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Warner Chilcott (NASDAQ:WCRX)

Q1 2013 Earnings Call

May 10, 2013 8:00 am ET

Executives

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

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

Analysts

Marc Goodman - UBS Investment Bank, Research Division

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

Liav Abraham - Citigroup Inc, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Jason M. Gerberry - Leerink Swann LLC, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

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

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

Christopher Caponetti - Morgan Stanley, Research Division

Operator

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

I would now like to turn the conference over to your host, Paul Herendeen. Sir, you may begin.

Paul S. Herendeen

Thank you, and good morning, everybody. This morning, we issued a press release that details our operating results for the first quarter of 2013. You can find that press release on our website if you don't already have it. Roger will make a few comments, and I'll provide some additional color around our financial results for the quarter, and as usual, we will end with a Q&A period.

But before we get started, 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 2012 Form 10-K and other filings, which are available on the SEC's website. Forward-looking statements made during this call are made only as of the date of this call, and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.

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

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

Roger M. Boissonneault

Thanks, Paul, and thanks for the speed reading. That was excellent. Good morning, everyone. Before Paul takes you through the specifics of our financial results, let me provide you with some color on our accomplishments so far in 2013. On our guidance call 2 months back, we described 2013 as a "blocking and tackling, taking care of business" type of year. With 4 product approvals in the first 5 months of 2013, I hope you'll agree that we're off to a strong start.

We certainly appreciate the contributions of our R&D team. The approvals of DELZICOL, DORYX 200 milligram and 2 new OCs we announced in April and yesterday should provide you with tangible evidence of our ability to develop and gain FDA approval of improved versions of our core products. The ability to grow our core franchise through focused product development is key to the sustainability of our business model.

Next, we will turn our attention to the successful commercialization of our new products. Let's start with DELZICOL. DELZICOL was approved in February. Immediately after the product was approved, we started discussions with managed care providers, with a goal of maximizing formulary coverage for the new product. We were able to secure coverage on a majority of key formularies and continue to work to improve coverage. Broadly, our managed care coverage out of the gate was in line with our expectations. We also worked with wholesale and retail channels to let them know about the launch of DELZICOL and provide information to assist during the transition from ASACOL 400 to DELZICOL.

With the groundwork well underway, in mid-March, we began the promotion of DELZICOL to physicians. Our gastroenterology and other field sales resources have done a great job of jump starting this important initiative. While it's still early days, I am pleased with the launch strategy of DELZICOL and the overall performance of ASACOL, DELZICOL franchise. The strength of ASACOL brand name and excellent managed care coverage have made ASACOL HD an additional prescribing option for certain patients during the transition to DELZICOL. Again, very early days, but I believe the transition of the franchise is going well. I'll let Paul talk about the revenues related to DELZICOL and ASACOL in a moment.

Let me turn to DORYX 200 milligram. In early April, we received FDA approval of DORYX 200 milligram. We expect to commercially launch DORYX 200 milligram in July. That timing takes into consideration many factors and ensures that we will be fully prepared for a successful launch. In the meantime, the dermatology teams continue to do a great job of promoting DORYX 150. As we get closer to the launch of 200 milligram, we expect to share additional details with you. For now, we'll just say that we are very excited to have this approval in hand and look forward to adding DORYX 200 milligram to our list of core brands.

Last and certainly not least are the approval of 2 new OCs. We expect to commercially launch the product announced yesterday under the MINASTRIN 24 FE tradename in early August. We notified the FDA of our intention to use MINASTRIN 24 FE tradename for this product as we do not intend to launch the OC that was approved in April at this time. We believe that yesterday's approval is a positive development regarding our efforts to resolve the warning letter related to our Fajardo manufacturing facility. We are still awaiting official correspondence from FDA on that point.

Let me turn to an update on product development, specifically an update on the progress made in the development of new products for urology and the dermatology segments. We have completed the Phase III development work for our PDE udenafil product and hope to be in position to file an NDA in early 2014. In addition, we have completed Phase II development on our novel tetracycline, ceracyline [ph], and are hard at work planning for Phase III studies, which we hope to initiate in 2014.

We continue to be focused on important strategic initiatives for 2013. As we turn our attention to the remainder of the year, our focus will be towards the successful commercial launch of the products I just discussed. I will continue to describe 2013 as a "blocking, tackling and taking care of business" year for us, and I believe our results thus far are providing that we are playing hard and expect to be successful.

With that, let me turn it over to Paul for an overview of our financial results.

Paul S. Herendeen

Yes. Thanks, Roger. Yes, let me start with the very high level of our results for the first quarter. Total revenue for the quarter was $593 million, which was a decrease of $92 million compared to the prior year quarter. The 2 major drivers of the decrease were the expected continued decline of our global ACTONEL revenues, which were down $35 million quarter-to-quarter and a $53 million decline in net sales of our gastro business, which is our mesalamine business. That includes ASACOL, ASACOL HD and DELZICOL.

The launch of DELZICOL is progressing, and the decrease in net sales reflects that we stopped selling ASACOL 400 in March, and we defer the recognition of most of the DELZICOL revenue that would have otherwise been recorded in the quarter. We expect to recognize the deferred revenue associated with DELZICOL in the second quarter, net of applicable gross-to-net factors. I'll talk more about the gastro franchise in a minute.

Within operating expenses, you see the results of our ongoing efforts to be efficient with our investment in promotional and selling expenses. Our G&A costs in the quarter were a little light relative to what you should think of or what we think of as our run rate due to the timing of certain expenses, mainly legal. We expect our quarterly run rate for G&A to be higher over the balance of the year, and we are maintaining our prior guidance for the full year for SG&A expense. We delivered a solid $232 million of adjusted cash net income in the quarter or $0.92 per share.

Those are the top-level highlights. Let me cover a few more specifics, starting with revenue for our key brands. First, the gastro franchise. Roger shared the current view of the ongoing transition from ASACOL 400 to DELZICOL. From a financial perspective, ASACOL net sales were $153 million, a decrease of 27% or $58 million compared to the $211 million we recorded in the prior year quarter.

We stopped shipping ASACOL 400 milligram in the United States in early March and commenced commercial shipments of DELZICOL shortly thereafter. The company shipped approximately $50 million of DELZICOL at gross sales value into the trade in March, of which net sales of $5 million was recognized in the quarter. The gross sales of $44 million were deferred based on the terms of those initial shipments. We expect the $44 million of deferred DELZICOL revenue to be recognized in the second quarter of 2013, again net of applicable gross-to-net factors.

Obviously, there was a significant contraction of pipeline inventories at ASACOL 400 during the quarter, and that will continue as remaining ASACOL 400 inventories in the trade are used to fill Rxs for ASACOL 400 that have not yet been transitioned to DELZICOL. From the standpoint of gastro net sales to be recorded by Warner Chilcott over the balance of 2013, we'd expect to see increases in net sales of both DELZICOL and ASACOL HD that will be partial offset to the impacts of the ASACOL 400 decline. The launch and promotion of DELZICOL is a top priority for us in 2013.

Moving to our OCs. Net sales of our OCs increased $9 million or 6% to $151 million in the quarter compared to $142 million last year. LO LOESTRIN, which is currently the primary promotional focus of our women's health care sales force efforts, generated net sales of $52 million, an increase of 86% compared to the prior year quarter. The increase in net sales was driven primarily by a 78% increase in filled Rxs. As expected, net sales of LOESTRIN 24 continued to decline due to the promotional emphasis that we place on LO LOESTRIN. Net sales declined to $93 million, which was a decrease of 14% compared to $108 million in the prior year quarter. The total LOESTRIN franchise, including both 24 and LO LO grew 7% compared with the year-ago quarter. As Roger discussed, we plan to launch our new oral contraceptive under the MINASTRIN 24 FE tradename in early August.

ESTRACE Cream continues to respond to the promotional effort that we put behind the brand and produced net sales of $53 million in the quarter, up 2% compared with the prior year quarter. That was due primarily to an 8% growth in filled Rxs. ENABLEX net sales declined $2 million compared to the first quarter of 2012. As we noted in our guidance call, we expect ENABLEX sales to decline year-over-year based on the current overall landscape for the brand. However, we continue to look at ways to optimize promotional efforts behind the brand.

DORYX net sales decreased $11 million or 37% compared to Q1 of '12. After 12 months of facing generic competition, filled Rxs for DORYX 150 have remained reasonably strong. Based on the most recent weekly Rx data, branded DORYX 150 continues to retain more than 60% of the total filled prescriptions for the combination of the branded product and its generic competitor. It's important to note that the maintenance of those DORYX prescriptions came at a cost in gross to net for the brand. But let me be clear that despite the higher gross to net, DORYX 150 remains a profitable brand for us. We're looking forward to adding DORYX 200 to our portfolio and expect to begin promotion of that product in July.

Finally, ACTONEL net sales continued their expected decline, with global revenues down 24% compared to the first quarter of 2012, and that was driven mainly by the loss of the exclusivity for the brand outside the United States, which began in 2010. Also, ATELVIA net sales totaled $19 million in quarter, an increase of about 19% compared to the prior year quarter. We view ATELVIA as a great product with clear differentiation and benefits for both patients and physicians. However, due to the current U.S. market dynamics for oral bisphosphonates, the prospects for growing ATELVIA are tough. We expect that the U.S. market will continue to contract in 2013.

Below the revenue line, our gross profit margin as a percent of total revenue was 88.2%, which represents a decrease from 89.5% in the prior year quarter, which was largely due to mix and volume of products sold. SG&A expenses in the quarter were $179 million, down 10% compared to prior year quarter. Advertising and promotion costs were down $8 million due to less promotional spend during the first quarter.

Selling and distribution costs were down $14 million or about roughly 13% primarily due to a $10 million reduction in co-promote expense as non-U.S. ACTONEL net sales continued to decline after loss of exclusivity in both western Europe and Canada. G&A expenses were $68 million, up $3 million versus $65 million the prior year quarter. I mentioned earlier, first quarter G&A expenses are probably light compared with the anticipated expenses for the remainder of the year on a quarterly basis, specifically in the G&A component of SG&A, where normal run rate for us is expected to be closer to $70 million to $75 million in the quarter.

R&D expenses were $25 million in the quarter -- both the quarters ended March 31, 2013, and 2012. The amount of our spending on R&D fluctuates based on the timing and stages of the various R&D projects that we have ongoing. The 4 NDA approvals we received in the first 5 months of 2013 are certainly a good indication of the R&D team's ability to efficiently and effectively continue to successfully pull programs through our internal pipeline. Adjusted cash net income per share for the quarter, which adds back the after-tax impact of amortization of intangibles, the amortization writeoff of deferred financing costs and the western European restructuring and litigation charges, was $0.92 per share, and that was using fully diluted shares of 251.2 million shares for the quarter.

Turning to liquidity. We generated net cash from operations totaling $114 million in the quarter, which compare to $208 million in the prior year quarter. The fluctuations in any quarter relative to -- for our cash flow are generally driven by a combination of earnings and the timing of movements of certain of our working capital accounts, mainly accounts receivable and accruals. I described that $114 million as being on the low side. I think all of you who followed us for a while, you will see that our quarterly cash flow was up and down but is reasonably predictable over the course of a full year.

During the first quarter, we made option prepayments of our debt totaling $250 million. We ended Q1 with $290 million of cash on hand. Leverage on a net debt basis was roughly 2.5x trailing 12 months adjusted EBITDA. We ended Q1 with approximately $3.7 billion of gross debt, which was comprised of $0.4 billion of term debt under our senior secured credit facilities and the $1.25 billion face amount of 7 3/4% senior unsecured notes.

Based on the results for Q1 and our outlook for the remainder of 2013, we are reaffirming our guidance issued in February of 2013, with a slight update that incorporates the after-tax impact of the western European restructuring and litigation-related charges but does not change the guidance ranges for adjusted cash net income or adjusted cash net income per share. Please refer to the end of the press release that we issued today for the detailed guidance table.

Before we move to Q&A, let me just reiterate that our focus over the remainder of the year will be on the successful commercial execution behind DELZICOL, DORYX 200 milligram and MINASTRIN 24 FE. I believe these products' approvals not only help clarify the prospects for our key product franchise for the remainder of 2013, but should also give you a better view of these product franchises' prospects for 2014 and beyond.

With that, I want to open up the line for Q&A. [Operator Instructions] Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank, Research Division

Maybe you could talk about the oral contraceptive launch and how we should be thinking about a switch. What is exactly a good switch in this scenario as far as the capture rate? And how much slippage are you expecting? Just give us a sense of how we should be thinking about this relative to, obviously, what's going on with ASACOL and DELZICOL.

Roger M. Boissonneault

Marc, it's Roger. I don't think we can get into the kind of mechanics or identify switch metrics. I think you should think of this as both these efforts were to improve the compliance of our existing OCs. As you know, historically, we have perhaps a couple of projects going on and that we're not always in control of how they move through the FDA. Actually, the second product that got approved, we intended to be the first. And how it turned out was it took a little delay, and it caused a bit of confusion. But like we said, we intend to launch that product in August. It indeed will be the next generation of LOESTRIN 24, and we will do our best to get that off to a launch that perhaps is similar to the DELZICOL execution, which has been -- and part of the FDA's concern is they don't want to have 2 product forms in the marketplace. They don't want to have a chewable and a non-chewable. So when we put the chewable into the marketplace to avoid confusion, we're going to try to get the non-chewable out as quickly as possible.

Marc Goodman - UBS Investment Bank, Research Division

So should we expect the non-chewable to be out before you even launch, as far as just bleed -- you're going to bleed down inventory? You're not...

Roger M. Boissonneault

No, no. That would be -- we're going to leave that in the marketplace. We just -- we want to minimize confusion. So it will be in the marketplace, and over a period of time, we will bring in the new chewable product.

Operator

Our next question is from Chris Schott of JP Morgan.

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

Can you just, also just elaborating on this OC dynamic, talk a little bit about how you're going to prioritize LO LO as compared to this -- the MINASTRIN launch? I guess, just how should we be thinking about the momentum of LO LO as, I guess, some of the maybe promotional priorities move towards the new products and away from that one?

Roger M. Boissonneault

Yes, that's a good question, Chris, and I think probably lost in the fact is our main focus is LO LO. Our main focus is the 10-microgram product and perhaps how we focus on minimizing estrogen exposure and not at the risk of decreased efficacy. So that is indeed our strategy. So LO LO is not to go to the side with this. It's -- in other words, how do we improve 24 because that's a 20-microgram product, and we look at that as potentially like -- as a different market, and the ultra-low-dose OC being the 10-microgram product. And we continue to look at lower doses of estrogen. So I mean, that's part of our strategy as a company.

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

Okay. So one follow-up. Just also as we think about formulary coverage for the new OC, just any comments you can make there. And should we think about this -- that this could be kind of DELZICOL-like that we can have comparable formulary coverage by the time the products launch? Or is there any differences here or difficulties here?

Roger M. Boissonneault

At this point, we don't perceive any difference. We couldn't talk about it until we got the product approved, but we'll be out there. I think you'll see managed care coverage similar to what we have on LOESTRIN 24 and LO LO right now. That's what we intend to duplicate.

Operator

Our next question is from Liav Abraham with Citi.

Liav Abraham - Citigroup Inc, Research Division

I'd be interested in your thoughts on the approvability of generic mesalamine following the documents that were recently presented by Watson to the court in Shire's Lialda case, where it seems as though Watson hasn't met the guidelines for the approvability of generic Lialda. Are you still confident in your working assumption that we won't see generic ASACOL 400 this year?

Roger M. Boissonneault

I think we're -- you're asking me a question that I really don't -- I can't really opine to the answer. I don't have definitive information you have to really talk to OIG, but I think you just have to separate the 2 between Lialda and ASACOL. Lialda is also a time release, so it's not purely dependent upon the pH delivery and how that delivers. So I read the news as you read the news, and it's interesting. And it may be that there's another roll of the dice maybe that you may lose at one court level, and they may challenge it. So it's hard to opine. But we're very confident in ASACOL and DELZICOL and certainly, the 800-milligram dose form. It's indeed a very tricky mechanism because we're trying to deliver mesalamine to the colon.

Operator

Our next question is from Greg Gilbert of Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

On the new OC can you talk about what clinical work you did, if any, and whether you got Hatch-Waxman? And what's the status of patent applications, if you can comment on that?

Roger M. Boissonneault

Thanks, Greg, for that. Yes, no, yes, we did clinical work, and we expect to get Hatch-Waxman. And we expected to -- I think it's going to operate under the 394 patent, and there may be some other opportunities for patent coverage.

Operator

Our next question is from Shibani Malhotra of RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

So on the DELZICOL, ASACOL franchise, can you talk about your expectations for the year? Obviously, we've seen a switch to DELZICOL, but we've also seen a switch to ASACOL HD, and entire franchise has been a bit choppy. So could you talk about how you expect the overall franchise to grow, how you expect the switch to go? And then, comment on the price or the realized price differential between HD and DELZICOL.

Roger M. Boissonneault

I'll just make, I mean, a brief comment. And it's going according -- we're promoting DELZICOL. We do see some movement into HD. We're really not -- we're not promoting ASACOL HD as an alternative for ASACOL 400 milligram. We do see some of that happening. But the primary focus is DELZICOL, and it's going quite well. And I'll let Paul opine to what we're going to see.

Paul S. Herendeen

Yes, I mean, I think that we are T -- we are time 0 plus 7 weeks here, Roger said several times and I even said it in my prepared remarks. So far this is going well. And we say, "Well, it's going well." And well actually is also in accordance with the way we had thought it would play out. And so we're 7 weeks out, and we have seen more than half of the ASACOL 400 Rxs at this point, either in DELZICOL or seen as an increase in ASACOL HD. It is early days, and so people have asked us a question offline one-on-one. "So well, gee, it seems to be going well. Are you changing your outlook in the way you think about the ASACOL, DELZICOL franchise?" It's still early days. We are feeling really good about how it's going so far. As it plays out over the next quarter or so, perhaps next time we get on this call, we'll have a lot better feel for how we think it will actually work out over the course of the year. You did hit on an interesting point on when you've seen a pickup in ASACOL HD, you will recall that, in the past, we talked about an ASACOL HD Rx being worth about 115% or 15% more than an ASACOL 400 Rx. And that's a function of how many milligrams per day patients tend to take when they're on ASACOL HD relative to ASACOL 400. We don't know what that relationship will be. We have 7 weeks' worth of data, and we'll just need to see the way it plays out. That said, I'll reiterate we are very happy with the way this transition has gone so far, and we expect that it will continue. And we expect that when we get on the phone with you for the next quarter, we'll have a much better read on how this will play out for the balance of '13 and the implications on '14 and beyond.

Operator

Our next question is from Jason Gerberry of Leerink Swann.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Just on the DORYX 200 milligram, could you comment at all on your outlook there? I noticed Heritage got an approval, and so I'd expect maybe some share leakage on the 150 milligram. But could you just comment on your thoughts on holding share at -- for the 150 milligram and kind of how much volume you expect to transition from 150 milligram over to 200 milligram?

Roger M. Boissonneault

I'll quote Paul Herendeen here. "It's still early days". We haven't even launched the product. But we continue to promote 150. It's been pretty steady. I can't say that we know we've made a lot of inroads on 150, but it seems to be pretty steady. We will maintain that, and then we will launch the 200 milligram. And I think it really is early. Until you actually see a product in the marketplace and you begin to see the trajectory of the product that it is premature, but I'll let Paul opine.

Paul S. Herendeen

Sure, let me comment on that [ph] . There's a couple of things that are a little bit different about the DORYX franchise. One is we are presently promoting, as Roger just said, DORYX 150 and doing so in a way that more than covers the cost of our effort. In fact, it's a nice contributor back to our pretax profitability. And so with that 150 in there, the question I think, the first question, was, "Gee, there's another approval. Do you think that will change the trajectory?" We don't. We continue to promote 150. We think we'll continue to maintain share consistent with what we've seen so far. So we don't see that as a big factor. But second and I think also important point for people to consider, DORYX 150 will continue to be on the market, and it's a product that has done well and we think, will continue to do well. We're very excited about the prospects though of adding in the DORYX 200 as a new option out there. And so we're looking forward to that, and that starts in July. I hope that answers it, Jason.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Just what exactly is the benefit of 200 versus 150? If you can clarify on that.

Roger M. Boissonneault

Yes, actually, it's a more efficient dosage form. It's indicated -- it does have an indication for chlamydia where it can be used daily rather than BID. It also includes acne in the label on the initial dose, and it's really 100 milligrams BID, where you can actually take this tablet and break it in half. But at this point, I think we'll let the physicians let them know what they think. And like I say, it's early days. We're maintaining our focus on the 150 right now.

Operator

Our next question is from Randall Stanicky of Canaccord Genuity.

Randall Stanicky - Canaccord Genuity, Research Division

Just a follow-up. You've had a lot of success moving oral contraceptives or switching them over very quickly in the past. How does your -- how do your thoughts or strategy change as you think about the potential Mylan entry in October, where we're still not sure if that could happen, versus Actavis in January?

Roger M. Boissonneault

I think our strategy is independent of Mylan. They do what they're going to do. Our strategy is consistent with improving our oral contraceptives. We've been encouraged by the FDA in these to minimize confusion on the part of the patient. So what we do is we try to switch as quickly as possible and as feasible. So whatever Mylan does, they do. We have our strategy, and we're going to implement it as efficiently as we can.

Randall Stanicky - Canaccord Genuity, Research Division

Roger, I guess, the other way to ask this, is 3 months -- given the success you've had to move things quickly in the past, is 3 months enough time for you guys to get the bulk of that product switched over?

Roger M. Boissonneault

Well, I don't -- I wouldn't even comment on the 3 months because I don't even know if is the 3 months real. But that's -- whatever it's going to be, this is our strategy, and we can't control whether it's 3 months, 6 months. But you got to remember the strategy is built around building a better OC and getting patients on a better OC.

Operator

Our next question is from Michael Tong of Wells Fargo Securities.

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

Maybe switching gears a little bit to your PDE5 inhibitor. What is the level of differentiation between udenafil and the rest of the competition right now? And how do you plan on going about competing with the Pfizers and the Lillys out there?

Roger M. Boissonneault

Michael, its Roger. I think if you look at udenafil, it's a long-acting, so it's more like CIALIS than say VIAGRA or the short-acting. Not to say that -- I think they've done a nice job with CIALIS, and I think you've got to look forward with udenafil. We have already talked about erectile dysfunction as being a primary indication, but we also see utility on a daily basis for BPH and positioning in for LUTS, which is a constellation of symptoms. So when you look at this type of drug, the short-acting products would not have -- would probably not have utility in BPH. The advantage of udenafil is it has utility outside of erectile dysfunction, and it's more positioned for lower urinary tract symptoms. So it's a longer-term strategy than, say, just a short-term strategy to get into the market for ED.

Operator

Our next question is from Andrew Finkelstein of Susquehanna Financial.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Maybe you could talk a little bit about the promotional investments you're making over the course of the year. I know your SG&A guidance was unchanged for the full year, and you talked a bit about the R&D. But on the promotional side, what's the cost of the DELZICOL launch, particularly at 1Q? And then how does that -- does that ramp up a bit as you're launching a couple of other products? And is DTC part of the mix? Are there any other incremental investments you're making?

Paul S. Herendeen

Yes, sure, Andrew. It's Paul speaking. Yes, first, the easy one. No, there is no DTC that we'll be using in 2013. The second is that the promotional resources that will help us to promote our various franchises are all part of our SG&A, have been, have been baked into our SG&A starting with the guidance. And as we said today, we're not changing our full year 2013 guidance to reflect the approval of DELZICOL and the work associated with the transition there to reflect the upcoming launch of DORYX 200 and to reflect the upcoming launch of MINASTRIN 24 FE. The primary promotional tool there will be face-to-face detailing to physicians to talk about product attributes and pull-through. So I don't think you need to model in any increases or lumpiness in our selling or in our advertising and promotional expenses, were all worked in there. And before I jump off, I think it is worth pointing out that we're not just using our specific sales forces to help here. I mean, one of the reasons why we are configured the way we are in 2013 with a number of territories that we have is because we anticipated and hoped that we would be in a position to be launching 2 or 3 products in 2013. It's possible that when we get to '14 and beyond, we could further optimize the size of our sales force, meaning it may not need to be quite as large as it is today. But right now, we have plenty of resource on hand to do -- to affect the challenges in front of us.

Operator

Our next question is from Irina Rivkind of Cantor Fitzgerald.

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

You guys have done a nice job with getting all these NDA approvals this year, and I was just wondering if there's anything loaded into the NDA submission pipeline from last year that could still potentially be approved this year. And if so, would you have any remaining promotional capacity for it, given that you're launching 3 new products?

Roger M. Boissonneault

I think, as Paul said, we do have certainly promotional capacity. And if the question is, "Are we done this year?" No. I mean, we do have -- we have the potential -- as you said, there's a potential for perhaps another approval this year. I know it's hard to believe that if you can get 4 done in 1 year, you should be happy. But we figured our R&D group has broad shoulders, and we're dependent on them. And there is potential to get another NDA approved this year, and we look forward to that.

Paul S. Herendeen

Yes, Irina, it's Paul. At the risk of over buttering the toast, you said it's nice that we've got these approvals. I think it's terrific. I think Roger referenced the performance of our R&D group earlier, and it's not just the R&D, but it's a group of people within our company. It's remarkable to get 4 NDAs approved 5 months into the year. As Roger just alluded, we have other things that we are working on that can be helpful to us and can further solidify our future. I think it's terrific.

Operator

Our last question is from David Risinger of Morgan Stanley.

Christopher Caponetti - Morgan Stanley, Research Division

This is Chris Caponetti for Dave Risinger. First, on ASACOL HD, can you just provide us an update of ongoing patent litigation with Zydus? I believe there was some order or proposed order on the Markman hearing ruling recently. And then also, do you think the uptake -- I know it's early days, but the uptake we're seeing in HD, is that durable? Or is that share going to shift to DELZICOL over time? My second question -- or I guess my third is just to clarify an earlier question. So are you guys expecting to get the 3 years of data exclusivity on the new chewable OC? And then finally, just a quick modeling question. In 2Q, should we just be adding $44 million to our DELZICOL numbers? Or is there some additional nuance there?

Roger M. Boissonneault

Okay. So I'll try to hit -- I think Paul definitely cleans up on this one. But we do believe we had a positive Markman hearing on ASACOL. As far as the HD, we're kind of surprised of the movement in HD, and we're watching it as you are watching it. And that's probably due to the similarities of the trademark. But it's not the results of our promotional efforts. As far as the chewable, we expect to get the 3-year Waxman-Hatch coverage on that, and that should be listed.

Paul S. Herendeen

I'm sorry, what was the cleanup question?

Roger M. Boissonneault

The cleanup question is an outlook question, forecast.

Christopher Caponetti - Morgan Stanley, Research Division

Yes, it's just...

Paul S. Herendeen

Yes, okay, with respect to DELZICOL, the 40 -- first of all, the $44 million that we deferred is gross sales, and so you have to degrade that by the gross-to-net amounts. Because it's initial load, it's not going to be on top of normal. What you're basically doing is priming the pump or establishing appropriate levels of pipeline inventory out there. You have to think of the 3 different products in the first quarter make up the mesalamine franchise for our company. ASACOL 400 pipeline contraction, significant pipeline contraction, we stopped shipping, Rxs are filled and eventually depletes the channel and that moves on. Second is to the extent that we're ramping up, as we are, with DELZICOL, you expect not just to record sales for the actual pull-through but also to establish that initial pipeline. There will be no more sales for ASACOL 400 recorded for the balance of the year so that's behind us in Q1. Now with DELZICOL, you're going to see a match between in-demand plus the appropriate build of the pipeline inventories out there so that the distributors and retailers can have an appropriate service level in servicing their customers. Last, you have seen a significant increase in ASACOL HD Rxs. So in addition to the pull -- the increased pull-through, you would expect to see those pipelines expand so that they can maintain the same high service level, meaning they being, in this case, the distributors and retailers, high service level than being able to fill Rxs for HD when it's out there. So it's really dynamic. So looking to say, "Gee, I'm just going to add some number to my Q2," probably not. But I'll go back to where I started. We're -- we feel good about our full year, all products, revenue guidance for 2013. Lots of these things we're taking into consideration in developing that guidance. We're off to a great start on that mesalamine franchise, and it's going to be hard to predict on a quarterly basis. But I think when we get to the end of year, we're all going to be happy.

Operator

I would now like to turn the conference back over to management for closing remarks.

Paul S. Herendeen

Yes, thanks. It's Paul. I'll deliver the closing remarks, I mean. Last winter, Roger and I started communicating to you that 2013 was going to be a year that we needed to deliver on a number of initiatives that would give the market comfort that our business model is sustainable and to give you better visibility into our revenue prospects over the next few years. And I'd say, so far, we're delivering. The 4 NDAs in the first 5 months of the year, that's, as I said, remarkable, and we're looking for more.

Now I've been associated with Warner Chilcott for most of the last 17 years, and I can't recall a moment in time where we had this much visibility into our prospects. Beginning in the second half of 2012, investor concerns started growing around the sustainability of our ASACOL franchise and ticking clock on the LOESTRIN 24 brand. Sitting here now, we've launched DELZICOL with good early results. It is a safe assumption that we're working on improved versions for ASACOL HD as well.

On the OC front our plans for the LOESTRIN 24 franchise are coming into focus. We're launching MINASTRIN 24 FE in early August, and we have another approved product that we'll continue to work on, but may have available in the future. We've been saying this for a while, but I'll say it again and with even more conviction. We expect to be a leader in the branded contraception space for the foreseeable future, and we expect this category to be a growth driver for us.

Then, there's our dermatology business. In the face of generic competition for our DORYX 150 milligram product, our dermatology sales team has maintained a very respectable share of that business, and we've got the approval of the DORYX 200 milligram. We're launching that in July, and I'd say that's pretty exciting. Away from these 3 important franchises, we continue to develop new improved versions for each of our key brands, so our prospects in the intermediate term look pretty bright.

Thank you for your interest in Warner Chilcott. If the remainder of 2013 is productive, as we've been so far, it's going to be a heck of a year. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.

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