Warner Chilcott Limited Q1 2008 Earnings Call Transcript

May. 9.08 | About: Warner Chilcott (WCRX)

Warner Chilcott Limited (NASDAQ:WCRX)

Q1 2008 Earnings Call

May 9, 2008 8:00 am ET

Executives

Paul Herendeen - EVP and CFO

Roger Boissonneault - President and CEO

Analysts

Jami Rubin - Morgan Stanley

David Buck - Buckingham Research

Michael Tong - Wachovia

Ken Trbovich - RBC Capital Markets

James Kelly - Goldman Sachs

Adam Greene - JPMorgan

Operator

At this time, I would like to welcome everyone to Warner Chilcott's operating results for the first quarter ended March 31, 2008 conference call. (Operator Instructions).

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

Paul Herendeen

Thanks very much, Lisa. Good morning, everyone, and thank you for joining our call. Earlier this morning we issued a press release that details our first quarter results, which I hope you've all had a chance to review. Copies of that press release are available on our website.

Roger and I would like to take a few moments to provide some additional comments with regard to our first quarter results, which will be followed by a Q&A period.

Before doing that, let me point out that on this call we will include a number of forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause the company's actual results to differ materially from such statements. These risks and uncertainties are discussed in 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 SEC regulations. In accordance with these regulations, we have provided reconciliations of these measures in our press release issued this morning to what we believe are the most directly comparable GAAP measures.

With that, let me turn things over to Roger Boissonneault, our President and CEO.

Roger Boissonneault

Thanks, Paul. Good morning, everyone, and thanks for joining us. I will give you a brief review of our performance for the first quarter, as well as provide an update on recent news and development activities before turning the presentation back to Paul for additional details and the heavy financial lifting.

Our first quarter revenue increased 5.1% to $229.5 million compared to the first quarter of '04. The increase was primarily led by the sales of our key promoted products for LOESTRIN 24, DORYX, TACLONEX and FEMCON.

LOESTRIN 24 generated revenues of $46.9 million in the first quarter of '08, a 36.2% increase versus the prior year. LOESTRIN 24 has continued to achieve revenue growth and market share gains, although its share gains have come at a slower pace than we think is possible. We remain focused on improving the effectiveness of our sales force and marketing executions in support of LOESTRIN 24.

LOESTRIN 24 is an excellent product. The key to the product's future success is the effectiveness of our individual sales representatives where it really counts, face to face with physicians in their offices. Our best sales reps have been successful in driving LOESTRIN 24 to double-digit market shares in their territories. Our objective is to replicate the success across all our sales districts and territories.

FEMCON generated sales of $10.8 million in the first quarter of '08 compared to the $5 million a year ago. 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 our Chilcott sales force. As I mentioned on last quarter's call, some FEMCON territories have a higher market shares than LOESTRIN 24 territories. Again, the difference is the quality of the execution by individual sales reps.

Revenue from DOVONEX, TACLONEX franchise totaled $70.1 million in the first quarter of '08. 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 a non-steroidal treatment option for their patients, we continue to promote DOVONEX Cream.

Also in dermatology, net sales of DORYX were $35.1 million in the first quarter of '08, representing a 31.4% increase compared in the prior year quarter. Total prescriptions for DORYX increased 2.6% in the first quarter of '08 compared to the prior year quarter and the most recent weekly data shows slightly higher growth when compared with the same weeks in the prior year. DORYX remains a high priority for us within dermatology.

Before turning things over to Paul, let me update you on the recent events and provide a progress report on our product developmental activities. We recently entered into tentative settlement of securities litigation stemming from events at the time of our initial public offering. The terms of the settlement do not and will not have a material and financial impact on the company. Although we believe that the suit was without merit, we believe that the settlement is in the best interest of all our shareholders.

With regard to new product development, the clinical trials for two new oral contraceptives continue to be on track. The clinical trial for the first product, which we refer to as 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 that product in the first half of '09. Second trial for a new oral contraceptive, the characteristics of which we have not disclosed, that trial completed enrollment in December of '07 and is progressing on a time line that is approximately six months behind low dose OC trial.

Let me now turn things over to Paul to take you through the financials.

Paul Herendeen

Thanks, Roger. And I'm going to step right through the revenue and the expense side. I will repeat some of the things Roger said with respect to revenue, but I just want to make sure we get it all in sequence here, okay.

As Roger mentioned, revenue in the first quarter increased to $11.1 million or roughly 5% to almost $230 million, and it was a nice increase versus the prior year quarter. The revenue growth in the quarter was really driven by the net sales of our key products LOESTRIN 24, DORYX, TACLONEX and FEMCON.

Within the OC portfolio, as we previously stated, generic competition faced by ESTROSTEP will continue to impact growth rates over the course of 2008 in comparison with 2007. During the first quarter of 2008 net sales of our oral contraceptive portfolio increased 1.5% or just under $1 million compared with the prior year quarter.

However, we continue to deliver year-over-year growth in our promoted products, LOESTRIN 24, and FEMCON. LOESTRIN 24 contributed almost $47 million in net sales in the first quarter, about a 36% increase versus the prior year quarter. Sequentially, LOESTRIN 24 sales increased about 13% in Q1 of '08 compared with the fourth quarter of 2007. LOESTRIN 24 is our top priority within our company. The specific initiatives focus directly on improving our sales prospectus in driving market share gains for this terrific product.

We introduced FEMCON in the second half of 2006 and began actively promoting the product in April of 2007. FEMCON generated net sales of $10.8 million in the first quarter of 2008, more than double the sales in the prior year quarter. Sequentially, filled prescriptions for FEMCON increased just under 9%, although net sales decreased 7% due to normal expansion in contractual pipeline inventories that occurred in each period.

The 30 to 35 microgram segment of the OC market continues to represent a large percentage, over 50% of new prescriptions being written for OCs. FEMCON is currently the only 30 or 35 microgram product being actively promoted in sample to OB/GYNs.

As I said initially, 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 the decrease of sales of $17.3 million of 78.7% compared to the prior year quarter. I do want to note that sales of our authorized generic TILIA offset a portion of that decline.

Turning to our dermatology portfolio, revenues of our dermatology products increased 7.5% or $7.4 million in the first quarter '08 compared to the prior year quarter. The growth in this segment was led by increased sales of DORYX. Net sales of DORYX increased $8.4 million or 31.4% to $35.1 million in the first quarter due to increased demand, as well as a higher average selling price for the product and an expansion pipeline inventories relative to the prior year quarter.

We attribute the recent growth trend for DORYX to adjustments we made at the beginning of 2007 to ensure that DORYX receives the appropriate amount of emphasis from our field sales forces. Filled prescriptions for DORYX increased 2.6% in the first quarter of '08 compared to the first quarter of 2007.

TACLONEX contributed $7.7 million or 26.4% increase in net sales in the first quarter of '08 compared to the prior year quarter, due primarily to a 16.5% increase in filled prescriptions. Sales of DOVONEX decreased $8.7 million in the first quarter compared to the prior year quarter due to reduction in filled prescriptions and a contraction of pipeline inventories relative to the prior year quarter, which were partially offset by higher selling prices.

Sales of our hormone therapy products increased $5.2 million in Q1 '08 compared to the prior year quarter. The increase is primarily due to an increase in sales of ESTRACE CREAM, up $3.5 million, as price increases more than offset flat unit demand for the product during the quarter.

Net sales of FEMHRT increased $2.8 million in the first quarter of 2008. An 11.9% decline in FEMHRT filled prescriptions was more than offset by price increases and an expansion of pipeline inventories relative to the prior year quarter.

Our gross profit margin as a percentage of total revenue was 79.2 % in the first quarter, up from 78.5% in the prior year quarter after excluding the $3.6 million expense related to the write-off of certain DOVONEX inventories, which occurred in Q1 of '07. The primary factor that impacts our gross profit margin is product mix. As discussed on our January guidance call, we currently forecast that our full year 2008 gross profit margin will be in the range of 80% to 81% of total revenue.

Reported SG&A expense for the quarter was $55.2 million, a decrease of $22.7 million or 29.1% compared with the first quarter of last year. Let me walk through the three specific areas of SG&A; selling and distribution, advertising, promotion and general administrative expenses.

Selling and distribution expenses increased $1.9 million or 8.6% in the first quarter of '08 compared to the prior year quarter, due primarily to the expansion of the Chilcott field force; that's the field force to promote FEMCON in the first half of 2007.

Advertising and promotion expenses decreased $14.1 million or almost 45% in the quarter compared to the prior year quarter as we had higher rate in P spend in the prior year quarter, primarily related to direct-to-consumer advertising in support of LOESTRIN 24. You will recall that in the second half of 2007, we announced our plans to reduce our overall A&P spend in 2008, including a reduction in DTC advertising. A&P spending in Q1 '08 was, as expected, roughly 30% of our anticipated full year 2008 A&P spend.

General and administrative expenses decreased by $10.5 million or 42.2% in the first quarter of '08 as compared to the prior year quarter. Note that in the prior year quarter, G&A expenses include a $7.5 million settlement of the OVCON 35 litigation. Adjusting for the legal settlement, G&A expenses decreased $3 million, primarily as a result of a reduction in external legal expenses associated with ongoing litigation.

Roger referenced in his opening remarks a settlement of the shareholder litigation. I just want to point out and buttress what Roger said that the financial impacts of the tentative settlement, including our expected recoveries under insurance policies, have been fully provided for in our operating results and should not impact on our future operating results or financial condition.

Turning to R&D; R&D expenses in the quarter totaled $12.2 million, an increase of $4.8 million compared to the prior year quarter. The higher expense is attributable to ongoing clinical trials for the two oral contraceptives which Roger mentioned, as well as other development projects, which began towards the end of 2007.

Our amortization totaled $52.6 million in the first quarter of 2008. As we noted in the past, in computing cash net income per share, we add back the after-tax impact of the amortization of intangible assets. Our forecast for aggregate scheduled amortization for 2008, based on current assumptions, is $207 million reducing to $184 million in 2009 and $150 million in 2010.

Net interest expense for the first quarter was $24 million and we ended the quarter with a debt balance of roughly of $1.2 million, I am sorry, roughly $1.2 billion. Note that we did not make any optional prepayments of debt in the first quarter of 2008, as cash from operations was utilized to make a significant tax related payments in three areas.

First, we made payments for estimates of amounts due for the anticipated settlements of the US federal tax audits for periods prior to the change of control transaction in January of 2005.

Second, we paid estimated federal income taxes for 2007 and 2008. And lastly, we made a payment related to federal tax of 2006, in connection with the signing of our advanced pricing agreement with the IRS. We expect our cash tax payments to normalize going forward as the bulk of these payments were in respective prior periods and are not recurring.

Our reported net income in the first quarter of 2008 was $33.7 million. In arriving at cash net income we add back the after tax impact of two 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 Q1 of 2008, the margin of tax rate for amortization of intangibles was 8.9% and the rate for deferred financing fees was 16.5%. Cash net income for the quarter was $82.9 million or $0.33 per share based on 250.6 million fully diluted Class A shares outstanding.

Turning to liquidity, as I noted and I just spoke about a second ago, in the fourth quarter, we anticipate that 2008 free cash flow will be less than 2007 free cash flow. Our cash flow from operations in the quarter was a use of $2.7 million, just quite a departure from our recent performance.

Two nonrecurring items account for the net use of cash in the quarter. We made payments in respect of income taxes totaling about $69 million, which I just talked about, of which roughly $50 million fall into the category of nonrecurring. And we made the final $9 million payment for the OVCON 35 FTC settlement, which was reserved and expensed in Q4 of last year. We still expect strong free cash flow over the balance of 2008. We ended the quarter with $16.2 million of cash on hand and no borrowings under our revolving credit facility.

As we previously stated, upon the FDA approval of TACLONEX SCALP, we would be required to pay a milestone payment of $40 million to LEO. We continue to expect to be able to utilize our available and excess cash flow for deleveraging purposes at least through the balance of 2008. And in the absence of compelling opportunities to invest our free cash flow in strategic initiatives such as in licensing, acquisitions or other internal product development activities, that's what we'll do, is continue to reduce debt.

For those debtholders on the call, we have included a reconciliation of net income to adjusted EBITDA in our press release. Adjusted EBITDA using the bank bond definition for Q1 of '08 was $119 million.

Before turning back to the Q&A, let me update you on our financial guidance for the full year of 2008. Based on the first quarter actual results and the current outlook for the remainder of 2008, we continue to expect total revenue to be in the range previously communicated, which is $935 million to $945 million.

We now expect that total SG&A for the year will be in the range of $223 million to $232 million. The $5 million decrease relates to a reduction of our expected spending for advertising and promotion over the full year 2008. We expect both the selling and distribution and general and administrative components of SG&A to be in the ranges previously communicated in January.

One other change in our guidance is worth noting. We now anticipate that our income tax provision for 2008 will be in the range of 5.5% to 6.5% of earnings before taxes and amortization or EBTA.

The decrease in the provision is driven by two factors, our most recent forecast for 2008 earnings by tax jurisdictions and the application of the actual terms of our advance pricing agreement with the IRS.

Based on this revised guidance, GAAP net income is expected to be in the range of $129 million to $142 million. Cash net income, which adds back the after-tax impact of book amortization of intangible assets, and the amortization, and write-off of deferred financing costs, is expected to be in the range of $326 million to $339 million.

Using 251 million Class A shares outstanding, the company would then expect cash net income per share to be in the range of $1.30 to $1.35 for the full year 2008.

Let me also be clear about a couple of assumptions that are included in our updated guidance. The updating guidance includes the known and anticipated impact of generic competition. It includes the impact of a generic version of DOVONEX solution that was launched this week to impact our Q2 results for that product.

We have launched an authorized generic version of DOVONEX solution, which we believe will offset a portion of those losses. In addition, we also anticipate generic competition for SARAFEM, beginning in the second quarter of 2008.

The guidance does not include the impact to reported earnings of any new licensing agreements with third parties, which could included on a reported R&D expense. Only estimated milestone under our existing agreements are included in our guidance at this time.

With that Lisa, why don’t we open up the call for Q&A.

Question-and-Answer Session.

Operator

Thank you, sir. (Operator Instructions) And we will take our first question from Jami Rubin with Morgan Stanley.

Jami Rubin - Morgan Stanley

Thank you. I just have few questions. Paul, can you update us on the PDUFA for of TACLONEX Gel and I think that was a couple of weeks ago April 28, and while this is not a big product, not a key driver to the Warner Chilcott story. Just curious to know, if your revenue guidance included TACLONEX Gel?

Secondly, LOESTRIN, the sequential growth of LOESTRIN 24, sales this quarter was 13%. If you look at prescription trend, it has slowed to 1%. Is the difference of pricing or are their channels that IMS isn't picking up or is there other fluctuations in inventory, we should be aware of?

And my last question relates to the tax rate guidance. Thinking about beyond 2008, I think a lot of models had assumed a general creeping up of the tax rate. Now with the APA in place and obviously excluding any major tax legislation change, which is difficult to predict today, can you give us a sense for how we should look at your tax rates going forward? Thanks.

Roger Boissonneault

Paul?

Paul Herendeen

Yes…

Roger Boissonneault

Let me -- I will do this PDUFA, do you want me?

Paul Herendeen

Sure.

Roger Boissonneault

Okay. The issue with the TACLONEX Gel was really -- we don’t have any direct conversations with the FDA. And it comes second hand through Leo. But we know of no major deficiencies. We do believe that it is progressing, I think there, are we talking months, weeks, we frankly don’t know, but we do know that, I think, the labeling is solid, I don't know of any major deficiencies and it might be just an issue of tidying up.

On LOESTRIN 24, the interesting thing about Jami when you look at the marketplace, the Rx's are indeed impacted by the all others group and if you look at the all others there has been some volatility in that, because as you may be aware Wal-Mart doesn't report and there are some things going on in the generic segment that have actually skewed the whole marketplace.

So yeah, its kind of hard to look at that as a surrogate. What we do know is -- we are concerned about the fact that we believe we should be growing faster, but even if you look at us compared to as the other branded major component and growth, we both seem to be almost on the same plain right now. We do believe that we can do a better job, but the market has been skewed a bit by that all other and the fact that Wal-Mart is not …

Jami Rubin - Morgan Stanley

So there is nothing unusual of inventories this quarter?

Roger Boissonneault

I will let Paul speak for that, but we didn't see anything I don't believe we have seen any unusual fluctuations in inventory. Paul?

Paul Herendeen

Yeah, there was really nothing unusual on the inventory during the period. I mean, we had a -- it was a modest contraction. And again I want to point out to everybody when we speak about pipeline, and the expansions and contractions. This has a bit of art not science. As good as the data is that we have, its still an art. And we don’t like to sit down and say the pipeline expanded some specific number. We chart what we expect, the net outflows were out of a channel, we know what we put in and we keep a running tally and we do our best to see where it expands and contracts and its directional. And during Q1 of '08 it was actually what we believe was modest contraction of LOESTRIN inventory. Also we had just pointed out that LOESTRIN RX is on a sequential basis were up 7% versus Q4 of '07, so the product continues to grow and we would expect it to continue to grow.

One other question there that you have with respect to the tax rate, looking at the tax rate for the balance of the year, what the EPA has allowed us to do is take one of the most uncertain items that falls within our area of calculating our tax provision and be a lot more certain about what that amount will be when we get to the end of the year.

For all those who are not students -- of how you on an interim basis computed tax provision, you essentially look through the end of the year based on your best guess of where you think you will end up and you calculate what you think your tax provision will be and its mainly against your booked pretax income and you established what you think your tax provision will be and then you'll apply it to each of your quarters.

That's what we do and that's I think what pretty much everyone does. I think the fact that our tax rate has gone down, is a function of us being able to be more precise and not providing for amounts that may or may not be payable in future period based on our review.

Jami Rubin - Morgan Stanley

But as far as going forward, Paul any sort of legislative change to the corporate tax rate? Should we assume something in the 5.5% to 6.5% range of EBITDA?

Paul Herendeen

Well, I mean that certainly is our guidance for the current year. Jami I mean I'd say it is dynamic based on a lot of factors, like if I am looking at 2009 or 2010, I am not sure I can answer that precisely but I can say we have a low tax rate. We expect to continue to have a low tax rate and we will do our best to provide you and all the others on the line as well with the way to estimate it at least in the near-term, but I would not expect it to move dramatically from where it is in 2008.

Jami Rubin - Morgan Stanley

Okay. Thank you.

Operator

And our next question comes from David Buck with Buckingham Research.

David Buck - Buckingham Research

Yeah. Thanks. And one of the sources of strength versus our model was DORYX in the quarter, can just review Paul what the inventory levels were for that, and maybe the effective price on DORYX. And for Roger, any update on lifecycle management strategies for DORYX?

Paul Herendeen

Sure, David. It's Paul. Let me start with the performance of the product. I mean first of all DORYX is in a growth mode. We always use total filled prescriptions as a proxy for unit demand. And DORYX is in a growth mode, and it has actually moved into a growth mode as we talked about a lot through our narrative after we refocused on our sales force's efforts on promoting the brand. It's a good product, and it's doing pretty well.

The average selling price for the product has ratcheted up if you are talking about it to just to use as a proxy. What it cost for 100 milligram pill, it's up over $6.50 per pill in Q1 of 2008

And to answer your question with respect to pipeline, we had a modest, and we are talking modest expansion or at least based on our calculations of the pipeline inventory during the course of Q1 '08. So I'm not sure of that -- does that give you what you need?

David Buck - Buckingham Research

Yeah. It's excellent. Yeah.

Paul Herendeen

Yeah.

Roger Boissonneault

On the DORYX front, and David as you are aware DORYX does have some significant clinical advantages over generic doxycycline and in fact it has much lower GI upset, and that's how we manufacture the products and the use of the pill through entericoating and we continue to improve that technology. We were not a company that front-runs new formulations or new products, but you can be reassured that we continue to work on the DORYX technology and we continue to improve that technology and like stay tuned. We continue to work on DORYX, we continue to improve DORYX and we have some further ideas about how we can improve DORYX and we will be implementing those in the near future.

David Buck - Buckingham Research

Got you. Can I just get a repeat on what you said, Roger, in terms of the filing timing for the Low Dose OC?

Roger Boissonneault

The Low Dose OC, we are getting it filed. It looks likely the -- we are saying at least the first half of '09, probably the first quarter of '09.

David Buck - Buckingham Research

Okay. Thank you.

Operator

And our next question comes from Michael Tong with Wachovia.

Michael Tong - Wachovia

Hi good morning. Just a few questions, actually on the TACLONEX franchise. Paul, can you remind me your amortization schedule for the anticipated $40 million payment to LEO and then secondly, I didn't hear if Roger answered, whether the revenue guidance for the year included revenue from TACLONEX Gel, and then finally, on TACLONEX itself, it looks like total prescriptions in Q1 is down from Q4. Just wondering if you can share some commentary and what you see going forward?

Paul Herendeen

Yeah, let me take a couple of those. TACLONEX, first of all, it does assume that we would have the approval of the TACLONEX for the scalp and our guidance does assume that that will occur in the second half of this year. Okay. So that is in.

The question was with respect to the sequential performance of TACLONEX is, a couple of factors there, I am glad you asked the question, because I wanted to get to it. So, a couple of things going on within TACLONEX; first of all, it is a seasonal product, so you want to really compare that at this stage now its an established product within the dermatology space versus the prior year. Even if you do that, TACLONEX RXs look to be down 3% year-over-year, right? If you are comparing Q1 of 2008 versus Q1 of 2007. What that does not take into consideration is the fact that we launched in the latter part of 2007, the 100 milligram, I am sorry, the 100 gram put up of TACLONEX, which has increased the overall script size. So the extended units for TACLONEX have increased to the mid 70s gram per RX from the mid 60s per RX, so that the 3.2% decline in TRXs is not really telling the entire story.

With respect to the $40 million payment that we would make, if called upon, in order to, I am sorry, if they were an approval, an FDA approval of that product, yeah we would start to amortizing that in 2008 and I believe it's on a 12 year amortization schedule to coincide with the exploration of the most important patents around that.

Does that answer your questions, Michael?

Michael Tong - Wachovia

Yea. Thanks very much.

Operator

And our next question comes from Ken Trbovich with RBC Capital Markets.

Ken Trbovich - RBC Capital Markets

Thanks for taking the question. I think the first question, really is, with regard to the key products, were there any significant price increases during the quarter? And then as a follow up to that, could you give us a better understanding as to the price separation obviously between DORYX and SOLODYN. It seems like there is ton of room there to potentially increase price. Could you give us a sense going forward as to what the guiding factor is around your decisions to take price on DORYX?

Paul Herendeen

Yeah. Ken, its Paul. I'll take the first and let Roger take the second. There were not any substantial price increases that occurred during the quarter. We did take a number of price increases at the beginning of the quarter, right at the start of the year. But there was nothing, I would say, unusual that occurred during the quarter. Roger, do you want to…?

Roger Boissonneault

Thanks for giving me the second question.

Paul Herendeen

Atta boy.

Roger Boissonneault

Ken, as you probably know, there are is a significant difference between the price of SOLODYN and DORYX. Although, we believe that DORYX is a superior product. That being said, the price at which SOLODYN entered was much higher. Those are one of the things that you just don't overcome. They enter with a much higher price and well they might even have an inferior product. The ability to -- we're not going to go up there and double the price of DORYX. But as you observe, there is plenty of pricing flexibility on our part, but we're not going to let that disturb our focus. Our focus is to grow units of DORYX and grow the franchise. And I think we'll let the price thing take care of itself.

Ken Trbovich - RBC Capital Markets

And when you say take care of itself, I know if we go back to the '05 timeframe, they were years in which it may not have been unusual to see a 25% or 30% price increase in the course of the year. Is that out of the ordinary as an effort to narrow the gap?

Roger Boissonneault

Well, it's -- but the thing is, I might have -- it is due to that you also saw that we dramatically increased units. When you're dramatically increasing units then on top of dramatically increasing units, you increase price 25% to 30% -- probably not because you're generating excellent organic growth.

We saw some of this catch-up in the hormone replacement products where actually the market got dinged and then all of a sudden, people sort of caught up. But it is one of these dynamics, when you have all the products out there that were initially priced much lower than never are going to catch up to newer products which are priced much higher. But it does give you a bit of flexibility on the financial front that you could accelerate the price.

But our strategy has been there is nothing like a good organic growth. And sometimes, you have to increase price to hit some perhaps some revenue targets. Obviously, you see the room, but we're not going to make up that room. And our strategy is to make up that room in two to three years. Our strategy is to increase the organic growth of DORYX.

Ken Trbovich - RBC Capital Markets

Okay. And then just with regards to the R&D spend, I know you don't give quarterly guidance, but just considering that the OC trials are going to be ramping up in the back half and perhaps with the first trial ramping up during the early part of the third quarter, should we be anticipating the R&D spend in the latter part of the year lightening up as we go into the subsequent years in '09 or do you expect that you'll put additional products into the clinical trial phase to essentially replace that spend?

Roger Boissonneault

Well, I mean it's not trying to obviously replace the spend. It is other projects moving forward and what does the portfolio look like. And you're right. You're going to spend most of your money in the Phase III part of the clinical trial. And yes, we are ramping up one trial. We're going to a second trial that's a fairly significant clinical, but we do have some projects that are in Phase II, but hopefully we'll be moving it to Phase III.

That's hard to predict, but as we have good Phase II data, that will trigger our Phase III event. And I think we'll probably see some of that in the second half as we do have some projects that are moving from [Phase II]. Whatever happens in the fourth quarter of this year or the first quarter of next year were not certain. So, that’s why you always have some art around R&D.

Paul Herendeen

Yes Ken, its Paul and just to go little bit further on that. Our guidance for the full year is 57 to 60 in R&D, you see what we incurred in Q1. I said in the past too, the hardest thing to -- one of the harder things for us to forecast is not the amount of expense because we track it pretty carefully, as Roger says, we are investing behind projects that we think are really good projects. The hard thing to forecast is the timing of when some of those expenses are incurred and so, we'd stick with our range of R&D for the year of 57 to 60 and by definition since we had 12, 2 in the first quarter. I mean this is going to be little bit heavier. Our current expectations will be a little bit heavy in the back half of the year.

Ken Trbovich - RBC Capital Markets

Okay. Thank you.

Operator

(Operator Instructions) And our next question comes from James Kelly with Goldman Sachs.

James Kelly - Goldman Sachs

My question has to do with the gross margin and mix as we look forward. Since the guidance calls for 80% to 81% and you're going to be launching TACLONEX Gel, why does the mix necessarily improve versus what we saw this quarter. That is given where the products mix came in, that seems to us that gross margin was tad light versus what we were to expect to, given the sales this quarter?

Paul Herendeen

I'll take that. First of all if we were in a fortunate positions to be able to launch the TACLONEX for scalp in the second half of the year, that will in part -- and may well in part replace some of the sales that we expect to lose based on the [generalization] which is starting right now with respect to the DOVONEX solution, you might think of it as a relative push.

Your point out that, the gross profit margin kind of in a way you like, the tax rate over the course of several quarters, we forecast that what we expect it to be for the full year. Yes, it fluctuates within quarters, but we didn't change our guidance for the full year with respect to what our expectation is. It turned out to be 79.2 based on the specific mix of products sold during that period just to reiterate for everybody who -- just to make sure everyone has it down our lower profit margin products are TACLONEX which would included the new version of TACLONEX if we launch it, DOVONEX.

And those two products together have gross profit margins in the 60's as compared with our OC's, which are in the high 90's as compared with our other products which are in the high 80's. So it really can move around quite a bit just based on the mix and we have not changed our view what we expect it to be for the full year.

James Kelly - Goldman Sachs

Thank you.

Operator

And our next question comes from Edmund Kim with JPMorgan

Adam Greene - JPMorgan

Morning it's actually Adam Greene. Just following up on the last question with TACLONEX SCALP. I assume Leo has heard something from the FDA, so should we just assume that they haven't told you anything at this point? Should we remove TACLONEX Scalp from our second quarter estimates, is that kind of what you are saying at this point, you said second half at this point and I have follow-up on that.

Roger Boissonneault

Well, all you are looking for in the second quarter is when does the load come in, when we sold the trade. As far as what we have heard, I would reiterate, we have heard of no major deficiencies. We do expect, we don't really believe there are any labeling issues around the products. That being said it's hard to anticipate what the potential issues could be with the FDA. At this point we don’t believe thee are any major issues and its kind of hard to speculate on exactly when we'll get the approval but once we get the approval we will be ready in April to launch at a moments notice. Paul?

Paul Herendeen

That covers, I mean, for playing purposes if you want to assume that, of course, second half, that's okay, I mean as I said it's included in our guidance and it's binary. We wait and see.

Adam Greene - JPMorgan

And then on LOESTRIN 24 efficiency, just can you give us some color on just how that's going with sales rep shuffle?

Roger Boissonneault

I guess it's not a shuffle. The issue is playing to our strength. We continue to see an excellent execution in some territories and districts, so we really don't believe that we have product issue and we continue to harp on the fact that it's an executional issue. I mean just simply put, we also see the same sort of phenomena with FEMCON.

So just to put it simplistically, if we have a good sales territory then we have sales reps that's doing well, you give them a bigger sales territory and if you have someone that's doing poorly, either you replace him with a good sales rep or they have less territory to do poorly or they are out of the company.

So that's an executional issue, if you look at our competition with Yaz we're both perhaps just [duking] it out on even basis right now, our issue is that there is no magic to this, its just flat executionally and we are just going to continue to play to our strength.

Adam Greene - JPMorgan

Thanks.

Operator

(Operator Instructions) And it appears we have no further questions at this time. I would like turn the conference back over to our speakers for any additional or closing remarks.

Paul Herendeen

Great. Thank you, Lisa, its Paul. Thank you all for attending our call, and we look forward to speaking with you again with our second quarter results. Thank you.

Operator

And that concludes today's teleconference. Thank you for your participation. Have a good day.

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