Warner Chilcott (WCRX)

TOP CONTRIBUTORS

Eric Essian

Business Overview

Warner Chilcott (NASDAQ: WCRX) is a global pharmaceutical company focused in the areas of gastroenterology, women's healthcare, dermatology and urology. The company, which was spun out of Warner-Lambert in 1996 and ultimately began operations in 2005, has a far reaching global scale and impact, with employees located in 12 countries and a main headquarters located in Dublin, Ireland, which was announced on February 25, 2010. The acquisition of Proctor and Gamble's global branded pharmaceuticals business in October 2009 helped to transform WCRX into a global provider of pharmaceuticals to their demographic, the Americas and Western Europe. The company's manufacturing facilities are located in Puerto Rico, Northern Ireland, and Germany.^[1]

Business Economics

Product Mix

A listing of Warner Chilcott's products are listed based on major therapeutic categories below (information taken directly from company website):^[2]

Gastroenterology

ASACOL® is the leading treatment for ulcerative colitis in the U.S. market for orally administered 5-aminosalicylic acid products. The new delayed-release formulation ASACOL® HD provides dosing advantages for patients in the treatment of moderately active ulcerative colitis.

Women's Health

ACTONEL® is the leading branded product in the U.S. non-injectable osteoporosis market for the prevention and treatment of osteoporosis in women.

LOESTRIN® 24 Fe was the first oral contraceptive featuring 24 days of active therapy compared with the traditional 21-day dosing regimen. The Company's oral contraceptive portfolio also includes FEMCON® Fe, OVCON® 35 and OVCON® 50 and ESTROSTEP® Fe.

Contents 1 Business Overview 2 Business Economics 2.1 Product Mix 2.2 Market Segmentation 2.3 Sources of Revenue 3 Competition Measures 3.1 Main Competitors 3.2 SWOT Analysis 3.2.1 Strengths 3.2.2 Weaknesses 3.2.3 Opportunities 3.2.4 Threats 3.3 Porter's Five Forces Analysis 3.3.1 Threat of Entry of New Competitors: Low/Medium 3.3.2 Threat of Substitute Products or Services: Low 3.3.3 Bargaining Power of Customers: Medium/High 3.3.4 Bargaining Power of Suppliers: Low 3.3.5 Intensity of Competitive Rivalry: High 4 Marketing Strategy 4.1 Product 4.2 Price 4.3 Place 4.4 Promotion 5 Financial Metrics 5.1 Profitability 5.1.1 Return on Assets 5.1.2 Return on Shareholder's Equity 5.1.3 Net Profit Margin 5.2 Efficiency 5.3 Solvency and Leverage 6 Operating Metrics 6.1 Research and Development 6.2 Legal Proceedings 6.3 Other Notes 7 Human Resources/Executive Compensation 8 References

ESTRACE® Cream is a leading topical product for the treatment of urogenital symptoms of menopause.

FEMHRT® is a systemic therapy for the treatment of menopausal symptoms.

Dermatology

DORYX® 150 mg, a tetracycline-class oral antibiotic, is indicated for the adjunctive treatment of severe acne. DORYX is one of the leading branded oral tetracyclines in the U.S. market.

Urology

ENABLEX® is prescribed to adults to treat the symptoms of overactive bladder. Warner Chilcott co-promotes ENABLEX under an agreement with Novartis.

Market Segmentation

Warner Chilcott currently employs approximately 935 employees located throughout the United States, Puerto Rico, Canada, Ireland, and the United Kingdom. In April 2011, Warner Chilcott announced a restructuring in their Western European operations however, which could affect 500 positions within the company.^[3] The company currently has five different locations in these areas (New Jersey, Fajardo, Toronto, Dublin, and Millbrook, respectively).^[4] WCRX focuses on four main areas when attempting to segment themselves from potential competitors:^[5]

Focus on selected therapeutic markets: WCRX focuses on branding highly-prescribed medications that are used in high volumes within their demographic locations. Medications that are used frequently by high-prescribing physicians are targeted as areas of production for Warner Chilcott.In addition, complimentary products that help utilize the main areas of focus for WCRX are also created to aid in the distribution of their main products.

Drive long-term growth: In order for growth to occur, a certain dominance in original target markets must be achieved. As a company, WCRX strives to target high-prescribing physicians within their demographic with a full service sales representation staff in order to better promote sales of their main products. With this achieved, the company can look to expand to new areas of high need with regards to Warner Chilcott's main therapeutic areas.

Execute focused, efficient R&D effort: Like many companies dealing with the creation and distribution of pharmaceutical drugs, research and development plays a large role in the function of Warner Chilcott's day-to-day operations. WCRX targets new drugs that are in accordance with regulatory guidance based on therapeutic area, and also improvements to their existing drugs. When compared to the development of new products in therapeutic areas lacking established regulatory guidance, Warner Chilcott's approach to R&D has historically involved less development and regulatory risk and shorter time lines from concept to market. In essence, the company focuses its energy on the creation of drugs that have strict guidelines in which to follow, reducing company risk, and indirectly reducing future company contingencies with potential third party legislation. By following strict rule, the company is also quicker and more efficient to develop new or improved pharmaceuticals.

Selectively acquire products that enhance our existing product portfolio: Warner Chilcott attempts to focus more on organic growth in comparison to acquisitions, but both methods are used in order for an optimal product mix. When looking at acquisitions, it is important for WCRX to focus on existing segments that would better compliment their targeted therapeutic areas. It is not part of their strategy to expand on these areas; only to better market themselves with existing products and preferences. Some of the companies recent acquisitions or exclusive agreements include (acquisition price in parenthesis):

• Proctor & Gamble Global Branded Pharmaceutical Products ($3.1 Billion)^[6]
• Rights to Enablex from Novartis ($400 Million)^[7]
• Paratek Pharmaceuticals, Inc. (undisclosed)^[8]

Warner Chilcott is in the Health Care Sector, and specifically in the Drug Manufacturer Industry^[9]

Sources of Revenue

Prior to the acquisition of Proctor & Gamble's Global Pharmaceuticals business in August of 2009, Warner Chilcott reported all of its revenue as that of domestic operations (North America). Following the acquisiton, WCRX moved operations overseas, and segmented its revenue based both on location of the revenue, and also by product revenue. As guessed, nearly all of the revenue of Warner Chilcott comes from the creation, patenting, and exclusive selling of their pharmaceutical products. The following two tables shows the distribution of revenue based both on location (North America vs ROW: Rest of World), and based on the product mix of their pharmaceuticals (with the majority of these sales focused on the previously discussed targeted therapeutic areas). All numbers are in thousands of dollars unless otherwise stated:^[10]

Looking at the first table (revenue breakdown by product), the acquisition of Proctor & Gamble's Global Pharmaceuticals business allowed Warner Chilcott the exclusive rights to the Gastroenterology product Asacol, which provided the company with over seven hundred million dollars in revenue in 2010 (Asacol is a drug used to treat individuals suffering from ulcerative colitis). Actonel, Loestrin, Estrace cream, Femhrt, and Femcon, all products within the women's health therapeutic category, account for the largest percentage of total revenues based on therapeutics, at a total of nearly 1.6 billion dollars. Specifically, Actonel accounted for 34.5% of total revenues for Warner Chilcott in 2010, which represents somewhat of a norm in the industry. It is common for one or two successful products to dominate a company's revenue while they still have exclusivity on that drug. For example, Medicis Pharmaceutical Corporation, largely a dermatology based company, has over 69% of its revenue accounted for by two main products within its dermatology and aesthetics market segment. Although the urology and dermatology therapeutic categories are under-represented in comparison to the other two main categories, they still represent a strong amount of revenue for Warner Chilcott. Finally, other products and revenues represent a small percentage of Warner Chilcott's revenue, stressing the importance placed on the four main therapeutic categories that Warner Chilcott focuses on. After 2008, when WCRX made its largest historical acquisiton, its total revenues rose by over 100%, and an increase in revenue of nearly 1.5 billion dollars accounted for nearly 50% of the acquisition cost associated with P&G.

As seen by the second table at the left (revenue breakdown by location), prior to the acquisition of Proctor & Gamble's Global Pharmaceuticals business, 100% of revenue for Warner Chilcott came within North America. A large spike in revenue is seen from 2008-2010 due to the acquisition of such a large segment during 2009. Although North America still dominates revenues for Warner Chilcott, an international presence is now felt throughout the company (Eliminations represent inter-segment revenues, or revenues that may be earned by both North America and the Rest of World simultaneously. Therefore, the eliminations segment will reduce the value of the other two segments. Since 2008 represented only one segment area for revenues, the elimination value is zero).

The final table at left represents a revenue split based on main therapeutic category. Osteoporosis (including the drug Actonel), accounted for the highest percentage of company revenue in 2010. One thing to notice is the large increase in revenue from this segment from 2009 to 2010. In Warner Chilcott's acquisition of P&G's global branded pharmaceutical products in August of 2009, Actonel was one of the two major prescriptions (along with Asacol) acquired.So, the revenue for the osteoporosis segment in 2009 represents only four months of having Actonel in their product portfolio, while 2010 represented Warner Chilcott's first full year with the pharmaceutical

Competition Measures

Main Competitors

When looking at the financial and operating metrics of Warner Chilcott, it is important to use as a comparative base the main companies that are in competition for the same resources (consumers) as WCRX to help gauge the positive or negative aspects of the company. The main competitors of Warner Chilcott are:^[11]

Medicis Pharmaceutical Corporation (NYSE: MRX), a specialty pharmaceutical company, engages in the development and marketing of products for the treatment of dermatological and aesthetic conditions in the United States, Canada, and Europe. With a market cap of approximately 2.07B, MRX has a market share about one third the size of WCRX^[12]

Teva Pharmaceutical Industries Limited (NASDAQ: TEVA), a generic pharmaceutical company, engages in the production and distribution of hundreds of different generic drugs within almost every major therapeutic category worldwide. With a market cap of about 40.2B, TEVA has a market share nearly seven times as large as that of WCRX.^[13]

When determining the financial and operating metrics for Warner Chilcott, both MRX and TEVA will be used as a direct comparison, as well as comparing all data to that of the industry norms. By using these comparisons, a better idea of company expectations and current performance can be derived.

SWOT Analysis

Strengths

The strengths of Warner Chilcott lie within their ability to strategically maneuver their target therapeutic categories to extend market share. The philosophy of this company is not one of great expansion; instead, they try to drive out competitors within their target geographical areas and widen their economic moat within their demographic. By centralizing their operations, Warner Chilcott is able to reach a wide majority of the people located in the specified regions (United States, Western Europe) and provide services to these regions. The areas in which Warner Chilcott offers the majority of their service are some of the most fiscally well established areas on earth, and it is these areas that will increase profits for Warner Chilcott.

Warner Chilcott also attempts to become a market leader for their therapeutic categories using both organic and acquisition-based growth. Over the past decade, WCRX has taken advantage of opportunities to grow their brand awareness and increase their constituents, while eliminating competition through the acquisition process, and they have rarely turned down the opportunity to do so. This mix of being conservative in expanding globally and aggressive in trying to grow their key main areas is the main strength of this company moving forward.

Weaknesses

The main weakness of Warner Chilcott is their inability and/or unwillingness to expand either their major therapeutic categories or their market share in underrepresented areas of the world. While targeting a few main areas is a solid foundation on which to build, Warner Chilcott has almost no presence in Asian or Pacific regions, as well as Middle Eastern or African target areas. By focusing their efforts on their target efforts, they can be productive and profitable, but eventually they could become stagnant as the law of diminishing returns begins to set in. By expanding their operations worldwide, they would not only increase market share, but the worldwide presence would help to establish the company as a leader in their respective therapeutic category.

The other area of concern is the lack of expansion on therapeutic categories. While Warner Chilcott focuses on only four major target areas, the industry as it stands today is extremely welcoming to companies that wish to grow exponentially. If Warner Chilcott could expand its operations by hiring more staff and testing more products, it could allow for a company to increase its profit significantly, as there is already evidence of a 17% margin of return for comparable companies in the industry. A limitation to this would be the amount of free cash flow available to increase testing and hiring.

Opportunities

As stated in the Weaknesses section, the opportunity for Warner Chilcott to grow in the pharmaceuticals market is unquestioned. The company currently resides in only five locations, and only attempts to serve these markets. The opportunity for Warner Chilcott to expand their operations globally remains one of the main ways for an increase of revenue for the company.

In addition to this, there will always be the opportunity to shift their functions to generic drug production when the patents of key and major drugs worldwide expire. As of now, Warner Chilcott is not involved in any generic drug production, but could easily enter the market with their existing resources and ability to create these new drugs with relative ease.

Threats

Some of the threats involved with Warner Chilcott include:

Generic Product Competition: If there are ever any cases of a generic drug being approved that would provide direct competition against the branded pharmaceuticals, then the sales of Warner Chilcott would be adversely affected. By offering identical pharmaceuticals that are generic in nature, the generic production costs would be reduced significantly, leaving the consumer with the choice of two identical drugs at significantly different prices.

The Expiration of Trademarks and Patents: All approved drugs are given an exclusivity in their production for a certain predetermined life. In the instance where a patent or trademark expires, mass production of the pharmaceutical can be reproduced and sold by competing corporations. The ability (or in some cases inability) of Warner Chilcott to protect their products after the expiration of their rights to exclusivity could harm their business operations moving forward.

Change in Pricing Conditions: There is always a pressure by consumers to their government or health care providers to cut the prices on health care across the globe. If there were ever to be legislation passed, or a significant change to the pricing conditions of pharmaceuticals manufactured by Warner Chilcott, then the companies revenues and final income numbers could be negatively affected.

Change in Market Conditions for Actonel and Asacol: As of their 2010 Annual Report, 59% of total revenue for Warner Chilcott was dependent on the two drugs.^[14] If, under any circumstances, new competing drugs were developed, or there was a significant stride in the reduction of the conditions these drugs are designed to prevent, there would be a highly material reduction in revenues and profits across the board for Warner Chilcott.

Porter's Five Forces Analysis

An analysis of market and industry conditions is conducted in order to determine the future risks and feasibility of companies moving forward within a certain sector. This analysis of Warner Chilcott is provided below:

Threat of Entry of New Competitors: Low/Medium

The threat of entry of new competitors into the same target therapeutic categories as Warner Chilcott is low. Patents for many of the existing drugs within these categories are already owned by existing companies, with expiration dates ranging from 5-25 years of exclusive rights. In addition to this roadblock, the amount of funding to research and develop new drugs to compete against existing companies would be astronomical for a new company attempting to enter the market. In this regard, existing companies within drug manufacturing with a solid finance base have a wide economic moat against potential new competition. However, there is always a threat of existing companies entering the same therapeutic categories as Warner Chilcott from other operational business. Therefore, WCRX must be on the lookout for new entrants into their target market.

Threat of Substitute Products or Services: Low

In terms of substitute goods, the threat of new products being manufactured in opposition of pharmaceuticals is low. There are some who suggest that a homeopathic treatment is a viable option, but there is no conclusive evidence that this method works regularly. Home-made remedies, which may include healthy eating choices or an aversion to certain activities or foods, also have no scientific evidence of working in lieu of pharmaceuticals. An example related to Warner Chilcott could be a substitute for the Gastroenterology product Asacol. Recent tests have been run on transfusions of Remicade within the immune system as opposed to the pill Asacol.^[15] Tests are preliminary, but there is hope that this treatment can someday be used in the same way as Asacol is currently being utilized.

Bargaining Power of Customers: Medium/High

The main customers of Warner Chilcott's products are insurance companies that pay the majority of product price, and government, who sets litigation and pricing limitations for pharmaceuticals. With the power to set price floors and ceilings on prices within the health care industry, the government has almost unlimited power to effect prices on many of Warner Chilcott's prices. Health care companies can lobby to government to reduce the cost of medication, which would greatly impact their bottom lines. However, it is very difficult to push legislation through to a bill in a short period of time, and the lobbyists for the pharmaceutical companies also yield power when it comes to new pricing situations. Individuals who actually use the medicine are responsible for only the copay and premiums in their health care plan. Recently, the prices of healthcare premiums and co-pays have been on the rise. Reports show that there has been an increase of 14% from 2010-2011^[16], and the expectation is for these exponential rises to continue.

Bargaining Power of Suppliers: Low

Warner Chilcott is very nearly vertically integrated, with distribution plants in Puerto Rico. The company does not rely on third party suppliers for resources, and therefore is competing with no one when it comes to bargaining the price of natural resources or completed goods. For this reason, WCRX does not have a reliance on outside vendors, utilizing their own company sources in order to obtain goods.

Intensity of Competitive Rivalry: High

Among the rivals of Warner Chilcott, there is an extreme competition to receive new patents, create new drugs within a therapeutic market, and target these drugs to their demographics as quickly as possible. The potential cost of losing out on exclusive rights to manufacture and distribute a drug could potentially cost a company such as Warner Chilcott billions of dollars. For this reason, the largest industry risk among the five forces is far and away the competition each company within the pharmaceutical industry has with each other.

Marketing Strategy

Product

Warner Chilcott has used its market share of the four major therapeutic categories to attempt to market its products to different demographics. The main products that the company market are listed in their product mix, shown above. The marketing of pharmaceutical drugs for the therapeutic categories WCRX is involved in can be difficult at times, as they are involved in categories such as Gastroenterology and Urology. Of their targeted categories, most of their marketing takes place within the Dermatology and Woman's Health target areas, with skin and vaginal creams, as well as pill-form pharmaceuticals receiving much of the attention. However, for most of their products, WCRX relies on an influx of customers reaching out to their product rather than the company actively pursuing avenues in which to market them. It can be noted, however that Actonel (a drug used to reduce osteoporosis) and Asacol (used for ulcerative colitis) both have their own website, with information on how to obtain a prescription and some of the uses for each drug.^[17][18]

Price

As with many other pharmaceutical companies in the industry, Warner Chilcott will rarely, if ever, market any of their products based on price. It would be quite uncommon for any large pharmaceutical conglomerate to associate their products with a low price as a means to attract new customers. Many of the prescription drugs offered by Warner Chilcott would fall into the hands of health care providers when attempting to derive a price, if the individual using the products had health care. Looking at the Asacol and Actonel websites, there is no empirical evidence of price marketing occurring on either site. The marketing sector for targeting consumers based on price seems to be geared more so towards where you purchase the medication. For example, as recently as 2003, millions of Americans were looking to cheapen their health care costs by purchasing medication outside of the United States.^[19]It is estimated that as many as 10 million residents of the United States retrieve medicine from countries outside of the United States annually (data as of 2003). Marketing a pharmaceuticals price, especially within the United States, seems like it would be a sunk cost for companies such as Warner Chilcott.

Place

When it comes to geographic locations of the marketing of Warner Chilcott, the company tends to use their "precision marketing" to target locations.^[20]That is, Warner Chilcott will attempt to target and gain market share in areas in which they operate before expanding to other regions. A large majority of marketing for WCRX therefore, takes place in the United States and Western Europe. Their presence in the Asia Pacific region is not very strong, so they do not focus much of their attention and spending on marketing these regions. In order for this company to grow, they need to be a strong presence in a smaller area before attempting to expand their operations worldwide.

Promotion

Warner Chilcott promotes most of their own pharmaceuticals. Following the acquisition of P & G's global pharmaceuticals brand business in 2009, WCRX was in an agreement to allow the marketing of pharmaceuticals within this acquisition to be marketed by an outside company, but later removed this "marketing agreement" from their overall acquisition agreement with Proctor & Gamble.^[21] By promoting their own products, Warner Chilcott is able to use their extensive knowledge on each of the pharmaceuticals to best persuade consumers within their demographic to use their drugs.

Overall, the marketing for pharmaceuticals is a difficult area to gauge within the health care sector. The data provided in the 2010 annual report was scarce, and their was not much information listed on other sources that could prove helpful for a better understanding of Warner Chilcott's marketing techniques.

Financial Metrics

Profitability

Return on Assets

Looking at the data from the chart on the right, it is easy to see that Warner Chilcott easily has the most volatility among the three companies discussed. For this chart and the next two discussed, please take note to the fact that Warner Chilcott did not operate in its current form until the year 2005 (it began operations on 1/1/2005 after being formed through a series of divestitures and acquisitions), so for the years 2002-2004 numbers of 0 will be used. While both MRX and TEVA are relatively steady in their return on assets, Warner Chilcott violently sways from one extreme to the next; however, they are consistently more inefficient in the use of their assets when compared to Medicis and Teva, with the exception of their P&G acquisition year, 2009. The 2005 fiscal year represented a low point for Warner Chilcott; they had a high asset base coupled with a negative net income. By looking at this chart, it seems that all three company's fiscal years are highly influenced by the profitability and exclusivity of prescriptions brought to market. It is difficult to project future trends for any of the companies, although an increase of return on assets would be expected in the future. Looking at this chart, one can determine that the drug manufacturing industry is not a stable one, highly dependent on breakthroughs for new pharmaceuticals and remedies for disease.

Return on Shareholder's Equity

Looking at the graph to the right, it can once again be seen that Warner Chilcott had a tendency to lag behind their competitive counterparts from the years 2005-2010. Again, bot Medicis and Teva had somewhat stable returns on their invested and retained capital, while Warner Chilcott struggled to keep pace. A couple of notes to keep in mind: 2005 represented the worst return on equity for Warner Chilcott, as they had a significant net loss for the year and a relatively high base for equity holdings. This can be seen in a positive light however, as their return on equity represents a higher negative percentage than did their return on assets, signifying that most of their assets were being financed by equity rather than by debt or future obligations. 2009 represented the best return on equity for WCRX, as the newly acquired products from P&G boosted their net income without changing their contributed and retained capital significantly. Once again, it is difficult to project these figures out long-term as the volatility of the sector and industry is significant to the point where projections may prove to be inconclusive.

Net Profit Margin

The last measure of profitability that will be discussed involves each of the three competing company's net profit margin, which measure the percentage of net sales that ends up as a net income figure. True to course, Warner Chilcott once again represented a sluggish company in regards to its competitors, with beta values that far exceeded those of Medicis and Teva. 2005 represented the worst fiscal year for Warner Chilcott, with a negative net profit margin of 112.6 percent. This large negative net income number can be attributed to an acquired in-process research and development project expense of 280 millions dollars. 2005 represented their worst year due to the fact that it was their first year of operations, and that the company had a large outflow of cash and expenses due to the principal acquisitions and divestitures that principally formed the company. 2009 represented a rare year in which Warner Chilcott outpaced its competitors, due to a large increase in income from the acquisition of the drug Actonel from P&G. Although the acquisition didn't occur until August, the company was still able to boost net income significantly from previous years. Projecting long-term numbers can be difficult with the lack of exclusivity in future products and the expiration of current patents, but it can be expected that Warner Chilcott's net profit margin will remain relatively steady, with sharp declines such as that in 2005 becoming more scarce.

Efficiency

The following table and chart provide the user with information about both Warner Chilcott and its main competitors when looking at efficient financial metrics. The first table shown on the right shows how efficient fixed assets (namely property, plant, and equipment) were used for each of the three companies during 2010, as well as how efficient each employee working for the companies were in regards to net income. It also shows how quickly a company was able to go through the cash conversion cycle, namely the time it took to receive cash from customers for product after it had paid cash for the same products to its suppliers (all data retrieved from 2010 annual reports).

Looking at both fixed asset turnover and the net income per employee numbers, it seems that Warner Chilcott is lagging behind both MRX and TEVA in the efficient use of resources. Warner Chilcott has the worst net income per employee by nearly 33% versus their direct competitors, and MRX dwarfs Warner Chilcott with the use of their employees in generating net income by nearly three times. The acquisition of Proctor and Gamble’s global branded pharmaceutical business line may have some effect on the net income of Warner Chilcott over the next few years (possibly into 2012), but the company needs to perform better against their competition than they currently are. As of April 18th, 2011, Warner Chilcott has plans to restructure their operations in Western Europe, cutting out 500 current employees. ^[22] Looking at the fixed asset turnover, Warner Chilcott is in the middle of MRX, who very efficiently uses their long term assets, and TEVA, who is unable to match the efficiency of either company in this regard. Although 2010 proved to be a year where Warner Chilcott was unable to match Medicis in many major analytical metrics, the company has still done well with the underlying circumstances at hand (large cash outflows for acquisitions, the loss of exclusivity on major products).

Looking at Warner Chilcott’s cash conversion cycle and comparing it to their two main competitors (WCRX cash conversion cycle chart at right), we can see the similar trend of Warner Chilcott being sandwiched between Medicis and Teva in terms of the measure of efficiency in receiving cash after it had been previously disbursed for goods or products. At 78.95 days, Warner Chilcott is taking slightly over 11 weeks to collect cash for goods after they had paid for it. The largest indicator of this number for WCRX was the days in inventory. Many of Warner Chilcott’s products sit in inventory for well over four months, which although represents a high number, is actually shorter than both of the company’s competitors. Having pharmaceuticals in inventory for extended periods of time does not represent a major problem, as the chance for obsolescence in the drug manufacturing industry is slim. The key separators in each companies cash conversion cycle lies with the amount of days it takes them to pay and receive cash for the goods. Medicis has the best spread in this regard, with a high number of payable days and a low number of receivable days. The chart at right gives you a visual idea of how Warner Chilcott’s Cash Conversion Cycle worked in 2010, with red bars indicating negative effects of cash outlay, and green bars representing positive numbers in the delay of cash payment. Overall, Warner Chilcott is about average in their cash efficiency when compared to MRX and TEVA.

Solvency and Leverage

The following table to the right illustrates the solvency and leverage of both Warner Chilcott and its two main competitors for the fiscal year 2010 (all data from 2010 annual reports). The first thing that should be observed is that 2010 represented a year in which Warner Chilcott had negative shareholder’s equity. The issuance of new shares of stock brought in little to no additional paid in capital for the company, which represents its major source of stockholders equity. Having a negative number here represents a huge concern for Warner Chilcott in regards to its ability to finance future assets. The debt-load that the company is currently facing is huge, as they have more total liabilities than they do total assets, which is never a good sign. In the short term, WCRX faces an uphill battle, as evidenced by a current ratio of less than one. This shows that at present, the company would not be able to pay off its short term debt if it came due immediately. These metrics are seriously lagging behind those of Warner Chilcott’s counterparts, who are at least keeping an asset base to meet their obligations. Having limited solvency, Warner Chilcott also has no leverage when it comes to financing new projects or assets, as previously stated.

One positive note in looking at the table is the rate in which Warner Chilcott is able to collect debts owed to them. In comparing the company to their direct competitors, there is a significant financial advantage for Warner Chilcott over the competition in this sense. However, this does not make up for the urgent matters facing the company’s solvency situation.

Operating Metrics

Research and Development

When looking at the three companies that are in main competition with eachother (WCRX, TEVA, MRX), an important indicator of operations is the amount of funds used on research and development as a function of sales. Using percentages helps to associate these companies more closely, as the market cap for them differentiates significantly, ranging from around two billion up to an area above 40 billion.

Starting with Warner Chilcott, it can be seen that the percentage of sales used on research and development from 2008-2010 is relatively similar from year to year, never moving up or down more than 0.5%. As stated earlier, Warner Chilcott emphasizes a strategy of following strict guidelines for the development of new drugs, so this lack of change is expected. Warner Chilcott targets similar therapeutic categories from a year to year basis, so the need for a large amount of funds that varies from the normal amount spent would cause concern for an external user.^[23]

Moving to Medicis Pharmaceutical Corporation, it can be seen that there is a large variance between 2008 and 2010 research and development figures. MRX focuses on one of the main therapeutic categories that Warner Chilcott is also involved in, dermatology. Such a significant change downward in the amount of research and development can be attributed to the completion of a new drug that has been approved, or to a strategy of moving away from research and development that may be costly and provide no benefit to the company. For MRX, the large fluctuation was due to the costs of "strategic collaborations".^[24] These costs decreased almost 100% from the year 2008 to the year 2010, leading to a more normalized R&D figure, which compared to that of WCRX.

Finally, this operating metric for Teva Pharmaceutical Industries Limited was comparable to that of Warner Chilcott, within 1-2% for the years 2008-2010. However, seeing as TEVA had a significantly larger business operation than that of WCRX, the percentage provides for a much higher investment nominally for TEVA. From 2008-2010, TEVA ranged from 786-933 million dollars annually for research and development.^[25] The strategic focus of this company provides for many generic drugs in many different therapeutic categories, so this amount of expense was not unwarranted.

Legal Proceedings

As is the case with many companies in the drug manufacturing industry, WCRX, MRX, and TEVA all face some sort of legal litigation from third parties. The following is an analysis of each companies legal proceedings:

WCRX: Warner Chilcott is currently involved with lawsuits ranging from unfair dismissal employment to product liabilities litigation. As of the 2010 release of their Form 10-K, Warner Chilcott was actively involved in 886 lawsuits.^[26] Warner Chilcott has liability insurance coverage on claims ranging from $25-$170 million, regardless of the reason for the lawsuit. The majority of litigation for WCRX deals with invalid drugs produced with respect to agreed upon patents for these products. Either the company was out of scope in creation of these products, or illegally produced drugs that did not conform to approved upon patents. The legal liabilities for this company were all concluded to be in the "normal course of operations". As many of these lawsuits take place over years or even decades, finding concrete information on the number of cases settled and pending in each specific year proved to be inconclusive. Within their 2010 Form 10-K, specific cases from the past 10 years are located. Some of these cases are still within the court systems, making it nearly impossible to specify which year the cases are settled and pending. The chart at left illustrates the listed pending and settled legislation for Warner Chilcott during their fiscal year 2010.

MRX: Like Warner Chilcott, Medicis Pharmaceutical Corporation is involved as both defendants and plaintiffs in legal proceedings. As of their 2010 Form 10-K release date, MRX was the defendant in at least 11 different cases against other pharmaceutical companies in relation to violations of existing patents. MRX is also the plaintiff in at least three additional cases, for the same reasons.^[27] Medicis has a significantly lower amount of lawsuit litigation than does WCRX, but the majority of lawsuits against WCRX are for product liability, meaning that they are being sued by individuals rather than companies (mainly due to unknown side effects affecting these individuals).

TEVA: Teva Pharmaceutical Industries Limited, an international company whose form 20-F is in compliance with IFRS rather than GAAP, was not required to reveal a specific section revolving around legal proceedings. However, the company concedes that patent litigation is one of their main risk factors associated with the success of business.^[28] Because of this uncertainty of litigation in the annual report of TEVA, much of the legal litigation research from this company is inconclusive and not comparable to that of Warner Chilcott.

Other Notes

In addition to the operating metrics listed, there is the opportunity for other measures to be calculated as well. Information regarding patent applications and approvals, drug information, and current testing phases of new or improved drugs could prove useful in the determination of how well a company is operating their target businesses. Unfortunately, the 10-K's provided by WCRX, MRX, and TEVA do not provide concrete quantifiable data in these segments, so any information is inconclusive with regards to these segments of operations.^[29][30][31]

Human Resources/Executive Compensation

Looking at Warner Chilcott's annual Definitive Proxy Statement, filed April 11th, 2011, the executive compensation structure and compensation can be determined. The following tables below illustrates some of the compensation bases and other information for executives within Warner Chilcott, for the year ended 12/31/10^[32]

References

1. ↑ Warner Chilcott Investor Relations: About Us
2. ↑ Warner Chilcott Investor Relations: Our Products
3. ↑ "Warner Chilcott To Restructure In Europe; 500 Jobs Affected" Wall Street Journal 4/18/11
4. ↑ Warner Chilcott: Career Opportunities
5. ↑ WCRX 2010 Form 10-K (Business Strategy p. 2)
6. ↑ "Warner Chicott Buying P&G Unit for $3.1 Billion" Reuters 8/24/09
7. ↑ "Warner Chilcott Acquires Rights to Enablex from Novartis for $400M" 9/24/10
8. ↑ "Warner Chilcott and Paratek Pharmaceuticals, Inc. Sign Collaboration Agreement for Novel, Narrow-Spectrum Agents for Acne and Rosacea" 7/9/07
9. ↑ Yahoo! Finance: WCRX Industry Analysis
10. ↑ Warner Chilcott 2010 Form 10-K: Segment Information (p.F-34,35)
11. ↑ Yahoo! Finance: Warner Chilcott Competitors
12. ↑ Yahoo! Finance: MRX Profile
13. ↑ Yahoo! Finance: TEVA Profile
14. ↑ 2010 Warner Chilcott Form 10-K: Risk Factors (p. 30-37)
15. ↑ Remicade: Ulcerative Colitis
16. ↑ "Health insurance premiums and other costs will rise for many workers in 2011" The Washington Post, 10/11/10
17. ↑ Asacol Information
18. ↑ Actonel Information
19. ↑ "Millions of Americans Look Outside U.S. for Drugs" The Washington Post, 10/23/03
20. ↑ 2010 WCRX Form 10-K: Business Overview (p. 2)
21. ↑ "Warner Chilcott Affirms Global Marketing and Collaboration Agreement With Sanofi-Aventis" 12/15/09
22. ↑ “Warner Chilcott to restructure west Europe ops, cut 500 jobs” Reuters 4/18/2011
23. ↑ Warner Chilcott 2010 Form 10-K: Income Statement (p. F-4)
24. ↑ MRX 2010 Form 10-K: Income Statement (p. F-14)
25. ↑ TEVA 2010 Form 20F: Income Statement (p. F-4)
26. ↑ Warner Chilcott 2010 Form 10-K: Legal Proceedings (p F38-44)
27. ↑ MRX 2010 Form 10-K: Legal Proceedings (p. 43-51)
28. ↑ TEVA 2010 For 20-F: Risk Factors (p. 5)
29. ↑ 2010 WCRX 10-K
30. ↑ 2010 MRX 10-K
31. ↑ 2010 TEVA 20-F
32. ↑ Warner Chilcott Investor Relations: 2010 Definitive Proxy Statement (p. 34)