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Executives

Paul Herendeen – Executive Vice President, Chief Financial Officer

Roger M. Boissonneault – President and Chief Executive Officer

Analysts

Randall Stanicky – Canaccord Genuity

David Risinger – Morgan Stanley

Douglas Tsao – Barclays Capital Inc

Gary Nachman – Susquehanna Financial Group

Gregg Gilbert – Bank of America/Merrill Lynch

Mark Verman – UBS

Shibani Malhotra – RBC Capital Markets Equity Research

Chris Schott – JPMorgan

William Tanner – Lazard Capital Markets

Elliot Wilbur – Needham & Company, LLC

Warner Chilcott Limited (WCRX) Q2 2012 Earnings Call August 3, 2012 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Warner Chilcott Second Quarter 2012 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Paul Herendeen, you may begin.

Paul Herendeen

Thank you, Meenie. Good morning, everyone. This morning, we issued a press release that details our operating results for the second quarter 2012. The press release is available on our website.

Roger will make a few opening comments and then I’ll provide some additional color around the financial results for the quarter. And 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 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 2011 Form 10-K and other filings which are available on the SEC’s website. The forward-looking statements made during this call are made only as of the date of this call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.

In addition, we 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 those 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 M. Boissonneault

Thanks, Paul. Good morning and thanks for joining our call. We posted another strong cash net income quarter and with half the year behind us, we have reasons for optimism for the balance of the year and beyond. We are quite busy, we were quite busy I should say during the quarter with regular business of promoting and developing our franchises.

For the first half, revenue for our core products of business which excludes ACTONEL grew by 2% compared with the first half of last year. Paul will provide more details. Though we posted sales growth in many of our key products including LO LO, ASACOL, ESTRACE Cream, and ATELVIA, in addition you will note that, as a result of our continued promotion and support of our DORYX brand in the phase of generic competition, we’ve been able to maintain a reasonable share of that business today.

Turning to R&D, we continue to work our next-generation products within the women’s healthcare, gastroenterology, dermatology and urology segments of branded pharmaceutical market. In the second quarter, we made a milestone payment to Paratek as our novel tetracycline for acne entered Phase II studies. We are excited about the advancement of this product and our long-term presence in the dermatology space.

Lastly, I want to provide you with an update on the status of a warning letter for our Fajardo manufacturing facility. We take this matter seriously. We submitted our written response to the FDA in April and believe we are making good progress in addressing the items outlined by the FDA. We look forward to resolving the warning letter as soon as possible.

I know that many of you are interested in the status of our review of strategic alternatives. We do not have any specific to share with you this morning. And we’ll just assure you that we continue to explore a broad range of strategic alternatives to enhance shareholder value. We believe in the fundamentals of our company. We continue to look for opportunities that could help us to strengthen and grow our business going forward.

In summary, one of the most important things we can do to deliver value is to drive the profitability of our current product portfolio. And I believe that over the first half of 2012, we have done a good job. We are gaining total RX share in the OC segment and the ASACOL franchise is a solid contributor to the bottom line.

Our promotional focus on key projects, the steps we took last year to restructure our Western European business and our continued effort to optimize our investment in U.S. sales force resources have enabled us to overcome the expected decline of ACTONEL net sales and the loss of exclusivity for DORYX 150 milligram products and still deliver growth in adjusted cash net income.

Let me turn it back to Paul to provide more details about our financial performance.

Paul Herendeen

Thanks, Roger. And starting at a high level, good quarter. We continued to do what we do best, which is to generate solid cash and income from our portfolio of marketed products. Total revenue in the quarter was in line with our expectations, while our gross profit margin was a bit better than expected in the quarter.

Within operating expenses, looking at this quarter versus the second quarter of last year, you can see the favorable impact of the changes that we made to our U.S. sales forces in late 2011, right sizing those field forces based on our (inaudible) of the returns on investment be a resources. You can also see the positive impact of the restructuring of our Western European operations.

Below the operating line, interest expense decreased due to our prepayments of debt in 2011 and Q1 of 2012. During the quarter, we realized a $20 million benefit in G&A from the reversal of the liability that we no longer expect will be payable. We excluded this gain from our adjusted CNI in the quarter of $1.03 per share. And that $1.03 per share is up roughly 10% from the second quarter of last year.

A little more texture for you starting with revenue. Reported revenue was down 5% compared with Q2 of 2011. Our core business continued to grow, up 2% versus the prior year quarter. Just to remind you and Roger will cover this, but I want to make sure everyone guess this. We think of core business as all of our products including DORYX which we continue to promote, but excluding global ACTONEL revenues.

First, let’s talk about the growers. Last quarter, we said that we expected the LOESTRIN franchise, which includes both LOESTRIN 24 and LO LOESTRIN to be a growth driver for us in 2012 versus prior year periods and the franchise delivered in the second quarter.

Net sales for LOESTRIN for the entire LOESTRIN franchise grew 16% versus the second quarter of 2011. We continue to grow the LOESTRIN franchise prescriptions and market share due to LO LOESTRIN. Franchise TRXs were up about 4%, when compared with the second quarter of 2011 and were up 4% sequentially versus the first quarter 2012. LO LOESTRIN is our promotional priority in the OC space, and the growth of LO LO prescriptions and share are expected to more than offset the predictable declines in LOESTRIN 24 RXs as we turned our promotional attention to LO LOESTRIN. We expect the LOESTRIN franchise to continue to grow in 2012 versus 2011.

ESTRACE Cream performed well with Q2 2012 net sales of $46 million, up 21% versus Q2 of 2011. The brand benefits from our continued promotional support, and that's evidenced by RXs growing 15% compared with the second quarter of 2011and up 2% sequentially from Q1 of this year.

ATELVIA revenue doubled compared with the second quarter of 2011, albeit from a low base went from $8 million in the year ago quarter to $16 million this quarter. RXs more than doubled as well, up 120% compared with last year. Our TRXs for ATELVIA continue to grow at a slow pace but steady, up 2% sequentially compared with Q1. ATELVIA is now at a run rate that it contribute to brand operating profit, again, brand is slow but steady growth.

Also in the steady column, ASACOL. ASACOL net sales of a $187 million were essentially flat compared to the prior year quarter. Recall that Q1 ASACOL sales were higher than expected due to pipeline expenses, that’s expansion which was that Q1 of this year, sequential RXs were essentially flat when compared with Q1.

ENABLEX was also flat compared with the prior year quarter. RXs were down, but were offset by increased prices and improvement in gross to net sales. Rounding out our significant core products, DORYX net sales decreased $9 million or about 28% when compared to the second quarter of last year.

In the first quarter facing general competition, DORYX 150 RXs stayed reasonably strong. Based on the most recent weekly RX data, branded DORYX 150 milligram retained about 65% of all RXs and that 65% of all RXs were both the brand and the generic equivalent. Maintenance of those RXs came at a cost in gross to net sales.

While we are happy to report the higher than expected revenue for DORYX this quarter, we continue to expect to loose RX share to generic competition over the balance of the year and our net sales per RX we expect to continue to decline. Our guidance for the full year 2012 reflects those expectations.

On a restatement, we said last quarter, we continue to promote DORYX using our dermatology sales force. While our revenue expectations for DORYX 150 are modest, we are more than adequate to enable us to cover the costs of our dermatology sales force. In the non-core area, ACTONEL continues to fall away with global revenues down 22% compared with the second quarter of last year.

The main factors continue to be loss of share to generics in Western Europe and continued contraction of the U.S. oral bisphosphonate market, where total market RX is down roughly 20% from this time last year based on the most recent weekly data. We expect global ACTONEL revenues to decline at a rate about 30% per year.

Moving to gross profit margin, our gross profit margin as a percent of total revenue was 89% in the quarter. Overall, manufacturing costs have been trending lower than we had expected and that has allowed us to increase our guidance for gross profit margins by 100 basis points for the full year 2012 to the range of 88% to 89% from 87% to 88%. Reported SG&A expenses in the quarter were $173 million, down 30% versus Q2 of 2011. however, SG&A in this quarter included that $20 million pickup from the reversal of the liability, which we no longer expect to pay.

Excluding that non-recurring and non-cash benefit from our SG&A expense, our SG&A expenses were down 22% when compared with Q2 of 2011. this reduction in cost was due to a number of factors including the reduction in the size of our U.S. field sales forces, the impact of moving to a distributor model in Western Europe, and a reduction in expenses supporting the launches of LO LOESTRIN and ATELVIA when compared with the prior year quarter.

You know we have lowered our guidance for adjusted SG&A expense for the full year 2012 by $25 million to the range of $775 million to $825 million and that was – that’s a $25 million reduction in the range. R&D expense in the quarter was $23 million, a decline of 8% compared with last year Q2. R&D savings were primarily due to the timing and stages of certain of our R&D projects. We have lowered our guidance for R&D spend for the full year by $10 million to the range of $100 million to $120 million from $110 million to $130 million.

Adjusted cash net income per share in the second quarter which adds back an after-tax impact of amortization and impairment of intangibles and the amortization and write-off of deferred financing fees and subtract that $20 million gain, which I mentioned when discussing SG&A, was $1.03 per share using fully diluted shares of $250 million for the quarter. Our share comp reflects our share redemption activity to-date in 2012.

On to liquidity, we generated net cash from operations totaling $156 million in the quarter compared to $260 million in the prior year quarter. Cash generated from operations was reduced by the timing of payments made against accruals including those related to severance payouts in Western Europe and income taxes. I characterize this quarter as a low cash flow quarter, not something that we would expect we’d be continuing as we go forward.

During Q2, we did not make any optional prepayments of debt and we did not make any additional redemptions of our shares under our share redemption program choosing instead to build and hold our cash on our balance sheet. We ended the quarter with $530 million of cash on hand. On a net debt basis, our leverage was roughly two times trailing 12 months EBITDA. We ended the quarter with approximately $3.5 billion of gross debt comprising $2.2 billion of term debt under our senior secured credit facilities and $1.25 billion base amount of 7.75% senior unsecured notes.

In summary, I touch on the components that result in our increased 2012 financial guidance and increasing gross margin as a percent of total revenue, lower adjusted SG&A expense, and lower R&D expense. As a result, we are raising our guidance for adjusted cash and income per share for the full year by $0.25 per share to the range of $3.55 to $3.65 from the prior range which was $3.30 to $3.40. For all the details, please refer to the guidance table that is included in this morning’s press release.

With that, I will open the line to Q&A. In the end, (inaudible) addressing all parties, please limit yourself to one question. Thanks. Meenie?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Randall Stanicky of Canaccord. Your line is open.

Randall Stanicky – Canaccord Genuity

Hey, Roger, Paul, good morning. Just a question. I'm not going to ask you about the strategic review unless you want to go there. But just in the context of you guys looking at the business going forward, how are you balancing that with, Paul, what has been an ongoing business developments process as you look for assets and maybe can you comment on what type of assets you’re seeing out there and may be where the interest currently rise?

Paul Herendeen

Sure. As we always say, we are focused on all areas where we can deliver value to shareholders. I think, as we always say, top of our list would be to, one, the easiest one is to think about investing back into our business, second would be to invest in the acquisition of assets or product rights or companies, and then as we ticked down there are other opportunities down like allocate capital in ways that we think we’ll deliver value to shareholders.

On the business development side, as I always say and I think we've said consistently over the years, we’re very active. We look at things, I think the market maybe a bit frustrated that we haven't pulled the trigger on something. It is not poor lack of effort on the inside here to look at transactions. But more do we believe that they’ve been transactions that have been done away from us that we say, we wish we have done that.

Our priority area is, one, as Roger covered a little bit in his remarks, is to drive the value of our existing portfolio of products. Secondarily is to look for ways that we can add to our business through appropriate acquisition. And last is to the extent that there are other ways we can deliver value, we will certainly act on those. Not sure, Randall, that entirely answered your question, but that’s perfect. Roger, do you want to?

Roger M. Boissonneault

Yeah, I’m going to. The exercises are moving money from the balance sheet to the income statement. The exercise basically and it's a very active exercise run by Michael Halstead. We look at a number of opportunities and it’s balanced by internal opportunities. The real issue here is, it is done by assets. I think there’s a value to the allocation of time for the sales force. They’re allocated against very profitable assets right now and if you didn’t buy something, you’re going to lose some of that and what is that balance.

So the issue is, yes, we’re probably looking at, I mean today we’re probably looking for three or four outside assets that we’re evaluating, it remains active. but it's not that we’re just looking out there, we’re going to buy some asset, because we want to take some of this cash and turn it into income, it’s a very thought-out process and also includes what we call opportunity cost.

Randall Stanicky – Canaccord Genuity

And just a follow-up there, I know you may or may not be able to answer this, but I’m going to ask it anyway. Are you willing to put a timeline just because we’re getting a lot of questions on how we should be thinking about the strategic review and how long that might take?

Roger M. Boissonneault

No, there’s not (inaudible), we’re going to be able to conclude a transaction in the next quarter or whatever. And regrettably, it’s a priority for us, but it’s not something that you can put a timeline on, and say we’re absolutely going to do something by some day and whichever that way if we’re all about us wanting to get something done, we get something done every quarter.

Randall Stanicky – Canaccord Genuity

Okay, thanks guys.

Roger M. Boissonneault

Thanks, Randall.

Operator

Our next question comes from David Risinger of Morgan Stanley. Your line is open.

David Risinger – Morgan Stanley

Yes, thanks very much. I have two questions, first is sort of a straightforward one. Can you just discuss the Paratek milestone payment and the Phase III plans for (inaudible). And second, with respect to your press release from April 30 on discussions with potential offers, the market is assumed that discussions faded going into August and I'm just wondering if that's correct, is that discussions have faded or have they accelerated going into August? Thank you.

Roger M. Boissonneault

I'll take the Paratek question. And you are right, we did have developmental milestone, its moving the product into Phase II studies. We are already enrolling those studies. We plan to complete Phase II certainly by the end of this year and depending on the Phase II outcome, we are embarked – we will embark on Phase III studies in 2013. So everything looks good there. We are encouraged by it. It is the new chemical entity and we've had an excellent relationship with Paratek. As far as discussions, I’ll let Paul comment on that.

Paul Herendeen

Yeah, sure. I mean, again, without really get into it, I'd just say with respect to that press release, we opened it up and we let folks know that exactly what we're doing, which did include speaking with potential offers with the company. Why we’d say on that score is, the other process continues until we either close it down or announce a transaction either of which we would report to you by a press release. We're not going to comment on status of discussions.

David Risinger – Morgan Stanley

Thank you.

Paul Herendeen

Thanks.

Operator

Our next question comes from Douglas Tsao of Barclays. Your line is open.

Douglas Tsao – Barclays Capital Inc

Hi, I’m just curious in thinking about the guidance and the increase. Obviously your assumptions of the cost side were much stronger or more favorable. Just curious is this a function of expectations in terms of some of the actions that you took last year coming in a little bit more quickly than you anticipated or is it that the magnitude of the cost savings being achieved are greater than you initially thought?

Paul Herendeen

Yeah, thanks. I can see, it’s Paul, I’ll take that one. I think that we are actually seeing better than expected results from the Western European restructuring reflected to our financials in 2012. I think as we went forward with that, we had all hoped that we would get these sort of results, but we are not prepared. Back at that time, we originally posted our guidance for 2012 to say, yeah, we are going to get them, but we are getting them.

The second thing to report is, you remember, late in 2011, we did right size our U.S. field forces and that, while it was in our guidance, I think that even that has been the tweaks that we have made to our U.S. field resources have been a bit better than expected. And of course on the R&D front, it’s just a function of timing of expenses. And so, those are the things that contributed. I want to point out may be will cover each of the elements of the guidance.

We want to point out that the pick up in our expected gross profit margin as a percentage of total revenue was also something that’s based on better than we had thought spending, meaning lesser spending in several of our facilities over the course of the first half, which we expect to continue on through the second half. So when you combine all those things, that’s what helps us bump up our CNI expectations for the full year by the $0.25.

Douglas Tsao – Barclays Capital Inc

And just, Paul, if you could just give a little more detail on the manufacturing costs trending lower than expected, what are the key drivers there?

Paul Herendeen

I think it’s just general indirect spending (inaudible) in Fajardo. You are of course aware that we are continuing remediation efforts in our Fajardo facility and lasted better efficiency.

Douglas Tsao – Barclays Capital Inc

Okay.

Roger M. Boissonneault

Yeah, then opportunity for me to editorialize, because I know all of you who follow various companies, you should always be thinking about when you have the cost of facility and trying to forecast the margin, you like to believe if that was nice and stable. At the beginning of any year, we like many of our competitors like, because I like to lots of them.

We have to assume certain levels of destructive inventory and what we call specials and you plan for them, and then they either occur or they don’t. If they all occur, you will be consistent with your initial target, if you get lucky and either done or only some of those situations present themselves during the course of the year, your gross profit margin will be better. So, I know while lots of people like to think it should be very straightforward to forecast that profit margin. It’s a little trickier and I think, the way to do it is to look at the beginning, be a little bit conservative and as the year plays out, you can raise the best we have.

Douglas Tsao – Barclays Capital Inc

Okay, great. Thank you very much.

Operator

Our next question comes from Gary Nachman of Susquehanna. Your line is open.

Gary Nachman – Susquehanna Financial Group

Hi, good morning. Roger, as you are waiting to resolve the Fajardo issue, how comfortable are you that will happen relatively soon and will contingency plans we have in place to ensure that you could get new OCs approved hopefully by next year, especially life cycle extension for LOESTRIN 24? Thanks.

Roger M. Boissonneault

I’m very optimistic about Fajardo. In fact I was there yesterday. So, the plan to move forward, we have been in discussions with the district. I think we have an excellent team in Fajardo that’s led by Frank Rodriguez, Elizabeth Sanchez, who work in [Lauren] with Claire Gilligan, who runs the quality organization, truly work as a team and they fully address all issues. So, we’re very confident with that group.

We do have arrangements well with other suppliers as far as hormonal contraceptives are concerned. So we have multiple strategies and we are not totally dependent upon for Fajardo.

Gary Nachman – Susquehanna Financial Group

Okay. So you’re still pretty confident that you could get potentially a new form of LOESTRIN 24 approved by next year?

Roger M. Boissonneault

The new form of LOESTRIN 24? We have multiple projects.

Gary Nachman – Susquehanna Financial Group

Right.

Paul Herendeen

[Within] the franchise.

Gary Nachman – Susquehanna Financial Group

Okay. Okay, thanks.

Operator

Our next question comes from Gregg Gilbert of Merrill Lynch. Your line is open.

Gregg Gilbert – Bank of America/Merrill Lynch

Thanks. Good morning. For Paul, a cash question. Can you expand on your comments about choosing to build cash in the quarter versus other things and can you quantify the magnitude of cash flow bounce back next quarter based on specials or whatever you may call them that occurred this quarter?

And for Roger, can you talk to DORYX promotion? What’s that detail like when the [dark in the red] know that the generic is the same as the brand. Just curious what they’re actually doing and can you speculate on when they might have something new to take to the docks? Thanks.

Paul Herendeen

Yeah, it’s Paul. I’ll start with the building on cash. Somebody referenced earlier, when we talked about strategic alternatives, we put our press release in August and – in April. And at that point in time it made sense for us. While we continue to evaluate things to hold to our cash, and that’s what we’ve done. At any moment in time, we could choose to take some portion of that $530 million and use it to retire debt. We felt it was a better strategy to maintain some cash on hand and some flexibility, in order to the able to take advantage of some other things that might present themselves or might have presented themselves in the period.

We’ll certainly update you on that as appropriate over the course of next quarter and what we intend to do with that cash. And your question about the cash flow is on quarter. You may recall, for example, Q4 of last year was the enormous cash flow quarter, I think we called that out and said hey, this is an abnormally high on a quarterly basis, generation of cash from operations. I think of our businesses there, you think about business has this year, our expectations for aggregate cash and incomes in the range of roughly, just call it $900 million of cash net income, our annual CapEx are less than $15 million, okay.

So, that’s a decent proxy that we’d expect to generate from cash buck for the ebbs and flows of adjusted working capital. What you saw in Q2 is we settled up a lot of liabilities. I would expect that to reverse itself over the back half of this year, as I said, we continue to do what we do best. What we do best is deliver cash net income per share, what we do best is to deliver cash flow, and I’d though look at that 156, if I got the number wrong, the 156 and say, [ogee] your cash generation has declined that sits normally in the number the quarter, and will certainly turn itself around in back half of the year.

Gregg Gilbert – Bank of America/Merrill Lynch

Okay.

Roger M. Boissonneault

On the DORYX front, Gregg, I can’t tell you exactly what’s going on with DORYX that haven’t worked with the sales reps. So, I want to plan on exactly what’s going on. I do think you have to realize that’s not really a dermatology sales force. If the sales force that promotes DORYX. So, there are in deed physicians out there are right doxycycline, and I some of this productive guys are right minocycline and those would also be in the end of target for. so it's also, it’s not just limited to calling on dermatologists, but these are high prescribers of doxycycline.

And I would also put forward that (inaudible) was probably more optimistic (inaudible) tends to be a little bit more pessimistic, kind of that, I think the sales force understands their objective. and they’re executing very well, so you guys I’ve told there the true assets.

That all being said, it’s like how can this happen. I think perhaps the most expensive medication is medication doesn't work. Our sales reps are out there in the promotion of it and we provide physicians sample, so that when the patient walks out the door, they walk out with the product they can try DORYX, they can see if it works, and then they make their decision.

As far as the economics of it, I mean they all have customers favors of the economics are adjusted to the patient and the physician plays a role in that. So I think when you line that all up, I believe that despite what has happened to the availability of generics DORYX and acne are going to be successful in promoting the product, and yes we do have – I’m not going to limit this, I'm not going to talk about dermatology, we have other products in the doxycycline and finally in the tetracycline family. You’re aware of our efforts with Paratek and we’re developing that. So it's not limited to dermatology, right. It’s really our presence in the acne and the development of antibiotics.

Gregg Gilbert – Bank of America/Merrill Lynch

Thanks.

Operator

Our next question comes from Mark Verman of UBS. Your line is open.

Mark Verman – UBS

Yes, Paul, were there any major changes in growth to net in the quarter relative to the first quarter just that we can understand that. And then second of all, on SG&A, all the savings now from the European restructuring, for those in the quarter so that's the run rate going forward or do you expect more? Thanks.

Paul Herendeen

Yeah, sure. With respect to goals to net, I think that the one called out in my prepared remarks was DORYX. In order to hang on to that 65%-ish share of it that we talked about, there was certainly an impact on our gross to net with DORYX. For example, DORYX in the year-ago period, you recall that we had pretty much had a less than attractive quarter, our gross-to-net a year-ago fro DORYX quite high down pretty substantially this year relative to last year. beyond that, no there’s not a lot going on in gross-to-net, we’ve kind of settled things down pretty substantially and everything that we’re thinking about is baked into our expectations for the full year 2012.

Onto the expenses, as you look at the quarterly expenses, again, please to make sure that as you’re looking at G&A, you had back that $20 million of one-time or you don’t want to be annualizing that or using as a run rate. So expect that they’re reasonable proxies for what you’d expect to see over the balance of this year.

G&A, the hard part for us in G&A is that the expenditures that are basically outside resources mainly legal resources, they tend to be lumpy, but not too bad, I mean, I think that we’re getting our business to the point where we’re in a reasonably steady state. Is that answered Mark?

Mark Verman – UBS

Yeah. And just one follow-up just on R&D. has there been any new projects that started over the past three to six months that you can talk about or anything that’s changed kind of behind the scenes from the last time you've given us an update?

Roger M. Boissonneault

The answer Mark is yes, but can we talk about or we generally don’t like to talk about that, because we start talking about, it continues – because the things that come, they go, we go through proof-of-concept and we do generally, we’ll let you know and sometimes when we file, we’d like to do, we want to make sure the filings and we’d love to let you know when products are approved. But yes, there’s multiple program is going on in R&D.

Operator

Thank you. Our next question comes from Shibani Malhotra of RBC Capital. You're line is open.

Shibani Malhotra – RBC Capital Markets Equity Research

Hi Paul and Roger and Emily. And my question is can you talk a bit more about, why you haven’t been able to find something to acquire or kind of no M&A so far, and what this means in terms of your business model, which in the past has been pretty M&A driven. And then following on from that, when Roger talks about opportunity costs, I guess what are you thinking about and what are you most excited about near-term in your own pipeline?

Roger M. Boissonneault

Let me start and perhaps finish on just the excitement piece, but the first thing is, there is not a lot of – I mean people talk about you haven’t found anything. I think in the context of finding thing, it seems like the parameters of who has found anything. I mean that’s not like that we’re missing a lot of deals out of here, that while we miss that one or somebody bought this and, but there is I mean the activity level here is, you have to be careful, when you go through these and we’d go through it’s been volatile you certainly on the private equity side of the venture guides, you go through 200 deals before you do a deal and you better make sure, you do the right deal. But I can’t tell you that there is deal that we said all please we miss that deal and we’re sorry, I’ll turn it over to Paul.

Paul Herendeen

Yeah, I mean we remain optimistic that there are opportunities out there for us to make acquisitions. When I talk about acquisitions, I talk about product rights. I talk about assets that are in the market, I talk about potential companies that we might be interested in acquiring or combining with all of those opportunities, are there. But yeah as I said earlier, if we were up to the amount of effort that we put into it, yeah we would transact all the time. The challenge is to find the right deal, find the right deal at the right price, be able to get to an agreement, and close that deal. You’re right, I mean over the course of our existence as a standalone from when we spun out from Warner-Lambert.

Yeah, we've done a lot of deals and I think we are proud of the success of the deals that we completed over the course of our history. We expect to continue to do that, you’re frustrated, investors are frustrated, we are frustrated. We would like to do deals. We know how it adds value, you can see it, you can see how it adds value where we transact, you can see how it adds value when others have transacted, and what impact that has on their share value. When we have the right situation, we will announce a deal, and I don't think that based on the total it’s not like (inaudible) M&A not in the cords.

Shibani Malhotra – RBC Capital Markets Equity Research

No, no. What I'm saying, I guess my question is more, why are you confident, I mean, it's been a year and half, I guess we’ve been talking about M&A, and I think the fact that you’re seeing you haven't found anything in a way is my question, it's like why are you confident you’ll find something, if you haven't found something for so long. And then moving on from that, help us get more comfortable with the internal pipeline should there not be a deal for another year and-a-half?

Roger M. Boissonneault

Let me take a shot, because Paul I guess...

Shibani Malhotra – RBC Capital Markets Equity Research

And I'm not...

Roger M. Boissonneault

What you see...

Shibani Malhotra – RBC Capital Markets Equity Research

Because I’m talking [about] you, you shouldn’t overpay.

Roger M. Boissonneault

I always use history to sort of try to predict the future, and we’ve been doing this for a while, and there’s no linear approach. I think you can, if you go back, you could see we do, sometimes we do a number of deals, I think at one year the year we bought the Pfizer assets, I think we’re going to do a deal with Glaxo, we’re did a deal with Lilly and we did three deals in a very short period of time, but we have been working on those deals for literally years before we consummated them. I think that's the problem or the problem that you guys have been in modeling anything is, you want to know okay, you’re going to talk to Paul gets up and say, he is going to do two deals this year and we do two deals this year.

It’s not like that, it’s like we many not do and we have, we didn’t do deals for two or three years. And all of a sudden, we’ll do a series of deals, because they’re good deals and those are things that we have set up over a period of time and we’ve been working on them. Some move faster than others, so we did the Lilly deal, that was a good deal and we saw the Lilly asset back and everything worked out. could we have predicted that? Very difficult.

On the other side, what are we excited about? We’re excited about like we have an excellent pipeline. we see that and if you have a good pipeline, you’re going to do better deals. what are we currently excited about? we’re currently excited about LO LO. I’ve been out in field and I’ve worked with sailing out last week about LO LO and I think probably we didn’t put enough focus on this. we’re focusing on too many of our Oral Contraceptives.

And if you look at the performance of LO LO most recently, you see LO LO is accelerating, right, because we’re putting focus in our – it is the next generation product. It’s out there, sometimes you already have the next generation product, you have to execute on it and you can be confident that it’s not an isolated project in Oral Contraceptives.

Shibani Malhotra – RBC Capital Markets Equity Research

Okay, thank you.

Operator

(Operator Instructions) Our next question comes from Chris Schott of JPMorgan. Your line is open.

Chris Schott – JPMorgan

Great. Thanks very much. Just elaborating a little bit more on the dynamics of the OC market right now. Can you just talk about what you’re seeing in terms of growth of the overall market, competitive dynamics? I know you just touched on LO LO, but has that refocus on LO LO been in line with your expectations, both for the growth you’re seeing with that as well as the rate of decline, you’re seeing for the older LOESTRIN business. And the second question – that's okay.

Roger M. Boissonneault

Okay, so let me just – if you look at the overall market-to-market is pretty consistent. Okay, so we have dynamics within the market, and what we are suggesting is, when you move to the lower dose product, we’re going to get some cannibalization of 24 as the day follows the night, it’s generally what’s (inaudible). What we believe is the 10-microgram as a category, we direct that category, and similar to happen, what happened when we introduce LOESTRIN 120. We move some business from the [1.530 into the 1.20] you’re going to have that in the shorter term. But in the longer term, we should be able to move the market to 10-micrograms, because that's the place you should be starting.

And I think you're seeing some of that now, are we have happy, Paul is a little more conservative, I’m a little far off (inaudible) am I happy, I’m not happy yeah. But I do like what’s happening. I mean, I think we're getting, we're getting people focused on this, and in my experience in the field, I do think that we’re beginning to see that okay that 10-microgram is a pill you should start with. So, I think from that perspective we're making progress.

Paul Herendeen

I have a follow-on because we are – in terms of the OCs it's one of the pillars of our company. This is a business where we are overrun on a run rate basis over $0.5 billion of highly, highly profitable revenue and growing. We've got LO LO, which we think is a unique and terrific asset that we have the ability to promote and grow for a while. We have LOESTRIN 24, which Chris I think as you pointed out is predictably declining as we shipped our focus, our focus to LO LO, and of course we have a pipeline of multiple opportunities to both protect and expand our physician in that marketplace. So with all of the segments in which we’re participating, I think we feel very good about the OCs both in the near-term and in the longer-term.

Chris Schott – JPMorgan

Great. Thanks for that. And then, the second question, we’re just talking about the sales resources currently being allocated to ATELVIA, I know you adjusted this late last year. I think you said in the comments the products are now profitable, but I guess with the trends we’re seeing in the category, the relatively modest growth from ATELVIA itself. I mean, do you feel you’ve got the appropriate level on investments here or is this something we could see actually more [thoughts] to that support being provided to that product? Thank you.

Paul Herendeen

Yeah, I’ll take that one because Roger always looked at me when it’s questions of allocation of resources against opportunity. We did at the end of last year. You recall, if you go back in time the company launched ATELVIA, we have 400% sales forces. The size of our last year’s sales force at this point is just about 200%. And I would say that based on the trajectory we continue to look at what level of investment is appropriate against that franchise I pointed out. We got to the point now with that franchise. That has now crossed the line on a run rate basis where it contributes to operating profit.

So it’s a cover, more than covering the direct costs associated with the promotion of that franchise. I would say we continue to think there might be ways we can tweak that, meaning if there is still a little bit lesser investment if we see opportunities or the availability of prescriptions and [share] in a space that we’re not currently covering, we could increase the resources against it, but right now it’s roughly, it’s a lower to 200 territories and we continue to evaluate that. As anybody who has followed for a while knows we don’t sit still. We don’t say it’s 200% and that’s what it is. We look and say is it 200%, should it be 180%, should it be 215% and whatever we think we’ll get us the return that's the way we’re going to size that field force. But importantly, we cross the line where it’s contributing brand operating profit.

Chris Schott – JPMorgan

Okay, thank you very much.

Roger M. Boissonneault

Thanks, Chris.

Operator

Our next customer from Bill Tanner of Lazard Capital Markets. Your line is open.

William Tanner – Lazard Capital Markets

Thanks for taking the question. Paul just on the ATELVIA, have you guys potentially I guess the next year or two Mercks, because that's an key inhibitor coming seems like that could be a decent product in those space. So it sounds like there is not going to be much of an effort over the near-term or immediate term to really drive hard the ATELVIA uptake. Is that kind of the way to deal with your comments and then maybe it sounds like more tweaking than the full quarter press.

Paul Herendeen

Well, I mean the issue we had at ATELVIA, it's in the category that has been declining. And we can’t direct it, the category they update, there have been some label change about around bisphosphonates, which has resulted, and I think the other thing is there some payment issues associated with us, because this is a Medicare population.

Now will Mercks product reinvigorate this marketplace, is the Merck product although efficacious, what’s the side-effect profile for this product, will this product be approved to prevent fractures or will it be approved to treat fractures. These are all issues that Merck has to deal with. We do think we have a very strong selling proposition and we've been trying to stick to that selling proposition, and that is the only bisphosphonates that you can actually take with the meal, which is a huge issue. What we're saying is, we’re successful in some areas and all other areas we’re perhaps less successful, and there is got to be a point.

We all see this, but as we move forward there's going to be a population, that's going to take bisphosphonates, they need to take this bisphosphonates. And unfortunately in this country, I think what's going to happen is, because we've seen less use of this bisphosphonates, we're going to see higher fractures. We’ve seen this is in other markets, I’ve seen it happen in oral contraceptives or the warnings about oral contraceptives, news of oral contraceptives went down and what happened, over the period of time it grows. I assume that same thing happened in hormone replacement therapy. If they ask clinician today, well, it’s okay to use estrogen to prevent osteoporosis, but watch out bisphosphonates. So, these things are ebbs and flows and we have to adapt ourselves to the ebbs and flows of medical thinking.

William Tanner – Lazard Capital Markets

And Roger maybe just a follow-up on the pipeline, if I could ask on a update on the alprostadil cream, I know that company has disclosed in filing that it’s preparing a response to the non-approval (inaudible) but I’m curious if there is any thing that you can tell us on that? Thank you.

Roger M. Boissonneault

We continue to work on alprostadil. It’s interesting, we have scheduled, we continue to do more clinical evaluation. We are interested in bringing the product for, but we’re also dependent on the manufacturer of the cream. And I think there is some activity that they were also pursuing. So, yes it’s an active project. It’s just that we got to make sure that we have product and we can meet the obligations which we have to do with the FDA, but it is an active project.

William Tanner – Lazard Capital Markets

Okay, thank you.

Operator

Thank you. Our final question comes from Elliot Wilbur of Needham & Company. Your line is open.

Elliot Wilbur – Needham & Company, LLC

Thanks. All these deal talk, it almost feels like we’re in the group-one call, but no surprise my question is also related to possible strategic transactions. And Roger specifically for you, outside of various financial metrics, I mean are there any taboos with respect to the range of acquisitions that you would pursue and I’m thinking obviously we would expect you to acquire specialty assets where you can leverage the infrastructure and existing sales force presence. But thinking maybe a little bit more broadly about possibility such as complimentary acquisitions in the device space, obviously many years ago, Warner Chilcott had a strong presence in a generic business. So I mean how do you feel about expanding the range of possibilities include assets such as those?

Roger M. Boissonneault

To be honest, I don’t think we’re quite there to get out of basically pharmaceuticals. The range of the acquisitions with the metric is we’re not pursuing Merck or Pfizer yet. But those are things like, what is that do like products versus companies. We’ve told you that before. We told you, we like products and then we brought the P&G business. So this really is the availability. Do we want to get into devices or something that’s not part of our core strategy, if it’s a great deal and it’s something that perhaps OB/GYN then there might be something that’s feeling to talk.

So, we do have a relatively broad range, but we also want a complement some of the areas we currently are providing products to, because that’s part of the opportunity cause. We don’t want to build or you really don’t want to build the separate sales force around the separate product or take sales force such as our OC sales force, which is delivering an asset of $500 million in sales and you go buy a $50 million asset that you have to deploy the sales rep, these sales force again. I’ll let Paul to continue.

Paul Herendeen

No, I think Roger you covered it. But, yeah, we keep an open mind about things that we think and add value to our company as Roger said is like – is at top of our list to think about you’re a device company or other types of businesses or complement, potentially complementary businesses that are not presently part of us. So we think about it and so it was the right transaction. We would certainly think about it, but I (inaudible) what we stored it with and we’re kind of wrap up with. We look first and foremost to build that business by focusing on the business that we own, investing in that, doing the best job we can delivering profitability from our portfolio marketed assets. Secondarily, we invest back into that R&D pipeline, which although not is visible to you as you might like. it certainly is a significant value driver for us. third on that list, we’d focus on these, [what I] call a broad range of potential M&A type activity. and then last is as we always talk about, there are other ways, we’d like to be able to deliver shareholder value.

So we keep it open mind, I will assure you that as Roger said in his remarks, Michael Halstead who runs our business development effort is a very busy guy. we look at lots and lots of and lots of stuff we hope that we have the opportunity to deliver on one or more of those sorts of things here over the course of next ex-bonds. But we can’t force it. we can only keep going until we get one done.

Operator

Thank you. I’m showing no further questions in the queue at this time. I’ll hand the call back to management for closing remarks.

Roger M. Boissonneault

Yeah, thanks, Mini. Thank you all for your interest in Warner Chilcott. We do look forward to the second half of 2012 and we will look to continue to execute against our portfolio and hopefully have the opportunities to deliver shareholder value both in the second half of ‘12, on into ‘13 and beyond. Thank you very much for participating in our call.

Operator

Thank you. Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect and have a wonderful day.

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