Warner Chilcott reports 209.5% increase in first-quarter 2010 revenues

Warner Chilcott plc ( WCRX) today announced its results for the quarter ended March 31, 2010. Revenue in the quarter was $761.3 million, an increase of $515.3 million, or 209.5%, over the prior year quarter. The primary drivers of the increase in revenue were the products acquired from The Procter & Gamble Company ("P&G"), primarily ACTONEL, ASACOL and ENABLEX, which together contributed $445.5 million of revenue growth in the quarter ended March 31, 2010, compared to the prior year quarter. For the quarter ended March 31, 2010, revenues contributed by all of the new products acquired from P&G totaled $478.3 million. Also contributing to the increase in revenue was growth in the net sales of LOESTRIN 24 FE, which contributed $26.4 million of revenue growth in the quarter ended March 31, 2010, compared to the prior year quarter. The growth delivered by these products was partially offset by net sales declines in certain other products.

The acquisition of the global branded prescription pharmaceuticals business ("PGP") of P&G on October 30, 2009 (the "PGP Acquisition") significantly impacted the Company's financial position and results of operations in the quarter ended March 31, 2010. The Company reported a GAAP net (loss) of $(17.2) million, or $(0.07) per diluted share, in the quarter ended March 31, 2010, compared with GAAP net income of $43.3 million, or $0.17 per diluted share, in the prior year quarter. Included in cost of sales in the Company's first quarter results was a $93.7 million expense, net of tax, attributable to a purchase accounting adjustment that increased the opening value of the inventories acquired in the PGP Acquisition. Also included in the results for the quarter ended March 31, 2010 was a $24.6 million gain, net of tax, resulting from the Company's sale of certain inventories to LEO Pharma A/S ("LEO") in connection with a transaction completed during the third quarter of 2009 (the "LEO Transaction"). Cash net income ("CNI") for the quarter ended March 31, 2010 was $154.6 million compared to $97.7 million in the prior year quarter. Excluding the purchase accounting expense included in cost of sales and the gain relating to the sale of certain inventories in connection with the LEO Transaction, adjusted CNI was $223.7 million, or $0.88 per diluted share.

References in this release to "cash net income" or "CNI" mean our net income adjusted for the after-tax effects of two non-cash items: amortization (including impairments, if any) of intangible assets and amortization (including write-offs, if any) of deferred loan costs related to our debt. Reconciliations from our reported results in accordance with US GAAP to CNI, adjusted CNI and adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") for all periods are presented in the tables at the end of this press release.

Revenue

Revenue in the quarter ended March 31, 2010 was $761.3 million, an increase of $515.3 million, or 209.5%, over the prior year quarter. In addition to transactions such as the PGP Acquisition, period over period changes in the net sales of our products are a function of a number of factors including changes in: market demand, gross selling prices, sales-related deductions from gross sales to arrive at net sales and the levels of pipeline inventories of our products held by our direct and indirect customers. We use IMS Health, Inc. estimates of filled prescriptions for our products as a proxy for market demand in the U.S.

Net sales of our oral contraceptive products increased $23.7 million, or 32.3%, in the quarter ended March 31, 2010, compared with the prior year quarter. LOESTRIN 24 FE generated revenues of $78.8 million in the quarter ended March 31, 2010, an increase of 50.4%, compared with $52.4 million in the prior year quarter. The increase in LOESTRIN 24 FE net sales was primarily due to increases in filled prescriptions of 70.8% and higher average selling prices, offset in part by the impact of higher sales-related deductions primarily due to increased utilization of customer loyalty cards and the contraction of pipeline inventories relative to the prior year quarter.

Revenues of ACTONEL were $262.3 million in the quarter ended March 31, 2010. Revenues in North America totaled $153.8 million, including $120.3 million in the United States. Generic competition in Canada began to negatively impact our net sales of ACTONEL in the first quarter of 2010 and we expect generic competition in Western Europe to negatively impact our net sales of ACTONEL beginning in the fourth quarter of 2010. In addition, in the United States, ACTONEL continues to face market share declines due to the impact of managed care initiatives encouraging the use of generic versions of other products.

Net sales of our dermatology products increased $8.6 million, or 7.5%, in the quarter ended March 31, 2010, compared with the prior year quarter. Net sales of DORYX were essentially flat as compared to the prior year quarter as increases in filled prescriptions of 32.1% and higher average selling prices were offset by increases in sales related deductions and a contraction of pipeline inventories relative to the prior year quarter. The increase in sales related deductions compared to the prior year quarter was primarily due to the increased usage of our customer loyalty card for DORYX 150 mg. DOVONEX and TACLONEX revenues recorded during the quarter ended March 31, 2010 totaled $72.7 million, a net increase of $8.1 million as compared to the prior year quarter. As a result of the LEO Transaction and related distribution agreement with LEO, we record revenue and cost of sales at distributor margins for all TACLONEX and DOVONEX products. We will continue to record revenue and cost of sales from the distribution of the products for LEO during 2010 until the termination of the distribution agreement. This will continue to negatively impact our gross margin percentage during the distribution period.

Net sales of ASACOL in the quarter ended March 31, 2010 were $165.0 million. Revenues in North America totaled $152.2 million, including $147.4 million in the United States.

Cost of Sales (excluding Amortization of Intangible Assets)

Cost of sales increased $168.6 million, or 346.0%, in the quarter ended March 31, 2010 compared with the prior year quarter, due to the 196.8% increase in product net sales, the $105.5 million impact of the purchase accounting inventory step-up as a result of the PGP Acquisition that was recognized in cost of sales in the quarter and approximately $73.0 million of costs for DOVONEX and TACLONEX products distributed at nominal distributor margins under the LEO distribution agreement. This increase was offset in part by a $25.1 million gain relating to the sale of certain inventories in connection with the LEO Transaction and the favorable change in product mix as a result of the PGP Acquisition. Our gross margin percentage, as a percentage of total revenue, decreased from 80.2% in the quarter ended March 31, 2009 to 71.4% in the quarter ended March 31, 2010. Excluding the $105.5 million purchase accounting expense included in cost of sales as a result of the PGP Acquisition, the impact of the gain from the LEO Transaction ($25.1 million) and the impact of the costs from the LEO distribution agreement ($73.0 million), our gross profit margin on total revenue, excluding revenues under the LEO distribution agreement ($72.7 million), was 90.7%.

Selling, General and Administrative ("SG&A") Expenses

SG&A expenses for the quarter ended March 31, 2010 were $320.1 million, an increase of $273.3 million, or 584.4%, from $46.8 million in the prior year quarter. A&P expenses in the quarter ended March 31, 2010 increased $23.3 million, or 303.8%, compared with the prior year quarter, primarily due to advertising and other promotional spending attributable to the acquired PGP products. Selling and distribution expenses for the quarter ended March 31, 2010 increased by $144.9 million, or 633.6%, compared to the prior year quarter. The increase is primarily due to the Sanofi-Aventis U.S. LLC ("Sanofi") co-promotion expense of $107.1 million under the Actonel Collaboration Agreement between us and Sanofi, increased headcount resulting from the acquisition of the PGP sales forces as well as new expenses related to the acquired PGP products. G&A expenses in the quarter ended March 31, 2010 increased $105.1 million, or 647.6%, compared with the prior year quarter, due in large part to increases in infrastructure costs, compensation expenses and professional and legal fees primarily relating to the PGP Acquisition. Included in G&A expenses in the quarter ended March 31, 2010 were $11.5 million of legal, consulting and other professional fees relating to the PGP Acquisition, expenses payable to P&G under our transition services agreement of $22.8 million and severance costs of $12.5 million.

Research and Development ("R&D")

Our investment in R&D for the quarter ended March 31, 2010 was $31.1 million, an increase of $7.2 million, or 30.5%, compared with $23.9 million in the prior year quarter. The quarter ended March 31, 2009 included $11.5 million of milestone payments including $9.0 million to Dong-A PharmTech Co. Ltd. ("Dong-A"), upon the achievement of a developmental milestone under our agreement for the development of an orally-administered udenafil product for the treatment of erectile dysfunction and $2.5 million to NexMed, Inc. ("NexMed") in connection with our acquisition of NexMed's U.S. rights to its topically applied alprostadil cream. Excluding these milestone payments in 2009, R&D expenses increased $18.7 million. The increase in R&D expenses in the quarter ended March 31, 2010 relative to the prior year quarter was primarily due to costs incurred relating to ongoing clinical studies, the addition of R&D projects from PGP and higher costs associated with an increase in personnel and facilities.

Amortization of intangible assets

Amortization of intangible assets in the quarters ended March 31, 2010 and 2009 was $160.9 million and $57.0 million, respectively. The increase in amortization expense in the quarter ended March 31, 2010 compared to the prior year quarter was due primarily to the amortization of intellectual property assets acquired in the PGP Acquisition which accounted for $120.8 million of the amortization expense in the quarter ended March 31, 2010. We expect amortization expense to significantly increase in 2010 as a result of the PGP Acquisition.

Net Interest Expense

Net interest expense for the quarter ended March 31, 2010 was $72.4 million, an increase of $54.4 million, or 301.8%, from $18.0 million in the prior year quarter. Included in net interest expense in the quarter ended March 31, 2010 was $19.6 million relating to the write-off of debt finance costs associated with the purchase and redemption of the remaining portion of our 8.75% senior subordinated notes due 2015 (the "Notes") and with the optional prepayment of $400.0 million of indebtedness under our new senior secured credit facilities (the "New Senior Secured Credit Facilities"). Included in net interest expense in the quarter ended March 31, 2009 was $1.3 million relating to the write-off of debt finance costs associated with the optional prepayment of $100.0 million of indebtedness under our prior senior secured credit facilities. Excluding the write-off of debt finance costs, net interest expense increased $36.1 million. The increase in net interest expense in the quarter ended March 31, 2010 was primarily due to an increase in the amount of our outstanding indebtedness under our New Senior Secured Credit Facilities used to fund the PGP Acquisition relative to our total outstanding indebtedness in the prior year quarter.

Net Income, CNI and Adjusted CNI

For the quarter ended March 31, 2010, we reported a net (loss) of $(17.2) million, or $(0.07) per diluted share, CNI was $154.6 million, and adjusted CNI was $223.7 million, or $0.88 per diluted share. Earnings per share figures are based on 252.9 million diluted ordinary shares outstanding. In calculating CNI, we add back the after-tax impact of the amortization (including impairments, if any) of intangible assets and the amortization (including write-offs, if any) of deferred loan costs. These items are tax-effected at the estimated marginal rates attributable to them. In the quarter ended March 31, 2010, the marginal tax rate associated with the amortization of intangible assets was 8.8% and the marginal tax rate for amortization (including write-offs) of deferred loan costs was 9.0%. Adjusted CNI for the quarter ended March 31, 2010 represents CNI as further adjusted to exclude (1) $93.7 million, net of tax, in cost of sales attributable to a purchase accounting adjustment that increased the opening value of the inventories acquired in the PGP Acquisition that was recorded in cost of sales as that inventory was sold and (2) a $24.6 million gain, net of tax, resulting from our sale of certain inventories to LEO.

Liquidity, Balance Sheet and Cash Flows

As of March 31, 2010, our cash and cash equivalents totaled $246.0 million and our total debt outstanding was $2,520.1 million. We generated $245.2 million of cash from operating activities in the quarter ended March 31, 2010, compared with $105.3 million of cash from operating activities in the prior year quarter, an increase of $139.9 million.

Subsequent Events

Sanofi

In April 2010, the Company and Sanofi entered into an amendment to the Actonel Collaboration Agreement. Under the terms of the amendment, the Company took full operational control over the promotion, marketing and R&D decisions for ACTONEL in the United States and Puerto Rico, and assumed responsibility for all associated costs relating to those activities. Prior to the amendment, the Company shared such costs with Sanofi in these territories. The Company remained the principal in transactions with customers in the U.S. and Puerto Rico and continues to invoice all sales in these territories. In return, it was agreed that Sanofi would receive, as part of the global collaboration payments between the parties, collaboration payments from the Company based on an agreed upon percentage of U.S. and Puerto Rico net sales for the remainder of the term of the Actonel Collaboration Agreement, which expires on January 1, 2015.

Dong-A

In April 2010, the Company amended its agreement with Dong-A to add the right to develop, and if approved, market in the U.S. and Canada, Dong-A's udenafil product for the treatment of lower urinary tract symptoms associated with Benign Prostatic Hyperplasia ("BPH"). This amendment resulted in the Company making an up-front payment to Dong-A of $20.0 million in April 2010, which will be included in R&D expense in the second quarter of 2010. Under the amendment, the Company may make additional payments to Dong-A in an aggregate amount of $25.0 million upon the achievement of contractually-defined milestones in relation to the BPH product. The Company also agreed to pay Dong-A a percentage of net sales of the BPH product in the U.S. and Canada, if any.

2010 Financial Guidance Update

Based on its first quarter results and current outlook for the remainder of 2010, the Company is affirming its full year 2010 financial guidance for revenue, Adjusted CNI and Adjusted CNI per share. Certain categories within the financial guidance are being updated. Of particular note are a 100 basis point increase in the range of expected gross margin on revenue and a 300 basis point increase in the range of expected income taxes as a percentage of earnings before taxes and amortization.

The Company currently anticipates that R&D expenditures will be in the range of $180.0 to $200.0 million, inclusive of the $20.0 million up-front payment to Dong-A described above. Offsetting the additional milestone payment is a $20.0 million reduction of expected internal R&D spend based on our current development plans.