Warner Chilcott Limited Q3 2007 Earnings Call Transcript

Nov.11.07 | About: Warner Chilcott (WCRX)

Warner Chilcott Limited (NASDAQ:WCRX)

Q3 2007 Earnings Call

November 9, 2007, 08:00 AM ET

Executives

Paul S. Herendeen - EVP and CFO

Roger M. Boissonneault - President and CEO

Analysts

Adam Greene - J.P. Morgan

David Buck - Buckingham Research

Marc Goodman - Credit Suisse

Michael Tong - Wachovia Securities

Scott Henry - Oppenheimer and Company

Gilbert Gregory - Merrill Lynch

Operator

Please standby. We are about to begin. Good morning, my name is Evelyn and I will be your conference operator today. At this time, I would like to welcome everyone to Warner Chilcott's Financial Results for the Third Quarter ended September 30, 2007 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

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

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

Thank you and good morning. This is Paul Herendeen. I would like to welcome everyone to our third quarter 2007 earnings call.

We issued our earnings release this morning. In case you've not seen it, a copy is posted on our website. This earnings call will include a number of 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… disclosed in our 2006 annual report on Form 10-K which is filed with the SEC, is also available on the SEC’s website.

The forward-looking statements made during this earnings call are made only as of the day of this call. The Company undertakes no obligation to update such statements to reflect subsequent events or circumstances. In addition, we’ll make references during the course of this call to non-GAAP financial measures as defined by the SEC regulations. In accordance with these regulations, we have provided reconciliation’s of these measures to GAAP in our third quarter earnings release.

With that I’d like to turn things over to Roger Boissonneault our CEO.

Roger M. Boissonneault - President and Chief Executive Officer

Thanks, Paul. Good morning every one and thank you for joining us. I will give you a brief overview of our performance in the third quarter of ’07 and other recent events before turning the presentation back to Paul for additional details about our financial results and our guidance.

Our third quarter revenue increased 16% to $226 million compared to the third quarter of ’06, led by sales of Loestrin and 24 of Taclonex. Sales of our OCs are increased 14% this quarter versus the third quarter of ’06 with Loestrin 24 contributing over $38 million of sales in the quarter. Loestrin 24 ended the quarter with a 4.25% share of new prescriptions in the hormonal contraceptive market. When compared to other successful contraceptive launches over the past few years, Loestrin 24 has done quite well. But as I discussed on our second quarter earnings call Loestrin 24 should do even better. We’re continuing to focus on improving our execution of promotional efforts before Loes… behind Loestrin 24. Improving rates number of physicians called down and quality of our sales representatives.

During last quarter’s call I said that when it comes to Loestrin 24 we need to execute better and behave like a market leader. Some of you took that to mean we needed to commit more resources, meaning an increased promotional budget. Let me make this clear, we have adequate resources in place to grow Loestrin 24. What we need to do is get better results from those resources. Loestrin 24 is an excellent product. In some of our sales territories Loestrin 24 is clearly out performing Yez. It’s obviously not the product but our sales execution makes the difference and that’s where we are focused. To that end in September we reconfigured our sales forces and moved more then half of our portfolio sales reps territories into women’s health care sales force that have Loestrin 24 as its top priority. This increases the size of women healthcare sales force to roughly 225 territories. The remaining portfolio of sales reps now cover approximately 30 world territories and promote Loestrin 24, Dovonex and Taclonex in these areas. During the third quarter our Femcon oral contraceptives generated sales of $9.4 million. Femcon total filled subscription were up 30% sequentially from the second quarter of this year. This brand remains a top priority of the Chilcott sales force which covers approximately 180 territories.

In our Dermatology portfolio revenue growth in the quarter was $41.1 million, a 17.7% increase over the prior year quarter. Revenue from the Dovonex/Taclonex franchise totaled over $65 million in the third quarter. Also in dermatology we saw an improvement in the prescription trends for Doryx. Total filled prescriptions in the quarter were up 2.2%, compared with the third quarter of ’06 and total filled prescriptions in the most recent weeks were up approximately 47% over the same weeks in the prior year. We attribute the positive change in Doryx scripts trends to refocusing our sales reps on Doryx as a high priority. Lastly a few updates on our product development activities. Internally we continue to make progress in the clinical trials of two new oral contraceptives currently under development. The first clinical trial which relates to new low dose OC completed enrollment in the third quarter of this year.

The second trial is for a new oral contraceptive, the characteristics of which we have not yet divulged. The trials continue to enroll patient and is progressing on timeline as approximately 6 months behind the low dose OC trial. In addition we announced last week a new licensing agreement with NexMed. It really grants us exclusive rights to the topical alprostadil cream for the treatment of erectile dysfunction. NexMed submitted an NDA related to the product in September of ’07. A positive outcome of that filing would provide one or two opportunity to expand into a specialty segment that we see as a very complementary to our existing activities, urology. Let me now turn the things over to Paul to take you through the financials.

Paul S. Herendeen – Executive Vice President and Chief Financial Officer

Thanks Roger. First let me provide you some additional details regarding our third quarter results. And I am recapping the headlines. Our third quarter revenue was $226.5 million which was a 16.3% increase compared with the year ago quarter and that growth as Roger said continues to be led by Loestrin 24 and Taclonex. You will recall that both of those products were launched in April of 2006. Loestrin 24 contributed $23.1 million of our $31.8 million revenue growth compared with Q3 of last year. Filled prescriptions for Loestrin 24 increased 9.8% sequentially versus the second quarter 2007. Loestrin 24 share of new prescription in the hormonal contraceptive market reached 4.25% by the end of September. This is a solid share for a oral contraceptive that has been on the market for 18 months. progress [inaudible] we believe the current condition in the hormonal contraceptive market as such that we should demand an even more from this product. While face to face detailing of Loestrin 24 is our primary promotional focus we ran another flight of DTC advertising to augment our sales forces efforts. We continue to monitor the effectiveness of our investments in our DTC advertising for less than 24 to ensure that our investments paying off in the flow of increased market share.

Turning to our the two oral Contraceptive Femcon. Femcon generated $9.4 million in net sales in the third quarter. it ended the third quarter with just over a 1% share of new prescriptions. Total filled prescriptions for Femcon in the quarter increased 30% compared with the second quarter of 2007. Before we began shipping Femcon, which we then called Ovcon Fe chewable a year ago. You should note that we did not initiate full promotional support for this product until April of 2007 with the deployment of our expanded Chilcott sales force and a flight that deals direct to consumer TV advertising. While DTC advertising was important element of the Femcon launch. We do not believe that DTC will be an effective promotional tool for the brand going forward. The brand continues to generate consistent market share growth week-to-week albeit at a rate much lower than we observed with the Loestrin 24. As the Chilcott sales force seasons, gains experience with Femcon and builds relationships with its target physicians, we expect to see continued growth of the Femcon brand.

Within our OC portfolio, the sales gains we saw from Loestrin 24 and Femcon more than offset declines in Estrostep and the old Ovcon 35 product compared to the prior year quarter. In total our OC sales grew 14.4% we stopped active promotional efforts for Estrostep in April of 2006 when we launched Loestrin 24. Estrostep sales decreased $7.6 million or nearly 30% compared with Q3 of ’06 due primarily to a 38% decrease in filled prescriptions compared to the prior year quarter and that was partially off set by increases in our selling price for the product. As expected Estrostep now faces generic competition in the marketplace, including an authorized generic version that we launched Goodwatson [ph] The impact of generic competition for Estrostep will be seen beginning in our fourth quarter results this year and we’ll obviously carry forward into 2008. Additionally net sales of Ocvon declined $16.1 million in Q3 ’07 compared with Q3 ’06 primarily due to generic versions of Ovcon 35 entering the market beginning October 2006.

Our hormone therapy portfolio generated strong net sales in the third quarter, led by our two main products in this phase. Estrace Cream and Femhrt. Sales of our hormone therapy products increased nearly 16% or $5.8 million compared with the prior year quarter. The increase was due to price increases which more than offset declines in filled prescriptions which were 9% for Femhrt and 2% for Estrace Cream. Both Femhrt and Estrace Cream have been able to maintain relatively consistent market share as well as benefiting from price increases in the hormone therapy market which are driven by the market leader.

Turning to our dermatology business. Net sales of our dermatology products increased nearly 17.7% compared to the prior year quarter. I’m not sure people appreciate the fact that we are a very significant player in the dermatology segment. Our year-to-date sales are nearly $290 million, which is 43% of our total revenue. Doryx net sales increased $4.6 million or 18.7% for Q3 ’07 compared with the prior year quarter. Filled prescriptions increased 2.2% compared with the prior year quarter. Importantly, Doryx filled prescriptions have been growing compared to the same periods as the prior year and as Roger said in the most recent weeks data, Doryx prescriptions are up 4% to 7% compared with the same periods last year. We believe that the positive change in Doryx prescription trends is due to the renewed promotional emphasis by our dermatology sales force and that emphasis is based on changes in the dermatology sales force’s incentives. Total filled prescriptions for Taclonex increased 49.1% in the quarter as compared to the prior year quarter and generated $33.1 million of sales this quarter, an increase of $13. 4 million compared with Q3 ’06. We believe additional growth opportunities for Taclonex, Taclonex actually remained both within and outside the dermatologist community. Within the dermatology segment the Taclonex growth opportunity is to capture an increase in share of the corticosteroid business. The other growth opportunity for Taclonex is with the GP and FP physicians. We don’t reach GP’s and FP’s directly. But, we expect that the Taclonex message will be carried to these doctors by patients that receive their initial prescription for Taclonex from dermatologists. In addition Dovonex continues to be an important treatment option for psoriasis patients when the use of a steroid is not considered an option. By the end of October more than 70% of filled Dovonex prescriptions are now for Dovonex cream. Dovonex ointment still generates roughly 13% of filled Dovonex prescriptions. Net sales of Dovonex decreased $3.9 million due to an 18.3% decrease in filled prescriptions and a contraction of pipeline inventories of Dovonex products. Particularly Dovonex ointment.

The declines of … I’m sorry. Cost of sales increased… turning to cost of sales. Cost of sales increased $6.3 million or 16.1% this quarter versus the prior year quarter. Due primarily to the 14.9 % increase in product net sales. Growth margin as a percentage of product net sales were 79.7% for the third quarter within the range of our expectations for the full year 2007. Total SG&A expense in the quarter was $60.8 million. Our SG&A expense is comprised of three categories; selling expense, which is the cost of our field sales forces. Advertising and promotion, which we often refer to as A&P and represents the promotional programs that we engage in, in support of our brands including DTC and general and administrative or G&A costs.

Selling expense in the quarter totaled $22.7 million a 10.7% increase over the prior year quarter. The increase is mainly the result of the expansion during the first half of 2007 of our Chilcott sales force to support promotional efforts behind the FEMCON brand. As we sit here now our sales forces are configured with an aggregate of just over 500 territories. We believe that the current figuration of territories provides adequate field selling resources to support the near term growth of our existing portfolio promoted brands. A&P’s lending in Q3 was $11.8 million which represents a 32.2% reduction from the prior year quarter, a period when we are early in the launch phases of both LOESTRIN 24 and TACLONEX and that launch cost. Sequentially A&P cost declined 47.3% compared with Q2 as went far with DTC advertising in the summer months and returned to television advertising late in Q3, that must have been mid September. The current flight of DTC advertising just wrapped up here last week and we will not resume DTC advertising until 2008. We have had a lot of questions about the magnitude of our DTC effort and we review the effectiveness of our DTC effort and the likelihood it will continue to commit similar resources to DTC as we move forward.

In 2007 our aggregate spend which included DTC in support of FEMCON and for LOESTRIN 24 is expected to be in the range of $32 million to $35 million dollars. While DTC played an important role in the launches of both LOESTRIN 24 and FEMCON it is not likely that we will continue to commit the same level of resources to DTC as we go forward. Our current intention is to reduce that spend in the next year by some $20 million.

G&A expenses in the third quarter decreased $35.5 million to $ 26.3 million compared with the third quarter of last year. In Q3 of ’06 there were two significant IPO related expenses totaling $42.3 million included in G&A expense. The current quarter includes a $9 million reserve related to the tentative settlement of the one remaining class-action suit in the OVCON 35 litigation. Excluding the impact of the $42.3 million IPO triggered expenses in the prior year quarter in the $9 million settlement this year’s quarter so that’s a lot of fixing but if you look at it on a normalized basis, G&A expenses decreased $2.2 million in the current year quarter compared to the prior year quarter. The decrease relates primarily to the higher G&A costs incurred in the 2006 quarter related to the implementation of the new ERP system that was SAP that we installed last year. A large component of the G&A spending both periods relates to legal costs which we anticipate could trend up as we continue on into the future.

R&D expenses in the third quarter totaled $24.1 million which includes both the $10 million milestone payment that we made to LEO Pharma on FDA acceptance of our submission for TACLONEX Gel as well as a $4 million upfront payment for Paratek to acquire rights to certain noval narrow-spectrum tetracyclines under a development for the treatment of Acne and Rosacea.

Excluding this payments R&D expense to be one, I think if it is our internal R&D expense increase $5.3 million versus the prior year quarter mainly due to timing of clinical activities relates to oral contraceptive that we have in development that Roger referenced in this opening remarks. The enrollment of patients just to be clear in what we’ve referred to as our low dose OC was completed in August and we are actively enrolling patients in a critical trial for other OC and characteristics of which we’d not discuss.

Development titling for the second OC is roughly 6 months behind the low dose OC. Net interest expense in the quarter was 28.3 million, a decrease of 49% versus the prior year quarter. Late in September 2007, we prepaid an additional 60 million of bad debt bringing our year to date optional prepayments of debts and available cash flow to $250 million. Included in the third quarter expense is a $1.1 million write off of deferred lowing cost associating with the third quarter prepayment. In just one year. Starting with the proceeds with of our IPO last September and as a result of the cash, we generate from our business during the past four quarters, we’ve reduce debt by nearly $930 million.

We ended the quarter with $1.293 billion of debt consisting of 903 million senior secured debt and 390 million of 83.75% senior subordinated notes. We have interest rate swaps in place in effectively fixed rates of over 80% of our bad debt. As of the end of the third quarter, our ratio of net debt EBITDA was 2.9 times, which is ahead of the expectations that we had of getting to approximately three times by the end of 2007. Third quarter pretax income was 10.8 million with a corresponding income tax provision of 5 million. Net of tax or reported net income the quarter was 5.8 million as compared to see $81 million net loss in the prior year quarter. To arrive a cash net income for the quarter we add debt a after tax impact of two times book amortization of identified intangible assets and the amortization or write off of deferred financing cost.

Note that each of these items has its only specific margin tax rate. In Q3, the tax rate associated with amortization of intangibles was 8.7% and foe deferred financing cost including the write off associated with the September prepayment was 9.9%. Adjusted cash net income for the third quarter was 69.3 million, a 175.6% increase over the prior years adjusted cash net income of 39.5 million. There is reconciliation from GAAP reported results to adjust a cash net income and that’s included in our press release. Using 250… I’m sorry, 250.5 million fully diluted class A shares in the quarter that translates into cash earning per share in Q3 of $0.28 cents. Also I will note for a debt holder there is a reconciliation net income to adjust to EBITDA include in press release. Adjusted EBITDA for the quarter was 123.4 million, 27.5% increase over the prior year quarter.

Let me just spend just a minute on our balance sheet and liquidity situation. We ended the quarter with $26.8 million of cash. No borrowing outstanding under our revolver and total funded debt as I’ve said of 1.293 billion. We started the quarter with cash on in hand of 57.9 million and generated cash flow from operating activities of 42 million. We use 69 of available cash to make an offshore prepayment of bad debt at the end of the quarter. Our investment and then look that 42 million of cash flow from operations, please note our investments in a networking capital ends and flows from quarter-to-quarter and I would call Q3 as kind of a low to middle of the road. Our view what might be considered a normal quarter for us in terms of cash generated from operations. During the quarter, we prepaid for future media time for our LOESTRIN 24 DTC campaign and so that you will see on our balance sheet and than that it’s as working capital item. That ends up as a illusive cash during the quarter and so reduces our operating cash flow. Also during the quarter we made payments against the settlements of portions of upfront FDC litigation, which had been accrued early in the year and so those items were paid during the quarter. Also those items have the effect of increasing there investments in network and capital and reduced our cash from operations in the quarter. Due to our low tax rate and relatively low annual capital expenditures roughly 30 million per year, we generate a large amount of free cash flow.

In the absence of some compelling fall call in our cash, we intend to continue to use future available cash flows to reduce our debt. Turning for a second to full year 2007 guidance but share our revise financial guidance expectations for the year. Based on third quarter results in our current outlook for net sales achieve price within our product portfolio. We anticipate that the full year 2007 revenues will be towards the top end of the guidance range of $870 to $890 million. Total SG&A guidance is now expected to be in the range of $262 to $271 million. The increase relates to General Administrative expansions, which are now expected to be in the range of $93 to $96 million due to higher than anticipated legal costs in the fourth quarter and the $9 million tenant of settlement reported in Q3 for the Ovcon litigation.

As I mentioned before our expected total SG&A expenses do not include any amounts that maybe payable in the future with respect to settlements of other outstanding litigation. The full year 2007 guidance for R&D expenses remains in the range of $54 million to $57 million which includes the $10 million milestone to LEO and the $4 million upfront payment to Paratek recognized during this quarter. We anticipate that our tax rate will be at the low end of our previous guidance of 6% to 7% of earnings before taxes in amortization have brokers earnings before in amortization and taxes, which we uses our proxy for our as a way to get out our total tax provision. Based on this revise guidance, GAAP net income is expected to be in the range of $12 million to $17 million for 2007. Expected amortization expense for 2007, is 228 million.

For 2008, it is 207 million and for 2009, it is 184 million. The marginal tax rate associated with the amortization of intangibles as estimated to be 9% for 2007. Adjusted cash net income, which adds back the after tax impact of book amortization of intangible assets. The amortization write off were deferred financial cost and the sense associated with litigation settlements is expected to be in the range of $258 to $263 million using $250.6 million class A common shares. So company expects adjusted cash in a income per share to be in the range of $1.3 to $1.5 for the full year 2007.

For a detail view of our 2007 guidance, I had ask you to please refer to the summary that is included at the back of our press release. That concludes our formal comment and with that Roger and I will be happy to take any of your questions.

Question and Answer

Operator

Thank you. [Operator Instructions].

We’ll first go to Adam Greene, J.P. Morgan.

Adam Greene - J.P. Morgan

Hi. Good morning everyone. I’ll cross the door, just question in terms of your plans for additional Urology products, which we expect going forward and which sales for us is going to be selling the products or we going to have or will we need to create a new sell force Urology product and then also if you could give us the breakdown of the sales territories right now. I know you mentioned that women's healthcare 225 securities, but the breakdown was for the other to three force?

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

Yes. There are few questions there out.

Roger M. Boissonneault - President and Chief Executive Officer

Yes. I’ve got that.

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

We’ll still start them up, Roger, you take the Urology and we’ll spilt out the details on the sales force.

Adam Greene - J.P. Morgan

Okay.

Roger M. Boissonneault - President and Chief Executive Officer

Right on the Alprostadil it is the first it’s a good product for us because it’s written primarily by urologists. And now we continue to look across the spectrum of products. Because we did Alprostalamine [ph] we're going to do a whole line of urology products because it could indeed stand by itself. What we like about Alprostadil was its… primarily with the urologist and therefore you really don’t need any primary to your coverage. We would not have any new sales efforts to cover the urologist. The urologists office is very close to the objuven’s office and also the dermatologists office. So, we wouldn’t have to redeploy and the fact that taking an existing rep in fact we have both Warner Chilcott and Women’s health care reps in the same territory. We could choose one sales force or use both sales forces split up the urologists, we have that kind of flexibility. We thought it was an interesting product, Alprostadil is well proven, it’s an easy delivery method and we do like the concentration of use within this particular specialty and the economics are very favorable.

Adam Greene - J.P. Morgan

Are you going to need to do any DTC at some point forward or is it--?

Roger M. Boissonneault - President and Chief Executive Officer

No DTC if were competing with alpha dire straits inhibitor I think you would use DTC When your calling on urologist most of their patients have already been on one PDE and are looking for some type of alternative.

Adam Greene - J.P. Morgan

Great. Okay. And then Paul do you mind just a break down of the women’s health care sales force?

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

Sure. Yes. It breaks down 225 in our current women’s health care force and just to reinforce that, that’s the force that promotes Loestrin 24 as its top priority. 180 territories in the Chilcott field force, which has Femcon as its top priority. 70 in the derm sales force which has, which basically splits time between Doryx and Taclonex and Dovonex and then lastly you have all the other we’ll call the PSOR is the balance of that 500 to 505 that we talked about earlier.

Adam Greene - J.P. Morgan

Thank you.

Operator

Thank you. Our next question is from David Buck, Buckingham Research.

David Buck - Buckingham Research

A couple of questions. In terms of the sales this quarter you mentioned that the inventory reductions Paul can you talk about whether there’s any inventory movement ahead of some of the price increases that you had during the quarter and can you give, you mentioned that you would be looking at DTC going down next year. Can you give us just some sort of an overall outlook for SG&A next year up down, can you give us a sense of what you’d be expecting in terms of investment? Thanks.

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

Sure. Hold on one second. Okay. Yes. Deep within the quarter, I had to look at my notes on the inventory, to be sure I would be accurate. In the quarter really the only brand where we felt that we weren’t needed to call out the change in inventory really was within the Dovonex franchise and you will recall that we have a product that’s out there that we stopped…stopped shipping that product, that was the ointment early and so there are lots of prescriptions being filled for that so definitionally you have pipeline inventory that is contracting for that brand and its measurable. I think I’ve mentioned in previous calls we do our best to try and track where the pipeline inventories are for each of our brands but its there’s a bit of art, its not quite science we do our best to track it but within the Dovonex franchise was clear that during the quarter we had a contraction of pipeline inventory also note that when you’re looking at pipeline inventory and you're comparing it to another period, what you're looking at is net contraction or net expansion of pipeline. So back to your question, if you're question is “was there a lot of pipeline movement during the quarter for other brands?” The answer to that is, no. But It was really contraction with Dovonex was the only one that rose to the level where we want to call it out.

David Buck - Buckingham Research

And for the ointment for the ointment for next year which… I’m sorry the Loestrin which may go generic may be used expecting in the fourth quarter to have any inventory issues with this slipping through there?

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

What you would expect with any product, I say not related directly to Dovonex lotion, but any product for example, Estrostep for example going back with off client in the period that leads up to a generic reduction you would expect that any company would start to take a hard look at reserves for product that it will comeback. Because it might be out there and so we try to recognize the revenue with a… recognize revenue in the periods leading up to a generic entrance. In a way, it says we’ll, that’s going to be revenue that’s going to stick and so we would not expect to see a substantial unusual reserve or anything with respect to that lotion when it goes generic. But it will follow a very, the sales of that will follow a very quickly. I’m not sure that, that answers the question.

David Buck - Buckingham Research

It does here.

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

Okay. Your other question was around DTC and the impact on next year with respect to guidance, I mean, we're going to look to do that as we did I think last year or at least the current plan is to provide full year 2008 guidance but in a January time frame. But there a couple of things that you can Glean from one, our results year-to-date plus some of the comments you made during this call. As you look at our… I went through the pieces that make up our SG&A line you could probably get a pretty good, get to a pretty good run rate for our selling expense based on where we are because as I said we're fully configured and we think that configuration is adequate to support our promotional plans here as we go forward. So that’s one piece. The A&P piece I think if you take a significant component like DTC and you currently… our current plan is that we're significantly reduce that. We provided you with an estimate of what we figured it will be reduced by is that’s that A&P component is probably coming down. And then lastly G&A is very difficult to forecast because it is too…I love my ebbs and flows, sort of characterization. Legal expenses can, they are very difficult to forecast at the time is very difficult to forecast. But, yes. Looking out to next year if you thought our G&A was roughly in line. They are also long winded not very specific while waiting a way to get at it but what I would suggest is in 2008, yes this is a year when we would expect to get some leverage on our overall operating expenses. Yes which are a little bit different than what we have, little bit different than what we saw in 2007 and certainly in 2006 when we were spending lots of money to launch two brands. Does that help David?

David Buck - Buckingham Research

Well that does. And circumstantially next year is whether its in absolute decline it shouldn’t be the same type of growth rate obviously as we saw this year. You're not building the sales force and not launching two new products.

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

I think that’s fair and again I would also call out, the magnitude of our DTC spend and when you take that down, that’s a lot of dough on our base.

David Buck - Buckingham Research

Understood, thank you.

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

Okay.

Operator

Thank you next we’ll hear from Marc Goldman. Excuse me. Marc Goodman, Credit Suisse.

Marc Goodman - Credit Suisse

I have a new name. A couple of questions. One is Paul can you just give us an update on if there’s been any movement in the APA with the tax guys? Second can you just give us an update on when we're going to start, or if you started the clinicals for your oral antibiotic, its in the pipeline and then third can you just give us an overall assessment of this whole Dovonex and Taclonex and the switch and pulling the whole one of the formulations and how the doctors are talking about it and whethere you think you're losing scripts. Just an overall assessment of how that’s going in and what you're tweaking and what you're happy with?

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

Sure let me get, let me address the APA piece first. The AP's first and then Roger can take the second two or I can take them into third. Who will go from there? On the APA process I think as we pointed out this a process, its process and that you are not able to forecast accurately, time to either to get an answer or not get to an answer. Process continues. We remain focused on trying to rate your agreement with the IRS and APA office. I think because same so far in the process nothing come to attention that led just or conclude that. We are not going to get to an agreement but we don’t have anything that we can point to and say this is where we are on the process. Let say lot of folks ask this question when were one on ones were speaking that conference. We are doing everything we can to try and get to enhance on this because that will provide your excellent clarity or ability to point to some thing for our investors and I say that I hope folks would take some comfort that it were here there through quarters of 2007 and even though on a interim basis our tax rate fluctuates up and down because it is a it can volatile when the interim period but I think overall I think we feel like we’ve provided pretty good guidance on what we believe our tax provision will be for 2007 and we would expect that to continue forward in to 2008, but of course, when presuming with guidance sometimes early next year, yes, we’ll give you another look at what that tax rate would be. So, that may be I think give lot of information what is going on with the APA, but it's the process that continues and…

Roger Boissonneault - Chief Executive Officer and President

Well I guess my question Paul is really has it heated up at all or still you would describe it has very early stages of the process and we not going to know anything for another year. Thanks for saying.

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

It is a long very long process in this. We do everything we can to keep the ball in the APA offices court. It’s not like commercial negotiation where we can specify, okay, here is the timeline. We have a conceptual agreement with the team there. We think there are good team and we are working towards a goal both of us. I’m trying to reach an agreement, but, yes, it’s a process and that involves lots of data and lots co-instances and lots of folks on both sides. We are both doing lots of work and I know that doesn’t help you. Your gage were we are but believe me this were commercial situation. We are trying to reach an agreement. We like to pick ourselves to be very deal friendly and able to get things done, get things done quickly that is not the case here. This a process that it takes however long it takes.

Roger M. Boissonneault - President and Chief Executive Officer

Okay. marc on the… I guess on the biotic front that which our biotic we are talking about but I’ve certainly the most recent licensing activity has been with Paratek and we are looking new chemical entities. We have at least one lead compound, which we identified in API manufacture for… and we are beginning to characterize that compound on the usual metrics around tetracycle and what type of spectrum does that have characteristics around for the potential toxicity, or local felicity. So that is moving forwards, so we do have weak compound and back we have couple back ups on that. And then we have obviously our Dovonex execution and there are some other products behind Dovonex that are sort of in between the Paratek compound and Dovonex that we really haven’t talked about that were characterizing as we speak. So we see it has portfolio products.

Marc Goodman- Credit Suisse

When you say Dovonex execution do you mean like second Gen Dovonex type products that you don’t want to give us time lines on?

Roger M. Boissonneault - President and Chief Executive Officer

Okay. The last piece of that was, how is the switch going with the Dovonex ointment cream and it is going quite well. I believe it’s now a amount of 85% of all Dovonex is in the cream form now. There is a small piece but in fact [inaudible] and wash them in lotion. That’s in the ointment but I think the important turn here is that, we see didn’t see in order to LEO. LEO has made, has taken actually had stop promoting the ointment and really Dovonex ointment has been replaced Taclonex. If you are going to use those just might as water on this Taclonex is far more effective product as an ointment. Probably, we do see Dovonex cream as a viable maintenance product. This product is superior and for those 0commission who do not want to result a steroid and patients that has psoriasis have abs and flows not only they have other word flair ups but when we are not having flair up an excellent choice will be Dovonex cream to maintain the situation and it doesn’t have still right on board. So I think that you certainties of this will as we move in to ’08 is we’ll have a sort of positioning of the product or we have portfolio products one for if you have flair issue, you should be taking Taclonex, if you are not in flair stage you should be taking Donovex cream to prevent. Next year we’ll probably have the… it looks that will have gel for the scalp product. So, we will have a portfolio, which this sales reps will and will… there will be an opportunity sort of cannibalization from Donovex to Taclonex. Simply Taclonex will just take over the ointment position.

Marc Goodman- Credit Suisse

Would you describe us which as when we laid up strategy earlier in the year. It’s played out like we thought. W don’t need to really do anything different, we are.

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

You were happy because and it was done I mean quite well because well it is, we notified physicians. The KOLs were on board. They understood and supported the strategy. We do had on occasional commission. You do get some who is whatever happen to ointment. You do get some confusion on patients, they walk and then the pharma whether is no more Donovex. All right, and it is… yes, there is Donovex and you got to go back and found there is cream. It simply only the ointment has been remove from the market. So we had some of that. When you look at the there better look like there any compression and saying that it does and if you look at the total number it doesn’t look like we lost any patient in this transfers. It is always very efficient.

Operator

Thank you Mr. Goodman. Our next question comes from Michael Tong, Wachovia Securities.

Michael Tong - Wachovia Securities

Hi. Good morning. Just actually a follow up question on Taclonex, in order for script kind of flattened out in Q2 and Q3 is at a seasonality issue or are you surprise to see that seasonality hits this early in the products lifecycle and then secondly I apologize if I missed it but when you expect to be with the file a low dose of contraceptive?

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

On the first peice incentive Micheal, it didn’t go down. We would expect to see seasonality otherwise we would have expect Taclonex to go down at the end of the second quarter or in the third quarter as we hit the summer of months, but it didn’t. It stated flat, so when you look at a relative to the previous year there was indeed and increase and so what to looking for now as we enter the winter months do we see a seasonal increase to Taclonex. As you probably aware about Taclonex business came from the use of cordical storage [ph], is always going to be above portion of that market that is going to use high potency cordical storage and we started to compete there in those physician who like to alternate between Donovex and cordical storage tackle mix certainly is the answer. Right now, as what we are looking at the data and seeing if we are going to see some seasonal effect on Taclonex as we working into the winter months because we did not see Taclonex going down in the summer as we would have expected. Okay. And the second question?

Michael Tong - Wachovia Securities

The low dose on contraceptive, when do we expect to be able to file that?

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

That overall we filled all in the first quarter of ’09 and I expect that these latest FDNA products for 12 months, so last patient went in August of ’07 which means the last patient comes out August of ’08 probably takes four to five months. December will end the year so I figure early in the first quarter of ’09

Michael Tong - Wachovia Securities

Okay. Great. Thank you.

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

Okay.

Operator

Thank you. Our next question comes from Jami Ruben, Morgan Stanley. Jami Ruben your line is now open. Please pose your question. We're getting no response well next Mr. Scott Henry Oppenheimer.

Scott Henry - Oppenheimer and Company

Thank you for taking the question. More of a big picture question, for Roger. The company appears to be very aggressive in its cost cutting efforts in this quarter and going forward which is actually refreshing given that the business is still performing strong right now. I guess my question is, do you have concerns that the business could be slowing and at this point the company's just reaching a point where costs are a bigger driver than perhaps the top line or are you simply trying to get as much out of the business as you can?

Roger M. Boissonneault - President and Chief Executive Officer

I guess it’s an interesting observation but we don’t see it as. We just see that as the natural progression of how you introduce a product. Where you have perhaps heavier advertising spends in the beginning to gain awareness. Then have the real work begins and I call that the executional phase. I agree, now we actually have more sales, we actually strengthen the sales organization. We have 225 reps now, all commanding less than 24, which is an increase. We didn’t believe PSR execution was doing what we thought it could do. We needed dedicated reps. we have in fact improved our reach in frequency against targets during this particular time frame. We have put in a hospital sales force also which targets Loestrin 24 using coding clinics which we believe we going to get all this from. We've got 180 reps promoting Femcon. I think the only thing that you've seen is perhaps not the dedication to DTC that we had when we initially launched a product. Because, we see fitting out this wide delta between, performance within sales representatives. So we truly believe that the sales reps are going to make a difference at this particular moment now that we have awareness out there. But what you're really seeing is the leverage of the promotional apparatus that we've put in. we don’t need any more sales reps. Its fine, as far as promotion everything that we need is in place it simply comes down to the digital effect of this thing is executing at the territory level.

Scott Henry - Oppenheimer and Company

Thank you. Just ask a follow up not directly related question, but just with regards to Loestrin 24, how has the managed care environment changed. If at all, since the beginning of the launch to the current time?

Roger M. Boissonneault - President and Chief Executive Officer

Well our strategy has been consistent. We want to be on peoples formularies and we really haven’t had an initially getting less then 24 on the major formularies. So I got to tell you as far as executing on the managed care platform it really hasn’t changed since we’ve launched the product.

Scott Henry - Oppenheimer and Company

Thank you for taking the question.

Operator

[Operator Instructions] We’ll now hear from Greg Gilbert, Merrill Lynch.

Gilbert Gregory - Merrill Lynch

Thanks. Good morning, Roger. Can you summarize the clinical data that is been generated for the EV product and what is part of the package at least in broad strokes?

Roger Boissonneault - Chief Executive Officer and President

Yes, it’s we know it to be an effective product and we know there it is possible to be an effective product. I think the issue here is been announced what next but news as an enhancer to gain penetration of Taclonex. I know there have been some talks work done on that and I think there ways of doing a transgenic mouth but unfortunately some of those outcomes are not reliable so you had to go back into a four year… two year mouth study and that has been supplemented to the FDA. And we have done an amount of mouth research, if you will, I think there’s no question that urologists believe that a proxy bill works. It’s just delivery of the drug. One you have to inject yourself or the other one being a placebo that has to be put down the urethra. Although you see this is… applying placebo in this way is much more satisfactory to the patient but the placebo has been well characterized and used by many patients. So the issue has been getting the regulatory package together demonstrating the efficacy which we believe is adequately demonstrated and overcoming any potential talks issues associated with the test thereof.

Gilbert Gregory - Merrill Lynch

Do you have an action date at this point?

Roger Boissonneault - Chief Executive Officer and President

No. Not yet.

Gilbert Gregory - Merrill Lynch

And then just on the… I guess bigger picture for the product. Do you think the bigger risk lies in improvability in the safety environment or do you think it’s sort of, is the commercial potential real? It seems quite obviously that there be a motivated group of users if approved.

Roger Boissonneault - Chief Executive Officer and President

If approved there is a market out there waiting for another product. You there are… so the issue is if we got it approved it definitely will be trial in the marketplace. As I said either you don’t have to use a syringe and inject the Alprostadil or you have to take this pilot and insert it into the orithro [ph], which are not… both are not very acceptable and there is… it’s almost like the ESTRACE market, anytime you have got this unsatisfied market out there you can get a product you will indeed get trial and the product will have the ability to prove itself. The interesting thing is, this is all with your neurologist.

Gilbert Gregory - Merrill Lynch

Thank you.

Operator

And we will go again to Jami Rubin, Morgan Stanley.

At this time, gentlemen, there are no further questions. I would turn the conference back to you Mr. Herendeen for any additional or closing remarks.

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

Yes. Thank you very much. Well, I would like to thank everybody for attending the call this morning. We will… as usual those of you have questions that may not have been answered, where to find us. Thanks very much and we will look forward to our next call in February, late toward January, February. Thank you.

Operator

And that does conclude today’s Teleconference. Thank you all for your participation.

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