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Warner Chilcott Initiated at Neutral

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We recently initiated coverage on Warner Chilcott plc with a Neutral recommendation and a target price of $13.00.

Warner Chilcott, formed through multiple acquisitions and divestitures, is headquartered in Dublin, Ireland. Warner Chilcott is a specialty pharmaceutical company engaged in developing, manufacturing, selling, and marketing branded prescription pharmaceutical products for women’s healthcare, gastroenterology, dermatology and urology.

The women’s healthcare franchise primarily caters to the hormonal contraceptive, osteoporosis and hormone therapy markets. The primary products in the hormonal contraceptive sub-group include Loestrin 24 FE and Lo Loestrin FE.  Actonel and its next generation version Atelvia are the primary osteoporosis drugs at Warner Chilcott. The drugs are marketed for the prevention and treatment of postmenopausal osteoporosis. Estrace cream, approved for treating vaginal and vulvar atrophy, is the primary hormone therapy products at Warner Chilcott.

The gastroenterology division primarily includes Asacol, approved for treating ulcerative colitis. Asacol consists of two versions - Asacol 400 mg and Asacol HD (800 mg). Currently, acne drug Doryx is the sole dermatological offering at Warner Chilcott. Enablex, used for the treatment of overactive bladder, is the primary drug marketed under the urology segment.

Geographically, Warner Chilcott operates through two segments - North America and the Rest of World (ROW). The North American segment includes the US, Canada and Puerto Rico.

With a significant part of its top line likely to be exposed to generic competition in the next few years, Warner Chilcott is looking towards cost-cutting initiatives to drive the bottom line. Following the genericization of Actonel in Western Europe in late 2010, Warner Chilcott announced in April 2011 its decision to reorganize its operation in Western European nations, such as Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the UK. Following the implementation of the restructuring plan, the company’s workforce has been trimmed by approximately 500 employees.

Cost savings due to the restructuring led the company to lower its 2012 guidance for selling, general and administrative (SG&A) costs. SG&A expenses for 2012 are now expected in the range of $775-$825 million (previous guidance: $800-$850 million). Research & development (R&D) expenses are now projected in the range of $100-$120 million (previous guidance: $110-$130 million). Warner Chilcott’s 2012 adjusted earnings guidance is driven by reduced operating cost projection. The company now expects adjusted earnings in the range of $3.55-$3.65 (previous guidance: $3.30-$3.40). We expect Warner Chilcott to achieve the guidance.

We are impressed by Warner Chilcott’s acquisition of Procter & Gamble's (PG - Free Report) global branded prescription pharmaceutical business in 2009. The acquisition has broadened Warner Chilcott’s product portfolio significantly. Such prudent acquisitions should help Warner Chilcott to sustain growth since generic competition is likely to intensify further going forward.

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