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Warner Chilcott plc (NASDAQ:WCRX)

Q1 2012 Earnings Call

May 4, 2012, 8:00 a.m. ET

Executives

Paul Herendeen - EVP & CFO

Roger Boissonneault - CEO, President & Director

Analysts

Randall Stanicky - Canaccord Genuity

John Boris – Citi

Gary Nechman – Susquehanna Financial Group

Chris Schultz – JP Morgan

Tim Chiang - CRT

Marc Goodman – UBS

Shibani Malhotra - RBC Capital

Gregg Gilbert – Bank of America/Merrill Lynch

Elliot Wilbur - Needham & Company

Douglas Gale – Barclays Capital

Michael Tong – Wells Fargo Securities

Jim Molloy - ThinkEquity

David Buck – Buckingham Group

Irina Rivkind – Cantor Fitzgerald

Operator

Good day, ladies and gentlemen, and welcome to the Warner Chilcott Announces First Quarter 2012 Financial Results conference call. At this time, all participants are in a listen-only mode. Later we’ll have a question-and-answer session and instructions will follow at that time. (Operator instructions). As a reminder, today’s conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Paul Herendeen, Chief Financial Officer. Sir, you may begin.

Paul Herendeen

Thank you, Mary. Good morning. This morning we issued a press release that details our operating results for the first quarter of 2012. The press release is available on our website if you don’t already have it.

Roger will make a few general comments and then I’ll provide some additional color around our financial results for the quarter. And then, as usual, we will end with 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 risk and uncertainties that could cause the company’s actual results to differ materially for such statements. These risks and uncertainties are discussed in our 2011 Form 10-K and other filings which are available on the SEC’s website. The forward-looking statement made during this call are made only as of the date of this call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.

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

With that, let me turn things over to Roger Boissonneault, our President and Chief Executive Officer.

Rober Boissonneault

Thanks, Paul. We’re off to a good start in 2012. In the first quarter we grew our core business and reduced our operating expenses as we nearly completed our Western European restructuring.

In our core business, we saw significant contributions from the Estrace Cream, Asacol and Loesterin franchise. Atelvia is also picking up and [inaudible] grew each month this quarter and we expect the trend to continue.

While conversion is slower than initially expected, we believe that we will get there – we will get there. Those are are RXs and they will be maintained.

Asacol HD continues to grow it’s share of the Asacol franchise. During the first quarter, Asacol HD grew almost a share point, and is now 13% on the total RX basis. These HD scripts are also more profitable.

There continues to be opportunities to grow the oral contraceptive franchise. We are focusing our efforts on Lo Loestrin, which we believe will strategically benefit the franchise.

We were disappointed to receive a warning letter on our Fajardo manufacturing facility earlier this year in March. We are working to address the items outlined in the warning letter and aim to get those resolved as quickly as possible.

Rather than speculate on timing, I will reassure you the revolution is a top priority for us; one we take seriously and are highly focused on.

As most of you probably have seen, early this week we learned the Judge’s decision at the Doryx trial. The Judge determined that our Doryx patent is valid, but not infringed by either Mylan or Impax. And consequently, we learned that Mylan entered the market with a generic equivalent of our Doryx 150.

Paul will discuss how this impacts our guidance. You should understand, we are committed to the derm space and plan to continue sales and marketing, R&D and business development efforts in this area.

Speaking of business development, we issued a press release earlier this week disclosing our preliminary discussions with potential offers as well as our valuation of a broad range of strategic alternatives to enhance shareholder value. We will not, repeat, not comment further today on this topic.

With that, let me turn it over to Paul for some thoughts about our first quarter financial performance.

Paul Herendeen

Yes, thanks, Roger. As Roger mentioned, but I do want to reiterate, 2012’s off to a strong start with several of our key ramp brands delivering revenue growth in the quarter, including Estrace Cream, Loestrin franchise, Asacol and Atelvia. The performance of these key brands, coupled with favorable gross margins in the period and our success in gaining additional leverage over our operating costs, allowed us to deliver a solid growth in adjusted cash on our income in the quarter; up 9% compared with Q1 of last year.

Note that on a per-share basis, adjusted cash on income further benefited from a reduction of shares due the share redemption program we initiated during the fourth quarter of last year and adjusted cash on income per share grew 11% versus the prior year.

Let me spend a minute and talk about each of our several key brands. Estrace Cream, net sales continue to grow, up 49% compared with the first quarter of 2011 and up 24% sequentially compared with the fourth quarter.

Estrace Cream has really responded to the increased promotional emphasis we placed on the brand. Filled prescriptions in the quarter were up 16% compared with the prior year quarter. And Estrace Cream is a product where gross net factors are more favorable than for some of our other brands so we benefit more from increase in unit demand and increases in price.

I do want to point out, our reported net sales for Estrace Cream in Q1 benefited from our favorable true-up of a government rebate program and we’re therefore about $5 million higher than they would have been in the absence of that true-up.

Net sales for the Loestrin franchise, which includes both Loestrin24 and Lo Loestrin, were up $9 million, or 7% compared with the prior year quarter. While we think of these two OCs as a franchise, our focus is on growing Lo Loestrin. We believe it’s an excellent product and that we have the opportunity to gain significant share with the brand in the U.S. over the next several years. With our promotional focus shifting to Lo Loestrin, we expect declines in Loestrin24 net sales. The good news is that we expect the Lo Loestrin net sales growth to exceed the decline of Loestrin24. This trend was seen in Q1 where quarter over quarter, Lo Loestrin grew $20 million, which more than offset the $11 million decline of Loestrin24 compared in the prior year.

Net sales for our Asacol franchise increased 13% in the quarter compared with Q1 of 2011. While filled RXs, as reported by IMS, decreased 4%. Now, I know that many, if not all of you, use IMS Prescription data in forecasting pharmaceutical product sales. If you use IMS data as either a proxy for units or to gage growth, you’re doing so on the assumption that the relationship between the script data and actual units remain confident. I suggest to you that in the case of Asacol, over the last several years, a disconnect may have developed between the raw IMS TRX data for the Asacol franchise and actual unit demand. If you rely on that raw IMS data to forecast Asacol net sales, we believe you might underestimate the strength of the franchise.

IMS data suggests that over the last several years, units have declined in the low-single digits. Our internal data suggests that units are more in a “flattish”. As Asacol is a large franchise, that difference between flattish and low-single digit decline is meaningful. In addition, we are able – with the Asacol franchise, to enjoy the benefits of periodic price increases and that’s why we think of Asacol as a franchise that can be a solid contributor to sales growth. Albeit a modest topline grower in percentage terms, but off of a large sales base.

All that said, Asacol sales in Q1 were higher than expected in the quarter due to Pipeline expansion. The quarter would have otherwise been no higher than, let’s say $200 million.

Moving to Atelvia. Despite the continued decline in the U.S. bisphosphonate market, we’ve been able to grow Atelvia at a modest, but consistent clip. Net sales in the quarter totaled $16 million, up $3 million sequentially from Q4 of ’11. We continue to expect Atelvia to be a contributor to growth over the next several years.

Last amongst the core brands that I want to talk about today is Doryx. As Roger noted, the Court issued it’s decision in the Doryx trial earlier this week. While Doryx net sales this quarter were as expected, as a result of the April 30 Court decision, the company expects significant Doryx revenue declines relative to our earlier expectations for the remainder of 2012. The reduction in our expectations for Doryx in 2012 was the main driver in lowering our full-year 2012 revenue guidance to 2.4 billion-2.5 billion from the range of 2.5 to 2.6 billion.

Finally, Actonel. As expected, global Actonel revenues were down 37% in the first quarter compared with the prior year quarter. This decline is primarily due to the continued contraction of the U.S. oral bisphosphonate market as well as the loss of exclusivity for Actonel in Western Europe. During the last two conference calls, I urged you to expect the Actonel business to decline globally about 30% year over year.

So that’s some overview from a product-by-product standpoint, but let me take as step back and look at the quarter in it’s totality.

Total revenue, including Actonel in Q1 was down 10% compared with the prior year quarter. As I highlighted on our guidance call, I think of our core business as being comprised of everything other than Actonel. Our core revenues were up 14 million, or about 3% compared with the prior year quarter. Pretty good, I would say; a good start to the year. Just keep in mind that historically, our first quarter is typically a higher revenue quarter for us.

Below the revenue line, our gross profit margin as a percentage of total revenue was 89.5%, which was an improvement of about 200 basis points from the prior year quarter, excluding the Manati repurposing, by the way. This was largely due to product mix and favorable variances in non-standard inventory cost items. This is also above the high end of our guidance range of 87 to 88%. We continue to expect our gross margin for the full year to be within the guidance range.

SG&A expenses in the quarter were 198 million, down 22% from the first quarter of last year, which was driven primarily by a reduction of operating expenses resulting from the European restructuring. Also contributing to the quarter-over-quarter decrease in costs were the additional expenses we incurred in Q1 of last year for the DTC campaigns to help support the launches of Atelvia and Lo Loestrin.

G&A expenses were 65 million in the quarter, down 13% from the prior year quarter. We continue to expect SG&A costs for the full year to come in line with our previously-announced guidance range of 800 to $850 million.

R&D expense for the quarter was 25 million, a decrease of 19% as compared to Q1 of last year. We expect R&D spends for the year to be heavier in the second half due to the timing of certain projects which are ongoing.

We have nearly completed our Western European restructuring this quarter and we recorded an additional $50 million in restructuring costs. We do not expect to record any additional restructuring costs in future periods for Western Europe. However, we expect to record some gains from pension-related curtailments triggered by the Western European restructuring over the next several quarters and we will call those out and exclude them from our adjusted cash net income and adjusted cash net income per share.

Adjusted cash net income per share for the quarter, which adds back the after-tax impact of amortization and impairment of intangibles, the amortization write-off of deferred financing, fees, and our after-tax restructuring costs was $1.16 per share using fully diluted shares of 251 million for the quarter. Our share count reflects our share redemption activity in Q1.

Onto liquidity. We generated net cash from operations totalling 208 million in the quarter compared to 272 million in the prior year quarter. In the quarter, we also redeemed 1.9 million shares at an aggregate $32 million, or an average cost of about $16.62 per share.

During Q1, we made optional prepayments totalling $350 million under our senior secured credit facilities. We made an optional prepayment of 150 million in January and made an additional optional prepayment, 200 million in March. We ended Q1 with $422 million in cash on hand. On a net-debt basis, our leverage was roughly 2.1 times trailing 12-months EBITDA. We ended the quarter with approximately 3.5 billion of gross debt comprised of 2.2 million of term debt under our senior secured credit facilities and 1.25 billion base amount of 7 ¾% senior unsecured notes.

As a result of the April 30 Court decision, we have lowered our 2012 Doryx expectations and are reducing our full-year 2012 revenue guidance to the range of 2.4 to 2.5 billion. Based on our – primarily on our reduced sales expectations for Doryx over the balance of the year, we also reduced our full-year 2012 guidance for adjusted cash net income per share to the range – excuse me. We adjusted that range by $0.30 per share to $3.30 to $3.40 per share from $3.60 to $3.70 a share.

Lastly, now that we have recorded the full amount of the expected Western European restructuring costs, we’ll include those in the guidance tables. They’re right there for you to see. Please see the guidance table in our press release for more detail.

Before we start the Q&A session, I want to reiterate Roger’s statement; that we will not respond to questions regarding our review of strategic opportunities to enhance shareholder value. We also ask that you please limit yourself to one question so we might have time to allow more individuals to have the opportunity to ask their question.

And with that, Mary, if we could open up the line for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Randall Stanicky from Canacord Genuity, your line is open.

Randall Stanicky - Cannacord

Thanks guys for the question. This is on Asacol, the numbers look good even we noticed in the pipeline expansion. Can you just maybe, Paul, talk about the HD switch? How your priorities are changed and where should we see that trending to going forward?

Roger Boissonneault

I’ll take that one Randall, it’s Roger. The product actually, you know we’ve seen some migration to the HD, primarily because that’s what the gastro is starting the new patients on. You see the 400 maintains itself because a lot of those scripts are older scripts where patients have been started on the 400. So, I think we’ve gone beyond the “okay let’s switch everything to the HD”, to promoting Asacol. Because I think the sales force has done an excellent job of getting new starts. So the idea is, this is the preferred form of delivery system for mesalamine, not simply, you know take this prescription and mover from 400 to HD. You’re just seeing that as a natural migration because more new patients are normally starting on HD with the gastroenterologist.

Paul Herendeen

Hey Randall, it’s Paul. I just yelled because I love statistics, and I think you’re right. The Asacol is doing pretty well, and I did call out some of the things you need to think about in the Rx data. That said, using that very same data, the Asacol franchiser percent of the market grew about 10 basis points, but it grew about 10 basis points in share. Asacol HD as a percent of the franchise went from 24% to about almost 26%. And as Asacol HD has a percent of the market was up from just below 12% to just below 13%. So, we’re making what I would call “good progress” with that franchise. It’s a great franchise for us.

Randall Stanicky - Cannacord

Where does that split between the two, get to over the next couple of years? I know that obviously from a (inaudible) generic concern issue, it’s pretty minimal for both, especially the HD. But do we see that continue to migrate towards HD?

Paul Herendeen

Well, it has, and like I’ve said - - I think what you’re seeing now is what you have is historical Rx’s that have migrated the primary care. So, if you look at the - - nearly all patients are started by a gastroenterologist after a colonoscopy. And then that patient migrates, so you see those historical (inaudible). So you’re going to see as we go forward a greater and greater percentage of HD, as a percent of the overall business, because that’s primarily where the new starts are occurring. How quickly that’s going to happen, is very difficult to predict.

Randall Stanicky - Cannacord

Okay, thanks guys.

Paul Herendeen

Thanks Randall

Operator

Thank you. Our next question comes from John Boris from Citi, your line is open.

John Boris - Citi

Thanks for taking the questions. Congrats on the results Roger and Paul. First question; If we look at the debt repayment that you’ve taken within the quarter, just your thought process on, you know, why debt repayment rather than rechannelling some of that spend into investing more heavily in some of your products to drive sales?

And on the derm sales force that you have, can you remind us how many reps there are and what you’ve reallocated those reps towards?

Then would you consider a co-promote on an asset or are you just looking for products to plug into that derm sales force to maintain it going forward? Thanks.

Paul Herendeen

Thanks John. You framed the question as to why did we use $350 million dollars a capital to retire debt. Let me answer the question more broadly, so that perhaps it will pick up some things I’m highly confident we’ll be asked later on.

I mean, when we think about uses of capital, I think it goes without saying that we make ongoing investments in our everyday business including our sales forces and including RV projects. Those sorts of investments are always going to return, you know, excellent returns. While we think about that, we also think about other ways that we might deploy capital the increase shareholder value. What everyone wants to talk about is, if the right deal presents itself on the business development front, you know, that will be our priority to deploy capital. Those are things like, product acquisitions, product rights, or even companies.

We’re also using are capital prepaid debt as we point out in Q1 and reduce our interest expense. So we think of that as increasing our future debt capacity to fund transactions that we believe are in the best interest of our shareholders.

From time to time we also consider transactions in our stock, as evidence by our current share redemption program, and the special dividend that we paid back in 2010. And in some circumstances what’s interesting is, you know, those sorts of transactions may be the way that you can deliver shareholder value.

But it’s worth noting that within some bound, all of the things I’ve just talked about, all of those alternatives are and can be on the table, and can be thought about at the same time. So, I’ve said many many times, when we think about using our capital to repay debt, shouldn’t think about is as being indicative of lack of opportunity to invest back in our business and all, or even to maintain (inaudible) to pursue a business development transaction. We think of it at the time, that’s the way we choose to deploy our capital, and we go back and reload if we saw a good opportunity.

Your question around the Derm franchise, I’ll take it or Roger will take it, he’s pointing at me.

Roger Boissonneault

Yes, because I know the number. The number is that we have 75 sales reps. I think John, you have to think about this, is Doryx the asset, or is the sales force the asset? We like to think here that the sales force is the asset. And since indeed you are a historian, you probably remember that we led with Vectrin back several years ago in 1997, and when we introduced Vectrin, it had a generic competitor in the marketplace, because we know we had other products coming. We do have other products coming in this particular category disclosed and not disclosed that have been internally developed. So, we remain confident that our sales force will remain focused on the promotion of this particular asset. We do think that dermatologists tend to be loyal. We’re going to take advantage of that, and we’re going to remain focused on the promotion of Doryx. In the meantime Paul has given you financial guidance, and we’re going to try to take a look at this, and until we see how this whole thing develops and I think it’s going to take four, five, six weeks before we see what’s really going on here.

But the idea here is, we believe in the sales force, the RV asset, and we’ll continue to develop products in this particular category.

Paul Herendeen

I’m going to chime in one more time because I think it is an important point, and even goes back John to the question you asked about deploying capital. We think, as Roger said, that sales force as being an asset. We’ve been calling continuously in dermatologist office since the latter part of the 1990’s. Those relationships and that sales force are an asset to the company, and so we expect to or intend to continue to invest in that asset while we get to whatever comes next in terms of a product in the dermatology space. So, in crafting our guidance, what we’ve essentially done is to leave those costs in the mix, we’ve reflected our change to our revenue outlook and that’s what you see, you know, that’s what really drives the change to both our revenue and bottom line guidance.

John Boris - Citi

Thanks guys.

Operator

Thank you, our next question comes from Gary Nechman from Susquehanna Financial, your line is open.

Gary Nechman – Susquehanna Financial

Good morning. Roger, on the Fajardo Facility, could you talk about some contingency plans to get new OC’s approved, if it takes longer than you hoped to resolve the warning letter. And are you still optimistic this could happen hopefully by next year in front of generic (inaudible) 24. Thanks.

Roger Boissonneault

Yes Gary, you know, we have great confidence in Fajardo. (inaudible) number one, and we have great confidence that we are going to do everything necessary to put this warning letter behind us, and the whole organization is mobilized. So, that is strategy (a).

Strategy (b) Is you’re quite right. The warning letter is specific to Fajardo, and do we have backup plans, and yes, we do have backup plans. But again, we remain focused on Fajardo, and that being priority number one to get Fajardo lifted from the warning letter.

Gary Nechman – Susquehanna Financial

Okay, I mean, however it materializes, you still feel pretty confident that you’ll have life cycle extension in place to protect the Loestrin 24 franchise?

Roger Boissonneault

Yes, we do. I feel better now. We would rather not have had the warning letter obviously, but the issue here is yes. And we have other facilities, we have other hormone facilities that we can manufacture in. So, it’s sort of laid out that we have some of this flexibility. But again, our major focus is Fajardo, and we’d like to get this thing remedied as quickly as possible.

Gary Nechman – Susquehanna Financial

I just want to confirm that the only product that you can ship from there that’s currently marketed is Ovcon, right? It’s not going to affect any of the other marketed OC’s?

Roger Boissonneault

No, and that’s our decision.

Operator

Thank you. Our next question comes from Chris Schultz from JP Morgan. Your line is open.

Chris Schultz – JP Morgan

Great, thanks very much. My question was on SG&A, obviously down significantly year over year. When I workup the guidance here for the rest of the year, should we be thinking about SG&A moving higher off of these levels and what’s going to drive that increase?

And as a follow-up to that, can you elaborate a little bit more on the EPS guidance cut we had here? Obviously, you are seeing a generic Doryx, but after $1.60 in earnings this quarter, it seems like a fairly conservative number for the rest of the year. I’m calculating EPS down to about $0.40 or so per quarter off these levels. So just elaborate a little bit more of what’s driving that dynamic and go from there. Thanks.

Paul Herendeen

Sure, I mean, let me start with the field selling expense for the balance of the year. I mean, you know, if you look at last year and just really going from – I should say selling expense, which includes CoPro, you know, it was clicking downward or clicked down towards the later part of Q4 and it’s now down even a little bit further. This is the level that we would expect to see through the balance, roughly where we expect to see through the balance of 2012. And frankly, you know, into 2013 and beyond unless we add other things into the portfolio.

So what you’re seeing is that, in part, the impact of the restructuring in Western Europe where we essentially eliminated the field selling resources and replaced that with a distribution model, and now the reduced number of sales territories that we have deployed against our products in the U.S., which totals about 750 territories as we speak. So on the selling side, you know, that’s what’s going on in SG&A.

Your question about the guidance for the balance of the year, I made the point, but it’s worth stating it again and being very clear. Revenue in the first quarter, if you look at last year, if you look at this year, revenue in the first quarter is a bit higher than you’d expect it to be through the balance of the year. So if you simply multiplied by four, you would get the wrong answer. So we feel like, with the expectations of revenue from 2.4 to 2.5 B for the entire year, and our cost structure, what we felt is about a $0.30 reduction in our prior communicated guidance for the full year. You know, if you took whatever your expectations are, excuse me, when you take something in the range of our guidance and subtract out the first quarter and divide it by three, you probably wouldn’t be too far off.

Chris Schultz – JP Morgan

Thanks.

Operator

Thank you. Our next question comes from Tim Chiang from CRT Capital. Your line is open.

Tim Chiang - CRT

Hi, thanks. I wanted to ask about inventory levels on Asacol and Estrace. Could you just comment on that?

Paul Herendeen

Yes, I mean, it’s Paul speaking. I can give you a rough idea, Tim, and this is what I tried to work it into my opening remarks. Let’s deal with Asacol first. If you looked at Q4, so think about it sequentially, if you looked at Q4, that was kind of a pipeline neutral quarter. As I called out, if you look at Q1, you have a pipeline expansion that resulted us in having global revenues of – if I say this wrong someone will look at me – at $211 million in the quarter. That’s higher than normal, and so if you kind of look at Q4 and you look at the actual results of Q1 with the – with my color that says that that includes some pipeline expansion, I think you get to a better good estimate as you think about the balance of the year.

The other one, with respect to Estrace Cream, there really wasn’t a whole lot in the way of pipeline in the quarter. What was really going on in that was that I called out, we had a change in a government rebate program where we had some accruals that we carried over from 2011 that were reversed in Q1. Obviously, those are not recurring, so the impact was about $5 million plus or minus. So that’s what’s going on in those franchises that’s other than normal.

Tim Chiang - CRT

Okay, great. Thanks, Paul.

Paul Herendeen

Yes. Thanks.

Operator

Thank you. Our next question comes from Marc Goodman from UBS. Your line is open.

Marc Goodman – UBS

Yes, good morning. First, can you just give us an update on the pipeline, Roger, like you normally do. And then second, just give us a flavor for what’s going on in the oral contraceptive world out there as far as competition and just the dynamics behind the scenes. And how are your numbers of reps relative to the other guys’ reps? Are the taking them down just because of the problems and how much of this are you taking share because of those problems? Just give us some more color on what’s going on in the market. Thanks.

Roger Boissonneault

Okay. Thanks, Marc. I guess, you know, it’s a lot of talk about the pipeline. There – obviously, we have a lot of activity. I think, you know, we generally give you an update on the new tetracycline is in Phase II. We hope to get that done. Nothing new on Undenafil. I know you guys like to talk about Undenafil. We’ve got an FDA meeting set up with that. We have activities around basically all our major brands and disclose that we do have activities in the area other than the new tetracycline, we do have activities in antibiotics and acne.

So it is a very busy time at Warner Chilcott. Specifically though, I would say, I think what you’re getting around is in the OC area and what we’re seeing shift is the competitive activity. And basically, the news around [inaudible] and the labeling about [inaudible], it’s not something that we are bond – I mean, it’s not, you know, really our issue nor is it something that we’re going to comment on. It’s just become part of class labeling. But we, indeed, are probably the major promotional force out there.

And what’s new with us is, is basically, we think the market should belong in 10 microgram. I think we’ve been, you know, we’ve been straddling this with our sales force and with our promotion and we’ve been talking about 24 and Lo Lo and probably some of our biggest competitors is our own Loestrin21 and that’s a 20-microgram product.

We’ve had the 10-microgram product in the marketplace for over a year now. We see the profile of the 10-microgram product similar to the 20-microgram product. In other words, this is half efficacious as the 20-microgram product. Side effect profile, similar. In other words, bleeding profile similar to 20 micrograms. We don’t understand why this shouldn’t be a 10-microgram market. So the attitude we’re taking right now is, we’re putting all our emphasis, and not dividing emphasis between 24 and Lo Lo, all the emphasis will go on Lo Lo. I think what you might see if some, you know, some of the market moving from 24 into Lo Lo, but I do think we have to transition this into a 10-microgram market. It’s half the dose and you get the same efficacy. It’s a simple message.

Did that answer your question, Marc?

Marc Goodman – UBS

Sure. I guess on the pipeline, I guess a follow up, will we see anything approved next year, this year?

Roger Boissonneault

You could. But then again, you know, we thought we were going to see other things approved, but you know, the FDA is the FDA and sometimes we plan to get things approved and they don’t get approved in a timely fashion. There is a possibility, but at this point, we don’t like to speculate on that.

Operator

Thank you. Our next question comes from Shibani Malhotra from RBC Capital. Your line is open.

Shibani Malhotra - RBC Capital

Thank you. Thanks for taking my question. Just – I guess it’s a follow up to Marc’s question. In terms of the dermatology sales force and franchise, you know, you said you were keeping that sales force because that’s the key asset and if tetracycline is still in Phase II, would it make sense or would it be fair if you were – possibly you could get another conversion for Doryx approval near term and that might be why you are keeping the sales force on? I'm just trying to understand otherwise why you wouldn’t redeploy them into something else until you have the tetracycline?

Roger Boissonneault

I think you answered your own question. So …

Shibani Malhotra - RBC Capital

Okay, can I just ask you quickly, on the DoJ investigation, is that something – has there been any progress on that front and how you guys are thinking about that?

Roger Boissonneault

I think Paul has a prepared remark.

Paul Herendeen

On the DoJ, all we’re going to say is it’s going to parrot what the disclosure is, that you know, we and our employees received – certified non-executive employees received Subpoenas and it’s on a wide range of matters, including sales and marketing activities, employee training related to all of our company’s key products. We’re in the process of responding to the subpoena. We intent to fully cooperate with the U.S. Attorney’s office and just for further information, we’ll call your attention to our disclosure and year-end report and our other public filings. I mean, beyond that, there’s not anything to report. It’s a process.

Shibani Malhotra - RBC Capital

Okay. Thank you.

Roger Boissonneault

Thanks Shibani.

Operator

Thank you. Our next question comes from Gregg Gilbert from Bank of America. Your line is open.

Gregg Gilbert – Bank of America/Merrill Lynch

Good morning, guys. You said you did want to talk about the strategic review or you did not? Since everyone’s ignoring that one question, I thought I’d ask about that one. So my one question for now will be about generic Doryx and I just want to understand your thinking here, and I understand what’s in the guidance now and it’s very clear, but from an income standpoint, it seems like a decision to not participate in the generic market. It comes dow to getting something versus getting nothing and whether that’s you launching it or someone launching on your behalf and paying you to do that. I don’t see how generic would undermine your commitment to derm on the brand front either. So I guess my question is, what am I missing? Is it not as simple as getting nothing versus getting something?

Roger Boissonneault

Well, I think the idea do you really get anything from an authorized generic, and you really have to look the category and you do have a situation where you have one generic competitor. So in that particular situation, I think, you know, history has taught us that you’re probably better off without an authorized generic. I don’t think authorized generics are really answers to anything, particularly for a branded company.

Gregg Gilbert – Bank of America/Merrill Lynch

I guess it’s debatable. The generic penetration is going to go full steam regardless of whether there’s one generic or two. But maybe I’ll ask my part two then, of Paul. Cash flow from looks like there was an accrued expense effect that the depressed cash flow a little bit in the quarter. Can you just comment on that and the go-forward on that issue? Thanks.

Paul Herendeen

Yes. Absolutely, good pickup. I think what we reported when we report our fourth quarter was our fourth quarter was an abnormally high cash flow quarter because we actually saw a build in those same accruals. A lot of those accruals are around the restructuring and other things that we’re doing within the company. What you saw during Q1 was sort of settlement of a number of those accruals. So it depressed our cash flow from ops relative to Q4 perhaps a bit lower than what I would consider normal. But again, for the full year, we’d expect to continue to be the same cash flow, solid cash flow generator that we have been in the past. But that’s what’s going on there.

If you look at the year end, accruals got – I would call abnormally high. We held cash, we settled up a lot of things in Q1.

Gregg Gilbert – Bank of America/Merrill Lynch

Thanks. Good luck on the year, guys.

Operator

Thank you. Our next question comes from Elliot Wilbur from Needham and Company. Your line is open.

Elliot Wilbur - Needham & Company

Thanks. Good morning. Roger, you hit on the dynamics around the OC franchise a little bit earlier, but maybe I could just ask a follow up question to some of your commentary. I mean, just kind of looking back since the launch of Lo Lo, and then sort of the trajectory of the overall franchise , I mean, scripts in total for Lo and Lo Lo, you know, essentially flat since the launch of Lo Loestrin and you know, we don’t have the – or I don’t have the source, the script data and have a kind of sense of where those are coming from like you guys have. But you know, I guess are you, you know, satisfied that you’re still getting what you want in terms of script origination on Lo Lo, meaning that you’re not still seeing what you would call excessive cannibalization, or maybe have you kind of changed gears a little bit here and are thinking about maybe trying to switch this franchise from one product to the other more on a lifecycle extension strategy versus a pure volume perspective?

Roger Boissonneault

Yes, I think, Elliot, you’re thinking of – the trap is that you like to grow the franchise. Sometimes that’s not too simple. Again, when we introduced the product, we really had no issue. We had a 10-microgram product. We didn’t know what the acceptance was going to be like and 24 had done quite well. You know, looking retrospectively, we – it’s kind of hard to grow both products at the same time without one clearly being the lead. I think the issue here has become clear to us, and you probably – you don’t see I guess the granular – the data that we see, but we really look at new to brand and that’s our key metric because RX will follow and totals will follow with that. We’ve seen a move, you know, a good strong move in Lo Lo and with the new, you know, the new strategy and the new strategy being okay, let’s relax here. Let’s not try to – it’s kind of hard to say, doctor, I think all your patients should be on a 10-microgram product when you’re also promoting a 20-microgram product. So you’ve got to make your mind up. I think the higher ground here is the 10-microgram product and the fact is, we have confidence in that 10-microgram product and that should be the market leader. I mean, it works as well as a 20-microgram product or a 30-microgram product.

The issue here is the configuration. You know, it’s 24, 2, 2 and we get the same efficacy with that product as you with the 20 or a 30 or 50. That’s where we have to have our conviction. What’s going to happen is, we’re going to lose some business from the 24 because it’s a 20-microgram product. We’ve got to lead with that conviction. I think that’s what’s new.

Operator

Thank you. Our next question comes from Douglas Gale from Barclays. Your line is open.

Douglas Gale – Barclays Capital

Hi. Good morning. Just sort of following up again on the OCs. Just broadly in terms of what you’re seeing in terms of the trends for new to brand as well as sort of the [inaudible], you know, preference or sort of willingness to prescribe brands versus generic OCs. You know, obviously there are a lot of generic alternatives out there and how you see that dynamic and how has that changed in recent years?

Roger Boissonneault

Well, the brands continues. There are a lot of – there’s Ortho trycycline Lo and to my knowledge, it’s not even being promoted and there are very few samples around. So clinicians indeed to like that confidence of the brand. We do believe that it’s – I mean, basically clinicians – we provide sales to clinicians. I mean, the idea being that at least try the product before you continue with the product. And that’s what the brand opportunity we have with the use of samples. I think, you know, when you look at the absolute economics, we’ve used patient cards and I think the clinician would prefer to use a brand like – they like to use the sample, the patient likes the sample when they walk out. I do think you’re going to see this particular product – this product continue on the market. It’s going to stay there. It’s going to stick.

Douglas Gale – Barclays Capital

And this is another thought. Do you continue to see some benefit to your franchise from the [Inaudible]?

Roger Boissonneault

We’re out the pursuing. In other words, we’re not out there talking about bio haz issues with [inaudible] and they’ve had to change their label. That’s their issue. Obviously, that segment of the market, their brands have suffered a bit from the labeling. The bigger issue for us is, you know, maybe [inaudible] has whatever share they have and that’s not the share that we’re looking at. We believe that the higher safety issue is really in the estrogen component. We have a 10-microgram product. There’s no generic 10-microgram product. There are plenty of generic 20-microgram products. That’s our position.

Douglas Gale – Barclays Capital

Okay, great. That’s very helpful.

Operator

Thank you. Our next question comes from Michael Tong from Wells Fargo. Your line is open.

Michael Tong – Wells Fargo Securities

Hi, Roger, good morning. Just a follow up on sort of the derm asset, whether it be the sales force or a dermatology product, I suppose as you commented earlier that sometimes things don’t work out as well or as planned with the FDA. So the question is, you know, how long would you wait before you redeploy the derm sales force into other areas or perhaps think about a product acquisition to fill a gap between new product company and Doryx going forward. Thanks.

Roger Boissonneault

Yes. I think you’re right, Michael, and it’s like we do have – we are patient. We are a patient group here. We do believe that the asset is indeed our sales force. And if an acquisition came up that would fit, we would certainly pursue that. Paul is ready here, he will make – he will buy assets, he will even buy companies at times because if we can take that asset and put it with our sales force, we know we can grow it and we can grow it efficiently and have an excellent return.

As stated, you know, we have multiple approaches to this and sometimes we have things well thought out and then you get surprised so we also have internal plans for development. And depending on how that shakes out, either you buy an asset and our first choice is obviously an internally developed asset because they’re most efficient.

But we do believe that sales force isa core asset and they will be prompting a product that they add value to.

Paul Herendeen

I’d say, it’s Paul, I’d even follow on on that just to put this in perspective, you know, you’re saying, well, do we want to deploy that sales force? We want to maintain that relationship, we feel like the sales force is an asset. I think you can take away from our comments that we’re working on something else to put into that sales force. And then I want to quantify for you, at least in round numbers, what your annual investment might be to maintain that sales force.

Operator

Thank you. Our next question comes from Jim Molloy from ThinkEquity. Your line is open.

Jim Molloy - ThinkEquity

Hey, guys. Thanks for taking the question. A couple things, on the Actonel/Atelvia, any thoughts on – or any opportunity to move that to a separate vehicle just to get this in a load stone of declining sales off your neck? And with the Asacol, has there been any additional commentary on what [inaudible] maybe or may not do or do you have expectations of if they’ll also drop their challenge to the product?

Paul Herendeen

I’ll take the Actonel/Atelvia piece. I mean, we have absolutely no interest in getting rid of the Atelvia business as we think of it as a contributor to growth here over the course of the next several years. The load stone or is it the no stone, I can’t remember which one you used, of Actonel, you know, honestly, the way we – we think there’s a lot of value to be realized through that franchise, not just now but in the future globally because the tail outside the United States is better than it is in the U.S. and what we’ve – the way we’re choosing to deal with that is we pointed out to investors, you out to think about it as an asset that declines at a rapid rate but throws off a lot of pre-tax and cash. So that’s the Actonel/Atelvia part. Roger?

Roger Boissonneault

You can see that Paul gets worked up over Actonel. It’s a good asset, it’s fine and we would do that nine out of nine times. The return on Actonel has been an incredible return.

Operator

Thank you. Our next question comes from Corey Davis from Jefferies. Your line is open.

Corey Davis (Gregg)– Jefferies & Co.

Hi, thank you. It’s Gregg in for Cory. Just one question. Given that you’ve had a nice rise in the stock price recently, and I won’t ask you about strategic options, but how do you think about share repurchase right now at these levels and if you could just give a reminder of what’s the balance right now in that share repurchase plan? Thank you.

Paul Herendeen

It’s Paul speaking. I mean, the overall program was a $250 million program. That program remains active through the balance of the year. We’ve used approximately 88 or just below $90 million of the capacity of that $250 million plan. And what we’ll do is under Irish rules, what we’re allowed to do is to report to you at the end of every quarter what the results are for the repurchase – excuse me, redemptions that are made under that plan. So it’s been successful for us. If you think about it, I think that investing in our stock, it’s quoted in the mid-16s, that we’re able to acquire stock during the period ended March 31. It’s been a good program for us. It remains in effect. We will, from time to time, buy shares under that program.

Corey Davis (Gregg)– Jefferies & Co.

Okay, just a quick follow-up on Estrace , if you don’t mind. How sustainable do you think the growth is on a go-forward basis at these levels that you saw in the first quarter?

Paul Herendeen

Well, I think it’s very sustainable. We’re still not the market leader. [Inaudible] continues to be the market leader. And we’ve got a lot of – and we’re improving. I would say we’re improving our effort against Estrace Cream from the sales capacity and the deployment of our sales reps. Yes, we think it’s an excellent asset, and it has significant room for growth.

Roger Boissonneault

And again on that one, because we certainly see it a lot, I described that asset as one where it’s a classic specialty format asset. You get a promotional response. We paid close and careful attention to it and deployed promotional resources against Estrace Cream. You see the kind of growth that we’ve been able to generate in RX terms, which in that case, I’ll use as a proxy for unit growth. But it’s really a nice promotion-sensitive asset that we will continue to promote. I did, and I’ll point out one more time, if you went a little bit higher because of that reversal of a rebate accrual, but a good asset.

Roger Boissonneault

Thanks, I appreciate it. Thank you.

Operator

Thank you. Our next question comes from David Buck from Buckingham Group. Your line is open.

David Buck – Buckingham Group

Yes, thanks for taking my question. I’ll give you just a couple of quick ones. First, for Roger, what’s the appropriate time, would you say, when you won’t be promoting the Loestrin24 whatsoever? And secondly, I guess for Roger as well, if we look at the guidance with the cut from generic directs, essentially you’re below the level that you had in 2010. Can you give, just conceptually, what the growth outlook, if you remain a public company, would be? Or how do you see yourselves being able to grow into 2013? Thanks.

Roger Boissonneault

Okay, well, we don’t have any negative. We don’t talk negatively about Loestrin24. It’s still a good product. We’re talking about not switching people from Loestrin24 to Lo Lo. We’re talking about pulling this thing out of new starts on 10-microgram product. So it’s not an active cannibalization program. But it is a focus program, where that we believe that new (inaudible), on an oral contraceptive should begin with a 10-microgram product. So that’s the positioning.

As far as Doryx, and you made some comment about remaining a public company, I don’t know where you got that. The issue is, how do we maintain? And let’s take a look and see what happens with this franchise. I don’t know what the answer is yet. Let’s give it the benefit of a couple of months, and we’ll make decisions from those time points.

Paul Herendeen

Yes, and David, I’ll go back and the way I describe, and we started to describe going back a couple of quarters now. Our core business, we’re thinking about the growth. If you separate out the Actonel piece and leave Doryx in, we do have to rebase our expectations for ’12 and ’13 and ’14, based on the revised outlook for Doryx. But suffice to say that we continue to believe as a company that we can grow our core franchise ex- Actonel, just taking Actonel out of the mix. We have a number of drivers in there that we talked about, whether it’s Asacol, Estrace Cream, Atelvia, the oral contraceptives. From a growth respect on that core business we’ve got to rebase based on the unfortunate loss of Doryx.

David Buck – Buckingham Group

Okay, but I guess just follow-up with the expectation that at some point you get an additional product in the derm franchise, whether it’s this year or next year.

Paul Herendeen

I’m sorry, David.

David Buck – Buckingham Group

I guess the expectation is that your core business will grow and, Roger, I mentioned it’s a public company because of the comment on seeking alternatives a couple of days ago. I’m not asking you to comment today, but the assumption for 2013, it sounds like you think you can grow your core business, and if potentially we get an additional product approval on Doryx.

Roger Boissonneault

Yes, exactly; I think that’s the strategy. I think Shibani had it right with her questions that she conveniently answered.

David Buck – Buckingham Group

Right, okay, fair enough. Thanks.

Operator

Thank you, and our last question comes from Irina Rivkind from Cantor Fitzgerald. Your line is open.

Irina Rivkind – Cantor Fitzgerald

Thanks for taking the questions. I just wanted to follow-up more on the Doryx sales force. And it sounds like your next product is fairly nearby, and I was just wondering if you could potentially allocate the sales force temporarily to grow Enablex a little bit; or just save some on the A & P and not necessarily lose the entire $25 million as you wait for the new asset? And then, as a follow-up to that, I’m just wondering if you do sort of know about the next generation products, and can we expect a guidance, update and (raise) once that is announced? Thanks.

Paul Herendeen

The plan is to keep them focused on Doryx. Let’s see what happens. It’s not easy to take a sales force and say, “Okay, now let’s spend part of your time” … You know, we’ve got everyone deployed against the targets. So how quickly a new (act appears), we don’t want to speculate on. However, we do believe that we’re going to continue (inaudible) now the status quo, let’s see what happens in a month or two from now. But (we’ll remain then) focused on, you know, from an asset (inaudible) the opportunity (costs here). But we’d rather have them maintain those relationships, and there’s nothing wrong with them promoting Doryx.

Roger Boissonneault

Yes, and I’ll follow along with that, perhaps as a way to think about the investment and field force. We will keep that field force in place and obviously (inaudible) discussion and thinking about what do we do in that (inaudible space) as we go forward. And that will play out as it plays out. In the interim, we expect to have that sales force continue to promote Doryx and while I would, if I were an (extra party), I would assume that we have limited, if any, success with that effort, that’s not what we’re trying to achieve. We’re trying to actually achieve some (maintenance) of Doryx market share with that field force out in the marketplace. And, as Roger said, give us a quarter or so and let’s see how that plays out. But I suspect that the full amount of the $25 odd million investment on an annual basis, some of that will be recouped and I think the maintenance of that asset will be of great benefit to us here in the future.

Irina Rivkind – Cantor Fitzgerald

Thanks very much.

Operator

Thank you. I’d like to turn the conference back to Mr. Paul Herendeen for our closing remarks.

Paul Herendeen

Yes, in closing, I’d like to thank everybody for your interest in Warner Chilcott. Setting aside the disappointing outcome of the Doryx situation, I think we are off to a very solid start in 2012. And we’re feeling good about our future. So again, thank you for your interest and we’ll look forward to talking to you next time. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This doesn conclude the program and you may all disconnect at this time.

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