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EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - Warner Chilcott plc | dex32.htm |
EX-31.1 - SECTION 302 CEO CERTIFICATION - Warner Chilcott plc | dex311.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - Warner Chilcott plc | dex312.htm |
EXCEL - IDEA: XBRL DOCUMENT - Warner Chilcott plc | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-53772
WARNER CHILCOTT PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Ireland | 98-0626948 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1 Grand Canal Square, Docklands
Dublin 2, Ireland
(Address of principal executive offices)
+353.1.897.2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x
As of April 29, 2011, the registrant had 253,872,732 ordinary shares outstanding.
Table of Contents
Items other than those listed above have been omitted because they are not applicable.
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Item 1. | Condensed Consolidated Financial Statements (unaudited) |
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share amounts)
(Unaudited)
As of March 31, 2011 |
As of December 31, 2010 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 200,667 | $ | 401,807 | ||||
Accounts receivable, net |
327,382 | 368,537 | ||||||
Inventories, net |
117,037 | 119,497 | ||||||
Prepaid income taxes |
20,633 | 49,385 | ||||||
Prepaid expenses and other current assets |
211,934 | 237,814 | ||||||
Total current assets |
877,653 | 1,177,040 | ||||||
Other assets: |
||||||||
Property, plant and equipment, net |
219,415 | 235,709 | ||||||
Intangible assets, net |
2,869,916 | 3,016,741 | ||||||
Goodwill |
1,028,550 | 1,028,550 | ||||||
Other non-current assets |
159,411 | 193,949 | ||||||
Total assets |
$ | 5,154,945 | $ | 5,651,989 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 59,881 | $ | 98,525 | ||||
Accrued expenses and other current liabilities |
688,247 | 730,830 | ||||||
Income taxes |
24,589 | 24,176 | ||||||
Current portion of long-term debt |
143,763 | 269,911 | ||||||
Total current liabilities |
916,480 | 1,123,442 | ||||||
Other liabilities: |
||||||||
Long-term debt, excluding current portion |
4,115,605 | 4,408,753 | ||||||
Other non-current liabilities |
185,677 | 185,436 | ||||||
Total liabilities |
5,217,762 | 5,717,631 | ||||||
Commitments and contingencies |
| | ||||||
SHAREHOLDERS (DEFICIT) |
||||||||
Ordinary shares, par value $0.01 per share; 500,000,000 shares authorized; 253,789,788 and 252,527,004 shares issued and outstanding |
2,538 | 2,525 | ||||||
Additional paid-in capital |
17,087 | 9,805 | ||||||
Accumulated deficit |
(86,384 | ) | (62,327 | ) | ||||
Accumulated other comprehensive income / (loss) |
3,942 | (15,645 | ) | |||||
Total shareholders (deficit) |
(62,817 | ) | (65,642 | ) | ||||
Total liabilities and shareholders (deficit) |
$ | 5,154,945 | $ | 5,651,989 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands except per share amounts)
(Unaudited)
Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
|||||||
REVENUE |
||||||||
Net sales |
$ | 730,747 | $ | 709,456 | ||||
Other revenue |
25,782 | 51,846 | ||||||
Total revenue |
756,529 | 761,302 | ||||||
COSTS, EXPENSES AND OTHER |
||||||||
Cost of sales (excludes amortization of intangible assets) |
122,911 | 217,436 | ||||||
Selling, general and administrative |
253,167 | 320,057 | ||||||
Restructuring costs |
42,919 | | ||||||
Research and development |
30,914 | 31,148 | ||||||
Amortization of intangible assets |
147,645 | 160,912 | ||||||
Interest expense, net |
155,025 | 72,398 | ||||||
INCOME / (LOSS) BEFORE TAXES |
3,948 | (40,649 | ) | |||||
Provision / (benefit) for income taxes |
28,005 | (23,406 | ) | |||||
NET (LOSS) |
$ | (24,057 | ) | $ | (17,243 | ) | ||
(Loss) per share: |
||||||||
Basic |
$ | (0.10 | ) | $ | (0.07 | ) | ||
Diluted |
$ | (0.10 | ) | $ | (0.07 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net (loss) |
$ | (24,057 | ) | $ | (17,243 | ) | ||
Adjustments to reconcile net (loss) to net cash provided by operating activities: |
||||||||
Depreciation |
10,519 | 7,491 | ||||||
Write-down of property, plant and equipment |
20,889 | | ||||||
Amortization of intangible assets |
147,645 | 160,912 | ||||||
Write-off of fair value step-up on acquired inventories |
| 105,504 | ||||||
Amortization of deferred loan costs |
85,350 | 27,512 | ||||||
Stock-based compensation expense |
5,576 | 4,683 | ||||||
Changes in assets and liabilities: |
||||||||
Decrease in accounts receivable, prepaid expenses and other current assets |
52,713 | 74,817 | ||||||
(Increase) in inventories |
(6,904 | ) | (29,988 | ) | ||||
(Decrease) / increase in accounts payable, accrued expenses and other current liabilities |
(53,989 | ) | 22,541 | |||||
Increase / (decrease) in income taxes and other, net |
34,080 | (110,984 | ) | |||||
Net cash provided by operating activities |
271,822 | 245,245 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of intangible assets |
| (2,900 | ) | |||||
Capital expenditures |
(12,057 | ) | (15,462 | ) | ||||
Net cash (used in) investing activities |
(12,057 | ) | (18,362 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Term borrowings under New Senior Secured Credit Facilities |
3,000,000 | | ||||||
Redemption of 8.75% senior subordinated notes due 2015 (8.75% Notes) |
| (89,460 | ) | |||||
Payments for loan costs, including refinancing premium |
(50,976 | ) | | |||||
Term repayments under Prior Senior Secured Credit Facilities |
(3,418,980 | ) | (429,875 | ) | ||||
Proceeds from the exercise of non-qualified options to purchase ordinary shares |
1,719 | 1,838 | ||||||
Other |
1,429 | (70 | ) | |||||
Net cash (used in) financing activities |
(466,808 | ) | (517,567 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
5,903 | (2,322 | ) | |||||
Net (decrease) in cash and cash equivalents |
(201,140 | ) | (293,006 | ) | ||||
Cash and cash equivalents, beginning of period |
401,807 | 539,006 | ||||||
Cash and cash equivalents, end of period |
$ | 200,667 | $ | 246,000 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Cash paid for income taxes |
$ | 1,271 | $ | 26,003 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
Notes to the Condensed Consolidated Financial Statements (unaudited)
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)
1. General
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States (U.S. GAAP) for complete consolidated financial statements have been condensed or are not included herein. The interim statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 (the Annual Report).
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim condensed consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The Company is responsible for the unaudited interim condensed consolidated financial statements included in this report. The Company has made certain reclassifications to prior period information to conform to the current period presentation. All intercompany transactions and balances have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
The following are interim updates to certain of the policies described in Note 2 of the notes to the Companys audited consolidated financial statements for the year ended December 31, 2010 included in the Annual Report.
Revenue Recognition
Revenue from product sales is recognized when title and risk of loss to the product transfers to the customer, which is based on the transaction shipping terms. Product sales are recorded net of all sales-related deductions including, but not limited to: trade discounts, sales returns, commercial and government rebates, customer loyalty programs and fee for service arrangements with certain distributors. The Company establishes accruals for its sales-related deductions in the same period that it recognizes the related gross sales based on select criteria for estimating such contra revenues including, but not limited to: estimated utilization or redemption rates, contract terms, costs related to the programs and other historical data. These reserves reduce revenues and are included as either a reduction of accounts receivable or as a component of accrued expenses. No revisions were made to the methodology used in determining these reserves during the quarter ended March 31, 2011.
As of March 31, 2011 and December 31, 2010, the amounts related to all sales-related deductions included as a reduction of accounts receivable were $29,240 and $30,274, respectively. The amounts included in accrued liabilities were $438,833 and $455,041 (of which $131,965 and $129,621 related to reserves for product returns) as of March 31, 2011 and December 31, 2010, respectively. The provisions recorded to reduce gross sales to net sales were $202,971 and $218,417 in the quarters ended March 31, 2011 and 2010, respectively.
Total other revenue for the quarters ended March 31, 2011 and 2010 was $25,782 and $51,846, respectively. Primarily as a result of the ENABLEX Acquisition (as defined in Note 4), the Company expects other revenue to decline in 2011 and product net sales to increase with respect to ENABLEX, as compared to the prior year period.
Deferred Loan Costs
Expenses associated with the issuance of indebtedness are capitalized and amortized as a component of interest expense over the term of the respective financing arrangements using the effective interest method. In the event that long-term debt is prepaid, the deferred loan costs associated with such indebtedness are expensed as a component of interest expense in the period in which such prepayment is made. Interest expense resulting from the amortization and write-offs of deferred loan costs amounted to $85,350 and $27,512 for the quarters ended March 31, 2011 and 2010, respectively. The increase in the quarter ended March 31, 2011 compared to the prior year quarter was due primarily to the write-offs of deferred loan costs in connection with the termination of the Companys Prior Senior Secured Credit Facilities (as defined in Note 11). During the quarter ended March 31, 2011, the Company paid $50,976 in connection with the incurrence of new indebtedness under its New Senior Secured Credit Facilities, as further discussed in Note 11. Aggregate deferred loan costs were $124,872 and $159,188 as of March 31, 2011 and December 31, 2010, respectively, and were included in other non-current assets in the condensed consolidated balance sheet.
Restructuring Costs
The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee severance costs are accrued when the restructuring actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. See Note 3 for more information.
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3. Strategic Initiatives
Western European Restructuring
In April 2011, the Company announced a plan to restructure its operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring will not impact the Companys operations at its headquarters in Dublin, Ireland, its facilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or its commercial operations in the United Kingdom. The Company determined to proceed with the restructuring following the completion of a strategic review of its operations in its Western European markets where its product ACTONEL lost exclusivity in late 2010. ACTONEL accounted for approximately 70% of the Companys Western European revenues in the year ended December 31, 2010. In connection with the restructuring, the Company intends to move to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The Company currently expects to complete the restructuring by the middle of 2012. The implementation of the restructuring plan, which is expected to impact approximately 500 employees, and the aggregate amounts to be expensed, remain subject to consultation with local works councils in certain European jurisdictions. Severance costs of $42,919 were recorded in the quarter ended March 31, 2011 and were included as a component of restructuring costs in the condensed consolidated statement of operations. Severance related costs are expected to be settled in cash within the next twelve months. The Western European restructuring costs were recorded in the Companys ROW operating segment (as defined in Note 16).
Manati Facility
In April 2011, the Company announced a plan to repurpose its Manati, Puerto Rico manufacturing facility. Going forward this facility will serve as a warehouse and distribution center. As a result of the repurposing, the Company recorded a charge of $20,889 in the quarter ended March 31, 2011 for the write-down of certain property, plant and equipment. Additionally, severance costs of $6,743 were recorded in the quarter ended March 31, 2011. The severance costs relating to the Manati repurposing are expected to be settled in cash within the next twelve months. The expenses related to the Manati repurposing were recorded in the Companys North American operating segment (as defined in Note 16) as a component of cost of sales.
The following table summarizes the activity in the Companys severance accruals during the quarter ended March 31, 2011:
Balance, December 31, 2010 |
$ | 5,975 | ||
Severance charges for newly identified employees |
49,662 | |||
Other |
633 | |||
Cash payments during the period |
(941 | ) | ||
Balance, March 31, 2011 |
$ | 55,329 | ||
4. Acquisitions
Enablex
The Company and Novartis Pharmaceuticals Corporation (Novartis) were parties to an agreement to co-promote ENABLEX, developed by Novartis, in the U.S. The Company shared development and promotional expenses with Novartis pursuant to the agreement and those costs were included within selling, general and administrative (SG&A) expenses. The Company received a contractual percentage of Novartis sales of ENABLEX, which was recorded, on a net basis, in other revenue. For the quarter ended March 31, 2010, the Company recognized other revenue related to ENABLEX of $18,180.
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On October 18, 2010, the Company acquired the U.S. rights to ENABLEX from Novartis for an upfront payment of $400,000 in cash at closing, plus future milestone payments of up to $20,000 in the aggregate based on 2011 and 2012 net sales of ENABLEX (the ENABLEX Acquisition). Concurrent with the closing of the ENABLEX Acquisition, the Company and Novartis terminated their existing co-promotion agreement, and the Company assumed full control of sales and marketing of ENABLEX in the U.S. market.
PGP
On October 30, 2009, the Company acquired the global branded prescription pharmaceutical business (PGP) of The Proctor & Gamble Company (P&G) for $2,919,261 in cash and the assumption of certain liabilities (the PGP Acquisition). Under the terms of the purchase agreement pursuant to which the Company acquired PGP, the Company acquired P&Gs portfolio of branded pharmaceutical products, prescription drug pipeline, manufacturing facilities in Puerto Rico and Germany and a net receivable owed from P&G of approximately $60,000. The total purchase price of $2,919,261 was allocated to the fair value of the assets acquired and liabilities assumed as of the acquisition date. In the quarter ended March 31, 2010, the Company recorded an expense, as a component of its cost of sales, of $105,504 as a result of the purchase accounting fair value step-up on inventories acquired in the PGP Acquisition as such inventories were sold to its customers. No such expense was recorded in the quarter ended March 31, 2011.
5. LEO Transaction
On September 23, 2009, the Company entered into a definitive asset purchase agreement (the LEO Transaction Agreement) with LEO Pharma A/S (LEO) pursuant to which LEO paid the Company $1,000,000 in cash in order to terminate the Companys exclusive license to distribute LEOs DOVONEX and TACLONEX products (including all dermatology products in LEOs development pipeline) in the United States and to acquire certain assets related to the Companys distribution of DOVONEX and TACLONEX products in the United States (the LEO Transaction). The Company recognized a gain on the sale of assets of $393,095 as a result of the LEO Transaction. The LEO Transaction closed simultaneously with the execution of the LEO Transaction Agreement. In connection with the LEO Transaction, the Company entered into a distribution agreement with LEO pursuant to which the Company agreed to, among other things, (1) continue to distribute DOVONEX and TACLONEX on behalf of LEO, for a distribution fee, through September 23, 2010 and (2) purchase inventories of DOVONEX and TACLONEX from LEO. In addition, the Company agreed to provide certain transition services for LEO for a period of up to one year after the closing. On June 30, 2010, LEO assumed responsibility for its own distribution services and on July 15, 2010 the parties formally terminated the distribution agreement.
During the quarter ended September 30, 2009, in connection with the distribution agreement mentioned above, the Company recorded a deferred gain of $68,919 relating to the sale of certain inventories in connection with the LEO Transaction. Pursuant to Financial Accounting Standards Board Accounting Standards Codification (ASC) Sub Topic 605-25, Revenue RecognitionMultiple-Element Arrangements, separate contracts with the same entity that are entered into at or near the same time are presumed to have been negotiated as a package and should be evaluated as a single arrangement. The LEO Transaction and distribution agreement contained (i) multiple deliverables, (ii) a delivered element with stand-alone value (intangible asset), and (iii) objective and reliable evidence of the undelivered items fair value. For the undelivered element, inventory, the Company retained title and the risks and rewards of ownership. The total arrangement consideration (or purchase price) of $1,000,000 was allocated among the units of accounting as set forth in ASC Sub Topic 605-25 Revenue RecognitionMultiple-Element Arrangements paragraph 30-1, and the portion of the gain in the amount of $68,919 on the undelivered product inventory at fair value, was deferred as of September 30, 2009.
The Company subsequently sold the inventory on behalf of LEO to its trade customers in the normal course of business and recognized revenues of approximately $76,762, $62,530 and $26,255, and cost of sales of approximately $42,578, $37,419 and $16,631 during the quarters ended December 31, 2009, March 31, 2010 and June 30, 2010, respectively. The amounts were recognized as sales and cost of sales in the Companys statement of operations when the earnings process was culminated as the goods were delivered to the Companys trade customers.
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6. Earnings Per Share
The Company accounts for earnings per share (EPS) in accordance with ASC Topic 260, Earnings Per Share and related guidance, which requires two calculations of EPS to be disclosed: basic and diluted. The numerator in calculating basic and diluted EPS is an amount equal to the consolidated net income/(loss) for the periods presented. The denominator in calculating basic EPS is the weighted average shares outstanding for the respective periods. The denominator in calculating diluted EPS is the weighted average shares outstanding, plus the dilutive effect of stock option grants, restricted share grants and their equivalent for the respective periods. The following sets forth the basic and diluted calculations of EPS for the quarters ended March 31, 2011 and 2010, respectively:
Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
|||||||
Net (loss) available to ordinary shareholders |
$ | (24,057 | ) | $ | (17,243 | ) | ||
Weighted average number of ordinary and potential ordinary shares outstanding: |
||||||||
Basic number of ordinary shares outstanding |
251,945,687 | 251,003,407 | ||||||
Dilutive effect of grants of stock options, unvested restricted shares and their equivalent |
| | ||||||
Diluted number of ordinary and potential ordinary shares outstanding |
251,945,687 | 251,003,407 | ||||||
(Loss) per ordinary share: |
||||||||
Basic |
$ | (0.10 | ) | $ | (0.07 | ) | ||
Diluted |
$ | (0.10 | ) | $ | (0.07 | ) | ||
Weighted-average amounts not included in calculation of diluted EPS as their impact was anti-dilutive under the treasury stock method: |
||||||||
Stock options to purchase ordinary shares |
7,836,781 | 8,035,816 | ||||||
Unvested restricted shares and equivalent |
2,085,067 | 1,118,539 | ||||||
7. Sanofi Collaboration Agreement
The Company and Sanofi-Aventis U.S. LLC (Sanofi) are parties to an agreement to co-promote ACTONEL on a global basis, excluding Japan (as amended, the Collaboration Agreement). ATELVIA, the Companys next generation risedronate sodium delayed-release product approved by the U.S. Food and Drug Administration (FDA) in October 2010, is also marketed in the United States pursuant to the Collaboration Agreement. The Companys and Sanofis rights and obligations are specified by geographic market. In certain geographic markets, the Company and Sanofi share selling and advertising and promotion (A&P) costs as well as product profits based on contractual percentages. In the geographic markets where the Company is deemed to be the principal in transactions with customers, the Company recognizes all revenues from sales of the product along with the related product costs. In geographic markets where the Company is not the principal in transactions with customers, revenue is recognized on a net basis, in other revenue for amounts earned based on Sanofis sale transactions with its customers. The Companys share of selling, A&P and contractual profit sharing expenses are recognized in SG&A expenses. For the quarter ended March 31, 2011, the Company recognized net sales and other revenue related to ACTONEL of $209,490 and $22,161, respectively, and co-promotion expenses of $58,876 were recognized in SG&A expense. For the quarter ended March 31, 2010, the Company recognized net sales and other revenue related to ACTONEL of $235,722 and $26,586, respectively, and co-promotion expenses of $107,094 were recognized in SG&A expense.
In April 2010, the Company and Sanofi entered into an amendment to the Collaboration Agreement. Under the terms of the amendment, the Company took full operational control over the promotion, marketing and research and development (R&D) decisions for ACTONEL and, since the Company commenced its promotional efforts in early 2011, ATELVIA in the United States and Puerto Rico, and assumed responsibility for all associated costs and expenses 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 United States and Puerto Rico and continues to invoice all sales in these jurisdictions. In return, it was agreed that Sanofi would receive, as part of the global collaboration agreement between the parties, 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 Collaboration Agreement.
In connection with the Collaboration Agreement, the Company is also party to two related supply agreements, including a tablet supply agreement pursuant to which a portion of the Companys ACTONEL product requirements are manufactured and supplied by Sanofi. The Company has exercised its right to terminate the tablet supply agreement with Sanofi, effective May 2012. The Company and Sanofi have been involved in discussions as to whether the termination of the tablet supply agreement results in the termination of the Collaboration Agreement. The Company believes that its termination of the tablet supply agreement results in the termination of the Collaboration Agreement in May 2012. Sanofi disagrees and instead believes that the Collaboration Agreement will remain in effect until January 1, 2015, the original expiration date of the agreement. On March 2, 2011, the Companys subsidiary, Warner Chilcott Company, LLC (WCCL), and Sanofi each filed a separate demand for arbitration with the American Arbitration Association pursuant to the dispute resolution provisions of the Collaboration Agreement. The WCCL demand seeks declaratory relief that the Collaboration Agreement will terminate in May 2012. The Sanofi demand, by contrast, seeks declaratory relief that termination of the tablet supply agreement will not result in the cross-termination of the Collaboration Agreement and that WCCLs assertion of the cross-termination violates a covenant of good faith and fair dealing contained in the Collaboration Agreement, as well as unspecified monetary damages. While the Company believes the terms of the Collaboration Agreement support its position, there can be no assurance as to the outcome of the arbitration proceeding.
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8. Inventories
Inventories consisted of the following:
As of March 31, 2011 |
As of December 31, 2010 |
|||||||
Finished goods |
$ | 62,308 | $ | 64,891 | ||||
Work-in-progress / Bulk |
31,110 | 27,602 | ||||||
Raw materials |
23,619 | 27,004 | ||||||
Total |
$ | 117,037 | $ | 119,497 | ||||
Total inventories above are net of $16,003 and $8,470 related to inventory obsolescence reserves as of March 31, 2011 and December 31, 2010, respectively.
Product samples are stated at cost ($8,101 and $7,427 as of March 31, 2011 and December 31, 2010, respectively) and were included in prepaid expenses and other current assets.
9. Goodwill and Intangible Assets
The Companys goodwill and a trademark have been deemed to have indefinite lives and are not amortized. The Companys acquired intellectual property, licensing agreements and certain trademarks that do not have indefinite lives are being amortized on either an economic benefit model, which typically results in accelerated amortization, or a straight-line basis over their useful lives not to exceed 15 years. Components of the Companys intangible assets as of March 31, 2011, consisted of the following:
Gross Carrying Value |
Accumulated Amortization |
Net Carrying Value |
||||||||||
Definite-lived intangible assets |
||||||||||||
ASACOL |
$ | 1,848,702 | $ | 339,557 | $ | 1,509,145 | ||||||
ENABLEX |
505,731 | 68,209 | 437,522 | |||||||||
ACTONEL |
525,205 | 250,541 | 274,664 | |||||||||
ATELVIA |
241,447 | 1,206 | 240,241 | |||||||||
ESTRACE Cream |
411,000 | 267,153 | 143,847 | |||||||||
DORYX |
331,300 | 197,980 | 133,320 | |||||||||
OVCON / FEMCON FE product family |
401,000 | 380,270 | 20,730 | |||||||||
FEMHRT product family |
318,500 | 306,599 | 11,901 | |||||||||
Other products intellectual property |
435,228 | 366,682 | 68,546 | |||||||||
Total Definite-lived intangible assets |
5,018,113 | 2,178,197 | 2,839,916 | |||||||||
Indefinite-lived intangible assets |
||||||||||||
Trademark |
30,000 | | 30,000 | |||||||||
Total intangible assets, net |
$ | 5,048,113 | $ | 2,178,197 | $ | 2,869,916 | ||||||
Aggregate amortization expense related to intangible assets was $147,645 and $160,912 for the quarters ended March 31, 2011 and 2010, respectively. The Company continuously reviews its products remaining useful lives based on each products estimated future cash flows.
As of March 31, 2011 estimated amortization expense based on current forecasts (excluding indefinite-lived intangible assets) for the remainder of 2011 and for each of the next five years is as follows:
Amortization | ||||
2011 |
$ | 442,971 | ||
2012 |
497,970 | |||
2013 |
444,464 | |||
2014 |
375,501 | |||
2015 |
332,980 | |||
2016 |
219,680 | |||
Thereafter |
526,350 | |||
2,839,916 | ||||
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10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
As of March 31, 2011 |
As of December 31, 2010 |
|||||||
Product rebate accruals (commercial and government) |
$ | 270,723 | $ | 254,662 | ||||
Sales return reserves |
131,965 | 129,621 | ||||||
Severance accruals |
55,329 | 5,975 | ||||||
Payroll, commissions, and employee costs |
36,380 | 35,513 | ||||||
Customer loyalty and coupon programs |
36,145 | 70,758 | ||||||
ACTONEL co-promotion liability |
35,370 | 84,652 | ||||||
Professional fees |
20,073 | 20,081 | ||||||
Contractual obligations |
15,880 | 15,880 | ||||||
Withholding taxes |
11,447 | 11,621 | ||||||
Research and development expense accruals |
10,075 | 11,313 | ||||||
Uncertain tax positions(1) |
9,526 | 9,526 | ||||||
Interest payable |
8,899 | 35,826 | ||||||
Obligations under product licensing and distribution agreements |
7,987 | 9,094 | ||||||
Value-added tax liabilities |
4,786 | 6,434 | ||||||
Advertising and promotion |
4,305 | 5,876 | ||||||
Deferred income |
2,954 | 2,460 | ||||||
Other |
26,403 | 21,538 | ||||||
Total |
$ | 688,247 | $ | 730,830 | ||||
(1) | As of March 31, 2011 and December 31, 2010, all income tax liabilities were related to reserves recorded under ASC Topic 740 Accounting for Income Taxes, (ASC 740). In addition, reserves included as a component of other non-current liabilities as of March 31, 2011 and December 31, 2010 totaled $77,289. |
11. Indebtedness
New Senior Secured Credit Facilities
On March 17, 2011, Warner Chilcott Holdings Company III, Limited (Holdings III), WC Luxco S.à r.l. (the Luxco Borrower), Warner Chilcott Corporation (WCC or the US Borrower) and WCCL (the PR Borrower, and together with the Luxco Borrower and the US Borrower, the Borrowers) entered into a new credit agreement (the Credit Agreement) with a syndicate of lenders (the Lenders) and Bank of America, N.A. as administrative agent in order to refinance the Companys Prior Senior Secured Credit Facilities (as defined below). Pursuant to the Credit Agreement, the Lenders provided senior secured credit facilities (the New Senior Secured Credit Facilities) in an aggregate amount of $3,250,000 comprised of (i) $3,000,000 in aggregate term loan facilities and (ii) a $250,000 revolving credit facility available to all Borrowers. The term loan facilities are comprised of (i) a $1,250,000 Term A Loan Facility (the Term A Loan) and (ii) a $1,750,000 Term B Loan Facility consisting of an $800,000 Term B-1 Loan, a $400,000 Term B-2 Loan and a $550,000 Term B-3 Loan (together, the Term B Loans). The proceeds of these new term loans, together with approximately $279,000 of cash on hand, were used to repay $3,218,980 in aggregate term loans outstanding under the Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest.
The Term A Loan matures on March 17, 2016 and bears interest at LIBOR plus 3.00%, with a LIBOR floor of 0.75%, and each of the Term B Loans matures on March 15, 2018 and bears interest at LIBOR plus 3.25%, with a LIBOR floor of 1.00%. The revolving credit facility matures on March 17, 2016 and includes a $20,000 sublimit for swing line loans and a $50,000 sublimit for the issuance of standby letters of credit. Any swing line loans and letters of credit would reduce the available commitment under the revolving credit facility on a dollar-for-dollar basis. Loans drawn and letters of credit issued under the revolving credit facility bear interest at LIBOR plus 3.00%. The Borrowers are also required to pay a commitment fee on the unused commitments under the revolving credit facility at a rate of 0.75% per annum, subject to a leverage-based step-down.
The loans and other obligations under the New Senior Secured Credit Facilities (including in respect of hedging agreements and cash management obligations) are (i) guaranteed by Holdings III and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Borrowers and each guarantor (subject to certain exceptions and limitations). As of March 31, 2011 there were letters of credit totaling $1,500 outstanding. As a result the Company had $248,500 available under the revolving credit facility as of March 31, 2011.
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The carrying amounts reported in the condensed consolidated balance sheets as of March 31, 2011 for the Companys debt outstanding under its New Senior Secured Credit Facilities approximates fair value as interest is at variable rates and it re-prices frequently.
Prior Senior Secured Credit Facilities
On October 30, 2009 in connection with the PGP Acquisition, Holdings III and its subsidiaries, the Luxco Borrower, WCC and WCCL entered into a credit agreement with Credit Suisse AG, Cayman Islands Branch as administrative agent and lender, and the other lenders and parties thereto pursuant to which the lenders provided senior secured credit facilities in an aggregate amount of $3,200,000 (the Prior Senior Secured Credit Facilities). The Prior Senior Secured Credit Facilities initially consisted of $2,950,000 of term loans, a $250,000 revolving credit facility and a $350,000 delayed-draw term loan facility. On December 16, 2009, the Borrowers entered into an amendment pursuant to which the Lenders agreed to provide additional term loans of $350,000, and the delayed-draw term loan facility was terminated. The additional term loans were used to finance, together with cash on hand, the repurchase or redemption of any and all of the Companys then-outstanding 8.75% senior subordinated notes due 2015. On August 20, 2010, Holdings III and the Borrowers entered into a subsequent amendment pursuant to which the Lenders provided additional term loans in an aggregate principal amount of $1,500,000 which, together with the proceeds from the issuance of $750,000 aggregate principal amount of the Companys 7.75% Notes (defined below), were used to fund a special cash dividend to shareholders in the amount of $8.50 per share, or $2,144,321 in the aggregate (the Special Dividend) and to pay related fees and expenses. In January 2011, the Company made an optional prepayment of $200,000 of its term loan indebtedness under the Prior Senior Secured Credit Facilities.
7.75% Notes
On August 20, 2010, the Company and certain of the Companys subsidiaries entered into an indenture (the Indenture) with Wells Fargo Bank, National Association, as trustee, in connection with the issuance by WCCL and Warner Chilcott Finance LLC (together, the Issuers) of $750,000 aggregate principal amount of 7.75% senior notes due 2018 (the Initial 7.75% Notes). The Initial 7.75% Notes are unsecured senior obligations of the Issuers, guaranteed on a senior basis by the Company and its subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The Initial 7.75% Notes will mature on September 15, 2018. Interest on the Initial 7.75% Notes is payable on March 15 and September 15 of each year, and the first payment was made on March 15, 2011.
On September 29, 2010, the Issuers issued an additional $500,000 aggregate principal amount of 7.75% senior notes due 2018 at a premium of $10,000 (the Additional 7.75% Notes and, together with the Initial 7.75% Notes, the 7.75% Notes). The proceeds from the issuance of the Additional 7.75% Notes were used by the Company to fund its $400,000 upfront payment in connection with the ENABLEX Acquisition, which closed on October 18, 2010, and for general corporate purposes. The Additional 7.75% Notes constitute a part of the same series as the Initial 7.75% Notes. The Issuers obligations under the Additional 7.75% Notes are guaranteed by the Company and by its subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The $10,000 premium received was added to the face value of the 7.75% Notes and is being amortized over the life of the 7.75% Notes as a reduction to reported interest expense.
The Indenture contains restrictive covenants that limit, among other things, the ability of Holdings III, and certain of Holdings IIIs subsidiaries, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repurchase subordinated debt and common and preferred stock, make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. The Indenture also contains customary events of default which would permit the holders of the 7.75% Notes to declare those 7.75% Notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the 7.75% Notes or other material indebtedness, the failure to satisfy covenants, and specified events of bankruptcy and insolvency.
As of March 31, 2011, the fair value of the Companys outstanding 7.75% Notes, based on available market quotes, was $1,309,375 ($1,250,000 book value).
Components of Indebtedness
As of March 31, 2011, the Companys outstanding debt included the following:
Current Portion as of March 31, 2011 |
Long-Term Portion as of March 31, 2011 |
Total Outstanding as of March 31, 2011 |
||||||||||
Revolving credit facility |
$ | | $ | | $ | | ||||||
Term loans under the New Senior Secured Credit Facilities |
142,500 | 2,857,500 | 3,000,000 | |||||||||
7.75% Notes (including $9,368 unamortized premium) |
1,263 | 1,258,105 | 1,259,368 | |||||||||
Total |
$ | 143,763 | $ | 4,115,605 | $ | 4,259,368 | ||||||
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As of March 31, 2011, mandatory principal repayments of long-term debt for the remainder of 2011 and each of the five years ending December 31, 2012 through 2016 and thereafter were as follows:
Year Ending December 31, |
Aggregate Maturities |
|||
2011 |
$ | 106,875 | ||
2012 |
236,250 | |||
2013 |
267,500 | |||
2014 |
267,500 | |||
2015 |
361,250 | |||
2016 |
111,250 | |||
Thereafter |
2,899,375 | |||
Total long-term debt to be settled in cash |
$ | 4,250,000 | ||
7.75% Notes unamortized premium |
9,368 | |||
Total long-term debt |
$ | 4,259,368 | ||
12. Stock-Based Compensation Plans
The Companys stock-based compensation, including grants of non-qualified time-based vesting options to purchase ordinary shares and grants of time-based and performance-based vesting restricted ordinary shares and their equivalents, is measured at fair value on the date of grant and is recognized in the statement of operations as compensation expense over the applicable vesting periods. For purposes of computing the amount of stock-based compensation attributable to time-based vesting options and time-based vesting restricted ordinary shares (and their equivalents) expensed in any period, the Company treats such equity grants as serial grants with separate vesting dates. This treatment results in accelerated recognition of share-based compensation expense whereby 52% of the compensation is recognized in year one, 27% is recognized in year two, 15% is recognized in year three, and 6% is recognized in the final year of vesting. The Company treats performance-based vesting restricted ordinary share grants as vesting evenly over a four year vesting period, subject to the achievement of annual performance targets.
Total stock-based compensation expense recognized for the quarters ended March 31, 2011 and 2010 was $5,576 and $4,683, respectively. Unrecognized future stock-based compensation expense was $44,788 as of March 31, 2011, which will be recognized as an expense over a remaining weighted average period of 1.31 years.
In establishing the value of the options on each grant date, the Company uses its actual historical volatility for its ordinary shares to estimate the expected volatility at each grant date. The fair value of options is determined on the applicable grant date using the Black-Scholes method of valuation and that amount is recognized as an expense over the four year vesting period. The options have a term of ten years. The Company assumes that the options will be exercised, on average, in six years. The Special Dividend paid in 2010 did not impact the dividend yield assumption for any grants. Using the Black-Scholes valuation model, the fair value of the options is based on the following assumptions:
2011 Grants | 2010 Grants | |||||||
Dividend yield |
None | None | ||||||
Expected volatility |
35.00 | % | 35.00 | % | ||||
Risk-free interest rate |
3.57 | % | 2.52 3.83 | % | ||||
Expected term (years) |
6.00 | 6.00 |
The weighted average remaining contractual term of all outstanding options to purchase ordinary shares granted is 7.2 years.
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The following is a summary of equity award activity for unvested restricted ordinary shares, and their equivalent, in the period from December 31, 2010 through March 31, 2011:
Restricted Share Grants (and their equivalent) |
||||||||
(in thousands except per share amounts) | Shares | Weighted Average Fair Value per share on Grant Date |
||||||
Unvested restricted ordinary shares, and their equivalent, at December 31, 2010 |
918 | $ | 19.91 | |||||
Granted shares |
1,250 | 24.70 | ||||||
Vested shares |
(263 | ) | 18.70 | |||||
Forfeited shares |
(7 | ) | 24.52 | |||||
Unvested restricted ordinary shares, and their equivalent, at March 31, 2011 |
1,898 | $ | 23.22 | |||||
The following is a summary of equity award activity for non-qualified options to purchase ordinary shares in the period from December 31, 2010 through March 31, 2011:
Options to Purchase Ordinary Shares | ||||||||||||
(in thousands except per option amounts) | Options | Weighted Average Fair Value per Option on Grant Date |
Weighted Average Exercise Price per Option |
|||||||||
Balance at December 31, 2010 |
7,473 | $ | 5.57 | $ | 11.94 | |||||||
Granted options |
596 | 10.11 | 25.01 | |||||||||
Exercised options |
(204 | ) | 6.85 | 8.40 | ||||||||
Forfeited options |
(26 | ) | 8.29 | 12.93 | ||||||||
Balance at March 31, 2011 |
7,839 | $ | 5.87 | $ | 13.02 | |||||||
Vested and exercisable at March 31, 2011 |
4,248 | $ | 3.82 | $ | 11.69 | |||||||
The intrinsic value of non-qualified options to purchase ordinary shares is calculated as the difference between the closing price of the Companys ordinary shares and the exercise price of the non-qualified options to purchase ordinary shares that had a strike price below the closing price. The total intrinsic value for the non-qualified options to purchase ordinary shares that are in-the-money as of March 31, 2011 was as follows:
(in thousands except per share and per option amounts) | Number of Options |
Weighted Average Exercise Price per Option |
Closing Stock Price per Share |
Total Intrinsic Value |
||||||||||||
Balance outstanding at March 31, 2011 |
7,241 | $ | 12.04 | $ | 23.26 | $ | 81,244 | |||||||||
Vested and exercisable at March 31, 2011 |
4,248 | $ | 11.69 | $ | 23.26 | $ | 49,149 |
13. Commitments and Contingencies
Product Development Agreements
In June 2006, PGP entered into an agreement with Watson Pharmaceuticals, Inc. (together with its subsidiaries, Watson) under which PGP acquired the rights to certain products under development relating to transdermal delivery systems for testosterone for use in females. Under the product development agreement, which the Company acquired in connection with the PGP Acquisition, the Company may be required to make additional payments to Watson upon the achievement of various developmental milestones that could aggregate up to $25,000. Further, the Company agreed to pay a supply fee and royalties to Watson on the net sales of those products, if any.
In July 2007, the Company entered into an agreement with Paratek Pharmaceuticals Inc. (Paratek) under which it acquired certain rights to novel tetracyclines under development for the treatment of acne and rosacea. The Company paid an up-front fee of $4,000 and agreed to reimburse Paratek for R&D expenses incurred during the term of the agreement. In September 2010, the Company made a $1,000 milestone payment to Paratek upon the achievement of a developmental milestone. The Company may make additional payments to Paratek upon the achievement of certain developmental milestones that could aggregate up to $23,500. In addition, the Company agreed to pay royalties to Paratek based on the net sales, if any, of the products covered under the agreement.
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In December 2008, the Company signed an agreement (the Dong-A Agreement) with Dong-A PharmTech Co. Ltd. (Dong-A), to develop and, if approved, market its orally-administered udenafil product, a PDE5 inhibitor, for the treatment of erectile dysfunction (ED) in the United States. The Company paid $2,000 in connection with signing the Dong-A Agreement. In March 2009, the Company paid $9,000 to Dong-A upon the achievement of a developmental milestone related to the ED product under the Dong-A Agreement. The Company agreed to pay for all development costs incurred during the term of the Dong-A Agreement with respect to development of the ED product for the United States and may make additional payments to Dong-A of up to $13,000 upon the achievement of contractually-defined milestones in relation to the ED product. In addition, the Company agreed to pay a profit-split to Dong-A based on operating profit (as defined in the Dong-A Agreement), if any, resulting from the commercial sale of the ED product.
In February 2009, the Company acquired the U.S. rights to Apricus Biosciences, Inc.s (formerly NexMed, Inc.) (Apricus) topically applied alprostadil cream for the treatment of ED and a prior license agreement between the Company and Apricus relating to the product was terminated. Under the terms of the acquisition agreement, the Company paid Apricus an up-front payment of $2,500, and agreed to pay a milestone payment of $2,500 to Apricus upon the FDAs approval of the products New Drug Application. The Company is currently working to prepare its response to the non-approvable letter that the FDA delivered to Apricus in July 2008 with respect to the product.
In April 2010, the Company amended the Dong-A Agreement to add the right to develop, and if approved, market in the U.S. and Canada, Dong-As udenafil product for the treatment of lower urinary tract symptoms associated with Benign Prostatic Hyperplasia (BPH). As a result of this amendment, the Company made an up-front payment to Dong-A of $20,000 in April 2010. Under the amendment, the Company may make additional payments to Dong-A in an aggregate amount of up to $25,000 upon the achievement of contractually-defined milestones in relation to the BPH product. These payments would be in addition to the potential milestone payments in relation to the ED product described above. 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.
In August 2010, the Company and TaiGen Biotechnology Co. Ltd (TaiGen) amended their existing license agreement in connection with the completion of Phase II clinical trials to provide for the cross-licensing of the parties respective patent rights relating to NEMONOXACIN and the transfer of TaiGens related Investigational New Drug Application. Under the amended agreement, TaiGen has exclusive development, manufacture and commercialization rights in certain Asian countries, and the Company has development, manufacture and commercialization rights in all other markets, including the United States, Europe and Japan. As a result of the amendment, the Company made an up-front payment to TaiGen of $5,000 in August 2010. Under the terms of the amended agreement, the Company may make additional payments to TaiGen in an aggregate amount of up to $25,000 upon the achievement of contractually-defined milestones, and the Company also agreed to pay TaiGen a royalty on its net sales of NEMONOXACIN, if any.
The Company and Sanofi are parties to the Collaboration Agreement pursuant to which they co-promote ACTONEL on a global basis, excluding Japan. ATELVIA, the Companys next generation risedronate sodium delayed-release product approved by the FDA in October 2010, is also marketed in the United States pursuant to the Collaboration Agreement. See Note 7 for additional information related to the Collaboration Agreement.
14. Legal Proceedings
General Matters
The Company is involved in various legal proceedings in the normal course of its business, including product liability litigation, intellectual property litigation, employment litigation, such as unfair dismissal and federal and state fair labor and minimum wage law suits, and other litigation. The outcome of such litigation is uncertain, and the Company may from time to time enter into settlements to resolve such litigation, such as its settlement with respect to FEMCON FE, that could result, among other things, in the sale of generic versions of the Companys products prior to the expiration of its patents. For a description of the Companys settlement agreements, see the Companys Annual Report filed on February 25, 2011.
The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable. The Company maintains insurance with respect to potential litigation in the normal course of its business based on its consultation with its insurance consultants and outside legal counsel, and in light of current market conditions, including cost and availability. In addition, the Company self-insures for certain liabilities not covered under its litigation insurance based on estimates of potential claims developed in consultation with its insurance consultants and outside legal counsel.
The following discussion is limited to the Companys material on-going legal proceedings:
Hormone Therapy Product Liability Litigation
Approximately 721 product liability suits, including some with multiple plaintiffs, have been filed against, or tendered to, the Company related to its hormone therapy (HT) products, FEMHRT, ESTRACE, ESTRACE Cream and medroxyprogesterone
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acetate. Under the purchase and sale agreement pursuant to which the Company acquired FEMHRT from Pfizer Inc. (Pfizer) in 2003, the Company agreed to assume certain product liability exposure with respect to claims made against Pfizer after March 5, 2003 and tendered to the Company relating to FEMHRT products. The cases are in the early stages of litigation and the Company is in the process of analyzing and investigating the individual complaints.
The lawsuits were likely triggered by the July 2002 and March 2004 announcements by the National Institute of Health (NIH) of the terminations of two large-scale randomized controlled clinical trials, which were part of the Womens Health Initiative (WHI), examining the long-term effect of HT on the prevention of coronary heart disease and osteoporotic fractures, and any associated risk for breast cancer in postmenopausal women. In the case of the trial terminated in 2002, which examined combined estrogen and progestogen therapy (the E&P Arm of the WHI Study), the safety monitoring board determined that the risks of long-term estrogen and progestogen therapy exceeded the benefits, when compared to a placebo. WHI investigators found that combined estrogen and progestogen therapy did not prevent heart disease in the study subjects and, despite a decrease in the incidence of hip fracture and colorectal cancer, there was an increased risk of invasive breast cancer, coronary heart disease, stroke, blood clots and dementia. In the trial terminated in 2004, which examined estrogen therapy, the trial was ended one year early because the NIH did not believe that the results were likely to change in the time remaining in the trial and that the increased risk of stroke could not be justified for the additional data that could be collected in the remaining time. As in the E&P Arm of the WHI study, WHI investigators again found that estrogen only therapy did not prevent heart disease and, although study subjects experienced fewer hip fractures and no increase in the incidence of breast cancer compared to subjects randomized to placebo, there was an increased incidence of stroke and blood clots in the legs. The estrogen used in the WHI Study was conjugated equine estrogen and the progestin was medroxyprogesterone acetate, the compounds found in Premarin ® and Prempro ® , products marketed by Wyeth (now a part of Pfizer). Numerous lawsuits were filed against Wyeth, as well as against other manufacturers of HT products, after the publication of the summary of the principal results of the E&P Arm of the WHI Study.
Approximately 80% of the complaints filed against, or tendered to, the Company did not specify the HT drug alleged to have caused the plaintiffs injuries. These complaints broadly allege that the plaintiff suffered injury as a result of an HT product. The Company has sought the dismissal of lawsuits that, after further investigation, do not involve any of its products. The Company has successfully reduced the number of HT suits it will have to defend. Of the approximately 721 suits that were filed against, or tendered to, the Company, 486 have been dismissed and 94 involving ESTRACE have been successfully tendered to Bristol-Myers pursuant to an indemnification provision in the asset purchase agreement pursuant to which the Company acquired ESTRACE. The purchase agreement included an indemnification agreement whereby Bristol-Myers indemnified the Company for product liability exposure associated with ESTRACE products that were shipped prior to July 2001. The Company has forwarded agreed upon dismissal notices in another 13 cases to plaintiffs counsel. Although it is impossible to predict with certainty the outcome of any litigation, an unfavorable outcome in these proceedings is not anticipated. An estimate of the range of potential loss, if any, to the Company relating to these proceedings is not possible at this time.
ACTONEL Product Liability Litigation
The Company is a defendant in approximately 97 cases and a potential defendant with respect to approximately 67 unfiled claims involving a total of approximately 171 plaintiffs and potential plaintiffs relating to the Companys bisphosphonate prescription drug ACTONEL. The claimants allege, among other things, that ACTONEL caused them to suffer osteonecrosis of the jaw (ONJ), a rare but serious condition that involves severe loss or destruction of the jawbone, and/or atypical fractures of the femur. All of the cases have been filed in either federal or state courts in the United States. The Company is in the initial stages of discovery in these litigations. The 67 unfiled claims involve potential plaintiffs that have agreed, pursuant to a tolling agreement, to postpone the filing of their claims against the Company in exchange for the Companys agreement to suspend the statutes of limitations relating to their potential claims. In addition, the Company is aware of four purported product liability class actions that were brought against the Company in provincial courts in Canada alleging, among other things, that ACTONEL caused the plaintiffs and the proposed class members who ingested ACTONEL to suffer atypical fractures or other side effects. It is expected that these plaintiffs will seek class certification. The Company is reviewing these lawsuits and potential claims and intends to defend these claims vigorously.
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Sanofi, which co-promotes ACTONEL with the Company on a global basis pursuant to the Collaboration Agreement, is a defendant in many of the Companys ACTONEL product liability cases. In some of the cases, manufacturers of other bisphosphonate products are also named as defendants. Plaintiffs have typically asked for unspecified monetary and injunctive relief, as well as attorneys fees. The Company cannot at this time predict the outcome of these lawsuits and claims or their financial impact. Under the Collaboration Agreement, Sanofi has agreed to indemnify the Company, subject to certain limitations, for 50% of the losses from any product liability claims in Canada relating to ACTONEL and for 50% of the losses from any product liability claims in the U.S. and Puerto Rico relating to ACTONEL brought prior to April 1, 2010, which would include ONJ-related claims that were pending as of March 31, 2010. Pursuant to the April 2010 amendment to the Collaboration Agreement, the Company will be fully responsible for any product liability claims in the U.S. and Puerto Rico relating to ACTONEL brought on or after April 1, 2010. The Company may be liable for product liability, warranty or similar claims in relation to PGP products, including ONJ-related claims that were pending as of the closing of the PGP Acquisition. The Companys agreement with P&G provides that P&G will indemnify the Company for 50% of the Companys losses from any such claims pending as of October 30, 2009, subject to certain limits.
The Company currently maintains product liability insurance coverage for claims between $25 million and $170 million, subject to certain exclusions, and otherwise is self-insured. The Companys insurance may not apply to, among other things, damages or defense costs related to the above mentioned HT or ACTONEL-related claims, including any claim arising out of HT or ACTONEL products with labeling that does not conform completely to FDA approved labeling. Although it is impossible to predict with certainty the outcome of any litigation, an unfavorable outcome in these proceedings is not anticipated. An estimate of the range of potential loss, if any, to the Company relating to these proceedings is not possible at this time.
ASACOL 400 mg Patent Matters
In September 2007, PGP and Medeva Pharma Suisse AG (Medeva) received a Paragraph IV certification notice letter from Roxane Laboratories, Inc. (Roxane), a subsidiary of Boehringher Ingelheim Corporation, indicating that Roxane had submitted to the FDA an Abbreviated New Drug Application (ANDA) seeking approval to manufacture and sell a generic version of PGPs ASACOL 400 mg product (ASACOL 400). The notice letter contended that Medevas U.S. Patent No. 5,541,170 (the 170 Patent) and U.S. Patent No. 5,541,171 (the 171 Patent), formulation and method patents which PGP exclusively licenses from Medeva covering ASACOL 400, were invalid and not infringed. The 170 Patent and 171 Patent expire in July 2013. In October 2007, Medeva and PGP filed a patent lawsuit against Roxane in the U.S. District Court for the District of New Jersey alleging infringement of the 170 Patent. The Company has elected not to bring an infringement action with respect to the 171 Patent. The lawsuit resulted in a 30-month stay of FDA approval of Roxanes ANDA until March 2010. The trial has been scheduled for July 2011. In addition, Roxane has agreed not to launch a generic version of ASACOL 400 before September 30, 2011. While the Company and Medeva intend to vigorously defend the 170 Patent and pursue their legal rights, the Company can offer no assurance as to when the lawsuit will be decided, whether the lawsuit will be successful or that a generic equivalent of ASACOL 400 will not be approved and enter the market prior to the expiration of the 170 Patent in 2013.
In June 2010, the Company and Medeva received a Paragraph IV certification notice letter from Par Pharmaceutical, Inc. (Par) indicating that Par had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ASACOL 400. The notice letter contended that the 170 Patent and 171 Patent were invalid and not infringed. In August 2010, the Company and Medeva filed a patent lawsuit against Par and EMET Pharmaceuticals LLC (EMET) in the U.S. District Court for the District of New Jersey alleging infringement of the 170 Patent. The Company has elected not to bring an infringement action with respect to the 171 Patent. EMET was the original filer of the ANDA according to Pars notice letter, and assigned and transferred all right, title and interest in the ANDA to Par in June 2010. The lawsuit resulted in a stay of FDA approval of Pars ANDA until December 2012, subject to prior resolution of the matter before the court. While the Company and Medeva intend to vigorously defend the 170 Patent and pursue their legal rights, the Company can offer no assurance as to when the lawsuit will be decided, whether the lawsuit will be successful or that a generic equivalent of ASACOL 400 will not be approved and enter the market prior to the expiration of the 170 Patent in 2013.
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ACTONEL Patent Matters
In July 2004, PGP received a Paragraph IV certification notice letter from a subsidiary of Teva Pharmaceutical Industries, Ltd. (together with its subsidiaries Teva) indicating that Teva had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of PGPs ACTONEL product. The notice letter contended that PGPs U.S. Patent No. 5,583,122 (the 122 Patent), a new chemical entity patent expiring in June 2014 (including a 6-month pediatric extension of regulatory exclusivity), was invalid, unenforceable or not infringed. In August 2004, PGP filed a patent lawsuit against Teva in the U.S. District Court for the District of Delaware charging Teva with infringement of the 122 Patent. In January 2006, Teva admitted patent infringement but alleged that the 122 Patent was invalid and, in February 2008, the District Court decided in favor of PGP and upheld the 122 Patent as valid and enforceable. In May 2009, the U.S. Court of Appeals for the Federal Circuit unanimously upheld the decision of the District Court.
In August 2008, December 2008 and January 2009, PGP and Hoffman-La Roche Inc. (Roche) received Paragraph IV certification notice letters from Teva, Sun Pharma Global, Inc. (Sun) and Apotex Inc. and Apotex Corp. (together Apotex) indicating that each such company had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of the once-a-month ACTONEL product (ACTONEL OaM). The notice letters contended that Roches U.S. Patent No. 7,192,938 (the 938 Patent), a method patent expiring in November 2023 (including a 6-month pediatric extension of regulatory exclusivity) which Roche licensed to PGP with respect to ACTONEL OaM, was invalid, unenforceable or not infringed. PGP and Roche filed patent infringement suits against Teva (which delivered the first Paragraph IV certification notice letter) in September 2008, Sun in January 2009 and Apotex in March 2009 in the U.S. District Court for the District of Delaware charging each with infringement of the 938 Patent. The lawsuits result in a stay of FDA approval of each defendants ANDA for 30 months from the date of PGPs and Roches receipt of notice, subject to the prior resolution of the matters before the court. The stay of approval of Tevas ANDA has expired. ACTONEL OaM had FDA exclusivity through April 2011 and the underlying 122 Patent, which covers all of the Companys ACTONEL products, expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity).
On December 1, 2009, the Company received a Paragraph IV certification notice letter from Aurobindo Pharma Limited (Aurobindo) regarding the Companys ACTONEL 5, 30 and 35 mg dosage strength tablets (ACTONEL Tablets), which are covered by the Companys U.S. Patent No. 6,165,513 (the 513 Patent), as well as U.S. Patent Nos. 5,994,329, 6,015,801, 6,432,932 and 6,465,443, owned by Merck & Co., Inc. (Merck) and licensed by the Company (the Merck Patents). The Paragraph IV certification notice letter advised the Company of the filing of an ANDA with the FDA requesting approval to manufacture and sell a generic version of ACTONEL Tablets prior to the expiration of the 513 Patent in 2018 and the Merck Patents in 2019. Merck did not assert the Merck Patents in any of the prior ACTONEL patent litigation. The Company has elected not to bring an infringement action with respect to this ANDA. In addition, Aurobindo did not certify against the 122 Patent, which expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity) and covers all of the Companys ACTONEL products (including the ACTONEL Tablets). As a result, the Company does not believe that Aurobindo will be permitted to market its proposed ANDA product prior to the expiration of Tevas 180-day period of marketing exclusivity following the June 2014 expiration (including a 6-month pediatric extension of regulatory exclusivity) of the 122 Patent.
In February 2010 and June 2010, the Company received Paragraph IV certification notice letters from Mylan Pharmaceuticals Inc. (Mylan) and Aurobindo, respectively, regarding the Companys ACTONEL with Calcium Tablets (Copackaged) (ACTONEL/Calcium), which are covered by the Companys 513 Patent, as well as the Merck Patents owned by Merck and licensed by the Company. Each of the Paragraph IV certification letters advised the Company of the filing of an ANDA with the FDA requesting approval to manufacture and sell a generic version of ACTONEL/Calcium prior to the expiration of the 513 Patent in 2018 and the Merck Patents in 2019. The certification notice letters set forth allegations of non-infringement and/or the invalidity of the 513 and Merck Patents. Merck did not assert the Merck Patents in any of the prior ACTONEL patent litigation. The Company previously discontinued sales of ACTONEL/Calcium in the U.S. and has elected not to bring infringement actions with respect to either of these ANDAs. In addition, neither Mylan nor Aurobindo certified against the 122 Patent which expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity) and covers all of the Companys ACTONEL products (including ACTONEL/Calcium). As a result, the Company does not believe that Mylan and Aurobindo will be permitted to market their proposed ANDA products prior to the expiration of Tevas 180-day period of marketing exclusivity following the June 2014 expiration (including a 6-month pediatric extension of regulatory exclusivity) of the 122 Patent.
On February 24, 2010, the Company and Roche received a Paragraph IV certification notice letter from Mylan indicating that it had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of the Companys 5, 30, 35 and 75 mg dosage strength ACTONEL tablets, as well as ACTONEL OaM tablets. The notice letter contends that the 513 Patent, the Merck Patents and the 938 Patent which cover the products are invalid and/or will not be infringed. The Company and Roche filed a patent suit against Mylan in April 2010 in the U.S. District Court for the District of Delaware charging Mylan with infringement of the 938 Patent based on its proposed generic version of ACTONEL OaM tablets. The lawsuit results in a stay of FDA approval of Mylans ANDA for 30 months from the date of the Companys and Roches receipt of notice, subject to prior resolution of the matter before the court. Additionally, ACTONEL OaM had FDA exclusivity through April 2011, and Mylan did not certify against the underlying 122 Patent which expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity) and covers all of the Companys ACTONEL products. As a result, the Company does not believe that Mylan will be permitted to market its proposed
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ANDA products prior to the expiration of Tevas 180-day period of marketing exclusivity following the June 2014 expiration of the 122 Patent (including a 6-month pediatric extension of regulatory exclusivity). In addition, the 938 Patent covering ACTONEL OaM expires in 2023.
In October, November and December 2010 and February 2011, the Company and Roche received Paragraph IV certification notice letters from Sun, Apotex, Teva and Mylan, respectively, indicating that each such company had amended its existing ANDA covering generic versions of ACTONEL OaM to include Roches new U.S. Patent No. 7,718,634 (the 634 Patent). The notice letters contended that the 634 Patent, a method patent expiring in November 2023 (including a 6-month pediatric extension of regulatory exclusivity) which Roche licensed to PGP with respect to ACTONEL OaM, was invalid, unenforceable or not infringed. The Company and Roche filed patent infringement suits against Sun and Apotex in December 2010, against Teva in January 2011 and against Mylan in March 2011 in the U.S. District Court for the District of Delaware charging each with infringement of the 634 Patent. We believe that no additional 30-month stay is available in these matters because the 634 Patent was listed in the FDAs Orange Book subsequent to the date on which Sun, Apotex, Teva and Mylan filed their respective ANDAs with respect to ACTONEL OaM. ACTONEL OaM had FDA exclusivity through April 2011, and the underlying 122 Patent, which covers all of the Companys ACTONEL products, expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity).
The Company and Roches actions against Teva, Apotex, Sun and Mylan for infringement of the 938 Patent and the 634 Patent arising from each such partys proposed generic version of ACTONEL OaM have been consolidated for pretrial purposes. Trial for the suits relating to the 938 Patent has been scheduled for July 2012. No trial date has been set for the suits relating to the 634 Patent. While the Company and Roche intend to vigorously defend the 938 Patent and the 634 Patent and protect their legal rights, the Company can offer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful or that a generic equivalent of ACTONEL OaM will not be approved and enter the market prior to the expiration of the 938 Patent and the 634 Patent in 2023.
DORYX Patent Matters
As a result of the enactment of the QI Program Supplemental Funding Act of 2008 (the QI Act) on October 8, 2008, Mayne Pharma International Pty. Ltd.s (Mayne) U.S. Patent No. 6,958,161 (the 161 Patent) covering the Companys DORYX product was submitted to the FDA for listing in the FDAs Orange Book and potential generic competitors that had filed an ANDA prior to the listing of the 161 Patent were permitted to certify to the listed patent within 120 days of the enactment of the QI Act. In November and December 2008, and January 2009, the Company and Mayne received Paragraph IV certification notice letters from Actavis Elizabeth LLC (Actavis), Mutual Pharmaceutical Company, Inc. (Mutual), Mylan, Impax Laboratories, Inc. (Impax) and Sandoz Inc. (Sandoz) indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of DORYX 100 and 75 mg delayed-release tablets (DORYX 100 and 75). Those notice letters contend that the 161 Patent is invalid, unenforceable or not infringed. In December 2008 and January 2009, the Company and Mayne filed lawsuits against each of the potential generic competitors in the United States District Court for the District of New Jersey, charging them with infringement of the 161 Patent. In March 2009, the Company received the FDAs response to a citizen petition that it had submitted requesting that the FDA impose a 30-month stay of approval on ANDAs referencing DORYX 100 and 75 that were filed prior to the listing of the 161 Patent under the transition rules of the QI Act. In its joint response to the citizen petitions of the Company and several other petitioners, the FDA took the position that a 30-month stay would not apply to approvals for such ANDAs. On November 9, 2009, pursuant to an agreement among the Company, Mayne and Mutual, the District Court dismissed the lawsuit against Mutual concerning generic versions of DORYX 100 and 75 following Mutuals agreement to withdraw its ANDA with respect to such products. In March 2011, the Company entered into a settlement agreement with Actavis pursuant to which Actavis agreed, among other things, not to market or sell a generic equivalent of Doryx 100 and 75 until December 15, 2016, subject to certain exceptions and conditions. In April 2011, the Companys action against Actavis was dismissed without prejudice.
In March 2009, the Company and Mayne received Paragraph IV certification notice letters from Impax and Mylan indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of DORYX 150 mg delayed-release tablets (DORYX 150). The notice letters contend that the 161 Patent is not infringed. In March 2009, the Company and Mayne filed a lawsuit against Impax in the United States District Court for the District of New Jersey, charging Impax with infringement of the 161 Patent. In May 2009, the Company and Mayne filed a lawsuit against Mylan in the United States District Court for the District of New Jersey charging Mylan with infringement of the 161 Patent. Based on the FDAs March 2009 response, the Company believes that because each of Impaxs and Mylans ANDAs with respect to generic versions of DORYX 150 were submitted after the listing of the 161 Patent in the FDAs Orange Book, that the FDA will stay approval of these generic versions of the product for up to 30 months, subject to the prior resolution of the matter before the District Court.
In January 2010, the Company and Mayne received a Paragraph IV certification notice letter from Sandoz indicating that it had amended its ANDA previously submitted to the FDA requesting approval to manufacture and sell generic versions of DORYX 100 and 75 to include a generic version of DORYX 150. The notice letter contends that the 161 Patent is invalid, unenforceable or not infringed. In January 2010, the Company and Mayne filed a lawsuit against Sandoz in the United States District Court for the District of New Jersey charging Sandoz with infringement of the 161 Patent with respect to DORYX 150. While the Company can give no assurance, it believes that under current law, the FDA may not approve Sandozs amended ANDA with respect to DORYX 150 until 180 days following the date on which the first filer of an ANDA with respect to DORYX 150 enters the market, unless the first filer transfers or forfeits its first filer rights, for example by failing to timely receive tentative approval of its product or begin marketing its product in a timely manner.
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In February 2010, the Company and Mayne received a Paragraph IV certification notice letter from Heritage Pharmaceuticals Inc. (Heritage) indicating that it had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of DORYX 100 and 75 and DORYX 150. In March 2010, the Company and Mayne filed a lawsuit against Heritage in the United States District Court for the District of New Jersey charging Heritage with infringement of the 161 Patent. In December 2010, the Company entered into a settlement agreement with Heritage pursuant to which Heritage agreed, among other things, not to market or sell generic equivalents of DORYX 100 and 75 and DORYX 150 until December 15, 2016, subject to certain exceptions and conditions. In February 2011, the Companys action against Heritage was dismissed without prejudice.
All of the actions against Mylan, Impax and Sandoz have been consolidated for discovery purposes. No trial dates have been set by the District Court. In December 2010, the FDA approved Impaxs and Mylans ANDAs with respect to generic versions of DORYX 100 and 75, and the Company believes that generic versions of these products were launched at-risk in January 2011. DORYX 100 and 75 represent less than 5% of our DORYX franchise based on total prescriptions according to IMS Health, Inc., while DORYX 150 currently represents the remainder of the DORYX franchise. If the FDA approves Impaxs or Mylans ANDAs with respect to DORYX 150 following the expiration of the applicable 30-month stay in September 2011, and Impax or Mylan elects to launch at-risk, a generic equivalent of DORYX 150 could also enter the market prior to the expiration of the 161 Patent in 2022. While the Company and Mayne intend to vigorously defend the 161 Patent and pursue all of their legal rights, including their right to any monetary damages, the Company can offer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful or that additional generic equivalents of DORYX 100 or 75, or any generic equivalent of DORYX 150, will not be approved and enter the market prior to the expiration of the 161 Patent in 2022.
LOESTRIN 24 FE Patent Matters
In April 2011, the Company received a Paragraph IV certification notice letter from Mylan, as U.S. agent for Famy Care Ltd. (Famy Care), indicating that Famy Care had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Companys oral contraceptive, LOESTRIN 24 FE. The notice letter contends that the Companys U.S. Patent No. 5,552,394 (the 394 Patent), which covers LOESTRIN 24 FE and expires in 2014, is invalid, unenforceable or not infringed. The Company is reviewing the Famy Care notice letter and expects to file an infringement lawsuit against Famy Care and Mylan within 45 days of its receipt of the Paragraph IV certification notice letter. If the Company files suit against Famy Care within 45 days, the FDA will be prohibited from approving Famy Cares ANDA for 30 months from the date of the Companys receipt of the Famy Care notice letter, subject to the prior resolution of the matter before the court. In January 2009, the Company entered into a settlement and license agreement with Watson to resolve patent litigation related to the 394 Patent. Under the agreement, Watson agreed, among other things, not to commence marketing its generic equivalent product until the earliest of (i) January 22, 2014, (ii) 180 days prior to a date on which the Company has granted rights to a third party to market a generic version of LOESTRIN 24 FE in the U.S. or (iii) the date on which a third party enters the market with a generic version of LOESTRIN 24 FE in the U.S. without authorization from the Company. In addition, under current law, unless Watson forfeits its first filer status, the FDA may not approve later-filed ANDAs until 180 days following the date on which Watson enters the market. However, the Company believes Watson may have forfeited its first filer status as a result of its failure to obtain approval by the FDA of its ANDA within the requisite period. In October 2010, the Company also entered into a settlement and license agreement with Lupin Ltd. and its U.S. subsidiary, Lupin Pharmaceuticals, Inc. (collectively Lupin), to resolve patent litigation related to the 394 Patent. Under that agreement, Lupin and its affiliates agreed, among other things, not to market or sell a generic equivalent product until the earlier of July 22, 2014 or the date of an at-risk entry into the U.S. market by a third party generic version of LOESTRIN 24 FE. While the Company intends to vigorously defend the 394 Patent and pursue its legal rights, it can offer no assurance that a generic equivalent of LOESTRIN 24 FE will not be approved and enter the market prior to the expiration of the 394 Patent in 2014.
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False Claims Act Litigation
In December 2009, the Company was served with a civil complaint brought by an individual plaintiff, purportedly on behalf of the United States, alleging that the Company and over 20 other pharmaceutical manufacturers violated the False Claims Act (FCA), 31 U.S.C. § 3729(a)(1)(A), (B), by submitting false records or statements to the federal government, thereby causing Medicaid to pay for unapproved or ineffective drugs. The plaintiffs original complaint was filed under seal in 2002, but was not served on the Company until 2009. The complaint alleges that the Company submitted to the Centers for Medicare and Medicaid Services (CMS) false information regarding the safety and effectiveness of certain nitroglycerin transdermal products. The plaintiff alleges that CMS included these products in its list of reimbursable prescription drugs and that, as a consequence federal Medicaid allegedly reimbursed state Medicaid programs for a portion of the cost of such products. The plaintiff asserts that from 1996 until 2003 the federal Medicaid program paid approximately $9.8 million to reimburse the states for the Companys nitroglycerin transdermal products. The complaint seeks, among other things, treble damages; a civil penalty of up to ten thousand dollars for each alleged false claim; and costs, expenses and attorneys fees.
The Company has requested all prior versions of plaintiffs complaint and expects to file its response to the complaint following its receipt and review of the prior versions. The Company intends to defend this action vigorously and currently believes that the complaint lacks merit. The Company has a number of defenses to the allegations in the complaint and anticipates filing a motion to dismiss the action. In addition, the United States has declined to intervene in this action with respect to the Company. Although it is impossible to predict with certainty the outcome of any litigation, an unfavorable outcome in these proceedings is not anticipated. An estimate of the range of potential loss to the Company, if any, relating to these proceedings is not possible at this time.
Fair Labor Standards Act and Related Litigation
In August 2010, the Company was served with a complaint in a class and collective action brought under the Fair Labor Standards Act and the Illinois Minimum Wage Law. The lawsuit was filed in the United States District Court for the Northern District of Illinois by a former pharmaceutical sales representative of the Company, on behalf of herself and other sales representatives. The suit alleges that the Company improperly categorized its pharmaceutical sales representatives as exempt rather than non-exempt employees and as a result, wrongfully denied them overtime compensation. Plaintiff is seeking damages for unpaid overtime, including backpay, liquidated damages, penalties, interest, and attorneys fees. Other pharmaceutical companies have been the subject of similar lawsuits. The Company believes it has meritorious defenses and intends to defend this action vigorously. This case is in the early stages of litigation, and an estimate of the range of potential losses to the Company, if any, relating to these proceedings is not possible at this time.
15. Income Taxes
The Company operates in many tax jurisdictions including: the Republic of Ireland, the United States, the United Kingdom, Puerto Rico, Canada, Germany, Switzerland and other Western European countries. The Companys effective tax rate for the quarters ended March 31, 2011 and 2010 was 709% and 58%, respectively. The effective income tax rate for interim reporting periods is volatile due to changes in income mix among the various tax jurisdictions in which the Company operates, the impact of discrete items, as well as the overall level of consolidated income before income taxes. In the quarter ended March 31, 2011 the discrete items included valuation allowances related to the announced restructuring of certain of the Companys Western European operations. The Companys estimated annual effective tax rate for all periods includes the impact of changes in income tax liabilities related to reserves recorded under ASC Topic 740.
16. Segment Information
The Companys business is organized into two reportable segments, North America (which includes the U.S., Canada and Puerto Rico) and the Rest of the World (ROW) consistent with how it manages its business and views the markets it serves. The Company manages its businesses separately in North America and ROW as components of an enterprise for which separate information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. In addition to managing the Companys results of operations in the two reportable segments, the Company manages revenues at a brand level.
An operating segments performance is primarily evaluated based on segment operating profit, which excludes interest expense, and is used by the chief operating decision maker to evaluate the success of a specific region. The Company believes that segment operating profit is an appropriate measure for evaluating the operating performance of its segments. However, this measure should be considered in addition to, not a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with U.S. GAAP.
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The following represents the Companys segment operating profit and a reconciliation to its consolidated income before taxes for the quarters ended March 31, 2011 and 2010:
North America |
ROW | Eliminations(1) | Total Company |
|||||||||||||
Quarter Ended March 31, 2011 |
||||||||||||||||
Total revenue |
$ | 1,323,362 | $ | 203,372 | $ | (770,205 | ) | $ | 756,529 | |||||||
Segment operating profit |
$ | 426,141 | $ | 9,523 | $ | (274,926 | ) | $ | 160,738 | |||||||
Corporate expenses |
(1,765 | ) | ||||||||||||||
Interest (expense), net |
(155,025 | ) | ||||||||||||||
Income before taxes |
$ | 3,948 | ||||||||||||||
Quarter Ended March 31, 2010 |
||||||||||||||||
Total revenue |
$ | 794,768 | $ | 209,825 | $ | (243,291 | ) | $ | 761,302 | |||||||
Segment operating profit |
$ | 64,292 | $ | 35,345 | $ | (62,043 | ) | $ | 37,594 | |||||||
Corporate expenses |
(5,845 | ) | ||||||||||||||
Interest (expense), net |
(72,398 | ) | ||||||||||||||
(Loss) before taxes |
$ | (40,649 | ) | |||||||||||||
(1) | Eliminations represent inter-segment revenues and related cost of sales. |
The following table presents total revenues by product for the quarters ended March 31, 2011 and 2010:
Quarter
Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
|||||||
Revenue breakdown by product |
||||||||
ACTONEL(1) |
$ | 231,651 | $ | 262,308 | ||||
ASACOL |
187,327 | 165,020 | ||||||
LOESTRIN 24 FE |
119,272 | 78,751 | ||||||
DORYX |
65,928 | 50,900 | ||||||
ENABLEX |
45,304 | 18,180 | ||||||
ESTRACE Cream |
34,553 | 29,758 | ||||||
LO LOESTRIN FE |
7,958 | | ||||||
FEMHRT |
7,890 | 9,293 | ||||||
FEMCON FE |
6,080 | 10,636 | ||||||
ATELVIA |
975 | | ||||||
DOVONEX |
| 37,804 | ||||||
TACLONEX |
| 34,906 | ||||||
Other Womens Healthcare |
15,646 | 15,892 | ||||||
Other Hormone Therapy |
6,368 | 7,398 | ||||||
Other Oral Contraceptives |
4,049 | 7,432 | ||||||
Other products |
17,120 | 20,815 | ||||||
Contract manufacturing product sales |
2,902 | 5,129 | ||||||
Other revenue |
3,506 | 7,080 | ||||||
Total revenue |
$ | 756,529 | $ | 761,302 | ||||
(1) | Other revenue related to ACTONEL is combined with its product net sales for purposes of presenting revenue by product and segment reporting. |
The following tables present additional segment information for the quarters ended March 31, 2011 and 2010:
North America | ROW | Total Company | ||||||||||
Quarter ended March 31, 2011 |
||||||||||||
Capital expenditures |
$ | 7,961 | $ | 4,096 | $ | 12,057 | ||||||
Amortization of intangible assets |
146,250 | 1,395 | 147,645 | |||||||||
Depreciation expense |
6,740 | 3,779 | 10,519 | |||||||||
Write-down of property, plant and equipment |
20,889 | | 20,889 | |||||||||
Quarter ended March 31, 2010 |
||||||||||||
Capital expenditures |
$ | 10,115 | $ | 5,347 | $ | 15,462 | ||||||
Amortization of intangible assets |
137,212 | 23,700 | 160,912 | |||||||||
Depreciation expense |
6,044 | 1,447 | 7,491 |
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The following table presents total revenue by significant country of domicile for the quarters ended March 31, 2011 and 2010:
Quarter
Ended March 31, 2011 |
Quarter
Ended March 31, 2010 |
|||||||
U.S. |
$ | 618,811 | $ | 562,386 | ||||
France |
31,490 | 40,393 | ||||||
Canada |
21,067 | 40,557 | ||||||
Puerto Rico |
13,139 | 7,817 | ||||||
UK / Republic of Ireland |
12,740 | 24,993 | ||||||
Italy |
12,487 | 17,220 | ||||||
Other |
46,795 | 67,936 | ||||||
Total |
$ | 756,529 | $ | 761,302 | ||||
17. Reliance on Significant Suppliers
In the event that a significant supplier (including a third-party manufacturer or supplier of certain active pharmaceutical ingredients, or API) suffers an event that causes it to be unable to manufacture the Companys product or meet the Companys API requirements for a sustained period and the Company is unable to obtain the product or API from an alternative supplier, the resulting shortages of inventory could have a material adverse effect on the business of the Company. The following table shows revenue generated from products by significant supplier as a percentage of total revenues.
Quarter
Ended March 31, 2011 |
Quarter
Ended March 31, 2010 | |||||||
Lonza Inc |
31% | 34% | ||||||
Cambrex Corporation |
23% | 19% | ||||||
Bayer |
20% | 13% | ||||||
LEO Pharma |
0% | 10% |
18. Comprehensive Income
ASC Topic 220, Comprehensive Income, requires foreign currency translation adjustments and certain other items, which were reported in shareholders (deficit) to be separately disclosed as other comprehensive (loss). Other comprehensive income / (loss) is comprised of net income / (loss) plus the period activity within accumulated other comprehensive income / (loss). Other comprehensive (loss) was $(4,470) and ($28,925) for the quarters ended March 31, 2011 and 2010, respectively.
The components of accumulated other comprehensive income / (loss) consist of:
As of March 31, 2011 |
As of December 31, 2010 |
|||||||
Cumulative translation adjustment |
$ | (4,164 | ) | $ | (23,829 | ) | ||
Actuarial gains related to defined benefit plans (net of tax) |
8,106 | 8,184 | ||||||
Total |
$ | 3,942 | $ | (15,645 | ) | |||
19. Retirement Plans
The Company has defined benefit retirement pension plans covering certain employees in Western Europe. Retirement benefits are generally based on an employees years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. The Swiss plan is partially employee funded, but the employee contributions were not material.
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The net periodic benefit cost of the Companys non-U.S. defined benefit plans for the quarters presented were as follows:
Quarter Ended March 31, | ||||||||
2011 | 2010 | |||||||
Service cost |
$ | 567 | $ | 529 | ||||
Interest cost |
1,091 | 1,049 | ||||||
Expected return on plan assets |
(1,064 | ) | (864 | ) | ||||
Amortization of: |
||||||||
Actuarial losses |
(45 | ) | | |||||
Prior service costs |
(33 | ) | | |||||
Net periodic benefit cost |
$ | 516 | $ | 714 | ||||
Company Contributions
For the quarter ended March 31, 2011, the Company contributed $1,291 to non-U.S. retirement plans.
20. Related Parties
In March 2011, certain of the Companys shareholders sold approximately 26,500,000 ordinary shares at a price of $23.25 per share in a registered public offering (the 2011 Secondary Offering). The selling shareholders included the remaining sponsors and members of the Companys senior management team. The Company did not receive any proceeds from the sale of the shares but did pay expenses of the 2011 Secondary Offering. Following the 2011 Secondary Offering, the remaining sponsors collectively owned approximately 30% of the Companys ordinary shares.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 (Annual Report). This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under Risk Factors in our Annual Report and elsewhere in this Form 10-Q.
Summary
The following are certain significant events that occurred in 2011:
| In January 2011, we made optional prepayments of our term loan indebtedness of $200 million; |
| In March 2011, we successfully completed the refinancing of our senior secured indebtedness. We used the proceeds of our term loan borrowings under our New Senior Secured Credit Facilities (as defined below), as well as approximately $279 million of cash on hand, to repay and terminate our Prior Senior Secured Credit Facilities (defined below) and to pay related fees, expenses and accrued interest. The refinancing had the effect of extending the maturity profile of our senior secured indebtedness and reducing certain LIBOR floors and interest margins; |
| In April 2011, we announced a plan to restructure our operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring will not impact our operations at our headquarters in Dublin, Ireland, our facilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or our commercial operations in the United Kingdom. We determined to proceed with the restructuring following the completion of a strategic review of our operations in our Western European markets where our product ACTONEL lost exclusivity in late 2010. ACTONEL accounted for approximately 70% of our Western European revenues in 2010. In connection with the restructuring, we intend to move to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The implementation of the restructuring plan is expected to impact approximately 500 employees and remains subject to consultation with local works councils in certain European jurisdictions. In connection with the restructuring, we recorded a pre-tax expense of $43 million related to severance charges in the quarter ended March 31, 2011; |
| In April 2011, we announced a plan to repurpose our Manati, Puerto Rico manufacturing facility. Going forward this facility will serve as a warehouse and distribution center. In connection with the repurposing, in the quarter ended March 31, 2011 we recorded $7 million in severance charges and $21 million in non-cash charges relating to the write-down of certain property, plant and equipment; |
| Our revenue for the quarter ended March 31, 2011 was $757 million and our net (loss) was ($24) million. |
2011 Strategic Transactions
During 2011, the following events impacted our results of operations and will continue to have an impact on our future operations.
Refinancing of Senior Secured Indebtedness
On March 17, 2011, our subsidiaries, Warner Chilcott Holdings Company III, Limited (Holdings III), WC Luxco S.à r.l. (the Luxco Borrower), Warner Chilcott Corporation (WCC or the US Borrower) and Warner Chilcott Company, LLC (WCCL) (the PR Borrower, and together with the Luxco Borrower and the US Borrower, the Borrowers) entered into a new credit agreement (the Credit Agreement) with a syndicate of lenders (the Lenders) and Bank of America, N.A. as administrative agent in order to refinance our Prior Senior Secured Credit Facilities (as defined below). Pursuant to the Credit Agreement, the Lenders provided senior secured credit facilities (the New Senior Secured Credit Facilities) in an aggregate amount of $3,250 million comprised of $3,000 million in aggregate term loan facilities and a $250 million revolving credit facility available to all Borrowers. At the closing, we borrowed a total of $3,000 million under the new term loan facilities and made no borrowings under the revolving credit facility. The proceeds of the new term loans, together with approximately $279 million of cash on hand, were used to repay $3,219 million in aggregate term loans outstanding under our Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest.
Western European Restructuring
In April 2011, we announced a plan to restructure our operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring will not impact our operations at our headquarters in Dublin, Ireland, our facilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or our commercial operations in the United Kingdom.
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We determined to proceed with the restructuring following the completion of a strategic review of our operations in our Western European markets where our product ACTONEL lost exclusivity in late 2010. ACTONEL accounted for approximately 70% of our Western European revenues in the year ended December 31, 2010. In connection with the restructuring, we intend to move to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. We currently expect to complete the restructuring by the middle of 2012. The implementation of the restructuring plan, which is expected to impact approximately 500 employees, and the aggregate amounts to be expensed, remain subject to consultation with local works councils in certain European jurisdictions. Severance costs of $43 million were recorded in the quarter ended March 31, 2011 and were included as a component of restructuring costs in the condensed consolidated statement of operations. Severance related costs are expected to be settled in cash within the next twelve months.
Manati Facility
In April 2011, we announced a plan to repurpose our Manati, Puerto Rico manufacturing facility. Going forward this facility will serve as a warehouse and distribution center. As a result of the repurposing, we recorded a charge of $21 million in the quarter ended March 31, 2011 for the write-down of certain property, plant and equipment. Additionally, severance costs of $7 million were recorded in the quarter ended March 31, 2011. The severance costs relating to the Manati repurposing are expected to be settled in cash within the next twelve months. The total expenses of $28 million related to the Manati repurposing were recorded as a component of cost of sales.
2010 Strategic Transactions
During 2010, we completed three strategic transactions that impacted our results of operations and will continue to have an impact on our future operations.
Amendment of the Sanofi Collaboration Agreement
In April 2010, we and Sanofi-Aventis U.S. LLC (Sanofi) entered into an amendment to our global collaboration agreement pursuant to which we co-develop and market ACTONEL products on a global basis, excluding Japan (as amended, the Collaboration Agreement). Under the terms of the amendment, we took full operational control over the promotion, marketing and research and development (R&D) decisions for ACTONEL products, and now ATELVIA, in the United States and Puerto Rico, and assumed responsibility for all associated costs relating to those activities. Prior to the amendment, we shared such costs with Sanofi in these territories. We remained the principal in transactions with customers in the United States and Puerto Rico and continue to invoice all sales in these territories. In return, it was agreed that Sanofi would receive, as part of the global collaboration agreement between the parties, payments from us based on an agreed percentage of U.S. and Puerto Rico net sales for the remainder of the term of the Collaboration Agreement. For a further description of the Collaboration Agreement, including the arbitration proceedings with respect to the potential early termination of the Collaboration Agreement, see Note 7 to our notes to the condensed consolidated financial statements.
Special Dividend Transaction
On September 8, 2010, we paid a special cash dividend of $8.50 per share, or $2,144 million in the aggregate, to shareholders of record on August 30, 2010 (the Special Dividend). In order to fund the Special Dividend and pay related fees and expenses, on August 20, 2010, we incurred $1,500 million aggregate principal amount of new term loan indebtedness in connection with an amendment to our Prior Senior Secured Credit Facilities and issued $750 million aggregate principal amount of 7.75% senior notes due 2018 (the Initial 7.75% Notes). The incurrence of this indebtedness and the indebtedness that was incurred in connection with the ENABLEX Acquisition (as defined below) impacted our interest expense during the quarter ended March 31, 2011.
ENABLEX Acquisition
On October 18, 2010, we acquired the U.S. rights to Novartis Pharmaceuticals Corporations (Novartis) ENABLEX product for an upfront payment of $400 million in cash at closing, plus future milestone payments of up to $20 million in the aggregate based on 2011 and 2012 net sales of ENABLEX (the ENABLEX Acquisition). Concurrent with the closing of the ENABLEX Acquisition, we and Novartis terminated our existing co-promotion agreement, and we assumed full control of sales and marketing of ENABLEX in the U.S. market. We issued an additional $500 million aggregate principal amount of 7.75% senior notes due 2018 (the Additional 7.75% Notes and, together with the Initial 7.75% Notes, the 7.75% Notes) on September 29, 2010 in order to fund the ENABLEX Acquisition and for general corporate purposes.
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Operating Results for the quarters ended March 31, 2011 and 2010
Revenue
The following table sets forth our unaudited revenue for the quarters ended March 31, 2011 and 2010, with the corresponding dollar and percentage changes:
Quarter Ended March 31, | Increase (decrease) |
|||||||||||||||
(dollars in millions) | 2011 | 2010 | Dollars | Percent | ||||||||||||
Womens Healthcare: |
||||||||||||||||
Osteoporosis |
||||||||||||||||
ACTONEL(1) |
$ | 232 | $ | 262 | $ | (30 | ) | (12 | )% | |||||||
ATELVIA |
1 | | 1 | 100 | % | |||||||||||
Total osteoporosis |
233 | 262 | (29 | ) | (11 | )% | ||||||||||
Oral Contraceptives |
||||||||||||||||
LOESTRIN 24 FE |
119 | 79 | 40 | 51 | % | |||||||||||
LO LOESTRIN FE |
8 | | 8 | 100 | % | |||||||||||
FEMCON FE |
6 | 11 | (5 | ) | (43 | )% | ||||||||||
Other Oral Contraceptives |
4 | 7 | (3 | ) | (46 | )% | ||||||||||
Total oral contraceptives |
137 | 97 | 40 | 42 | % | |||||||||||
Hormone Therapy |
||||||||||||||||
ESTRACE Cream |
35 | 30 | 5 | 16 | % | |||||||||||
FEMHRT |
8 | 9 | (1 | ) | (15 | )% | ||||||||||
Other Hormone Therapy |
6 | 7 | (1 | ) | (14 | )% | ||||||||||
Total hormone therapy |
49 | 46 | 3 | 5 | % | |||||||||||
Other womens healthcare products |
16 | 16 | | | % | |||||||||||
Total Womens Healthcare |
435 | 421 | 14 | 3 | % | |||||||||||
Gastroenterology: |
||||||||||||||||
ASACOL |
187 | 165 | 22 | 14 | % | |||||||||||
Dermatology: |
||||||||||||||||
DORYX |
66 | 51 | 15 | 30 | % | |||||||||||
TACLONEX(2) |
| 35 | (35 | ) | (100 | )% | ||||||||||
DOVONEX(2) |
| 38 | (38 | ) | (100 | )% | ||||||||||
Total Dermatology |
66 | 124 | (58 | ) | (47 | )% | ||||||||||
Urology: |
||||||||||||||||
ENABLEX(3) |
45 | 18 | 27 | 149 | % | |||||||||||
Other: |
||||||||||||||||
Other products net sales |
17 | 21 | (4 | ) | (18 | )% | ||||||||||
Contract manufacturing product sales |
3 | 5 | (2 | ) | (43 | )% | ||||||||||
Other revenue(4) |
4 | 7 | (3 | ) | (50 | )% | ||||||||||
Total Revenue |
$ | 757 | $ | 761 | $ | (4 | ) | (1 | )% | |||||||
(1) | Includes other revenue of $22 million and $27 million for the quarters ended March 31, 2011 and 2010, respectively, as reported in our condensed consolidated statement of operations, resulting from the Collaboration Agreement with Sanofi. |
(2) | Includes revenues from our distribution agreement with LEO Pharma A/S (LEO). On September 23, 2009, we entered into a definitive asset purchase agreement with LEO pursuant to which LEO paid us $1,000 million in cash in order to terminate our exclusive license to distribute LEOs DOVONEX and TACLONEX products (including all products in LEOs development pipeline) in the United States and to acquire certain assets related to our distribution of DOVONEX and TACLONEX products in the United States (the LEO Transaction). In connection with the LEO Transaction, we entered into a distribution agreement with LEO pursuant to which we agreed to, among other things, (1) continue to distribute DOVONEX and TACLONEX on behalf of LEO, for a distribution fee, through September 23, 2010 and (2) purchase inventories of DOVONEX and TACLONEX from LEO. As a result of the distribution agreement with LEO, we continued to record net sales of DOVONEX and TACLONEX following the closing of the LEO Transaction until June 30, 2010. On June 30, 2010, LEO assumed responsibility for its own distribution services, and on July 15, 2010 the parties formally terminated the distribution agreement. |
(3) | Includes other revenue of $18 million for the quarter ended March 31, 2010 reported in our condensed consolidated statement of operations resulting from the contractual percentage we received of Novartis sales of ENABLEX. Effective October 18, 2010, we began to record sales of ENABLEX on a gross basis as we became the principal in the sales transactions. |
(4) | Excludes other revenue of $22 million and $45 million for the quarters ended March 31, 2011 and 2010, respectively, reported in our condensed consolidated statement of operations and disclosed above pursuant to footnotes 1 and 3 above. |
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Total revenue in the quarter ended March 31, 2011 was $757 million, a decrease of $4 million, or 1%, compared to the quarter ended March 31, 2010. For the quarter ended March 31, 2011 declines in DOVONEX and TACLONEX net sales (as a result of the LEO Transaction) and ACTONEL revenues were offset, in part, by revenue growth in certain other products, primarily LOESTRIN 24 FE, ENABLEX and ASACOL, as compared to the prior year quarter. In addition to transactions such as the LEO Transaction, 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. (IMS) estimates of filled prescriptions for our products as a proxy for market demand in the U.S.
Revenues of our osteoporosis products decreased $29 million, or 11%, in the quarter ended March 31, 2011, compared with the prior year quarter. Global revenues of ACTONEL were $232 million in the quarter ended March 31, 2011 compared to $262 million in the prior year quarter. The 12% decrease in ACTONEL global revenues in the quarter ended March 31, 2011 relative to the prior year quarter was attributable primarily to the loss of exclusivity in Western Europe which began in the fourth quarter of 2010. ACTONEL revenues outside of North America, or rest of world (ROW), were $69 million in the quarter ended March 31, 2011, down 37% from $108 million in the prior year quarter. Revenues of ACTONEL in North America were $163 million and $154 million, respectively, including $144 million and $120 million, respectively in the U.S., for the quarters ended March 31, 2011 and 2010. In the United States, ACTONEL revenues increased $24 million compared to the prior year quarter primarily due to a decrease in sales-related deductions, an expansion of pipeline inventories, and higher average selling prices, offset in part by a 27% decrease in filled prescriptions. In the U.S., ACTONEL continues to face market share declines due to the impact of managed care initiatives that encourage the use of generic versions of other products, such as Fosamax, as well as declines in filled prescriptions within the overall oral bisphosphonate market. While we expect to continue to experience significant declines in global ACTONEL revenues throughout the remainder of 2011 relative to 2010, we expect revenues from our new product ATELVIA will grow and partially offset some of those declines in the U.S. market. ATELVIA, which we began to promote in the U.S. in early 2011, generated net sales of $1 million in the quarter ended March 31, 2011.
Net sales of our oral contraceptive products increased $40 million, or 42%, in the quarter ended March 31, 2011, compared with the prior year quarter. LOESTRIN 24 FE generated revenues of $119 million in the quarter ended March 31, 2011, an increase of 51%, compared with $79 million in the prior year quarter. The increase in LOESTRIN 24 FE net sales was primarily due to a 20% increase in filled prescriptions in the quarter ended March 31, 2011, as well as a decrease in sales-related deductions and higher average selling prices, offset in part by a contraction of pipeline inventories relative to the prior year quarter. LO LOESTRIN FE, which we began to promote in the U.S. in early 2011, generated net sales of $8 million in the quarter ended March 31, 2011. In March 2011, as expected, we believe Teva launched a generic version of our FEMCON FE product. We anticipate net sales of FEMCON FE will continue to decline during 2011 as compared to the prior year periods as a result of generic competition.
Net sales of our hormone therapy products increased $3 million, or 5%, in the quarter ended March 31, 2011 as compared with the prior year quarter. Net sales of ESTRACE Cream increased $5 million, or 16%, compared to the prior year quarter. The increase in ESTRACE Cream was primarily due to higher average selling prices and an increase in filled prescriptions of 10% compared to the prior year quarter.
Net sales of ASACOL were $187 million in the quarter ended March 31, 2011, an increase of 14%, compared with $165 million in the prior year quarter. ASACOL revenues in North America in the quarters ended March 31, 2011 and 2010 totaled $178 million and $152 million, respectively, including revenues in the United States of $173 million and $147 million, respectively. The increase in ASACOL net sales in the United States was primarily due to higher average selling prices and an expansion of pipeline inventories, offset in part by a decrease in filled prescriptions of 3%, relative to the prior year quarter. In October 2007, we and Medeva Pharma Suisse AG (Medeva), the owner of the formulation and method patent for the ASACOL 400 mg product, filed a patent infringement suit against Roxane Laboratories, Inc. (Roxane), a subsidiary of Boehringher Ingelheim Corporation, with respect to Roxanes ANDA for a generic version of the ASACOL 400 mg product. See Note 14 to the notes to the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more information. Our ASACOL 800 mg product (known as ASACOL HD in the U.S.) was launched in the United States in June 2009 and has protection under a separate formulation patent until 2021, which is not currently subject to litigation. This patent does not protect the ASACOL 400 mg product. The ASACOL 400 mg product accounted for the substantial majority of our total ASACOL net sales in the quarters ended March 31, 2011 and 2010.
Net sales of our dermatology products decreased $58 million, or 47%, in the quarter ended March 31, 2011, as compared to the prior year quarter. This decrease relative to the prior year quarter was primarily due to a $73 million decrease in net sales of DOVONEX and TACLONEX resulting from LEOs assumption of responsibility for the distribution of DOVONEX and TACLONEX on June 30, 2010. From the closing of the LEO Transaction in September 2009 until June 30, 2010, we recorded net sales (and cost of sales) for all DOVONEX and TACLONEX products sold in the United States at nominal distributor margins pursuant to the distribution agreement executed in connection with the LEO Transaction. We did not record any net sales of DOVONEX or TACLONEX in the quarter ended March 31, 2011. Net sales of DORYX increased $15 million, or 30%, in the quarter ended March 31, 2011, compared to the prior year quarter, primarily due to a decrease in sales-related deductions as well as higher average selling prices, offset, in part, by a 24% decrease in filled prescriptions. The decrease in sales-related deductions compared
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with the prior year quarter was primarily a result of changes to our loyalty card program in early 2011 which reduced the rebate offered to patients on DORYX 150 mg. As expected, the reduction in the rebate resulted in decreased usage of our customer loyalty card for DORYX 150 mg and a meaningful decline in filled prescriptions of DORYX 150 mg relative to the prior year quarter. Offsetting the decline in filled prescriptions were significantly higher average net sales values per prescription for DORYX 150 mg. Although our DORYX patent does not expire until 2022 and we and Mayne Pharma International Pty. Ltd. (Mayne) have filed infringement lawsuits against Mylan Pharmaceuticals Inc. (Mylan) and Impax Laboratories, Inc. (Impax) arising from their Abbreviated New Drug Application (ANDA) filings with respect to our DORYX 75 mg and 100 mg products, we believe that generic versions of such products were launched at risk in January 2011 following the Food and Drug Administrations approval of their respective ANDAs in December 2010. See Note 14 to the notes to the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more information.
Revenues of ENABLEX in the quarter ended March 31, 2011 were $45 million compared to $18 million in the prior year quarter. The increase in ENABLEX revenues in the quarter ended March 31, 2011 relative to the prior year quarter was primarily attributable to the ENABLEX Acquisition on October 18, 2010 pursuant to which we acquired the U.S. rights to ENABLEX. As a result of the ENABLEX Acquisition, we began to record sales of ENABLEX in product net sales on a gross basis as we became the principal in the sales transactions. During periods prior to the ENABLEX Acquisition, including the quarter ended March 31, 2010, ENABLEX revenue was recorded based on the contractual percentage we received of Novartis net sales pursuant to our co-promotion agreement with Novartis. Filled prescriptions of ENABLEX in the U.S. decreased 2% in the quarter ended March 31, 2011 compared to the prior year quarter.
Cost of Sales (excluding amortization of intangible assets)
The table below shows the calculation of cost of sales and cost of sales percentage for the quarters ended March 31, 2011 and 2010:
(dollars in millions) | Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
$ Change |
Percent Change |
||||||||||||
Product net sales |
$ | 731 | $ | 709 | $ | 22 | 3 | % | ||||||||
Cost of sales (excluding amortization) |
123 | 217 | (94 | ) | (43 | )% | ||||||||||
Cost of sales percentage |
17 | % | 31 | % | ||||||||||||
Cost of sales (excluding amortization) decreased $94 million, or 43%, in the quarter ended March 31, 2011 compared with the prior year quarter. The quarter ended March 31, 2011 included $28 million in costs related to the repurposing of the Manati facility. The decrease in cost of sales in the quarter ended March 31, 2011 relative to the prior year quarter was, in part, due to the impact of the purchase accounting inventory step-up resulting from the acquisition of The Procter & Gamble Companys global branded pharmaceutical business (the PGP Acquisition) of $106 million that was recognized in the quarter ended March 31, 2010. Also included in the quarter ended March 31, 2010 was approximately $73 million of costs related to DOVONEX and TACLONEX products distributed at nominal distributor margins under the LEO distribution agreement. These costs in the quarter ended March 31, 2010 were offset, in part, by a $25 million gain relating to the sale of certain inventories in connection with the LEO Transaction. Excluding the impact of the items mentioned above, our cost of sales percentage increased in the quarter ended March 31, 2011 relative to the prior year quarter from 10% to 13% primarily due to the mix of products sold and the fact that there were no costs of sales associated with our Enablex revenue in the prior year quarter.
Selling, General & Administrative (SG&A) Expenses
Our SG&A expenses were comprised of the following for the quarters ended March 31, 2011 and 2010:
(dollars in millions) | Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
$ Change |
Percent Change |
||||||||||||
Advertising & Promotion (A&P) |
$ | 50 | $ | 31 | $ | 19 | 62 | % | ||||||||
Selling and Distribution |
128 | 168 | (40 | ) | (24 | )% | ||||||||||
General, Administrative and Other (G&A) |
75 | 121 | (46 | ) | (38 | )% | ||||||||||
Total |
$ | 253 | $ | 320 | $ | (67 | ) | (21 | )% | |||||||
SG&A expenses for the quarter ended March 31, 2011 were $253 million, a decrease of $67 million, or 21%, from $320 million in the prior year quarter. A&P expenses for the quarter ended March 31, 2011 increased $19 million, or 62%, compared to the prior year quarter, primarily due to advertising and other promotional expenses attributable to the U.S. launches of ATELVIA and LO LOESTRIN FE. Selling and distribution expenses for the quarter ended March 31, 2011 decreased $40 million, or 24%, compared to the prior year quarter. The decrease was primarily due to a decrease in the Sanofi co-promotion expense of $48 million as a result of decreased ACTONEL revenues primarily in Western Europe and the April 2010 amendment to the Collaboration Agreement, offset, in part, by increases in promotional spending related to the launches of ATELVIA and LO LOESTRIN FE. G&A expenses in the quarter ended March 31, 2011 decreased $46 million, or 38%, as compared to the prior year quarter, primarily due to the following charges which were included in G&A expenses in the quarter ended March 31, 2010: (i) $23 million of expenses payable to P&G under the transition services agreement entered into in connection with the PGP Acquisition, (ii) $12 million of legal, consulting and other professional fees relating primarily to the PGP Acquisition and (iii) $13 million of severance costs.
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R&D
Our R&D expenses were comprised of the following for the quarters ended March 31, 2011 and 2010:
(dollars in millions) | Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
$ Change |
Percent Change |
||||||||||||
Unallocated overhead expenses |
$ | 18 | $ | 16 | $ | 2 | 9 | % | ||||||||
Expenses allocated to specific projects |
12 | 14 | (2 | ) | (13 | )% | ||||||||||
Regulatory fees |
1 | 1 | | | % | |||||||||||
Total |
$ | 31 | $ | 31 | $ | | | % | ||||||||
Our investment in R&D for the quarter ended March 31, 2011 was essentially flat as compared to the prior year quarter. Our R&D expenses consist of our internal development costs, fees paid to contracted development groups and license fees paid to third parties. R&D expenditures are subject to fluctuation due to the stage and timing of our R&D projects. Project related costs in the quarters ended March 31, 2011 and March 31, 2010 primarily related to project spend within our urology, womens healthcare and dermatology therapeutic categories.
Amortization of Intangible Assets
Amortization of intangible assets in the quarters ended March 31, 2011 and 2010 was $148 million and $161 million, respectively. Our amortization methodology is calculated on either an economic benefit model or a straight-line basis to match the expected useful life of the asset, with identifiable assets assessed individually or by product family. The economic benefit model is based on expected future cash flows and typically results in accelerated amortization for most of our products. We regularly review the remaining useful lives of our identified intangible assets based on each product familys estimated future cash flows. We expect our 2011 amortization expense to decline compared to 2010 as most of our intangible assets are amortized on an accelerated basis. This decline in 2011 is expected to be offset, in part, by amortization expense associated with certain of our new products, such as ATELVIA, and as a result of the ENABLEX Acquisition.
Net interest expense
Our net interest expense was comprised of the following for the quarters ended March 31, 2011 and 2010:
(dollars in millions) | Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
$ Change |
Percent Change |
||||||||||||
Interest expense on outstanding indebtedness, net of interest income |
$ | 70 | $ | 44 | $ | 26 | 55 | % | ||||||||
Amortization of deferred loan costs |
8 | 8 | | | % | |||||||||||
Write-offs of deferred loan costs resulting from debt prepayments, including refinancing premium |
77 | 20 | 57 | 293 | % | |||||||||||
Total |
$ | 155 | $ | 72 | $ | 83 | 114 | % | ||||||||
Net interest expense for the quarter ended March 31, 2011 was $155 million, an increase of $83 million, or 114%, from $72 million in the prior year quarter. Included in net interest expense in the quarter ended March 31, 2011, was $77 million relating to the write-off of deferred loan costs associated with optional prepayments of debt and the repayment of the outstanding balance in connection with the refinancing of our senior secured indebtedness in March 2011. Included in net interest expense in the quarter ended March 31, 2010, was $20 million relating to the write-off of deferred loan costs associated with the purchase and redemption of the remaining portion of our 8.75% senior subordinated notes due 2015 (8.75% Notes) and the optional prepayment of $400 million of indebtedness under our Prior Senior Secured Credit Facilities. Excluding the write-off of deferred loan costs, net interest expense increased $26 million in the quarter ended March 31, 2011 relative to the prior year quarter. The increase was primarily due to an increase in our average outstanding indebtedness relative to the same period in 2010. The increase in our average outstanding indebtedness in the quarter ended March 31, 2011 as compared to the prior year quarter was due primarily to the timing of the incurrence of indebtedness during 2010 in connection with the Special Dividend and the ENABLEX Transaction.
Provision / (Benefit) for Income Taxes
We operate in many tax jurisdictions including: the Republic of Ireland, the United States, the United Kingdom, Puerto Rico, Canada, Germany, Switzerland and other Western European countries. Our effective tax rate for the quarters ended March 31, 2011 and 2010 was 709% and 58%, respectively. The effective income tax rate for interim reporting periods is volatile due to changes in income mix among the various tax jurisdictions in which we operate, the impact of discrete items, as well as the overall level of consolidated income before income taxes. In the quarter ended March 31, 2011 the discrete items included valuation allowances related to the announced restructuring of certain of our Western European operations. Our estimated annual effective tax rate for all periods includes the impact of changes in income tax liabilities related to reserves recorded under Financial Accounting Standards Board Accounting Standards Codification (ASC) 740 Income Taxes (ASC 740).
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Net (Loss)
Due to the factors described above, we reported a net (loss) of ($24) million and ($17) million in the quarters ended March 31, 2011 and 2010, respectively.
Operating Results by Segment
Our business is organized into two reportable segments, North America (which includes the U.S., Canada and Puerto Rico) and the ROW consistent with how we manage our business and view the markets we serve. We manage our business separately in North America and ROW as components of an enterprise for which separate information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance.
We measure an operating segments performance primarily based on segment operating profit, which excludes interest, and is used by the chief operating decision maker to evaluate the success of a specific region.
In the quarters ended March 31, 2011 and 2010, revenues in North America were $1,323 million and $795 million, respectively. Revenues in North America increased primarily as a result of an increase in our inter-segment revenues. Revenues in ROW in the quarters ended March 31, 2011 and 2010 were $203 million and $210 million, respectively. Revenues in ROW decreased by $7 million primarily as a result of a decrease in ACTONEL revenues offset, in part, by an increase in our inter-segment revenues.
Segment operating profit in North America was $426 million and $64 million in the quarters ended March 31, 2011 and 2010, respectively. ROW segment operating profit was $10 million and $35 million in the quarters ended March 31, 2011 and 2010, respectively. Segment operating profit in North America grew as a result of the factors described above.
Financial Condition, Liquidity and Capital Resources
Cash
At March 31, 2011, our cash on hand was $201 million, as compared to $402 million at December 31, 2010. As of March 31, 2011 our total outstanding debt was $4,259 million and consisted of $3,000 million of term loan borrowings under our New Senior Secured Credit Facilities (as defined below), $1,250 million aggregate principal amount of 7.75% Notes, and $9 million of unamortized premium attributable to the 7.75% Notes.
The following table summarizes our net change in cash and cash equivalents for the periods presented:
(dollars in millions) | Quarter Ended March 31, 2011 |
Quarter Ended March 31, 2010 |
||||||
Net cash provided by operating activities |
$ | 272 | $ | 245 | ||||
Net cash (used in) investing activities |
(12 | ) | (18 | ) | ||||
Net cash (used in) financing activities |
(467 | ) | (518 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
6 | (2 | ) | |||||
Net (decrease) in cash and cash equivalents |
$ | (201 | ) | $ | (293 | ) | ||
Our net cash provided by operating activities for the quarter ended March 31, 2011 increased $27 million compared with the prior year quarter. We reported a net (loss) of ($24) million for the quarter ended March 31, 2011 as compared to a net (loss) of ($17) million for the prior year quarter. Included in the net (loss) in the quarter ended March 31, 2011 were $28 million of charges not settled in cash relating to the Manati repurposing, $43 million of restructuring costs that were not settled in cash during the quarter as well as non-cash interest charges of $85 million. Included in our net (loss) in the quarter ended March 31, 2010 was a non-cash charge of $106 million relating to the write-off of the fair value step-up of inventories acquired in the PGP Acquisition as such inventories were sold as well as non-cash interest charges of $28 million. Our liability for unrecognized tax benefits (including interest) under ASC 740 which is expected to settle within the next twelve months is $10 million. Our liability for unrecognized tax benefits (including interest) which is expected to settle after twelve months is $77 million.
Our net cash used in investing activities during the quarter ended March 31, 2011 totaled $12 million, and consisted of capital expenditures. Our cash used in investing activities in the quarter ended March 31, 2010 totaled $18 million and consisted of $3 million of contingent purchase consideration paid to Pfizer Inc. in connection with the 2003 acquisition of FEMHRT and $15 million of capital expenditures. We expect our investments in capital expenditures in 2011 to decrease relative to our 2010 levels.
Our net cash used in financing activities in the quarter ended March 31, 2011 was $467 million, principally consisting of $3,000 million of borrowings under our New Senior Secured Credit Facilities, offset by prepayments and repayments in an aggregate amount of $3,419 million of term debt under our Prior Senior Secured Credit Facilities and the payment of loan costs of $51 million. We currently intend to use future cash flows provided by operating activities, net of cash used in investing activities, to make optional prepayments of our long-term debt or purchases of such debt in privately negotiated or open market transactions, by tender offer or otherwise. Our net cash used in financing activities in the quarter ended March 31, 2010 principally consisted of payments of $430 million of principal indebtedness under the Prior Senior Secured Credit Facilities and $90 million for the repurchase and redemption of the remaining aggregate principal amounts of our 8.75% Notes.
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New Senior Secured Credit Facilities
On March 17, 2011, the Borrowers entered into the Credit Agreement with the Lenders and Bank of America, N.A. as administrative agent in order to refinance our Prior Senior Secured Credit Facilities (as defined below). Pursuant to the Credit Agreement, the Lenders provided the New Senior Secured Credit Facilities in an aggregate amount of $3,250 million comprised of (i) $3,000 million in aggregate term loan facilities and (ii) a $250 million revolving credit facility available to all Borrowers. The term loan facilities are comprised of (i) a $1,250 million Term A Loan Facility (the Term A Loan) and (ii) a $1,750 million Term B Loan Facility consisting of an $800 million Term B-1 Loan, a $400 million Term B-2 Loan and a $550 million Term B-3 Loan (together, the Term B Loans). The proceeds of these new term loans, together with approximately $279 million of cash on hand, were used to repay $3,219 million in aggregate term loans outstanding under the Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest.
The Term A Loan matures on March 17, 2016 and bears interest at LIBOR plus 3.00%, with a LIBOR floor of 0.75%, and each of the Term B Loans matures on March 15, 2018 and bears interest at LIBOR plus 3.25%, with a LIBOR floor of 1.00%. The revolving credit facility matures on March 17, 2016 and includes a $20 million sublimit for swing line loans and a $50 million sublimit for the issuance of standby letters of credit. Any swing line loans and letters of credit would reduce the available commitment under the revolving credit facility on a dollar-for-dollar basis. Loans drawn and letters of credit issued under the revolving credit facility bear interest at LIBOR plus 3.00%. The Borrowers are also required to pay a commitment fee on the unused commitments under the revolving credit facility at a rate of 0.75% per annum, subject to a leverage-based step-down.
The loans and other obligations under the New Senior Secured Credit Facilities (including in respect of hedging agreements and cash management obligations) are (i) guaranteed by Holdings III and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Borrowers and each guarantor (subject to certain exceptions and limitations). As of March 31, 2011 there were letters of credit totaling $2 million outstanding. As a result we had $248 million available under the revolving credit facility as of March 31, 2011.
The carrying amounts reported in the condensed consolidated balance sheets as of March 31, 2011 for our debt outstanding under our New Senior Secured Credit Facilities approximates fair value as interest is at variable rates and it re-prices frequently.
Prior Senior Secured Credit Facilities
On October 30, 2009 in connection with the PGP Acquisition, Holdings III and its subsidiaries, Luxco Borrower, WCC and WCCL, entered into a credit agreement with Credit Suisse AG, Cayman Islands Branch as administrative agent and lender, and the other lenders and parties thereto, pursuant to which the lenders provided senior secured credit facilities in an aggregate amount of $3,200 million (the Prior Senior Secured Credit Facilities). The Prior Senior Secured Credit Facilities initially consisted of $2,950 million of term loans, a $250 million revolving credit facility and a $350 million delayed-draw term loan facility. On December 16, 2009, the Borrowers entered into an amendment pursuant to which the lenders agreed to provide additional term loans of $350 million, and the delayed-draw term loan facility was terminated. The additional term loans were used to finance, together with cash on hand, the repurchase or redemption of any and all of our then-outstanding 8.75% senior subordinated notes due 2015. On August 20, 2010, Holdings III and the Borrowers entered into a second amendment pursuant to which the Lenders provided additional term loans in an aggregate principal amount of $1,500 million which, together with the proceeds from the issuance of $750 million aggregate principal amount of the 7.75% Notes (defined below), were used to fund the Special Dividend and to pay related fees and expenses. In January 2011, we made an optional prepayment of $200 million of our term loan indebtedness under the Prior Senior Secured Credit Facilities.
7.75% Notes
On August 20, 2010, we and certain of our subsidiaries entered into an indenture (the Indenture) with Wells Fargo Bank, National Association, as trustee, in connection with the issuance by WCCL and Warner Chilcott Finance LLC (together, the Issuers) of $750 million aggregate principal amount of 7.75% senior notes due 2018 (the Initial 7.75% Notes). The Initial 7.75% Notes are unsecured senior obligations of the Issuers, guaranteed on a senior basis by us and our subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The Initial 7.75% Notes will mature on September 15, 2018. Interest on the Initial 7.75% Notes will be payable on March 15 and September 15 of each year, with the first payment made on March 15, 2011.
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On September 29, 2010, the Issuers issued an additional $500 million aggregate principal amount of 7.75% senior notes due 2018 at a premium of $10 million (the Additional 7.75% Notes and, together with the Initial 7.75% Notes, the 7.75% Notes). The proceeds from the issuance of the Additional 7.75% Notes were used by us to fund our $400 million upfront payment in connection with the ENABLEX Acquisition, which closed on October 18, 2010, and for general corporate purposes. The Additional 7.75% Notes constitute a part of the same series as the Initial 7.75% Notes. The Issuers obligations under the Additional 7.75% Notes are guaranteed by us and by our subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The $10 million premium received was added to the face value of the 7.75% Notes and is being amortized over the life of the 7.75% Notes as a reduction to reported interest expense.
The Indenture contains restrictive covenants that limit, among other things, the ability of Holdings III, and certain of Holdings IIIs subsidiaries, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repurchase subordinated debt and common and preferred stock, make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. The Indenture also contains customary events of default which would permit the holders of the 7.75% Notes to declare those 7.75% Notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the 7.75% Notes or other material indebtedness, the failure to satisfy covenants, and specified events of bankruptcy and insolvency.
As of March 31, 2011, the fair value of our outstanding 7.75% Notes, based on available market quotes, was $1,309 million ($1,250 million book value).
Components of Indebtedness
As of March 31, 2011, our outstanding debt included the following:
(dollars in millions) | Current Portion as of March 31, 2011 |
Long-Term Portion as of March 31, 2011 |
Total Outstanding as of March 31, 2011 |
|||||||||
Revolving credit facility |
$ | | $ | | $ | | ||||||
Term loans under the New Senior Secured Credit Facilities |
143 | 2,857 | 3,000 | |||||||||
7.75% Notes (including $9 unamortized premium) |
1 | 1,258 | 1,259 | |||||||||
Total |
$ | 144 | $ | 4,115 | $ | 4,259 | ||||||
As of March 31, 2011, mandatory principal repayments of long-term debt in the remainder of 2011 and each of the five years ending December 31, 2012 through 2016 and thereafter were as follows:
Year Ending December 31, |
Aggregate Maturities (in millions) |
|||
2011 |
$ | 107 | ||
2012 |
236 | |||
2013 |
268 | |||
2014 |
268 | |||
2015 |
361 | |||
2016 |
111 | |||
Thereafter |
2,899 | |||
Total long-term debt to be settled in cash |
$ | 4,250 | ||
7.75% Notes unamortized premium |
9 | |||
Total long-term debt |
$ | 4,259 | ||
Our ability to make scheduled payments of principal, or to pay the interest or additional interest, on, or to refinance our indebtedness, or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on the current level of operations, we believe that cash flows from the operations for each of our significant subsidiaries, available cash and short-term investments, together with borrowings available under our New Senior Secured Credit Facilities, will be adequate to meet our future liquidity needs for the next twelve months. We note that future cash flows from operating activities may be adversely impacted by the settlement of contingent liabilities and could fluctuate significantly from quarter-to-quarter based on the timing of certain working capital components and capital expenditures. In addition, our cash flows from operating activities will be significantly impacted by the total cash required for the restructuring of our Western European operations. To the extent we generate excess cash flow from operations, net of cash flows from investing activities, we intend to make optional prepayments of our long-term debt or purchases of
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such debt in privately negotiated open market transactions. As a result of the above mentioned prepayments of long-term debt, we may recognize non-cash expenses for the write-off of applicable deferred loan costs which is a component of interest expense. Our assumptions with respect to future costs may not be correct, and funds available to us from the sources discussed above may not be sufficient to enable us to service our indebtedness under the New Senior Secured Credit Facilities and 7.75% Notes or to cover any shortfall in funding for any unanticipated expenses. In addition, to the extent we in the future engage in strategic business transactions such as acquisitions or joint ventures or pay a special dividend, we may require new sources of funding including additional debt, or equity financing or some combination thereof. We may not be able to secure additional sources of funding on favorable terms or at all. We also regularly evaluate our capital structure and, when we deem prudent, will take steps to reduce our cost of capital through refinancings of our existing debt, equity issuances or repricing amendments to our existing facilities.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are interest rates on debt and movements in exchange rates among foreign currencies. We had neither foreign currency option contracts nor any interest rate hedges at March 31, 2011.
The following risk management discussion and the estimated amounts generated from analytical techniques are forward-looking statements of market risk assuming certain market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets.
Interest Rate Risk
We manage debt and overall financing strategies centrally using a combination of short- and long-term loans with either fixed or variable rates. Based on variable rate debt levels of $3,000 million as of March 31, 2011, a 1.0% increase in interest rates would impact net interest expense by approximately $8 million per quarter to the extent the interest rates raise above our LIBOR floors.
Foreign Currency Risk
A significant portion of our earnings and assets are in foreign jurisdictions where transactions are denominated in currencies other than the U.S. dollar (primarily the Euro and British pound). In addition we have intercompany financing arrangements between our entities, certain of which may be denominated in a currency other than the entities functional currency. Depending on the direction of change relative to the U.S. dollar, foreign currency values can increase or decrease the reported dollar value of our net assets and results of operations. Our international-based revenues, as well as our international net assets, expose our revenues and earnings to foreign currency exchange rate changes.
We may enter into hedging and other foreign exchange management arrangements to reduce the risk of foreign currency exchange rate fluctuations to the extent that cost-effective derivative financial instruments or other non-derivative financial instrument approaches are available. As of March 31, 2011, we have not entered into any derivative financial instruments. Derivative financial instruments are not expected to be used for speculative purposes. The intent of gains and losses on hedging transactions is to offset the respective gains and losses on the underlying exposures being hedged. Although we may decide to mitigate some of this risk with hedging and other activities, our business will remain subject to foreign exchange risk from foreign currency transaction and translation exposures that we will not be able to manage through effective hedging or the use of other financial instruments.
Inflation
Inflation did not have a material impact on our operations during the quarters ended March 31, 2011 and 2010.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act, as amended (the Exchange Act)) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive and Chief Financial Officers, evaluated the effectiveness of the Companys disclosure controls and procedures as of March 31, 2011. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective as of March 31, 2011 at the reasonable assurance level.
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Changes in Internal Control over Financial Reporting.
There were no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 1. | Legal Proceedings |
We are involved in various legal proceedings of a nature considered normal to our business, including product liability litigation, intellectual property litigation, employment litigation, such as unfair dismissal and Federal and State fair labor and minimum wage law suits, and other litigation and contingencies. We record reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable. We maintain insurance with respect to potential litigation in the normal course of our business based on our consultation with our insurance consultants and outside legal counsel, and in light of current market conditions, including cost and availability. In addition, we self-insure for certain liabilities not covered under our litigation insurance based on estimates of potential claims developed in consultation with our insurance consultants and outside legal counsel.
See Note 14 to our Notes to the condensed consolidated financial statements for the quarter ended March 31, 2011 included in this quarterly report on Form 10-Q for a description of our significant legal proceedings.
Item 1A. | Risk Factors |
In addition to the other information in this report, the factors discussed in Risk Factors in our periodic filings, including our Annual Report on Form 10-K for the year ended December 31, 2010 (Annual Report), should be carefully considered in evaluating the Company and its businesses. The risks and uncertainties described in our periodic reports are not the only ones facing the Company and its subsidiaries. Additional risks and uncertainties, not presently known to us or otherwise, may also impair our business operations. If any of the risks described in our periodic filings or such other risks actually occur, our business, financial condition or results of operations could be materially and adversely affected.
Item 6. | Exhibits |
31.1 | Certification of the Chief Executive Officer under Rule 13a-14(a) of the Securities Exchange Act, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer under Rule 13a-14(a) of the Securities Exchange Act, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101* | The following materials from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets (Unaudited), (ii) the Condensed Consolidated Statements of Operations (Unaudited), (iii) the Condensed Consolidated Statements of Cash Flows (Unaudited), and (iv) Notes to the Condensed Consolidated Financial Statements (Unaudited), tagged as blocks of text. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WARNER CHILCOTT PUBLIC LIMITED COMPANY | ||||
Date: May 6, 2011 | By: | /S/ ROGER M. BOISSONNEAULT | ||
Name: | Roger M. Boissonneault | |||
Title: | President and Chief Executive Officer | |||
Date: May 6, 2011 | By: | /S/ PAUL HERENDEEN | ||
Name: | Paul Herendeen | |||
Title: | Executive Vice President and Chief Financial Officer |
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