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Warner Chilcott Ltd. Reports Operating Results (10-Q)

November 08, 2010 | About:

Warner Chilcott Ltd. (WCRX) filed Quarterly Report for the period ended 2010-09-30.

Warner Chilcott Ltd. has a market cap of $5.89 billion; its shares were traded at around $23.34 with a P/E ratio of 7.91 and P/S ratio of 4.1. WCRX is in the portfolios of David Williams of Columbia Value and Restructuring Fund, Stanley Druckenmiller of Duquesne Capital Management, LLC, Steven Cohen of SAC Capital Advisors, Edward Owens of Vanguard Health Care Fund.

Highlight of Business Operations:

On September 8, 2010, we paid a special cash dividend of $8.50 per share, or $2,144.3 million in the aggregate, to the holders of our ordinary shares (the Special Dividend). In order to fund the Special Dividend and pay related fees and expenses, on August 20, 2010, we incurred $1,500.0 million aggregate principal amount of new term loan indebtedness in connection with an amendment to the New Senior Secured Credit Facilities (Amendment No. 2) and issued $750.0 million aggregate principal amount of 7.75% senior notes due 2018 (the Initial 7.75% Notes). The incurrence of such indebtedness impacted our interest expense during the quarter and nine months ended September 30, 2010. See Note 11 to the notes to the condensed consolidated financial statements for the quarter ended September 30, 2010 included in this report on Form 10-Q for a further description of Amendment No. 2 and the Initial 7.75% Notes.

On September 29, 2010, we issued an additional $500.0 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) in order to fund the $400.0 million upfront payment in connection with the Enablex Acquisition and for general corporate purposes. The Additional 7.75% Notes were issued at a premium of $10.0 million and constitute a part of the same series as the Initial 7.75% Notes. See Note 11 to the notes to the condensed consolidated financial statements for the quarter ended September 30, 2010 included in this report on Form 10-Q for a further description of the Additional 7.75% Notes.

On October 30, 2009, pursuant to the purchase agreement dated August 24, 2009 (as amended, the Purchase Agreement), between the Company and P&G, we acquired PGP for $2,919.3 million in cash and the assumption of certain liabilities (the PGP Acquisition). The purchase price remains subject to certain post-closing adjustments. Under the terms of the Purchase Agreement, we 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 $60.0 million. The total purchase price of $2,919.3 million was allocated to the estimated fair value of the assets acquired and liabilities assumed as of the date of the PGP Acquisition. The purchase price allocation was finalized in October 2010 and was completed based on a valuation conducted by an independent third party valuation firm. In order to fund the PGP Acquisition, certain of our subsidiaries entered into the New Senior Secured Credit Facilities, comprised of $2,950.0 million in aggregate term loan facilities and a $250.0 million revolving credit facility. On October 30, 2009, the Company borrowed $2,600.0 million of the aggregate $2,950.0 million of term loan facilities to finance the PGP Acquisition. On December 16, 2009, in connection with an amendment (Amendment No. 1) to the New Senior Secured Credit Facilities, (i) the committed but undrawn $350.0 million delayed-draw term loan facility was terminated, and (ii) the agreement was amended to create a new tranche of term loans which was borrowed on December 30, 2009 by our U.S. subsidiary, Warner Chilcott Corporation, in an aggregate principal amount of $350.0 million in order to finance, together with cash on hand, the repurchase or redemption of any and all of our then outstanding 8.75% senior subordinated notes (the 8.75% Notes). The PGP Acquisition was accounted for as a business combination using the acquisition method of accounting. The results of operations of PGP since October 30, 2009 have been included in our condensed consolidated statement of operations.

On September 23, 2009, we entered into a definitive asset purchase agreement (the LEO Transaction Agreement) with LEO pursuant to which LEO paid us $1,000.0 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). We recognized an initial pre-tax gain of $393.1 million on the sale of assets in the LEO Transaction. The LEO Transaction closed simultaneously with the execution of the LEO Transaction Agreement. 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, our gross margin percentage during the term of the distribution agreement was negatively impacted in the first two quarters of 2010 as we recorded net sales and costs of sales at nominal distributor margins. In addition, we 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, we recorded a deferred gain of $68.9 million 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, we retained title and the risks and rewards of ownership. The total arrangement consideration (or purchase price) of $1,000.0 million 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 $68.9 million on the undelivered product inventory at fair value, was deferred as of September 30, 2009.

We subsequently sold the inventory on behalf of LEO to our trade customers in the normal course of business and recognized revenues of approximately $76.8 million, $62.5 million and $26.2 million, and cost of sales of approximately $42.6 million, $37.4 million and $16.6 million 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 our statement of operations when the earnings process was culminated as the goods were delivered to our trade customers.

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