Warner Chilcott Ltd. Q4 2007 Earnings Call Transcript

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 |  About: Warner Chilcott Limited (WCRX)
by: SA Transcripts

Warner Chilcott Ltd. (NASDAQ:WCRX)

Q4 2007 Earnings Call

February 29, 2008, 8:00 am ET

Executives

Paul Herendeen - Executive Vice President and Chief Financial Officer

Roger Boissonneault - President and CEO

Analysts

David Buck – Buckingham Research

Edmund Kim – JP Morgan

Ken Trbovich – RBC Capital

Dave Windley – Jeffries & Company

[Adam Chang] – Deutsche Bank

Operator

At this time I would like to welcome everyone to Warner Chilcott’s Fourth Quarter and Full Year 2007 Financial Results Conference Call. [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.

Paul Herendeen

Good morning everyone thank you for joining the call. Earlier this morning we issued a press release that details our fourth quarter and full year 2007 results which I hope you’ve all had a chance to review. A copy of that press release is available on our website. Roger and I would like to take a few moments this morning to provide some additional comments with regard to our fourth quarter and our full year 2007 results and we’ll follow that with a question and answer period.

Before doing that let me point out that on this call we will make forward looking statements. These statements are subject to a number of risks and uncertainties that could cause the company’s actual results to differ materially from such statements. These risks and uncertainties are discussed in our 2007 annual report of Form 10-K which is available on the SEC’s website. The forward looking statements made during this call are made only as of the date of this call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.

In addition, we may make reference during the course of this call to non-GAAP financial measures as defined by the SEC regulations. In accordance with these regulations we provided reconciliations of these measures in our press release issued this morning to what we believe are the most directly comparable GAAP measures. With that let me turn things over to Roger Boissonneault our President and CEO.

Roger Boissonneault

Good morning everyone and thanks for joining us. I’ll give you a brief review of our performance for the fourth quarter and full year ’07 as well as provide an update on recent events and development activities before turning the presentation back to Paul for additional details, he’ll talk about our financial results.

Our fourth quarter revenue increased 10.3% to $227.7 million compared to the fourth quarter of ’06. For the full year ’07 revenue increased 19.2% over the prior year to $899.6 million. The increases in both periods were led by sales of Loestrin 24 and Taclonex. Sales of our OC’s increased 14% this quarter versus the fourth quarter of ’06 with Loestrin 24 contributing over $41 million of sales in the fourth quarter of ’07. Loestrin 24 ended the year with a four point five share of new prescriptions in the hormonal contraceptive market.

While we continue to make progress with Loestrin 24 and gain market share we are not satisfied with the pace of our results. Over the last several months our focus has been on improving the effectiveness of our sales and marketing execution of Loestrin 24. We do have adequate resources in place for ’08 to improve the rate of growth for Loestrin 24. Loestrin 24 is an excellent product and in fact, many of our sales territories Loestrin 24 has double digit market share. In those territories it’s our sales execution that makes the difference. The strategy is to turn many into most of our territories as the key to success is our sales representatives.

Femcon generated sales of $11.6 million in the fourth quarter an increase of $4.1 million or 53.3% versus the fourth quarter of ’06. Although we first introduced Femcon in the second half of ’06 we did not initiate promotional efforts in support of the product until April of ’07 when it became the top priority of the Chilcott sales force. Interestingly some Femcon territories have a higher market share than Loestrin 24 territories. Again the sales rep makes the difference.

In our Dermatology portfolio revenue increased $12.6 million or 14.3% over the prior year. Revenue from Dovonex/Taclonex franchise totaled $67.8 million in the fourth quarter of ’07. We continue our efforts to promote the use of Taclonex as a first line treatment option for patients with mild to moderate psoriasis. For those physicians looking for non-psorital options for their patients we promote and sample Dovonex Cream. The strategy is to grow the franchise as both products have a unique advantage.

Also in Dermatology net sales of Doryx were $31.6 million in the fourth quarter of ’07 representing a 16.4% increase compared to the prior year quarter. Our efforts of Doryx were diluted by the launch of Taclonex, particularly in the second half of ’06. In early ’07 we took steps to ensure that our dermatology sales force placed appropriate emphasis on Doryx. Beginning in Q3 of ’07 Doryx returned to a growth mode. Total prescriptions for Doryx increased 4.8% in the fourth quarter of ’07 compared to the prior year quarter.

Turning to recent events I am pleased to announce that earlier this week we entered into an advance price agreement or APA with the IRS. As you will recall we first began this process of working with the IRS towards the goal of obtaining an APA in March ’07. I will let Paul provide additional details regarding the APA but will say that we are pleased to report the successful completion of this important project.

Lastly, let me provide you with a few updates on our product development activities. We continue to make progress with the clinical trials of two new oral contraceptives currently under development. The first clinical trial, which we refer to as the Low Dose OC completed enrollment in the third quarter of ’07. If all goes well we could be in a position to file an NDA for this product in the first half of ’09. The second trial is for a new oral contraceptive, the characteristics of which we have not divulged. That trial completed enrollment in December of ’07 and is progressing on a timeline that is probably six months behind the Low Dose OC trial.

At this stage we have nothing new to report with respect to Leo’s filed NDA for Taclonex scalp product. The predicted date for this product is April 27, 2008. During ’07 we entered into two new product licensing deals, in July of ’07 we reached an agreement with Paratek which we acquired rights to novel tetracyclines under development for the treatment of acne and rosacea. As compared with other products we undertaken this is a longer term higher investment and higher risk proposition. However, we feel that the potential benefits of those successful development efforts are compelling.

At this stage we are working with Paratek to agree on a lead comp for development. In November of ’07 we announced a licensing agreement with NexMed, the agreement grants us exclusive US rights topical alprostadil cream for the treatment of erectile dysfunction. NexMed submitted and NDA related to the product in September of ’07 which was accepted for review in November ’07.

Now let me turn things over to Paul to take you through the financials.

Paul Herendeen

As Roger mentioned to recap revenue for the fourth quarter increased $21 million or roughly 10% versus the prior year quarter. The full year revenue increased $145 million or about 19% to just under $900 million in 2007. The strong revenue growth that we posted for both the quarter and the year was driven by Loestrin 24 and Taclonex. Net sales of our oral contraceptive portfolio increased almost 14% or $8 million in the fourth quarter ’07 compared with the prior year quarter an increase of 16.8% or $38 million for the full year, primarily driven by sales of Loestrin 24.

Loestrin 24 contributed $41.6 million of net sales in the fourth quarter nearly double the sales in the prior year quarter. Loestrin 24 sales increased 8.9% sequentially primarily due to a 6.5% increase in filled prescriptions in Q4 ’07 as compared with Q3 ’07. Loestrin 24 continues to be a top priority within our company. Since the launch of Loestrin 24 in early 2006 we have seen the overall market trend for prescriptions for first time OC patients favoring the use of 24 day OC’s as compared with the traditional 21 day products. We believe that Loestrin 24 is well positioned to continue to gain market share and we remain optimistic about the brands potential to be a leading product in the hormonal contraceptive market.

We introduced Femcon the second half of 2006 and began actively promoting the product in April ’07. Femcon generated net sales of $11.6 million in the fourth quarter of ’07 an increase of $4.1 million or 53% compared to the prior year quarter. Sequentially Femcon net sales increased $2.2 million or 23% primarily due to a 15% increase in filled prescriptions. The growth of Femcon has been consistent although more moderate than Loestrin 24 with the product beginning the year with a 0.3% share in new prescriptions in the hormonal contraceptive market and ending the year with a 1.16% share.

Within the oral contraceptive market 30 to 35 microgram products continue to represent over 50% of new prescriptions written. Femcon is currently the only 30 or 35 microgram product being actively promoted and sampled to OBGYN’s. Offsetting the growth delivered by Loestrin 24 and Femcon was the impact of generic competition on our OC portfolio. Sales of generic versions of Estrostep began in late October 2007 and contributed to a decrease of sales of $13.9 million or 58% compared to the prior year quarter. As we stated previously the generic competition faced by Estrostep will continue to impact 2008 net sales comparisons with 2007.

In addition, Ovcon net sales declined $1.9 million or 37% in the fourth quarter of ’07 compared with the prior year quarter primarily due to continued erosion of the old Ovcon products market share to generic versions.

Turning to our Dermatology portfolio revenues of our dermatology products increased 14% or $12.6 million in the fourth quarter ’07 compared with the prior year quarter and 25% or $78.9 million for the full year 2007 compared with 2006. The growth in this segment was let by increased sales of Taclonex which contributed a $7.5 million or 33% increase in net sales in the fourth quarter as compared with the fourth quarter of ’06. Sales of Dovonex are relatively flat in the fourth quarter of ’07 compared with the prior year quarter as price increases offset a reduction in filled prescriptions.

We continue to believe the growth prospects for Taclonex are with the GPFP community as we have done a good job in achieving a high penetration rate for Taclonex amongst dermatologists. We don’t directly promote the GPFP community but rather the message of Taclonex is often delivered to those doctors by patients who are currently using the product. As Roger mentioned we remain focused on the Dovonex and Taclonex franchise and will continue to employ tactics to enhance the growth potential to that franchise.

At the beginning of 2007 we noted that we made adjustments to our sales incentive compensation plans to ensure that Doryx received the appropriate amount of emphasis to increase its share of the acne market. We’ve seen a positive result of those changes as Doryx has returned to a growth mode with filled prescriptions increasing 4.8% in the fourth quarter ’07 compared with the prior year quarter. Net sales of Doryx increase $4.5 million or 16.4% to $31.6 million in the fourth quarter due to the increased demand as well as higher average selling prices during the period.

Sales of our hormone therapy products increased $2.5 million in Q4 compared with the prior year quarter. The increase is primarily due to an increase in sales of Estrace cream up $2.5 million as price increases offset flat unit demand for the product during the quarter. Net sales of femhrt in the fourth quarter ’07 declined modestly compared to the prior year quarter due to a 12.9% decline in filled prescriptions the impact of which was partially offset by price increases.

Dropping down to our gross profit our gross profit margin as a percentage of total revenue was 80.8% in the fourth quarter up from 78.9% in the prior year quarter. The primary factors that impacts our gross profit margin is product mix. Overall our women’s healthcare products enjoy a higher gross profit margin as compared to our dermatology products. As discussed on last month’s guidance call we believe that our 2008 gross profit margin on total revenues will be in the range of 80% to 81%.

Looking at SG&A our reported SG&A expenses for the quarter were $57 million an increase of $2.1 million or 3.7% compared with Q3 of ’06. Let me walk through the three specific spending areas of SG&A. Selling and distribution, advertising and promotion, and general administrative expenses. Selling and distribution expenses increased $2.7 million or 13% in the fourth quarter compared with the prior year quarter due primarily to the expansion of the Chilcott field force in the first half of ’07 in supported by the launch of our promotional efforts of Ovcon.

Advertising and promotion expenses increased $1.5 million or 8.8% in the quarter compared to the prior year quarter as we had higher A&P spend in the prior year quarter related to the ongoing launch cost for Loestrin 24 and Taclonex. In Q4 of ’07 we incurred some direct to consumer costs associated with the current advertising campaign for Loestrin 24. A&P spending in Q1 of ’08 is expected to represent over 30% of our full year 2008 spend.

General and administrative expenses increased slightly by $0.9 million or 5% in the fourth quarter of ’07 compared with the prior year quarter primarily as a result of normal annual increases in compensation expense. Full year 2007 SG&A costs were $239.3 million which by the way which excludes the $26.5 million in the litigation settlement charges incurred during the year. As discussed we expect 2008 SG&A to be in the range of $228 to $237 million primarily due to a reduction in our planned BTC advertising spend in 2008.

R&D expense in the quarter was $11.7 million and for the full year was $54.5 million an increase compared to both the prior year quarter and full year ’06. The higher expense in 2007 as compared to 2006 is attributable to the timing of our activities in the development of several products primarily the two oral contraceptives which Roger mentioned during his remarks. In addition, we paid a total of $14.5 million in milestone and licensing fees during 2007 that are included in our R&D expense. That includes a $10 million to Leo Pharma upon their successful filing in the NDA for Taclonex Scalp as well as licensing fee of $4 million to Paratek and both of which occurred in Q3 and $0.5 million licensing fee to NexMed in Q4.

Amortization totaled $56.2 million in the fourth quarter and $228.3 million for the full year 2007. As we noted in the past in computing our cash net income per share we add back the after tax impact of amortization. Our forecast for aggregate scheduled amortization for 2008 based on current assumptions is $207 million 2008 reducing to $184 million in 2009 and $150 million in 2010. Net interest expense for the fourth quarter was $27.3 million which includes a write off of $1.6 million of deferred financing costs related to the optional prepayment of $90 million under our senior secured facility which we made at the end of December 2007.

Over the course of 2007 we made principle repayments of term debt totaling $350.5 million using free cash flow and cash on hand. We ended the year with a debt balance of roughly $1.2 billion of which roughly $600 million resides in our Puerto Rican subsidiary and $600 million resides in our US subsidiary. Our pre-tax income for the fourth quarter totaled $31.9 million. Our provision for taxes was $12.2 million in the fourth quarter. As Roger mentioned we recently signed an advance pricing agreement with the IRS. For those of you not familiar with the APA process it’s an avenue open to all companies which is designed to resolve actual or potential transfer pricing disputes in a principled and cooperative manner.

Under the APA process companies work proactively with the IRS in an effort to reach a mutually agreed upon transfer pricing method. As with many pharmaceutical companies transfer pricing is a large and important component of our overall tax provision calculation. Our successful completion of this project provides our company with a binding agreement with the IRS that governs the terms of our transfer pricing activities for the years 2006 through 2010. We are very pleased that we were able to reach an accord with the APA office and believe that the process resulted in an equitable agreement for both our stakeholders and for the US Treasury.

For 2008 after giving effect to the terms of our APA we are affirming our guidance for a total tax provision in 2008 of between 7.5% and 8% of EBTA (Earnings Before Taxes and Book Amortization). Our reported net income in the fourth quarter 2007 was $19.7 million. In arriving at cash net income we add back the after tax impact of two expense items, book amortization of intangibles and the amortization of deferred financing fees. We add these items back at the marginal tax rates specific to each item in each period. For the fourth quarter of ’07 the margin tax rate associated with the amortization of intangibles was 8.8% and the rate for deferred financing fees was 8.9%.

Tax debt income for the quarter was $73.9 million or $0.30 per share using $250.5 million fully diluted class ‘A’ shares outstanding. For the full year our reported net income was $28.9 million. Using the same methodology that I just discussed in adding the after tax impact of $26.5 million of litigation settlement expenses incurred during 2007 we generated adjusted cash net income of $276.1 million or $1.10 per share, based on the $250.5 million fully diluted class ‘A’ shares outstanding. The reconciliation from GAAP net income to cash net income and adjusted cash net income is included in our press release.

Turning to liquidity we generated $105.8 million of cash from operating activities in the fourth quarter and ended the year with a balance in cash and cash equivalents of $30.8 million. As we previously stated in the absence of compelling opportunities to invest our free cash flow and strategic initiatives such as in licensing, acquisition or other internal product development activities we expect to continue to use excess cash for de-leveraging purposes at least through the balance of 2008. For the full year our cash generated from operations was roughly $340 million.

We invested roughly $43 million in the purchase of intangible assets and capital expenditures and used the balance plus some cash on hand to prepay the total of $350.5 million of term debt over the course of 2007 and we ended the year with net debt of $1.17 million. Our leverage at year end measured by debt to trailing 12 months adjusted EBITDA was two point six times as compared with roughly three point eight times a year ago. I know I say it over and over but because of our attractive tax rate and modest annual capital expenditure requirements we generate a lot of cash.

However, we anticipate that 2008 free cash flow will be less than 2007 free cash flow due to the timing of certain working capital items. For those model builders on the line, I know there are a lot of you. We noted on our guidance call last month that we expect our capex in 2008 to total roughly $30 million. For those debt holders on the call we have also included a reconciliation of our net income to adjusted EBITDA in our press release. Adjusted EBITDA using the bank bond definition for Q4 ’07 was $125.4 million and was $461.3 million for the full year 2007.

In summary, we had a very solid fourth quarter in 2007. Our results for the quarter and full year 2007 support the guidance that we communicated on our January call. You can access the 2008 guidance call through our IR website under the events and presentations tab. We are excited about our prospects for 2008 as we see continued growth in our promoted products Loestrin 24, Doryx, Dovonex/Taclonex franchise and Femcon. With that I would ask the operator to open the lines for the Q&A.

Question & Answer Session

Operator

[Operator Instructions] Our first question comes from David Buck from Buckingham Research.

David Buck – Buckingham Research

A couple of questions, Paul could you talk about what the current thinking is on competition for Dovonex this year and perhaps timing of line extension? Roger can you give some update, you had some activity last year in business development and pipeline building but can you give us a sense of what you are seeing in the market now in terms of new opportunities, your confidence or optimism and be able to do some pipeline building this year?

Paul Herendeen

I’ll start with the Dovonex question. As many of you will recall that during the course of 2007 we were successfully converting the bulk of the Dovonex franchise over to our Clean product. That product is doing quite well. Many of you also recall that we had expected at the beginning part of January of this year 2008 be face generic competition for the solution which is used predominantly on the scalp. We’ve not seen that generic competition yet. I think at this stage we are continuing to say we do expect it but we haven’t seen it. As time goes on that’s a good thing for us. We do continue to expect and we’ll fact competition there.

As Roger said we are focusing now on the Dovonex/Taclonex family as a franchise. We believe that both products have the opportunity to grow and be a part of our overall Derm franchise for the future, does that answer your question David.

David Buck – Buckingham Research

I guess it does. If there is upside what does the guidance assume, did it assume full generic competition in January? If there is upside from a lack of generics do you spend that on A&P, what is the drop to the bottom line?

Roger Boissonneault

The answer to that is we’ve been trying to figure out what the status is with the FDA and we haven’t any more clarity on it. As we move forward we could get a generic at any time. That’s what goes into the assumption. Until the situation becomes clear to us, then we’ll reveal it to the investment community. We can’t make any assumptions going forward that there is no risk. Are we going to take those monies and reinvest it in A&P or however we are going to use those dollars? We would use it in general conduct of our business.

On the business development front, we look a lot of stuff. The issue is, what can we develop ourselves versus what do we have to bring in. I think if you look at our pipeline we’ve done a pretty good job of developing products. I don’t think we get the credit we should for developing our products internally. You’ve got to look at what do I want to license in that might be in phase two or phase three versus what we could do ourselves. The second piece of that is, are there some assets that Big Pharma is going to be selling that we could do a better job with.

I think that is just purely episodic. The deal flow on that side everybody talks about that being a reality. The fact is there are not that many; when you talk to us it’s got to be an asset that’s got to be between at least $100 to $200 million because it’s not worth the opportunity costs of our sales force to be refocused. That goes on David, it’s like one of those things where you might be able to do something like a Leo deal or you might be able to extract a large asset but it’s purely on episodic basis.

David Buck – Buckingham Research

Any timing on the Doryx line extension that you might be willing to talk about?

Paul Herendeen

We are not willing to talk about it yet. Stay focused, we continue to work and as you know we don’t like to talk about or reveal these things until it’s imminent. Be reassured that we continue to work on that.

Operator

Adam Green with JP Morgan has our next question.

Edmund Kim – JP Morgan

The Taclonex RX is quarter to quarter were up but yet sales came lighter than my expectations and dollar per RX was down, I was curious if you could comment on that?

Paul Herendeen

There were two items there, one is people love to believe now that we have these agreements with the wholesale that there are no ebbs and flows and pipeline inventories but there are. I think that based on our internal analysis that was a contraction of the pipeline inventory a little bit in Q4 of ’07. Second, we did have a slight change to our gross to net factors with Taclonex. Taclonex has now been out in the market for if you look at a reported results for seven quarters. We start to have better data to be able to establish the reserves to degrade our gross selling price to that and we ended up changing our methodology a little bit in Q4 which also had the affect of reducing our sales in Q4. You hit on the key fundamental which is RX’s continue to look good.

Edmund Kim – JP Morgan

What would be an appropriate dollar per RX, high $300’s perhaps.

Roger Boissonneault

In the third quarter we brought in the 100 gram too so right now it’s not all the same size too. You are either going to be writing for the 60 where they might write one for 60 or two 60’s or now they are writing for the 100 gram tube. You are right, the value of RX’s are going to change a bit until we understand what that dynamic that flip is going to be between 100 gram and 60 gram. Even if the RX’s go down a bit they might become more valuable because they write for 100 gram tubes. Like I said, we put that in, in the third quarter we began shipping the 100 gram.

Edmund Kim – JP Morgan

You talked about in your prepared remarks about certain territories where Loestrin 24 is higher than other territories. Could you elaborate on what those sales reps are doing better than other sales force?

Roger Boissonneault

I think those are probably better sales reps. It’s not peculiar to Loestrin or Femcon I would venture to guess in our experience, at least my experience even with Lipitor and some of the other products that we had launched you see a big disparity between what a successful rep can do and what a rep that is not as motivated or not as intent advised or doesn’t have the internal discipline. I think we had suffered a bit because we tried to expand our sales force rapidly when we introduced Femcon. We declined a little bit in quality but that’s being remedied.

It gives you great confidence to know it’s not the product, it’s the execution. In some sales territories we do extremely well, like I said double digit. In fact in some areas we are in fact the market leader. I think what that is, it really is up to the execution of the sales rep. It’s something that doesn’t happen immediately, the thing is let’s get our sales force or DM’s of high quality and we believe we have the assets it’s just a matter of execution.

Edmund Kim – JP Morgan

The APA covers 2006 to 2010 so how should we think about impact on the P&L now versus beyond 2010?

Paul Herendeen

It’s kind of interesting, you go an reach an agreement and the agreement covers a period out to 2010, can I make any generally comments about 2011 is it might change, it might go up it might go up modestly it might stay the same or it might go down modestly. The great news for us in being able to be successful with the office here now is we’ve established that our tax rate as we’ve communicated it to all of you folks going backwards and in our guidance going forward is between now and 2010 you’ve got a pretty good idea that we should be pretty tight with our ability to forecast our tax provision.

Looking out to 2011 I would not expect it to change markedly in 2011, 2012 and all periods going forward. We were very pleased that we were able to reach an agreement with the folks down in Washington DC and we feel like it was a good agreement and I said this before, it’s possible that we agreed to pay a little bit more than we might have been able to successfully defend if we’d just taken the approach of filing our returns and letting them deal with it on audit.

We feel that it’s a better way to go to sit down with them and come to an agreement that works for both sides and we would be cautiously optimistic that some time in 2009 we start the process again and try to figure out what we can do for periods beyond 2010. This was a great step for us.

Operator

Our next question comes from Ken Trbovich with RBC Capital.

Ken Trbovich – RBC Capital

The first question Roger I guess I wanted to go back and touch on something that was just brought up in terms of the Doryx line extension. Should we look at the WC2055 as the line extension or is there some other formulation out there that you are referring to when you discuss the line extension for Doryx?

Roger Boissonneault

Yes, there are some that are not listed. They are the development. Some of these are, I think 2055 is probably more progressed that’s not what you are going to see next. As you know, we take advantage of opportunities if we see an opportunity in the market place. We are going to develop a product and perhaps it won’t be listed in our pipeline but we are taking advantage of its development. Wait and see, be patient you know that we continue to improve this product. We’ve had great success with Doryx and most recently we’ve put more emphasis on it and we see Doryx can clearly be distinguished versus generic Doxycycline from a GI side effect profile. If we can make the product better we are going to make the product better. Stay tuned and don’t assume that the next one is WC2055.

Ken Trbovich – RBC Capital

It just seems the only one that you’ve disclosed as being in the clinic and because of that wasn’t certain that you guys would disclose if you took a line extension into the clinic whether that’s something you’d even disclose.

Roger Boissonneault

We wouldn’t disclose until we got to the finish. There are always uncertainties along the way. That’s the problem a lot of people start talking about products and they don’t end up on the other side and you are trying to explain what happened along the way. Until we are fairly certain of where we stand then we will make that disclosure because then it will become material.

Ken Trbovich – RBC Capital

To give us some comfort could you go back perhaps and talk about the history of the product and then for example your competitors faced competition on the generic front several times for guidance. I don’t recall that necessarily ever happening with Doryx. Could you go back and review that for us?

Roger Boissonneault

I can go back to 1985 when we first introduced Doryx or 1997 when we first purchased Doryx from Warner Lambert. As you know everybody talked about the fact that is there going to be a generic for Doryx. The facts are there has never been a generic for Doryx, there was at one point an authorized generic because we thought there would be a generic and that was back in the old Park Davis days. We’ve had Doryx with Warner Chilcott for a total of 10 years and haven’t seen a generic. People look and say, “When is there going to be a generic?”

We keep on moving and improving the product but it has not happened because I think we’ve been successful in moving the product along and creating the next generation Doryx and rest assured it’s a better product. If we look at the history of Doryx no, there has never been a generic. There have been people that have gotten, I think at one point a company did get an NDA approval but they couldn’t validate the manufacturing of the product. We have some confidence but we don’t rest on our laurels, we continue to improve the product and be reassured our track record has been pretty good and we are proud of that track record.

Ken Trbovich – RBC Capital

One last question, I know you don’t typically talk much about the pipeline but you are indicating that Leo is planning on taking the next version of Taclonex into phase three is there a sense around the point at which we hear more about the product and it characteristics. I know they describe it as a facial product, you guys don’t say much about it.

Roger Boissonneault

Quite frankly that really isn’t in Leo’s court. The closest product we are talking about the scalp product and we really don’t have any feedback at least through Leo about the FDA. We are anticipating it’s an April approval. The interesting thing is we still have the Dovonex lotion which is used for the scalp and now we would have of the Taclonex product. It’s not a huge product it’s sort of a modest line extension. The next one would be as Leo has disclosed that would be the facial product. We don’t have a lot of visibility on that until we reach a milestone and that would be when they file the product with the FDA.

Ken Trbovich – RBC Capital

My last question is actually for Paul on the tax situation. Going through the disclosures and the 10-K I was curious it seems as though you reach some sort of agreement with the IRS having to do with prior year audits. I guess I’m a little confused by the disclosures because on the one had it says its not expected to be material to the operating results but would adversely affect cash flow in the quarter in which the final settlement is paid. Could you give us a little more detail on that?

Paul Herendeen

Yes, looking back we are talking about periods that were prior to our take private transaction. Those are items that, if you think of it very basically, those are items that are reserved so they won’t run through our provision or I should say the vast majority would not run through our provision. Modest amounts can but when they are paid they are paid. That’s cash, could be material to a period. We’ve reach a tentative settlement we are not done yet.

Ken Trbovich – RBC Capital

In other words the reserve that you already have in place are adequate based on what you know at this time?

Paul Herendeen

That’s correct. I think that we’ve had this question a lot when people look backwards and say are there any other things that we need to think about. When we took the company private we did a lot of re-organizational, a lot of restructuring we had some things that were liabilities that go back to what I’ll call the predecessor company even though its our company before that deal. We believe we are adequately reserved, we’ve said that all along and we continue to believe we are adequately reserved. If you recall what I said earlier in my prepared remarks when I talked about cash for 2008 said it is going to be less in 2008 or expected to be less in 2009 and then in 2007 one of the reasons why is settlements those pre-acquisition tax liabilities.

Operator

[Operator Instructions] Dave Windley with Jeffries & Company has our next question.

Dave Windley – Jeffries & Company

Paul you mentioned channeling to one of the earlier questions. Could you answer that in full, did you see a general increase or decrease in inventories across the product portfolio?

Paul Herendeen

No, its very interesting, people believe that you have a nice stable 28 days to ply out in the channel. It ebbs and flows, if it goes from 19 to 32 it’s a big difference. The only ones that we tend to call out are the ones where it has an impact on the sales in the quarter for comparison.

Dave Windley – Jeffries & Company

For Taclonex it did and that’s the only one this time?

Paul Herendeen

Doryx also had a bit of a pipeline reduction relative to prior periods.

Dave Windley – Jeffries & Company

Second question is, in terms of the sales rep performance from the discussions around pushing Loestrin 24 to a greater degree, you mentioned getting appropriate district management in place. What other steps are you taking, has there been an overall sales leadership change and whether or not there has been, what’s your satisfaction level with your sales leadership?

Roger Boissonneault

There have been some adjustments. Carl Reichel has taken more of a direct control of the sales force. At this point Carl is very experienced and it’s been done before. Sometimes it takes more of a hands on and he’s fulfilling that obligation. There have been some changes made in the district manager part of the organization. What happens is you have DM’s making hiring calls, if that’s not a solid position then it just gets worse because then they are making some decisions on hiring and then you’ve got fix the rep end of this thing.

As far as the organization Carl is taking more of a hands on that would be number one. We are also looking at the deployment issues, making sure we have enough sales reps in the right areas to make the difference, looking at different territories and optimizing sales force coverage. Carl is focused on that. Believe me we are all focused on getting better execution in ’08. I just want to make sure the investment community understands that’s not a function of SG&A it doesn’t mean we have to invest more dollars into it. Execution really has no economics around it. It’s just flat doing a better job.

Dave Windley – Jeffries & Company

Last question, could you give us an update around the patent back and forth on the dermatology products and what your thoughts are in terms of getting claims reinstated and what implications that has for line extension already discussed in SG&A?

Roger Boissonneault

I’m guessing this is Taclonex?

Dave Windley – Jeffries & Company

Yes, right.

Roger Boissonneault

We have nothing new to talk about on that front. I think what we did say was its going to take quite some time. This is a long process. There has been no change in the patents for Taclonex in the orange book. The issue we were talking about we the breadth of the patent. That’s still being resolved.

Dave Windley – Jeffries & Company

Is your confidence level or your view as to how many of those claims or how many of the key claims you can get reinstated that patent changed?

Roger Boissonneault

It hasn’t changed my confidence level remains high. Our patent department and our patent lawyers have done an excellent job. I’m probably more optimistic than Paul because is the finance guy and they tend to be pessimistic. They key is we want to make sure there is intellectual property around Taclonex and you can be reassured of that.

Paul Herendeen

We’ve said in the past and we’ll say again, even if the process were to stop right now there is still a patent that would protect the product we market Taclonex in the market place. What’s at issue is the breadth of that patent. People worry most about could you have a potential generic competitor out there. We believe that we have a patent around our product and we’ll continue to have a patent and as Roger said it’s listed in the orange book.

There are multiple patents listed for Taclonex listed in the orange book. We are going to be protected with that product from direct, meaning generic competition. The purpose of Galderm pursuing this is in our opinion, you can guess, is that they are interested in developing another branded product and that’s for them, good luck.

Operator

[Operator Instructions] We will now go to David Buck with Buckingham Research for our next question.

David Buck – Buckingham Research

I have a follow up. On Loestrin 24 it appears you have changed your marketing message somewhat at least the direct to consumer. Can you talk about whether you have done that in final form or should we be expecting more changes there in addition to the sales force work around? Any sense of what development in the Asman case might mean for your franchise and your loyalties from your competitor?

Paul Herendeen

The DTC methods really are adapted to the market. The last wave of DTC was really on the marketing side they wanted to strengthen this particular message about Loestrin 24. I think it was executed well. It doesn’t mean that we are going to run it continuously over the next year or even if we are going to run it again. I think we look at DTC as being episodic, if it works it has impact, that’s great. That doesn’t mean that we are going to try to pull the same trigger. It may be that we change that message.

With DTC it depends on, we had the writers strike how you well that. In the beginning of the year it’s pretty good because you’ve got a lot of new programs. In the summer it really isn’t that effective because there is not enough there as far as eyeballs. The next time would be probably in the full venue. We haven’t made any decisions around that. We look at DTC as being episodic. The job is done by the sales rep. You can do all the DTC that you want but it really comes down to an individual sales rep discussing the attributes of their product with the physician.

It’s hard the Asman case, I have absolutely no color on how that’s going to shake itself out. A lot of these cases take twists and turns but it doesn’t affect us in any form or substance.

Operator

We will go to Adam Green with JP Morgan for our next question.

Edmund Kim – JP Morgan

You talked about the Dovonex/Taclonex franchise to the GPFP segment. I curious how do you assess that is becoming more and more prevalent. Do you look at squibs or do you get antic dote feed back?

Roger Boissonneault

We look at prescriptions. When we talk about the GPFP it’s only what we would call on a GPFP only if they prescribe similar to a dermatologist. What you do see is that if you can get the derms to change their prescribing it is generally picked up by the GPFP or primary care. Many times someone with psoriasis will first see a dermatologist then they will determine the therapy. Then that individual may not go back to the dermatologist but they’ll get their prescription refilled with the GPFP.

You see this evolution, it moves from the primary care or the specialist who is a derm and then is mimicked by the primary care. Most people when they first enter with psoriasis they are going to see a derm and then those prescriptions may be followed up with the GPFP. There are too many GPFP’s out there for us to expand our reach unless they are defacto dermatologists. You’ll see that in some rural areas. In urban areas it’s all going to be around the derm. In rural areas sometimes you’ve got a GPFP that might acts in fact like a dermatologist.

Paul Herendeen

We actually tract that data. We have data where we can see where the prescriptions, data where we can see where the prescriptions are coming from. What we are seeing in the GPFP or I could clarify the non called universe is increased utilization of Taclonex and that’s backed by data not antic dote.

Operator

We will now go to [Adam Chang] with Deutsche Bank for our next question.

[Adam Chang] – Deutsche Bank

A couple quick questions for you, your debt level has come down significantly over the last year. What would you say your target leverage ratio is? In terms of potential acquisitions if funded with that what would you say your comfort level is in terms of leverage on the upside?

Paul Herendeen

We have not articulated a specific target for debt, for us we use debt to EBITDA but suffice it to say that over the course of January 2005 we were very levered through the IPO but also through cash generation and prepayment of debt we’ve got our debt down in the mid twos. I would submit that we get it down to two or less before we’d start thinking about whether or not there are other uses for that cash. We are a company that has used debt as an important component of our capital structure. There is a rule for debt in our capital structure as we go forward.

With respect to what’s the amount of leverage that we can put on I think in this market I’m not sure we could lever up very much at all because of the availability of debt. However, if we are able to make an acquisition we are company that would use debt to finance a significant portion of that if it was available to us and we think it would be.

Roger Boissonneault

To amplify that I think it depends on the quality of the acquisition. If the quality of the acquisition is self funded we do have a lot of support on the board with our sponsors. We’d look at a lot of things, we’ve never looked at anything we felt constricted because we’re not going to have enough cash to do the deal. I think you show me a quality acquisition and I don’t think we feel that constraint. We’ve demonstrated we’ve taken the company private; we layered on significant debt where at that time everyone thought it was significant. Now that we’ve de-levered it the next question is what are you going to do with cash? Our track record it hasn’t stopped us from making the acquisition, it’s the quality of the acquisition.

Operator

It appears we have no further questions at this time. For additional or closing remarks I would like to turn the conference back over to Mr. Paul Herendeen for any additional remarks.

Paul Herendeen

Thanks to everybody who was able to listen in on our call this morning and for your questions. As always, we appreciate your support and look forward to our next call which will be in May. Thanks very much.

Operator

That does conclude our conference for today. Thank you for your attendance and please have a wonderful day.

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