10-K 1 d265230d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 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)

Registrant’s telephone number, including area code: +353.1.897.2000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Ordinary Shares, $0.01 par value   The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 ¨   Smaller reporting company ¨
    

(Do not check if a 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

The aggregate market value of ordinary shares held by non-affiliates as of June 30, 2011 was approximately $4,137.7 million, using the closing price per share of $24.13, as reported on The NASDAQ Global Market as of such date. Ordinary shares held by our executive officers and directors and certain shareholders as of June 30, 2011 have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of January 30, 2012, the number of the registrant’s ordinary shares, par value $0.01 per share, outstanding was 249,337,918.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of this Annual Report on Form 10-K (“Annual Report”) is incorporated by reference from the registrant’s proxy statement to be filed pursuant to Regulation 14A with respect to the registrant’s Annual Meeting of Shareholders to be held on May 8, 2012.

 

 

 


Table of Contents

WARNER CHILCOTT PLC

 

INDEX

  

PART I.

  

Item 1.    Business      1   
Item 1A.    Risk Factors      29   
Item 1B.    Unresolved Staff Comments      48   
Item 2.    Properties      48   
Item 3.    Legal Proceedings      48   
Item 4.   

Mine Safety Disclosures

     48   

PART II.

  

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      49   
Item 6.    Selected Financial Data      52   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      54   
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      91   
Item 8.    Financial Statements and Supplementary Data      92   
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      92   
Item 9A.    Controls and Procedures      92   
Item 9B.    Other Information      93   

PART III.

  

Item 10.    Directors, Executive Officers and Corporate Governance      94   
Item 11.    Executive Compensation      94   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      94   
Item 13.    Certain Relationships and Related Transactions, and Director Independence      94   
Item 14.    Principal Accounting Fees and Services      94   

PART IV.

  

Item 15.    Exhibits, Financial Statement Schedules      95   

Signatures

     96   

 

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PART I.

Item 1. Business.

Business Overview

We are a leading specialty pharmaceutical company currently focused on the women’s healthcare, gastroenterology, dermatology and urology segments of the branded pharmaceuticals market, primarily in North America. We are a fully integrated company with internal resources dedicated to the development, manufacture and promotion of our products. Our franchises are comprised of complementary portfolios of established branded and development-stage products that we actively manage throughout their life cycles. Multiple products make up our existing sales base and several of these provide opportunities for future growth.

Our women’s healthcare franchise is anchored by our strong presence in the hormonal contraceptive, osteoporosis and hormone therapy (“HT”) markets. Our hormonal contraceptive product offerings include: LOESTRIN 24 FE (norethindrone acetate and ethinyl estradiol tablets, USP and ferrous fumarate tablets), the leading branded product in the U.S. hormonal contraception market according to IMS Health, Inc. (“IMS”), and LO LOESTRIN FE (norethindrone acetate and ethinyl estradiol tablets, ethinyl estradiol tablets and ferrous fumarate tablets), our new oral contraceptive product launched in January 2011 that offers women the lowest dosage of estrogen of any oral contraceptive currently available in the U.S. market. In January 2011, we also commenced our promotional efforts for ATELVIA (risedronate sodium delayed-release tablets), our new product for the treatment of postmenopausal osteoporosis in the United States. ATELVIA is the first, and currently the only, oral bisphosphonate that can be taken immediately after breakfast, thereby eliminating the waiting time to eat or drink. In addition, ACTONEL (risedronate sodium tablets), which we acquired from The Procter & Gamble Company (“P&G”) in October of 2009 in connection with our acquisition (the “PGP Acquisition”) of P&G’s global branded pharmaceuticals business (“PGP”), remains the leading branded product in the U.S. oral bisphosphonate market for the prevention and treatment of osteoporosis in women, based on IMS data. We also have a significant presence in the HT market, where we offer ESTRACE Cream (estradiol vaginal cream, USP, 0.01%) and other HT products.

Our gastroenterology franchise is built upon our ASACOL (mesalamine) product line, which we acquired in the PGP Acquisition. ASACOL is the leading treatment for ulcerative colitis in the U.S. market for orally administered 5-aminosalicylic acid products, with approximately 50% of the market based on filled prescriptions according to IMS. In dermatology, our product DORYX (doxycycline hyclate delayed-release tablets, USP) is one of the leading branded tetracycline-class oral antibiotics in the United States indicated for adjunctive treatment of severe acne. Our urology franchise is currently centered on ENABLEX (darifenacin extended-release tablets), a product for the treatment of overactive bladder which we acquired from Novartis Pharmaceuticals Corporation (“Novartis”) in late 2010, and we also have development work ongoing for potential new products to augment this franchise.

In addition to expanding our product offerings in a key franchise through the promotional launches of LO LOESTRIN FE and ATELVIA, we also announced a number of other initiatives in 2011 that we believe will position us to continue to deliver value to our shareholders. These initiatives included the successful completion in March 2011 of the refinancing of our senior secured indebtedness, which reduced our interest expense and extended the maturity profile of such indebtedness, and the announcement in April 2011 of our Western European restructuring plan following the loss of exclusivity for ACTONEL in Western Europe, which reduced our operating costs in these markets going forward. In addition, in November 2011, we announced that our Board of Directors had authorized the redemption of up to an aggregate of $250 million of our ordinary shares (the “Redemption Program”).

For financial information regarding each of our segments, see “Note 18” to the Notes to the Consolidated Financial Statements for the year ended December 31, 2011 included elsewhere in this Annual Report. Unless otherwise stated, all market information is based on total filled prescriptions as reflected in IMS data for the week ended February 10, 2012.

 

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Strategy

Our primary strategy is to continue to develop our specialty pharmaceutical products business by focusing on therapeutic areas dominated by specialist and other high-prescribing physicians. We remain committed to driving long-term revenue and profit growth by continuing to improve upon our portfolio of products and marketing those products through our precision marketing techniques. Furthermore, we intend to supplement this growth and broaden our market position in our existing franchises through ongoing product development and selected acquisition, partnership and product in-licensing opportunities.

Focus on selected therapeutic markets. We primarily concentrate our efforts on branded products that are prescribed by specialty and other high-prescribing physicians, as well as developing products that complement those products and therapeutic segments. We are currently focused on the women’s healthcare, gastroenterology, dermatology and urology segments in the markets we serve.

Drive long-term growth. We believe we are well positioned in our target markets, where we seek to increase our market share by identifying the high-prescribing physicians in our therapeutic categories and then targeting the activities of our sales representatives to reach those specific physicians. We believe this strategy results in an efficient and effective return on our marketing efforts.

Execute focused, efficient R&D effort. We have a number of new products in our research and development (“R&D”) pipeline, including products based upon new chemical entities and improved versions of our existing products. Our product development efforts are focused primarily on developing new products that target therapeutic areas with established regulatory guidance and making improvements to our existing products, including developing new and enhanced dosage forms. When compared to the development of new products in therapeutic areas lacking established regulatory guidance, our approach to R&D has historically involved less development and regulatory risk and shorter timelines from concept to market. Substantial time and attention is devoted to making improvements to our existing products and developing new and enhanced dosage forms. Our R&D efforts benefit from an experienced team of scientists, clinicians and regulatory professionals with proven product development expertise. Since March 2003, our internal development efforts have yielded a number of approvals from the U.S. Food and Drug Administration (“FDA”), including, in 2010, those for ATELVIA, LO LOESTRIN FE and an oral contraceptive which we licensed to Watson Pharmaceuticals, Inc. (together with its subsidiaries, “Watson”).

Selectively acquire products that enhance our existing product portfolio. To supplement our organic growth, we continually evaluate opportunities to expand our pharmaceutical product portfolio through selected acquisition, partnership and product in-licensing opportunities. Past examples include transactions with P&G, Novartis, LEO Pharma A/S (“LEO”), Paratek Pharmaceuticals, Inc. (“Paratek”), Dong-A PharmTech Co. Ltd. (“Dong-A”) and Apricus Biosciences, Inc. (formerly NexMed, Inc.) (“Apricus”). We focus on acquisitions and partnerships in therapeutic categories that we believe will complement our strategic focus. For example, the PGP Acquisition broadened our product breadth in women’s healthcare and expanded our reach into gastroenterology and urology. Gastroenterology and urology are specialty segments that we believe are well suited to our marketing strategies as they are characterized by a relatively small concentrated base of physicians. We have acquired a number of products through license, co-promotion arrangements or purchase, including the following:

 

   

ASACOL

 

   

ACTONEL

 

   

ENABLEX

 

   

ESTRACE Cream

 

   

FEMHRT

 

   

LOESTRIN

 

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Our Principal Products

We market and sell the following principal products:

Our Principal Products

 

   

Product

(Active Ingredient)

 

Indication

 

U.S. Patent Expiry(1)

 

Year Ended
December 31,
2011  Revenue
($mm)

Women’s Healthcare  

Osteoporosis

     
 

ACTONEL

(Risedronate sodium)

  Prevention and treatment of postmenopausal osteoporosis  

June 2014(2) and

November 2023(3)

  $771
 

ATELVIA

(Risedronate sodium)

 

Treatment of postmenopausal

osteoporosis

 

June 2014(2) and

January 2028(4)

  $33
  Hormonal Contraceptives      
 

LOESTRIN 24 FE

(Norethindrone acetate

and ethinyl estradiol)

  Prevention of pregnancy   July 2014(5)   $396
 

LO LOESTRIN FE

(Norethindrone acetate

and ethinyl estradiol)

  Prevention of pregnancy  

July 2014(5) and

February 2029(6)

  $63
  Hormone Therapy      
 

ESTRACE Cream

(17-beta estradiol)

 

Vaginal cream for treatment of

vaginal and vulvar atrophy

 

Patent expired

March 2001

  $157
Gastroenterology   Ulcerative Colitis      
 

ASACOL 400 mg

(Mesalamine)

 

Treatment of mild to moderate ulcerative colitis and maintenance

of remission

  July 2013(7)   $743(8)
 

ASACOL HD (800 mg)

(Mesalamine)

 

Treatment of moderately active

ulcerative colitis

 

July 2013(7) and

November 2021(9)

 
Dermatology   Acne      
 

DORYX 150 mg

(Doxycycline hyclate)

  Oral adjunctive therapy for severe acne   December 2022(10)   $173(11)
Urology   Overactive bladder      
 

ENABLEX

(Darifenacin)

  Treatment of overactive bladder  

March 2015 and

August 2016(12)

  $171

 

(1) See Item 1A. “Risk Factors—Risks Relating to Our Business—If generic products that compete with any of our branded pharmaceutical products are approved and sold, sales of our products will be adversely affected,” Item 1. “Business—Competition” and “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report. In addition, our products have lost or may lose exclusivity in other countries at earlier dates. For example, ASACOL has no exclusivity in the United Kingdom, and ACTONEL lost exclusivity in Canada in early 2010 and in Western European markets in late 2010.

 

(2) New chemical entity (“NCE”) patent (including a 6-month pediatric extension of regulatory exclusivity) covering all ACTONEL and ATELVIA products. In July 2004, PGP received a Paragraph IV certification notice letter from a subsidiary of Teva Pharmaceutical Industries, Ltd. (together with its subsidiaries, “Teva”) regarding this NCE patent and indicating that Teva had submitted to the FDA an Abbreviated New Drug Application (“ANDA”) seeking approval to manufacture and sell generic versions of ACTONEL. PGP filed a patent infringement suit against Teva in August 2004. In that case, Teva admitted patent infringement but alleged that the NCE patent was invalid and, in February 2008, the U.S. District Court for the District of Delaware decided in favor of PGP, upholding the NCE patent as valid and enforceable. Teva appealed, and the U.S. Court of Appeals for the Federal Circuit unanimously upheld the decision of the District Court in May 2009. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

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(3) Two method patents with respect to the once-a-month ACTONEL product (the “‘938 ACTONEL Method Patent” and the “‘634 ACTONEL Method Patent,” and together, the “ACTONEL Method Patents”) (including, in each case, a 6-month pediatric extension of regulatory exclusivity). These patents do not protect the once-a-week ACTONEL product or ATELVIA. In 2008 and 2009, PGP and Hoffman-La Roche Inc. (“Roche”), which licensed the ACTONEL Method Patents to PGP, received Paragraph IV certification notice letters from Teva, Sun Pharma Global, Inc. (“Sun”) and Apotex Inc. and Apotex Corp. (together, “Apotex”) regarding the ‘938 ACTONEL Method Patent (not the NCE patent) covering the once-a-month ACTONEL product and 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. In February 2010, we and Roche received a Paragraph IV certification notice letter from Mylan Pharmaceuticals Inc. (“Mylan”) regarding the ‘938 ACTONEL Method Patent indicating that it had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the once-a-month ACTONEL product. PGP and Roche filed a patent infringement suit against Teva in September 2008, against Sun in January 2009 and against Apotex in March 2009. We and Roche filed a patent infringement suit against Mylan in April 2010. The lawsuits resulted in a stay of FDA approval of each defendant’s ANDA for 30 months from the date of our or PGP’s receipt of notice, as applicable, subject to the prior resolution of the matters before the court. The stay of approval of each of Teva’s, Sun’s and Apotex’s ANDAs has expired, and the FDA has tentatively approved Teva’s ANDA with respect to its generic version of the once-a-month ACTONEL product. However, the underlying ACTONEL NCE patent, which covers all of our ACTONEL products, does not expire until June 2014 (including a 6-month pediatric extension of regulatory exclusivity). As a result, we do not believe that any of the defendants will be permitted to market their proposed generic versions of the once-a-month ACTONEL product prior to June 2014. In October, November and December 2010 and February 2011, we 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 the once-a-month ACTONEL product to include the ‘634 ACTONEL Method Patent. We and Roche filed patent infringement suits against Sun and Apotex in December 2010, against Teva in January 2011 and against Mylan in March 2011 charging each with infringement of the ‘634 ACTONEL Method Patent. We believe that no additional 30-month stay is available in these matters because the ‘634 ACTONEL Method Patent was listed in the FDA’s Orange Book subsequent to the date on which Sun, Apotex, Teva and Mylan filed their respective ANDAs with respect to the ACTONEL once-a-month product. However, as noted above, the underlying NCE patent does not expire until June 2014 (including a 6-month pediatric extension of regulatory exclusivity). The suits against Teva, Apotex, Sun and Mylan for infringement of the ‘938 ACTONEL Method Patent were consolidated, and trial for those suits has been scheduled for July 2012. The subsequent suits against Teva, Apotex, Sun and Mylan for infringement of the related ‘634 ACTONEL Method Patent have been consolidated with the suits relating to the ‘938 ACTONEL Method Patent for all pretrial purposes. While we and Roche intend to vigorously defend the ACTONEL Method Patents and pursue our legal rights, we can offer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful or that a generic equivalent of the ACTONEL once-a-month product will not be approved and enter the market prior to the expiration of the ACTONEL Method Patents in 2023. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

(4) Two formulation and method patents with respect to ATELVIA (the “ATELVIA Patents”). In August and October 2011, we received Paragraph IV certification notice letters from Watson and Teva regarding the ATELVIA Patents (not the NCE patent) indicating that each such company had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ATELVIA 35 mg tablets. We filed patent infringement suits against Watson in October 2011 and against Teva in November 2011 charging each with infringement of the ATELVIA Patents. The lawsuits result in a stay of FDA approval of each defendant’s ANDA for 30 months from the date of our receipt of such defendant’s notice letter, subject to prior resolution of the matter before the court. In addition, neither Watson nor Teva certified against the NCE patent, which covers all of our ATELVIA products and expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity). As a result, we do not believe that either of the defendants will be permitted to market their proposed generic versions of ATELVIA 35 mg tablets prior to June 2014. While we intend to vigorously defend the ATELVIA Patents and pursue our legal rights, we can offer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful or that a generic equivalent of the ATELVIA 35 mg product will not be approved and enter the market prior to the expiration of the ATELVIA Patents in 2028. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

(5)

Method patent with respect to our LOESTRIN products (the “LOESTRIN Patent”). In April 2011, we received a Paragraph IV certification notice letter from Mylan, as U.S. agent for Famy Care Ltd. (“Famy Care”), regarding the LOESTRIN Patent indicating that Famy Care had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of our LOESTRIN 24 FE product. In June 2011, we filed a patent infringement suit against Famy Care and Mylan charging each with infringement of the LOESTRIN Patent. The lawsuit results in a stay of FDA

 

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  approval of Famy Care’s ANDA for 30 months from the date of our receipt of the Famy Care notice letter, subject to the prior resolution of the matter before the court. In January 2009, we entered into a settlement and license agreement with Watson to resolve patent litigation related to LOESTRIN 24 FE. Under the agreement, Watson was permitted to commence marketing its generic equivalent product on the earliest of (i) January 22, 2014, (ii) 180 days prior to the date on which we 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 another generic version of LOESTRIN 24 FE enters the U.S. market without authorization from us. While we intend to vigorously defend the LOESTRIN Patent and pursue our legal rights, we can offer no assurance as to when the Famy Care lawsuit will be decided, whether the Famy Care lawsuit will be successful or that a generic equivalent of LOESTRIN 24 FE will not be approved and enter the market prior to the expiration of the LOESTRIN Patent in 2014. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

(6) Method patent with respect to LO LOESTRIN FE (the “LO LOESTRIN Patent”). This patent does not protect the LOESTRIN 24 FE product. In July 2011, we received a Paragraph IV certification notice letter from Lupin Ltd. (together with its subsidiaries, “Lupin”) regarding the LOESTRIN Patent and LO LOESTRIN Patent indicating that Lupin had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of LO LOESTRIN FE. In September 2011, we filed a patent infringement suit against Lupin charging Lupin with infringement of the patents. The lawsuit results in a stay of FDA approval of Lupin’s ANDA for 30 months from the date of our receipt of the Lupin notice letter, subject to the prior resolution of the matter before the court. While we intend to vigorously defend the LOESTRIN Patent and LO LOESTRIN Patent and pursue our legal rights, we can offer no assurance as to when the lawsuit will be decided, whether the lawsuit will be successful or that a generic equivalent of the LO LOESTRIN FE product will not be approved and enter the market prior to the expiration of the LOESTRIN Patent in 2014 or the LO LOESTRIN Patent in 2029. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

(7) Formulation and method patent with respect to our ASACOL products (the “ASACOL Patent”). In June 2010, we and Medeva Pharma Suisse AG (“Medeva”) received a Paragraph IV certification notice letter from Par Pharmaceutical, Inc. (“Par”) regarding the ASACOL Patent indicating that Par had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the ASACOL 400 mg product. We and Medeva filed a patent infringement suit against Par and EMET Pharmaceuticals LLC (“EMET”), the original filer of the ANDA, in August 2010, which resulted in a stay of FDA approval of Par’s ANDA for up to 30 months from the date of our receipt of the Par notice letter (December 2012), subject to the prior resolution of the matter before the court. While we and Medeva intend to vigorously defend the ASACOL Patent and pursue our legal rights, we can offer no assurance as to when the lawsuit will be decided, whether the lawsuit will be successful or that a generic equivalent of the ASACOL 400 mg product will not be approved and enter the market prior to the expiration of the ASACOL Patent in 2013. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

(8) Represents total ASACOL revenues (400 mg and HD (800 mg)). The substantial majority of our ASACOL revenue during the year ended December 31, 2011 was ASACOL 400 mg.

 

(9) Formulation and method patent with respect to ASACOL HD (800 mg) (the “ASACOL HD Patent”). This patent does not protect the ASACOL 400 mg product. In September 2011, we received a Paragraph IV certification notice letter from Zydus Pharmaceuticals USA, Inc. (together with its affiliates, “Zydus”) regarding the ASACOL HD Patent indicating that Zydus had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ASACOL HD. Zydus also indicated that it had submitted a Paragraph III certification with respect to the ASACOL Patent, consenting to the delay of FDA approval of its ANDA product until the ASACOL Patent expires. In November 2011, we filed a patent infringement suit against Zydus charging Zydus with infringement of the ASACOL HD Patent. The lawsuit results in a stay of FDA approval of Zydus’ ANDA for 30 months from the date of our receipt of the Zydus notice letter, subject to prior resolution of the matter before the court. While we intend to vigorously defend the ASACOL HD Patent and pursue our legal rights, we can offer no assurance as to when the lawsuit will be decided, whether the lawsuit will be successful or that a generic equivalent of the ASACOL HD product will not be approved and enter the market prior to the expiration of the ASACOL HD Patent in 2021. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

(10)

Formulation and method patent with respect to our DORYX 150 mg product (the “DORYX Patent”). In December 2010 and January 2012, we entered into settlement agreements with Heritage Pharmaceuticals Inc. (“Heritage”) and Sandoz Inc. (“Sandoz”) pursuant to which Heritage and Sandoz are permitted to market and sell a generic equivalent version of our DORYX 150 mg product on or after December 15, 2016, subject to certain exceptions and conditions. In addition, in March 2009, we and Mayne Pharma International Pty. Ltd. (“Mayne”), who licenses the DORYX Patent to us, received Paragraph IV certification notice letters from Impax Laboratories, Inc. (“Impax”) and Mylan indicating that

 

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  each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of our DORYX 150 mg delayed-release tablets. In March and May 2009, we and Mayne filed infringement lawsuits against each of Impax and Mylan. The resulting 30-month stay of FDA approval of each of Mylan’s and Impax’s ANDAs with respect to the DORYX 150 mg product expired in September 2011, and Mylan received final approval from the FDA for its generic version of the DORYX 150 mg product on February 8, 2012. We believe that Impax has not yet received tentative approval of its ANDA from the FDA with respect to the DORYX 150 mg product.

 

     Our lawsuits against Impax and Mylan relating to our DORYX 150 mg product were consolidated. A trial was held in early February 2012, and the court has indicated that it expects to issue its decision by the end of February or early March 2012. The court has issued a temporary restraining order prohibiting Mylan from launching a generic version of our DORYX 150 mg product until the court renders its decision. If Mylan is successful in the trial, or if Impax receives final approval of its ANDA with respect to the DORYX 150 mg product from the FDA and is successful at trial or is not otherwise prohibited by the court, such party could enter the market with a generic equivalent of our DORYX 150 mg product as early as the first quarter of 2012. While we and Mayne intend to vigorously defend the DORYX Patent and pursue our legal rights, including our right to any monetary damages, we can offer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful or that a generic equivalent of our DORYX 150 mg product will not enter the market prior to the expiration of the DORYX Patent in 2022. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

(11) Includes a de minimis amount of DORYX 75 mg and DORYX 100 mg revenues for the year ended December 31, 2011.

 

(12) NCE patent protecting ENABLEX and expiring in March 2015 and formulation and method patent protecting ENABLEX and expiring in August 2016. Under the settlement agreements to resolve outstanding patent litigation, each of Teva, Anchen Pharmaceuticals, Inc. (“Anchen”) and Watson agreed not to launch a generic version of ENABLEX until the earlier of March 15, 2016 (or June 15, 2016, if a 6-month pediatric extension of regulatory exclusivity is granted) or, among other circumstances, (i) the effective date of any license granted to a third party for a generic ENABLEX product or (ii) in the event a third party launches a generic ENABLEX product “at risk” and injunctive relief is not sought or granted.

Revenues by Product Class/Percentage of Total Revenue

The following product classes accounted for a significant percentage of consolidated total revenue:

 

(dollars in millions)    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009(3)
 

Osteoporosis

   $ 804         29   $ 1,032        35   $ 222        15

Gastroenterology

     743         27     715        24     115        8

Hormonal Contraceptives

     479         18     406        14     321        22

Hormone Therapy

     202         7     213        7     203        14

Dermatology

     173         6     322 (1)      11     480 (1)      33

Urology

     171         6     107 (2)      4     15 (2)      1

 

(1) Includes revenues we recorded from net sales of DOVONEX and TACLONEX following the closing of the LEO Transaction (as defined below) in September 2009 under our distribution agreement with LEO. On June 30, 2010, LEO assumed responsibility for its own distribution services.

 

(2) Until October 18, 2010, ENABLEX revenue was recorded based on the contractual percentage we received of Novartis’ net sales pursuant to our co-promotion agreement with Novartis. On October 18, 2010, we acquired the U.S. rights to ENABLEX from Novartis and terminated the co-promotion agreement. As a result, we began to record all of our sales of ENABLEX in product net sales on a gross basis.

 

(3) Includes revenues from PGP products from October 30, 2009 through December 31, 2009.

For a discussion of product revenues and other results of our operations, see Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For a discussion of our revenues and property, plant and equipment by country of origin, see “Note 18” to the Notes to the Consolidated Financial Statements for the year ended December 31, 2011 included elsewhere in this Annual Report.

 

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History and Development of the Company

Our company was formed principally through a series of acquisitions and divestitures. We began commercial operations on January 5, 2005 when we acquired Warner Chilcott PLC (our “Predecessor”). Our Predecessor was incorporated in 1968 as a sales and marketing organization focused on branded pharmaceutical products in Northern Ireland. Our Predecessor expanded into the U.S. pharmaceuticals market through the acquisition in September 2000 of a U.S. pharmaceutical business that marketed a portfolio of products including OVCON and ESTRACE Cream acquired from Bristol-Myers Squibb Company. Between 2001 and 2004, our Predecessor disposed of its pharmaceutical services businesses and its U.K. pharmaceutical products businesses and focused its strategy on strengthening its pharmaceutical products business in the United States, specifically in the areas of women’s healthcare and dermatology, through transactions such as its acquisition of the U.S. sales and marketing rights for SARAFEM from Eli Lilly and Company (“Lilly”) in 2003 and its acquisition of LOESTRIN, ESTROSTEP FE and FEMHRT from Pfizer Inc. (“Pfizer”) in 2003.

In November 2004, affiliates of Bain Capital Partners, DLJ Merchant Banking (the “DLJMB Funds”), J.P. Morgan Partners (currently advised by CCMP Capital) and Thomas H. Lee Partners, L.P. (collectively, the “Sponsors”) reached an agreement to acquire our Predecessor. The acquisition became effective on January 5, 2005, and thereafter, following a series of transactions, we acquired 100% of the share capital of the Predecessor. We refer to this transaction as our “leveraged buyout.” To complete our leveraged buyout, the Sponsors, certain of their limited partners and certain members of our management indirectly funded equity contributions to us and certain of our subsidiaries, the proceeds of which were used to purchase 100% of the Predecessor’s share capital. On January 18, 2005, certain of our subsidiaries borrowed an aggregate of $2,020 million, consisting of an initial drawdown of $1,420 million under our then existing $1,790 million senior secured credit facilities and the issuance of $600 million aggregate principal amount of 8.75% senior subordinated notes due 2015 (the “8.75% Notes”) by one of our U.S. subsidiaries, Warner Chilcott Corporation (“WCC”). The proceeds from the acquisition financings, together with cash on hand at our Predecessor, were used to pay the selling shareholders $3,014 million, to retire all of our Predecessor’s outstanding share options for $70 million, to retire all of our Predecessor’s previously outstanding funded indebtedness totaling $195 million and to pay related fees and expenses.

In September 2006, our parent company, at that time Warner Chilcott Limited, sold 70,600,000 of its Class A common shares (“Class A common shares”) in an initial public offering (the “IPO”) at a price to the public of $15.00 per share for an aggregate offering price of $1,059 million (before direct issuance fees). Immediately following the IPO, the Sponsors owned approximately 61% of the outstanding Class A common shares.

In August 2009, we completed a redomestication from Bermuda to Ireland (the “Redomestication”), whereby each Class A common share of Warner Chilcott Limited was exchanged on a one-for-one basis for an ordinary share of Warner Chilcott plc, a newly formed public limited company organized in, and tax resident of, Ireland, and Warner Chilcott Limited became a wholly owned subsidiary of Warner Chilcott plc.

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 product licensing rights in the United States to distribute LEO’s TACLONEX, TACLONEX SCALP and DOVONEX products (including rights to all dermatology products in LEO’s development pipeline), which we acquired in 2005 and 2006 (the “LEO Transaction”). LEO also acquired certain assets related to our distribution of the products in the United States in the LEO Transaction. We used approximately $482 million of the proceeds from the LEO Transaction to repay the entire remaining principal balance of the loans outstanding under our then existing senior secured credit facilities.

On October 30, 2009, we acquired PGP with proceeds from our prior senior secured credit facilities (the “Prior Senior Secured Credit Facilities”) and cash on hand for approximately $2,919 million in cash and the

 

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assumption of certain liabilities. Under the terms of the purchase agreement, we acquired PGP’s portfolio of branded pharmaceutical products (including its two primary products ASACOL and ACTONEL), PGP’s prescription drug pipeline and its manufacturing facilities in Puerto Rico and Germany. In order to finance the majority of the consideration for the PGP Acquisition, certain of our subsidiaries entered into the Prior Senior Secured Credit Facilities, comprised of $2,950 million in aggregate term loan facilities and a $250 million revolving credit facility. The term loan facilities were initially comprised of $2,600 million of term loans and a delayed-draw term loan facility in the amount of $350 million. On the closing date, our subsidiaries borrowed a total of $2,600 million under the term loan facilities.

On November 23, 2009, certain of our shareholders sold 23,000,000 ordinary shares in a registered public offering pursuant to an effective shelf registration statement (the “2009 Secondary Offering”) at a price to the public of $22.25 per share for an aggregate offering price of $512 million. The selling shareholders included the Sponsors, certain other institutional shareholders and members of our senior management team. We did not receive any proceeds from the sale of the shares but did pay the expenses of the 2009 Secondary Offering. Following the 2009 Secondary Offering, the Sponsors collectively owned approximately 54% of our ordinary shares.

On December 16, 2009, certain of our subsidiaries entered into an amendment to the Prior Senior Secured Credit Facilities, pursuant to which a new tranche of term loans was borrowed by WCC, and the delayed-draw term loan facility was terminated. The additional term loans were used to finance, together with cash on hand, the repurchase and redemption of all of our then-outstanding 8.75% Notes.

On September 8, 2010, we paid a special cash dividend of $8.50 per share (the “Special Dividend”), or $2,144 million in the aggregate, to shareholders of record on August 30, 2010. 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”).

On October 18, 2010, we acquired the U.S. rights to 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.

In October 2010, we were informed by the designated representative of the DLJMB Funds that such funds had divested (either by sale or via a distribution to their investors) all of such funds’ holdings of our shares. Following such sale, the remaining Sponsors collectively owned approximately 40% of our ordinary shares.

2011 Developments

On March 17, 2011, certain of our subsidiaries entered into our current 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. At the closing, our subsidiaries 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 make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 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.

 

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In March 2011, certain of our shareholders sold an aggregate of 26,461,462 ordinary shares in a registered public offering pursuant to an effective shelf registration statement (the “2011 Secondary Offering”) at a price to the public of $23.25 per share for an aggregate offering price of $615 million. The selling shareholders included the remaining Sponsors and certain members of our senior management team. We did not receive any proceeds from the sale of the shares but did pay the expenses of the 2011 Secondary Offering. Following the 2011 Secondary Offering, the remaining Sponsors collectively owned approximately 30% of our ordinary shares.

In April 2011, we announced a plan to restructure our operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and 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. In connection with the restructuring, we are in the process of moving to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. See also Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report.

On November 9, 2011, we announced that our Board of Directors had authorized the Redemption Program. Pursuant to the Redemption Program, we recorded the redemption of 3.7 million ordinary shares in the year ended December 31, 2011 for an aggregate cost of $56 million. Following the settlement of such redemptions, we cancelled all shares redeemed.

Alliance with Sanofi

We and Sanofi-Aventis U.S. LLC (“Sanofi”) are parties to a collaboration agreement pursuant to which the parties co-develop and market ACTONEL on a global basis, excluding Japan (the “Collaboration Agreement”). Sanofi has rights to ACTONEL under the Collaboration Agreement from us. ATELVIA, our new risedronate sodium delayed-release product, currently sold primarily in the United States, is also marketed pursuant to the Collaboration Agreement.

As a result of ACTONEL’s loss of patent exclusivity in Western Europe in late 2010 and as part of our transition to a wholesale distribution model in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom, we and/or Sanofi have reduced or discontinued our marketing and promotional efforts in certain territories covered by the Collaboration Agreement as described below. Under the Collaboration Agreement, there are currently six principal territories, each with different promotion and marketing obligations:

 

   

United States and Puerto Rico. We market the product independently in the United States and Puerto Rico under the brand name ACTONEL. In addition, since we commenced our promotional efforts in January 2011, ATELVIA has been marketed independently by us in this territory. We are responsible for all promotion and marketing costs in the United States and Puerto Rico. Depending upon actual net sales in the United States and Puerto Rico, Sanofi receives collaboration payments from us in an amount equal to an agreed upon percentage of either actual net sales in the territory or an agreed minimum sales threshold for the territory. We remain the principal in transactions with customers in the United States and Puerto Rico and continue to invoice all sales in this territory.

 

   

Co-Promotion Territory. In the co-promotion territory, the product is sold through the alliance arrangements of the Collaboration Agreement under the brand name ACTONEL. This territory is comprised of Canada and France. We and Sanofi share promotion and marketing costs as well as product profits in the co-promotion territory based on contractual percentages. We are deemed to be the principal in transactions with customers and invoice all sales in the co-promotion territory.

 

   

Secondary Co-Promotion Territory. In the secondary co-promotion territory, the product is sold through the alliance arrangements of the Collaboration Agreement under the brand name ACTONEL. Although this territory includes Ireland, Sweden, Finland, Greece, Switzerland, Austria, Portugal and Australia, the product is currently promoted and/or marketed on a limited basis, if at all, in this territory, other than in Australia and Greece. We and Sanofi share promotion and marketing costs as

 

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well as product profits in the secondary co-promotion territory based on contractual percentages. Sanofi is deemed to be the principal in transactions with customers and invoices all sales in the secondary co-promotion territory.

 

   

Co-Marketing Territory. In the co-marketing territory, any marketing activities with respect to the product are conducted independently under each company’s own brand name. Italy is the only country in the co-marketing territory. In Italy, the product is sold under the brand name ACTONEL by us and under the brand name Optinate® by Sanofi. In the co-marketing territory, we and Sanofi share net product profits, as defined, for each company’s separately branded product based on contractual percentages. Each company is deemed to be the principal in transactions with customers and invoices all sales with respect to its separately branded product. Each company also sells the product independently under its own brand name in Spain, although Spain is not included in the co-marketing territory. The product is sold in Spain by us under the brand name ACREL®, independent of the alliance arrangements of the Collaboration Agreement, and by Sanofi under the brand name ACTONEL, as part of the “Sanofi Only Territory” described below.

 

   

Warner Chilcott Only Territory. In Germany, Belgium, Luxembourg, the Netherlands and the United Kingdom, we continue to sell, but no longer market or promote, the product under the brand name ACTONEL. We and Sanofi share product profits based on contractual percentages in the Warner Chilcott only territory, and we are deemed to be the principal in transactions with customers and invoice all sales.

 

   

Sanofi Only Territory. In all other countries where the product is marketed, the product is marketed by Sanofi independently under the brand name ACTONEL or another agreed trademark. In this territory, Sanofi is responsible for all promotion and marketing costs, and pays us a percentage of Sanofi’s net sales in the territory. Sanofi is deemed to be the principal in transactions with customers and invoices all sales in the Sanofi only territory.

Under the Collaboration Agreement, a joint oversight committee comprised of equal representation from us and Sanofi is responsible for overseeing the development and promotion of ACTONEL. Under the Collaboration Agreement, Sanofi generally has the right to elect to participate in the development of ACTONEL-related product improvements, other than product improvements specifically related to the United States and Puerto Rico, where we have full control over all product development decisions. Under the Collaboration Agreement, the ongoing global R&D costs for ACTONEL are shared equally between the parties, except for R&D costs specifically related to the United States and Puerto Rico, which are borne solely by us. In addition, under the Collaboration Agreement, the parties are generally equally responsible for all product liability costs, except for any such costs relating to product liability claims brought in the United States or Puerto Rico on or after April 1, 2010, which are generally our sole responsibility.

In geographic markets where we are deemed to be the principal in transactions with customers and invoice sales, we recognize all revenues from sales of the product along with the related product costs. In these markets, all selling, advertising and promotion expenses incurred by us and all contractual payments to Sanofi are recognized in selling, general and administrative expenses. Our share of selling, advertising and promotion expenses in geographic markets where Sanofi is deemed to be the principal in transactions with customers and invoices sales is recognized in selling, general and administrative expenses and we recognize our share of income attributable to the contractual payments made by Sanofi to us in these territories as a component of “other revenue”. For the fiscal year ended December 31, 2011, we recognized net sales and other revenue related to ACTONEL and ATELVIA of $804 million, and co-promotion expenses under the Collaboration Agreement of $231 million were recognized in selling, general and administrative expense.

The Collaboration Agreement, which was originally entered into in 1997, was amended and restated in 2004 and has subsequently been amended further, including in April 2010, when we assumed full operational control over the promotion, marketing and development for ACTONEL in the United States and Puerto Rico. We will continue to sell ACTONEL and ATELVIA products with Sanofi in accordance with our obligations under the

 

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Collaboration Agreement until the termination of the Collaboration Agreement on January 1, 2015, at which time all of Sanofi’s rights under the Collaboration Agreement will revert to us. Thereafter, we will have the sole right to market and promote ACTONEL and ATELVIA on a global basis, excluding Japan. In connection with the Collaboration Agreement, we are also party to two related supply agreements with affiliates of Sanofi: (i) a finished product supply agreement, which terminates concurrently with the Collaboration Agreement, in which we provide finished ACTONEL product to Sanofi for sale by Sanofi under the Collaboration Agreement and (ii) a tablet supply agreement, which terminates in May 2012, pursuant to which a portion of our ACTONEL product requirements are manufactured and supplied by Sanofi.

Research and Development

We focus our R&D efforts primarily on developing new products that target therapeutic areas with established regulatory guidance and making improvements to our existing products, including developing new and enhanced dosage forms. When compared to the development of new products in therapeutic areas lacking established regulatory guidance, this approach to R&D has historically involved less development and regulatory risk and shorter timelines from concept to market. Our R&D team has significant experience and proven capabilities in pharmaceutical development and clinical development. As of December 31, 2011, our R&D team consisted of over 200 professionals and has successfully developed and obtained regulatory approvals for a number of products, including most recently: ATELVIA for the treatment of postmenopausal osteoporosis in the United States and LO LOESTRIN FE for the prevention of pregnancy in the United States. Our R&D team is currently developing new products, including products based upon new chemical entities and improved versions of our existing products such as next generation hormonal contraceptives (for the prevention of pregnancy), risedronate products (for the treatment of postmenopausal osteoporosis) and ASACOL products (for the treatment of ulcerative colitis). See “—Product Pipeline.”

In addition, we from time to time augment our R&D product pipeline by entering into product development and other collaborative arrangements with third parties for the development and commercialization of product candidates, such as our in-licensing arrangements described below:

 

   

In July 2007, we entered into an agreement with Paratek under which we acquired certain rights to novel tetracyclines under development for the treatment of acne and rosacea. We paid an up-front fee of $4 million and agreed to reimburse Paratek for R&D expenses incurred during the term of the agreement. In September 2010, we made a $1 million milestone payment to Paratek upon the achievement of a developmental milestone which was included in R&D expense in the year ended December 31, 2010. We may make additional payments to Paratek upon the achievement of certain developmental milestones that could aggregate up to $24 million. In addition, we agreed to pay royalties to Paratek based on the net sales, if any, of the products covered under the agreement.

 

   

In December 2008, we signed an agreement (the “Dong-A Agreement”) with Dong-A, to develop and, if approved, market its orally-administered udenafil product, a PDE5 inhibitor for the treatment of erectile dysfunction (“ED”) (WC3043), in the United States. We paid $2 million in connection with signing the Dong-A Agreement. In March 2009, we paid $9 million to Dong-A upon the achievement of a developmental milestone related to the ED product under the Dong-A Agreement, which was included in R&D expense for the year ended December 31, 2009. We agreed to pay for all development costs incurred during the term of the Dong-A Agreement with respect to development of the ED product to be marketed in the United States, and we may make additional payments to Dong-A of up to $13 million upon the achievement of contractually-defined milestones in relation to the ED product. In addition, we 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, we acquired the U.S. rights to Apricus’ topically applied alprostadil cream for the treatment of ED and a prior license agreement between us and Apricus relating to the product was terminated. Under the terms of the acquisition agreement, we paid Apricus an up-front payment of $3 million, which was included in R&D expense for the year ended December 31, 2009. We also agreed to

 

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make a milestone payment of $3 million upon the FDA’s approval of the product’s New Drug Application (“NDA”). We continue to work to prepare our response to the non-approvable letter that the FDA delivered to Apricus in July 2008 with respect to the product.

 

   

In April 2010, we amended the Dong-A Agreement to add the right to develop, and if approved, market in the United States and Canada, Dong-A’s udenafil product for the treatment of lower urinary tract symptoms associated with Benign Prostatic Hyperplasia (“BPH”). As a result of the amendment, we made an up-front payment to Dong-A of $20 million in April 2010, which was included in R&D expense for the year ended December 31, 2010. Under the amendment, we may make additional payments to Dong-A in an aggregate amount of up to $25 million 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. We also agreed to pay Dong-A a percentage of net sales of the BPH product in the U.S. and Canada, if any.

Our investment in R&D, funded primarily by our Puerto Rican subsidiary, consists of our internal development costs, fees paid to contract research organizations and license fees and milestone payments paid to third parties. License fees and milestone payments are recognized as R&D expense unless or until they relate to products approved by the FDA, at which time they are capitalized as intangible assets. In the years ended December 31, 2011, 2010 and 2009, we spent $108 million, $147 million and $77 million, respectively, on R&D in the aggregate, which was comprised of $62 million, $64 million and $35 million, respectively, of unallocated overhead expenses, $42 million, $53 million and $24 million, respectively, of expenses allocated to specific projects (including $15 million, $11 million and $8 million, respectively, allocated to pre-clinical stage projects and $27 million, $42 million and $16 million, respectively, allocated to clinical stage projects), $0 million, $26 million and $12 million, respectively, of milestone payments and license fees paid to third parties as described above, and $4 million, $4 million and $6 million, respectively, of regulatory fees. In 2011, approximately $9 million of expenses were incurred in connection with the development of WC3043, a product under development for the treatment of ED in the U.S, and in 2010, approximately $22 million of expenses were incurred in connection with the development of WC3043. No amount of R&D expense allocated to any of our other R&D projects in 2011 or 2010 was material, and no amount of R&D expense allocated to any of our R&D projects in 2009 was material. In 2011, our R&D spend allocated to specific projects within our women’s healthcare, gastroenterology, dermatology, urology and other therapeutic categories were approximately $15 million, $4 million, $11 million, $11 million and $1 million, respectively. In 2010, our R&D spend allocated to specific projects within our women’s healthcare, gastroenterology, dermatology, urology and other therapeutic categories were approximately $13 million, $6 million, $8 million, $24 million and $2 million, respectively. In 2009, our R&D spend allocated to specific projects within our women’s healthcare, gastroenterology, dermatology, urology and other therapeutic categories were approximately $6 million, $1 million, $8 million, $9 million and $0 million, respectively. These amounts are not necessarily indicative of our future R&D spend within our therapeutic categories or of our current or future R&D focus. Our R&D spend and the allocation of R&D spend among our therapeutic categories is highly unpredictable, as we do not conduct our R&D efforts pursuant to a predetermined budget. Instead, we continually evaluate each product under development in an effort to efficiently allocate R&D dollars to projects we deem to be in the best interests of the Company based on, among other factors, the performance of such product in pre-clinical and/or clinical trials, our expectations regarding the potential future regulatory approval of the product and our view of the potential commercial viability of the product in light of market conditions. As a result of this flexible approach to R&D, we are not able to provide an estimate of our future R&D expenses within our therapeutic classes. In addition, even when we do make the determination to pursue R&D projects within a particular therapeutic category, the magnitude of R&D spend in such category during any given period often will not correlate to its significance to us due to the timing of the incurrence of R&D expenses within the development and regulatory approval process and our strategic focus on relatively low-cost product improvements such as new and enhanced dosage forms.

 

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Product Pipeline

The list below shows certain new products in our R&D pipeline and their respective stages of development. In determining which products in our R&D pipeline are material or otherwise appropriate to disclose, we consider a complex set of factors including: (i) the materiality of R&D spend on the product; (ii) the development stage of the product; (iii) the performance of the product in pre-clinical and/or clinical trials; (iv) our expectations regarding the potential future regulatory approval of the product; (v) the commercial viability of the product, including our assumptions as to whether the product is likely to significantly impact our future financial performance; and (vi) to a lesser extent, the expected impact of such disclosure on our competitive position. As a general matter, the greater the R&D spend on the product and the more confident we are in its prospects based on the development stage, clinical performance, regulatory approval process and commercial viability, the greater the likelihood that the product will be disclosed.

As described in the “Risk Factors” section and elsewhere in this Annual Report, there are a number of risks and uncertainties associated with the development and marketing of new products, and the information below should be viewed with caution. These risks and uncertainties include changes in market conditions, uncertainty as to whether any of our current product candidates will prove effective and safe in humans and whether we will be successful in obtaining required regulatory approvals. Specifically, the approval processes in the U.S., Europe, Canada and other countries can be time-consuming and expensive and there is no assurance that approval will be forthcoming. Generally, without the approval of the relevant regulatory authority, products cannot be commercialized. Furthermore, even if we obtain regulatory approvals, the terms of any product approval, including labeling, may be more restrictive than desired and could affect the marketability of our products, and the approvals may be contingent upon burdensome post-approval study commitments.

Women’s Healthcare

Hormonal Products. We have new hormonal contraceptive and hormone therapy products in various stages of development.

Osteoporosis Products. We have next generation risedronate products for the treatment of osteoporosis in postmenopausal women in preclinical development.

Gastroenterology

Ulcerative Colitis Products. We have next generation ASACOL products for the treatment of ulcerative colitis in clinical development.

Dermatology

WC3035. In July 2007, we entered into an agreement with Paratek under which we acquired certain rights to novel tetracyclines under development for the treatment of acne and rosacea. Phase II studies are expected to begin in 2012.

Urology

WC3036. In November 2007, we entered into an agreement with Apricus (formerly NexMed, Inc.) under which we acquired an exclusive license of the U.S. rights to Apricus’ topically applied alprostadil cream for the treatment of ED. Apricus’ NDA for the product was accepted for review by the FDA in November 2007. In July 2008, Apricus announced that it had received a non-approvable letter from the FDA with respect to the product. On February 3, 2009, we acquired the U.S. rights to Apricus’ product and the previous license agreement between us and Apricus relating to the product was terminated. We continue to work to prepare our response to the non-approvable letter.

WC3043. In December 2008, we entered into the Dong-A Agreement to develop and market Dong-A’s orally-administered udenafil product, a PDE5 inhibitor for the treatment of ED, in the United States. This product is in Phase III development.

 

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WC3055. In April 2010, we amended the Dong-A Agreement to add the right to develop and market in the United States and Canada, Dong-A’s udenafil product for the treatment of lower urinary tract symptoms associated with BPH. We are preparing to commence Phase II clinical trials for the BPH indication.

Work on our NEMONOXACIN product under development was discontinued in the fourth quarter of 2011 as a result of our evaluation of the regulatory approval prospects for the product and a determination that a reallocation of R&D resources to other higher priority projects was in the best interests of the Company.

Sales and Marketing

We market our products primarily to physicians and employ marketing techniques to identify and target those physicians with the highest potential to prescribe our products. In connection with our marketing initiatives, we seek to efficiently size, deploy, direct and compensate our sales force in order to grow our market share, drive product sales growth, revitalize acquired products and successfully launch new products. Our sales force promotes products to physicians within their designated areas with frequent face-to-face product presentations and a consistent supply of product samples. In the U.S., our sales force is currently divided into 750 territories within five promotional categories: “Women’s Healthcare”, “Urology”, “Gastroenterology”, “Dermatology” and “Osteoporosis.” We regularly review our promotional priorities and the size and effectiveness of our sales force as they execute our sales strategies and may adjust the size and/or deployment of our sales force depending on general economic conditions, the sales of our promoted products and other factors.

We also may, from time to time, enter into collaboration agreements with third parties to jointly market our products, such as the Collaboration Agreement with Sanofi (see “—Alliance with Sanofi”).

Customers

While the ultimate end-users of our products are the individual patients to whom our products are prescribed by physicians, our direct customers include certain large wholesale pharmaceutical distributors, such as McKesson Corporation (“McKesson”), AmerisourceBergen Corporation (“AmerisourceBergen”) and Cardinal Health, Inc. (“Cardinal”), who serve as the principal channels of distribution for our products. During the periods presented, the following customers accounted for 10% or more of our total revenue:

 

 

     Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009(1)
 

McKesson

     25     24     26

Cardinal

     24     23     31

AmerisourceBergen

     11     11     9

 

(1) Includes the impact of PGP from October 30, 2009 through December 31, 2009.

Financial information regarding revenue from customers attributed to significant geographic areas is incorporated herein by reference to “Note 18” to the Notes to the Consolidated Financial Statements found elsewhere in this Annual Report.

Competition

The pharmaceutical industry is highly competitive. Our branded products compete with brands marketed by other pharmaceutical companies including large, fully integrated concerns with financial, marketing, legal and product development resources substantially greater than ours. The ability of our products to compete with products manufactured by other companies will depend on a number of factors, including safety, efficacy, patient convenience, price, availability and effective marketing.

 

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Our principal branded competitors in our targeted market segments include:

 

   

Osteoporosis—Roche (Boniva®), Lilly (Evista®), Novartis (Reclast®) and Amgen Inc. (Prolia®);

 

   

Hormonal Contraceptives—Bayer AG (Safyral, Beyaz, Natazia), Johnson & Johnson (Ortho Tri-Cyclen® Lo, Ortho Evra®) and Merck & Co., Inc. (Nuvaring®);

 

   

Hormone Therapy—Pfizer (Premarin®, Premarin® Vaginal Cream, Prempro®) and Novo Nordisk A/S (Vagifem®, Activella®);

 

   

Gastroenterology—Shire plc (Lialda®, Pentasa®) and Salix Pharmaceuticals, Ltd. (Colazal®, Apriso);

 

   

Acne—Medicis Pharmaceutical Corporation (Solodyn®) and Galderma S.A. (Oracea®); and

 

   

Urology—Pfizer (Detrol®LA, Toviaz®), GlaxoSmithKline plc (VESIcare®), Allergan, Inc. and Indevus Pharmaceuticals, Inc. (Sanctura XR®).

Our branded pharmaceutical products are or may become subject to competition from generic equivalents of our products or those of our branded competitors, including, in some cases, prior to the expiration of the applicable patents. Our ACTONEL products no longer have patent protection in Canada or the Western European countries in which we sell these products, and ASACOL is not currently protected by a patent in the United Kingdom. In addition, other products, such as ESTRACE Cream and FEMHRT are currently not protected by patents in the United States where we sell these products. Generic equivalents are currently available in Canada and Western Europe for ACTONEL and in the United States for our DORYX 75 and 100 mg products, certain versions of our FEMHRT products, FEMCON FE and certain of our less significant products. See Item 1A. “Risk factors—Risks Relating to Our Business—If generic products that compete with any of our branded pharmaceutical products are approved and sold, sales of our products will be adversely affected.” These generic equivalents of our branded pharmaceutical products are sold by other pharmaceutical companies at lower prices. As a result, drug retailers have economic incentives to fill prescriptions for branded products with generic equivalents when available. After the introduction of a generic competitor, a significant percentage of the prescriptions written for the branded product may be filled with the generic version at the pharmacy, resulting in a commensurate loss in sales of the branded product. In addition, legislation enacted in most states in the United States allows or, in some instances mandates, that a pharmacist dispense an available generic equivalent when filling a prescription for a branded product, in the absence of specific instructions from the prescribing physician. Generic equivalents of competing branded products may also compete with our branded pharmaceutical products. For example, generic versions of Fosamax® became available following the loss of patent protection in 2008 and compete with our ACTONEL products. The availability of generic equivalents of our products or those of our branded competitors may cause a material decrease in revenue from our branded pharmaceutical products.

Manufacturing, Supply and Raw Materials

Finished Product Manufacturing

Our pharmaceutical manufacturing facility in Fajardo, Puerto Rico houses approximately 194,000 sq. ft. of manufacturing space. Adjacent to the facility is an approximately 24,000 sq. ft. warehouse that we lease from a third party. The Fajardo facility currently manufactures many of our oral contraceptive and HT products, including LOESTRIN 24 FE and LO LOESTRIN FE, and packages our DORYX and ENABLEX products. We also utilize our facility in Larne, Northern Ireland to manufacture our FEMRING vaginal rings.

In the PGP Acquisition, we acquired our manufacturing facility in Weiterstadt, Germany, which houses approximately 50,000 sq. ft. of manufacturing space and 54,000 sq. ft. of warehouse space. The Weiterstadt facility currently manufactures ASACOL tablets and packages ACTONEL for distribution outside the U.S.

 

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We currently contract with third parties to manufacture and supply certain of our products. We will continue to rely on our third-party partners, such as Mayne for DORYX, Novartis for ENABLEX and Contract Pharmaceuticals Limited Niagara (“CPL”) for ESTRACE Cream. In addition, both Sanofi and Norwich Pharmaceuticals Inc. (“NPI”) currently manufacture our ACTONEL products, and NPI currently manufactures all of our ATELVIA product requirements. GlaxoSmithKline plc (“GSK”) currently manufactures our ASACOL 400 mg product sold in the U.K. Below is a list of our key products manufactured by third parties and our current third party manufacturer for that product:

 

Product

  

Third-Party Manufacturer

  

Expiration

ATELVIA

   NPI    December 2014

ACTONEL

   Sanofi    May 2012

ACTONEL

   NPI    December 2014

ASACOL 400 mg

   GSK (for U.K.)    December 2014

DORYX

   Mayne    December 2013

ENABLEX

   Novartis    October 2013

ESTRACE Cream

   CPL    January 2015

The products described in this section accounted for a significant percentage of our product sales during the twelve-month period ended December 31, 2011 or are expected to account for a significant percentage of our product sales during 2012. See “Note 19” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

Raw Material Supply

We currently source the active pharmaceutical ingredient (“API”) for certain of our key products from third party suppliers. Currently our most significant API suppliers are Lonza Inc., Cambrex Corporation and Bayer AG. To the extent that a third party supplier is our sole source of API for any product, we attempt to manage the associated risk by developing secondary sources where commercially feasible, carrying additional inventory and managing our relationships with such supplier. We also continuously monitor the production capacity of our current suppliers and their ability to continue to supply our needs.

We conduct quality assurance audits of our manufacturing and other property sites, our contract manufacturers’ sites and our raw material suppliers’ sites and related records to confirm compliance with the relevant regulatory requirements. However, we cannot ensure that our sites and the sites of our third-party manufacturers and raw material suppliers’ will continue to remain in compliance. If we or our manufacturers or suppliers fail to comply with regulatory requirements or suffer any other event that results in the inability to supply our product requirements for an extended period, the resulting shortages of inventory could have a material adverse effect on our business. See Item 1A. “Risk factors—Risks Relating to Our Business—Delays in production or other disruptions within our supply chain could have a material adverse impact on our business.”

Patents, Proprietary Rights and Trademarks

Protecting our intellectual property, such as trademarks and patents, is a key part of our strategy.

Patents, Trade Secrets and Proprietary Knowledge

We rely on patents, trade secrets and proprietary knowledge to protect our products. We take steps to enforce our legal rights against third parties when we believe that our intellectual property or other proprietary rights have been infringed. Please refer to the table in Item 1. “Business”—“Our Principal Products” for a listing of the expiration dates for the patents covering our principal products. The following is a description of recent actions we have taken to enforce our intellectual property rights against various third parties:

 

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Osteoporosis

ACTONEL

In July 2004, PGP received a Paragraph IV certification notice letter from Teva regarding PGP’s NCE patent covering ACTONEL and today, ATELVIA. The letter indicated that Teva had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of ACTONEL. PGP filed a patent infringement suit against Teva in August 2004 charging Teva with infringement of the NCE patent covering ACTONEL. In that case, Teva admitted patent infringement but alleged that the NCE patent was invalid and, in February 2008, the U.S. District Court for the District of Delaware decided in favor of PGP, upholding the NCE patent, which expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity), as valid and enforceable. Teva appealed, and the U.S. Court of Appeals for the Federal Circuit unanimously upheld the decision of the District Court in May 2009.

In August 2008, December 2008 and January 2009, PGP and Roche (which licensed the ACTONEL Method Patents to PGP with respect to the ACTONEL once-a-month product), received Paragraph IV certification notice letters from Teva, Sun and Apotex regarding the ‘938 ACTONEL Method Patent covering once-a-month ACTONEL. In February 2010, we and Roche received a Paragraph IV certification notice letter from Mylan regarding the ‘938 ACTONEL Method Patent covering once-a-month ACTONEL. PGP and Roche filed a patent infringement suit against Teva in September 2008, Sun in January 2009 and Apotex in March 2009 charging each with infringement of the ‘938 ACTONEL Method Patent. We and Roche filed a patent infringement suit against Mylan in April 2010 charging Mylan with infringement of the ‘938 ACTONEL Method Patent. In October, November and December 2010 and February 2011, we and Roche received Paragraph IV certification notice letters from Sun, Apotex, Teva and Mylan regarding the ‘634 ACTONEL Method Patent covering once-a-month ACTONEL. We and Roche filed patent infringement suits against Sun and Apotex in December 2010, against Teva in January 2011 and against Mylan in March 2011 charging each with infringement of the ‘634 ACTONEL Method Patent.

ATELVIA

In August and October 2011, we received Paragraph IV certification notice letters from Watson and Teva regarding the ATELVIA Patents (not the NCE patent) and indicating that each such company had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ATELVIA 35 mg tablets. We filed patent infringement suits against Watson in October 2011 and against Teva in November 2011 charging each with infringement of the ATELVIA Patents.

Gastroenterology

ASACOL

In June 2010, we and Medeva received a Paragraph IV certification notice letter from Par regarding the ASACOL Patent and indicating that Par had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the ASACOL 400 mg product. We and Medeva filed a patent infringement suit against Par and EMET, the original filer of the ANDA, in August 2010 charging Par and EMET with infringement of the ASACOL Patent.

ASACOL HD

In September 2011, we received a Paragraph IV certification notice letter from Zydus regarding the ASACOL HD Patent and indicating that Zydus had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ASACOL HD. In November 2011, we filed a patent infringement suit against Zydus charging Zydus with infringement of the ASACOL HD Patent.

 

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Hormonal Contraceptives

LOESTRIN 24 FE

In April 2011, we received a Paragraph IV certification notice letter from Mylan, as U.S. agent for Famy Care, regarding the LOESTRIN Patent and indicating that Famy Care had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of our LOESTRIN 24 FE product. In June 2011, we filed a patent infringement suit against Famy Care and Mylan charging each with infringement of the LOESTRIN Patent.

In June 2006, we received from Watson a Paragraph IV certification notice letter indicating that Watson had submitted an ANDA to the FDA seeking approval to market a generic version of LOESTRIN 24 FE prior to the expiration of the LOESTRIN Patent. We filed a complaint against Watson alleging that Watson’s submission of an ANDA for a generic version of LOESTRIN 24 FE infringed the LOESTRIN Patent. In January 2009, we settled the patent litigation related to LOESTRIN 24 FE with Watson. In July 2009, we received a Paragraph IV certification notice letter from Lupin notifying us that Lupin had filed an ANDA seeking approval to manufacture and sell a generic version of LOESTRIN 24 FE. In September 2009, we filed an infringement lawsuit against Lupin in response to its submission, and in October 2010, we and Lupin settled our patent litigation relating to LOESTRIN 24 FE.

LO LOESTRIN FE

In July 2011, we received a Paragraph IV certification notice letter from Lupin regarding the LOESTRIN Patent and LO LOESTRIN Patent and indicating that Lupin had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of LO LOESTRIN FE. In September 2011, we filed a patent infringement suit against Lupin charging Lupin with infringement of the LOESTRIN Patent and LO LOESTRIN Patent.

FEMCON FE

We previously settled our infringement lawsuits against several ANDA filers, including Teva, relating to our FEMCON FE product. As a result, Teva entered the market with its generic version of FEMCON FE in March 2011.

Dermatology

DORYX

In March 2009, we 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 generic versions of our DORYX 150 mg product. In March and May 2009, we and Mayne filed infringement lawsuits against Impax and Mylan, charging each with infringement of the DORYX Patent. Our lawsuits against Impax and Mylan relating to our DORYX 150 mg product were consolidated. A trial was held in early February 2012, and the court has indicated that it expects to issue its decision by the end of February or early March 2012.

In January 2010, we and Mayne received a Paragraph IV certification notice letter from Sandoz indicating that it had amended its ANDA previously submitted to the FDA to include a request for approval to manufacture and sell a generic version of our DORYX 150 mg product. In addition, in February 2010, we and Mayne received a Paragraph IV certification notice letter from Heritage indicating that it had submitted an ANDA to the FDA seeking approval to market a generic version of our DORYX 150 mg product. In January and March 2010, we filed infringement lawsuits against Sandoz and Heritage in response to their submissions, and in December 2010 and January 2012, we settled our patent litigation with Heritage and Sandoz relating to their ANDAs.

For a discussion of our ongoing legal proceedings relating to the matters set forth above, see “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

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We also seek to protect our proprietary rights by filing applications for patents on certain inventions and entering into confidentiality, non-disclosure and assignment of invention agreements with our employees, consultants, licensees and other companies. However, we do not ultimately control whether we will be successful in enforcing our legal rights against third-party infringers, whether our patent applications will result in issued patents, whether our patents will be subjected to inter parte reexaminations by the United States Patent and Trademark Office (“USPTO”) or similar proceedings in jurisdictions outside the U.S., whether our confidentiality, non-disclosure and assignment of invention agreements will be breached and whether we will have adequate remedies in the event of any such breach, or whether our trade secrets will become known by competitors. In addition, some of our key products are not protected by patents and proprietary rights and therefore are or may become subject to competition from generic equivalents. For a further discussion of our competition, see “—Competition” and Item 1A. “Risk Factors—Risks Relating to Our Business—If generic products that compete with any of our branded pharmaceutical products are approved and sold, sales of our products will be adversely affected.”

Trademarks

Due to our branded product focus, we consider our trademarks to be valuable assets. Therefore, we actively manage our trademark portfolio, maintain long-standing trademarks and obtain trademark registrations for new brands in key jurisdictions in which we operate. The names indicated below are certain of our key registered trademarks, some of which may not be registered in all relevant jurisdictions:

 

ACTONEL

   FEMHRT

ATELVIA

   LO LOESTRIN

DORYX

   LOESTRIN

ENABLEX

   Warner Chilcott

ESTRACE

  

We also police our trademark portfolio against infringement and violation by third parties. However, our efforts to protect our trademarks may be unsuccessful and we may not have adequate remedies in the event of such infringement or violation.

As a result of the PGP Acquisition, we are the exclusive licensee of the trademark ASACOL in the United States and the owners of the trademark in the United Kingdom.

Government Regulation

The pharmaceutical industry is subject to regulation by national, regional, state and local agencies in the U.S., including the FDA, the Drug Enforcement Administration, the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services, the Centers for Medicare and Medicaid Services, the Consumer Product Safety Commission, the Occupational Safety and Health Administration and the U.S. Environmental Protection Agency (“EPA”). The Federal Food, Drug and Cosmetic Act, the Public Health Service Act and other U.S. federal and state statutes and regulations govern to varying degrees the research, development and manufacturing of, and commercial activities relating to, prescription pharmaceutical products, including pre-clinical and clinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information and promotion. The manufacture and disposal of pharmaceutical products in the United States is also regulated by the EPA. Similar regulatory authorities and regulations exist in Canada, the member states of the European Union and in other foreign countries in which we manufacture, test, distribute and sell our products.

The process of testing, data analysis, manufacturing development and regulatory review necessary to obtain and maintain required governmental approvals is costly. Non-compliance with applicable legal and regulatory requirements can result in civil fines, criminal fines and prosecution, recall of products, the total or partial suspension of manufacture and/or distribution, seizure of products, injunctions, whistleblower lawsuits, failure to

 

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obtain approval of pending product applications, withdrawal of existing product approvals, exclusion from participation in government healthcare programs and other sanctions. Any threatened or actual government enforcement action can also generate adverse publicity and require that we devote substantial resources that could otherwise be used productively in other areas of our business.

U.S. Product Approval Requirements

FDA approval is required before a prescription drug can be marketed in the United States, subject to narrow exceptions. For innovative, or non-generic, new drugs, an FDA-approved NDA is required before the drug may be marketed in the U.S. The NDA must contain data to demonstrate that the drug is safe and effective for its intended uses and that it will be manufactured to appropriate quality standards. In order to demonstrate safety and effectiveness, an NDA generally must include or reference pre-clinical studies and clinical data from controlled trials in humans. For a new chemical entity, this generally means that lengthy, uncertain and rigorous pre-clinical and clinical testing must be conducted. For compounds that have a record of prior or current use, it may be possible to utilize existing data or medical literature and limited new testing to support an NDA. Any pre-clinical testing that we wish to rely upon for FDA action must comply with the FDA’s good laboratory practice and other requirements. Clinical testing in human subjects must be conducted in accordance with the FDA’s good clinical practice and other requirements.

In order to initiate a clinical trial, the sponsor must submit an Investigational New Drug Application, or IND, to the FDA or meet one of the narrow exemptions that exist from the IND requirement. Clinical research must also be reviewed and approved by independent institutional review boards, or IRBs, at the sites where the research will take place, and the study subjects must provide informed consent. The FDA or an IRB can prevent a clinical trial from being started or require that a clinical trial be terminated or suspended. Some clinical trials are also monitored by data safety monitoring boards, which review available data from the studies and determine whether the studies may continue or should be terminated or modified based on ethical considerations and the best interest of the study subjects. There are also legal requirements to register clinical trials on public databases when they are initiated, and to disclose the results of the trials on public databases upon completion.

The FDA can, and does, reject NDAs, require additional clinical trials, or grant approvals on a restricted basis only, even when product candidates performed well in clinical trials. In addition, the FDA may approve an NDA subject to burdensome post-approval study or monitoring requirements, or require that other risk management measures be utilized. There are also requirements to conduct pediatric trials for all new NDAs and supplements to NDAs, unless a waiver or deferral applies.

The FDA regulates and often inspects manufacturing facilities, equipment and processes used in the manufacturing of pharmaceutical products before granting approval to market any drug. Each NDA submission requires a substantial user fee payment unless a waiver or exemption applies. Under current FDA policies, the FDA has committed generally to review and make a decision concerning approval on an NDA within 10 months, and on a new priority drug within six months. However, final FDA action on the NDA can take substantially longer, and where novel issues are presented there may be review and recommendation by an independent FDA advisory committee. The FDA can also refuse to file and to review an NDA it deems incomplete or not properly reviewable.

U.S. Generic Drug Approvals

Generic drugs are approved through a special, abbreviated process typically involving the filing of an ANDA with the FDA. As a general matter, the amount of testing and effort required to prepare and submit an ANDA is substantially less than that required for an NDA. Subject to limited exceptions, the ANDA must seek approval of a drug product that has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use (labeling) as a “reference listed drug” approved under an NDA. The ANDA also must generally contain limited clinical data to demonstrate that the product covered by the ANDA is bioequivalent to the reference listed drug. In addition, the ANDA must contain certifications to patents listed with the FDA for the reference listed drug.

 

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Special procedures apply when an ANDA contains certifications stating that a listed patent is invalid or not infringed. If the owner of the patent or the NDA for the reference listed drug brings a patent infringement suit within a specified time, an automatic stay bars FDA approval of the ANDA for a specified period of time pending resolution of the suit or other action by the court. In addition, periods of regulatory exclusivity may apply to the reference listed drug and bar either the filing or approval of an ANDA for a period of time. The first complete ANDA filed with the FDA that contains a certification challenging the patents listed with the FDA for a reference listed drug is also eligible to receive 180 days of market exclusivity during which the FDA is prohibited from approving subsequent ANDAs. This period of 180-day exclusivity is subject to certain forfeiture events.

U.S. Post-Approval Regulatory Requirements

The FDA continues to review marketed products even after approval. If previously unknown problems are discovered or if there is a failure to comply with applicable regulatory requirements, the FDA may restrict the marketing of an approved product, impose new risk management requirements, cause the withdrawal of the product from the market, or under certain circumstances seek recalls, seizures, injunctions or criminal sanctions. For example, the FDA may require withdrawal of an approved marketing application, labeling changes, additional studies, or other risk management measures for any marketed drug product if new information reveals questions about a drug’s safety or effectiveness. In addition, changes to the product, the manufacturing methods or locations, or labeling are subject to additional FDA approval, which may or may not be received, and which may be subject to a lengthy FDA review process.

All drugs must be manufactured, packaged and labeled in conformity with current Good Manufacturing Practices (“cGMP”) requirements, and drug products subject to an approved application must be manufactured, packaged, labeled and promoted in accordance with the approved application. Certain of our products must also be packaged with child-resistant and senior-friendly packaging under the Poison Prevention Packaging Act and Consumer Product Safety Commission regulations. Our third-party manufacturers must also comply with cGMP requirements. In complying with cGMP requirements, manufacturers must continually expend time, money and effort in production, record keeping and quality assurance and control to ensure that their products meet applicable specifications and other requirements for product safety, efficacy and quality. The FDA and other regulatory agencies periodically inspect drug manufacturing facilities to ensure compliance with applicable cGMP requirements. Some mutual recognition agreements for government inspections exist between the United States, the European Union, Canada, Australia and New Zealand. Failure to comply with these and other statutory and regulatory requirements (including, in the case of our manufacturing facility located in Fajardo, Puerto Rico, certain obligations that we assumed in our purchase of the facility arising out of a consent decree entered into by the previous owner before a U.S. District Court) subjects the manufacturer to possible legal or regulatory action.

The distribution of pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level and sets minimum standards for the registration and regulation of drug distributors at the state level. Under the PDMA and state law, states generally require the registration of manufacturers and distributors who provide pharmaceuticals in that state, including, in certain states, manufacturers and distributors who ship pharmaceuticals into the state even if such manufacturers or distributors have no place of business within the state. Certain states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Both the PDMA and state laws impose requirements and limitations upon drug sampling to ensure accountability in the distribution of samples. The PDMA sets forth civil and criminal penalties for violations of these and other provisions.

Other reporting and recordkeeping requirements also apply for marketed drugs, including, for prescription products, requirements to review and report cases of adverse events. Adverse experiences resulting from the use of products can result in the imposition of marketing restrictions through labeling changes, risk management

 

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requirements or product removal. Product advertising and promotion are also subject to FDA and state regulation, including requirements that promotional claims conform to any applicable FDA approval, be appropriately balanced with important safety information and otherwise be adequately substantiated.

Other U.S. Regulation

Our sales, marketing and scientific/educational programs must comply with applicable requirements of the anti-kickback and fraud and abuse provisions of the Social Security Act, the False Claims Act, the Veterans Healthcare Act, the implementing regulations and policies of the U.S. Health and Human Services Office of Inspector General and U.S. Department of Justice, the privacy provisions of the Health Insurance Portability and Accountability Act and similar state laws. These laws and regulations are broad in scope, and although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and regulatory safe harbors are often limited, and promotional practices may be subject to scrutiny if they do not qualify for an exemption or safe harbor. In certain cases, there may also be an absence of guidance in the form of specific regulations or legal precedent. In addition, the federal government and several states have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. Similar legislation is being considered in other states. All of our activities are also potentially subject to federal and state consumer protection and unfair competition laws. Our business activities outside the United States are subject to regulation under the U.S. Foreign Corrupt Practices Act (“FCPA”), which generally prohibits U.S. companies and their intermediaries from making payments to foreign government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We are subject to possible administrative and legal proceedings and actions under the laws and regulations described above. In particular, the FDA, the Department of Justice and other agencies have increased their enforcement activities with respect to the sales, marketing, research and similar activities of pharmaceutical companies in recent years, and many pharmaceutical companies have been subject to government investigations related to these practices. Actions related to such investigations or other noncompliance with applicable laws and regulations may result in the imposition of civil and criminal sanctions, which may include fines, penalties and injunctive or administrative remedies.

We also participate in various programs under government-sponsored health systems and are subject to the requirements of those programs. For example, we participate in the Federal Medicaid rebate program established by the U.S. Omnibus Budget Reconciliation Act of 1990, as well as several state supplemental rebate programs. Under the Medicaid rebate program, we pay a rebate to each state Medicaid program for our products that are reimbursed by those programs. The Medicaid rebate amount is computed each quarter based on our submission to the Centers for Medicare and Medicaid Services at the U.S. Department of Health and Human Services of our current average manufacturer price and best price for each of our products. The terms of our participation in the program impose an obligation to correct the prices reported in previous quarters, as may be necessary. Any such corrections could result in an overage or underage in our rebate liability for past quarters, depending on the direction of the correction. In addition to retroactive rebates (and interest, if any), if we are found to have knowingly submitted false information to the government, the statute provides for civil monetary penalties which could be material. We also participate in the Medicare Part D outpatient prescription drug program, which went into effect in 2006 and provides elderly and disabled patients eligible for Medicare with access to subsidized prescription drug coverage. Coverage under Medicare Part D is provided primarily through private entities, which act as plan sponsors. These plan sponsors use their purchasing power under these programs to negotiate price concessions from pharmaceutical manufacturers. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid.

Recent healthcare reforms may subject us to additional regulatory requirements. In the U.S., the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), in early 2010 substantially changes the way health care is financed by both governmental and private payors and significantly affects many companies in the pharmaceutical industry, including us. Among the provisions of the PPACA are those governing enrollment in federal health care programs, reimbursement changes and the increased use of comparative effectiveness research

 

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in health care decision-making, which may affect existing government health care programs and result in the development of new programs and additional regulations. Specifically, these changes included, among other things:

 

   

an increase in certain Medicaid rebates, including (i) the minimum basic Medicaid rebate for branded prescription drugs (from 15.1% of Average Manufacturer Price (“AMP”) to 23.1% of AMP) and (ii) the additional rebate on “line extensions” of solid oral dosage forms of branded products;

 

   

a revised definition of AMP that eliminates the inclusion of certain non-retail channel segments;

 

   

a requirement that manufacturers pay states rebates on prescription drugs dispensed to Medicaid managed care enrollees;

 

   

an expansion of the categories of entities eligible for Section 340B discounted pricing on outpatient drugs;

 

   

a requirement that manufacturers provide a 50% discount on prescriptions filled while the beneficiary is in the Medicare Part D coverage gap, also known as the “donut hole”; and

 

   

the payment by drug manufacturers of an annual fee (which is non-deductible for U.S. federal income tax purposes) based on the manufacturer’s market share of sales of branded drugs and biologics to, or pursuant to coverage under, specified U.S. government programs.

In addition, in 2011, regulations and guidance were issued pursuant to the PPACA requiring health plans generally to eliminate any patient cost-sharing, such as co-payments, co-insurance or deductibles, on certain preventive health services, including oral contraceptives. However, under the regulation, plans may be able to retain some flexibility to use reasonable medical management techniques to determine how to cover preventive services, including the ability to require cost-sharing for branded drugs if a generic version is available. It is not yet clear how this regulation will be implemented and what effect, if any, it may have on the market for branded oral contraceptives. The PPACA also made various other changes (some of which are likely to be implemented in 2012) that may also increase our costs of doing business, including the provisions referred to as the “Sunshine Act,” which increased disclosure and compliance requirements relating to, among other things, transfers of value to health care providers and the distribution of product samples to health care providers.

We are unable to predict the future course of health care legislation and regulations, including regulations that may be issued to implement the provisions of the PPACA. Further, U.S. federal and state governments as well as foreign governments continue to propose other legislative and regulatory measures aimed at reforming their respective healthcare systems, including proposals in the U.S. to permit the federal government to use its purchasing power to negotiate further discounts from pharmaceutical companies under Medicare. The PPACA and future healthcare reform legislation could decrease the prices we receive for our products or our sales volume and could impose additional taxes or other measures that increase the cost of doing business.

U.S. Manufacturing for Export

Products sold outside of the United States that are manufactured in the United States are subject to certain FDA regulations, including rules governing export, as well as regulation by the country in which the products are sold. We currently supply LOESTRIN to Teva in Canada. We currently sell certain products, including ACTONEL, in Canada, Western Europe and Australia that are manufactured in the United States.

Regulation in Canada

Whether or not FDA approval has been obtained, separate Canadian authorization for a pharmaceutical product must be obtained prior to the commencement of marketing of the product in Canada. Similar to the U.S., the Canadian pharmaceutical industry is subject to federal regulation by Health Canada pursuant to the Canadian federal Food and Drugs Act and other applicable federal legislation. Health Canada’s process and substance required for obtaining and maintaining marketing approval is generally similar to that of the FDA. However, the

 

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Office of Legislative and Regulatory Modernization at Health Canada has undertaken consultations with respect to, and may propose, regulatory reforms to introduce new life-cycle regulation of pharmaceutical products in Canada, including additional post-marketing conditions such as safety and surveillance requirements.

In addition to regulation by Health Canada, innovative pharmaceutical products pertaining to a Canadian patent are subject to price review by the federal Patented Medicine Prices Review Board (the “PMPRB”) whose mandate is to ensure that prices charged by manufacturers for patented medicines are not excessive. In recent years, the PMPRB has increased their enforcement activity which has resulted in a significant increase in payments by manufacturers as well as board hearings and appeals within the judicial system. Provincial regulation of pharmaceutical manufacturers in Canada is generally limited to pricing, reimbursement and accreditation issues relating to the inclusion and maintenance on federal, provincial and territorial (“F/P/T”) formularies under various F/P/T requirements.

Regulation in Europe

Whether or not FDA approval has been obtained, authorization of a pharmaceutical product by regulatory authorities must be obtained in any country in Europe prior to the commencement of clinical trials or the marketing of the product in that country. The authorization process varies from country to country and the time may be longer or shorter than that required for FDA approval.

Under European regulatory systems, we must submit an application for and obtain a clinical trial authorization (“CTA”) in each member state in which we intend to conduct a clinical trial. The application for the CTA must include an Investigational Medicinal Product Dossier, or IMPD, which must contain pharmaceutical, pre-clinical and, if existing, previous clinical information on the drug substance and product. An overall risk-benefit assessment critically analyzing the non-clinical and clinical data in relation to the potential risks and benefits of the proposed trial must also be included. The application for the CTA must be submitted to the regulatory authorities of each member state where the trial is intended to be conducted prior to its commencement. The trial must be conducted on the basis of the proposal as approved by an ethics committee in each member state (the EU equivalent to an IRB) before the trial commences.

After we complete our clinical trials, we must obtain marketing authorization before we can market our product. In Europe, there are three procedures under the prevailing European pharmaceutical legislation that, if successfully completed, allow us to obtain marketing authorizations. For certain designated drugs, an applicant may obtain a marketing authorization from the European Commission pursuant to a centralized procedure following the issuance of a positive opinion from the European Medicines Agency. Such marketing authorizations are valid in each of the European Union member states and also in Norway, Iceland and Liechtenstein under the European Economic Area Agreement. With the exception of products that are authorized centrally, the competent authorities of the member states are responsible for granting marketing authorizations for products that are sold in their markets. Applicants not relying on the centralized procedure who intend to market their product in more than one member state may seek marketing authorizations under the mutual recognition procedure or the decentralized procedure. The mutual recognition procedure may be used if the product has already been authorized in one member state under that member state’s national authorization procedure to facilitate mutual recognition of the existing authorization in another member state. The decentralized procedure, on the other hand, may be used in cases where the product has not received a marketing authorization in any member state. Under this procedure, the applicant may facilitate the grant of a marketing authorization in one or more member states on the basis of an identical dossier presented to such member states. The marketing authorization of a product may be made conditional on conducting post-marketing studies.

Irrespective of whether a marketing authorization for a product is obtained centrally, under the mutual recognition procedure or under the decentralized procedure, the product must be manufactured in accordance with the principles of good manufacturing practices set forth in the relevant European Union directives and other rules governing the manufacture of medicinal products in the European Union. More specifically, our manufacturing facility in Weiterstadt, Germany is subject to regulation by the German Bundesinstitut für

 

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Arzneimittel und Medizinprodukte and the FDA. Our facility in Larne, Northern Ireland is approved and regularly inspected by the U.K. Medicines and Healthcare products Regulatory Agency and the FDA. Our manufacturing activities in Germany are governed by the German Arzneimittelgesetz and its ordinances, while our manufacturing activities in the United Kingdom are governed by the United Kingdom Medicines Act of 1968 and the regulations promulgated thereunder.

In addition to applicable regulations relating to the manufacture of medicinal products in the European Union, each marketing authorization carries with it the obligation to comply with many post-authorization regulations relating to the marketing and other activities of the authorized holder. These include requirements relating to adverse event reporting and other pharmacovigilance requirements, advertising, packaging and labeling, patient package leaflets, distribution and wholesale dealing. Violations of these regulations may result in civil and criminal liability, loss of marketing authorization and other sanctions.

Regulatory approval of prices for certain products is required in many countries outside the United States. In particular, many European countries make the reimbursement of a product within the national health insurance scheme conditional on the agreement by the seller not to sell the product above a fixed price in that country. Also common is the unilateral establishment of a reimbursement price by the national authorities, often accompanied by the inclusion of the product on a list of reimbursable products. Related pricing discussions and ultimate governmental approvals can take several months to years.

Seasonality

Our results of operations are minimally affected by seasonality.

Employees

As of December 31, 2011, we had approximately 2,200 employees, approximately 1,500 in North America and approximately 700 in the rest of the world. None of our employees in North America are unionized. Certain of our employees in Europe are represented by works councils and certain employees are members of industry, trade and professional associations.

Environmental Matters

Our operations and facilities are subject to various U.S., foreign and local environmental laws and regulations, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, or third-party property damage or personal injury claims, in the event of violations or liabilities under these laws and regulations, or noncompliance with the environmental permits required at our facilities. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future.

We acquired our Fajardo, Puerto Rico facility from Pfizer in 2004. Under the purchase agreement, Pfizer retained certain liabilities relating to pre-existing contamination and indemnified us, subject to certain limitations, for other potential environmental liabilities. In addition, in 2008 and 2009, we acquired an aggregate of approximately 9 vacant acres adjacent to our Fajardo manufacturing facility in separate transactions not involving Pfizer, in respect of which we have no indemnification rights for potential environmental liabilities. As part of the PGP Acquisition we acquired facilities in Manati, Puerto Rico and Weiterstadt, Germany. While we are not aware of any material claims or obligations relating to these sites, our current or former sites, or any off-site location where we sent hazardous wastes for disposal, the discovery of new or additional contaminants or other non-compliance issues, the imposition of new or additional cleanup obligations at our Fajardo, Manati, Weiterstadt or other sites, or the failure of any other party to meet its financial obligations to us, could result in significant liability.

 

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Executive Officers

The executive officers of Warner Chilcott plc, their positions and their ages are as listed below.

 

Name

   Age   

Position

Roger M. Boissonneault

   63    Chief Executive Officer, President and Director

Paul Herendeen

   56    Executive Vice President, Chief Financial Officer

Marinus Johannes van Zoonen

   54    President, Europe/International and Marketing

Leland H. Cross

   55    Senior Vice President, Technical Operations

Herman Ellman, M.D.

   64    Senior Vice President, Clinical Development

Andrew Fenton

   48    Senior Vice President, Chief Information Officer

Rochelle Fuhrmann

   42    Senior Vice President, Finance

Claire A. Gilligan, Ph.D.

   50    Senior Vice President, Quality

Michael Halstead

   38    Senior Vice President, Corporate Development

Izumi Hara

   52    Senior Vice President, General Counsel and Secretary

Alvin D. Howard

   57    Senior Vice President, Regulatory Affairs

Roger M. Boissonneault was appointed Chief Executive Officer, President and Director of Warner Chilcott as of January 5, 2005. Mr. Boissonneault was appointed Chief Executive Officer and Director for the Predecessor in September 2000. From 1996 to 2000, he served as President and Chief Operating Officer of the company acquired by the Predecessor, which was also known as Warner Chilcott PLC, serving as a director from 1998 through 2000. From 1976 to 1996, Mr. Boissonneault served in various capacities with Warner-Lambert (now part of Pfizer), including Vice President, Female Healthcare, Director of Corporate Strategic Planning and Director of Obstetrics/Gynecology Marketing.

Paul Herendeen joined Warner Chilcott as Chief Financial Officer and Executive Vice President on April 1, 2005 and is responsible for finance, accounting and treasury functions. From April 2001 to March 2005, Mr. Herendeen was Executive Vice President and Chief Financial Officer of MedPointe Inc. From 1998 through March 2001, Mr. Herendeen served as our Executive Vice President and Chief Financial Officer. Mr. Herendeen also served as a director of our predecessor companies from 1996 through March 2001.

Marinus Johannes van Zoonen joined Warner Chilcott as President, Europe/International & Marketing in November 2009 after 20 years at P&G, most recently as Vice President, Pharmaceuticals Europe, Australia & Japan and International Health Affairs. From 1989 to 2008, he served in various capacities at P&G in its prescription and OTC divisions and from 2005 to 2009 represented the industry as President of the European OTC Association. Prior to joining P&G, Mr. van Zoonen worked at Duphar Pharmaceuticals International.

Leland H. Cross joined Warner Chilcott as Senior Vice President, Technical Operations on September 1, 2001 and is responsible for technical operations worldwide. From 1994 to 2001, Mr. Cross was part of the Global Manufacturing group at Warner-Lambert (now part of Pfizer), where most recently he served as General Manager of Pfizer Ireland Pharmaceuticals, responsible for Pfizer’s dosage manufacturing operations in Ireland. Prior to joining Warner-Lambert, Mr. Cross managed a manufacturing operation for Merck & Co. Inc.

Herman Ellman, M.D., joined Warner Chilcott as Senior Vice President, Clinical Development in June 2000. Dr. Ellman is responsible for clinical development and medical affairs activities. Prior to joining the company, Dr. Ellman held the position of Medical Director for Women’s Healthcare at Berlex Laboratories.

Andrew Fenton currently serves as Senior Vice President, Chief Information Officer for Warner Chilcott and is responsible for our information technology strategy, infrastructure and operations. Mr. Fenton joined Warner Chilcott in November 2005 and held positions of increasing responsibility before his promotion to Senior Vice President in January 2012, including most recently, Vice President, Chief Information Officer. Prior to joining Warner Chilcott, Mr. Fenton held various positions in information technology at IBM Corporation, including most recently, Vice President, Global Relationship Partner.

 

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Rochelle Fuhrmann currently serves as Senior Vice President, Finance for Warner Chilcott and is responsible for various corporate finance functions as well as investor relations. Ms. Fuhrmann joined Warner Chilcott in June 2006 and held positions of increasing responsibility before her promotion to Senior Vice President in January 2011, including most recently, Vice President, Finance. Prior to joining Warner Chilcott, Ms. Fuhrmann held various positions in finance, accounting policy, investor relations and marketing at AT&T, Inc., including most recently, Director, Accounting Policy.

Claire A. Gilligan, Ph.D., currently serves as Senior Vice President, Quality for Warner Chilcott and is responsible for quality worldwide. Dr. Gilligan joined a predecessor of Warner Chilcott in 1992 and has held positions of increasing responsibility at Warner Chilcott since that time. From 2004 to July 2010, Dr. Gilligan was Vice President of Pharmaceutical Development, during which time she was responsible for the development of all products and manufacturing processes. Prior to joining Warner Chilcott, Dr. Gilligan lectured in the School of Pharmacy at the Queen’s University of Belfast.

Michael Halstead currently serves as Senior Vice President, Corporate Development for Warner Chilcott and is responsible for the company’s business development efforts. Mr. Halstead joined Warner Chilcott's legal group in May 2005 and held positions of increasing responsibility before his promotion to his current position in June 2011. Prior to joining Warner Chilcott, Mr. Halstead practiced law in the mergers and acquisitions group of Davis Polk & Wardwell LLP.

Izumi Hara joined Warner Chilcott as Senior Vice President and Deputy General Counsel in June 2001 and is responsible for the legal matters of the company. She was promoted to General Counsel as of August 1, 2005. Prior to joining the company, Ms. Hara held positions of increasing responsibility at Warner-Lambert (now part of Pfizer), where her most recent position was Vice President and Associate General Counsel, Corporate Affairs, and where she was responsible for all corporate legal matters, including acquisitions, divestitures, alliances and other transactions in all of Warner-Lambert’s lines of business worldwide.

Alvin D. Howard joined Warner Chilcott as Vice President, Regulatory Affairs in February 2001. He was promoted to Senior Vice President as of August 1, 2005 and is responsible for the registration of all products and for managing relationships with the FDA, Health Canada and other agencies regulating the sale of pharmaceutical products. Prior to joining the company, Mr. Howard was Vice President, Worldwide Regulatory Affairs at Roberts Pharmaceuticals.

 

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WHERE YOU CAN FIND MORE INFORMATION

We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Unless specifically noted otherwise, these filings are not deemed to be incorporated by reference in this Annual Report. Statements contained in this Annual Report as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed or incorporated by reference as an exhibit, reference is made to the copy of such contract or other document filed or incorporated by reference as an exhibit to this Annual Report, each statement being qualified in all respects by such reference. A copy of this Annual Report, including the exhibits and schedules thereto, may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is http://www.sec.gov. We also maintain an Internet site at www.wcrx.com. We make available on our Internet website free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, as amended (the “Exchange Act”), as soon as practicable after we electronically file such reports with the SEC. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Annual Report.

 

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Item 1A. Risk Factors.

Special Note Regarding Forward-Looking Statements

This Annual Report contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our anticipated financial performance and financial condition, and our business plans, growth strategy and product development efforts. The words “may,” “might,” “will,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and elsewhere in this Annual Report.

You should carefully consider the risk factors set forth below as well as the other information contained in this Annual Report before making an investment decision. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations. Any of the following risks could materially adversely affect our business, financial condition, results of operations or cash flows. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as may be required by law.

Risks Relating to Our Business

If generic products that compete with any of our branded pharmaceutical products are approved and sold, sales of our products will be adversely affected.

Generic equivalents for branded pharmaceutical products are typically sold by competing companies at a lower cost than the branded product. After the introduction of a competing generic product, a significant percentage of the prescriptions previously written for the branded product are often written for the generic version. In addition, legislation enacted in most states in the United States allows or, in some instances mandates, that a pharmacist dispense an available generic equivalent when filling a prescription for a branded product, in the absence of specific instructions from the prescribing physician. As a result, branded products typically experience a significant loss in revenues following the introduction of a competing generic product. Our branded pharmaceutical products are or may become subject to competition from generic equivalents because there is no proprietary protection for some of the branded pharmaceutical products we sell, because our patent protection expires or because our patent protection is not sufficiently broad or enforceable. In addition, we may not be successful in our efforts to extend the proprietary protection afforded our branded products through the development and commercialization of proprietary product improvements and new and enhanced dosage forms. Competition from generic equivalents could result in an impairment of our intangible assets or the acceleration of amortization on our non-impaired intangible assets and have a material adverse impact on our revenues, financial condition, results of operations and cash flows.

Our ACTONEL products no longer have patent protection in Canada or the Western European countries in which we sell these products, and ASACOL is not protected by a patent in the United Kingdom. In addition, other products such as ESTRACE Cream and FEMHRT are not protected by patents in the United States where we sell these products. Generic equivalents are currently available in Canada and Western Europe for ACTONEL and in the United States for our DORYX 75 and 100 mg products, certain versions of our FEMHRT products, FEMCON FE and certain of other less significant products.

During the next five years, additional products of ours will lose patent protection or likely become subject to generic competition. For example, our ASACOL 400 mg product will lose U.S. patent protection in July 2013, our ACTONEL once-a-week product will lose U.S. patent protection in June 2014 (including a 6-month pediatric extension of regulatory exclusivity) and our LOESTRIN 24 FE product will lose U.S. patent protection in July 2014. Some of our products may also become subject to generic competition prior to the expiration of patent protection in the event a generic competitor elects to launch its generic equivalent product “at-risk”. For example, although our DORYX

 

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patent does not expire until 2022, and we and Mayne filed infringement lawsuits against Mylan and Impax arising from their ANDA filings with respect to our DORYX 75 mg and 100 mg products, generic versions of such products were launched “at-risk” in January 2011 following the FDA’s approval of their respective ANDAs.

Our generic competitors may also challenge the validity or enforceability of the patents protecting our products or otherwise seek to circumvent them. For example, we and Mayne have received several challenges relating to our DORYX products. In March 2009, we 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 our DORYX 150 mg delayed-release tablets, which today account for all but a de minimis amount of our DORYX net sales. In March and May 2009, we and Mayne filed infringement lawsuits against each of Impax and Mylan. The resulting 30-month stay of FDA approval of each of Impax’s and Mylan’s ANDAs with respect to our DORYX 150 mg product expired in September 2011, and Mylan received final approval from the FDA for its generic version of the DORYX 150 mg product on February 8, 2012. We believe that Impax has not yet received tentative approval of its ANDA from the FDA. Our lawsuits against Impax and Mylan relating to our DORYX 150 mg product were tried in early February 2012, and the court has indicated that it expects to issue its decision by the end of February or early March 2012. The court has issued a temporary restraining order prohibiting Mylan from launching a generic version of our DORYX 150 mg product until the court renders its decision. If Mylan is successful in the trial, or if Impax receives final approval of its ANDA with respect to the DORYX 150 mg product from the FDA and is successful at trial or is not otherwise prohibited by the court, a generic equivalent of our DORYX 150 mg product could enter the market as early as the first quarter of 2012. Such entry would result in an impairment of our intangible assets relating to DORYX and have a material adverse impact on our revenues, financial condition, results of operations and cash flows in subsequent periods.

We have also received challenges from potential generic competitors with respect to our ACTONEL and ATELVIA products. In July 2004, PGP received a Paragraph IV certification notice letter from Teva regarding PGP’s NCE patent covering ACTONEL and indicating that Teva had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of ACTONEL. PGP filed a patent infringement suit against Teva in August 2004. In that case, Teva admitted patent infringement but alleged that the NCE patent was invalid and, in February 2008, the U.S. District Court for the District of Delaware decided in favor of PGP, upholding the NCE patent as valid and enforceable. Teva appealed, and the U.S. Court of Appeals for the Federal Circuit unanimously upheld the decision of the District Court in May 2009. In 2008 and 2009, PGP and Roche received Paragraph IV certification notice letters from Teva, Sun and Apotex regarding the ‘938 ACTONEL Method Patent covering the once-a-month ACTONEL product and 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. In February 2010, we received a Paragraph IV certification notice letter from Mylan regarding the ‘938 ACTONEL Method Patent indicating that it had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the once-a-month ACTONEL product. PGP and Roche, which licensed the ACTONEL Method Patents to PGP, filed a patent infringement suit against Teva in September 2008, against Sun in January 2009 and against Apotex in March 2009 charging each with infringement of the ‘938 ACTONEL Method Patent. We and Roche filed a patent infringement suit against Mylan in April 2010 charging Mylan with infringement of the ‘938 ACTONEL Method Patent. In October, November and December 2010 and February 2011, we and Roche received Paragraph IV certification notice letters from Sun, Apotex, Teva and Mylan indicating that each such company had amended its existing ANDA covering generic versions of the once-a-month ACTONEL product to include the ‘634 ACTONEL Method Patent. We and Roche filed patent infringement suits against Sun and Apotex in December 2010, against Teva in January 2011 and against Mylan in March 2011 charging each with infringement of the ‘634 ACTONEL Method Patent. Our lawsuits against Teva, Apotex, Sun and Mylan for infringement of the ‘938 ACTONEL Method Patent were consolidated, and trial for those suits has been scheduled for July 2012. The subsequent lawsuits against Teva, Apotex, Sun and Mylan for infringement of the related ‘634 ACTONEL Method Patent have been consolidated with the suits relating to the ‘938 ACTONEL Method Patent for all pretrial purposes. The FDA has tentatively approved Teva’s ANDA with respect to the once-a-month ACTONEL product. However, the underlying ACTONEL NCE patent, which covers all of our ACTONEL products and ATELVIA, does not expire until June 2014 (including a 6-month pediatric extension of regulatory exclusivity).

 

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In August and October 2011, we received Paragraph IV certification notice letters from Watson and Teva regarding the ATELVIA Patents and indicating that each such company had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of the ATELVIA 35 mg product. We filed a patent infringement suit against Watson in October 2011 and against Teva in November 2011 charging each with infringement of the ATELVIA Patents. Neither Watson nor Teva certified against the NCE patent, which covers all of our ACTONEL and ATELVIA products and expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity).

Our ASACOL products have also been subject to challenges from potential generic competitors. In June 2010, we and Medeva received a Paragraph IV certification notice letter from Par regarding the ASACOL Patent indicating that Par had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the ASACOL 400 mg product. We and Medeva filed a patent infringement suit against Par and EMET, the original filer of the ANDA, in August 2010, which resulted in a stay of FDA approval of Par’s ANDA until December 2012, subject to prior resolution of the suit. In October 2011, the court held a Markman hearing to determine claim construction of the patent claims at issue in the litigation. The court has not indicated when it expects to issue its Markman decision. In September 2011, we also received a Paragraph IV certification notice letter from Zydus regarding the ASACOL HD Patent and indicating that Zydus had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the ASACOL HD (800 mg) product. In addition, Zydus indicated that it had submitted a Paragraph III certification with respect to the ASACOL Patent, consenting to the delay of FDA approval of the ANDA product until the ASACOL Patent expires. In November 2011, we filed a patent infringement suit against Zydus charging Zydus with infringement of the ASACOL HD Patent. The lawsuit results in a stay of FDA approval of Zydus’ ANDA for 30 months from the date of our receipt of the Zydus notice letter, subject to the prior resolution of the matter before the court.

We have also received challenges from potential generic competitors with respect to our contraceptive products, including LOESTRIN 24 FE and LO LOESTRIN FE. For example, in April 2011, we received a Paragraph IV certification notice letter from Mylan, as U.S. agent for Famy Care, regarding the LOESTRIN Patent and indicating that Famy Care had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the LOESTRIN 24 FE product. In June 2011, we filed a patent infringement suit against Famy Care and Mylan charging each with infringement of the LOESTRIN Patent. The lawsuit results in a stay of FDA approval of Famy Care’s ANDA for 30 months from the date of our receipt of the Famy Care notice letter, subject to the prior resolution of the matter before the court. In July 2011, we also received a Paragraph IV certification notice letter from Lupin regarding the LOESTRIN Patent and LO LOESTRIN Patent and indicating that Lupin had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the LO LOESTRIN FE product. In September 2011, we filed a patent infringement lawsuit against Lupin charging Lupin with infringement of the patents. The lawsuit results in a stay of FDA approval of Lupin’s ANDA for 30 months from the date of our receipt of the Lupin notice letter, subject to the prior resolution of the matter before the court.

While we intend to vigorously defend each of our patents described above, and pursue our legal rights, including our right to any monetary damages when available, we can offer no assurance as to when any of our lawsuits will be decided, whether such lawsuits will be successful or that a generic equivalent of our products will not be approved and enter the market prior to the expiration of the applicable patents. See the table in Item 1. “Business — Our Principal Products” for a listing of the expiration dates for each of the patents described above.

In addition, although we seek to enforce our legal rights against third parties when we believe that our intellectual property or other proprietary rights are infringed, we have in the past, and may in the future, enter into settlements of our litigation with generic competitors that result in the sale of generic products prior to the expiration of our patents. For example, as a result of our settlement in January 2009 of our outstanding patent litigation against Watson relating to LOESTRIN 24 FE, we granted Watson a non-exclusive license to launch a generic version of this product in 2014. More specifically, under the agreement, Watson was permitted to commence marketing its generic equivalent product on the earliest of (i) January 22, 2014, (ii) 180 days prior to a date on which we 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 another generic version of LOESTRIN 24 FE enters the U.S. market without authorization from us. In addition, in December 2010 and January 2012, we settled patent litigation related to our DORYX 75

 

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mg, 100 mg and 150 mg products with Heritage and Sandoz. Under the applicable settlement agreement, Heritage and Sandoz each agreed, among other things, not to market and sell a generic equivalent product until December 15, 2016, subject to certain exceptions. We can offer no assurance that generic equivalents of our LOESTRIN 24 FE and/or DORYX 150 mg products will not enter the market prior to the expiration of the applicable patents in 2014 and 2022, respectively. In addition, recent legislative and regulatory proposals, if adopted, could affect the duration of our patent protection for our products by limiting our future ability to settle litigation with companies that file ANDAs to sell generic versions of our products.

We cannot predict the outcome of the matters described above or whether we will receive additional challenges to our intellectual property. If we lose market exclusivity for any of our products, it could result in an impairment of our intangible assets or the acceleration of amortization on our non-impaired intangible assets and our business, financial condition, results of operations and cash flows could be materially adversely affected.

Our trademarks, patents and other intellectual property are valuable assets, and if we are unable to protect them from infringement or challenges, our business prospects may be harmed.

Due to our focus on branded products, we consider our trademarks to be valuable assets. Therefore, we actively manage our trademark portfolio, maintain long-standing trademarks and typically obtain trademark registrations for new brands. We also police our trademark portfolio against infringement. Our efforts to defend our trademarks may be unsuccessful and we may not have adequate remedies in the event of a finding of infringement due, for example, to the fact that a violating company may be insolvent.

We also rely on patents, trade secrets and proprietary knowledge to protect our products. We take steps to protect our proprietary rights by filing applications for patents on certain inventions, by entering into confidentiality, non-disclosure and assignment of invention agreements with our employees, consultants, licensees and other companies and enforcing our legal rights against third parties that we believe may infringe our intellectual property rights. We do not ultimately control whether we will be successful in enforcing our legal rights against third-party infringers, whether our patent applications will result in issued patents, whether our patents will be subjected to inter parte reexamination by the USPTO, whether our confidentiality, non-disclosure and assignment of invention agreements will be breached and whether we will have adequate remedies in the event of any such breach, or whether our trade secrets will become known by competitors.

We are today, and have in the past been, involved in litigation with respect to the validity and infringement of our patents. In addition, we may be involved in such litigation in the future. The outcome of this type of litigation is unpredictable, and if unfavorable, may deprive us of market exclusivity or prevent us from marketing and selling a product altogether. In addition, bringing and defending these lawsuits is costly, and consequently we may decide to not bring or defend such suits and to abandon the products to which they relate. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report. If we lose market exclusivity for or stop marketing a product, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Delays in production or other disruptions within our supply chain could have a material adverse impact on our business.

Our pharmaceutical manufacturing facility located in Fajardo, Puerto Rico currently manufactures many of our products, including LOESTRIN 24 FE and LO LOESTRIN FE, and packages our DORYX tablets and ENABLEX products. The PGP facility we acquired in Weiterstadt, Germany currently manufactures ASACOL tablets and packages ACTONEL for distribution outside the U.S. The manufacture of pharmaceutical products requires precise and reliable controls and is subject to significant compliance obligations under applicable laws and regulations. If we fail to comply with such requirements at our Fajardo, Weiterstadt or other facilities, we may be subjected to legal or regulatory action, including potential shutdowns, which could result in our failure to meet the demand for our existing products, the loss of all or a portion of our current market share or delays in the qualification of such facilities for the manufacture of our new products.

 

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We currently contract with various third parties to manufacture certain of our pharmaceutical products and/or supply the API and other pharmaceutical ingredients necessary to manufacture our products. Certain of these third parties are currently our sole source of supply for the applicable product or product component. If we are unable to renew these third party contracts on favorable terms or identify an acceptable replacement, any of our suppliers experience financial difficulties or any of our suppliers fail to provide us with products or product components without interruption or comply with their obligations under our various supply arrangements, we may experience a delay in supply which could be significant. In the event of such a delay, we may not have adequate contractual or equitable remedies for any breach. Our suppliers have occasionally been unable to meet all of our orders, which has led to the depletion of our safety stock and temporary shortages of trade supply and promotional samples, and we may in the future experience additional interruptions in our product supply if any of our suppliers are unable to meet our needs.

The manufacture of our products, including product components such as API, is highly regulated, and any failure by our own manufacturing facilities or the facilities of any third-party supplier (each a “product supplier”), to comply with regulatory requirements could adversely affect our supply of products. All facilities and manufacturing techniques used for the manufacture of pharmaceutical products must be operated in conformity with cGMPs. In complying with cGMP requirements, product suppliers must continually expend time, money and effort in production, record-keeping and quality assurance and control to ensure that their products meet applicable specifications and other requirements for product safety, efficacy and quality. Manufacturing facilities are subject to periodic unannounced inspections by the FDA and other regulatory authorities. Failure to comply with applicable legal requirements (including, in the case of our manufacturing facility located in Fajardo, certain obligations that we assumed in our purchase of the facility arising out of a consent decree entered into by the previous owner) subjects product suppliers to possible legal or regulatory action, including shutdown, which may adversely affect such product supplier’s ability to supply product.

The FDA and other regulatory authorities must approve suppliers of certain active and inactive pharmaceutical ingredients and certain packaging materials used in our products as well as suppliers of finished products, and the approval process can be lengthy. The development, regulatory approval and commercial sales of our products are dependent upon our ability to procure these ingredients, packaging materials and finished products from suppliers approved by the FDA and other regulatory authorities. In the event that certain ingredients, packaging materials or finished products were no longer available from the initially approved supplier or that supplier had its approval from the FDA or other regulatory authority withdrawn, we would be required to find a new approved supplier. The qualification of a new product supplier or a new supplier of product components could potentially halt or delay the manufacture of the drug involved. Furthermore, we may not be able to obtain API, packaging materials or finished products from a new supplier on terms that are as favorable to us as those agreed to with the initially approved supplier or at reasonable prices.

We also contract with various third parties to package and distribute certain of our products. If we are unable to renew these third party contracts on favorable terms or identify an acceptable replacement or any of these parties experience financial difficulties or fail to satisfy their contractual obligations, we may experience a disruption in our supply chain which could be significant. In the event of such a disruption, we may not have adequate contractual or equitable remedies for any breach.

In addition, our product supply chain could be negatively impacted by a number of other factors outside of our control, including labor disputes or shortages, natural disasters such as hurricanes, floods, fires and earthquakes and security threats. For example, hurricanes are relatively common in Puerto Rico where our Fajardo and Manati facilities are located, and the severity of such natural disasters is unpredictable.

Any delay or disruption in our supply chain could result in our inability to meet the demand for our products or the loss of all or a portion of our market share with respect to such products, and materially adversely affect our revenues, financial condition, results of operations and cash flows.

 

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Pricing pressures from managed care organizations and other third-party payors, government sponsored health systems and regulations relating to Medicare and Medicaid, healthcare reform, pharmaceutical reimbursement and pricing in general could decrease our revenues.

Our commercial success in producing, marketing and selling products depends, in part, on the availability of adequate reimbursement from third-party healthcare payors, such as managed care organizations and government bodies and agencies, for the cost of the products and related treatments. The market for our products may be limited by actions of third-party payors.

Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs, including by developing formularies to encourage plan beneficiaries to utilize preferred products for which the plans have negotiated favorable terms. Exclusion of a product from a formulary, or placement of a product on a disfavored formulary tier, can lead to sharply reduced usage in the managed care organization patient population. If our products are not included within an adequate number of formularies or if adequate reimbursements are not provided, or if reimbursement policies increasingly favor generic products, our market share and business could be negatively affected. For example, net sales of some of our ACTONEL products in recent years have experienced decreased demand in the United States as a result of aggressive managed care initiatives implemented to favor generic versions of competing branded products, and we cannot ensure that our efforts to address these market share pressures through, among other things, the marketing of our new bisphosphonate product, ATELVIA, will succeed in limiting any further loss of market share.

We also experience pricing pressures from government sponsored health systems, particularly as a result of regulations relating to Medicare and Medicaid. In 2006, the Medicare Part D outpatient prescription drug benefit went into effect, which provides elderly and disabled patients eligible for Medicare with access to subsidized prescription drug coverage. Coverage under Medicare Part D is provided primarily through private entities, which act as plan sponsors. These plan sponsors use their purchasing power under these programs to demand discounts from pharmaceutical companies that may implicitly create price controls on prescription drugs. As a result, our revenues from products such as ACTONEL, which are covered by the Medicare drug benefit, have decreased and may decrease further. With respect to our drug products reimbursed under the Medicaid program, most states have established preferred drug lists (“PDLs”) and require that manufacturers pay supplemental rebates, in addition to the federal rebate, to the state in order to be included in the PDL or to avoid being placed in a disfavored position on the state formulary. Publicly funded drug insurance programs operated by provincial and territorial governments in Canada also maintain formularies that similarly may require us to provide our products at reduced prices in order to be listed on the applicable government formulary. In addition, most European Union member states impose controls on the prices at which medicines are reimbursed under state-run healthcare schemes. In many European countries reimbursement of a product is conditional on the agreement by the seller not to sell the product above a fixed price in that country. Often the reimbursement price is established unilaterally by the national authorities and is accompanied by the inclusion of the product on a list of reimbursable products. Some member states operate reference pricing systems in which they set national reimbursement prices by reference to those in other member states. Increased pressures to reduce government healthcare spending and increased transparency of prices following the adoption of the euro have meant that an increasing number of governments have adopted this approach. Furthermore, increased price transparency or the loss of exclusivity, such as our loss of exclusivity for ACTONEL in Western European markets in late 2010, may result in an increase in parallel importation of pharmaceuticals from lower price level countries to higher priced markets, which could lower our effective average selling price.

 

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Recent healthcare reforms have affected, and may further affect, the pricing and reimbursement of our products and have a material adverse effect on our revenues, financial condition, results of operations and cash flows. In the U.S., the enactment of the PPACA substantially changes the way healthcare is financed by both governmental and private payors and significantly affects many companies in the pharmaceutical industry, including us. These changes included, among other things:

 

   

an increase in certain Medicaid rebates, including (i) the minimum basic Medicaid rebate for branded prescription drugs (from 15.1% of AMP to 23.1% of AMP) and (ii) the additional rebate on “line extensions” of solid oral dosage forms of branded products;

 

   

a revised definition of AMP that eliminates the inclusion of certain non-retail channel segments;

 

   

a requirement that manufacturers pay states rebates on prescription drugs dispensed to Medicaid managed care enrollees;

 

   

an expansion of the categories of entities eligible for Section 340B discounted pricing on outpatient drugs;

 

   

a requirement that manufacturers provide a 50% discount on prescriptions filled while the beneficiary is in the Medicare Part D coverage gap, also known as the “donut hole”; and

 

   

the payment by drug manufacturers of an annual fee (which is non-deductible for U.S. federal income tax purposes) based on the manufacturer’s market share of sales of branded drugs and biologics to, or pursuant to coverage under, specified U.S. government programs.

In addition, in 2011, regulations and guidance were issued pursuant to the PPACA requiring health plans generally to eliminate any patient cost-sharing, such as co-payments, co-insurance or deductibles, on certain preventive health care services, including oral contraceptives. However, under the regulation, plans may be able to retain some flexibility to use reasonable medical management techniques to determine how to cover preventive services, including the ability to require cost-sharing for branded drugs if a generic version is available. It is not yet clear how this regulation will be implemented and what effect, if any, it may have on the market for branded oral contraceptives such as our LOESTRIN products.

We are unable to predict the future course of health care legislation and regulations, including additional regulations that will be issued to implement the provisions of the PPACA. Further, U.S. federal and state governments as well as foreign governments continue to propose other legislative and regulatory measures aimed at reforming their respective healthcare systems, including proposals in the U.S. to permit the federal government to use its purchasing power to negotiate further discounts from pharmaceutical companies under Medicare. The PPACA and future healthcare reform legislation could decrease the prices we receive for our products or our sales volume, impose additional taxes or other measures that result in an increase to our costs of doing business and have a material adverse effect on our revenues, financial condition, results of operations and cash flows.

Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability, and changes in tax laws and regulations could materially adversely affect our results of operations, financial position and cash flows.

We conduct operations world-wide through subsidiaries in various tax jurisdictions. Certain aspects of the transactions between our subsidiaries, including our transfer pricing (which is the pricing we use in transactions between our various subsidiaries) and our intercompany financing arrangements, could be challenged by applicable taxing authorities. While we believe both our transfer pricing and our intercompany financing arrangements comply with existing tax rules, either or both could be challenged by the applicable taxing authorities. Following any such challenge, our taxable income could be reallocated among our subsidiaries. Such reallocation could both increase our consolidated tax liability and adversely affect our financial condition, results of operations and cash flows.

 

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We previously entered into an Advance Pricing Agreement (the “APA”) with the Internal Revenue Service (the “IRS”) covering the calendar years 2006 through 2010. This APA was applicable to our U.S. operations as they existed prior to the PGP Acquisition. While we are seeking a renewal of our APA covering calendar years after 2010, we cannot ensure that a renewal of our APA will be concluded or that any renewal of the APA will contain terms comparable to those in our APA for the calendar years 2006 through 2010. If we do not renew our APA, while we believe that our transfer pricing arrangements comply with existing U.S. tax rules, the IRS could challenge our transfer pricing arrangements.

In addition, our future operating results, financial position and cash flows could be materially adversely affected by changes in the application of tax principles, including tax rates, new tax laws, or revised interpretations of existing tax laws and precedents.

Changes in market conditions, including lower than expected cash flows or revenues for our branded pharmaceutical products as a result of competition from other branded products, may result in our inability to realize the value of our products, in which case we may have to record an impairment charge.

The pharmaceutical industry is characterized by rapid product development and technological change, and as a result, our pharmaceutical products could be rendered obsolete or their value may be significantly decreased by the development of new technology or new branded pharmaceutical products indicated for the treatment of conditions currently addressed by our products, technological advances that reduce the cost of production or marketing or pricing actions by one or more of our competitors. For example, net sales of our ACTONEL products have experienced decreased demand in the United States due to market share gains by competing products. We cannot ensure that our efforts to address these market share pressures through, among other things, the marketing of new products such as ATELVIA, will succeed in limiting any loss of market share. Some of the companies we compete against have significantly greater resources than we do, and therefore, may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or devote greater resources to the promotion and sale of their products than we can. Our inability to compete successfully with respect to these or other factors may materially and adversely affect our cash flows or revenues, or may result in our inability to realize the value of our branded pharmaceutical products, including products acquired from third parties, and may require us to record an impairment charge which may be material.

Certain key products generate a significant percentage of our revenues, and any events that adversely affect the markets for these products could materially reduce our revenues and earnings.

For the year ended December 31, 2011, revenues of our ACTONEL, ASACOL and LOESTRIN 24 FE products represented 70% of our total revenue for the period. Any events that adversely affect the future sales of these products could materially reduce our revenues and earnings. These events could include loss of patent protection, competition from generic versions of our products, generic versions of competing branded products (including those that compete with our ACTONEL and oral contraceptive products) and branded products, the discovery of previously unknown side effects, pricing pressures and reimbursement policy changes and any production delays. For example, as discussed elsewhere in this Annual Report, ACTONEL products lost patent protection in Canada and Western European countries in 2010, and certain ACTONEL and ASACOL products have experienced market share declines in the U.S. as a result of competition from other branded and generic products. In addition, ACTONEL revenues in the U.S. have been adversely impacted by declines in the overall oral bisphosphonate market.

Extensive legal and regulatory requirements could make it more difficult for us to obtain new or expanded approvals for our products, and could limit our ability or make it more burdensome to commercialize our approved products.

The pharmaceutical industry is subject to extensive regulation by national, regional, state and local governmental authorities, and we are required in the United States and other countries to obtain approval from regulatory authorities before we can manufacture, market and sell our products. Even after approval, the relevant

 

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governmental authorities continue to review marketed products and can, among other things, require additional studies and testing, restrict the marketing of an approved product, impose new risk management requirements, cause the withdrawal of the product from the market, or under certain circumstances seek recalls, seizures, injunctions or criminal sanctions.

For example, in the U.S. the Food and Drug Administration Amendments Act of 2007 provided the FDA with extensive authority to impose post-approval clinical study and clinical trial requirements, require safety-related changes to product labeling, review advertising aimed at consumers, and require the adoption of risk management plans, referred to in the legislation as risk evaluation and mitigation strategies (“REMS”). The REMS may include requirements for special labeling or medication guides for patients and special communication plans for healthcare professionals, and may also impose restrictions on the distribution and use of products. For example, if the FDA were to make the requisite findings, it might require that a new product be prescribed only by physicians with certain specialized training, only in certain designated healthcare settings, or only in conjunction with special patient testing and monitoring.

The legislation also includes provisions requiring the disclosure to the public of certain information regarding ongoing clinical trials for drugs through a clinical trial registry and for disclosing clinical trial results to the public through a clinical trial database; renewed requirements for conducting trials to generate information on the use of products in pediatric patients; and penalties, for such acts as false or misleading consumer drug advertising. Other proposals have been made to impose additional requirements on drug approvals, further expand post-approval requirements, and restrict sales and promotional activities.

Requirements have also been imposed in some states, and proposed in other states, requiring us to provide paper or electronic pedigree information for the drugs that we distribute to help establish their authenticity and to track their movement from the manufacturer through the chain of distribution. These federal and state requirements, and additional requirements that have been proposed and might be adopted, may make it more difficult or burdensome for us to obtain new or expanded approvals for our products, may be more restrictive or come with onerous post-approval or other requirements, may hinder our ability to commercialize approved products successfully, and may harm our business.

Delays and uncertainties in clinical trials or the government approval process for new products could result in lost market opportunities and hamper our ability to recoup costs associated with product development.

FDA approval is generally required before a prescription drug can be marketed in the United States. For innovative, or non-generic, new drugs, an FDA-approved NDA is required before the drug may be marketed in the United States. The NDA must contain data to demonstrate that the drug is safe and effective for its intended uses, and that it will be manufactured to appropriate quality standards. Products marketed outside the United States are also subject to government regulation, which may be equally or more demanding. The clinical trials required to obtain regulatory approvals can be complex and expensive, and their outcomes are uncertain. Positive results from pre-clinical studies and early clinical trials do not ensure positive results in later clinical trials that form the basis of an application for regulatory approval. Even where clinical trials are completed successfully, the FDA or other regulatory authorities may determine that a product does not present an acceptable risk-benefit profile, and may not approve an NDA or its foreign equivalent or may only approve an NDA or its foreign equivalent with significant restrictions or conditions. The drug development and approval process can be time-consuming and expensive without assurance that the data will be adequate to justify approval of proposed new products. If we are unable to obtain regulatory approval for our products, we will not be able to commercialize our products and recoup our R&D costs. Furthermore, even if we were to obtain regulatory approvals, the terms of any product approval, including labeling, may be more restrictive than desired and could affect the marketability of our products, and the approvals may be contingent upon burdensome post-approval study commitments. If we are unable to obtain timely product approvals on commercially viable terms, our profitability and business could suffer.

 

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The perceived health risks of our products may affect their acceptability and commercial success.

If perceived health risks arise with respect to any of our products or those of our competitors, it could have an adverse effect on our ability to successfully market our products. For example, studies during the last decade have analyzed the health risks of estrogen therapies (such as our ESTRACE Cream, ESTRACE Tablets, FEMRING and FEMTRACE products) and estrogen-progestogen therapy products (such as FEMHRT), and as a result, the American College of Obstetricians and Gynecologists has recommended that consumers use these products in the lowest possible dose for the shortest possible duration. We believe the publicity surrounding some of these studies resulted in a significant industry-wide decrease in the number of prescriptions being written for estrogen therapy and estrogen-progestogen therapy products, including our HT products.

In addition, case reports in scientific literature have described certain side effects that developed in patients subsequent to alleged use of bisphosphonate medications. Since 2003, there have been case reports of adverse events involving patients who developed osteonecrosis of the jaw (“ONJ”) subsequent to alleged use of bisphosphonates. The majority of these case reports involved multiple myeloma patients who used high doses of intravenous bisphosphonates as part of their cancer therapy. In 2005, the FDA requested that all manufacturers of bisphosphonate medications, such as our bisphosphonate prescription product ACTONEL, which is approved for various osteoporosis indications, include language in their labeling regarding the reports of ONJ. In June 2008, the FDA requested information from all bisphosphonate manufacturers regarding any adverse event reports of atypical femoral fractures. The large majority of the published case reports of atypical femoral fractures have been associated with alendronate, which is marketed for osteoporosis indications by Merck as Fosamax®. In October 2010, the FDA issued a drug safety communication requiring that all manufacturers of bisphosphonate medications approved for osteoporosis indications include language in their labeling regarding the reports of atypical femoral fractures in patients taking these medications. Health Canada has since required similar class labeling in Canada on all bisphosphonate medications. The labeling of our ACTONEL and ATELVIA bisphosphonate products contain language regarding ONJ and atypical femoral fractures. In September 2011, an FDA Advisory Committee was convened to discuss the benefits and risks of long-term bisphosphonate use for osteoporosis indications in light of the potential safety concerns of ONJ and atypical femoral fractures. The Advisory Committee recommended that the labels for bisphosphonate drugs further clarify the duration of use to treat osteoporosis in an effort to minimize safety concerns regarding ONJ and atypical femoral fractures that may be associated with long-term use. Revised labeling addressing the duration of use has not yet been approved by the FDA.

The ultimate effect of these studies, and any further changes in labeling for our products, may further adversely affect the acceptability of our products by patients, the willingness of physicians to prescribe our products for their patients and/or the duration of their therapy.

Product liability claims and product recalls could harm our business.

The development, manufacture, testing, marketing and sale of pharmaceutical products entail significant risk of product liability claims or recalls. Our products are, in the substantial majority of cases, designed to affect important bodily functions and processes. Unforeseen side-effects caused by, or manufacturing defects inherent in, the products sold by us could result in exacerbation of a patient’s condition, further deterioration of the patient’s condition or even death. The occurrence of such an event could result in product liability claims and/or the recall of one or more of our products. Claims may be brought by individuals seeking relief for themselves or, in certain jurisdictions, by groups seeking to represent a class.

For example, approximately 721 product liability suits, including some with multiple plaintiffs, have been filed against, or tendered pursuant to acquisition agreements to, us in connection with the HT products FEMHRT, ESTRACE Tablets, ESTRACE Cream and medroxyprogesterone acetate. 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 Women’s Health Initiative (“WHI”), examining the long-term effect of HT on the prevention of coronary heart disease and osteoporotic fractures, and

 

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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 by 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 Pfizer). See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

Further, we may be liable for product liability, warranty or similar claims in relation to our ACTONEL bisphosphonate products. One such set of claims relates to litigation involving ACTONEL, which we acquired in October 2009 in the PGP Acquisition. Since 2003, there have been case reports in scientific literature of adverse events involving patients who developed ONJ subsequent to alleged use of bisphosphonate medications. Following the publication of these reports, several product liability lawsuits were filed against P&G and its partner under the Collaboration Agreement, Sanofi, regarding ACTONEL. These cases primarily alleged that ACTONEL caused the plaintiffs to suffer ONJ, although a few cases alleged atypical femoral fractures, both alone and in conjunction with ONJ claims. In 2010, following case reports of patients who developed atypical femoral fractures after alleged use of bisphosphonate medications, the FDA issued a drug safety communication regarding such reports. Subsequent to the issuance of the FDA’s communication, a number of our more recent product liability claims have alleged only atypical femoral fractures. We are a defendant in approximately 139 cases and a potential defendant with respect to approximately 176 unfiled claims involving a total of approximately 323 plaintiffs and potential plaintiffs arising out of the claimants’ alleged ingestion of ACTONEL. The 176 unfiled claims involve potential plaintiffs that have agreed, pursuant to a tolling agreement, to postpone the filing of their claims in exchange for our agreement to suspend the statutes of limitations relating to their potential claims. In addition, we are also aware of four purported product liability class actions brought against us 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. Generally, the plaintiffs allege that ACTONEL increases the risk of ONJ and/or atypical femoral fractures and that these risks were not included in the product’s warnings during the relevant time periods. Under the Collaboration Agreement, Sanofi has agreed to indemnify us, 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 approximately 90 claims relating to ONJ and other alleged injuries that were pending as of March 31, 2010 and not subsequently dismissed. Pursuant to the April 2010 amendment to the Collaboration Agreement, we are fully responsible for any product liability claims in the U.S. and Puerto Rico relating to ACTONEL brought on or after April 1, 2010. Our agreement with P&G provides that P&G will indemnify us, subject to certain limits, for 50% of the losses from any product liability claims relating to PGP products that were pending as of the closing date of the PGP Acquisition, including approximately 88 claims relating to ONJ and other alleged injuries pending as of October 30, 2009 and not subsequently dismissed. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

Product liability insurance coverage is expensive, can be difficult to obtain and may not be available in the future on acceptable terms, if at all. Our product liability insurance may not cover all liabilities we may incur in connection with the development, manufacture or sale of our products. In addition, we may not continue to be able to obtain insurance on satisfactory terms or in adequate amounts.

 

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We currently maintain product liability insurance coverage for claims between $25 million and $170 million, subject to certain exclusions, and are otherwise self-insured. Our 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. Successful claims brought against us in connection with our HT product liability litigation, the ACTONEL-related litigation, or other matters that are either not covered by, or are in excess of, available insurance coverage could subject us to significant liabilities and have a material adverse effect on our business, financial condition, results of operations and cash flows. Such claims could also harm our reputation and the reputation of our products, thereby adversely affecting our ability to market our products successfully. In addition, irrespective of the outcome of product liability claims, defending a lawsuit with respect to such claims could be costly and significantly divert management’s attention from operating our business. Furthermore, we could be rendered insolvent if we do not have sufficient financial resources to satisfy any liability resulting from such a claim or to fund the legal defense of such a claim.

Product recalls may be issued at our discretion or at the discretion of certain of our suppliers, the FDA, other government agencies and other entities that have regulatory authority for pharmaceutical sales. From time to time, we have recalled some of our products; however, to date none of these recalls have been significant. Any recall of a significant product could materially adversely affect our business and profitability by rendering us unable to sell that product for some time.

Changes in laws and regulations could adversely affect our results of operations, financial position or cash flows.

Our future operating results, financial position or cash flows could be adversely affected by changes in laws and regulations such as (i) changes in the FDA or equivalent foreign approval processes that may cause delays in, or limit or prevent the approval of, new products, (ii) new laws, regulations and judicial decisions affecting product marketing, promotion or the healthcare field generally and (iii) new laws or judicial decisions affecting intellectual property rights.

The loss of the services of members of our senior management team or scientific staff or the inability to attract and retain other highly qualified employees could impede our ability to meet our strategic objectives and adversely affect our business.

Our success is dependent on attracting and retaining highly qualified scientific, sales and management staff, including our Chief Executive Officer, Roger Boissonneault. We face intense competition for personnel from other companies, academic institutions, government entities and other organizations. The loss of key personnel, or our failure to attract and retain other highly qualified employees, may impede our ability to meet our strategic objectives.

Pursuant to our business strategy, we intend to develop improvements to our existing products as well as new products. This strategy may require us to hire additional employees with expertise in areas that relate to product development. We cannot fully anticipate or predict the time and extent to which we will need to hire this type of specialized personnel. We may not be successful in attracting and retaining the personnel necessary to pursue our business strategy fully. In addition, if competition continues to intensify, then our cost of attracting and retaining employees may escalate.

Sales of our products may be adversely affected by the consolidation among wholesale drug distributors and the growth of large retail drug store chains.

The network through which we sell our products has undergone significant consolidation marked by mergers and acquisitions among wholesale distributors and the growth of large retail drugstore chains. As a result, a small number of large wholesale distributors control a significant share of the market, and the number of independent drug stores and small drugstore chains has decreased. Three large wholesale distributors accounted for an aggregate of 60% of our total revenues during the year ended December 31, 2011. If any of our major

 

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distributors reduces its inventory levels or otherwise reduces purchases of our products, it could lead to periodic and unanticipated future reductions in revenues and cash flows. Consolidation of drug wholesalers and retailers, as well as any increased pricing pressure that those entities face from their customers, including the U.S. government, may increase pricing pressure and place other competitive pressures on drug manufacturers, including us.

If we fail to comply with government regulations we could be subject to fines, sanctions and penalties that could adversely affect our ability to operate our business.

We are subject to regulation by national, regional, state and local agencies, including, in the United States, the FDA, the Drug Enforcement Administration, the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services, the Centers for Medicare and Medicaid Services, the U.S. Environmental Protection Agency and other regulatory bodies. The Federal Food, Drug and Cosmetic Act, the Public Health Service Act, the PPACA and other federal and state statutes and regulations in the United States, and equivalent laws and regulations in the European Union and Canada, govern to varying degrees, the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including pre-clinical and clinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information and promotion.

Our sales, marketing, research and other scientific/educational programs must also comply with the anti-kickback and fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provisions of the Health Insurance Portability and Accountability Act, and similar state laws. Pricing and rebate programs must comply with the Medicaid drug rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply, including the Federal Acquisition Regulation. Our business activities outside the United States are subject to regulation under the FCPA, which generally prohibits U.S. companies and their intermediaries from making payments to foreign government officials for the purpose of obtaining or retaining business or securing any other improper advantage.

All of our sales, marketing, research and other scientific/educational programs and activities are also potentially subject to federal and state consumer protection and unfair competition laws. In addition, in recent years, the federal government and several states in the United States, including California, Connecticut, Massachusetts, Maine, Minnesota, Nevada, New Hampshire, New Mexico, Texas, Vermont and West Virginia, as well as the District of Columbia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing and prohibit certain other sales and marketing practices. Similar legislation is being considered in other states.

Some of the statutes and regulations that govern our activities, such as federal and state anti-kickback and false claims laws, are broad in scope, and while exemptions and statutory safe harbors protecting certain common activities exist, they are often narrowly drawn. Certain other requirements, such as those under the PPACA’s “Sunshine Act” provisions, are new and their breadth and application are uncertain. While we manage our business activities to comply with these statutory provisions, due to their breadth, complexity and, in certain cases, uncertainty of application, it is possible that our activities could be subject to challenge by various government agencies. In particular, the FDA, the U.S. Department of Justice and other agencies have increased their enforcement activities with respect to the sales, marketing, research and similar activities of pharmaceutical companies in recent years, and many pharmaceutical companies have been subject to government investigations related to these practices. On February 22, 2012, we, along with certain non-executive employees in our sales organization, received subpoenas from the United States Attorney for the District of Massachusetts. The subpoena we received seeks information and documentation relating to a wide range of matters, including sales

 

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and marketing activities, payments to people who are in a position to recommend drugs, medical education, consultancies, prior authorization processes, clinical trials, off-label use and employee training (including with respect to laws and regulations concerning off-label information and physician remuneration), in each case relating to all of our current key products. We intend to cooperate in responding to the subpoena, but cannot predict or determine the impact of this inquiry on our future financial condition or results of operations. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for further discussion of our material ongoing governmental investigations.

A determination that we are in violation of these and/or other government regulations and legal requirements may result in civil damages and penalties, criminal fines and prosecution, administrative remedies, the recall of products, the total or partial suspension of manufacture and/or distribution, seizure of products, injunctions, whistleblower lawsuits, failure to obtain approval of pending product applications, withdrawal of existing product approvals, exclusion from participation in government healthcare programs and other sanctions. The U.S. Attorney’s investigation and any other threatened or actual government enforcement action could also generate adverse publicity and require that we devote substantial resources that could be used productively on other aspects of our business. Any of these types of investigations or enforcement actions could affect our ability to commercially distribute our products and could materially and adversely affect our business, financial condition, results of operations and cash flows.

We may not be able to successfully identify, develop, acquire, license or market new products as part of growing our business.

In order to grow and achieve success in our business, we must continually identify, develop, acquire and license new products that we can ultimately market. Any future growth through new product acquisitions will be dependent upon the continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. Even if such opportunities are present, we may not be able to successfully identify products as candidates for potential acquisition, licensing, development or collaborative arrangements. Moreover, other companies, many of which may have substantially greater financial, marketing and sales resources, are competing with us for the right to acquire such products.

If an acquisition candidate is identified, the third parties with whom we seek to cooperate may not select us as a potential partner or we may not be able to enter into arrangements on commercially reasonable terms or at all. Furthermore, we do not know if we will be able to finance the acquisition or integrate an acquired product into our existing operations. The negotiation and completion of potential acquisitions could result in a significant diversion of management’s time and resources and potentially disrupt our ongoing business. Future product acquisitions may result in the incurrence of debt and contingent liabilities and an increase in interest expense and amortization expense, as well as significant charges relating to integration costs.

At each stage between developing or sourcing new products and marketing these products, there are a number of risks and uncertainties, and failure at any stage could have a material adverse effect on our ability to achieve commercial success with a product or to maintain or increase revenues, profits and cash flow. In addition, if we are unable to manage the challenges surrounding product development, acquisitions or the successful integration of acquisitions, it could have materially adverse effects on our business, financial condition, results of operations and cash flows.

Prescription drug importation from Canada and other countries could increase pricing pressure on certain of our products and could decrease our revenues and profit margins.

Under current U.S. law, U.S. individuals may import prescription drugs that are unavailable in the United States from Canada and other countries for their personal use under specified circumstances. Other imports, although illegal under U.S. law, also enter the country as a result of the resource constraints and enforcement priorities of the FDA and the U.S. Customs Service. The volume of prescription drug imports from Canada and

 

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elsewhere could increase due to a variety of factors, including the further spread of Internet pharmacies and actions by certain state and local governments to facilitate Canadian and other imports. These imports may harm our business.

We currently sell a number of products, including ACTONEL, ASACOL and FEMHRT, in Canada. In addition, ESTRACE Tablets are sold in Canada by third parties. Due to government price regulation in Canada and other countries, these products are generally sold in Canada and other countries for lower prices than in the United States. As a result, if these drugs are imported into the United States from Canada or elsewhere, we may experience reduced revenue or profit margins.

We have a significant amount of intangible assets, which may never generate the returns we expect.

Our identifiable intangible assets, which include trademarks and trade names, license agreements and patents acquired in acquisitions (including the PGP Acquisition), were $2,420 million at December 31, 2011, representing approximately 48% of our total assets of $5,030 million. Goodwill, which relates to the excess of cost over the fair value of the net assets of the businesses acquired, was $1,029 million at December 31, 2011, representing approximately 20% of our total assets. The majority of our intangible assets are owned by our Puerto Rican subsidiary.

Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition. Under Financial Accounting Standards Board Accounting Standards Codification No. 350 “Intangibles—Goodwill and other”, goodwill is reviewed at least annually for impairment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Future impairment may result from, among other things, deterioration in the performance of the acquired business or product line, adverse market conditions and changes in the competitive landscape, the launch of a generic equivalent of any of our products, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business or product line, changes in accounting rules and regulations, and a variety of other circumstances. The amount of any impairment is recorded as a charge to the statement of operations. We may never realize the full value of our intangible assets. Any determination requiring the write-off of a significant portion of intangible assets may have an adverse effect on our financial condition and results of operations. For example, in connection with our annual review of intangible assets during the fourth quarter of 2008, we recorded a non-cash impairment charge of $163 million relating to our OVCON / FEMCON FE product family.

If we fail to comply with our reporting and payment obligations under the Medicaid rebate program or other governmental pricing programs, we could be subject to additional reimbursements, penalties, sanctions and fines which could have a material adverse effect on our business.

In the U.S., we participate in the federal Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990, as well as several state supplemental rebate programs. Under the Medicaid rebate program, we pay a rebate to each state Medicaid program for our products that are reimbursed by those programs. The minimum amount of the rebate for each unit of product is set by law as 23.1% of AMP of that product, or if it is greater, the difference between AMP and the best price available from us to any customer. The rebate amount also includes an inflation adjustment, if necessary.

Federal law requires that any company that participates in the Medicaid rebate program extend comparable discounts to qualified purchasers under the Public Health Services (“PHS”) pharmaceutical pricing program. The PHS pricing program extends discounts comparable to the Medicaid rebates to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of economically disadvantaged patients.

Under the Veterans Health Care Act (“VHCA”), manufacturers are required to offer certain drugs and biologics at a discount to a number of federal agencies including the Veterans’ Administration (“VA”), the

 

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Department of Defense, and the Public Health Service in order to participate in other federal funding programs including Medicare and Medicaid. Through contractual agreements with the VA implementing the requirements of the VHCA, we must offer certain products on the VA Federal Supply Schedule and through other contract vehicles at prices that are equal to or lower than the Federal Ceiling Price, which is a price determined through the use of a statutory formula that provides for a discount off the average price to wholesalers. In addition, legislative changes require that similarly discounted prices be offered for certain Department of Defense purchases for its TRICARE program via a rebate system.

As a manufacturer of different types of drug products, including products that the Centers for Medicare and Medicaid Services treats as innovators (usually branded products) and noninnovators (usually generic products), rebate and pricing calculations are complex and vary among products and programs. For example, the Medicaid rebate amount is computed each quarter based on our submission to the Centers for Medicare and Medicaid Services at the U.S. Department of Health and Human Services of our current AMP and best price for each of our products, while the Federal Ceiling Price is calculated annually by the VA based on quarterly and annual sales submissions. The terms of our participation in the Medicaid program impose an obligation to correct the prices reported in previous quarters, as may be necessary. Any such corrections could result in an overage or underage in our rebate liability for past quarters, depending on the direction of the correction. In addition to retroactive rebates (and interest, if any), if we are found to have knowingly submitted false information to the government, the statute provides for civil monetary penalties in amounts that could be material. Similar risks and obligations apply to the VHCA program.

In addition to being complex, calculations of rebates and pricing in the U.S., Canada and many of the European member states in which we sell our products are also, in certain respects, subject to interpretation by us, governmental or regulatory agencies and the courts. Government and regulatory agencies are increasingly scrutinizing the pricing and rebates reported by pharmaceutical companies, and if they disagree with our calculations, we may be subject to investigations, lawsuits or other actions that may result in additional payments by us. Finally, governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid.

Adverse outcomes in our outstanding litigation matters, or in new litigation matters that arise in the future, could negatively affect our business, results of operations, financial condition and cash flows.

Our financial condition could be negatively affected by unfavorable results in our outstanding litigation matters, including those described in “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report, or in lawsuits that may be initiated in the future. Our outstanding litigation matters include intellectual property litigation, product liability litigation, employment litigation, such as unfair dismissal and federal and state fair labor and minimum wage law suits, and litigation relating to rebates and other pricing matters, any of which, if adversely decided, could negatively affect our business, results of operations, financial condition and cash flows.

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness.

We have a significant amount of indebtedness. As of December 31, 2011, we had total indebtedness of $3,863 million.

Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our leases and other financial obligations and contractual commitments, could have other important consequences. For example, it could:

 

   

make it more difficult for us and certain of our direct and indirect subsidiaries to satisfy our obligations with respect to our indebtedness and any failure to comply with the obligations of any of our debt

 

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instruments, including financial and other restrictive covenants, could result in an event of default under the agreements governing our indebtedness;

 

   

make us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation;

 

   

require us or our subsidiaries to dedicate a substantial portion of our or their cash flow from operations to payments on our indebtedness, thereby reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

place us at a competitive disadvantage compared to our competitors that have less debt; and

 

   

limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.

Any of the above listed factors could materially adversely affect our business, financial condition and results of operations. Furthermore, our interest expense could increase if interest rates increase because debt under our New Senior Secured Credit Facilities bears interest at our option at adjusted LIBOR (subject to a floor rate in most cases) plus an applicable margin or ABR plus an applicable margin. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do.

In addition, the agreements governing our indebtedness contain financial and other restrictive covenants that limit our subsidiaries’ ability to engage in activities that may be in our long-term best interests and require us to maintain specified financial ratios. A failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.

Current global economic conditions could negatively affect our business and operating results.

Our business may be adversely affected by global economic conditions. A prolonged economic downturn may decrease the prices that third-party payors, such as managed care organizations and government bodies and agencies, are willing or able to pay for our products and/or lead to the implementation of other cost containment measures that could adversely affect our revenues. For example, challenging fiscal conditions in many European countries have resulted in austerity measures aimed at, among other things, reducing the prices that state-run healthcare schemes pay for drugs. In addition, as a result of an economic downturn, individuals may experience reductions in healthcare coverage due to job losses or cutbacks in benefits provided by employers under group health plans. This could, in turn, lead to changes in patient behavior that negatively impact sales of our products, including delaying or foregoing treatment. Also, if any of the third parties that we rely on for certain aspects of our business, including our suppliers, wholesalers and our collaboration partners, experience financial difficulties as a result of any economic downturn or continued uncertainty in global economic conditions, it could disrupt our operations and have a material adverse effect on our business and operating results.

Risks Relating to Our Ordinary Shares

Future sales of our shares could depress the market price of our ordinary shares.

Sales of a substantial number of our ordinary shares, in the public market or otherwise, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares. As of December 31, 2011, we had a total of approximately 250.2 million of our ordinary shares outstanding.

In November 2009, certain of our shareholders sold 23.0 million ordinary shares in the 2009 Secondary Offering. The selling shareholders included the Sponsors, certain other institutional shareholders and members of

 

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our senior management. During 2010, one of our Sponsors divested (either by sale or via a distribution to its investors) the remainder of its holdings of our shares, or approximately 33.8 million ordinary shares in the aggregate. In March 2011, certain of our shareholders sold an aggregate of approximately 26.5 million ordinary shares in the 2011 Secondary Offering. The selling shareholders included the remaining Sponsors and members of our senior management. As of December 31, 2011, our remaining Sponsors collectively beneficially owned approximately 31% of our outstanding ordinary shares. All of the ordinary shares held by them were issued and sold by us in private transactions and are eligible for public sale if registered under the Securities Act or sold in accordance with Rule 144 thereunder, subject to volume and manner of sale limits and contractual restrictions. The remaining Sponsors have the right, subject to certain conditions, to cause us to register the ordinary shares that they currently own, and members of our senior management, who own substantially all of the remaining outstanding ordinary shares that are not freely tradable, have “piggyback” registration rights in respect of any such Sponsor-requested registration. In addition, our articles of association permit the issuance of up to approximately 249.8 million additional ordinary shares. Thus, we have the ability to issue substantial amounts of ordinary shares in the future, which would dilute the percentage ownership held by current shareholders.

In addition, we have also filed a registration statement on Form S-8 under the Securities Act to register up to approximately 17.3 million of our ordinary shares issued pursuant to awards granted under the Warner Chilcott Equity Incentive Plan (the “Plan”), plus an indeterminate number of additional shares to prevent dilution resulting from stock splits, stock dividends such as the Special Dividend, or similar transactions. As restricted share awards and their equivalents under the Plan are granted and vest and option awards under the Plan are granted, vest and are exercised, subject to certain limitations under the management shareholders agreement, the shares vesting and/or issued on exercise, as applicable, generally will be available for sale in the open market by holders who are not our affiliates and, subject to the volume and other applicable limitations of Rule 144, by holders who are our affiliates. As of December 31, 2011, options to purchase approximately 6.8 million of our ordinary shares were outstanding (of which options to acquire approximately 4.1 million ordinary shares were vested). In addition, as of December 31, 2011, approximately 6.1 million restricted shares and their equivalents were granted under the Plan (of which approximately 4.0 million shares were vested).

The market price of our ordinary shares may be volatile, which could cause the value of your investment to decline significantly.

Securities markets worldwide experience significant price and volume fluctuations in response to general economic and market conditions and their effect on various industries. This market volatility could cause the price of our ordinary shares to decline significantly and without regard to our operating performance. In addition, the market price of our ordinary shares could decline significantly if our future operating results fail to meet or exceed the expectations of public market analysts and investors.

Some specific factors that may have a significant effect on our ordinary shares’ market price include:

 

   

actual or expected fluctuations in our operating results;

 

   

actual or expected changes in our growth rates or our competitors’ growth rates;

 

   

conditions in our industry generally;

 

   

conditions in the financial markets in general or changes in general economic conditions;

 

   

our inability to raise additional capital;

 

   

changes in market prices for our products; and

 

   

changes in stock market analyst recommendations regarding our ordinary shares, other comparable companies or our industry generally.

 

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Provisions of our articles of association could delay or prevent a takeover of us by a third party.

Our articles of association could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our ordinary shares. For example, our articles of association:

 

   

permit our board of directors to issue one or more series of preferred shares with rights and preferences designated by our board;

 

   

impose advance notice requirements for shareholder proposals and nominations of directors to be considered at shareholder meetings;

 

   

stagger the terms of our board of directors into three classes; and

 

   

require the approval of a supermajority of the voting power of the shares of our share capital entitled to vote generally in the election of directors for shareholders to amend or repeal our articles of association.

These provisions may discourage potential takeover attempts, discourage bids for our ordinary shares at a premium over the market price or adversely affect the market price of, and the voting and other rights of the holders of, our ordinary shares. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors other than the candidates nominated by our board.

Because our remaining Sponsors own a substantial portion of our outstanding ordinary shares, if they act collectively, the influence of our public shareholders over significant corporate actions may be limited, and conflicts of interest between our remaining Sponsors and us or you could arise in the future.

As of December 31, 2011, our remaining Sponsors collectively beneficially owned approximately 31% our outstanding ordinary shares. As a result, if such Sponsors act collectively, they could exercise substantial influence over the composition of our board of directors and the vote of our ordinary shares. If this were to occur, our remaining Sponsors could have a significant amount of control over our decisions to enter into any corporate transaction and could make it very difficult for us to enter into any transaction that requires the approval of our stockholders even if other equity holders believe that any such transactions are in their own best interests. If our remaining Sponsors act collectively, they could also exercise substantial control over our decision to make acquisitions that increase our indebtedness or sell revenue-generating assets. Additionally, our remaining Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our remaining Sponsors may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our remaining Sponsors continue to own a significant amount of our equity, if they exercise their shareholder rights collectively, they would be able to significantly influence our decisions.

We are incorporated in Ireland, and Irish law differs from the laws in effect in the United States and may afford less protection to, or otherwise adversely affect, our shareholders.

Our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction of the United States. As an Irish company, we are governed by the Irish Companies Acts (the “Companies Act”). The Companies Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. For example, under Irish law, the duties of directors and officers of a company are generally owed to the company only. As a result, shareholders of Irish companies do not have the right to bring an action against the directors or officers of a company, except in limited circumstances. In addition, depending on the circumstances, you may be subject to different or additional tax consequences under Irish law as a result of your acquisition, ownership and/or disposition of our ordinary shares, including, but not limited to, Irish stamp duty, dividend withholding tax and capital acquisitions tax.

 

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We are an Irish company and it may be difficult for you to enforce judgments against us.

We are incorporated in Ireland and a substantial portion of our assets are located in jurisdictions outside the United States. It may therefore be difficult for investors to effect service of process against us or to enforce against us judgments of U.S. courts predicated upon civil liability provisions of the U.S. federal securities laws.

There is no treaty between Ireland and the United States providing for the reciprocal enforcement of foreign judgments. The following requirements must be met before the foreign judgment will be deemed to be enforceable in Ireland:

 

   

the judgment must be for a definite sum;

 

   

the judgment must be final and conclusive; and

 

   

the judgment must be provided by a court of competent jurisdiction.

An Irish court will also exercise its right to refuse judgment if the foreign judgment was obtained by fraud, if the judgment violated Irish public policy, if the judgment is in breach of natural justice or if it is irreconcilable with an earlier judgment.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our pharmaceutical manufacturing facility in Fajardo, Puerto Rico houses approximately 194,000 sq. ft. of manufacturing space. Adjacent to the facility is an approximately 24,000 sq. ft. warehouse that we lease from a third party. The Fajardo facility currently manufactures many of our women’s healthcare products, including LOESTRIN 24 FE and LO LOESTRIN FE, and packages our DORYX and ENABLEX products.

In the PGP Acquisition, we acquired facilities in Weiterstadt, Germany and in Manati, Puerto Rico. The facility in Weiterstadt, Germany houses approximately 50,000 sq. ft. of manufacturing space and 54,000 sq. ft. of warehouse space. The Weiterstadt facility currently manufactures ASACOL tablets and packages ACTONEL for distribution outside the U.S. The facility in Manati, Puerto Rico houses approximately 131,000 sq. ft. of warehousing, distribution and administrative space.

We also own a 154,000 sq. ft. facility in Larne, Northern Ireland, 54,000 sq. ft. of which is leased to a third party. The remainder is dedicated to the manufacture of our vaginal rings, research and product development as well as development of analytical methods. In addition, we acquired a facility in Dundalk, Ireland in March 2010 which houses approximately 55,000 sq. ft. of administrative and laboratory space.

As of December 31, 2011, we leased approximately 9,500 square feet of office space in Dublin, Ireland, where our corporate headquarters are located, and 97,000 sq. ft. of office space in Rockaway, New Jersey, where our U.S. operations are headquartered.

Item 3. Legal Proceedings.

See “Note 16” to the Notes to the Consolidated Financial Statements for the year ended December 31, 2011 included elsewhere in this Annual Report.

Item 4. Mine Safety Disclosures.

Not applicable.

 

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Prices for Ordinary Shares

Our ordinary shares trade on The NASDAQ Global Market under the symbol “WCRX”. The following table presents the high and low prices for our ordinary shares on The NASDAQ Global Market during the periods indicated:

 

     High      Low  

2011:

     

First Quarter (ended March 31, 2011)

   $ 25.07       $ 21.70   

Second Quarter (ended June 30, 2011)

   $ 25.92       $ 21.99   

Third Quarter (ended September 30, 2011)

   $ 24.65       $ 13.63   

Fourth Quarter (ended December 31, 2011)

   $ 19.00       $ 12.90   

2010:

     

First Quarter (ended March 31, 2010)

   $ 29.24       $ 24.85   

Second Quarter (ended June 30, 2010)

   $ 28.95       $ 21.75   

Third Quarter (ended September 30, 2010)

   $ 30.57       $ 20.31 (1) 

Fourth Quarter (ended December 31, 2010)

   $ 25.32       $ 19.01   

 

(1) See “Cash Dividends” below.

As of January 30, 2012, there were 6 registered holders of record for our ordinary shares and 249,337,918 shares outstanding. Because many of our ordinary shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The closing price of our ordinary shares on The NASDAQ Global Market on January 30, 2012 was $16.84.

Cash Dividends

On September 8, 2010, we paid a special cash dividend of $8.50 per share to shareholders of record on August 30, 2010. We do not, however, pay cash dividends to our stockholders on a regular basis, and during the year ended December 31, 2011, we did not pay any cash dividends to our stockholders. We currently intend to retain future earnings to fund the development and growth of our business, to repay our outstanding indebtedness and to fund share redemptions under our Redemption Program and, therefore, do not anticipate paying regular cash dividends within the foreseeable future. Any future payment of dividends will be determined by our Board and will depend on our consolidated financial position and results of operations and other factors deemed relevant by our Board.

 

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Performance Graph

The following graph shows the value as of December 31, 2011 of a $100 investment in our ordinary shares as if made on December 31, 2006, as compared with similar investments based on the value of (i) the NASDAQ Composite Index and (ii) the NASDAQ Pharmaceuticals Index in each case on a “total return” basis assuming reinvestment of dividends. The index values were calculated assuming an initial investment of $100 in such indexes on December 31, 2006. The stock performance shown below is not necessarily indicative of future performance.

 

LOGO

 

 

* $100 invested on 12/31/06 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. The Performance Graph represents the performance of the Class A common stock of Warner Chilcott Limited from December 31, 2006 until the effective time of the Redomestication following the close of business on August 20, 2009, and the performance of our ordinary shares from August 21, 2009 through December 31, 2011. The Class A common stock of Warner Chilcott Limited was also listed on The NASDAQ Global Market under the symbol “WCRX”. In connection with the Redomestication, Warner Chilcott Limited became a wholly owned subsidiary of Warner Chilcott plc.

Comparative values:

 

     Warner
Chilcott
Stock
     NASDAQ
Composite
Index
     NASDAQ
Pharmaceuticals
Index
 

On December 31, 2006

   $ 100.00       $ 100.00       $ 100.00   

On December 31, 2007

   $ 128.29       $ 110.26       $ 90.99   

On December 31, 2008

   $ 104.92       $ 65.65       $ 84.71   

On December 31, 2009

   $ 206.01       $ 95.19       $ 95.64   

On December 31, 2010

   $ 227.39       $ 112.10       $ 100.10   

On December 31, 2011

   $ 152.50       $ 110.81       $ 110.44   

 

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Unregistered Sales of Securities

None.

Repurchases of Equity Securities During the Quarter Ended December 31, 2011

The following table provides information with respect to ordinary shares redeemed by us during the fourth quarter of 2011.

 

Period   



Total Number of Shares
Purchased(1)
    


Average Price
Paid per Share
    
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
     Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(2)
 

October 1 to 31

     —         $ —           —         $ —     

November 1 to 30

     1,824,146         15.33         1,824,146         222,035,842   

December 1 to 31

     1,851,980         14.98         1,851,980         194,306,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,676,126         15.15         3,676,126         194,306,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All shares were redeemed pursuant to a 10b5-1 plan entered into in connection with the announcement of our Redemption Program.

 

(2) On November 9, 2011, we announced that our Board of Directors had authorized the Redemption Program, which will terminate on the earlier to occur of December 31, 2012 or the redemption by us of an aggregate of $250 million of our ordinary shares.

 

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Item 6. Selected Financial Data.

The following table sets forth our selected historical consolidated financial data. The selected consolidated financial data as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010, and 2009 presented in this table have been derived from our audited consolidated financial statements and related notes included elsewhere in this Annual Report. The selected consolidated financial data as of December 31, 2009, 2008 and 2007, and for the years ended December 31, 2008 and 2007 presented in this table are derived from our audited consolidated financial statements and related notes which are not included in this Annual Report.

The selected consolidated financial data set forth below should be read in conjunction with, and is qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report and in previously filed Annual Reports on Form 10-K.

 

    Year Ended December 31,  
(dollars and share amounts in
thousands, except per share amounts)
  2011(1)     2010(1)     2009(1)     2008     2007  

Statement of Operations Data:

         

Total revenue(2)

  $ 2,728,106      $ 2,974,482      $ 1,435,816      $ 938,125      $ 899,561   

Costs and expenses:

         

Cost of sales (excluding amortization of intangible assets)(3)

    356,144        492,801        320,278        198,785        185,990   

Selling, general and administrative

    923,925        1,090,351        436,384        192,650        265,822   

Restructuring costs(4)

    103,780        —          —          —          —     

Research and development

    107,796        146,506        76,737        49,956        54,510   

Amortization of intangible assets

    596,305        652,920        312,172        223,913        228,330   

Impairment of intangible assets(5)

    —          —          —          163,316        —     

(Gain) on sale of assets(6)

    —          —          (393,095     —          —     

Net interest expense(7)(8)(9)

    339,923        284,448        124,617        93,116        117,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    300,233        307,456        558,723        16,389        47,291   

Provision for income taxes

    129,087        136,484        44,605        24,746        18,416   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income / (loss)

  $ 171,146      $ 170,972      $ 514,118      $ (8,357   $ 28,875   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data(10)(11)(12):

         

Earnings / (loss) per ordinary share—basic

  $ 0.68      $ 0.68      $ 2.05      $ (0.03   $ 0.12   

Earnings / (loss) per ordinary share—diluted

  $ 0.67      $ 0.67      $ 2.05      $ (0.03   $ 0.12   

Dividends per share(7)

  $ —        $ 8.50        —          —          —     

Weighted average shares outstanding—basic

    252,047        251,302        250,565        249,807        248,916   

Weighted average shares outstanding—diluted

    254,313        253,851        251,219        249,807        250,454   

Balance Sheet Data (at period end):

         

Cash and cash equivalents

  $ 616,344      $ 401,807      $ 539,006      $ 35,906      $ 30,776   

Total assets(3)(4)(5)(6)(7)(8)

    5,030,029        5,651,989        6,054,114        2,582,891        2,884,974   

Total debt(6)(7)(8)(9)

    3,862,796        4,678,664        3,039,460        962,557        1,200,239   

Shareholders’ equity / (deficit)(7)(10)(11)(12)

    69,131        (65,642     1,889,093        1,349,920        1,354,420   

 

(1) On October 30, 2009, pursuant to the purchase agreement dated August 24, 2009 (as amended, the “Purchase Agreement”), between us and P&G, we acquired PGP from P&G for $2,919 million in cash and the assumption of certain liabilities in the PGP Acquisition. Under the terms of the Purchase Agreement, we acquired P&G’s 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 million. We recorded adjustments to the fair value of our assets and liabilities as of the date of the PGP Acquisition. This resulted in a significant increase to intangible assets, including in-process research & development (“IPR&D”). During 2009, 2010 and 2011, the following items were included in our operating results:

 

   

total revenues and the related cost of sales for PGP products beginning October 30, 2009;

 

   

a charge of $106 million in the year ended December 31, 2010 and $74 million in the year ended December 31, 2009 in cost of sales attributable to a purchase accounting adjustment increasing the opening value of the inventories acquired in the PGP Acquisition that was recorded as that inventory was sold during each respective period;

 

   

SG&A and R&D expenses from PGP, including transaction costs and transition services expenses paid to P&G;

 

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amortization expense for intangible assets acquired in the PGP Acquisition; and

 

   

increased interest expense from the $2,600 million in aggregate term loan indebtedness we incurred under our Prior Senior Secured Credit Facilities to complete the PGP Acquisition.

 

(2) The increase in total revenues in the years ended December 31, 2007 through 2010 was, in part, due to the successful commercialization of internally developed products.
(3) In April 2011, we announced a plan to repurpose our Manati, Puerto Rico manufacturing facility. This facility now serves primarily as a warehouse and distribution center. As a result of the repurposing, we recorded charges of $23 million in the year ended December 31, 2011 for the write-down of certain property, plant and equipment. Additionally, severance costs of $8 million were recorded in the year ended December 31, 2011. The expenses related to the Manati repurposing were recorded as a component of cost of sales.
(4) 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 did 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 the year ended December 31, 2010. In connection with the restructuring, we are in the process of moving to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. Severance costs of $101 million were recorded in the year ended December 31, 2011 and were included as a component of restructuring costs in the consolidated statement of operations. Also included as restructuring costs in the consolidated statement of operations were certain contract termination expenses of $3 million in the year ended December 31, 2011.
(5) During the year ended December 31, 2008, we recorded a noncash impairment charge related to the OVCON/FEMCON product family intangible asset as our forecast of future cash flows declined compared to prior forecasts.
(6) On September 23, 2009, we agreed to terminate our exclusive product licensing rights from LEO in the United States to TACLONEX, TACLONEX SCALP, DOVONEX and all other dermatology products in LEO’s development pipeline, and sold the related assets to LEO, for $1,000 million in cash. The LEO Transaction resulted in a gain of $380 million, net of tax. The LEO Transaction impacted our financial position as follows:

 

   

Goodwill was reduced by $252 million; and

 

   

Intangible assets were reduced by $220 million.

 

   A portion of the cash proceeds were used to terminate our then outstanding 2005 Senior Secured Credit Facilities. As a result of the LEO Transaction, we entered into a distribution agreement with LEO pursuant to which we agreed to, among other things, continue to distribute DOVONEX and TACLONEX for LEO, for a distribution fee, through September 23, 2010. On June 30, 2010 LEO assumed responsibility for its own distribution services.
(7) We declared and paid the Special Dividend to our shareholders on September 8, 2010 of $8.50 per share, or $2,144 million in the aggregate. At the time of the Special Dividend, our retained earnings were in a deficit position. As a result, the Special Dividend reduced our additional paid-in-capital from $2,087 million to zero. The remaining portion of the Special Dividend increased the accumulated deficit by $57 million. 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 incurrence of such indebtedness impacted our interest expense during the years ended December 31, 2011 and 2010.
(8) On September 23, 2010, we and Novartis entered into a definitive asset purchase agreement pursuant to which we agreed to acquire the U.S. rights to 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. On September 29, 2010, we issued $500 million aggregate principal amount of Additional 7.75% Notes in order to fund the $400 million upfront payment in connection with the ENABLEX Acquisition and for general corporate purposes. The incurrence of such indebtedness impacted our interest expense during the years ended December 31, 2011 and 2010.
(9) In March 2011, we refinanced our senior secured indebtedness. We used the proceeds of our term loan borrowings under our New Senior Secured Credit Facilities, as well as approximately $279 million of cash on hand, to make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 million in aggregate term loans under our Prior Senior Secured Credit Facilities, terminate our Prior Senior Secured Credit Facilities and to pay related fees and 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.
(10) As part of the Redomestication on August 20, 2009, each holder of Warner Chilcott Limited’s outstanding Class A common shares, par value $0.01 per share, received ordinary shares, par value $0.01 per share, of Warner Chilcott plc on a one-for-one basis. References throughout to “ordinary shares” refer to Warner Chilcott Limited’s Class A common shares, par value $0.01 per share, prior to the effective time of the scheme of arrangement and to Warner Chilcott plc’s ordinary shares, par value $0.01 per share, since the effective time of the scheme of arrangement.
(11) We were in a net loss position for the year ended December 31, 2008. The effect from the exercise of outstanding stock options and the vesting of restricted shares and their equivalents during the periods would have been anti-dilutive. Accordingly, the effect of the shares issuable upon exercise of such stock options and the restricted shares and their equivalents have not been included in the calculation of diluted earnings per share for the year ended December 31, 2008.
(12) On November 9, 2011, we announced a program to redeem up to an aggregate amount of $250 million of our outstanding ordinary shares. In accordance with this program, we redeemed 3.7 million shares in the year ended December 31, 2011 for an aggregate cost of $56 million. Following such redemption such shares were cancelled. As a result, the par value of our outstanding ordinary shares and retained earnings were reduced.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion together with Part II, Item 6. “Selected Financial Data” and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis 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 Item 1A. “Risk Factors” and elsewhere in this Annual Report.

Unless otherwise noted or the context otherwise requires, references in this Form 10-K to “Warner Chilcott,” “the Company,” “our company,” “we,” “us” or “our” refer to Warner Chilcott plc and its direct and indirect subsidiaries.

Overview

We are a leading specialty pharmaceutical company currently focused on the women’s healthcare, gastroenterology, dermatology and urology segments of the branded pharmaceuticals market, primarily in North America. We are a fully integrated company with internal resources dedicated to the development, manufacture and promotion of our products. Our franchises are comprised of complementary portfolios of established branded and development-stage products that we actively manage throughout their life cycle. Multiple products make up our existing sales base and several of these provide opportunities for future growth.

2011 Strategic Transactions

During 2011, we completed the following strategic transactions that 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” or 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 make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 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 did 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 the year ended December 31, 2010. In connection with the restructuring, we are in the

 

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process of moving 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 impacts approximately 500 employees in total. Pretax severance costs of $101 million were recorded in the year ended December 31, 2011 and were included as a component of restructuring costs in our consolidated statement of operations. Also included in restructuring costs were certain pretax contract termination expenses of $3 million in the year ended December 31, 2011. We expect the restructuring costs in 2012 will be significantly less than the amounts recorded in the year ended December 31, 2011. As a result of agreements reached with certain local European works councils subsequent to December 31, 2011, we will record net expenses of approximately $30 million in our consolidated statement of operations in the year ended December 31, 2012 as a component of restructuring costs. As a result of the execution of the final agreements and the timing of the termination of employees, we anticipate that these expenses will include severance charges recorded in the quarter ended March 31, 2012 and certain contract termination expenses and pension curtailment gains recorded during the year ended December 31, 2012. The majority of the remaining severance related costs and other liabilities 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. This facility now serves primarily as a warehouse and distribution center. As a result of the repurposing, we recorded charges of $23 million relating to the write-down of certain property, plant and equipment and $8 million of severance charges in the year ended December 31, 2011. These expenses were included as a component of cost of sales. The majority of severance costs relating to the Manati repurposing were settled in cash during the quarter ended June 30, 2011.

Redemption Program

On November 9, 2011, we announced that our Board of Directors authorized the redemption of up to an aggregate of $250 million of our ordinary shares (the “Redemption Program”). Pursuant to the Redemption Program, we recorded the redemption of 3.7 million ordinary shares in the year ended December 31, 2011 at an aggregate cost of $56 million. Following the settlement of such redemptions, we cancelled all shares redeemed. The Redemption Program will terminate on the earlier to occur of December 31, 2012 or the redemption by us of an aggregate of $250 million of our ordinary shares.

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 for the remainder of the term of the Collaboration Agreement Sanofi would receive, as part of the global collaboration agreement between the parties, payments from us which, depending on actual net sales in the United States and Puerto Rico, are based on an agreed percentage of either United States and Puerto Rico actual net sales or an agreed minimum sales threshold for the territory. For a further description of the Collaboration Agreement see “Note 8” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

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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”). These transactions are referred to in this Annual Report collectively as the “Leveraged Recapitalization”. The incurrence of this indebtedness and the indebtedness incurred in connection with the ENABLEX Acquisition (as defined below) impacted our interest expense during the years ended December 31, 2011 and 2010.

ENABLEX Acquisition

On October 18, 2010, we acquired the U.S. rights to Novartis Pharmaceuticals Corporation’s (“Novartis”) ENABLEX product for an upfront payment of $400 million in cash at closing, plus potential 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.

2009 Strategic Transactions

During 2009, we completed two strategic transactions that impacted our results of operations during the fourth quarter of 2009 and the full years 2010 and 2011, and will continue to have an impact on our future operations.

PGP Acquisition

On October 30, 2009, pursuant to the purchase agreement dated August 24, 2009 (as amended, the “Purchase Agreement”), between us and The Procter & Gamble Company (“P&G”), we acquired P&G’s global branded pharmaceuticals business (“PGP”) for $2,919 million in cash and the assumption of certain liabilities (the “PGP Acquisition”). Under the terms of the purchase agreement, we acquired P&G’s 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 million. The total purchase price of $2,919 million was allocated to the 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 majority of the consideration for the PGP Acquisition, certain of our subsidiaries entered into senior secured credit facilities (the “Prior Senior Secured Credit Facilities”), initially comprised of $2,950 million in aggregate term loan facilities and a $250 million revolving credit facility. On October 30, 2009, we borrowed $2,600 million of the aggregate $2,950 million of term loan facilities to finance the PGP Acquisition. On December 16, 2009, in connection with an amendment (“Amendment No. 1”) to the Prior Senior Secured Credit Facilities, (i) the committed but undrawn $350 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 million in order to finance, together with cash on hand, the repurchase and redemption 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 consolidated statement of operations. The purchase price allocation presented below provides the fair values of all the net assets acquired based on the final independent valuation.

 

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Purchase Price:

  

Total cash consideration

   $ 2,919   
  

 

 

 

Identifiable net assets:

  

Trade accounts receivable (approximates contractual value)

   $ 296   

Inventories

     256   

Other current and long term assets

     77   

Property, plant and equipment

     85   

Intangible Assets—intellectual property

     2,556   

In-process research and development

     248   

Other current and long term liabilities

     (669

Deferred income taxes, net

     40   
  

 

 

 

Total identifiable net assets

     2,889   
  

 

 

 

Goodwill

     30   
  

 

 

 

Total

   $ 2,919   
  

 

 

 

In connection with the closing of the PGP Acquisition and in order to facilitate the transition of the PGP business, we and P&G entered into a Transition Services Agreement, effective as of October 30, 2009 (the “Transition Services Agreement”). Pursuant to the terms of the Transition Services Agreement, P&G agreed to provide us with specified services for a limited time following the closing of the PGP Acquisition, including with respect to the following: order acquisition and management, distribution, customer service, purchasing and procurement systems, integrated supply network systems, manufacturing execution systems, IT support, sales and marketing, research and development and regulatory and certain accounting and finance related services. We agreed to pay P&G a fee for these services through the term of the Transition Services Agreement. The Transition Services Agreement expired during the fourth quarter of 2010.

LEO Transaction

On September 23, 2009, we entered into a definitive asset purchase agreement (the “LEO Transaction Agreement”) with LEO Pharma A/S (“LEO”) pursuant to which LEO paid us $1,000 million in cash in order to terminate our exclusive license to distribute LEO’s DOVONEX and TACLONEX products (including all products in LEO’s 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 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 was negatively impacted beginning in the fourth quarter of 2009 and also in the first two quarters of 2010, as we recorded net sales and cost 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 $69 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 Recognition—Multiple 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

 

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(i) multiple deliverables, (ii) a delivered element with stand-alone value (intangible asset), and (iii) objective and reliable evidence of the undelivered item’s 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 million was allocated among the units of accounting as set forth in ASC Sub Topic 605-25 “Revenue Recognition—Multiple Element Arrangements” paragraph 30-1, and the portion of the gain in the amount of $69 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 $77 million, $63 million and $26 million, and the related cost of sales of approximately $43 million, $37 million and $17 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.

Factors Affecting Our Results of Operations

Revenue

We generate two types of revenue: revenue from product sales (including contract manufacturing) and other revenue which currently includes royalty revenue and revenue earned under co-promotion and distribution agreements. Since the PGP Acquisition on October 30, 2009, we have generated additional revenues mainly from the sale of ACTONEL, ASACOL and ENABLEX. As a result, our operating results related to the PGP-acquired products include twelve months in 2011 and 2010 as compared to only two months in the 2009 period. In addition, as a result of the LEO Transaction, beginning in October 2009 and continuing through June 2010, we recorded revenue and cost of sales of DOVONEX and TACLONEX for LEO at nominal distributor margins under the LEO distribution agreement. Subsequent to June 30, 2010, we no longer recorded revenues and cost of sales related to DOVONEX or TACLONEX.

Net Sales

We promote a portfolio of branded prescription pharmaceutical products currently focused on the women’s healthcare, gastroenterology, dermatology and urology segments of the branded pharmaceuticals market, primarily in North America. To generate demand for our products, our sales representatives make face-to-face promotional and educational presentations to physicians who are potential prescribers of our products. By informing these physicians of the attributes of our products, we generate demand for our products with physicians, who then write prescriptions for their patients, who in turn go to the pharmacy where the prescription is filled. Pharmacies buy our products either through wholesale pharmaceutical distributors or directly from us (for example, retail drug store chains) in certain markets. We recognize revenue when title and risk of loss pass to our customers, net of sales-related deductions.

When our unit sales to our direct customers in any period exceeds consumer demand (as measured by filled prescriptions or its equivalent in units), our sales in excess of demand must be absorbed before our direct customers begin to order again. We refer to the estimated amount of inventory held by our direct customers and pharmacies and other organizations that purchase our product from our direct customers, which is generally measured by the number of days of demand on hand, as “pipeline inventory”. Pipeline inventories expand and contract in the normal course of business. When comparing reported product sales between periods, it is important to consider whether estimated pipeline inventories increased or decreased during each period.

We generate revenue primarily from the sale of branded pharmaceutical products in the North American and Western European markets including our osteoporosis products (ACTONEL and ATELVIA), our oral contraceptives (LOESTRIN 24 FE, LO LOESTRIN FE, and others), our HT products (ESTRACE Cream, FEMHRT, and others), our gastroenterology product (ASACOL), our oral antibiotic for the adjunctive treatment of severe acne (DORYX) and our urology product (ENABLEX). Prior to the LEO Transaction in September 2009 and during the subsequent period through June 30, 2010 when we sold product for LEO under the

 

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distribution agreement, our revenue also included sales of LEO’s psoriasis products (TACLONEX and DOVONEX). Our revenue from sales of these products consists primarily of sales invoiced less returns and other sales-related deductions (also see Critical Accounting Policies—“Revenue Recognition” for a detailed description of our sales-related deductions). In addition to the products listed above, we earn a small portion of revenues from the sale of generic products under profit-sharing supply and distribution agreements with third parties. The revenue we earn under these agreements is included with our related branded product revenue for financial reporting purposes.

Included in net sales are amounts earned under contract manufacturing agreements. Contract manufacturing is not an area of strategic focus for us as the profit margins are significantly below the margins realized on sales of our branded products.

Changes in revenue from sales of our products from period to period are affected by factors that include the following:

 

   

changes in the level of competition faced by our products, including changes due to the launch of new branded products by our competitors and the introduction of generic equivalents of our branded products or those of our competitors prior to, or following, the loss of regulatory exclusivity or patent protection. For example, we lost exclusivity for FEMCON FE and certain versions of FEMHRT in the U.S. in early 2011, ACTONEL in Canada in early 2010 and in Western European markets in late 2010;

 

   

changes in the level of promotional or marketing support for our products and the size of our sales force;

 

   

expansions or contractions of the pipeline inventories of our products held by our customers;

 

   

changes in the regulatory environment, including the impact of healthcare reforms in the U.S. and other markets we serve;

 

   

our ability to successfully develop or acquire and launch new products;

 

   

changes in the level of demand for our products, including changes based on general economic conditions in North America and Western European economies;

 

   

long-term growth or contraction of our core therapeutic markets, currently women’s healthcare, gastroenterology, dermatology and urology;

 

   

price changes, which are common in the branded pharmaceutical industry and for the purposes of our period-over-period comparisons, reflect the average gross selling price billed to our customers before any sales-related deductions;

 

   

changes in the levels of sales-related deductions, including those resulting from changes in utilization levels or the terms of our customer loyalty card programs and the utilization and / or rebates paid under commercial and government rebate programs.

We and Sanofi are parties to the Collaboration Agreement pursuant to which we co-develop and market ACTONEL on a global basis, excluding Japan. ATELVIA, our new risedronate sodium delayed-release product is also currently sold in the United States pursuant to the Collaboration Agreement. As a result of ACTONEL’s loss of patent exclusivity in Western Europe in late 2010 and as part of our transition to a wholesale distribution model in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom, we and/or Sanofi have reduced or discontinued our marketing and promotional efforts in certain territories covered by the Collaboration Agreement. Our and Sanofi’s rights and obligations are specified by geographic market. For example, under the Collaboration Agreement, Sanofi generally has the right to elect to participate in the development of ACTONEL-related product improvements, other than product improvements specifically related to the United States and Puerto Rico, where we have full control over all product development decisions. Under the Collaboration Agreement, the ongoing global R&D costs for ACTONEL are shared equally between the parties, except for R&D costs specifically related to the United States and Puerto Rico, which are borne solely by us. In certain geographic markets, we and Sanofi share selling and advertising and promotion (“A&P”) costs as

 

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well as product profits based on contractual percentages. In the geographic markets where we are deemed to be the principal in transactions with customers, we recognize all revenues from sales of the product along with the related product costs. Our share of selling, A&P and contractual profit sharing expenses are recognized in SG&A expenses. In geographic markets where we are not the principal in transactions with customers, revenue is recognized on a net basis, in other revenue for amounts earned based on Sanofi’s sale transactions with its customers. As discussed above, in April 2010, we and Sanofi entered into an amendment to the Collaboration Agreement. Under the terms of the amendment, we took full operational control over the promotion, marketing and R&D decisions for ACTONEL, and now 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, 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 jurisdictions. In return, it was agreed that for the remainder of the term of the Collaboration Agreement, Sanofi would receive, as part of the global collaboration payments between the parties, payments from us which, depending on actual net sales in the United States and Puerto Rico, are based on an agreed upon percentage of either United States and Puerto Rico actual net sales or an agreed minimum threshold for the territory. We will continue to sell ACTONEL and ATELVIA products with Sanofi in accordance with our obligations under the Collaboration Agreement until the termination of the Collaboration Agreement on January 1, 2015, at which time all of Sanofi’s rights under the Collaboration Agreement will revert to us. For a discussion of the Collaboration Agreement, see “Part I. Item 1. Business—Alliance with Sanofi.”

Other Revenue

We recognize other revenue as a result of licensing our patents and intellectual property rights, based on third-party sales, as earned in accordance with contractual terms when the third-party sales can be reasonably estimated and collection is reasonably assured. These amounts are included as a component of “other revenue”. In addition, we recognize revenue earned based on a percentage of our co-promotion partners’ net sales on a net basis in “other revenue” when the co-promotion partners ship the products and title passes to their customers.

Cost of Sales (excluding amortization and impairment of intangible assets)

Cost of sales represents the total costs associated with our inventory that we sell to our customers. We currently have manufacturing capabilities in our facilities in Fajardo, Puerto Rico, Weiterstadt, Germany and Larne, Northern Ireland. We also have supply contracts with our third-party manufacturers and development partners, such as Contract Pharmaceuticals Limited Niagara (“CPL”) (ESTRACE Cream), Mayne Pharma International Pty. Ltd. (“Mayne”) (DORYX), Novartis (ENABLEX) and Norwich Pharmaceuticals Inc. (“NPI”) (ACTONEL and ATELVIA). Our supply agreements with these third-party manufacturers and development partners may include minimum purchase requirements and may provide that the price we pay for the products we sell can be increased based on factors outside of our control such as inflation, increases in the third-party manufacturer costs or other factors.

For products that we manufacture and package in our facilities, (including as of December 31, 2011, LOESTRIN 24 FE, LO LOESTRIN FE and FEMHRT), our direct material costs include the costs of purchasing raw materials and packaging materials. For products that we only package (including as of December 31, 2011, DORYX and a portion of ACTONEL), our direct material costs include the costs of purchasing packaging materials. For products that we only manufacture (including as of December 31, 2011, ASACOL), our direct material costs include the costs of purchasing materials. Direct labor costs for these products consist of payroll costs (including benefits) of employees engaged in production, packaging and quality control in our manufacturing plants. The largely fixed indirect costs of our manufacturing plants consist of production, overhead and certain laboratory costs. We record provisions for inventory obsolescence as a component of cost of sales. We do not include amortization or impairments of intangible assets as components of cost of sales.

A significant factor that influences the cost of sales, as a percentage of product net sales, is the terms of our license and supply agreements with our third-party licensors and manufacturers. For example, we pay a royalty fee to Medeva Pharma Suisse AG (“Medeva”), the owner of certain patents protecting our ASACOL products based on our net sales of ASACOL in the U.S. and Canada which is included as a component of our cost of sales.

 

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In September 2005 and January 2006, we became the exclusive licensee of the U.S. sales and marketing rights to TACLONEX and DOVONEX, respectively, under agreements with LEO. We were obligated to pay LEO specified supply fees and royalties based on a percentage of our net sales. We terminated these arrangements with LEO as part of the LEO Transaction in September 2009.

The application of purchase accounting increased the opening value of the inventories acquired in the PGP Acquisition resulting in a non-recurring charge which was recorded in our cost of sales as that inventory was sold to our customers. The write-up of the opening value of the PGP inventory reduced our gross margin on product sales. This expense was reflected in our income statement during the years ended December 31, 2010 and 2009. Excluding the impact of the purchase accounting inventory step-up in the years ended December 31, 2010 and 2009, our gross margin on total revenue was positively affected by the PGP Acquisition.

In April 2011, we announced a plan to repurpose our Manati, Puerto Rico manufacturing facility. This facility now serves primarily as a warehouse and distribution center. As a result of the repurposing, we recorded charges in the year ended December 31, 2011 for the write-down of certain property, plant and equipment and severance-related costs. These expenses were included as components of cost of sales in our consolidated statements of operations.

Selling, General and Administrative (“SG&A”) Expenses

SG&A expenses are comprised of selling and distribution expenses, A&P and general and administrative expenses (“G&A”). Selling and distribution and A&P expenses consist of all expenditures incurred in connection with the sales and marketing of our products, including warehousing costs. Following the PGP Acquisition, our share of selling and distribution, A&P, and contractual expenses under the Collaboration Agreement are also recognized in SG&A expenses.

The major items included in selling and distribution and A&P expenses are:

 

   

since the close of the PGP Acquisition in October 2009, co-promotion expenses related to the Collaboration Agreement;

 

   

costs associated with employees in the field sales forces and sales force management, including salaries, benefits and incentive bonuses;

 

   

promotional and advertising costs, including samples, medical education programs and direct-to-consumer campaigns; and

 

   

distribution and warehousing costs reflecting the transportation and storage associated with transferring products from our manufacturing facilities to our distribution contractors and on to our customers.

Changes in selling and distribution and A&P expenses, as a percentage of our revenue, may be affected by a number of factors, including:

 

   

changes in sales volumes, as higher sales volumes enable us to spread the fixed portions of our selling and A&P expenses over higher sales;

 

   

changes in the mix of products we promote, as some products (such as those in launch phase, for example) may require more intensive promotion than others; and

 

   

changes in the size and configuration of our sales forces, such as when we establish a sales force to market a new product or expand or reduce our sales forces.

G&A expenses consist of management and administrative salaries, benefits, incentive compensation, rent, legal, consulting and professional fees, foreign currency transaction gains/(losses) and miscellaneous administration and overhead costs (including transaction-related expenses and transition service fees paid to P&G). G&A expenses also include various non-income related taxes such as franchise taxes, sales and use taxes

 

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and other miscellaneous taxes. On October 25, 2010, Puerto Rico enacted tax legislation that, in certain situations, imposes a temporary excise tax on a portion of the income of non-Puerto Rican related parties that purchase and sell products that are manufactured in Puerto Rico by related parties. The tax, which took effect January 1, 2011, decreases from 4% in 2011 to 1% in 2016 and resulted in an expense of $12 million in the year ended December 31, 2011. Since the beginning of 2011, as a result of U.S. healthcare reform legislation, G&A expenses have also included our payment by drug manufacturers of a fee based on our market share of sales of branded drugs and biologics to, or pursuant to coverage under, specified U.S. government programs, which resulted in an expense of $16 million in the year ended December 31, 2011.

Restructuring Costs

We record 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.

R&D

Our R&D expenses consist of our internal development costs, fees paid to contracted development groups and license fees paid to third parties. These costs are typically associated with:

 

   

developing improvements to our existing products, including new dosage forms;

 

   

developing new products, often based on compounds which have been previously shown to be safe and effective; and

 

   

supporting and conducting clinical trials and subsequent registration of products we develop internally or license from third parties.

Payments to third-party licensors are generally made when products that we have licensed reach contractually-defined milestones. Milestone payments are recognized as expenses, unless they meet the criteria of an intangible asset, in which case they are capitalized and amortized over their useful lives.

The aggregate level of our R&D expense in any period is related to the number of products in development and the stage of their development process. Our R&D spend and the allocation of R&D spend among our therapeutic categories is highly unpredictable, as we do not conduct our R&D efforts pursuant to a predetermined budget. Instead, we continually evaluate each product under development in an effort to efficiently allocate R&D dollars to projects we deem to be in our best interests based on, among other factors, the performance of such product in pre-clinical and/or clinical trials, our expectations regarding the potential future regulatory approval of the product and our view of the potential commercial viability of the product in light of market conditions. In addition, even when we do make the determination to pursue R&D projects within a particular therapeutic category, the magnitude of R&D spend in such category during any given period often will not correlate to its significance to us due to the timing of the incurrence of R&D expenses within the regulatory approval process and our strategic focus on relatively low-cost product improvements such as new and enhanced dosage forms. As a general matter Phase III clinical trials typically account for a significant portion of the total development costs of a product.

 

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Depreciation and Amortization

Depreciation costs relate to the depreciation of property, plant and equipment and are included in our statement of operations, primarily in cost of sales and G&A expenses. Depreciation is calculated on a straight-line basis over the expected useful life of each class of asset. No depreciation is charged on land.

Amortization costs relate to the amortization of identified definite-lived intangible assets, which for us consists primarily of intellectual property rights. Amortization is calculated on either an economic benefit model or a straight-line basis over the expected useful life of the asset, with identifiable assets assessed individually or by product family. The economic benefit model is based on the expected future cash flows and typically results in accelerated amortization for most of our products. Patents and other intellectual property rights are amortized over periods not exceeding 15 years. We periodically review the amortization schedules for intangible assets to ensure that the methods employed and the amortization rates being used are consistent with our then current forecasts of future product cash flows. Where appropriate, we make adjustments to the remaining amortization to better match the expected benefit of the asset.

Interest Income and Interest Expense (“Net interest expense”)

Interest income consists primarily of interest income earned on our cash balances. Interest expense consists primarily of interest on outstanding indebtedness, amortization of deferred loan costs and the write-off of deferred loan costs associated with the early prepayment of debt. In the year ended December 31, 2011, there was a significant increase in our average outstanding indebtedness relative to the year ended December 31, 2010, offset in part, by lower interest rates in the year ended December 31, 2011 relative to the prior year. The increase in our weighted average debt outstanding in the year ended December 31, 2011 as compared to the prior year was primarily due to the timing of the incurrence of indebtedness to fund the Special Dividend and the ENABLEX Acquisition in the year ended December 31, 2010.

Provision for Income Taxes

Provision for income taxes consist of a current corporate tax expense, deferred tax expense and any other accrued tax expense. In addition, interest and penalties accrued on our reserves recorded under ASC Topic 740, “Income Taxes,” (“ASC 740”), are included as a component of our provision for income taxes. We are an Irish company with operating subsidiaries in the Republic of Ireland, Puerto Rico, the United States, the United Kingdom, Canada, Germany, Switzerland and other Western European countries. We have a tax agreement with the Puerto Rican tax authorities whereby the substantial majority of our earnings in Puerto Rico, which are a large component of our overall earnings, are subject to a 2% income tax for a period of 15 years expiring in 2024. See “Note 17” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for further discussion of Income Taxes.

2011 Significant Events

The following are certain significant events that occurred in 2011:

 

   

In 2011, we made optional prepayments aggregating $750 million of our term loan indebtedness, including $200 million in January 2011 and $250 million in March 2011 in connection with the refinancing of our Prior Senior Secured Credit Facilities and $300 million under our New Senior Secured Credit Facilities;

 

   

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 well as approximately $279 million of cash on hand, to make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 million in aggregate term loans under our Prior Senior Secured Credit Facilities, terminate our Prior Senior Secured Credit Facilities 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;

 

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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 did 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 are in the process of moving to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The implementation of the restructuring plan impacts approximately 500 employees in total. In connection with the restructuring, pretax severance costs of $101 million and pretax contract termination expenses of $3 million were recorded in the year ended December 31, 2011. These charges are recorded as a component of restructuring costs;

 

   

In April 2011, we announced a plan to repurpose our Manati, Puerto Rico manufacturing facility. This facility now serves primarily as a warehouse and distribution center. In connection with the repurposing, we recorded $8 million in severance charges and $23 million in non-cash charges relating to the write-down of certain property, plant and equipment in the year ended December 31, 2011, as a component of cost of sales;

 

   

Pursuant to our Redemption Program, we redeemed 3.7 million ordinary shares in the year ended December 31, 2011 at an aggregate cost of $56 million. Following the settlement of such redemptions, we cancelled all shares redeemed;

 

   

Our revenue for the year ended December 31, 2011 was $2,728 million and our net income was $171 million.

 

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Operating Results for the years ended December 31, 2011 and 2010

Revenue

The following table sets forth our revenue for the years ended December 31, 2011 and 2010, with the corresponding dollar and percentage changes:

 

     Year Ended December 31,      Increase
(decrease)
 
(dollars in millions)            2011                      2010              Dollars     Percent  

Women’s Healthcare:

          

Osteoporosis

          

ACTONEL(1)

   $ 771       $ 1,027       $ (256     (25 )% 

ATELVIA

     33         5         28        523
  

 

 

    

 

 

    

 

 

   

 

 

 

Total osteoporosis

     804         1,032         (228     (22 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Oral Contraceptives

          

LOESTRIN 24 FE

     396         342         54        16

LO LOESTRIN FE

     63         —           63        100

Other Oral Contraceptives

     20         64         (44     (69 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total oral contraceptives

     479         406         73        18
  

 

 

    

 

 

    

 

 

   

 

 

 

Hormone Therapy

          

ESTRACE Cream

     157         136         21        15

FEMHRT

     20         51         (31     (61 )% 

Other Hormone Therapy

     25         26         (1     (5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total hormone therapy

     202         213         (11     (6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Other women’s healthcare products

     64         63         1        2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Women’s Healthcare

     1,549         1,714         (165     (10 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Gastroenterology:

          

ASACOL

     743         715         28        4

Dermatology:

          

DORYX

     173         173         —          —  

TACLONEX(2)

     —           74         (74     (100 )% 

DOVONEX(2)

     —           75         (75     (100 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Dermatology

     173         322         (149     (46 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Urology:

          

ENABLEX(3)

     171         107         64        59

Other:

          

Other products net sales

     61         85         (24     (27 )% 

Contract manufacturing product sales

     17         16         1        7

Other revenue(4)

     14         15         (1     (8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenue

   $ 2,728       $ 2,974       $ (246     (8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Includes “other revenue” of $77 million and $93 million for the years ended December 31, 2011 and 2010, respectively, as reported in our consolidated statement of operations resulting from the Collaboration Agreement with Sanofi.
(2) Represents revenues from our distribution agreement with LEO. 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) Prior to the ENABLEX Acquisition on October 18, 2010, includes “other revenue” of $63 million reported in our 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 $77 million and $156 million for years ended December 31, 2011 and 2010, respectively, reported in our consolidated statement of operations and disclosed pursuant to footnotes (1) and (3) above.

 

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Total revenue in the year ended December 31, 2011 was $2,728 million, a decrease of $246 million, or 8%, over the year ended December 31, 2010. The decline was primarily due to a decrease in global ACTONEL revenues of $256 million, primarily due to the loss of exclusivity in Western Europe and a decrease in DOVONEX and TACLONEX net sales of $149 million as a result of LEO’s assumption of responsibility for the distribution of DOVONEX and TACLONEX on June 30, 2010. The decrease was offset, in part, by net sales growth in certain other products, primarily ENABLEX, LO LOESTRIN FE and LOESTRIN 24 FE, as compared to the prior year. Excluding ACTONEL revenues and DOVONEX and TACLONEX net sales in both years, total revenue in the year ended December 31, 2011 was $1,957 million, an increase of $159 million, or 9%, over the year ended December 31, 2010. Primarily as a result of the continued expected declines in global ACTONEL revenues (discussed more fully below), we expect our total revenue in 2012 to decrease as compared to 2011. In addition to the impact of transactions such as the LEO Transaction and ENABLEX Acquisition, period over period changes in the net sales of our products are a function of a number of factors including changes in: market demand, gross selling prices, sales-related deductions from gross sales to arrive at net sales and the levels of pipeline inventories of our products held by our direct and indirect customers. We use IMS Health, Inc. (“IMS”) estimates of filled prescriptions for our products as a proxy for market demand in the U.S.

Revenues of our osteoporosis products decreased $228 million, or 22%, in the year ended December 31, 2011, compared to the prior year. Total ACTONEL revenues were $771 million in the year ended December 31, 2011, compared to $1,027 million in the prior year. The decline was primarily attributable to the loss of exclusivity in Western Europe, which began in the fourth quarter of 2010, and declines in U.S. net sales of ACTONEL. Total ACTONEL revenues were comprised of the following components:

 

     Year Ended 
December  31,
     Increase
(decrease)
 
(dollars in millions)    2011      2010      Dollars     Percent  

United States

   $ 441       $ 542       $ (101     (19 )% 

Non-U.S. North America

     63         88         (25     (29 )% 

Rest of world (“ROW”)

     190         304         (114     (37 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total net sales

     694         934         (240     (26 )% 

ROW, other revenue

     77         93         (16     (17 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total ACTONEL revenues

   $ 771       $ 1,027       $ (256     (25 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

United States ACTONEL net sales decreased $101 million in the year ended December 31, 2011, compared to the prior year, primarily due to a decrease in filled prescriptions of 32%, offset, in part, by a decrease in sales-related deductions, higher average selling prices and an expansion of pipeline inventories relative to the prior year. United States ACTONEL net sales continue to face market share declines due to the increased use of generic versions of competing products and declines in filled prescriptions within the overall oral bisphosphonate market. Outside the United States, ACTONEL revenues continued to decline in the year ended December 31, 2011 compared to the prior year as a result of the loss of exclusivity in most countries beginning in the fourth quarter of 2010 and in Canada in the first quarter of 2010. While we expect to continue to experience significant declines in total ACTONEL revenues in 2012 relative to 2011, we expect revenues from our new product in this category, ATELVIA will grow and partially offset a portion 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 $33 million in the year ended December 31, 2011.

Net sales of our oral contraceptive products increased $73 million, or 18%, in the year ended December 31, 2011, compared with the prior year. LOESTRIN 24 FE generated net sales of $396 million in the year ended December 31, 2011, an increase of 16%, compared with $342 million in the prior year. The increase in LOESTRIN 24 FE net sales was primarily due to a reduction in sales-related deductions and higher average selling prices, offset in part by a decrease in filled prescriptions of 4%, and a contraction of pipeline inventories relative to the prior year. LO LOESTRIN FE, which we began to promote in the U.S. in early 2011, generated net sales of $63 million in the year ended December 31, 2011. Filled prescriptions of LO LOESTRIN FE increased

 

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38% in the quarter ended December 31, 2011 as compared to the quarter ended September 30, 2011. FEMCON FE revenues in the year ended December 31, 2011, which we report in “Other Oral Contraceptives” revenue, were negatively impacted by the introduction of generic competition beginning in March 2011.

Net sales of our hormone therapy products decreased $11 million, or 6%, in the year ended December 31, 2011, as compared with the prior year. Net sales of ESTRACE Cream increased $21 million, or 15%, in the year ended December 31, 2011 as compared to the prior year. The increase was primarily due to higher average selling prices and an 11% increase in filled prescriptions in the year ended December 31, 2011, offset in part, by an increase in sales-related deductions as compared to the prior year. Net sales of FEMHRT decreased $31 million, or 61%, during the year ended December 31, 2011 as compared to the prior year as a result of the introduction of generic competition for certain versions of our FEMHRT products beginning in early 2011.

Net sales of ASACOL were $743 million in the year ended December 31, 2011, an increase of 4%, compared with $715 million in the prior year. ASACOL net sales in North America in the year ended December 31, 2011 and 2010 totaled $695 million and $661 million, respectively, including net sales in the United States of $672 million and $639 million, respectively. The increase in ASACOL net sales in the United States was primarily due to higher average selling prices, offset in part by an increase in sales-related deductions and a decrease in filled prescriptions. Our ASACOL 400 mg product accounted for the substantial majority of our total ASACOL net sales in the years ended December 31, 2011 and 2010. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for a description of our legal proceedings relating to ASACOL.

Net sales of our dermatology products decreased $149 million, or 46%, in the year ended December 31, 2011, as compared to the prior year. The decrease in the year ended December 31, 2011, relative to the prior year was due to a decrease in net sales of DOVONEX and TACLONEX of $149 million, resulting from LEO’s 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 year ended December 31, 2011. Net sales of DORYX were $173 million in both the years ended December 31, 2011 and 2010. DORYX net sales in the year ended December 31, 2011 relative to the prior year, were impacted by a decrease in filled prescriptions of 36%, offset by a reduction in sales-related deductions and higher average selling prices. The decrease in sales-related deductions in the year ended December 31, 2011 compared with the prior year was primarily a result of changes to our loyalty card program 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. Offsetting the decline in filled prescriptions were significantly higher average net sales values per prescription for DORYX 150 mg as compared to the prior year. We and Mayne Pharma International Pty. Ltd. (“Mayne”), who licenses the DORYX patent to us, have filed infringement lawsuits against Impax Laboratories, Inc. (“Impax”) and Mylan Pharmaceuticals Inc. (“Mylan”) arising from their respective ANDAs relating to DORYX 150 mg, which today accounts for all but a de minimis amount of our DORYX net sales. Our lawsuits against Impax and Mylan relating to DORYX 150 mg were consolidated. A trial was held in early February 2012 and the court has indicated that it expects to issue its decision by the end of February or early March 2012. See “Note 16” to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

Revenues of ENABLEX in the year ended December 31, 2011 were $171 million, an increase of 59%, compared to $107 million in the prior year. The increase in ENABLEX revenues in the year ended December 31, 2011 relative to the prior year was attributable to the ENABLEX Acquisition in October 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 we recorded ENABLEX revenue, on a net basis, 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 7% in the year ended December 31, 2011 as compared to the prior year.

 

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Cost of Sales (excluding amortization of intangible assets)

The table below shows the calculation of cost of sales and cost of sales, as a percentage of product net sales, for the years ended December 31, 2011 and 2010:

 

(dollars in millions)    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    $
Change
    Percent
Change
 

Product net sales

   $ 2,637      $ 2,804      $ (167     (6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales (excluding amortization)

     356        493        (137     (28 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales percentage

     14     18    
  

 

 

   

 

 

     

Cost of sales (excluding amortization) decreased $137 million, or 28%, in the year ended December 31, 2011 compared with the prior year. In the year ended December 31, 2011, cost of sales included $31 million in costs related to the repurposing of our Manati facility. In the year ended December 31, 2010, cost of sales included the impact of the purchase accounting inventory step-up of $106 million resulting from the PGP Acquisition and approximately $149 million of costs related to DOVONEX and TACLONEX products distributed at nominal distributor margins under the LEO distribution agreement. These costs in year ended December 31, 2010 were offset, in part, by a gain of $35 million relating to the sale of certain inventories in connection with the LEO Transaction and an $18 million reduction in cost of sales as a result of the reversal of a contingent liability relating to the termination of a contract. Excluding the impact of the items mentioned above, our cost of sales as a percentage of product net sales increased from 11% in the year ended December 31, 2010 to 12% in the year ended December 31, 2011.

SG&A Expenses

Our SG&A expenses were comprised of the following for the years ended December 31, 2011 and 2010:

 

(dollars in millions)    Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     $
Change
    Percent
Change
 

A&P

   $ 149       $ 123       $ 26        20

Selling and Distribution

     513         575         (62     (11 )% 

G&A

     262         392         (130     (33 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 924       $ 1,090       $ (166     (15 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

SG&A expenses for the year ended December 31, 2011 were $924 million, a decrease of $166 million, or 15%, compared to the prior year. A&P expenses for the year ended December 31, 2011 increased $26 million, or 20%, versus the prior year, primarily due to advertising and other promotional expenses attributable to the launch of ATELVIA and LO LOESTRIN FE in the U.S. in early 2011. Selling and distribution expenses for the year ended December 31, 2011 decreased $62 million, or 11%, as compared to the prior year, primarily due to the decrease in Sanofi co-promotion expense of $71 million as a result of lower ACTONEL revenues in Western Europe and Canada and the April 2010 amendment to the Collaboration Agreement. Sanofi co-promotion expenses were $231 million under the Collaboration Agreement in the year ended December 31, 2011 compared to $302 million in the prior year. The decrease was offset, in part, by increases in promotional spending related primarily to the promotion of ATELVIA and LO LOESTRIN FE. G&A expenses for the year ended December 31, 2011 decreased $130 million, or 33%, as compared to the prior year. New G&A expenses in the year ended December 31, 2011, including $12 million relating to a Puerto Rican excise tax and $16 million relating to a pharmaceutical fee imposed on manufacturers resulting from U.S. healthcare reform legislation, were more than offset by operating savings resulting from the Western European restructuring and one-time costs incurred in the year ended December 31, 2010, including: (i) $22 million of consulting and other professional fees relating primarily to the PGP Acquisition, (ii) $23 million of consulting and other professional fees related to the system and other infrastructure initiatives to

 

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establish our global operations, (iii) $47 million of expenses payable to P&G under the transition services agreement entered into in connection with the PGP Acquisition, (iv) $16 million of severance costs and (v) $12 million of other integration expenses resulting from the PGP Acquisition. We expect total SG&A expenses to continue to decline in the 2012 fiscal year relative to the 2011 fiscal year, due primarily to decreases in A&P and selling and distribution expenses in the U.S. and cost savings realized from the Western European restructuring.

Restructuring Costs

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 did 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.

Pretax severance costs of $101 million were recorded in the year ended December 31, 2011 and were included as a component of restructuring costs in our consolidated statement of operations. Also included in restructuring costs were certain pretax contract termination expenses of $3 million in the year ended December 31, 2011.

R&D

Our R&D expenses were comprised of the following for the years ended December 31, 2011 and 2010:

 

(dollars in millions)    Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     $
Change
    Percent
Change
 

Unallocated overhead expenses

   $ 62       $ 64       $ (2     (3 )% 

Expenses allocated to specific projects

     42         53         (11     (20 )% 

Payments to third parties

     —           26         (26     (100 )% 

Regulatory fees

     4         4         —          —  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 108       $ 147       $ (39     (26 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Our investment in R&D for the year ended December 31, 2011 was $108 million, a decrease of $39 million, or 26%, compared to the prior year. In the year ended December 31, 2010 we made payments to third parties totaling $26 million, including a $20 million up-front payment to Dong-A Pharma Tech Co. Ltd. (“Dong-A”) in connection with the amendment of our agreement to add the right to develop, and if approved, market, in the U.S. and Canada, Dong-A’s udenafil product for the treatment of lower urinary tract symptoms associated with Benign Prostatic Hyperplasia. Also included in the year ended December 31, 2010 was a $5 million up-front payment to TaiGen Biotechnology Co. Ltd (“TaiGen”) in connection with the amendment of a license agreement as well as a $1 million milestone payment to Paratek Pharmaceuticals, Inc. (“Paratek”), paid upon the achievement of a developmental milestone under out agreement to develop a novel tetracycline for the treatment of acne and rosacea. Excluding these one time payments, R&D expense decreased $13 million, or 10%, in the year ended December 31, 2011 compared to the prior year, primarily due to the timing and stages of development of our various R&D projects. Our R&D expenses consist of our internal development costs, fees paid to contract development groups and license fees paid to third parties. R&D expenditures are subject to fluctuation due to the timing and stages of development of our various R&D projects. Project related costs in the year ended December 31, 2011 primarily related to women’s healthcare, urology and dermatology therapeutic categories. Project related costs in the year ended December 31, 2010, primarily related to project spend within our urology, women’s healthcare and dermatology therapeutic categories.

 

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Amortization of Intangible Assets

Amortization of intangible assets in the years ended December 31, 2011 and 2010 was $596 million and $653 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 continuously review the remaining useful lives of our identified intangible assets based on each product or product family’s estimated future cash flows. In the event that we do not achieve the expected cash flows from any of our products or lose market exclusivity for any of our products as a result of the expiration of a patent, the expiration of FDA exclusivity or an at-risk launch of a competing generic product, we may accelerate amortization or record an impairment charge and write-down the value of the related intangible asset.

Net interest expense

Our net interest expense was comprised of the following for the years ended December 31, 2011 and 2010:

 

(dollars in millions)    Year Ended
December 31,
2011
     Year Ended
December 31,
2010
     $
Change
    Percent
Change
 

Interest expense on outstanding indebtedness, net of interest income

   $ 230       $ 219       $ 11        5

Amortization of deferred loan costs

     26         32         (6     (21 )% 

Write-offs of deferred loan costs resulting from debt prepayments, including refinancing premium

     84         33         51        159
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 340       $ 284       $ 56        20
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest expense for year ended December 31, 2011 was $340 million, an increase of $56 million, or 20%, from $284 million in the prior year. The increase in interest expense on outstanding indebtedness in the year ended December 31, 2011 relative to the prior year was due, in large part, to a significant increase in our average outstanding indebtedness relative to the year ended December 31, 2010, offset, in part, by lower interest rates in the year ended December 31, 2011 as a result of the refinancing of our senior secured credit facilities in March 2011. The increase in our weighted average debt outstanding in the year ended December 31, 2011 as compared to the prior year was primarily due to the timing of the incurrence of indebtedness to fund the Special Dividend and the ENABLEX Acquisition.

Included in net interest expense in the year ended December 31, 2011 was $84 million relating to the write-off of deferred loan costs associated with optional prepayments of $750 million aggregate principal amount of senior secured indebtedness and the repayment of the outstanding balance in connection with the refinancing of our Prior Senior Secured Credit Facilities in March 2011. Included in net interest expense for the year ended December 31, 2010 was $33 million relating to the write-off of deferred loan costs associated with optional prepayments of debt under our Prior Senior Secured Credit Facilities and the write-off of deferred loan costs associated with the purchase and redemption of the remaining portion of our 8.75% Notes. In the year ended December 31, 2010, we made optional prepayments totaling $900 million of aggregate principal amount of indebtedness under our Prior Senior Secured Credit Facilities.

Provision for Income Taxes

Our effective tax rates, as a percentage of pre-tax income, for the years ended December 31, 2011 and 2010 were 43% and 44%, respectively. Our corporate effective tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions in which we operate and the amount of our consolidated income before taxes. Our Puerto Rican subsidiary owns the substantial majority of our intangible assets and records the majority of income and amortization expense related to these intangible assets. As a result, the

 

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proportion of our consolidated book income before taxes generated in Puerto Rico, where our tax rate is 2%, has a significant impact on the effective tax rate. For the year ended December 31, 2011, our income tax reserves, state taxes net of federal benefit and non-deductible expenses increased our effective tax rate above the U.S. statutory rate. Similarly, for the year ended December 31, 2010, our Puerto Rican subsidiary generated the majority of our overall profits, which was subject to a 2% tax. In addition, for the year ended December 31, 2010, our income tax reserves and foreign withholding taxes also increased our effective tax rate above the U.S. statutory rate.

The valuation allowance for deferred tax assets of $42 million and $48 million as of December 31, 2011 and 2010, respectively, related principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss carryforwards in various jurisdictions. We expect to generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets on our Consolidated Balance Sheet. The valuation allowance was calculated in accordance with the provisions of ASC 740, which required a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.

Our calculation of tax liabilities involves uncertainties in the application of complex tax regulations in various tax jurisdictions. In 2010, we received an income tax ruling granting a reduced tax rate for our subsidiary in Switzerland for the tax year 2009. As a result of the ruling, in accordance with ASC 740, we recognized tax benefits of approximately $8 million in the income tax provision for the year ended December 31, 2010 to revalue certain tax liabilities. Amounts related to tax contingencies that management has assessed as unrecognized tax benefits have been appropriately recorded under the provisions of ASC 740. For any tax position, a tax benefit may be reflected in the financial statements only if it is “more likely than not” that we will be able to sustain the tax return position, based on its technical merits. Potential liabilities arising from tax positions taken are recorded based on our estimate of the largest amount of benefit that is cumulatively greater than 50 percent likely to be realized. These liabilities may be adjusted to take into consideration changing facts and circumstances. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from the current estimate of the tax liabilities. These potential tax liabilities are recorded in accrued expenses in the Consolidated Balance Sheet.

We intend to continue to reinvest accumulated earnings of our subsidiaries for the foreseeable future where a distribution of such earnings would give rise to an incremental tax liability; as such, no additional provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for differences related to investments in subsidiaries.

On February 25, 2008, our U.S. operating entities entered into an advanced pricing agreement (“APA”) with the IRS covering the calendar years 2006 through 2010. The APA is an agreement with the IRS that specifies the agreed upon terms under which our U.S. entities are compensated for distribution and service transactions between our U.S. and non-U.S. entities. The APA provides us with greater certainty with respect to the mix of our pretax income in certain of the tax jurisdictions in which we operate. This APA is applicable to our U.S. subsidiaries and operations as they existed prior to the PGP Acquisition. We are currently in the process of negotiating a new APA. In any event, we believe that our transfer pricing arrangements comply with existing U.S. tax rules.

Net Income

Due to the factors described above, we reported net income of $171 million and $171 million in the years ended December 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 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

 

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allocate resources and assess performance. In addition to managing our results of operations in the two reportable segments, we manage revenues at a brand level. The discussion set forth above presents revenues discussion at the brand level.

We measure an operating segment’s 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 year ended December 31, 2011, revenues in North America were $3,998 million, compared to $4,355 million in 2010. Revenues in ROW in the year ended December 31, 2011 were $659 million, compared to $990 million in 2010. Our revenues by segment fluctuate from period to period primarily due to the timing of our inter-segment revenues.

Segment operating profit in North America was $656 million in the year ended December 31, 2011, compared to $1,032 million in the year ended December 31, 2010. ROW segment operating profit was $82 million in 2011, compared to $51 million in 2010. Our segment operating profit fluctuates based on many factors, including the timing and amount of our inter-segment revenues and mix of profit by jurisdiction.

 

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Operating Results for the years ended December 31, 2010 and 2009

Revenue

The following table sets forth our total revenue for the years ended December 31, 2010 and 2009, with the corresponding dollar and percentage changes:

 

     Year Ended December 31,      Increase
(decrease)
 
(dollars in millions)            2010                      2009              Dollars     Percent  

Women’s Healthcare:

          

Osteoporosis

          

ACTONEL(1)

   $ 1,027       $ 222       $ 805        363

ATELVIA

     5         —           5        100
  

 

 

    

 

 

    

 

 

   

 

 

 

Total osteoporosis

     1,032         222         810        365
  

 

 

    

 

 

    

 

 

   

 

 

 

Oral Contraceptives

          

LOESTRIN 24 FE

     342         248         94        38

FEMCON FE

     42         49         (7     (16 )% 

Other Oral Contraceptives(2)

     22         24         (2     (9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total oral contraceptives

     406         321         85        26
  

 

 

    

 

 

    

 

 

   

 

 

 

Hormone Therapy

          

ESTRACE Cream

     136         116         20        18

FEMHRT

     51         60         (9     (15 )% 

Other Hormone Therapy

     26         27         (1     (3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total hormone therapy

     213         203         10        5
  

 

 

    

 

 

    

 

 

   

 

 

 

Other women’s healthcare products

     63         21         42        206
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Women’s Healthcare

     1,714         767         947        124
  

 

 

    

 

 

    

 

 

   

 

 

 

Gastroenterology:

          

ASACOL

     715         115         600        522

Dermatology:

          

DORYX

     173         210         (37     (18 )% 

TACLONEX(3)

     74         137         (63     (46 )% 

DOVONEX(3)

     75         133         (58     (44 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Dermatology

     322         480         (158     (33 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Urology:

          

ENABLEX(4)

     107         15         92        619

Other:

          

Other products net sales

     85         18         67        358

Contract manufacturing product sales

     16         13         3        23

Other revenue(5)

     15         28         (13     (46 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenue

   $ 2,974       $ 1,436       $ 1,538        107
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Includes “other revenue” of $93 million and $8 million for the years ended December 31, 2010 and 2009, respectively, as reported in our consolidated statement of operations resulting from the Collaboration Agreement with Sanofi.
(2) Includes revenue from related authorized generic product sales from the date of their respective launch.
(3) Includes revenues for LEO following the closing of the LEO Transaction.
(4) Prior to October 18, 2010, includes “other revenue” of $63 million and $15 million for the years ended December 31, 2010 and 2009, respectively, reported in our 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.
(5) Excludes “other revenue” of $156 million and $23 million for the years ended December 31, 2010 and 2009, respectively, reported in our consolidated statement of operations and disclosed above pursuant to footnotes 1 and 4 above.

 

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Total revenue in the year ended December 31, 2010 was $2,974 million, an increase of $1,538 million, or 107%, over the year ended December 31, 2009. The primary drivers of the increase in revenue were the products acquired in the PGP Acquisition, primarily ACTONEL and ASACOL, which together contributed $1,405 million of revenue growth. The PGP products were acquired on October 30, 2009. As a result, our reported results of operations for the fiscal year ended December 31, 2009 included only two months of operations for the PGP business. Sales-related deductions increased significantly during the year ended December 31, 2010 compared to the prior year. The increase was due primarily to the acquisition of the PGP products (which have historically had higher sales-related deductions as a proportion of gross sales than our legacy products) and, to a lesser extent, as a result of the increased utilization of our loyalty card programs and increases in rebates related to our legacy products sold under commercial and governmental managed care programs. The sales-related deductions recorded to reduce gross sales to net sales were $1,035 million and $378 million in the years ended December 31, 2010 and 2009, respectively. In addition to transactions such as the PGP Acquisition and 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 estimates of filled prescriptions for our products as a proxy for market demand in the U.S.

Revenues of our osteoporosis products increased $810 million, or 365%, in the year ended December 31, 2010, compared with the prior year. Revenues of ACTONEL were $1,027 million in the year ended December 31, 2010 compared to $222 million in the prior year. The increase in ACTONEL revenues in the year ended December 31, 2010 relative to the prior year is primarily attributable to the timing of the PGP Acquisition on October 30, 2009. Revenues of ACTONEL in North America were $630 million, including $542 million in the U.S., for the year ended December 31, 2010. Filled prescriptions of ACTONEL in the U.S. decreased 24% in the year ended December 31, 2010 compared to the prior year. 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 Fosomax, as well as declines in filled prescriptions within the overall oral bisphosphonate market. Generic competition began to negatively impact our net sales of ACTONEL in the first quarter of 2010 in Canada and in the fourth quarter of 2010 for Western Europe. Sales of ATELVIA began in December 2010 and totaled $5 million in the year ended December 31, 2010.

Net sales of our oral contraceptive products increased $85 million, or 26%, in the year ended December 31, 2010, compared with the prior year. LOESTRIN 24 FE generated revenues of $342 million in the year ended December 31, 2010, an increase of 38%, compared with $248 million in the prior year. The increase in LOESTRIN 24 FE net sales was primarily due to an increase in filled prescriptions of 64% in the year ended December 31, 2010, as well as higher average selling prices compared to the prior year, offset in part by the impact of higher sales-related deductions primarily due to increased utilization of our customer loyalty cards. Net sales of our oral contraceptive product FEMCON FE were $42 million, a decrease of 16%, compared with $49 million in the prior year. Pursuant to a 2008 settlement agreement, Teva entered the U.S. market with a generic version of FEMCON FE in March 2011.

Net sales of our hormone therapy products increased $10 million, or 5%, in the year ended December 31, 2010 as compared to the prior year. Net sales of ESTRACE Cream increased $20 million, or 18%, in the year ended December 31, 2010, compared to the prior year, primarily due to higher average selling prices and an increase in filled prescriptions of 10%, offset in part by a contraction of pipeline inventories relative to the prior year. Net sales of FEMHRT decreased $9 million, or 15%, in the year ended December 31, 2010, compared to the prior year.

Net sales of ASACOL in the year ended December 31, 2010 were $715 million compared to $115 million in the prior year. The increase in ASACOL net sales in the year ended December 31, 2010 relative to the prior year is primarily attributable to the timing of the PGP Acquisition on October 30, 2009. Net sales of ASACOL in

 

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North America were $661 million, including $639 million in the U.S., for the year ended December 31, 2010. Filled prescriptions of ASACOL in the U.S. decreased in the year ended December 31, 2010 compared to the prior year. Our ASACOL 800 mg product (known as ASACOL HD in the U.S.) was launched in the United States in June 2009. In 2010, the ASACOL 400 mg product accounted for the substantial majority of our total ASACOL net sales.

Net sales of our dermatology products decreased $158 million, or 33%, in the year ended December 31, 2010, as compared to the prior year. Net sales of DORYX decreased $37 million, or 18%, in the year ended December 31, 2010, compared to the prior year, primarily due to an increase in sales-related deductions and a contraction of pipeline inventories relative to the prior year, offset in part by higher average selling prices and an increase in filled prescriptions of 10%. The increase in sales-related deductions compared with the prior year was primarily due to the increased usage of our customer loyalty card for DORYX 150 mg as well as an increase in product returns primarily related to the 75 and 100 mg strengths. DOVONEX and TACLONEX revenues recorded during the year ended December 31, 2010 totaled $149 million, a decrease of $121 million as compared to the prior year. As a result of the LEO Transaction and related distribution agreement with LEO, we recorded revenue and cost of sales at distributor margins for all TACLONEX and DOVONEX products until June 30, 2010. On June 30, 2010, LEO assumed responsibility for its own distribution services. As a result, we did not record DOVONEX and TACLONEX net sales (or the cost of sales relating to such products) in periods subsequent to the second quarter of 2010.

Revenues of ENABLEX in the year ended December 31, 2010 were $107 million compared to $15 million in the prior year. The increase in ENABLEX revenues in the year ended December 31, 2010 relative to the prior year is primarily attributable to the timing of the PGP Acquisition on October 30, 2009. During 2009 and the majority of 2010, ENABLEX revenue was recorded based on the contractual percentage we received of Novartis’ net sales. Effective October 18, 2010 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. Filled prescriptions of ENABLEX in the U.S. increased 3% in the year ended December 31, 2010 compared to the prior year.

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 years ended December 31, 2010 and 2009:

 

(dollars in millions)    Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    $
Change
     Percent
Change
 

Product net sales

   $ 2,804      $ 1,385      $ 1,419         102
  

 

 

   

 

 

   

 

 

    

 

 

 

Cost of sales (excluding amortization)

     493        320        173         54
  

 

 

   

 

 

   

 

 

    

 

 

 

Cost of sales percentage

     18     23     
  

 

 

   

 

 

      

Cost of sales (excluding amortization) increased $173 million in the year ended December 31, 2010 compared with the prior year, due primarily to the 102% increase in product net sales. In addition, the increase in cost of sales was, in part, due to the impact of the purchase accounting inventory step-up that was recognized as a result of the PGP Acquisition of $106 million in the year ended December 31, 2010 as compared to $73 million in the year ended December 31, 2009. Cost of sales included approximately $149 million and $77 million in the years ended December 31, 2010 and 2009, respectively, related to DOVONEX and TACLONEX products distributed at nominal distributor margins under the LEO distribution agreement. The increases were offset, in part, by gains relating to the sale of certain inventories resulting from the LEO Transaction of $35 million and $34 million in the years ended December 31, 2010 and 2009, respectively. The increase in cost of sales was offset, in part, by an $18 million reduction in cost of sales in the year ended December 31, 2010 as a result of the

 

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reversal of a contingent liability relating to the termination of a contract. Excluding the impact of the items mentioned above, the PGP Acquisition had a favorable impact on our cost of sales percentage in 2010 as compared to 2009.

SG&A Expenses

Our SG&A expenses were comprised of the following for the years ended December 31, 2010 and 2009:

 

(dollars in millions)    Year Ended
December 31,
2010
     Year Ended
December 31,
2009
     $
Change
     Percent
Change
 

A&P

   $ 123       $ 61       $ 62         102

Selling and Distribution

     575         188         387         205

G&A

     392         187         205         110
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,090       $ 436       $ 654         150
  

 

 

    

 

 

    

 

 

    

 

 

 

SG&A expenses for the year ended December 31, 2010 were $1,090 million, an increase of $654 million, or 150%, compared to the prior year primarily as a result of the PGP Acquisition on October 30, 2009. A&P expenses for the year ended December 31, 2010 increased $62 million, or 102%, versus the prior year, primarily due to advertising and other promotional expenses attributable to the PGP products. Selling and distribution expenses for the year ended December 31, 2010 increased $387 million, or 205%, over the prior year. The increase is primarily due to the Sanofi co-promotion expense of $302 million recognized under the Collaboration Agreement in the year ended December 31, 2010 compared to $99 million in the prior year, increased headcount resulting from the acquisition of the PGP sales force as well as other expenses related to the acquired PGP products. G&A expenses in the year ended December 31, 2010 increased $205 million, or 110%, as compared to the prior year. The increase is due in large part to increases in infrastructure costs, increases in compensation expenses and legal, consulting and other professional fees primarily relating to the PGP Acquisition and integration. Included in G&A expenses in the year ended December 31, 2010 were the following charges; (i) consulting and other professional fees relating to the PGP integration of $22 million, (ii) expenses payable to P&G under the Transition Services Agreement of $47 million, (iii) severance costs of $16 million and (iv) other integration expenses of $12 million. Included in G&A expenses in the year ended December 31, 2009 were $61 million of legal, consulting and other professional fees relating primarily to the PGP Acquisition, expenses payable to P&G under the Transition Services Agreement of $17 million and severance costs of $33 million.

R&D

Our R&D expenses were comprised of the following for the years ended December 31, 2010 and 2009:

 

(dollars in millions)    Year Ended
December 31,
2010
     Year Ended
December 31,
2009
     $
Change
    Percent
Change
 

Unallocated overhead expenses

   $ 64       $ 35       $ 29        83

Expenses allocated to specific projects

     53         24         29        116

Milestone payments to third parties

     26         12         14        129

Regulatory fees

     4         6         (2     (37 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 147       $ 77       $ 70        91
  

 

 

    

 

 

    

 

 

   

 

 

 

Our investment in R&D for the year ended December 31, 2010 was $147 million, an increase of $70 million, or 91%, compared with the prior year. The year ended December 31, 2010 included payments of $26 million primarily consisting of a $20 million upfront payment to Dong-A, resulting from the amendment of our agreement to add the right to develop, and if approved, market, Dong-A’s udenafil product, for the treatment of lower urinary tract symptoms associated with BPH in the U.S. and Canada. Also included in the year ended

 

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December 31, 2010, was a $5 million up-front payment to TaiGen resulting from the amendment of a license agreement, as well as a $1 million milestone payment to Paratek paid upon the achievement of a developmental milestone under our agreement to develop a treatment for acne and rosacea. R&D expense for the year ended December 31, 2009 included a $9 million payment to Dong-A upon the achievement of a developmental milestone under our agreement for an orally-administered udenafil product for the treatment of ED. Also included in the year ended December 31, 2009, was a $3 million payment to Apricus Biosciences Inc. (formerly NexMed Inc.) (“Apricus”) in connection with our acquisition of the rights to its topically applied alprostadil cream for the treatment of erectile dysfunction (“ED”). Excluding these one time payments in both periods, R&D expense increased $56 million, or 84%, in the year ended December 31, 2010 compared to the prior year, which was primarily due to the addition of R&D projects from PGP, higher costs associated with an increase in personnel and facilities and costs incurred relating to ongoing product development efforts, which included our work on the next generation of the significant products within each of our therapeutic categories. Specifically in the year ended December 31, 2010 we incurred approximately $22 million of expenses in connection with a product under development for the treatment of ED in the U.S.

Amortization of Intangible Assets (including Impairment of Intangible Assets)

Amortization of intangible assets in the years ended December 31, 2010 and 2009 was $653 million and $312 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 the 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 family’s estimated future cash flows. The years ended December 31, 2010 and 2009 included amortization expense of $501 million and $85 million, respectively, relating primarily to intellectual property assets acquired in the PGP Acquisition and Enablex Acquisition.

Net interest expense

Net interest expense for the year ended December 31, 2010 was $284 million, an increase of $159 million, or 128%, from $125 million in the prior year. Included in net interest expense in the year December 31, 2010, was $33 million relating to the write-off of deferred loan costs associated with optional prepayments and scheduled repayments of debt under our Prior Senior Secured Credit Facilities and the write-off of deferred loan costs associated with the purchase and redemption of the remaining portion of our 8.75% Notes. In the year ended December 31, 2010, we made optional prepayments totaling $900 million aggregate principal amount of indebtedness under our Prior Senior Secured Credit Facilities. Included in net interest expense in the year ended December 31, 2009, was $21 million relating to the write-off of deferred loan costs associated with optional prepayments and scheduled repayments of debt under our then-existing 2005 Senior Secured Credit Facilities and the write-off of deferred loan costs in connection with the termination of the delayed-draw term loan under our Prior Senior Secured Credit Facilities. In the year ended December 31, 2009, we made optional prepayments totaling $100 million before repaying the remaining $480 million aggregate principal amount of indebtedness and terminating our then-existing 2005 Prior Senior Secured Credit Facilities with proceeds received in the LEO Transaction. In addition, in the year ended December 31, 2009 we purchased and retired $290 million aggregate principal amount of our 8.75% Notes, which resulted in a premium payment of $14 million.

The increase in our net interest expense in the year ended December 31, 2010 relative to the prior year was due primarily to the significant increase in our total outstanding indebtedness in the 2010 fiscal year. The increase in our weighted average outstanding indebtedness in the year ended December 31, 2010 as compared to the prior year, was due primarily to the timing of the incurrence of indebtedness to fund the PGP Acquisition, and the incurrence of additional indebtedness (including loan costs) during 2010 in connection with the Leveraged Recapitalization and the ENABLEX Acquisition.

 

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Provision for Income Taxes

Our effective tax rates, as a percentage of pre-tax income, for the years ended December 31, 2010 and 2009 were 44% and 8%, respectively. Our corporate effective tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions in which we operate and the amount of our consolidated income / (loss) before taxes. Our Puerto Rican subsidiary owns the substantial majority of our intangible assets and records the majority of income and amortization expense related to these intangible assets. As a result, the proportion of our consolidated book income before taxes generated in Puerto Rico, where our tax rate is 2%, has a significant impact on the effective tax rate. For the year ended December 31, 2010, this Puerto Rican subsidiary generated the majority of our overall profits which was subject to a 2% tax rate. However, in 2010, the overall profits generated in Puerto Rico in proportion to the overall consolidated profits were substantially less than in 2009. In addition, our income tax reserves and foreign withholding taxes increased in 2010 as compared to 2009. As a result, the effective tax rate for the year ended December 31, 2010, was significantly higher than the U.S. statutory tax rate and the effective tax rate for the year ended December 31, 2009. For the year ended December 31, 2009, our Puerto Rican subsidiary generated the substantial majority of our overall profits, in large part due to the gain on the LEO Transaction, which was subject to a 2% tax rate. This was offset, in part, by non-deductible transaction costs related to the PGP Acquisition. As a result, the effective tax rate for the year ended December 31, 2009 was less than the U.S. statutory rate.

The valuation allowance for deferred tax assets of $48 million and $22 million as of December 31, 2010 and 2009, respectively, related principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss carryforwards in various jurisdictions. We expect to generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets on our Consolidated Balance Sheet. The valuation allowance was calculated in accordance with the provisions of ASC 740, which required a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.

Our calculation of tax liabilities involves uncertainties in the application of complex tax regulations in various tax jurisdictions. In 2010, we received an income tax ruling granting a reduced tax rate for our subsidiary in Switzerland for the tax year 2009. As a result of the ruling, in accordance with ASC 740, we recognized tax benefits of approximately $8 million in the income tax provision for the year ended December 31, 2010 to revalue certain tax liabilities. Amounts related to tax contingencies that management has assessed as unrecognized tax benefits have been appropriately recorded under the provisions of ASC 740. For any tax position, a tax benefit may be reflected in the financial statements only if it is “more likely than not” that we will be able to sustain the tax return position, based on its technical merits. Potential liabilities arising from tax positions taken are recorded based on our estimate of the largest amount of benefit that is cumulatively greater than 50 percent likely to be realized. These liabilities may be adjusted to take into consideration changing facts and circumstances. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from the current estimate of the tax liabilities. These potential tax liabilities are recorded in accrued expenses in the Consolidated Balance Sheet. We intend to continue to reinvest accumulated earnings of our subsidiaries for the foreseeable future where a distribution of such earnings would give rise to an incremental tax liability; as such, no additional provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for differences related to investments in subsidiaries.

Net Income

Due to the factors described above, we reported net income of $171 million and $514 million in the years ended December 31, 2010 and 2009, respectively. Net income for the year ended December 31, 2009 included a gain ($380 million net of tax) on the sale of assets related to the LEO Transaction.

Operating Results by Segment

After the PGP Acquisition, we organized our business 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

 

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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. Prior to the PGP Acquisition on October 30, 2009, all of our revenues were derived domestically through one reportable segment. Today we record revenues in the U.S., Puerto Rico, Canada and Western Europe. In addition to managing our results of operations in the two reportable segments, we manage revenues at a brand level. The discussion set forth above presents revenues discussion at the brand level.

We measure an operating segment’s performance primarily based on segment operating income, which excludes interest, and is used by the chief operating decision maker to evaluate the success of a specific region.

In the year ended December 31, 2010, revenues in North America were $4,355 million, compared to $2,076 million in the year ended December 31, 2009. Revenues in ROW in the year ended December 31, 2010 were $990 million, compared to $143 million in the year ended December 31, 2009. Revenues in North America increased as a result of the PGP Acquisition and growth in net sales of promoted products as described above. Revenues in ROW increased due to the PGP Acquisition, as we did not generate revenues in ROW prior to the PGP Acquisition.

Segment operating profit in North America was $1,032 million in 2010, compared to $708 million in the year ended December 31, 2009. ROW segment operating profit / (losses) was $51 million in the year ended December 31, 2010, compared to $(8) million in the year ended December 31, 2009. Segment operating profit in North America grew as a result of the factors describe above.

Financial Condition, Liquidity and Capital Resources

Cash

At December 31, 2011, our cash on hand was $616 million, as compared to $402 million at December 31, 2010. As of December 31, 2011 our total outstanding debt was $3,863 million and consisted of $2,604 million of term loan borrowings under our New Senior Secured Credit Facilities, $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)    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
 

Net cash provided by operating activities

   $ 1,177      $ 948   

Net cash (used in) investing activities

     (46     (498

Net cash (used in) financing activities

     (914     (575

Effect of exchange rates on cash and cash equivalents

     (2     (12
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

   $ 215      $ (137
  

 

 

   

 

 

 

Our net cash provided by operating activities for year ended December 31, 2011 increased $229 million compared with the prior year. We reported net income of $171 million for the years ended December 31, 2011 and 2010. Included in net income in the year ended December 31, 2011, was $23 million of non-cash charges relating to the Manati repurposing and non-cash charges relating to deferred loan costs of $110 million relating to the repayment and optional prepayments of outstanding indebtedness. Included in net income in the year ended December 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 $65 million of deferred loan costs. Net cash provided by operating activities in the year ended December 31, 2011 was positively impacted by a decrease in working capital due to the timing of a change in accounts receivable and increases in accrued expenses. We expect our net cash provided by operating activities in 2012 to decline compared to 2011 primarily due to an increase in working capital related to cash payments for certain sales-related deductions and cash

 

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required for the Western European restructuring. Impacting our net cash provided by operating activities in the year ended December 31, 2010 were (i) a decrease of $85 million in the ACTONEL co-promotion liability resulting from the timing of payments related to the April 2010 amendment to the Collaboration Agreement and (ii) the decrease in other current liabilities resulting from the recognition of a deferred gain relating to the LEO Transaction of $35 million along with the reversal of a contingent liability of $18 million relating to the termination of a contract. Our liability for unrecognized tax benefits under ASC 740 which is expected to settle within the next twelve months is $0 million. The amounts not expected to be settled in the next twelve months are $77 million, including interest.

Our net cash used in investing activities during the year ended December 31, 2011 totaled $46 million and related to capital expenditures. Our net cash used in investing activities in the year ended December 31, 2010 totaled $498 million and consisted of $400 million paid to Novartis at the closing of the ENABLEX Acquisition, $95 million relating to capital expenditures and $3 million of contingent purchase consideration paid to Pfizer in connection with our 2003 acquisition of FEMHRT.

Our net cash used in financing activities in the year ended December 31, 2011 totaled $914 million and consisted principally of prepayments and repayments in an aggregate principal amount of $3,419 million of term debt under our Prior Senior Secured Credit Facilities, prepayments and repayments of $396 million of term debt under our New Senior Secured Credit Facilities and the payment of loan costs of $51 million, offset in part by $3,000 million of borrowings under our New Senior Secured Credit Facilities. We also paid $56 million to redeem ordinary shares under our Redemption Program. Our net cash used in financing activities in the year ended December 31, 2010 was $575 million and principally consisted of $1,500 million of borrowings under the Prior Senior Secured Credit Facilities, $1,260 million in proceeds from the 7.75% Notes, offset by cash paid of $2,138 million in connection with the Special Dividend, the payment of loan costs associated with our 2010 borrowings of $84 million, prepayments and repayments of $1,031 million aggregate principal amount of term debt under our Prior Secured Credit Facilities, and the repurchase and redemption of the remaining $89 million aggregate principal amounts, of our 8.75% Notes.

The following represents a summary of activity related to indebtedness in the year ended December 31, 2011:

 

Balance, December 31, 2010

   $ 4,679   

Amortization of 7.75% Notes premium

     (1

Term borrowings for the Refinancing of our Senior Secured Indebtedness

     3,000   

Term repayments under New Senior Secured Credit Facilities

     (396

Term repayments under Prior Senior Secured Credit Facilities

     (3,419
  

 

 

 

Balance, December 31, 2011

   $ 3,863   
  

 

 

 

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. 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 make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 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.

 

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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). The New Senior Secured Credit Facilities contain customary provisions related to mandatory prepayment of the loans thereunder with (i) 50% of excess cash flow, as defined, subject to a leverage-based step-down and (ii) the proceeds of asset sales or casualty events (subject to certain limitations, exceptions and reinvestment rights) and the incurrence of certain additional indebtedness. More specifically, subsequent to the end of each year, aggregate optional prepayments of senior secured indebtedness during such year are assessed under the mandatory prepayment provision of the New Senior Secured Credit Facilities to determine whether additional prepayments are required based on Excess Cash Flow, as defined, in such year. If such aggregate optional prepayments do not equal or exceed the percentage of Excess Cash Flow required to be prepaid for such year, a mandatory prepayment of indebtedness under the New Senior Secured Credit Facilities would be required. For the year ended December 31, 2011, aggregate optional prepayments exceeded the percentage of Excess Cash Flow required to be prepaid in such year and no further mandatory prepayment was required. In addition, the New Senior Secured Credit Facilities contain certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, loans and investments, acquisitions, dividends and other restricted payments, transactions with affiliates, asset dispositions, mergers and consolidations, prepayments, redemptions and repurchases of other indebtedness and other matters customarily restricted in such agreements and, in each case, subject to certain exceptions.

As of December 31, 2011, Holdings III was in compliance with all covenants under the New Senior Secured Credit Facilities. We made optional prepayments of $300 million of term loan indebtedness under our New Senior Secured Credit Facilities in the year ended December 31, 2011. On January 31, 2012, we made an optional prepayment of $150 million of our term loan indebtedness under our New Senior Secured Credit Facilities. As of December 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 December 31, 2011.

The New Senior Secured Credit Facilities specify certain customary events of default including, without limitation, non-payment of principal or interest, violation of covenants, breaches of representations and warranties in any material respect, cross default or cross acceleration of certain other material indebtedness, material judgments and liabilities, certain Employee Retirement Income Security Act events, and invalidity of guarantees and security documents under the New Senior Secured Credit Facilities.

The fair value as of December 31, 2011 of our debt outstanding under our New Senior Secured Credit Facilities was approximately $2,601 million ($2,604 million book value).

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 the Prior Senior Secured Credit Facilities in an aggregate amount of $3,200 million. The Prior Senior Secured Credit Facilities initially consisted of $2,600 million of term loans, a $250 million revolving credit facility and a

 

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$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% Notes. 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, were used to fund the Special Dividend and to pay related fees and expenses. In the first quarter of 2011, we made optional prepayments of $450 million of our term loan indebtedness under the Prior Senior Secured Credit Facilities.

2005 Senior Secured Credit Facilities

On January 18, 2005, Holdings III and its subsidiaries, WCC and WCCL, entered into our $1,790 million senior secured credit facilities with Credit Suisse as administrative agent and lender, and the other lenders and parties thereto. Our 2005 Senior Secured Credit Facilities consisted of $1,640 million of term loans (including $240 million of delayed-draw term loans) and a $150 million revolving credit facility, of which $30 million and $15 million were available for letters of credit and swing line loans, respectively, to WCC and WCCL. The then outstanding debt under the 2005 Senior Secured Credit Facilities was repaid with a portion of the proceeds of the LEO Transaction in September 2009.

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 our 7.75% Notes. The 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 7.75% Notes will mature on September 15, 2018. Interest on the 7.75% Notes is payable on March 15 and September 15 of each year, with the first payment made on March 15, 2011.

On September 29, 2010, the Issuers issued the Additional 7.75% Notes at a premium of $10 million. 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 each of Holdings III, and certain of Holdings III’s 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 December 31, 2011, Holdings III was in compliance in with all covenants under the Indenture.

As of December 31, 2011 and 2010, the fair value of our outstanding 7.75% Notes ($1,250 million book value), based on available market quotes, was $1,278 million and $1,225 million, respectively.

 

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Components of Indebtedness

As of December 31, 2011, our outstanding debt included the following:

 

(dollars in millions)    Current Portion
as of
December 31, 2011
     Long-Term
Portion as of
December 31, 2011
     Total Outstanding
as  of

December 31, 2011
 

Revolving credit facility

   $ —         $ —         $ —     

Term loans under the New Senior Secured Credit Facilities

     184         2,420         2,604   

7.75% Notes (including $9 unamortized premium)

     1         1,258         1,259   
  

 

 

    

 

 

    

 

 

 

Total

   $ 185       $ 3,678       $ 3,863   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2011, mandatory principal repayments of long-term debt in each of the five years ending December 31, 2012 through 2016 and thereafter were as follows:

 

Year Ending December 31,

   Aggregate
Maturities
(in millions)
 

2012

   $ 184   

2013

     207   

2014

     207   

2015

     279   

2016

     79   

Thereafter

     2,898   
  

 

 

 

Total long-term debt to be settled in cash

   $ 3,854   

7.75% Notes unamortized premium

     9   
  

 

 

 

Total long-term debt

   $ 3,863   
  

 

 

 

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 and the timing of payments for product rebates and other sales-related deductions. 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 such debt in privately negotiated or open market transactions, fund share redemptions under our Redemption Program, or pursue compelling strategic alternatives. 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 our 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

 

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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.

Contractual Commitments

The following table summarizes our financial commitments as of December 31, 2011:

 

     Cash Payments due by Period  
     Total      Less than
1 Year
     From
1 to  3

Years
     From
3 to  5

Years
     More than
5 Years
 

Long-term debt:

              

New Senior Secured Credit Facilities

   $ 2,604       $ 184       $ 414       $ 358       $ 1,648   

7.75% Notes

     1,250         —           —           —           1,250   

Interest payments on long-term debt(1)

     1,176         202         380         345         249   

Supply agreement obligations(2)

     63         62         1         —           —     

Lease obligations

     34         13         11         7         3   

Other

     17         10         3         3         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 5,144       $ 471       $ 809       $ 713       $ 3,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest payments reflect borrowing rates for our outstanding long-term debt as of December 31, 2011 and the mandatory future reductions of long-term debt. Based on our variable rate debt levels of $2,604 million as of December 31, 2011, a 1.0% change in interest rates would impact our annual interest payments by approximately $26 million to the extent such change exceeds the LIBOR floors, as applicable.
(2) Supply agreement obligations consist of outstanding commitments for raw materials and commitment under non-cancelable minimum purchase requirements.

The table above does not include optional payments related to any of the items mentioned below.

Our liability for unrecognized tax benefits under ASC 740 is not included in the table above. The amounts which are expected to settle within the next twelve months are $0 million, and the amounts expected to be settled after twelve months are $77 million, including interest.

Product Development Agreements

In July 2007, we entered into an agreement with Paratek under which we acquired certain rights to novel tetracyclines under development for the treatment of acne and rosacea. We paid an up-front fee of $4 million and agreed to reimburse Paratek for R&D expenses incurred during the term of the agreement. In September 2010, we made a $1 million milestone payment to Paratek upon the achievement of a developmental milestone, which was included in R&D expense in the year ended December 31, 2010. We may make additional payments to Paratek upon the achievement of certain developmental milestones that could aggregate up to $24 million. In addition, we agreed to pay royalties to Paratek based on the net sales, if any, of the products covered under the agreement.

In December 2008, we signed an agreement (the “Dong-A Agreement”) with Dong-A, to develop and, if approved, market its orally-administered udenafil product, a PDE5 inhibitor, for the treatment of ED in the United States. We paid $2 million in connection with signing the Dong-A Agreement. In March 2009, we paid $9 million to Dong-A, which was included in R&D expense for the year ended December 31, 2009, upon the achievement of a developmental milestone related to the ED product under the Dong-A Agreement. We 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 million upon

 

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the achievement of contractually-defined milestones in relation to the ED product. In addition, we 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, we acquired the U.S. rights to Apricus’ topically applied alprostadil cream for the treatment of ED and a prior license agreement between us and Apricus relating to the product was terminated. Under the terms of the acquisition agreement, we paid Apricus an up-front payment of $3 million, which was included in R&D expense in the year ended December 31, 2009. We also agreed to make a milestone payment of $2 million upon the FDA’s approval of the product’s New Drug Application. We continue to work to prepare our response to the non-approvable letter that the FDA delivered to Apricus in July 2008 with respect to the product.

In April 2010, we amended the Dong-A Agreement to add the right to develop, and if approved, market in the U.S. and Canada, Dong-A’s udenafil product for the treatment of lower urinary tract symptoms associated with Benign Prostatic Hyperplasia (“BPH”). As a result of the amendment we made an up-front payment to Dong-A of $20 million in April 2010, which was included in R&D expense for the year ended December 31, 2010. Under the amendment, we may make additional payments to Dong-A in an aggregate amount of up to $25 million 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. We 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, we and TaiGen amended our existing license agreement to provide for the cross-licensing of the parties’ respective patent rights relating to NEMONOXACIN and the transfer to us of TaiGen’s related Investigational New Drug Application. Under the amended agreement, TaiGen had exclusive development, manufacture and commercialization rights in certain Asian countries, and we had development, manufacture and commercialization rights in all other markets, including the United States, Europe and Japan. As a result of the amendment, we made an up-front payment to TaiGen of $5 million in August 2010, which was included in R&D expense for the year ended December 31, 2010. In the fourth quarter of 2011, we provided notice of our termination of the license agreement to TaiGen, and development work on NEMONAXACIN was discontinued.

Collaboration Agreements

We and Sanofi are parties to the Collaboration Agreement pursuant to which we co-develop and market ACTONEL on a global basis, excluding Japan. ATELVIA, our new risedronate sodium delayed-release product is also currently sold in the United States pursuant to the Collaboration Agreement. As a result of ACTONEL’s loss of patent exclusivity in Western Europe in late 2010 and as part of our transition to a wholesale distribution model in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom, we and/or Sanofi have reduced or discontinued our marketing and promotional efforts in certain territories covered by the Collaboration Agreement. Our and Sanofi’s rights and obligations are specified by geographic market. For example, under the Collaboration Agreement, Sanofi generally has the right to elect to participate in the development of ACTONEL-related product improvements, other than product improvements specifically related to the United States and Puerto Rico, where we have full control over all product development decisions. Under the Collaboration Agreement, the ongoing global R&D costs for ACTONEL are shared equally between the parties, except for R&D costs specifically related to the United States and Puerto Rico, which are borne solely by us. In certain geographic markets, we and Sanofi share selling and A&P costs as well as product profits based on contractual percentages. In the geographic markets where we are deemed to be the principal in transactions with customers, we recognize all revenues from sales of the product along with the related product costs. Our share of selling, A&P and contractual profit sharing expenses are recognized in SG&A expenses. In geographic markets where we are not the principal in transactions with customers, revenue is recognized on a net basis, in other revenue for amounts earned based on Sanofi’s sale transactions with its customers. As discussed above, in April 2010, we and Sanofi entered into an amendment to the Collaboration Agreement. Under the terms of the amendment, we took full operational control over the promotion, marketing and R&D decisions for ACTONEL,

 

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and now 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, 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 jurisdictions. In return, it was agreed that for the remainder of the term of the Collaboration Agreement Sanofi would receive, as part of the global collaboration payments between the parties, payments from us, which, depending on actual net sales in the United States and Puerto Rico, are based on an agreed upon percentage of either United States and Puerto Rico actual net sales or an agreed minimum sales threshold for the territory. We will continue to sell ACTONEL and ATELVIA products with Sanofi in accordance with our obligations under the Collaboration Agreement until the termination of the Collaboration Agreement on January 1, 2015, at which time all of Sanofi’s rights under the Collaboration Agreement will revert to us. For a discussion of the Collaboration Agreement, see “Part I. Item 1. Business—Alliance with Sanofi.”

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

New Accounting Pronouncements

See “Note 2” to the Notes to the Consolidated Financial Statements for the year ended December 31, 2011 included elsewhere in this Annual Report for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

We make a number of estimates and assumptions in the preparation of our financial statements in accordance with accounting principles generally accepted in the U.S. Actual results could differ significantly from those estimates and assumptions. The following discussion addresses our most critical accounting policies, which we believe are important to the portrayal of our financial condition and results of operations and require management’s judgment regarding the effect of uncertain matters.

On an ongoing basis, management evaluates its estimates and assumptions, including those related to revenue recognition, recoverability of long-lived assets and the continued value of goodwill and intangible assets. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable at the time the estimates and assumptions are made. Actual results may differ from these estimates and assumptions under different circumstances or conditions.

Revenue Recognition

We recognize revenue in accordance with ASC 605, Revenue Recognition in Financial Statements (“ASC 605”). Our accounting policy for revenue recognition has a substantial impact on our reported results and relies on certain estimates that require difficult, subjective and complex judgments on the part of management. Changes in the conditions used to make these judgments could have a material impact on our results of operations. Management does not believe that the assumptions which underlie its estimates are reasonably likely to change in the future. Revenue from product sales is recognized when title and risk of loss to the product transfers to our customers, which is based on the transaction’s shipping terms. Based on the above criteria, revenue is generally recognized when the product is received by the customer. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and completion of all performance obligations. We warrant products against defects and for specific quality standards, permitting the return of products under certain circumstances. Product sales are recorded net of trade discounts, sales returns, commercial and government rebates, customer loyalty card programs and fee for service arrangements with certain distributors. As part of our revenue recognition policies, we estimate the items that reduce our gross sales to net sales. We establish accruals for these contra revenues in the same period that we recognize the related sales. Revenues associated with royalty revenues are recognized based on a percentage of sales reported by third parties. Other revenues recognized include service revenues based on a contractual fee.

 

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In the U.S., we record provisions for Medicaid, Medicare, government and managed care rebates based upon our historical experience of rebates paid, contractual terms and actual prescriptions written. We apply the historical experience to the respective period’s sales to determine the ending accrual and related contra revenue amount. This estimated provision is evaluated regularly to ensure that the historical trends are as current as practicable as well as to factor in changes relating to new products, contractual terms, discount rates, selling price changes, pipeline movements, generic launches, and regulatory changes. When new regulatory changes impact our rebates we estimate the impact based on the application of historical data to the provisions of the new requirements. As appropriate, we will adjust the estimated discounts to better match our current experience or our expected future experience.

On March 23, 2010 the Patient Protection and Affordable Care Act of 2010 was signed into law. The statute impacts the Company’s net sales by increasing certain rebates it pays per prescription, most notably managed Medicaid, which was effective in 2010 and the Medicare coverage gap rebates, which became effective in 2011. Based on current utilization rates, the Company does not believe that the impact of this law is a material percentage of the Company’s net sales.

In the U.S., we offer customer loyalty card programs on certain key products, the most significant of which are DORYX 150 mg and LOESTRIN 24 FE. These customer loyalty programs either “cap” the per prescription co-pay amount paid by our ultimate customers or reduce the amount paid by our ultimate customers. The costs incurred by us in connection with the customer loyalty programs are considered sales-related deductions which are included as a component of reported net sales. We estimate the accruals for these programs based on estimated redemption rates, costs per redemption, contractual program terms and other historical data.

We account for product returns in accordance with ASC 605, by establishing an accrual in an amount equal to our estimate of the portion of sales that are expected to be returned for credit in a future period. For established products, we estimate the sales return accrual primarily based on historical experience regarding actual sales returns but we also consider other factors that could cause future sales returns to deviate from historical levels. These factors include levels of inventory in the distribution channel, estimated remaining shelf life of products sold or in the distribution channel, product recalls, product discontinuances, price changes of competitive products, introductions of generic products and introductions of new competitive products. We consider all of these factors and adjust the accrual periodically throughout each quarter to reflect actual experience and changes in expectations. The accruals needed for future returns of new products are estimated based on the historical sales returns experience of similar products, such as those within the same line of product or those within the same or similar therapeutic category.

Other sales-related deductions primarily represent cash discounts and rebates to government agencies, wholesalers and distributors with respect to our pharmaceutical products. These deductions represent estimates of the related obligations which requires judgment and knowledge of market conditions and practice when estimating the impact of these sales deductions on gross sales for a reporting period. These estimates and types of sales-related deductions vary depending on the region.

Outside the U.S., the majority of our pharmaceutical rebates, discounts and price reductions are contractual or legislatively mandated, and our estimates are based on actual invoiced sales within each period. Both of these elements help to reduce the risk of variations in the estimation process. Some European countries base their rebates on the government’s unbudgeted pharmaceutical spending and we use an estimated allocation factor (based on historical payments) and total revenues by country against our actual invoiced sales to project the expected level of reimbursement.

 

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The movement in our sales-related reserve accounts for the periods presented is as follows:

 

(dollars in millions)   Other
Government
Rebates
    Managed
Care
    Returns     Medicare     Customer
Loyalty
Programs
    Wholesaler
Rebates
    Cash
Discounts
    Other     Total  

December 31, 2008 Balance

  $ 9      $ 1      $ 61      $ —        $ 6      $ 5      $ 2      $ 6      $ 90   

Current provision related to sales(1)(2)

    42        46        53        10        125        32        32        38        378   

PGP acquired reserves

    28        74        37        43        —          12        4        10        208   

Current processed returns / rebates

    (29     (31     (45     (11     (86     (32     (32     (35     (301
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2009 Balance

  $ 50      $ 90      $ 106      $ 42      $ 45      $ 17      $ 6      $ 19      $ 375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current provision related to sales(1)

    153        220        81        95        282        54        64        86        1,035   

Current processed returns / rebates

    (98     (203     (57     (94     (256     (54     (64     (99     (925
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2010 Balance

  $ 105      $ 107      $ 130      $ 43      $ 71      $ 17      $ 6      $ 6      $ 485   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current provision related to sales(1)

    185        236        60        115        111        59        63        120        949   

Current processed returns / rebates

    (125     (193     (59     (109     (135     (52     (64     (114     (851
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011 Balance

  $ 165      $ 150      $ 131      $ 49      $ 47      $ 24      $ 5      $ 12      $ 583   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Adjustments of estimates to actual results were less than 1.0% of net sales for each of the periods presented.
(2) Includes amounts recorded as part of gain on sale of assets in connection with the LEO Transaction.

We consider information from external sources in developing our estimates of gross to net sales adjustments. We purchase prescription data for our key products, which we use to estimate the market demand. We have access to the actual levels of inventory held by three of our major U.S. customers (which aggregate approximately 60% of our global sales for the year ended December 31, 2011). We also informally gather information from other sources to attempt to monitor the movement of our products through the wholesale and retail channels. We combine this external data with our own internal reports to estimate the levels of inventories of our products held in the wholesale and retail channels as this is a significant factor in determining the adequacy of our sales-related reserves. Our estimates are subject to inherent limitations that rely on third-party information, as certain third-party information is provided in the form of estimates, and reflects other limitations including lags between the date which third-party information is generated and the date on which we receive third-party information.

Inventories and Inventory Reserves

Inventories are stated at the lower of cost or market value and consist of finished goods purchased from third party manufacturers held for distribution, as well as raw materials, work-in-process and finished goods manufactured by us. We determine cost on a first-in, first-out basis.

We establish reserves for our inventory to reflect situations in which the cost of the inventory is not expected to be recovered. We review our inventory for products that are close to or have reached their expiration date and therefore are not expected to be sold, for products where market conditions have changed or are expected to change, and for products that are not expected to be saleable based on our quality assurance and control standards. The reserves we establish in these situations are equal to all or a portion of the cost of the inventory based on the specific facts and circumstances. In evaluating whether inventory is properly stated at the

 

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lower of cost or market, we consider such factors as the amount of product inventory on hand, estimated time required to sell such inventory, remaining shelf life and current and expected market conditions, including levels of competition. We record provisions for inventory obsolescence as part of cost of sales.

Valuation of Goodwill and Intangible Assets

Goodwill and intangible assets constitute a substantial portion of our total assets. As of December 31, 2011, goodwill represented approximately 20% of our total assets and intangible assets represented approximately 48% of our total assets. Goodwill is associated with one of our two reporting units, while intangible assets are split between the two reporting units.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of assets acquired net of liabilities assumed in a purchase business combination. We periodically evaluate goodwill for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and the operational performance of our business. We carry out an annual impairment review of goodwill unless an event occurs which triggers the need for an earlier review. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our business is impaired. Goodwill is tested for impairment at the reporting unit level in accordance with ASC 350, “Intangibles—Goodwill and other” (“ASC 350”), which, for us, is one reporting unit. In order to perform the impairment analysis, management makes key assumptions regarding future cash flows used to measure the fair value of the entity. These assumptions include discount rates, our future earnings and, if needed, the fair value of our assets and liabilities. In estimating the value of our intangible assets, as well as goodwill, management has applied a discount rate of approximately 12%, our estimated weighted average cost-of-capital, to the estimated cash flows. Our cash flow model used a 5-year forecast with a terminal value. The factors used in evaluating goodwill for impairment are subject to change and are tracked against historical results by management. Changes in the key assumptions by management can change the results of testing. Any resulting impairment could affect our financial condition and results of operations. We completed our annual test during the quarter ended December 31, 2011 and no impairment charge resulted.

Definite-Lived Intangible Assets

We assess definite-lived intangible assets for impairment, individually or on a product family basis, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Our analysis includes, but is not limited to, the following key assumptions:

 

   

review of period-to-period actual sales and profitability by product;

 

   

preparation of sales forecasts by product;

 

   

analysis of industry and economic trends and projected product growth rates;

 

   

internal factors, such as the current focus of our sales forces’ promotional efforts;

 

   

projections of product viability over the estimated useful life of the intangible asset (including consideration of relevant patents and generic competition, if any); and

 

   

consideration of regulatory and legal factors.

When we determine that there is an indicator that the carrying value of a definite-lived intangible asset may not be recoverable we test the asset for impairment based on undiscounted future cash flows. We measure impairment, if any, based on estimates of discounted future cash flow. These estimates include the assumptions described above about future conditions within the Company and the industry. The assumptions used in evaluating intangible assets for impairment are subject to change and are tracked against historical results by

 

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management. If actual cash flows differ from those projected by management, or if there is a change in any of these key assumptions, additional write-offs may be required. Management does not believe that its key assumptions are reasonably likely to change in the future.

As a result of changing assumptions in evaluating intangible assets for impairment, certain unimpaired assets may be subject to a change in amortization recognized in future periods to approximate expected future cash flows.

Indefinite-Lived Intangible Assets

We have a Warner Chilcott trademark with an indefinite life, which is not amortized. However, the carrying value would be adjusted if it were determined that the fair value had declined. The impairment test is performed on an annual basis, or more frequently if necessary, and utilizes the same key assumptions as those described above for our definite-lived assets. In addition, if future events occur that warrant a change to a definite life, the carrying value would then be amortized prospectively over the estimated remaining useful life. We completed our annual test during the quarter ended December 31, 2011 and no impairment charge resulted.

Income Taxes

We must make certain estimates and judgments in determining our net income for financial statement purposes. This process affects the calculation of certain of our tax liabilities and the determination of the recoverability of certain of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. Deferred tax assets and liabilities could also be affected by changes in tax laws and rates in the future.

A valuation allowance is established to reduce deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. All available positive and negative evidence is considered in evaluating the ability to recover deferred tax assets, including past operating results, the existence of cumulative losses in recent years and the forecast of future taxable income. Assumptions used to estimate future taxable income include the amount of future state, federal and international pretax operating income and the reversal of temporary differences. These assumptions are consistent with our plans and estimates used to manage our business, however, such assumptions require significant judgment about the forecasts of future taxable income.

Any recorded valuation allowances will be maintained until it is more likely than not that the deferred tax assets will be realized. Income tax expense recorded in the future will be reduced to the extent of decreases in these valuation allowances. The realization of remaining deferred tax assets is principally dependent on future taxable income. Any reduction in future taxable income may require an additional valuation allowance to be recorded against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense and could have a significant impact on future earnings.

In addition, the calculation of our tax liabilities involves uncertainties in the application of complex tax rules in various jurisdictions. Amounts related to tax contingencies that management has assessed as unrecognized tax benefits have been appropriately recorded under the provisions of ASC 740. For any tax position, a tax benefit may be reflected in the financial statements only if it is “more likely than not” that we will be able to sustain the tax return position, based on its technical merits. Potential liabilities arising from tax positions taken are recorded based on our estimate of the largest amount of benefit that is cumulatively greater than 50 percent likely to be realized. These liabilities may be adjusted to take into consideration changing facts and circumstances. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from the current estimate of the tax liabilities. If the estimate of tax liabilities is less than the ultimate assessment, then an additional charge to expense would result. If payment of these amounts is ultimately less than the recorded amounts, then the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer necessary.

 

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Litigation

We are involved in various legal proceedings in the normal course of our business, including product liability litigation, intellectual property litigation, employment litigation such as unfair dismissal and federal and state fair labor minimum wage lawsuits, and other litigation. We record reserves related to these legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable. See “Note 16” to the Notes to the Consolidated Financial Statements for the year ended December 31, 2011 included elsewhere in this Annual Report for a description of our significant current legal proceedings.

Business Combinations

The acquisition method of accounting as defined in ASC Topic 805 “Business Combinations,” (“ASC 805”), uses the fair value concepts defined in ASC Topic 820 “Fair Value Measurements and Disclosures,” (“ASC 820”), which we have adopted in the required periods.

We value most assets acquired and liabilities assumed in a business purchase combination at their fair values as of the acquisition date. Fair value measurements can be highly subjective and the reasonable application may result in a range of alternative estimates using the same facts and circumstances.

The process for estimating the fair values of IPR&D, identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, timing and probability of success to complete in-process projects and projecting regulatory approvals. Under ASC 805, transaction costs are not included as a component of consideration transferred, and are expensed as incurred. The excess of the purchase price (consideration transferred) over the estimated amounts of identifiable assets and liabilities as of the effective date of the acquisition are allocated to goodwill in accordance with ASC 805.

ASC 805 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can reasonably be estimated. If the fair value of an asset or liability that arises from a contingency can be determined, the asset or liability would be recognized in accordance with ASC Topic 450, “Accounting for Contingencies” (“ASC 450”). If the fair value is not determinable and the ASC 450 criteria are not met, no asset or liability would be recognized.

Item 7A. 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 is 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 December 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 $2,604 million as of December 31, 2011, a 1.0% change in interest rates would impact net interest expense by approximately $7 million per quarter. In addition, most of our indebtedness outstanding under our New Senior Secured Credit Facilities is subject to a LIBOR floor of 0.75% to 1.0%. Currently LIBOR rates are below the floor of 0.75% and therefore an increase in interest rates would only impact our net interest expense to the extent it exceeds the floor of 0.75%.

 

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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 functional currencies of such entities. 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. 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 years ended December 31, 2011, 2010 and 2009.

Item 8. Financial Statements and Supplementary Data.

The information required by this Item is incorporated by reference to the Consolidated Financial Statements beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. 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 SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s 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 Company’s disclosure controls and procedures as of December 31, 2011. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2011 at the reasonable assurance level.

Management’s Annual Report on Internal Control over Financial Reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed by, or under the supervision of the Chief Executive Officer and Chief

 

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Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Management, with the participation of the Chief Executive and Chief Financial Officers, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making its assessment of internal controls over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this evaluation, management, with the participation of the Chief Executive and Chief Financial Officers, concluded that, as of December 31, 2011, the Company’s internal control over financial reporting was effective.

PricewaterhouseCoopers LLP, the independent registered public accounting firm who audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, which is included herein.

Changes in Internal Control over Financial Reporting.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None.

 

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Part III

Item 10. Directors, Executive Officers and Corporate Governance.

In addition to the information set forth under the caption “Executive Officers” in Part I of this Annual Report, the information required by this Item is incorporated by reference to our Proxy Statement with respect to our Annual Meeting of Shareholders to be held on May 8, 2012.

Item 11. Executive Compensation.

The information called for by this item is hereby incorporated by reference to our Proxy Statement with respect to our Annual Meeting of Shareholders to be held on May 8, 2012.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information called for by this item is hereby incorporated by reference to our Proxy Statement with respect to our Annual Meeting of Shareholders to be held on May 8, 2012.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information called for by this item is hereby incorporated by reference to our Proxy Statement with respect to our Annual Meeting of Shareholders to be held on May  8, 2012.

Item 14. Principal Accounting Fees and Services.

The information called for by this item is hereby incorporated by reference to our Proxy Statement with respect to our Annual Meeting of Shareholders to be held on May 8, 2012.

 

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PART IV.

Item 15. Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements

The Financial Statements listed in the Index to the Consolidated Financial Statements beginning on page F-1, filed as part of this Annual Report.

(a)(2) Financial Statement Schedules

None.

(a)(3) Exhibits

The exhibits listed at the end of this Annual Report are filed as part of this Annual Report.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 24, 2012.

 

WARNER CHILCOTT PLC
By:   /S/    ROGER M. BOISSONNEAULT        
Name:   Roger M. Boissonneault
Title:  

Chief Executive Officer, President and Director

(Principal Executive Officer)

By:   /S/    PAUL HERENDEEN        
Name:   Paul Herendeen
Title:  

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 24, 2012.

 

Signature

  

Title

/S/    ROGER M. BOISSONNEAULT        

Roger M. Boissonneault

   Chief Executive Officer, President and Director (Principal Executive Officer)

/S/    PAUL HERENDEEN        

Paul Herendeen

   Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

/S/    TODD M. ABBRECHT        

Todd M. Abbrecht

   Director

/S/    JAMES H. BLOEM        

James H. Bloem

   Director

/S/    JOHN P. CONNAUGHTON        

John P. Connaughton

   Director

/S/    LIAM M. FITZGERALD        

Liam M. Fitzgerald

   Director

/S/    JOHN A. KING        

John A. King

   Director

/S/    STEPHEN P. MURRAY        

Stephen P. Murray

   Director

/S/    PATRICK J. O’SULLIVAN        

Patrick J. O’Sullivan

   Director

 

96


Table of Contents

 

Exhibit
No.

  

Description

2.1    Implementation Agreement, dated October 27, 2004, among the Consortium Members (as defined therein), Waren Acquisition Limited and Warner Chilcott PLC and Second Supplemental Agreement thereto, dated November 16, 2004 (incorporated herein by reference to Exhibit 2.1 to the Registration Statement on Form S-4 filed by Warner Chilcott Holdings Company III, Limited and Warner Chilcott Corporation on July 18, 2005, Registration Number 333-12666 (the “Warner Chilcott Holdings Company III S-4”))
2.2    Purchase Agreement, dated as of August 24, 2009, between The Procter & Gamble Company and Warner Chilcott plc (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Warner Chilcott plc on August 24, 2009 (the “Warner Chilcott August 24, 2009 8-K”))
2.3    Transition Services Agreement effective as of October 30, 2009 between Warner Chilcott plc and The Procter & Gamble Company (incorporated by reference to Exhibit 2.3 to the Annual Report on Form 10-K filed by Warner Chilcott plc on March 1, 2010, for the year ended December 31, 2009 (the “Warner Chilcott 2009 10-K”))
2.4    Asset Purchase Agreement dated as of September 23, 2009 among LEO Pharma A/S, LEO Laboratories Ltd., Warner Chilcott plc, Warner Chilcott Company, LLC and Warner Chilcott (US), LLC (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Warner Chilcott plc on September 23, 2009)
2.5    Asset Purchase Agreement dated as of September 23, 2010 among Novartis Pharmaceuticals Corporation, Novartis Pharma AG, Warner Chilcott Company, LLC and Warner Chilcott plc (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Warner Chilcott plc on September 27, 2010 (the “Warner Chilcott September 27, 2010 8-K”))
3.1