, but we would not do that for the wrong opportunity. It’s not for lack of wanting or trying to en-license additional assets. We expect to continue to do that, and as we do that over time, I think that’s going to be a good thing for our long term prospects.

David Buck - Buckingham Research

The relative contribution of Taclonex Scalp in the fourth quarter, and does anything in the guidance actually change versus what you had given in the last call?

Paul Herendeen

The Taclonex Scalp, I think, has basically sort of taken over the economic position of the old Dovonex Solution. We happened to think it’s a very good product. I will say as we’ve said a couple of times when we’ve been out in conferences and the like, for the scalp, it’s a great product, but right now, we have better opportunity to put our back behind the Doryx franchise and grow that than to try and emphasize Taclonex for the scalp. We continue to promote the product, and we expect that we’ll continue to see uptake of the product because it’s a good product, but as we sit here right now, it’s essentially taken over the old economic position of the Dovonex Solution.

David Buck - Buckingham Research

Which means about 10% of the franchise?

Paul Herendeen

Yes, about that.

David Buck - Buckingham Research

Did anything actually change from the guidance call in terms of 2009 outlook?

Paul Herendeen

No. We have not changed our guidance for 2009.

David Buck - Buckingham Research

So, all the ranges are the same?

Paul Herendeen

That’s correct.

Operator

Your next question comes from the line of Michael Tong with Wachovia Capital Markets.

Michael Tong - Wachovia Capital

Thanks for running through the R&D pipeline, but from a clinical news perspective, should we be expecting any clinical news flow in 2009?

Paul Herendeen

As you know, we don’t provide that sort of data. I think what we’re looking at for the early part of 2009, I think our next event will be the hopeful filing of our so-called low-dose OC. We continue to make progress on the second OC that we never disclosed the characteristics of that are six months behind that, so that may be perhaps second half of this year. That’s a product that we out-licensed to Watson. We continue to engage in all the internal activities around protecting our various brand franchise, but no, we do not provide that sort of data.

Michael Tong - Wachovia Capital

You still control the NDA submission for this OC that you licensed to Watson?

Paul Herendeen

That’s correct. It’s our responsibility to bring that to the finish line.

Michael Tong - Wachovia Capital

My last question has to do with Doryx 150. Compared to the 75 mg strength, is there linear dose proportionality between the two of them from a bioavailability standpoint?

Paul Herendeen

I wish Roger was here. I don’t know the answer to that question, so I have to circle back with you.

Operator

Your next question comes from the line of Ken Trbovich with RBC Capital Markets.

Ken Trbovich – RBC Capital Markets

Paul, I wanted to go back to the charge-off of the intangibles associated with Ovcon/Femcon. I’m just looking at it given the script growth is still there at 30% growth, can you give us a sense as to how much of this decision was related to underperformance of Femcon relative to your initial targets as opposed to perhaps being connected to the settlement agreements on Loestrin and Femcon?

Paul Herendeen

It’s a great question, and it actually gives me the opportunity to go back over what our priorities are here over the course of the next several years. With all of the things that have occurred over the course of the last four or five months, now you start to have some real clarity around where we are going to put out promotional emphasis with respect to our OC portfolio. You look at our OC portfolio today, we have LOESTRIN 24, and we have Femcon. LOESTRIN has a patent that runs out in mid 2014. Watson can come in with a generic version in early 2014, so for the near term and for all the obvious reasons, LOESTRIN 24 remains our top priority, and then you have Femcon, and then we talked about our so called low-dose OC, and we said we expect to file that OC in the first half of this year with the hope that it’s approved and launched in the first half of 2010.

As we look forward, we start to think about our portfolio. One of the great things about our company is we have a portfolio of assets, so we start to think about where we are going to put our promotional effort and emphasis. Right now, it’s clearly very much so on LOESTRIN 24. As we look ahead, I think it will be a reasonable assumption to say very clearly we expect to have a new product or hoping to have a new product in the first half of 2010, and that could become a significant emphasis for us. As we look at that and forecast it around, the Femcon asset while it’s a very good and productive asset for us is probably third on that list. As long as we are on this subject because I got a question on this earlier this morning, when you think about the impairment charge we take on FEMCON/OVCON, it’s a non-cash accounting event that reflects our future promotional priorities within our portfolio as compared to something that happened to Femcon that caused to say, gee, it’s not what we thought. The asset has done really good things for us. It’s just that its value, the accounting value, is less than it was when we thought about it a quarter ago or a year ago or certainly in the beginning part of 2005.

Ken Trbovich – RBC Capital Markets

I think the only question is really on the dramatic nature or the dramatic change it must have occurred to get to that conclusion at this time. It just begs the question of whether that second low-dose OC was somehow connected to the Femcon franchise, and again that’s something that’s not obvious to those of us on the outside looking in.

Paul Herendeen

It’s more about Femcon was an asset that had intellectual property that ran out to 2019 and now it goes out to 2012.

Ken Trbovich – RBC Capital Markets

With just regard to the development pipeline on the dermatology side, how are things progressing with the compounds that you have been working on with Leo?

Paul Herendeen

We continue to work on a number of things with Leo, but none that we are featuring in our near-term discussions.

Ken Trbovich – RBC Capital Markets

In terms of priorities, you mentioned that Tony and the folks on the BD side have been busy potentially trying to find other products to en-license. You certainly spend a lot of time expanding the potential in the ED market in urology. Would further expansion in the urology category be a similar priority or would you consider other sort of specialties beyond urology, women’s health, and dermatology?

Paul Herendeen

We look at the asset. If it’s an asset that we think that we can get approved, and two, can promote effectively, and three, we think has long-term commercial value, it could be in any field where we felt that we could optimize the value of that asset, so it’s not restricted to women’s health, dermatology, and urology. It’s what assets are out there and available that we have the capacity to promote effectively and efficiently.

Ken Trbovich – RBC Capital Markets

On the debt repayment side, can you help us understand the prioritization between the bank debt and the subordinated notes?

Paul Herendeen

Yes. I think during the quarter, we did buy some 10 million face amount of senior subordinated notes that was a function of us getting the opportunity to acquire them at 10% discount, and so we took advantage of that opportunity. As you can see, most of the time we are continuing to reduce bank debt. This quarter, it was $60 million of bank debt and 10 million of senior sub notes. To the extent that there are opportunities out there for us to acquire and retire, the senior sub notes, you’d expect us continue to do that, but at the same token, we are just going to continue to ratchet down the senior secured facility as well.

Ken Trbovich – RBC Capital Markets

Is that the first purchase of subordinate note since the time of the IPO?

Paul Herendeen

Yes, since the time of the IPO. You remember that we did exercise the clawback at the time of IPO and brought down to 390, and now face amount, we are down to 380, so yes, that was. That debt by the way is resident in the US.

Operator

Your next question comes from the line of Mark Goodman with UBS.

Mark Goodman – UBS

You talked about DORYX, and you mentioned you had some other things for the life cycle strategy. Are we going to see anything else in 2009 as part of that strategy? Second question, can you give us the amortization for ’09 and 2010? Third, for Udenafil, are you going to do a placebo-controlled study? Will there be a head to head versus one of the existing brands?

Paul Herendeen

Let me start at the end because, again, I’m going to defer. Roger would love to answer that question; however I’m not able to answer that one. I’ll go backwards. To your amortization question, in 2009, $226 million; 2010, $161 million; 2011, $131 million. I point out on these amortization charges, and I’ve said it a number of times we review our identified intangibles every single quarter, and so that number can move around, but when it changes, we’ll generally tell you what it is. With respect to DORYX, we are not disclosing anything with respect to what we are doing around that franchise for 2009.

Operator

Your next question comes from the line of Scott Henry with Roth Capital Partners.

Scott Henry – Roth Capital Partners

Paul, I just wanted to dig a little deeper on the DORYX 150 mg. For starters, it has climbed according to my numbers about 40% share, probably 50% of dollar share and perhaps higher on the profit side. What percent do you think you can achieve with a 150 mg dose? Is there a reason that that will kind of hit wall at some point? I just wanted to get a little color on that.

Paul Herendeen

Yes. First of all, we follow this as you might expect quite closely. It was already representing 50% of new prescriptions which will be the leading indicator that it’s 50% of the expected units and a greater amount of the revenue and profits associated with the franchise, and our most recent weekly data, we took a big jump up, and as of the most recent week, it was 60% of new prescriptions. It is now over 50% of total prescriptions and again the new prescriptions are the leading indicator, and I believe, and I’ll call on Reichel to put it in front of me, the economic value of a 150-mg script as compared to a 100-mg script is about 23% more. Economic value meaning in terms of net sales, dollars per prescription, than 100 mg, so the 150 is really moving towards now being a clear majority of the revenue associated with DORYX franchise. To your question how far can it go, the Doryx 150 is a good product. It’s received great market acceptance, and we continue to promote the benefits of the Doryx product out there, and we would expect it to continue to gain share of new prescriptions and total prescriptions as we continue to promote it. I don’t know what the practical maximum is. It’s certainly not 100% of the franchise in unit terms, but it certainly could be two-thirds or 70% or something in that range and perhaps higher.

Scott Henry – Roth Capital Partners LLC

Let’s say that the generic75-mg does reach the market. How do you think the 150 mg is impacted if there is a generic? Then I have the logistical question; I don’t know if you know the answer. If a patient shows up with a 150-mg script at the pharmacy, is it even legally possible to swap for that pharmacist to tell them to take two 75 mg?

Paul Herendeen

If there were generic 75, I would expect that it would have some impact on prescribing for the 150, and that sort of answers your second question. The substitution, it might not be legal, it might not be the way it’s supposed to work; however, there would be some substitution, and you would see some leakage.

Scott Henry – Roth Capital Partners LLC

Just shifting over to LOESTRIN, looking at revenue pre script, it was a little lower this quarter. I think it was around $51 a share depending on whose data you use. In the past, it had been as high as the upper or mid 50 range. Where do you think that number goes? It was 51. Was there a little of destocking this quarter, or is that a good go ahead number?

Paul Herendeen

Yes, while I’m talking, I’m going to ask Reichel to dig through the pipeline data there. The ebb and flow of the revenue per prescription is really around the ebb and flow of pipeline inventories. The selling price of the product and the sales deductions for that product have really not changed a whole lot for us over the course of the last four quarters.

Scott Henry – Roth Capital Partners LLC

With regards to debt reduction, debt is getting harder to come by. At what point do you sit on the debt you have because you may not be able to replace it and build cash with the thought of maintaining financial flexibility going forward?

Paul Herendeen

We believe that if we had the right transaction that required debt capital, if it were truly the right transaction that we would find a way to fund that deal with appropriate sources of financing. In the absence of having an opportunity in front of us, we just continue to reduce debt. We believe that if we have the right transaction, we would be able to find the capital. As good as we can, we maintain excellent relationships with providers of debt capital, and if the situation presents itself, I think we’d be able to source capital.

Scott Henry – Roth Capital Partners LLC

In terms of the low-dose contraceptive, have you seen the clinical results there yet, or are you still waiting for the final clinicals?

Paul Herendeen

We are gearing up to hopefully file the NDA here in the first half of this year. We are not going to talk about what the results were expect to say that we expect to file the NDA in the first half of this year.

Operator

Your next question comes from the line of David Windley with Jeffries & Company.

David Windley – Jeffries & Company

Paul, on the Obama administration healthcare reform budget yesterday, they raised a couple of things that I wanted to ask you about. First one, I presume it’s small, but I wondered how much of your revenue by payer comes from Medicaid?

Paul Herendeen

I don’t have the percentage handy, but it is modest.

David Windley – Jeffries & Company

Is it a single-digit number?

Paul Herendeen

We’ll circle back with you, but I’m guessing 10% or less.

David Windley – Jeffries & Company

And then more conceptually, in some of those line items, they do kind of specifically call out or suggest higher levels of rebate from reformulated products, and not to over-read that too much, but in making some value judgments about which products ought to be able to take price or get price and which shouldn’t, and I guess I’m just wondering if you’ve had a chance to look at that, and it’s probably not a huge surprise, but how that makes you think about Warner Chilcott’s strategy?

Paul Herendeen

We continue to believe that we develop and then market products that are good products. To the extent that the environment changes, it could be harder for us to gain share and maintain share in the market. This is the environment that all other companies are facing as well. We keep an eye on it, of course. It’s very important that you understand the environment in which you work, and the environment is not getting better; however, we continue to believe that our strategy which is to develop, in the case of hormonal contraception, novel oral contraceptives and introduce them into the marketplace and gain share. With respect to what we’re doing in the dermatology field, we have unique products that address specific needs and those products their will or will not used by physicians based on their call.

David Windley – Jeffries & Company

On the erectile dysfunction products that you’ve en-licensed, have you commented publicly about what you believe the differentiated opportunities there is given that that market is dominated by big players?

Paul Herendeen

The easier of those two is the NexMed product because topical Alprostadil is unique in the marketplace, so with the ability to market that, we think it would be a great product if we can get it to the finish line, so that one is relatively straight forward. It would address what we believe is a need within that segment. With respect to the Dong-A product, it’s a longer duration product, like Cialis. That is the fastest growing segment of that market. There are some market dynamics there where we believe that we could position another product in order to gain share for that product. Someone asked recently at one of our conferences do you expect this to be a giant product. Look, for a company like ours, relative to the cost of developing that brand, we think as a team that if that PDE-5 is approved that we can go in and establish enough share that makes that a very attractive economic asset to our company. It doesn’t say that expect to go out and dominate the market. That’s not it.

David Windley – Jeffries & Company

You addressed the economic position of Taclonex Scalp in your portfolio and Doryx as a bigger opportunity for you to put your backs behind. The question that arose in my mind was why not increase your promotional resource and push both, and I thought I’d just post that and see what your reaction was.

Paul Herendeen

Not to say that we don’t promote Taclonex, we obviously do promote the Taclonex franchise. It’s just that currently our priority is in pushing behind the Doryx franchise for now. A couple of factoids on that. Doryx is our product which carries a much higher gross profit margin than Dovonex and Taclonex products which we licensed in from our friends at Leo, so the economic value of growth in Doryx is just more attractive. Secondarily, I think I said really early on in my opening remarks we’ve done a nice job in the dermatologist’s office with the overall Taclonex franchise, and I believe we will continue to grow the scalp product within the dermatology area, but the growth opportunity for the Taclonex is as that filters out into the GP/FP community, and that’s not something that we can push.

Operator

We have no further questions on our roster. Therefore, Mr. Herendeen, I’ll turn the conference back over to you for any closing remarks.

Paul Herendeen

Thank you for attending the call this morning. We’re pleased with the quarter and the year that we put on the board, and we remain confident in our guidance for 2009 and look forward to speaking to you at the conclusion of our first quarter.

Operator

This does conclude the Warner-Chilcott operating results for the fourth quarter and full year 2008 conference call. We do appreciate your participation, and you may disconnect at this time.

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Source: Warner Chilcott Ltd. Q4 2008 Earnings Call Transcript
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