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Warner Chilcott PLC (NASDAQ:WCRX)

Q2 2011 Earnings Call Transcript

August 5, 2011, 8:00 am ET


Paul Herendeen - CFO

Roger Boissonneault - President, CEO


Shibani Malhotra - RBC Capital Markets

Marc Goodman - UBS

Chris Schott - JPMorgan

David Risinger - Morgan Stanley

Michael Tong - Wells Fargo

Corey Davis - Jefferies

John Boris - Citi

Louise Chen - Collins Stewart

Chris Holterhoff - Oppenheimer & Company

Gary Nachman - Susquehanna Financial

Greg Waterman - Goldman Sachs

Bill Tanner - Lazard Capital Markets

Gregg Gilbert - Bank of America

Scott Henry - ROTH Capital

David Buck - Buckingham Research


Good day, ladies and gentlemen, and welcome to the Warner Chilcott Announces Second Quarter 2011 Financial Results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Paul Herendeen, Chief Financial Officer. Please go ahead.

Paul Herendeen

Thank you, [Allie]. Good morning. Thank you for joining the call. Earlier this morning we issued a press release that details our second quarter results. The press release is available on our website if you don't already have it.

Roger and I will take a few minutes to give a general business overview of the second quarter and the second quarter financial results, which will be followed by a Q&A period. As I talk about our financial results, I'll try to call out any non-recurring items.

Before doing that, let me point out that on this call we will make 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 2010 Form 10-K and other filings, which are available on the SEC's website. The forward-looking statements made during this call are made only as of the date of this call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.

In addition, we'll 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, let me turn it over to Roger Boissonneault, our president and CEO.

Roger Boissonneault

Thanks, Paul. I'll try to slow it down a tad. I can characterize our first half of 2011 with the phrase we can do better. 2010 ended with our R&D organization demonstrating their expertise by generating three NDA approvals.

Building on recent transitions, we expect the R&D team will continue to perform at a high level, which we believe should enable us to protect and grow our various product franchises.

Where we can do better is at executing the opportunities in front of us, starting with our oral contraceptives. Today Loestrin 24 is the market leader in new prescriptions and we just launched Lo Loestrin and it is now second only to Loestrin 24 in new patient starts.

While we continue to grow share week to week in the second quarter, we're not satisfied with the pace of our growth and are taking steps designed to help us accelerate that growth.

Next, the Asacol franchise; the Asacol brand is the longstanding market leader in ulcerative colitis market. With the availability of Asacol HD, we have every opportunity to continue to gain share by broadening our promotional efforts.

The concentration of Asacol prescription writing, the chronic nature of UC and the reluctance of UC patients to change their therapy once they have controlled their symptoms combine to make Asacol our most attractive brand franchise.

We believe the duration of exclusivity for Asacol may extend beyond the [inaudible] of the various patents and [ANDA] challenges. For these reasons, we continually are rethinking ways that we might best grow the overall franchise, not just convert 400 milligram to HD.

We can do better with Doryx. We had issues with the structure of our loyalty cards and we addressed those issues at the start of 2011 which returned our net sales per RX for Doryx to an attractive level. That was step one.

Now our focus is on gaining share in high-value RXs and growing net sales by adjusting the promotional inputs including the size, targeting quality of the [derm] sales force and further possible adjustments to the card program.

Finally, the Atelvia launch; while managed care has certainly played a role in dampening the launch directory of Atelvia, the underlying story here is need for consistent execution against the opportunity at the rep, district manager and regional manager level.

Our best reps are gaining traction with Atelvia. That is why we remain encouraged by the prospects for Atelvia. We continue the process of sharpening our focus on Atelvia.

It would be easy to underestimate the challenges that we face in assembling the [PGP] business into Warner Chilcott. Though we have overcome most of the challenges, particularly on the R&D, manufacturing and G&A fronts, we are still adapting at being much larger and a much more complex commercial operation.

That said, Warner Chilcott today is positioned with a solid portfolio of marketed products, generates significant cash flow to fund strategic business opportunities as they arrive and has the internal capability to develop new and improved products to sustain and grow our company.

As expected, 2011 is a challenging year for us on the top line due to loss of exclusivity for Actonel outside the US and that variability is part of launching new products. While we worked to do it, we know we can do better and we expect to remain confident in our near-term and long-term prospects.

Let me turn it back to Paul to cover some of the financial highlights of our second quarter.

Paul Herendeen

Thanks, Roger, and I'll just try to cover a few of the highlights. When looking at our revenue compared with Q2 last year, I'll just call your attention. Remember that last year we had $76 million of Dovonex and Capanex sales under the distribution agreement with LEO in that quarter. Those were essentially sort of non-profitable sales. They were flat sales with no margin.

Excluding those sales from the prior year quarter, revenues were down roughly $70 million or about 9%. On the plus side, Enablex, which we acquired in Q4 of last year, added $19 million of revenue relative to the prior year quarter and net sales of our OCs were up $6 million.

Estrace Cream continues to benefit from the promotional support that we put behind the brand and we saw our field RXs grow almost 9%.

Net sales were up a modest $4 million compared with Q2 of 2010 and those are held back a bit by contraction of pipeline inventories during the current year quarter.

On the other side of the coin, the Actonel-Atelvia franchise accounted for $63 million of the decline, with $33 million of that outside the USA where Actonel has lost its exclusivity.

Total filled prescriptions in the overall bisphosphonate market in the US continued to decline and the market dynamics for branded offerings, such as Actonel and Atelvia, remained challenging.

Doryx net sales declined $19 million or 37% in comparison with Q2 of 2010. Doryx RXs were down 46% compared to the prior year quarter mainly due to the changes that we made to our loyalty cards that Roger just referenced at the beginning of 2011.

However, our average net sales per RX normalized but inventory and pipeline fluctuations increased and was roughly $350 per RX in the current year quarter compared with roughly $250 in the year-ago quarter.

The decline in Doryx sales versus Q2 was also impacted by a significant reduction in channel pipeline inventories in the current year quarter and also relative to the prior year quarter.

Asacol net sales of $188 million were down slightly compared to the prior year quarter due to increases in sales related deductions offset in part by increased growth selling prices.

Asacol HD continues to grow as a percentage of the franchise RXs and is now more than 25% of Asacol and RXs. Net sales of our oral contraceptive products increased $6 million or 6% in the current year quarter versus Q2 '10 and I want to point out that within our overall OC portfolio, RXs for the Loestrin franchise were up 6% and net sales were up 27% year-over-year but this growth was masked in the current year quarter by declines in our other non-promoted OCs, including the continued erosion of Estrostep and Ovcon and the introduction of generic competition for Femcon in March of this year.

Loestrin 24 generated revenues of $102 million in the quarter, an increase of 15% from the prior year quarter, primarily due to a reduction in sales related deductions ion higher average selling prices. Lo Loestrin, which we launched in January, generated net sales of $11 million in the quarter.

So thinking about revenue and, in summary, the takeaways I -- or at least the things I would focus on during the quarter were the decline of the Actonel-Atelvia franchise due to the loss of exclusivity OUS and the difficult market in the US and the reduction of Doryx pipeline inventories offset in part by gains in our OC portfolio, Estrace Cream and the impact of the acquired Enablex brand.

Moving to gross profit, our adjusted gross margin on total revenue in the quarter was 89%, which is in line with our expectations.

Reported SG&A in the quarter totaled $246 million. The prior year quarter included a total $38 million of costs associated with the integration of PGP. Excluding those costs from the 2010 quarter, our SG&A expenses increased slightly by $3 million, mainly due to higher A&P costs associated with the DTC campaigns for Atelvia and Lo Loestrin.

Our G&A cost in the quarter was $76 million, which at this stage represents a normal quarterly run rate for the company. Separately, we continue to break up our costs that are related to the restructuring of our Western European operations which totaled $16 million in the quarter.

The Western European restructuring is on track and, based on our most recent review, we anticipate for the full restructuring slightly higher restructuring expenses during the calendar year 2011 in the range of $120 million to $130 million, which is up roughly $10 million from the prior communicated range.

R&D expenses in the quarter totaled $25 million and include the cost of all of our ongoing product development programs. There were no milestone payments included in R&D in the second quarter.

R&D expense in Q2 2010 included $20 million of milestone payments. Based on the timing of project spend, we are reducing our R&D range for the full year 2011 by $10 million to $120 million to $140 million and in that range we expect R&D expense to ramp up during the second half of the year.

Below the operating line, net interest expense for the quarter totaled $65 million, including $10 million of the amortization and write off of deferred financing fees. The $22 million increase in interest expense for Q2 of '11 compared to the prior year is reflective of the incremental debt that we incurred to fund leverage recapitalization and the debt we incurred to fund the acquisition of Novartis' rights to Enablex during the second half of 2010.

Those were offset in part by the reduction of our term debt interest rates achieved through the refinancing completed in the first quarter of this year. We ended the quarter with $4.1 billion of gross debt comprised of $2.8 million of term debt under our senior secured credit facilities and $1.25 billion face amount of 7.75% senior end secured notes.

During the quarter, we made prepayments of our term debt totaling $186 million of which $150 million were optional prepayments.

Income taxes in the quarter reflect a corporate effective tax rate of 23%. I want to point out our corporate effective tax rate can be volatile on a quarter-to-quarter basis. Our guidance for the full year 2011 continues to anticipate cash tax rate for the full year of between 10% and 11%.

GAAP net income in the quarter was $72 million or $0.28 per diluted share. To arrive at adjusted cash and income for Q2 of '11 we add back the after tax impact of the book amortization of intangibles, the write off or amortization of deferred financing fees and the after tax impacts of the costs of restructuring of our Western European operations and the Manati repurposing.

Adjusted cash net income in the quarter was $0.94 per share based on $255 million fully diluted shares outstanding. Let me just point out that included in our press release this morning is the reconciliation from our reported GAAP net income to adjusted cash net income.

A couple of factoids for those model builders out there; in the quarter, the marginal tax rate for the amortization intangibles was 5.1%. For the write off of an amortization deferred loan cost was 6.1% and for restructuring costs was 5.7%.

Turning to liquidity, we generated $260 million of cash from operations during the quarter. We reduced our debt by $186 million and ended the quarter with $262 million of cash on hand.

We retained a bit more cash on hand than we might in the future in anticipation of payments we will need to make in respect of the restructuring in Western Europe. For the debt holders on the call, adjusted EBITDA, as defined in the credit agreement for the quarter, totaled $343 million and there is also a reconciliation of that to our GAAP net income included in the press release.

Turning to our guidance, we are reiterating our full year 2011 guidance for revenue and adjusted cash and income for share. We've made changes within certain of the categories between revenue and adjusted cash and income and call your attention to the summary included with our press release this morning.

Just a bit more texture, last quarter we indicated that we might be toward the high end of our range for revenue. We are modifying that statement today to say we anticipate being in the range of $2.7 billion to $2.8 billion.

With that, [Allie], if we could open up the line for Q&A.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Shibani Malhotra - RBC Capital Markets.

Shibani Malhotra - RBC Capital Markets

Just a couple, first can you talk about your sales organization or the reorganization of your sales efforts and what has been driving this? Then can you comment on the uptick of Atelvia in more detail?

Roger, I know you mentioned that this was partly driven by reimbursement and there have been some changes to your reimbursement strategy and where you are with that. But can you comment on what your expectations are in terms of share growth or the franchise stabilizing or growing?

Roger Boissonnault

It really isn't a sales reorganization basically. We've been going through a reorganization on a global basis. As you're aware, we've had significant organizational changes in Europe, even within the R&D organization and certainly with the manufacturing organization.

I think you should view this as part and parcel of continuing integration of Warner Chilcott and [P&G]. You must remember at the end of the day we actually purchased the company twice our size and it doesn't happen in six months.

As a result of this, [Carl] is going to move on. He contributed -- he has had a significant contribution certainly to Warner Chilcott but as part of us moving forward Hans will be taking over that report and Hans will remain to be primarily out of the -- will work out of both the Dublin and the Rockaway office.

On the Atelvia front, yes, the issue is in part reimbursement and we've made steady progress in adding plans and adding Atelvia to Actonel. What does encourage us is that we do have districts that are doing an excellent job with Atelvia but we've got to figure out how we can spread that excellent execution to the rest of the country. So we're going to have a close eye on that.

Shibani Malhotra - RBC Capital Markets

Just to follow up, just in terms of preparation for the launch, I guess what do you feel you maybe underestimated regarding the challenges on reimbursement with Atelvia?

Roger Boissonnault

I think the deployment in areas in which you do have brand prescribing needed to be the focus. Begin there and then move out. Some areas the generic presence, you're not going to overcome it.

I do think the constant theme here is any time when you talk to clinicians they clearly see the advantage of Atelvia. The frustrating part is what do I have to do to get Atelvia to my patient and the conversation I have to have with that patient? So those are the things that have to overcome.

So I think Atelvia is going to be a slow build but once it gets installed I do think it's going to become the standard of therapy.


Your next question comes from the line of Marc Goodman - UBS.

Marc Goodman - UBS

First of all, can you help on a Atelvia just quantify the progress that you're making in managed care a little bit there? That's number one. Number two, on Doryx, I guess usually by now in typical Warner Chilcott fashion, we would have already had a new Doryx approved in some formulation or dose that would be a life cycle extension strategy for the old one.

I was curious what was going on there and what are you thinking about that franchise right now with respect to protection from potential generic competition, which we don't know exactly when they'll get approved but obviously the 30 month stay is an issue?

Then third, as far as Europe is concerned, can you help quantify what you're thinking of as far as taking cost out of the business?

Roger Boissonnault

On the Atelvia front, I'm not going to take you through plan by plan but let it be known that there are -- basically you have the Medicare plans and then you have the commercial plans. So it is, indeed, a little bit complicated but we have had a couple of the major plans put Atelvia on.

But even outside of that, Marc, I've got to tell you that we've got excellent execution, certainly some at the district level despite the fact that we don't have that type of access on the plan level.

But we suspect over this year and a lot of the plans the [forumulas] kick in 2012, so you're really positioning yourself for 2012 and that indeed is going to get better. The issue here is how can we spread where we are successful against where we are having some difficulties?

I think on the Doryx front it is a little bit murky and we have several strategies in place and you hit it like what is the 30 month stay and does the 30 month stay expire, is it extended? There was a CP involved with this. But you've got to remember that we don't have a strategy, we have multiple strategies and what we're looking is seeing how the situation has developed and what we best can do.

So I wouldn't be overly concerned at this particular moment is there a new Doryx out there or what is it. You've got to remember we have to adapt to the environment and gain better clarity on the situation.

As far as Europe is concerned, it's not really a cost cutting approach. The issue in Europe is we have people who, indeed, were executing well who wanted to work but we lost exclusivity on Actonel and that can be a complicated process.

So if you don't have an asset that you can promote and extend you just simply have to close down some of those operations. Happy to say that that has gone smoothly, very difficult situation and I would expect by the end of the year we'll have a majority of that done and everything will be consolidated.

Paul Herendeen

Marc, it's Paul. I'll follow on on the Western European restructuring question. Just to reiterate, we're moving to a distribution model there which will enable us to eliminate much of the operating infrastructure that's [resident] in each one of those countries and that's the large or the majority of the operating cost that you would see in each one of those markets.

Now, we don't guide beyond '11. We wouldn't guide with respect to a specific segment or business but here's a way that you ought to think about it is when we elected to go to the distribution-type model we, of course, felt that that would have an influence on the downward trajectory of revenues in those markets.

But almost by definition, we felt that the cost savings would be in excess of the increased decline of those revenues in those countries and so that net net it is accretive. Now, accretive is -- if anybody who has seen us speak -- accretive is easy. More importantly, I think you should view this as positive [MPB].

We are incurring a large amount of cost. I mentioned during my remarks about roughly as much as $120 million of costs this year. Not only do we expect to recoop those costs, we expect to earn a return on those costs by virtue of taking these actions.

So it was the right thing for us to do and it's, as Roger said, going smoothly and we expect to be substantially complete by year end.

Marc Goodman - UBS

Roger, just as a follow- up on Atelvia, is there push back from the doctors at all? Is there anything like that? There's really no push back because you've got -- .

Roger Boissonneault

You're right, Marc. It is a bit frustrating but you've got to remember that the environment we're dealing with with older patients and the physician has to take the time to explain this is falling under Medicare right now so the physician now isn't being reimbursed for doing this type of activity.

So he's got 50 or whatever patients to see during the day and sad to say it's not an active disease state where the patient comes in with an acute condition. You will see -- if you look at the data, the new-to-brander starts we do very well.

So indeed if they have a patient that's naïve to bisphosphonate therapy, you start them off on Atelvia. But taking the time to try to switch somebody that you've explained to them you can't take this product with a meal is a lot of effort.

But intuitively, when you talk to physicians, they think Atelvia is a great idea. It has been a bit frustrating.


Your next question comes from the line of Chris Schott - JPMorgan.

Chris Schott - JPMorgan

The first is it's maybe more just broadly speaking. Roger, you started your comments with a statement that you can do better on product execution. This certainly hasn't been an issue with Warner in the past. Can you just maybe elaborate a little bit more in your view what happened first half of the year that has not allowed you to really maximize on your opportunities here?

Is this growing pains because the company's larger? Is the company not adjusting quickly enough to some changing market dynamics? Just some comments there would be appreciated.

Second comment was Actonel rest of the world seems to be hanging in there pretty well. Can you just talk a little bit about what you're expecting second half of the year and where you see that franchise bottoming?

Finally, you mentioned you're taking some steps to accelerate the OC franchise growth. Can you just elaborate a little bit more on those steps you're taking?

Roger Boissonneault

You're right, Chris. The issue is execution. It is complicated. I would say the old Warner Chilcott we were dealing with perhaps at the max 300 reps. Our clear focus was on oral contraceptives and the dermatology business.

Now we've taken on Asacol, $700 million, $800 million brand alone and moving from 300 reps to 900 reps and the complexities of that and rolling out the sales forces and getting people targeted.

Yes, it puts a significant pressure on sales ops and can we do better? I believe we can do better and I think with the streamlining of the organization we will.

Let me just take the -- the OC franchise, we've been operating in this franchise for a number of years now. I think Lo Lo is going to be a great product. It's just how do we excel the adoption of Lo Lo?

It's clear. Sometimes it's a little bit frustrating and I think with focused frequency on the right targets we can accelerate the adoption of Lo Lo.

We've seen a bit of the 24. It's not that we're cannibalizing 24. We've seen 24 perhaps move off to the old 21 day Loestrin 120 but we've got to remain -- we've got to maintain that business and grow the overall franchise.

But again, a focus on Lo Lo and moving that forward, it's doing -- it is doing good. We just have to step it up a bit.

As for Actonel and the rest of the world, I think Paul can handle that.

Paul Herendeen

Yes, well, Actonel in the rest of the world, I think you saw in the first quarter that the erosion or lost of share to generics was less than we had been thinking and I think that that trend continued but also point out that the downward trajectory is rapid and continuing.

So I think all that I would suggest is that for the full year 2011 I dare say that our OUS sales for Actonel will be higher than we had thought when we entered the year. But make not mistake. Those sales are going to decline dramatically and continue to decline dramatically OUS.

I think what's more interesting as you think about Actonel as a franchise within the US we continue to watch the overall bisphosphonate market and look for signs of it flattening out and reaching a place where the overall market stops contracting.

Actonel in both the 35 milligram and the 150 milligram versions you can chart them and you can look at them and you can make your own conclusions about perhaps a flattening of the decline as we approach the second half of the year.

Of course, Atelvia, albeit at a slow rate so far, continues to grow and we would expect that to continue to grow through the second half of the year. Does that help?

Chris Schott - JPMorgan

Yes, that's helpful. If I can just do one follow-up for Roger on the OC efforts you're making. Should we be thinking about this as any type of incremental spend or is this just really trying to optimize resources and shifting some of the focus in terms of your marketing efforts and sales efforts?

Roger Boissonneault

No, really it's the second part, Chris. It's the optimization and the focus. It really comes down to execution and getting frequency at the right level at the right targets because -- I'm not saying it's not doing poorly. We're not saying we're doing bad. We just have to accelerate the growth and I think we can execute better.


Your next question comes from the line of David Risinger - Morgan Stanley.

David Risinger - Morgan Stanley

I guess first -- and if it's okay maybe we'll just go one by one here -- Roger, maybe you could just talk about Hans and his new focus on the US and whether he's going to hire more formulary management and managed care experts to ensure greater formulary access or whether that's already in place.

Roger Boissonneault

Well, I think it's not a new focus. As you may or may not be aware that the marketing groups reports to Hans and even the managed care group reports to Hans. I think Hans has great organizational skills. He was a senior guy within [P&G], in fact the most senior person we got.

He has been occupied with wrapping up Europe and this opportunity is a focus to look at the US. He already has the marketing group, so we have a focused effort and he is a great executor of the business.

David Risinger - Morgan Stanley

Then changing gears to a couple of other topics, with respect to the FDA's bisphosphonate panel meeting, I'm wondering what investors should expect and also wondering -- and I know you wouldn't have the data -- but is there any way that Atelvia can be positions as less risky for esophageal cancer given it's taken after food intake?

Roger Boissonneault

Well, I did have an opportunity to -- we have a 25 page document that we submit to the FDA in preparation for the meeting. I think it is -- I've had a chance to review it. I think it is very well written and I will -- I'll go out on a limb and say that this issue of esophageal cancer with [residronate]. We just haven't seen the association.

But we'll get our day in front of the FDA. It should be an interesting meeting. Those meetings are, as you are aware, are very hard to predict. But we have an excellent case to present.

David Risinger - Morgan Stanley

Then my next question is basically on balancing the reduction of co-pay assistance, so obviously that benefits net price and there is a reduction of prescriptions. I think Doryx scripts are down about 50% year-over-year. Just wondering if you feel like you have the balance right now for Doryx and Loestrin in terms of the co-pay assistance and the script declines.

Paul Herendeen

I think you're right. You even referenced our remarks. Year-over-year, in this case it won't round up. RXs on the quarterly basis were down 46% and yet the net selling price per RX was up about 40%. Did we get the balance right? I think there might be ways that we can tweak that program and both Roger and I referenced in our remarks that there might be ways that we can work on that program to get Doryx back to a place where RXs will grow but profitably.

That's the goal. The goal is if all of you who have lived through the second half of last year, we certainly could deliver the RXs but at a declining net selling price per RX and that doesn't work for us. So we made the changes in January and I think the outcome was within the range of what we expected.

We lost a lot of RXs and we substantially increased the value of the RXs that we retained. Now the goal is to take steps to go back to a mode where we're growing from where we are now, growing the Doryx franchise in terms of RXs while at the same time not giving up all of that increased net sales for RX that we've enjoyed through the first half of this year.

David Risinger - Morgan Stanley

Then my final question, Paul, is could you just comment on the prospects for asset or company acquisitions in the near term?

Paul Herendeen

Yes, sure, I think that the business development opportunities -- there continue to be opportunities out there. We continue to be active in looking at those and evaluating them. The most frustrating thing both for you and all of our investors and for the management team is that it's impossible to predict the timing of a successful transaction.

Suffice it to say that when and if there's an opportunity out there, we are absolutely ready to pursue it and hopefully bring it to closure and we're always hopeful that there's that opportunity on the horizon but it's just impossible to predict. I think the environment is similar to what it's been the last couple of years.


Your next question comes from the line of Michael Tong - Wells Fargo.

Michael Tong - Wells Fargo

Roger, we've been talking about tweaking the sales model and things like that and certainly Warner Chilcott has been doing that for a long time. What's interesting to me at least in the last several quarter is there seems to be somewhat of a continuous struggle here.

Is there something more macro that you're seeing that is keeping this strategy that has worked so well in the past from working as well maybe outside of the challenge of Atelvia and things like that but something more macro?

Then my second question has to do with absent an acquisition, can you see 2012 growing, as far as the top line is concerned, relative to 2011?

Roger Boissonneault

As far as -- you're right. There really is no macro issue out there. Selling is all about execution and I do think that it's been a trying time and the fact that any time you go from 300 sales reps to 900 sales reps you're in different therapeutic areas. I think sometimes you just have to step back.

I think we try to do too many things at one time and focus and execute. I think the -- I think Hans from an operational point will produce some organization. We probably didn't have enough of the infrastructure in place and the planning in place but I do think the executional piece will improve. It's not going to improve tomorrow but it will improve over the course of the year.

As for looking at 2012, when I look forward I always look at Mr. Herendeen.

Paul Herendeen

Yes, of course, we're not going to provide guidance for 2012 but I'll just say this. Within our portfolio we certainly have opportunities to grow our top line and I think we've touched on a couple of those in our OCs. We're in a good spot with Loestrin 24, the market leader and now Lo Lo, which as Roger referenced, is a product that is gaining traction but we think we can do even better.

So I think of our OCs as being a lever for growth. Of course, Atelvia, on a small level because it's just gaining traction, as well will provide us with an opportunity to grow. Estrace Cream continues to grow. The Asacol franchise broadly is in good shape and provides an opportunity for us to go forward.

Doryx, we are taking some steps here in the second half of the year. We'll have to see how those play out in 2012 and beyond, so I think that within our portfolio we have every opportunity to drive growth of our individual and key franchises but we're not going to guide to 2012 today.


Your next question comes from the line of Corey Davis - Jefferies.

Corey Davis - Jefferies

My first one in comparing your leverage ratios to the stock price valuation it seems to me that right now buying back stock might be more value generative than delevering. So with the debt that it looks like you paid off this quarter how do you think about balancing -- continuing to do that versus more aggressive stock buyback?

Paul Herendeen

We just a year ago engaged in a fairly significant leverage recapitalization. Say that was something that I don't want to say we're still digesting it. I think we are pretty good at handling the amount of debt that we have on our balance sheet today but I would also say that we're perhaps not fully reloaded for what I think it would be a real opportunity to go out and make an acquisition of a business or technology or a company or asset or whatever.

So there's always that balance. We certainly appreciate the math and it's just math at the margin. Everybody can computer our cost of debt capital and when you're trading at something akin to a 20% or plus cash yield on our shares it's pretty easy to say we should buy back shares.

For now, we're going to continue to run our business and we're going to continue to reload our cap structure so that we're in position to take advantage of the opportunities that we hope will present themselves over the course of whether it's the second half of 2011 or into 2012 and beyond.

Now, that said, I know we are out there in a lot of conferences and this question comes up pretty often is, gee, are you going to pay another dividend or are you going to buy back stock or whatever.

So if we are continuing along and we fully reloaded at least in our opinion our cap structure so that we're in position to make an acquisition, it's possible that we would engage in a transaction involving our equity, be that some form of a dividend or a share buyback. But that's not something that is in our mind today.

Corey Davis - Jefferies

Second question, you spoke to the changes in the senior management in the sales organization. But back in June you announced changes to the R&D organization, so any comments you have there in terms of progress finding replacement or more precise directives as to what are the top priorities within R&D right now.

Roger Boissonneault

Yes, R&D has been working pretty well and we basically have been integrating. But the focus of R&D is indeed Ireland. [John King] has -- although he's had his hand in this and [John] is an excellent chemist by any standard and has worked in R&D, so we've got him back a bit working on that.

I've taken back some of my previous direct reports. But the activity is firmly in Ireland and I think as we move forward you'll see more of the organization being staffed there in Ireland and then basically that the R&D function will be run out of Ireland and we'll make that transition.

But that transition will be over time. We feel very comfortable about our efforts in R&D and you'll begin to see some of those efforts not only in late stage products but in some early stage products that we are working on.

We do have medicinal chemistry group in [Dundock] that's fully operational now. Our development group is, I believe, world class. You'll see some of those fruits in the future. But the clear focus is going to be running that group out of Ireland.


Your next question comes from the line of John Boris - Citi.

John Boris - Citi

First question, Roger, as Hans takes over the American sales organization, can you maybe just articulate what his top priorities, top couple of priorities will be as he assumes the role? Then I have two follow-ups.

Roger Boissonneault

Yes, his priority right now is getting better in simulating the process, understanding the process and I think he will be focusing on sales operation, deployment, focused frequency and return against the use of our sales reps, more marrying our IT and our information systems in how we operate the sales force so they have them properly focused.

John Boris - Citi

On your sales guidance you at least projected a little bit more optimism on your revenue guidance last quarter and tempered it this quarter by indicating it's potentially going to come in below the high end of the range. What are the assumptions that changed sequentially that resulted in that change?

Paul Herendeen

We're not going to comment on specific product franchises. We look at our guidance and we look at our expectation for the balance of the year based on the results year-to-date and what we expect in the second half of the year.

At the end of the first quarter, as you all know, we had a pretty good quarter from a revenue perspective. We I think helped people understand that it wasn't going to be the same in Q2 and Q3 and Q4 and at that time we felt like we'd be towards the high end and now we think we'll be in the range.

We're just trying to make sure that people have an understanding of where we think we will come out for the full of 2011. We have a pretty broad portfolio of products. There are lots of puts and takes within our sales forecast and I think, unfortunately, we need to leave that to you to determine where you might want to tweak.

John Boris - Citi

Last question just has to do with the bisphosphonate franchise. With the FDA panel, Roger, that's upcoming, what do you think are some of the positive things that could come out of that panel?

Obviously the FDA when it revised labels on long bone fractures has caused a lot of negative direct-to-consumer advertising to occur on TV by trial lawyers. How do you think at least the debate out of the FDA can maybe help temper that negative dynamic that's out there?

Roger Boissonneault

Yes, you hit it on the head. The interesting this is everybody loves bad news and it's hard to disseminate good news. I do think that the track record for [residronate] and we will have an opportunity to read their document. This is a very safe compound.

Sometimes it's the exception. Unfortunately, I think this is carrying the message and it's concerning some women who should be on bisphosphonates because they've had fractures and they're worrying about these side effects which are basically remote side effects.

The interesting thing, they sometimes occur as much in the placebo group as in the active group. So hopefully FDA can take a stand in clearing the air here because the whole market has contracted around this.

We've seen it around the hormone replacement therapy. In fact, we saw it around -- and I'm old enough to know that it happened around oral contraceptives. We saw the market contract but over a period of time we've seen the benefits and the OC market has come back. I think it's going to take a while for the hormone market to come back.

Hopefully, this is the beginning of -- this is the primary product that should be used to treat women who, indeed, have had fractures. Sorry to report that this negative publicity has caused the contracting and hopefully this event will put the truth on the table.


Your next question comes from the line of Louise Chen - Collins Stewart.

Louise Chen - Collins Stewart

First question I have is with respect to your R&D guidance and which projects may have moved out or maybe some color on which projects may have moved out to lower that guidance for the year.

Then secondly, maybe if you can give us more thoughts on the sustainability of Asacol, Doryx and Loestrin longer term; should we be continuing to model them as key growth drivers for Warner Chilcott.

Then lastly, just on your line extensions, I assume, even though you don't give an update, you're working on those. Are there any metrics that you could provide us that can give us some color on where you are with those?

Roger Boissonneault

As for R&D guidance, I think I'll let Paul talk to that but it's not because we've eliminated projects. It's trying to get those projects.

Paul Herendeen

Yes, mostly it reflects the timing of expected expenditures against the portfolio of projects which we have ongoing. That includes, as you point out, for essentially all of our key brands we are working on improved versions of each one of those key brands in order to help us protect our market share and hopefully grow our market share.

It's not reflective of us stopping anything or reducing our focus or any of those items. It's just simply when do we actually incur the expenditures that are associated with those.

Roger Boissonneault

I think your second and third point really match in the fact of what do we see going forward in the area of Asacol, Doryx, Loestrin and that does relate to line extensions. Beyond line extensions, NCEs and our investment, when we look at Asacol, we're looking at ulcerative colitis, inflammatory disease and we have projects that are designed at the later end of the 400 and the HD and which, indeed, are their next generations.

We also look at Mesalamine as a compound and we look at other compounds that are mediators of inflammation that are active in the colon. So, yes, we see ulcerative colitis as a serious disease state. We attack it on all levels because we have the market leader and we're there to protect that but we're also looking at what we call buckets.

The secondary bucket, which is perhaps an NDA in the tertiary bucket would be mediators of inflammation that are directed to the colon. Certainly you know about Doryx. Doryx has been -- our focus is on coming up with a new chemical entity in the Tetracylcine class.

We do have that compound. Currently it is in phase one and hopefully will be in phase two development. Everything is positive about that. We have to make sure that we have an excellent safety profile.

Loestrin, you see it. We've been executing against it and it's all about -- we've got another I think oral contraceptive going into the clinic next year. We have a couple compounds that we are working currently on that will actually be out of the clinic this year.

So we believe we are the market leaders here. We have done the dominant force and we look forward to extending that franchise. The oral contraceptive market is an excellent marketplace. We occupy the number one spot and we continue. We will continue to occupy that spot.


Your next question comes from the line of Chris Holterhoff - Oppenheimer & Company.

Chris Holterhoff - Oppenheimer & Company

I was just trying to get a sense of growth trends with Estrace and other urology products. I know you're still in the process of building out the urology sales force. I think the territories are expected to be filled by the middle of this year, so I was just hoping if you can give us an update on where you're at with that sales force expansion.

Roger Boissonneault

I think you go it. We've been -- unfortunately, we've had priorities obviously with the launch of Loestrin, Lo Loestrin and Atelvia and the urology sales force has -- I think we've come to the point where if we were using -- actually we're using supplemented with rental sales reps.

I think that's out of place and you're quite right that that sales force should be functional by the end of the year. We're going to spend a lot of time focusing on that sales force because we do believe Estrace Cream is an excellent asset.

We also have the Enablex in this area. In fact, we look to the future: erectile dysfunction products and perhaps other products that can be positioned against the urologist and the OB/GYN because it's not only urology we're talking about here but the urology as it relates to the urologist and also the OB/GYN as far as being high prescribers of these products.

Chris Holterhoff - Oppenheimer & Company

Then on the [P4] challenge on the Lo Loestrin, can you tell us if Lupin has filed on both of your patents or if it was just one of them?

Roger Boissonneault

I believe it's the -- I think they filed on the [24-2-2] patent.


Your next question comes from the line of Gary Nachman - Susquehanna Financial.

Gary Nachman - Susquehanna Financial

First for Roger, what are you seeing are the dynamics of the [5ASA] market? How will you be able to accelerate growth of the Asacol franchise? Anything to change with that sales force and Asacol HD has been less of a focus for you guys but interestingly we've been seeing a little shift to that product. So what's happening there?

Roger Boissonneault

Yes, the [ASA], it's an interesting marketplace and it actually obviously turns over very slowly but when people identify ulcerative colitis they tend to be younger and they take it for obviously a long period of time.

I do think the magic of around Asacol is its delivery system and delivers it to the distal colon. If you look at efficacy of Asacol, perhaps against [Lialdon Sympotasa] that because it is so site specific it works more quickly.

I think we lost a little bit of focus in the fact that convincing clinicians that you shouldn't use the 400 you should be using the HD. The issue is the reason that you use Asacol is not because it's 400 milligrams or 800 milligrams. The fact is that it works quickly, it's well tolerated and you can virtually take this for a long period of time.

I don't think anybody out there has any more data than us as far as taking Mesalamine for long periods of time in this particular disease state and we've got to get back the same -- the advantages of Asacol and its targeted delivery system. That's where we're at.

Gary Nachman - Susquehanna Financial

Do you think the sales force is the right size? I know in the past you've said that. How do you expect to grow the franchise if it's not increasing the size of the sales force? What other promotional tricks do you have up your sleeve?

Roger Boissonneault

As you know, Gary, we don't do tricks here. We like that. If you go back and you look at it and we -- what happened was we took some [derm] wraps and we took some GI wraps and put them together and it was like a simplistic execution. Just move the 400 milligram to the HD.

It's a major franchise and I think we've spent some time here taking a look at what it's going to take to grow the franchise. It's not a -- and change, things have changes. The FDA's guidance has changed around the 400 milligram, so we believe it's far more difficult now and they've recognized the difficulty in doing this.

So we have to step back and it's more of looking at this franchise and how do we deploy against this franchise for the longer term? It's right. It may not be a size difference. It may be a better deployment against who indeed and where -- our metrics now is we're looking at new to brand. That's key because once the patient is on the product they tend to be on that product for a very long period of time.

Gary Nachman - Susquehanna Financial

Then one more on the OC, how are you guys taking advantage of concerns with [just very known] products that your competitors have? It seems like it's a great opportunity for you guys to grab share in that market.

Roger Boissonneault

Well, I wouldn't call it an advantage. I think it's -- the issue here is that there is a lot of negative publicity out there and the fact that we have Lo Lo, the only 10 microgram product.

You do see conversion of Yaz to Beyaz. So when you look at new-to-brand, we do get most of the new patients. You do see some switching from Yaz to Beyaz and then new-to-brand because they're switching a brand.

So you're not seeing -- if you looked at new patient starts, naïve new patient starts, we'd clearly lead that category. So we've got good -- we have an advantage out of there. You don't want to wish this on anybody as far as the negative publicity with [drisperanone] but it is out there and if you want to be objective about it, I don't know how a clinician starts someone one [drisperanone] with all the lawsuits.

But that's one of the areas that we feel a bit frustrated that we shouldn't have faster growth of Lo Lo.

Gary Nachman - Susquehanna Financial

Then one quick one for Paul; I know you said you're comfortable with the cash tax rate guidance that you've given but it did look a little low to us in the quarter. So anything you could call out that may have caused that; and that cash tax rate, should we think of that as being sustainable for the next several years?

Paul Herendeen

Yes, I think -- thanks, Gary. It gives me the opportunity to reiterate when you look at a quarterly tax rate or even a year-to-date tax rate it can bounce around. It can give you the wrong answer. That's the nature of GAAP accounting for the provision for income taxes and the GAAP accounting drives how you will view our cash tax rate.

We provide it for the full year. We feel pretty comfortable about it and we've settled on this metric of saying the total GAAP provision divided by EBTA as a way that an outsider can figure out what our tax rate should look like for the full year.

Again, we reiterate our guidance for the cash tax rate for this year, so we feel comfortable with it. We believe our tax rate is sustainable. There are elements of our structure that are very helpful and there's nothing on the horizon that we think would cause us to have that tax rate change in a significant way as we look to '12 or '13 or '14.

So I daresay we spent as much time focused on that and the protection of that as any company and we should.

Gary Nachman - Susquehanna Financial

The Puerto Rico excise tax, that hasn't had a big impact on your numbers, right? Is that something that you could quantify?

Paul Herendeen

No, I think what I described today is it's a real number but it's within our G&A because it's an excise tax not an income tax. It's within our G&A number. Again, daresay, if not for that excise tax that came out of left field, our G&A number would be smaller but it's in there. It's not a big deal.

If you look at the structure of that excise tax, it should decline over the course of the next several years, although I think there are many people, including myself, that believe that once a tax is in place the probability of that actually sunsetting and going away is pretty remote but it is manageable within our G&A line.


Your next question comes from the line of Greg Waterman - Goldman Sachs.

Greg Waterman - Goldman Sachs

You discussed some of the challenges this year including higher reimbursement hurtles for Atelvia and then also some execution challenges related to the expanded business. I guess I'm trying to understand how do these factors play into how you're thinking about business development priorities both in terms of areas of focus and the size of acquisitions you would consider?

Paul Herendeen

Certainly, I think the market and the way you look at a branded asset today is different than it was 10 years ago and that just is a part of your diligence when you're looking at an asset is looking at how -- what is the nature of that market and what do you truly expect to have to pay to pay to play in a space.

You've heard me or maybe you haven't directly but I've certainly talked about the bisphosphonate space. As we look at assets, if you'd asked us say back in 2009 do you want to be in the bisphosphonate space, the answer might well have been no. But we were very attracted to -- they used to call it the ulcerative colitis space.

But in order to get that business we are indeed a participant in the bisphosphonate space. The market dynamics there are very, very challenging, so as we look at potential asset acquisitions or companies that we might be interested in, we surely look at the spaces in which those assets -- those brands participate, the segments in the market.

Some are more challenging than others and I think it just boils down to you need to be very, very realistic about what the prospects are for brands based on those individual competitive dynamics of the marketplace. That's changed. It's changed over the last 10 years.

Roger Boissonneault

Just to put my two cents in on this thing [as you know] what we're really looking at or you have to look at if you're in the pharmaceutical business is something called market exclusivity because we have hard ends here.

The end of a brand is very difficult. So the thing is when we look at a product or we look in a particular marketplace, it's the opportunity to extend that product, be it in the short term or a longer term, and we saw those types of opportunities certainly around ulcerative colitis take a serious step forward with Asacol.

Sometimes the market dictates what's going to happen and Paul's quite right. The osteoporosis market has shrunk to an extent but is this indeed a cycle and what are those products if we are indeed in the osteoporosis market that are going to be the future and that's what we have to focus on.

But anytime you make an acquisition, the first question I want to know is what the life cycle looks like and what's the intellectual property around that product.

Greg Waterman - Goldman Sachs

If I could also ask just more broadly on the co-pay assistance programs, obviously the structure of these programs is really important in terms of driving up volume and we've heard some noise from payers in terms of concerns about these programs.

I guess I'm just wondering about any risk you see longer term in terms of increasing hurtles to implementing these co-pays in these programs.

Paul Herendeen

We have a program that is meant to help out our patients, enable them to get our products if their coverage has a co-pay which is onerous. I'm not sure what a commercial plan can say about us helping out a patient.

Certainly their behavior changes or can change when you have a company that uses or takes -- has as part of its strategy a co-pay assistance card but that just continues to evolve.

I think the more interesting question around the cards is -- and this was asked, I think, earlier -- is you think about the terms of those cards and we did make substantial changes, for example, to the Doryx card and we made changes to the Loestrin 24 card at the beginning of the year.

It's our challenge is to watch the changes in those terms and see are there changes that we can make which will benefit our -- the patients who are likely candidates to be on our products and help them get that prescription filled without them having to come out of pocket in a substantial way.

We look at that all the time. I think you saw last year in 2010 where the program, the pendulum swung on Doryx too far to one side and at the beginning of the year we swung it way back to the other side.

We look at that and we think about are there ways that we can tweak the terms of that card in a way that will help us to gain additional share with our products. But I don't think it's the commercial payers that are going to be the impediment.


Your next question comes from the line of Bill Tanner - Lazard Capital Markets.

Bill Tanner - Lazard Capital Markets

Roger, just back on the Atelvia and osteoporosis market. I know that I guess Warner will have a presence at the panel. I'm just wondering longer term with Atelvia it seems like it's definitely an important differentiated asset. How much do you think the company could play a bigger role or have a louder voice [and get some] disease management and then just with I guess the void of effective therapies and concern?

Then the second question is you speak to someone who's got a very high level of familiarity with the product and they always tell us if the drug is positioned correctly it could be important. I'd like to get your thoughts on how well the drug is positioned now, if you think anything could potentially change to take advantage. Obviously, you have a pretty good opportunity.

Roger Boissonneault

I think about Atelvia and the upcoming meeting and it really is around [residronate]. We are in a good -- well, thanks to [P&G]; I'm not going to take full credit for this -- but [P&G] has done a lot of studies on [residronate].

We have studies that go out to, in fact, seven years. So there is a great deal of study that has been done, a great deal of data that we will be utilizing with the FDA that may be unique to our particular drug, [residronate]. I just don't know around [elidronate] and [MERC], I can't tell you what they're going to present.

But I can tell you that I've reviewed the material and it looks to be a very favorable profile at least to me and we do have indeed a great deal of data. I don't know if the FDA is going to go forward and differentiate among bisphosphonates or are they looking for something for class labeling. That's difficult to predict.

I do know -- we do have a strong positioning with Atelvia and I -- you don't get into an argument with a clinician. They just look at you and say you're right. You can take it with a meal. This is a huge advantage.

But, again, I'll go back to it's one thing to talk to this poor clinician and it's another thing for this clinician to explain it to the patient and get the patient off of an existing product and onto Atelvia. That has been the frustrating piece.

That said, I'll tell you. We see some areas in which -- and I can't totally explain it; we're going to learn more about this where Atelvia does much better than in other areas of the country and we have to understand what that differentiation is. Is it the physician's motivation to do a prior auth?

Sometimes they have to do the prior auth. It takes a bit of work but at the end of the day no one doubts that the patient benefits from Atelvia.

Bill Tanner - Lazard Capital Markets

Just then any change in the messaging I guess or anything you think coming out of the panel, anything that going forward you might be able to take better advantage of or do you think it's just going to take time?

Roger Boissonneault

Yes, I think it's going to take time. If I had a bet, the panel is going to take a look at this. They're going to digest the information. I don't think you're going to get any quick answers.

I think the FDA is really looking at class labeling and what can be said. Unfortunately, sometimes you end up with great compromises here.

Bill Tanner - Lazard Capital Markets

Do you think that they will discuss more the notion of drug holidays and maybe how to -- not codify it -- but I guess how to provide some guidance for that and that actually might provide a little bit of clarity?

Roger Boissonneault

Yes, it's [par]. It certainly is in the agenda. I just don't know what you can do. I don't know if there's any data truly that supports the use of drug holidays. But I'll tell you we had the same issue with oral contraceptives. I've been around where the clinicians were talking about you need a drug holiday with an oral contraceptive, which didn't make any sense whatsoever, other than putting the patient at a great risk of pregnancy.

It seems that came and went. Hopefully, I hope it's the same situation with bisphosphonates. The issue here is why would you put somebody on a drug holiday? I don't know of any hard clinical evidence that these patients continue to benefit.

It may be associated with [elidronate] but I’m not aware of any hard data with [residronate] or bisphosphonate.


Your next question comes from the line of Gregg Gilbert - Bank of America.

Gregg Gilbert - Bank of America

Paul, does your guidance for this year still assume no generic Doryx 150?

Paul Herendeen

That is correct, Gregg.

Gregg Gilbert - Bank of America

Paul, I don't know if you have this at your fingertips but can you quantify the company's exposure to dual eligibles in case some of the rules change on that front?

Paul Herendeen

Yes, I can't necessarily quantify exactly what our exposure might be but it's actually a good leading, Gregg, to let me walk through because we've been getting lots and lots and lots of questions around our exposure to governmental programs.

So let me actually tick down our key franchise and just give you a general sense for how our units are separated at between commercial cash and the balance in government and let me make some comments around that.

Let me start with the OCs. First of all, more than 90% of our units are covered by commercial plans or paid in cash. The balance, by definition, in what I'll call the government sector -- and with respect to the OCs that's almost entirely Medicaid. That's OCs.

Actanel-Atelvia, about 65% of the units, roughly two-thirds of the units are in commercial or cash with the balance in government, in this case, mostly [Med D].

Asacol HD, just less than 80% are in commercial or cash and the balance are in government and, again, mostly in [Med D]. Estrace Cream, 80% of their units commercial third-party pay or cash. The balance, again, mainly [Med D].

Then last, Enablex, about more than 60% are commercial or cash and the rest in government, again, mostly [Med D]. So how will that affect us with the dual eligibles? It's not entirely clear. I just want to point out that to the extent that particularly with Actanel-Atelvia to the extent that you have something that's covered in [Med D], I will tell you we paid for the pleasure of being covered there.

Then if that were to flip into a Medicaid type reimbursement, the delta would not be a big delta. So I don't want to sit and try and actually pencil out and quantify for you but I think it is helpful to think about our key franchises and say here's where we have exposure, if you will, to Medicare and Medicaid and how should you think about this as we go forward.

I think we're pretty well positioned. I think we had our bumps last year when we were surprised by some things that had -- things that were being filled in Medicaid that we weren't really paying to get and we ended up paying some rebates there but that's been sorted out.

At this stage, we feel like our exposure is, of course, you have some and, yes, I'll tell you what. We like every other pharma company have absorbed costs associated with the other continued efforts on the part of government to reduce healthcare expenditures. But I think it's reflected in our guidance for '11 and it's certainly reflected in our expectations for '12 and beyond.

Did that help at all, Gregg?

Gregg Gilbert - Bank of America

Yes, thank you. Lastly, maybe I'll ask Roger to chime in on this one. You've obviously had some time to live with [PGP]. I'm curious how your views have changed, if at all, on doing large deals.

I could see on one hand you saying maybe not next time or I could see on the other hand saying we've learned a lot and we could do the next one even better. So where are you thinking on that? I know that opportunity set is what it is out in the marketplace but if you had the opportunity to do a large deal how would you frame that for us?

Roger Boissonneault

As you know, I think -- would I do another [PGP] deal? Yes, tomorrow, and it's been great. As far as size and scale, I've got to tell you, it's a lot of work. But it has improved our size and scale. So the fact is could we do another one? Yes, we'd probably do it more easily now just because of the scale we have and moving forward.

But right down to the systems, the SAP systems that you have to do to integrate and make yourself a functional company, operationally you have to be far more sophisticated. Everything is on a scale base.

What you're trying to do is run a large company like a small company. I've been at [Warner Lambert]. We've all been at large companies and [P&G] was certainly a large company. But you're trying to put in the communication systems and the nimbleness that perhaps we're larger but we don't want to lose that nimble aspect of the business.

That all being said, it created a lot of value and I do think that now that we are at a much larger platform we probably could do it again. Again, our primary focus is on the asset base. If we could buy or add an asset to the franchise that would make significant -- it would have to be a pretty good size asset -- we probably would call that A.

If indeed, including buying a larger company or merging with a larger company, I think we're far more well positioned for that for the future.


Your next question comes from the line of Scott Henry - ROTH Capital.

Scott Henry - ROTH Capital

Just want to get back a little bit to the bisphosphonate category issue because it seems to me that -- and maybe I differ here -- but I think the Atelvia launch from a market share standpoint is actually going okay if not in the good direction.

But it's this headwind of bisphosphonate category declining 25% to 30% that seems to create the biggest problem and fundamentally osteoporosis rates are going up and there are no alternative therapies really that are stealing a lot of share.

So my question to you would be when you talk to the reps what are they saying that the doctors are doing and it really gets down to how sustainable is this declining trend? It would seem like we're at least closer to the end now but I’m curious what you're hearing from the reps in terms of what the docs are saying.

Roger Boissonneault

It is kind of bewildering with it is indeed the only therapy. I think what you've got is you've got some negative publicity out there, negative media about risks of taking bisphosphonates and I think people have the notion or women have the notion this particular category they could do as well with calcium.

In all our studies, in all our fracture studies, calcium is the placebo group, so we know it doesn't work. Do you wait until the time where you see an increase in fracture rates because the targeted population has not been taking bisphosphonates? That would be a sad outcome.

But I do think -- and we do see -- and the confounding variable here is we do se some areas where we have had success. I can't tell you that -- what those particular reps do. Are they better at prior auth, are they in a geography where clinicians are willing to engage their patients in dialogue, is it a higher socioeconomic group where they're not having -- where the patient actually pays for the visit and they're more attentive to listen to the clinician?

I can't tell you but I do think that we are all frustrated because we do know we have a better product and we're frustrated by the fact that -- and I agree with you. If you look at Atelvia, it is indeed growing and you look at the share basis. It doesn't look like it's doing well but it's the overall market that doubt has been cast on.

I hope that at the end of this FDA meeting some of that can be revealed because we lost a lot of patients that should be on bisphosphonates and sad to say this is going to result in a higher incidence of fractures because they're not taking the medication that they should be taking and they have this belief that they can take calcium or a combination of calcium and Vitamin D and get to the same clinical endpoint and that just isn't so.

Scott Henry - ROTH Capital

If I could just ask specifically, at the FDA panel do you expect votes to be taken or do you expect it to be a discussion-based panel?

Roger Boissonneault

I don’t know. This is only purely my perspective. It sounds like it's going to be discussion-based. Everybody gets their time to get up to pose their case. As I said, I do know you're limited to 25 pages of which you submit and that will become part of public record, so you'll all be able to see what we're submitting.


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

David Buck - Buckingham Research

First, for Roger on Doryx and the [derm] business, can you talk about whether or not you're looking at this area and when will you be potentially looking at M&A and business development? We've seen a couple of transactions obviously in the last month from two of your competitors, one with existing product lines and one with some pipeline assets.

So again, is that an area of focus where you'll be looking to do some business development and do we need to wait for the next [NCE]? It looks like from you may have a different formulation, say a 200 milligram version of Doryx there.

Roger Boissonneault

David, the issue with dermatology is you have to have a significant asset. The problem is you don't need another $20 million or $30 million brand and you need something you can focus on that you can bring to an asset of size.

Acne is obviously a great market, a market we want to continue in. If you look strategically, psoriasis would be a large market. We operate in that particular marketplace.

If there was something significant there, obviously we would be interested in it. But right now our focus is indeed on Doryx and acne and executing and getting to our [NCE] and you've identified some of the projects and there's more than one of building our franchise in acne.

We've been at this for quite a while and it's a strategy. It's not something that we look at in the long term but there clearly is a need for an alternative Tetracycline which has a superior spectrum, perhaps works more quickly because of the inherent safety profile and that's what we're trying to get there.

I do think that we would look at -- we don't look at other possible acquisitions of people who are further ahead of us. But it'd have to be a significant piece of dermatology.

David Buck - Buckingham Research

Just a follow-up to the R&D guidance cut and the $25 million or so in the quarter; can you talk about if anything -- I'm not sure I heard the answer to this question. Did anything actually get delayed materially in terms of timing and can you maybe update on what the outlook is for udenafil?

Roger Boissonneault

I'll let Paul talk a little bit more about the budgeting but basically I think we're a little bit aggressive when set up our R&D budget. If you're a guy like Paul you'd rather have the aggressive, everything comes off as planned.

On udenafil we're still -- that has slowed down a bit. We're still looking at -- we did our dose ranging study. We have the [psoranagenesis] study to look at. We have a few things to do to prepare. I think we've asked for a meeting with the FDA to make sure that our submissions will be consistent with their wishes.

But it's moving forward, perhaps not at the rate that we had first anticipated and, hence, the issues with budgeting. Some projects move ahead more quickly but it's not based on perhaps the clinical trials that we're going to do and how fast we have to enroll a clinical trial but I'll leave that to Paul.

Paul Herendeen

Yes, with respect to the forecast for the balance of the year, it's just reflective of our revised estimates of when we expect to incur costs. It wasn't any one project that was cancelled. It wasn't any one project that's been substantially delayed. It's just the expected timing of the expenditures that we intend to make against projects which are in our portfolio.

David Buck - Buckingham Research

On udenafil then is there a risk that first quarter of next year -- isn't that when we see the filing?

Paul Herendeen

There is that risk. We basically need a meeting with the FDA to -- this is the close of the phase three. Do we have to do any additional studies because as the FDA always gets better at things -- you look at your predecessors, well, we did everything they did. Do we need to do anything else because we're further down the line and that we have to make sure.


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

Paul Herendeen

Yes, thank you, [Allie]. In closing, as always, there are pluses and minuses in the quarter. Two of our key brand franchises, Loestrin and Asacol, are clicking along. The Loestrin franchise, Loestrin 24 and Lo Lo together posted solid gains in net sales compared with the prior year quarter while Asacol was essentially flat to the prior year quarter but is in good shape.

With Doryx, as anticipated, we saw declines in RXs driven by the changes we made to the loyalty cards at the beginning of the year, nearly offset by the increase in average net sales per RX. I want to note that the net sales for Doryx in the quarter reduced by a significant contraction of channel pipeline inventories both in the quarter and relative to Q2 of 2010.

Estrace Cream continued to benefit from increased promotional effort with RXs up 9%, net sales up 13% versus the prior year quarter. Enablex helped as well, as did the modest ramp of Atelvia net sales in the quarter.

From a revenue growth perspective, Actonel was the big drag, down $71 million compared to the prior year quarter. So as you think about how we've been doing, there are some good things happening that have been in large part masked by the challenges that we face with Actonel.

We're fortunate that we have two brands still early in their launch phases and we're making progress with those brands week to week, month to month and quarter to quarter. That said, I'll echo what Roger said earlier. We can and will do better.

Thank you for joining our call this morning.


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

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