Paul Herendeen - EVP & CFO
Roger Boissonneault - CEO, President & Director
Randall Stanicky - Canaccord Genuity
John Boris - Citi
Louise Chen - Collins Stewart
Chris Schott - JPMorgan
David Risinger - Morgan Stanley
Gary Nachman - Susquehanna Financial
Gregg Gilbert - Bank of America
Marc Goodman - UBS
Michael Tong - Wells Fargo Securities
Shibani Malhotra - RBC Capital
David Buck - Buckingham Research
Greg Waterman - Goldman Sachs
Elliot Wilbur - Needham & Company
Jim Molloy - ThinkEquity
Chris Holterhoff - Oppenheimer
Warner Chilcott plc (WCRX) Q3 2011 Earnings Call November 4, 2011 8:00 PM ET
Good day, ladies and gentlemen, and welcome to the Warner Chilcott announces third 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, CFO. Please go ahead.
Thank you, Ally and good morning everyone and thanks for joining our call. Earlier this morning we issued a press release that details our third quarter results. The press release is available on our website if you haven’t already seen it.
Roger and I will take a few minutes to give a general business overview and we will review the third quarter 2011 financial results, which will be followed by a Q&A period. 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 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 things over to Roger Boissonneault, our President and CEO.
Thanks, Paul. We spoke last time about expectations for the business moving forward. I want to reassure all of you as we speak. We have a team of employees to meet those expectations and since we last spoke we’ve seeing indications that we are moving in a right direction.
For example, Commercial Managed Care and Medicare coverage for ATELVIA has improved significantly over the course of 2011. And we are now are approaching levels similar to ACTONEL. We believe this coverage coupled with improvements in execution by our sales leadership and our individual sales reps are creating momentum in that franchise.
Since we last spoke, the FDA held its bisphosphonate panel. While the panel voted for an update to bisphosphonate labels regarding duration of use, we still did not know the final outcome. Some of takeaways from the panel seem to be positive for ATELVIA and the ACTONEL products. First and foremost was that bisphosphonates are important category for the treatment of osteoporosis. Second was that the FDA invited speaker [Chose] to call up the difficulty of fast [inscriptions] which we couldn’t agree more with.
While the overall oral bisphosphonate market in the US continued to decline by more than 20% year-over-year, the good news is that the generic share of new prescriptions is not growing. Paul will talk about this in a few minutes.
LOESTRIN growth has been good and unlike recent publicity associated with new progestins. LOESTRIN focuses on the estrogenic component. Over the course of the third quarter, newer access increased 68% and total RXs increased a 102% based on IMS data.
In addition, while I can’t and won’t get to deep into the details of our pending litigation matters, we did recently receive good news in our patent litigation with Roxane. When it informed us that it will no longer be pursuing marketing approval for its shared version of our ASACOL 400 mg product and that a trial is no longer necessary. The court in the case has ordered the parties to find a joint stipulated dismissal by early November.
Last and importantly since we last spoke we have had some positive developments with DORYX franchise. We received approval for and launched an improved version of our DORYX 150 product, a dual-scored DORYX 150 to provide patients and physicians with improved dosing flexibility. We’ll also continue to defend the 161 patent that protect the DORYX franchise.
So in summary, since we last spoke we have had several positive developments and we continue to be in a strong position with the solid portfolio of marketed products. We generate significant free cash flow which provides us with options to continue to increase value for our shareholders. To date this year, we have chosen to voluntarily [prepaid] aggressively, as we reduce our debt we increase our unused debt capacity, which helps us to maintain ready access to capital and form strategic business opportunities as they arise.
We have the capabilities to both pursue external opportunities as well as to internally develop new and improved products to sustain and grow our company for the longer term. We remain confident in our future prospects.
Let me turn it back over to Paul to cover some of the financial highlights of our third quarter.
Thank you, Roger and turning to our Q3 results, we are trying to give some texture but its not necessarily there in the press release and what you will see in the MDNA in our 10-Q.
We had a solid quarter as we continue to drive sales gains in our key promoted brands versus the prior year quarter, and we had strong cash net incomes as well. At the top line, compared with the same quarter in 2010, net sales of our oral contraceptives LOESTRIN 24 and LO LOESTRIN which we launched in January together grew 50% compared to the prior year quarter. ASACOL grew 5% compared to the prior year quarter; ESTRACE cream 18% versus the prior year quarter.
ATELVIA which we launched at the beginning of the year and ENABLEX which we acquired in Q4 of last year contributed revenue growth as well. As has been the case since our acquisition of PGP, the good things going on with our key promoted brands were masked by the continued and expected erosion of ACTONEL, which is not a promotional priority for us in the United States.
ACTONEL revenues outside of the United States declined approximately 37% due to the loss of exclusivity in Western Europe and declined 38% in the US when the market continues to contract and market share continues to move away from our brand.
If you thought about our revenue as being comprised of two streams, so our total revenue has been comprised of two streams, that’s global ACTONEL revenues and everything else, the ACTONEL piece was down 38%, while the rest of our business which is comprised of those key promoted brands grew 12% compared to the prior year quarter.
I want to make, what I believe, is a very important point. Just as we do, you should expect ACTONEL to continue to erode outside of the United States and to decline in the U.S. unless and until units of the U.S. bisphosphonate market stabilizes, there is no reason to expect things to change for ACTONEL in the U.S. and the erosion trend for ACTONEL outside of the U.S. is expected to continue and is reasonably predictable.
So you should bake those expectations into your thinking about our revenue trajectory, and here comes the important part. While the expected revenue trajectory is not attractive for ACTONEL, our aggregate expected profits from ACTONEL over the next five years are sizeable, and I am talking about in the hundreds of millions of dollars. Those profits just happen to be attached to a declining revenue stream.
Below the revenue line, our adjusted gross profit margin as a percentage of total revenue was 87.6%, which is essentially flat when compared with last year. SG&A expenses in the quarter were $218 million, which was down $33 million from the third quarter of last year, and that was driven mainly by lower G&A expenses compared to the prior year quarter, which includes the consulting, integration and transition service fees related to the PGP acquisition.
In the current quarter, we benefited from the updated and favorable estimates of our expenses for the Puerto Rican excise tax for 2011 and then updated estimate of our liability for the healthcare reform (inaudible) for 2011 as well as favorable movements in our currency exchange rates. While our reported G&A for the quarter was $56 million, you should expect our ongoing at normalized level of G&A to be closer to $70 million.
R&D in the quarter was roughly $25 million and it includes the cost of all the projects to maintain our internal R&D infrastructure as well as the cost of all ongoing projects.
In the quarter, we recorded another $45 million of pre-tax expense associated with restructuring of our Western European operations. We continue to make progress in moving most of our Western European operations into what we called a distributor model, eliminating many of the in-market SG&A costs in each of those markets. We still expect the total pre-tax Western European restructuring cost to be in the range of $130 to $140 million with the majority of those charges and the bulk of the restructuring to be completed by year end 2011. So we’ll escort to see the benefits of that reduced cost in early 2012.
Before I go into more detail, in arriving in our adjusted cash and income per share for the third quarter, we add back the book amortization of in tangibles, to write-off for deferred financing fees and the after-tax impact of the restructuring reserve.
With diluted shares of $255 million in the quarter, our adjusted cash net income per share in the quarter was $0.89. On to liquidity, we generated cash flow from operations totaling roughly $250 million in the quarter and elected to make an option prepayment on our senior secured debt of $150 million in addition to the scheduled $32 million payment.
We ended the quarter with $316 million of cash on hand. On a net debt basis, our leverage declined to roughly 2.4 times trailing twelve months adjusted EBITDA. We ended the quarter with $3.9 billion of gross debt comprised of $2.6 billion of the term debt under our senior secured credit facilities and $1.25 billion base amount of 7.75% senior unsecured notes.
Turning to our guidance. We are raising our guidance for the full year cash tax rate to 11% to 12% of adjusted EBTA and we raised that from the range of 10% to 11%. I want to point out that that is mainly due to the impact of expenses associated with the Western European restructuring as well as some changes in the jurisdictional mix of our pre-tax income and an anticipated increase in some certain non-deductible expenses.
Additionally, due to the timing of projects we now expect a lower R&D range for 2011 of $110 million to $130 million, which is down from a $120 million to $140 million. We do not expect these updates to change our full year revenue our adjusted CNI guidance, which we are reiterating as in the range of $2.7 billion to $2.8 billion for revenue and $3.70 to $3.80 per share for adjusted cash net income.
We try to keep this very short to ensure that we have plenty of time for all of your questions. We would ask that you limit your initial question to one question and we will get back to you for a follow-up. With that, we will open up the line for Q&A. Alley could you open the line please?
(Operator Instructions) Our first question comes from Randall Stanicky of Canaccord Genuity. Please go ahead.
Randall Stanicky - Canaccord Genuity
Great, thanks guys very much for the question. Paul, there has been a lot of debate out there around, if the timing of you guys possibly doing in assets deal but also the size. Can you, maybe, just give us some color, maybe around the deal landscape, what you’re seeing, how we should think about timing and then how big of a deal you can do? Thanks.
Sure, and thanks Randall. As everyone knows is I think, we get this question at essentially every Investor meeting and in every time we go to a conference, but it’s a good question. Certainly, business development opportunities are very important to us as you would expect, we get it. We understand that business development transactions create value and it creates it in a stair-step function. It would be to the extent that we find a transaction that fits our criteria. We would be very interested in closing that up and I think you would be as well.
The environment for business development transactions continues to be, I don’t want to call it favorable, but it’s like as it all is this. There are opportunities out there. We pursue them and to the extent that we can get a seller to engage. We would expect to at least have the opportunity to try to close up on a deal, but it’s, as you know or we all know, it’s impossible to predict the timing and the probability of a deal. I just say that if you get me the longest and long, long period of time, so yes, we will do it, deal it some point here in the future, the difficulties in predicting what, when and the exact nature of the deal.
With respect to our ability, I think, Roger referenced a little bit in his remarks about our free cash flow and continuing our reduction of debt to improve our debt capacity. Right now, the credit markets are pretty good as anybody who’s on the line, who participates in the credit markets, they swing back and forth where things tighten up and then things loosen up. I think the good news for our company is that we maintain even in periods where it’s a little bit tight. We feel like we maintain access to that capital. It’s that the pricing certainly goes from what might be attractive to less attractive, but still attractive relative to the cost of equity capital.
In terms of our ability to lever up, again that is in the size of a deal that we could do utilizing debt capital, that is a function of how the markets are at that moment in time. But I think it’s a fair assumption that we have at least one, perhaps, as many as two turns of EBITDA capacity within our company now, and if we were to make an acquisition of a company or a set of assets that came with it, a stream of operating profit, we’d be able to lever that piece up as well.
Without getting real specific to say that we are able or would be able, we believe, to conclude a transaction using that capital of several billion dollars or more. I hope that answers.
Our next question comes from John Boris of City. Please go ahead.
John Boris - Citi
Thanks for taking the questions, guys. Just a brief point of clarification on ASACOL HD. Can you just give some clarity, I think, Roxane is no longer pursuing the marketing application and trial update there in there. And then can you call out for a us what the HD revenues were in the quarter, thanks.
I think, John, you are talking about the 400 milligram and as Roger said in his remarks, I mean, Roxane is basically withdrawn and is not pursuing an approval for a generic to the 400. We don’t want to speculate on exactly the [bottom line] but we do know this and I’ll say it again and then we’ll wrap it up; we know it’s good. It’s good for us in terms of the revenue split as between HD and in the 400 we continue to drive increases in HD as a percentage of the overall franchise, but I think as Roger correctly characterizes, this is all good news.
We continue to have little bits of news around that franchise. Point out too, that the aggregate is called franchise and I referenced it in my remarks, you look at it year-over-year; year-over-year, quarter-to-quarter its plus 5%. Year-to-date, this year versus last year its plus 5% and we’re talking about franchises in the neighborhood of $750 million run rate asset; we like ASACOL, we like it a lot.
Our next question comes from Louise Chen of Collins Stewart. Please go ahead.
Louise Chen - Collins Stewart
My question is, do you think that you currently have the right assets in place till you to grow the top line in 2012 or do you think you need to expand your pipeline of product offering in order to do that? Thanks.
Well it’s probably, when you look at that and as Paul has mentioned, you know we’re seeing decline in ACTONEL and we knew that was going to decline because basically we moved down in Europe and that was a driver of revenue. The issue is how fast can we grow some of the other brands; I do think there is a lot of growth associated with the LO LOESTRIN and the landscape continues to change.
The FDA has announcements about the new progestins and perhaps the safer and of course is some of the older progestins have been in the marketplace and of course we feature that with LO LOESTRIN and in fact that we’ve lowered the estrogen content to 10 micrograms. And again if you look at the OC labeling, that’s where the black box is, about the estrogen content. So we have a 10 microgram product in the marketplace, its applications as any other product containing higher doses of estrogen so that’s going to be a focus of our growth.
And as Paul says, we’re growing off a base of ASACOL which is a relatively high base and I think that there is growth there and there certainly has been a lot of growth opportunities in ESTRACE Cream. So my answer to you is yes, we continue to grow this franchise despite the fact that in the revenues I think that we’re displacing in Europe our lower margin revenues and what they would be in the U.S., so our business mix is certainly going to improve.
And Louise its Paul, I want to jump in here as well, because I think your question opened up the opportunity to think about our assets as being comprised of two buckets. One is our product assets and the second is our sales forces and we view the sales force as an asset that helps us to drive the revenue and market share of our promoted brands.
Right now, sitting with the portfolio, we think as I ticked off the products that are key promoted brands that are doing pretty well and I didn’t mentioned all of our brands, but we are promoting those brands and we think we’re doing a pretty good job of it here in 2011.
As we look forward to 2012, we always ask ourselves the question of, is our sales force the right size; is it too big, is it too small and based on our prospects, as we look forward we continue to tweak that. So if your question was also centered around how do we view the size of our field sales forces, we continue to tweak that based on our estimates of what we would expect to get in terms of return on investment as we put that behind our promoted brands. So just make that point.
Our next question comes from Chris Schott of JPMorgan. Please go ahead.
Chris Schott - JPMorgan
Just had one question, following up on an earlier comment on capital deployment. With your stock below 20, how do share repo fit in the capital deployment picture at this point? And if I can slip in a second question, ATELVIA, I appreciate the comments on the formulary access improving, do you think it’s possibly to meaningfully ramp ATELVIA given the broader controversies around kind of the roll on duration of use for bisphosphonate at this point or do you need to see that category start to stabilize a bit more before you can really get traction with ATELVIA? Thank you.
Thanks Chris, its Paul. I’ll take the share repo question. I mean certainly when we see our shares trading where they are today and investing in our shares we believe is a very attractive investment opportunity. What we have been saying is much since the beginning of this year was that we had some things internally that we needed to do in order to be in a position to be able to go forward with some sort of program and as we get deeper into the year, I think that it’s something we consider. Certainly, something we consider.
Any of us can do the math, I mean we’re looking at the margin and paying off term debt that has a cash interest cost in the low to mid fours versus a stock the trades that a very high cash yield based on this year’s [FD] 2011 estimated cash net income that’s something that we are focused on and just bear with us.
Chris, as far as the thoughts and it’s kind of interesting when if you listen to the FDA Advisory Committee Meeting and the overall arching theme here was the fact that we’ve seen with the use of bisphosphonate a lower fracture risk in the older way and in fact the fracture risk has gone down over a period of time, we would expect it to go up. So we know that there's a benefit and when you talk to the KOLs in this particular area they are actually befuddled and confused why they actually use the bisphosphonate that is declining and when are we going to come to the realization that we are going to see a resulting increase in fracture in the elderly population.
So with that backdrop, yeah it is kind of confusing why the market is contracting as it is. As I said it’s even contracting on the generic side, it’s not that the generic piece of this market is growing. So the issue is when does this ameliorate? We saw the same thing happen with hormone replacement and actually it’s been around as long as I have.
We actually saw with OCs and that market has obviously come back. So I think you’ve got the math of market factor. The other question you ask is about ATELVIA and can we sustain a ramp in ATELVIA and I will tell you that it’s not because the market is growing, but we are seeing switches to ATELVIA. So the ATELVIA is new to brand business is really coming from the generic component of people who have, obviously where physicians believe that there's an advantage to ATELVIA earning compliance.
So our selling point with ATELVIA is that to be realistic there is a lower incidence of GI side effects because the patient takes it with food and the patient is far more compliant. So it’s not dependent on growing the market, it’s more dependent on switches. In other word, patients who are currently out there on other brands of bisphosphonate that would be switched to ATELVIA because if they are pharma compliant and they don't get the side effect of GI upset.
I am going to jump in as well because I think that one of the things that Roger touched on here, both ACTONEL and ATELVIA have certainly participated in that market and to the extent that the market is continuing to contract that is a factor, what's interesting is that through the panel, they are recommending a duration of therapy in 3 to 5 year range and then further went to state that they feel like the vast majority of patients, the duration of therapy is currently around 3 years.
I mean I am not forecasting here, but it gives you some hope that the amount of contraction that we’ve seen can start to slow and that the asset that would have the greatest impact within our portfolio would be ACTONEL, ACTONEL 35, and ACTONEL 150 those are assets that are, I think in the US ACTONEL in the quarter was $83 million or $84 million, call it $85 millionish.
You know if you have that and you have the units running away at 20%, you are maintaining share probably maintaining share if that unit stop running away from here and in that passion and that would be helpful to us. But as I said, my remarks there is not a lot we can do about stopping the contraction of that overall market, but when it’s slow and hopefully flattens, we would be the beneficiaries.
Our next question comes from David Risinger of Morgan Stanley. Please go ahead.
David Risinger - Morgan Stanley
A couple of questions, first your pipeline is obviously largely undisclosed and relatively opaque, but just hoping you could update us on the erectile dysfunction drug and any other pipeline opportunities that you can share with us. And then second I was hoping you could just frame for us the DORYX litigation outlook with Mylan and just what to watch next and finally Paul if you could just talk about the tax rate outlook beyond 2011? Thanks very much.
I like that David you know we have an opaque. I couldn’t characterize that. Specifically on udenafil I guess you asked specifically about udenafil and we are finishing up some of the Phase 3 we do have a meeting with FDA to find out if the completeness of the new Phase III clinic as we do have a meeting with FDA to find out as the completeness of those clinicals and are they adequate to support the NDA and we look forward to resolving that in the fourth quarter and that will dictate obviously timing of the potential submission.
As far as the pipeline in general, I think you do know that we have been working on the next generation of tetracycline. We are probably clear on that and perhaps some of the other projects. But the idea there is to develop the next generation tetracycline. That is the product that perhaps it’s similar efficacy to accutane, but the safety profile of the tetracycline and that is going forward and obviously a lot of that is based on the [cronectox] and how we can dose range this product and we intend to go into Phase II clinical trials next year.
Once we get through Phase II clinical trials and we get through our dose ranging, I think we can be clear about you know exactly where this product is going to go and what the clinics is going to look like and perhaps when we are going to generate the NDA, but I can reassure you that we have a full pipeline of efforts in the area of contraception, in the area of hormone development. We consider that a core competency.
We generally don’t reveal which direction that we are going, but you can reassure that we’ve new products in the pipeline and we are doing clinical trials. This year we have one in the clinic and next year, in the area of IBD we are looking forward. In fact we have a medicinal chemistry group.
In the area of anti-infectives, we are not only limited to tetracyclines, but we are also looking at Quinolones, so if you go across the horizon, basically we’ve developed a portfolio of products that we’re developing and I guess we’re not strictly focusing at the end of product lifecycles.
As far as the DORYX litigation, I can update you a new fact that we do have an appeal hearing that I believe will occur at the end of November, perhaps the beginning of December and we look forward to a trial perhaps in the January, February timeframe.
And as far as tax, I let you talk to the guru of tax here.
Yeah just to buttress on one thing, the appeal that’s on the PI and that’s the end of November and as Roger said, we’re looking forward to the trial. You’d asked the question about the tax rate as we did increase by 100 basis points, the guidance range for our cash tax rate for 2011. I think what I would suggest to everybody is that in the absence of us providing you specific guidance for ‘12 and beyond, a reasonable starting place to continue to use our now current guidance for 2011.
Now, here comes the color around that. I did call out specifically in my remarks about why we increased the guidance range on the cash tax rate, the fact that we had fair amount of impact from restructuring costs which were incurred in connection with the Western European restructuring that we were going through.
That would suggest a linkage between restructuring costs and the increased tax rate and it would also suggest that to the extent that we get the majority of our restructuring behind us in 2011 that it could help or could emphasis could, help us in 2012 and beyond with respect to that cash tax rate. I’ll give one more bit of color on this.
We’ve always said our cash tax rate or our tax rate in general can creep, the tax rates as and we were fortunate enough to get our first APA and have everything working for us. I mentioned that the next time you go through the process the expectation is that the rate doesn't go down, it goes up and it creeps. The good news is it creeps. It’s not a stair step, it is a movement upward. Our tax rate continues to be something that is I think of a real benefit to our shareholders, it’s something that we work very hard to protect and it just changed a little bit here for us in 2011. I hope that helps.
Our next question comes from Gary Nachman of Susquehanna Financial. Please go ahead.
Gary Nachman - Susquehanna Financial
The OCs came very strong in the quarter. Paul is there any inventory builds for LO LO that number seemed a little high? And Roger, have you actually done anything differently to try and take advantage of the issues you’ve just spared on containing OCs from a commercial standpoint and just a little bit more on expectations going into the panel? Thanks.
I will take the inventory one; yeah it was a good quarter in the OCs, what we had actually with LO LO as you would expect, when you have a product that is growing, there is a natural pipeline expansion that is associated with that. So the LO LO pipeline did expand, but appropriately given its growth trajectory.
I want to point out that on the other side of the equation, we think of LO LOESTRIN 24 and LO LO together as a franchise. LO LOESTRIN 24 pipeline inventory is actually contracted in a reasonable way in Q3, so that net-net our OCs in total and that's the total OCs actually contracted during the quarter.
So if you are thinking about how do I view Q3 ’11 when I admit sales of my OC is $130 million, how do you think about that. You think about that as if anything there might be a little upside to that as compared with, you know Gee, that was a big expansion and it’s not sustainable. The OCs are going a quite well. Roger?
Actually that was a good question Gary and actually I’ll turn it around a little bit and your question is, are we targeting to Drospirenone containing oral contraceptives. And really the issue is that category of contraceptives is declining and it certainly isn’t the market leaders, so I think probably we’ve done perhaps too good a job of may be targeting those and providing the alternatives.
The interesting thing if you look at – knew the brand in the marketplace Ortho still controls 25% of new-to-brand and actually those are primarily higher dose OCs. So we see that as the opportunity and the fact that Ortho is not promoting their products.
So the Drospirenone containing products and I would say I think its even a boarder classification because the FDA just came out and include not only Drospirenone containing OCs but they included in that group the progestin NuvaRing and also the progestin that’s contained in the Evra patch. Obviously, so they are aching, there might have been a retrenching in the marketplace to go to older and more trusted brands.
So our focus remains on the estrogen component and as you’re aware with only 10 milligrams of estrogen and similar efficacy there is a lot of products out there that are referred gain for us. So we’ve seen not only the opportunity in the publicity around new progestins, but also the use of older higher containing products which I think is the real opportunity.
Gary Nachman - Susquehanna Financial
And just a little bit more color going into the panel where your expectation is in terms of how they are going to structure it and maybe I don’t know some of the key takeaways that could benefit you guys?
Gary, its always difficult to speculate on how the FDA panel is going; I mean if you look at the labeling right now, it contains a black box. The black box talks about the estrogenic component, nothing of our progestin. So you know I wouldn’t want to speculate what they are going to come up with although I do think that as a result of the policy associated with this is and the litigation perhaps that’s associated with this, we see a decline in use in those types of progestins.
Our next question comes from Gregg Gilbert of Bank of America please go ahead.
Gregg Gilbert - Bank of America
Roger, higher level question, if we think about the departures of two long time senior guys over the past years, so can you give us some color on what the new team brings to the table sort of how does that senior team feel different now versus a year or two ago, obviously you all are still there; I appreciate that, but….
I still have some of the similar people here, Rochelle taking a bow and Paul is here and so some are confident and the issue what you have to look at it is we do become a larger organization and I do think what P&G brings to us are the P&G intellect is more of the process and the controls in the business. You know we went from a sales force of perhaps 200 reps to 900 reps.
So we have gone into far more detail as far as we do have some European businesses, we have a Canadian operation, but I think the organization and the management of the business at a much higher level because we are a much higher level business. Certainly, has benefitted from the likes of Hans van Zoonen that we have taken actually the country manager from Canada and he has taken the place of running all of North America and he has a country level experience. We also have the country manager from Australia that has come and is taking over and a significant piece of responsibility.
I think it all helps in the planning, in the execution on a business front. So we are very pleased with the addition of those personnel. We have some great guys that help us along both in business development and the sales side and building the organization, but quite frankly, as we look forward Gregg it’s no longer we want to choke on it, it’s no longer P&G. We are a different company.
Gregg Gilbert - Bank of America
What about changed BD, more process oriented, and less reliance on relationships or what’s the flavor change on [biz-dev]?
Well we have the benefit of having Michael who work closely with Tony in the transition role. I mean Tony always have been looking forward his plan was to – as he more forward to develop Michael and he has done a great job. So I don’t think we’ve lost a step there. They obviously work closely with Paul, but I do think with Michael in that role and with Paul in his role I don’t think we missed too much of the step.
Our next question comes from Marc Goodman of UBS. Please go ahead.
Marc Goodman - UBS
Roger, I assume that your expectations for revenues for the ACTONEL, ATELVIA franchise are probably a little lower than they were a year ago, with respect how you’re thinking about may be next year, the year after, the year after, really the question is what are you doing that kind of makes us a very profitable franchise and so what are you doing kind of the expense side to keep the profit?
Marc, you’re right and the fact is you have to look at the expense side, but the other thing you have to look at is we have the opportunity here is to focus where the growth is and I’ve told you like before, it’s not linear, we have varies in what we’ve done very well with ATELVIA and we need to focus on those areas as and area growth and really the growth has come from switching, not really new to brand. So I think as we move forward we have to focus on what we’ve done right and perhaps not focus on areas in which we haven’t executed as well.
And that's all part of business management, and it is quite a significant franchise and we want to maintain that franchise obviously because our strategic value is, it doesn't end in 2013 or 2014. It’s how do we carry this franchise even further because I don’t see any other therapies right now to prevent osteoporosis that are being developed. So, we do see strategic value through these assets and how do we focus, and its akin to looking at it as though, you know, how do we turn this from a GPSE market into a specialty market and through the use of targeted marketing, how do we identify the high prescribers of ATELVIA and bisphosphonates and act as though this were a specialty market, so we are more efficient in our promotion.
Marc Goodman - UBS
And so with that, does that mean less reps on the product and less advertising or obviously you are saying more focus or assuming less?
Yeah, what happens as you define your market around, basically a specialty market, now I don't want to get ahead of ourselves here and say like okay, well this is what we are going to do with sales reps, but its also have to do with the deployment of sales reps. It doesn't necessarily mean fewer sales reps, it means redeploying sales reps where they are more productive.
Our next question comes from Michael Tong of Wells Fargo Securities. Please go ahead.
Michael Tong - Wells Fargo Securities
Hi, Good morning. Roger, maybe just thinking about business development from what you've seen in the last 12 months, were there any transactions that you thought you would be able to get to the finish line on and get one way or another – it didn’t pan out that way, and if there were - was it more price or was it more fit within the organization? And if I could see the second one when it was Roxane, let it picture, is there any other remaining litigation ASACOL 400?
Let me hit the first one as far as BD, and you cleverly asked that question, you know, it’s amazing that we perceive that we missed, and I can tell a conference that I don’t think we miss anything. Now that doesn’t [imbibe] anybody else’s deals, but I don’t think we have missed anything.
And Paul can applying to that, as far as the Roxane litigation does that clear the way, I think the takeaway from that is they did use biologic endpoints here and they were doing clinical trails based on biologic endpoints versus, you know, kinetics. So, I think, you know it’s sort of evaluate the approach by FDA that if you are going to do -- if you get to compare products you have to do end points that are based on pharmakinetics rather than based on biologic endpoints of clinic. We talked about clinical endpoints.
I talked in my bio availability to people my kinetics through replay call those biologic also. So I think the endpoints are fairly clear and we’re trying to get that clarified on the part of the FDA. As far as -- beyond the points of doubt if you are looking at ASACOL you have to do Pharmakinetic end points, and as far as we can go back on --
On the [BDM] Michael -- I think Roger caught it. We did not -- there wasn’t anything that was done out there that we feel like we missed, that the market environment continues to be one where we see things that we think are interesting, but by definition here we are in November, we did not see some that we actually pulled the trigger on and move forward with, but there was always opportunity out there.
Our next question comes from Shibani Malhotra of RBC Capital. Please go ahead.
Shibani Malhotra - RBC Capital
Thanks guys for taking my question. I guess my question is on what’s in filing on ATELVIA, and I just wanted to get your view on the strength of the ATELVIA patent. The reason I ask is clearly, it was an obvious things for companies to try to get rid of the [fastened] requirements and my question is if it was so straight forward and easy to do, why didn’t something like Merck do it given FOSAMAX was such a big brand for them. So based on that, sort of, background, can you just comment on the strength of the patent and how difficult it was to actually create the ATELVIA formulation? Thank you.
Thanks, Shiba. I think we really don’t comment on relative strengths of patents because you really don’t know the strength of your patent until you actually get into litigation and examining and actually get to look at what they’ve done. I do think that an interesting thing that Watson came after ATELVIA and I think and obviously, it look kind of quick but if you look at the -- they must really fear ATELVIA as they were going to transfer the business into ATELVIA or that’s going to be such a growing assets. So I guess we should take, we should thank Watson for thinking so much of us, but to be truthful, this is going to take a quarter -- it’s really early and again it’s going to take a course. We believe in our patent, we believe we can sustain our patent and we’ll see how things develop.
Shibani Malhotra - RBC Capital
Okay. Can I just ask a follow up since you didn’t really answered the question? Can you just talk about the switch from ACTONEL to ATELVIA in particular into the 150 milligram dose? And then based on that that, your expectations for the BONIVA patent case since you share the patent on the 150 milligram dose, I mean, how are you thinking about that playing out and what are the implications for your overall franchise for next year?
I will tell you that we actually don't share the same patent. We both have separate patents for the monthly. We do share some of the similar intellectual property but the two patents are distinct as one affects the other. We do think so. There might be a relationship between -- If they’re successful in their patent litigation, but we do have a separate patent for the 150 product.
That is about to be and we’re only speculating on that. That clearly is in their court. They do have litigations coming up. I think it’s a couple months. So that it’s going to be heard. I do think that at the end of the day, they still are protected by an NCE patent. We are watching that closely and if indeed they’re successful, that we would believe that would be a good thing for us to have a monthly patent. How’d it affect us going forward?
Do we shift business to the monthly product? Strategically, we’d have to take a look at that, but I will have to tell you that the sales that have been successful on ATELVIA has not been conversion of ACTONEL to ATELVIA. It’s been conversion of ALENDRONATE to ATELVIA. So basically, looking forward we see there might be the opportunity of maintaining both the ACTONEL and ATELVIA time because one obviously is dosed on a monthly basis and one can be dosed here regardless of with food. So we are watching it. We will see what happens. We do think that if approach prevailed that could be positive for us, but then again we are not dependent upon that.
Our next question comes from David Buck of Buckingham Research. Please go ahead.
David Buck - Buckingham Research
Hi, yes thanks for taking the question. First one is just a quick follow up on the question before, on revenue growth for 2012 I guess I didn’t understand the answer whether there was a yes or no to overall revenue growth. And then for Paul on the gross margin for the quarter was a little bit below our expectations but you maintained the same range for the full year. What happened in the quarter and why should it bounce back up and can you also review any major changes to either pricing or gross to net for the major products?
My piece of this thing and I will pass it over to Paul because it has a lot of numbers associated with it, is that all revenue is not created equal. So that’s the message going forward because with some of the revenue they were exchanging perhaps is revenue in Europe versus US based revenue and the overall profitability and certainly how gross to net effects number. With that being said, I’ll pass along to Paul.
I am not sure who asked the question about revenue growth in 2012, while all I would say is with respect to your thinking about 12 and thinking about 12 and beyond is as I suggest, take the things out of the mix that you are darn sure aren’t going to grow, ACTONEL outside the US, you know at least until something changes with respect to the bisphosphonate market ACTONEL within the US and then you look at the balance of our key promoted brands and you ask yourself the question, can ATELVIA grow, yes. Can our OCs grow, yes. Can ASACOL grow, yes.
Is there an opportunity to grow ENABLEX and DORYX yes and it really, the piece that as I say we can’t control is the drop of that ACTONEL revenue which is just a legacy of what we bought, we’ve bought the Procter & Gamble pharma business, but I think that by looking at our core promoted brands, I feel comfortable saying that we will grow them like in 12 via 11, but we are not at this moment in time making a statement with respect to 2012 revenue expectations.
On your question on the gross margin percentage, as you may know it bounces around, if you happen to have a batch go bad in a quarter, it can effect your cost of good sold, recognized in the quarter. We maintained our guidance because that’s what we think it will be for the full year, but it does bounce around I mean there are multiple expenses that kind of bounce around on a quarterly basis and gross margin percentage or cost of good sold is one of them, the other one that is a bouncer is income tax.
David Buck - Buckingham Research
And then just on the gross to net in pricing, any major changes there?
We are not going to go through gross to net and pricing and we did take some price increase, I don’t have my sheets sitting directly in front of me, but that’s all available.
Our next question comes from Greg Waterman of Goldman Sachs. Please go ahead.
Greg Waterman - Goldman Sachs
A follow-up on the ex-US restructuring process, if you could just give us a little bit more color and to as how far you are along in the process and physically where current spending levels are relative to what could be considered more of a runrate and how we should think about timing there and then quickly on DORYX, I believe there has been some continued tweaking of the co-pay assistance program. I am just curious if you think you found the right balance there and what the realized price we are seeing now, is there a reasonable runrate going forward?
With respect to the ex-US restructuring, as we’ve said in our remarks, I mean we are hoping that we can have the vast majority of the restructuring part of it meaning the severance and the agreements to wrap it up within this calendar year, so 2011, so that we would start 2012 with a relatively clean slate meaning, you would have moved to a distributor model in western Europe which by definition means all the cost or the vast majority of the costs out of each one of those markets.
We’re not there yet, we are still in the process of restructuring and so we’re not a 100% down in expenses in Western Europe, but they are trending in the right direction because that’s what we are attending to do is move to that distributor type model.
Okay on the DORYX, we actually have two cards. So we’ve gone from I guess the original card that we have and now we have a second card that can be used depending on the physician and the needs of the physician and also laid on top of that, we have the launch of dual-score. So what’s you’re seeing is a lot more new patient starts and when you see new patient starts, you see a more skewed, the expanded use of that card which I will you know we’ve thrown to Paul’s court and that ends up with this gross, the next calculation.
And if you do see because of the expanded used of the card, the decline in the average selling price, then you have to compensate on inventory moving forward, so that just makes Paul’s job that much more easier. So that’s why we direct you away from gross to net, but I think the thing what you want to focus on with DORYX is the significant increase in new RXs which transfers into total RXs and increases the whole business. Right now you’re getting a skew with the use of the card because you’re seeing so much of the new RXs being used and with the introduction of the new prescription cards being used with the introduction of the dual-score product.
I mean just for the avoidance of doubt here I mean yeah, we change the terms of the card, we continue to look at the means by which we give ourselves the best opportunity to grow overall net sales dollars. That’s what we’re focused on is net sales dollars.
By tweaking the card, we give ourselves a better opportunity to increase our RX pull-through, our RX demand but it certainly comes at a price and you would see in our quarter Q3 of this year that definitely gross to net decline with respect to DORYX and with those cards in place should expect it to be lower, but the flip side is we have had a good RX trajectory with the brand. We’re trying to find that right spot where we’ll give ourselves the opportunity to increase net sales dollars. That’s how we get paid.
Our next question comes from [Tim Chang] of CRG Capital. Please go ahead.
Roger and Paul, I had a question you talked about the restructuring costs and the restructuring that you are doing now and going into the distribution model in Europe, I mean is there a ballpark number as to where our target cost savings number that you are trying to reach heading into next year that you could tell us?
Well, I mean you think you can and I mean I will give you a couple of rules of thumbs that you might be able to use to back into it, I mean we always say that if you look our configured territories in the US and you look at that times a number, of couple of $100,000 per. You come with a number that’s approximately what we are spending in the US and then you subtract that from what you see in selling expenses excluding (inaudible) to Sanofi etc.
And you will be able to see a number that, gee that was their selling expense in Western Europe or OUS. Not all of that’s going to go away. We maintain a selling presence in Canada, we maintain a selling presence in the United Kingdom. But the other markets we are going to a flat distributor model where that means the cost there are nil.
And so we didn’t guide to specifically what we expect to say, but I think we did say when we announced the restructuring. We did this because we felt like it would give us the best pre-tax cash flow from the streams of revenue that we expect in those Western European countries. And I think I even said, the [IRR] on the investment if you will in restructuring costs was strongly positive.
So, we expect to significantly reduce our cost OUS on the selling line, little bit on the G&A but that’s very modest. And we should expect to start seeing that evidence in a clean way, perhaps not Q1 of 2012, but certainly in the first half of 2012.
Okay. Thanks Paul, and just one quick follow up. I think you mentioned earlier that you did prepay some of your bank debt, I think, around a 150 million, is that something that you plan on continuing to do every quarter, just reduce your debt here?
Yeah, it’s a decision that we make on an ongoing basis based on how we expect or wish to deploy capital at any moment in time. So far this year, we, I think as Roger, even referenced in his opening remarks, we’ve pretty aggressively look to repay debt. That doesn’t mean we will definitely continue that in Q4 but in the absence of seeing anything different, it’s a reasonable assumption. It’s a reasonable assumption that’s also we will continue to add in 2012 in the absence of some other place to put that money.
Our next question comes from Elliot Wilbur of Needham & Company. Please go ahead.
Elliot Wilbur - Needham & Company
Just wanted to go back to some of your earlier comments around the Doryx franchise. It doesn’t really sound like there’s been any real change in the overall economic value proposition to you guys in terms of the loyalty cards and alike. But just looking at the prescription trends in the last couple of weeks, I mean there has been a pretty dramatic rebound there sort of outside of what you would expect from just kind of normal seasonality. So I am wondering what may account for that? Has there been any change in sales force detailing level or positioning that might account for that?
And then as a follow-up question that in looking at the LOESTRIN franchise, obviously, you guys have put up very strong numbers in terms of overall sales growth. But in terms of aggregate RX generation from that franchise, the numbers kind of peaked back in December 2010. I am just wondering what your data is telling you about sort of the source of RXs for LO LO, and how much cannibalization you're seeing relative to the overall franchise?
And Roger, I think we'll use the term stealth to describe your pipeline rather than opaque? Thanks.
Thanks Elliot that's another good word. I think its hard for DORYX, maybe I mean maybe you are underestimating the value of Dual-Scored and I do think that that's why we've had this incentive in growth because I mean acne is a disease state characterized by inflammation and what happens is patients will improve and then they will sort of regress and what will happen and what you have to do is constantly adjust the dose.
And one of the strategies going after this is having five or six different doses and I think the FDA is on record is supporting the idea that if you can have multiple doses associated with your medication as characterized by putting a score on it, so you create the flexibility on the patient’s part to adjust the dose of the medication to the disease state and I think this is, it has really simplified I think for patient and for clinician the fact that I can know write DORYX 150 milligram and I have flexibility and how I dose the product.
The FDA certainly was very interested in the labeling that we put on this so were to be clear to patients and they fully endorsed this rather than coming out with a bunch of different strength of products which I think is both confusing to patients and perhaps difficult for the clinicians to titrate dose, due to fact that acne is associated with flares.
On the LO LOESTRIN side, I would point you to the fact that if you look franchisee value and you look at share franchise value it has been growing most recently. We’ve seen the growth of the 10 microgram product or LO LO sometimes both of them are confusing with the names that LO LO’s growth has overwhelmed any regression that we’ve seen in 24 sp we’re seeing the whole franchise at this moment grow in our access. And that’s what IMS is telling us and that’s what we’re basically saying all also the sales force level. And I’ll take your advice as far as stealth R&D being.
And Elliot it’s Paul. I just want to point out because you asked the question about DORYX and the recent trends and just to reiterate that for everybody, we did make changes back at the beginning of the summer in the terms of those cards and that is helping us to improve our ex-trajectory and the cost to that is certainly being evidenced through gross to net.
But our goal again just to restate it, our goal there is to maximize net sales dollars with respect to the DORYX franchise and I would also like to thank you for not using the despicable, when talking about DORYX.
The other point that you brought up was on LOESTRIN and thinking about Gee, if it was really strong December ’10; I want to point out something else as well, through the end of 2010, we did indeed have cards in place that we used to help us drive our ex-share and I think many of you may recall, we changed the terms of those cards at the beginning of the year, because we said what we are getting from the redemptions against those cards were prescriptions that were not necessarily the most profitable at the margin.
So we changed the terms of those cards, we did loose it’s kind of like we have lost some traction on the RX side, that was the bad news. The good news was our gross to net went up significantly with respect to the LOESTRIN 24 and so we kind of rebased it from the unit perspective beginning of the year and then as Roger says that in the aggregate we think we’re doing quite well with our OCs, we’re doing well.
Our next question comes from Jim Molloy of ThinkEquity. Please go ahead.
Jim Molloy - ThinkEquity
Just could you give me your thoughts on, you're down from $4.9 billion, your peak is that third quarter ‘10 down around $3.7 billion, $3.9 billion, now $3.7 billion range now. Can you talk about your preferences between buying back shares or repaying debt, which you think is a better use of capital at these levels?
Jim its Paul, I’ll take that one, I mean to the extend that we have the capacity to do it as I said we only have the opportunity to prepay debt in the low to mid fours, 4% range on a cash interest basis versus acquiring our share at the prices where we currently trade. And I think that there would be an interest in the cracking and the company acquiring shares through the end of Q3 we continue to prepay debt. To state again what we’ve been talking about since the beginning of the year, in the wake of the $8.57 a share special dividend hit a little more than a year ago. We did need to re-prime the pump, when the pump is re-primed then we will have other opportunities.
Our final question comes from the line of Chris Holterhoff of Oppenheimer. Please go ahead.
Chris Holterhoff - Oppenheimer
You talked about the reimbursement environment improving for ATELVIA; just wondering what you're hearing from your reps about any reluctance doctors might have to switch patients from ACTONEL or from other bisphosphates to ATELVIA?
Well Chris as I said the strategy is to not switch ACTONEL to ATELVIA but to the benefit of risedronate versus alendronate and the fact that the dosing advantages of ATELVIA and sometimes you know clinicians you know it takes a bit of convincing I think but you’ve convinced them and certainly in the payer environment that we’re in sometimes they requires them to pursue what we call a prior authorization.
But once that’s done and they are on ATELVIA we see that the patients are obviously happy with the use of ATELVIA and the fact that they can take it foods and I think the hidden side effect in this whole thing is that there is whole lot less GI upside when you can take this medication with food versus without and so the benefit of ATELVIA once we can get the patients switch from alendronate the current form of it to ATELVIA that proves itself sometimes that hurdle is obviously a little bit difficult because the issue here is the physician have to take sometime with the patient and explain that they are being taking from one medication to another medication and explain the benefits so the physician really have to be motivated to make that conversion. But once the conversion is made generally both are happy, both the clinician and the patient.
With no further questions at this time, I would like to turn the conference back over to Mr. Paul Herendeen for closing remarks.
Thank you and thanks everybody for joining our call this morning. We hope that it was useful. In closing, I am going to repeat a few things, but let me say that we continue to do the things that we believe will drive increase shareholder volume.
First and foremost, we drive share and revenue growth of our key brands. Net sales within the LO LOESTRIN franchise were up 50% from a year ago. I’ll repeat that, 50% from a year ago quarter and 45% year-to-date when compared with last year. That’s pretty good and we continue to have room for growth as we go forward.
Net sales of ASACOL up 5% in the quarter, 5% year-to-date; again, pretty good. Global franchise $750 million-ish and that’s going pretty well. ESTRACE Cream up 18% in the quarter and up 16% year-to-date as we continue to build our presence in neurology. All these things are good, right?
And on other fronts, since we last spoke, we were pleased that we’re able to launch that improved version of DORYX that Roger just talked about and we made progress in our continuing defense of the patent protecting DORYX.
On the ASACOL front, we got the news that Roxane is no longer pursuing approval for a generic of ASACOL 400 and that’s the good thing.
On the ATELVIA and ACTONEL fronts, the bisphosphonate panel is behind us and while we don’t know the final outcome, we have some positive takeaways from that meeting.
We generated $250 million of cash flow from operations in the quarter and we used that cash flow in part to prepay another $182 million of our debt. And I think of that as a transference of enterprise value from our debt holders to our shareholders.
Over the last quarter, I’ve seen a great many of you at various conferences and investor meetings and a lot of people continue to want to view us through an ACTONEL coded lens. If you do that, I think you’ll miss the good things that we have going on in the value that we are creating within our core franchises. So, thank you for joining our call and until the next time.
Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!