Forest Laboratories Inc. F2Q09 (Qtr End 09/30/08) Earnings Call

Oct.21.08 | About: Forest Laboratories, (FRX)

Forest Laboratories Inc. (NYSE:FRX)

F2Q09 (Qtr End 09/30/08) Earnings Call

October 21, 2008 10:00 am ET

Executives

Frank Murdolo - VP of IR

Larry Olanoff - President and COO

Frank Perier - SVP of Finance and CFO

Analysts

Tim Chiang - FTN Midwest Research

Edmund Kim - JPMorgan

Rich Silver - Lehman Brothers

Greg Gilbert - Merrill Lynch

Corey Davis - Natexis

Annabel Samimy – UBS

Gene Mack - Lazard Capital Markets

Ian Sanderson - Cohen

David Buck - Buckingham Research

Frank Pinkerton - Banc of America Securities

Marc Goodman - Credit Suisse

Dave Windley - Jefferies & Co

Angela Larson – SIG

Andrew Finklestein - Leerink Swann

Ronnie Gal - Sanford Bernstein

Operator

At this time, I would like welcome everyone to the Forest Laboratories second quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. You may begin your conference.

Frank Murdolo

Good morning everyone. This is Frank Murdolo. Thanks for joining us today for the second quarter fiscal 2009 conference call. Joining me this morning is Larry Olanoff, our President and Chief Operating Officer, and Frank Perier, our Senior Vice President of Finance and Chief Financial Officer. By now, each of you should have seen the earnings release that we put on the wires around eight o'clock this morning, and the release is also available at our website, www.frx.com.

By way of Safe Harbor statement, let me add that various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements and within the meaning of the Private Securities Litigation Reform Act of 1995 and actual results may be different

That being said, let me turn the call over to Larry, who will comment on the business during the quarter.

Larry Olanoff

Good morning, everyone. I will start today's call by reviewing key company events for the quarter and then turn the call to Frank Perier who will review the financial details of the quarter.

Our underlying business continued to perform well during the quarter, as we saw solid prescription volume for all of our key marketed products. Reporting earnings in the just completed quarter totaled $0.80 per share.

In addition to strong financial performance, we have also reported on several key milestone events, associated with advances in our late-stage product pipeline during the quarter, including positive Phase III study results for aclidinium for the treatment of chronic obstructive pulmonary disease and positive Phase II study results for cariprazine, also known as RGH-188 in the treatment of bipolar I disorder.

Yesterday, we and our partners Cypress Bioscience announced that the FDA advises that it was unable to take final action by the scheduled PDUFA date of October 18th on our new drug application for milnacipran for the treatment the fibromyalgia. Milnacipran was filed for the treatment of fibromyalgia in December 2007, on the basis of two positive Phase III trials conducted in the US.

The NDA included some 2,000 fibromyalgia patients in total, as well as the previous safety experience in clinical trials and in medical practice for milnacipran in indications other than fibromyalgia. The safety profile for the product was similar to that of other SNRIs in use in the US for various indications. Prior to the PDUFA date the NDA review had proceeded in a highly interactive fashion between the sponsor companies Forest and Cypress, and the agency, and accordingly the delay was quite unexpected.

The agency has not requested any additional information, but did indicate that a clinical data question related to the NDA submission required confirmation. They indicated that their assessment could be completed in a matter of weeks, but could not confirm specific timing and could not provide further information as to the reason for the delay. We continue to plan for a first quarter 2009 product launch meeting.

Regarding our in-line products, Lexapro sales in the quarter totaled $584 million, an increase of 4.4% year-over-year, while Namenda sales were $246 million during the quarter providing for growth of 28% year-over-year.

At the end of the quarter the key national wholesalers held about 2.2 weeks of Lexapro inventory, compared with two weeks at the end of last quarter, which equates to about $9 million in sales. They also held about 2.5 weeks of Namenda inventory, compared with 1.9 weeks at the end of the June quarter, which represents approximately $11 million in sales. Namenda sales increased sequentially by $27 million.

Regarding Benicar, projected end-user net sales, which are recorded by our partner Daiichi Sankyo were approximately $204.9 million in the quarter with our partnership pre-tax earnings for the quarter totaling $45.4 million.

Bystolic sales in the quarter were $14.2 million following the launch at the end of January this year. The launch continues to track with expectations and we continue to see an encouraging mix of patients including significant proportions of those switching from generic beta blockers, those new to beta blockers, and those being maintained on Bystolic therapy. Presently over two-thirds of patients maybe characterized as continuing patients, which is indicative of the early success with Bystolic therapy.

Another positive measure of performance is the sustained high number of new physicians writing their first prescriptions each week along with a growing base of repeat prescribers. Both primary care physicians and cardiologists are prescribing the product and share amongst cardiologists exceeds that of the national share for beta blockers as a class. This is particularly important because like in many categories primary care physicians will often rely on the opinions and recommendations of specialists.

We are seeing steady growth in prescription volume through the initial launch phase with a majority of prescriptions written for 5-milligram tablets. This indicates that most patients are achieving sufficient blood pressure reductions at our starting dose and that the product is performing as we expected. We continue to make substantial progress relative to Bystolic's managed care goals on the coverage basis.

Overall, our access without any step-edit or any prior authorization restrictions covers over 85% of total beta blocker volume and with several recent tier two additions Bystolic now has unrestricted tier two coverage on 11 major national health plans.

Overall, we are pleased with the strong performance during the quarter from our in-line products and are excited about the positive clinical trial results we have reported.

I’ll now turn the call over to Frank, who’ll provide more details on the financial results.

Frank Perier

Thank you, Larry. Fiscal second quarter total revenues, which are inclusive of sales, pre-tax earnings from Benicar, interest and other income totaled $992.5 million, an increase of 8% from the year ago period.

Revenues were comprised of $925.6 million of product sales which increased 9.9% compared to last year, and $45.4 million of contract revenue from the Benicar Agreement, down 8.5% versus last year because we are no longer actively promoting the product, as well as $19.2 million of interest income.

Other contract revenue and other income in the quarter totaled $2.4 million. Gross margin in the quarter came in at 77.9%, slightly ahead of our expectations for the current fiscal year and ahead of last year's second fiscal quarter.

SG&A spending during the quarter was $326.3 million, up 16.3% from last year. In addition to our ongoing spending levels and support of inline products, this quarter included significant investment behind spending to support the launch of Bystolic, as well as pre-launch activities for Milnacipran.

Research and development spending was $146.4 million in the quarter, a decrease of 14.3% from the year ago period. For comparison purposes I would highlight that last year included a $70 million licensing charge in connection with the Ironwood Pharmaceuticals Agreement.

This quarter included approximately $36.5 million in milestone development expenses, and we continue to anticipate approximately $100 million of milestone expenses for the year. Last year's second quarter did not include any such milestone expenses.

Our effective tax rate in the quarter was 22.5%, slightly higher than expected due to the mix of earnings from higher rate jurisdictions.

During the quarter we repurchased 3.5 million shares for $101 million and have an additional 5.7 million shares of common stock available under the existing $35 million share repurchase program. Actual shares outstanding as of September 30th were 301,380,000 shares.

Our cash and marketable securities balance as of September 30th was approximately $2.6 billion, an increase of $95 million from last quarter after share repurchase. Of this, $641 million or 25% of our cash and marketable securities balances are domiciled domestically with the remainder maintained by our international subsidiaries.

Moving to our fiscal guidance for 2009, we now expect a fully diluted earnings per share for the fiscal year ended March 31, excluding the one-time charge related to the termination of the AZOR co-promotion agreement in the first quarter, will be in the range of $3.30 to $3.40 per share.

We continue to expect to spend approximately $100 million in development milestones. However, the timing of certain programs has shifted. With the re-instatement of the R&D tax credit, we expect the annual effective rate for the full fiscal year to be approximately 21.5%.

I will now turn the call back to Larry for a pipeline update.

Larry Olanoff

Thank you, Frank. As we move into the second half of fiscal 2009, we continue to be in the midst of a busy period where we will be receiving additional clinical trial results for later stage compounds and expect to file two supplemental NDAs.

In addition, we have a supplemental NDA action date in March of 2009 for Lexapro for the treatment of major depressive disorder in adolescents. We also continue to work towards a regulatory submission for Bystolic for congestive heart failure based on data from the senior study done by Menarini, and we anticipate filing a supplemental NDA in early 2009.

We recently reported positive Phase III data for aclidinium in the treatment of chronic obstructive pulmonary disease. We are now developing our plans for a pathway forward. We expect to meet with the FDA in early 2009 to review the acclaimed I and II trial results, and discuss filing and development plans.

Pending FDA feedback; our plan is to file the NDA with the acclaimed data in late calendar 2009 or early 2010. In addition, we will continue monotherapy development at higher, once daily doses or at different dose frequencies. The adverse event experienced from the acclaimed studies, suggest that higher doses will be well tolerated.

Lastly, the acclaimed results facilitate and potentially accelerate our strategy to develop a twice daily aclidinium formoterol combination.

For Septaraline, we have initiated two Phase III studies for community acquired pneumonia and we anticipate those results by second quarter 2009. Data from both the community acquired pneumonia, and complicated skin and skin structure infection studies, if supportive will serve as our planned late 2009 submission package to the FDA for initial marketing approval.

Regarding Linaclotide, the positive Phase IIb study results from a clinical trial in patients with irritable bowel disease were presented two weeks ago at the American College of Gastroenterology meeting. Analysis of the data indicates that once daily dosing of Linaclotide across a range of doses significantly reduced abdominal pain and significantly improved constipation symptoms in patients with IBS-C throughout the 12 week study period. Working with our partner, Ironwood Pharmaceuticals, we have initiated a comprehensive Phase III clinical program to evaluate Linaclotide safety and efficacy in patients with either constipation predominant IBS or chronic constipation. The constipation studies have been initiated and the IBS trials should start by early next year.

Turning to cariprazine, last month we announced preliminary top line results from a Phase II clinical trial in patients with acute mania associated with bipolar 1 disorder. The data show that patients treated with cariprazine experienced significant symptom improvement compared to placebo within the first week of treatment and at each subsequent time point study.

This potential indication may represent a significant opportunity for this compound in addition to its indication for schizophrenia, which we are pursuing. As previously reported for the schizophrenia indication we have initiated a Phase IIb study with our partner Gideon Richter, which will examine in greater detail a range of lower doses based on the encouraging results of the first Phase II study. This study is being performed in order to better determine an optimal dose to take into the planned Phase III program.

The Phase II PDE4 inhibitor program partnered with Glenmark for Oglemilast has moved into a proof-of-concept study in COPD, which is in progress.

While we continue to believe that our late stage product pipeline could collectively represent several billion dollars of potential product sales in the long-term, sufficient to replace the revenues lost due to patent expiries for Lexapro and Namenda, we must operate with the assumption that not all of our late stage programs will ultimately result in approved products or approved products that will achieve our peak sales projections.

Given this assumption, we view it necessary to double the commercial potential of our late stage pipeline by 2012, through the advancement of either our earlier stage programs, as well as the addition of new development opportunities.

Frank Murdolo

Thank you, Larry. I will now read some of the sales figures for our smaller products. Sales of Aerobid were $3.8 million, AeroChamber $3.2 million, Camprel $7.2, Celexa brand $3.2 million, Cervidil $15.3 million, Combunox $0.1 million, $Esgic 0.8 million, Europe $18.8 million, Generic $1.0 million, Infasurf $3.2 million, Lorcet $2.3 million, Monurol $0.4, Tessalon including generic $0.7, Thyroid $15.6, Tiazac brand $1.8, Tiazac generic $3.6. And that is the last of them.

So with that we will turn back to our operator to start our Q&A questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tim Chiang of FTN Midwest Research.

Tim Chiang - FTN Midwest Research

Is there any more color you can provide on the milnacipran filing and also what specifically the FDA asked at this point?

Larry Olanoff

No. There is nothing else we can really say. We really have been very open with what we know, and the agency has not given us any further information that we can announce today or at this point. What we are, what we have been saying and which would remind everyone is we are planning for the launch early next year, and we are going ahead with those plans.

Tim Chiang - FTN Midwest Research

And just one quick follow-up. On the aclidinium studies, is there any sort of data point that you can provide as to why the efficacy of the acclaimed study was not as good as some of your previous Phase II studies?

Larry Olanoff

I think again that the one point to drop off, if any was the trough FEV1 although that was clearly highly statically significant and reproducible, and we think clinically a relevant change. The difference between the Phase II program and the Phase III programs really were two-fold. One is that, patients in the Phase III program were taking perhaps more background medications than in Phase II, which may have influenced both their initial disease severity and their response, and also we used centralized [barometry] and that may have had some impact on the ultimate results, but again I want to emphasize we see these results as very positive and will allow us to move forward.

Operator

Your next question is from the line of Edmund Kim of JPMorgan.

Edmund Kim - JPMorgan

Question, I have two. Firstly on tax rate is it -- would it be balanced more in the latter quarter -- in the last fiscal quarter or just kind of spread between the remaining back half.

And then secondly, just wanted some additional clarity on aclidinium. In the event that the FDA does ask you to replicate a higher dose or a different dosing regimen, are you committed to those potential studies and just kind of give us a sense of how long those studies would be?

Larry Olanoff

Turning first to tax rate, we expect to book a fairly significant catch up entry for the R&D credit in our fiscal third quarter, which would be the quarter ended December 31st. And then you would see the rate go to the annual rate in the fourth quarter.

Now, I will address the aclidinium question. Again, I want to emphasize, the two studies we have are highly reproducible, both highly statistically significant, all the parameters came in I think very clinically relevant ranges. So we have no hesitation to go ahead and talk to the agency about a filing with those first two studies.

Independently, because of the… where we think is the great tolerability of this product in the Phase II results, as well as Phase III results demonstrated that tolerability, we have a lot of room to move here on dose, and so we believe that we have comfortable range to study both, as a once daily and as a potential twice daily dose and a twice daily dose is a great [Segway] into our combination program formoterol.

So, we will plan on doing those studies in parallel to our discussions with the agency.

Operator

Your next question comes from the line of Rich Silver of Lehman Brothers.

Rich Silver - Lehman Brothers

Yeah, do you think you could comment on the inventory levels that you saw and what we should expect going forward as a good number to use, for both Namenda and Lexapro, the two that you mentioned on the call?

Larry Olanoff

Yeah, sure Rich. There is nothing that is out of the ordinary in the inventory levels. We kind of target to have about two weeks of inventory and it can be impacted based upon when the wholesalers order and when the quarter actually ends. So where as Namenda was under two weeks at the end of the last quarter, it is slightly over two weeks this quarter resulting in the $11 million equivalent adjustment. But it is right within our normal kind of two to three week range that we always plan for.

Rich Silver - Lehman Brothers

And could you also talk about R&D excluding the $100 million in R&D milestones, the sort of called the normalized R&D estimate for the year and whether that is also unchanged or is that lower than you previously expected?

Larry Olanoff

We probably expect R&D expenses to come in slightly under our prior estimate just based upon as we indicated some of the movement and timing of the programs.

Rich Silver - Lehman Brothers

Slightly, okay. And then lastly on SG&A, that on the other side looked like a very high number, what should we be expecting going forward on SG&A on a sequential basis?

Larry Olanoff

You know, I am not -- we are not giving guidance on specific line items at this point, Rich. We kind of indicated the main source points for the adjustment in the guidance being the R&D credit and some timing with regard to R&D expenditures.

Rich Silver - Lehman Brothers

Okay. I understand you do not give quarterly guidance but it looks like certainly relative to our estimate and consensus that the R&D tax difference would not be enough to account for the increase in the guidance for the year. So can you… and obviously you have got the actual quarterly surprise, so is there anything else that we might be…

Larry Olanoff

Rich, I am not going to give any further comment on quarterly guidance.

Rich Silver - Lehman Brothers

Okay. Thanks.

Operator

Your next question comes from the line of Greg Gilbert of Merrill Lynch.

Greg Gilbert - Merrill Lynch

Thanks. Good morning. Larry, going back to aclidinium, putting commercial potential aside given the results you have, to what extent can the FDA consider the efficacy of your product versus other approved products in assessing approvability? What is your view on that?

Larry Olanoff

Well, you asked a good question. I think the issue is whether those numbers are clinically relevant; our assessment is that they are. They FDA by law is not supposed to be comparing one product to another in terms of making their determination of approval. Clearly, we have… where we believe to be a very well tolerated product and stated thus far as not redoing any safety signals. So having another hope even if you want to take a [partner's] view having an alternative product within adequate efficacy, picture is one that the agency would be, I think compelled to review it and consider for approval.

Going beyond that though, we would never launch a product if we did not think it had clear commercial value and ability to compete. And I do not want to get too far into this description at this point, but what I have said before is that this product aside from the trough value which was a bit lower than we would have predicted and was lower than had been reported for Spiriva. If you look at the literature values for peak values -- peak FEV1 values, and a general representation of the ability of these studies to show effects on very important secondary parameters using standard scales for symptoms or exacerbation, we look very competitive I believe with Spiriva.

And you add in the safety profile which you take the product with a 20% opportunity for dry mouth versus near 0% opportunity for dry mouth. And you also add in a device which is very patient friendly, and I think one that the regulatory bodies will accept, I think we have a good start here.

Greg Gilbert - Merrill Lynch

Thanks for that. On Lexapro, can you update us on your assumptions for the year there? And what can you do to slow the rate of market share loss there? It looks like you have lost your annual, allotment of share through mid-year. Can you talk to that a bit?

Larry Olanoff

Now that is a good question. We realized in some [fronts] this is the secondary for that -- focus on a major launch, so we realize that going in. But what we have done with Lexapro is to stay -- what we believe stabilizing the share change in a way where we especially beginning of this summer when our details be coming off of both benicar and walking away from the Azor deal gave us the opportunity to put additional details on Lexapro.

We also through this year have negotiated, we think some very strategic catch-up activities with some of the managed-care contracts, some key managed care contracts to really allow this product to be accessed in appropriate way with appropriate co-pay. We have actually gone out and done some initiatives at the patient level regards to co-pays as well.

All of those three things in addition to some other activities we continue to pursue in the field we think has done a good job in terms of starting to stabilize that share change. We have also benefited from a modest market growth, but one that is maybe slightly ahead of what we would have projected.

Greg Gilbert - Merrill Lynch

Thanks. And lastly, Larry, given FRX’s financial position versus that of the overall market, I guess all things considered, should we expect FRX to be more opportunistic than you have been in the past, when it comes to the size and number of business development transactions we can expect to see over the next year or so? Thanks.

Larry Olanoff

Okay. Well, that is also very good question. We have never been limited in our appetite for deals, but we have always said that our deals all about acquiring products, and whether that is through a business license or a product license or product acquisition or company acquisition, we will take whatever path makes most sense for us and the one that gets the product in our hands.

Opportunistic wise, we have a very widespread, in terms of where we look both in terms of therapeutic area, as well as the stage of development. But we will still focus primarily on later stage compounds, and we are out there aggressively looking and we keep adding to our business development capabilities to pursue that.

So everybody knows they have the cash on hand to do the kind of deals we have to do, and we are looking for all opportunities across, as I said a wide range of therapeutic areas and potential development stages.

Operator

Your next question is from the line Corey Davis of Natexis.

Corey Davis - Natexis

Thanks very much. I want to shift back to Greg's, I think, first question on the FDA kind of changing its stance in terms of comparing new drugs to ones already on the market, despite their mandate, and specifically in thinking about the Cariprazine’s program, are you contemplating including active comparators in the Phase II or in the upcoming Phase IIIs just given the experience with [haloperidol], I think it is very clear that division wanted an active comparator that was the main reason the drug was not approved?

Larry Olanoff

That was -- you make a good point. I do not know if that is the only reason that drug was not approved. I cannot comment further on that. But what I can tell you is that active comparators in a program like this is always a good consideration just for purposes of coming in with some competitive data. So it is a serious consideration for us in terms of design of our programs both in Phase II and potentially in later phases.

Corey Davis - Natexis

And next question on R&D milestones, can you tell us which did and did not materialize in the quarter any more specifically?

Frank Perier

Corey, we normally do not comment on specific milestones that we paid. You can probably pick up a couple from partner press releases, but we do not normally give that detail.

Corey Davis - Natexis

Okay. Fair enough. Last question, I think I asked this every quarter, but given the experience with Cymbalta and Lyrica in the fibromyalgia market that make you more or less encouraged we have a tough time seeing what prescriptions are written from those drugs in that particular segment, but have you done any independent market research that can help us understand the size of that market?

Larry Olanoff

We are looking at a market of about six million plus patients. In terms of the size of the market, our guess, initial guesstimates are probably where we were when we entered the Alzheimers disease with Namenda. So its $1billion dollar potential plus market, and we are very, very bullish in terms of our own opportunity because we are going to go out there just for fibromyalgia. And we are going to be highly focused on that particular opportunity and targets associated with that opportunity. We would not be moving into other areas any time soon, relative to diffusing kind of our efforts on the fibromyalgia side.

Corey Davis - Natexis

Great. Thanks, Larry and Frank and Frank.

Operator

Your next question comes from the line of Annabel Samimy of UBS.

Annabel Samimy – UBS

HI, thanks for taking my call. Just some follow-up questions on aclidinium. I guess, I am little bit surprised to see the timing of an NDA filing is about a year after you -- it seems like you have an FDA meeting scheduled, and I am just wondering, are you going to be waiting for some of the data on some of the additional studies that you are doing before you file?

And also related to those studies, what makes you comfortable that a higher dose is going to get you a more impactful change in FEV1, because I guess if I remember correctly in the Phase II study, the 400-microgram dose did not really show that improvement in FEV changes. So can you just speak to that a little bit or if there is anything else that you see in the higher doses that might get you comfortable with that?

Larry Olanoff

We have limited experience with the higher doses, but depending on how you analyze the days there are some trends there. But we also have the opportunity to go beyond the 400 dose as well. So, we believe that there is a purposeful rationale for going forward with a range of higher doses and as I mentioned before also doses of greater than once-a-day frequency.

Answer to your question about the NDA, I would remind you NDA for an aerosol product is very complex Annabel. It goes beyond just simple clinical data and includes a great deal of CMC data in the filing and for us at the moment is the rate controlling event.

Annabel Samimy – UBS

Okay. And just so a clarification on the tax, the R&D tax credit, you said you were going to be seeing that R&D tax credit in the third quarter and then the fourth quarter should see a normalized tax rate, but if you average it out, it's 21.5, is that my understanding of that correctly?

Frank Perier

Yes. Annabel, that is correct. Again, because the R&D credit was approved for calendar 2008 and 2009, so we have a catchup adjustment that will be -- so you will have the impact of the third calendar quarter of which for us ends in December, plus the catchup adjustment being booked in that quarter and then you will see the normalized rate going forward into fourth quarter of '09 and then running out through remainder of 2009.

Annabel Samimy – UBS

Okay. And if I may just one more question on Lexapro. Is there anything else that you are seeing in the depression market? I mean, seems like generics are definitely taking some more share. Is there any type of changes in some of the managed care? Any kind of managed care pressures that you're seeing outside of just having taken reps off of Lexapro and needing to put reps back on? Is there anything else you're seeing in the whole anti-depression market?

Larry Olanoff

Nothing that we can point to precisely. I think the greatest competition in the market is just as you indicated, its generics and for us the major generic competition is citalopram and citalopram has taken share not only from Lexapro but from the other generics as well. So it is interesting to watch those share changes, but the proprietary products are pretty much frozen versus the market relative to any increase we're seeing in largely being spread amongst those generics and again largely citalopram. So that’s our biggest competitor. That’s how we plot our strategy going forward, and I think it is still a market that is reasonably sensitive to detailed frequency and the appropriateness of details and people you have to get the targets, which are both primary care and specialty care oriented.

Annabel Samimy – UBS

Okay, great. Thank you.

Operator

Your next question comes from the line of [Gene Mack of Lazard Capital markets].

Gene Mack - Lazard Capital Markets

Thanks for taking the question. Just wondering if your discussions with FDA on milnacipran included preliminary label discussions and if there might be any insight as to what sort of warnings or highlights might be on the label?

Larry Olanoff

We are not really commenting on where we are in terms of that particular aspect of our review. What we said is that it was a very highly interactive review. It was continuing to progress to the point where they alerted us, that they would not be able to meet their action date. So we were a bit surprised by that.

Gene Mack - Lazard Capital Markets

Okay. And I actually had a question about I guess my understanding is there is an FDA review of non-inferiority end points, specifically related to antibiotics that is going to occur, I think sometime in November, and I am just wondering would that have any impact on your plans with of [ceftaroline] and are you going to looking at that and is there any flexibility in the trial to alter end points if need be?

Larry Olanoff

We tried to avoid that as a problem. Obviously, we will be in attendance at the meeting and listening to what is said, but if you look at our design of our studies, we started with very conservative analyses in terms of the kind of end point designs we decided in terms of non-inferiority margins. So we already had -- we started out with the premise at 10% on skin and skin structure. And again its very conservative number on community acquired pneumonia. So nothing happened thus far makes us concerned in terms of having to change the study designed to meet a different end point.

Its not just -- in skin it is pretty straightforward in terms of what is been accepted in the past as well, and what they are considering. I think in community acquired pneumonia, it has moved a bit, especially given some of the more recent results probably as an analogy and hospital acquired pneumonia. But there it is not just a non-inferiority margin. It is also the quality of the patient you are studying, which will then dictate the non-inferiority margin.

Gene Mack - Lazard Capital Markets

Great. Thanks a lot.

Operator

Your next question comes from the line of Ian Sanderson of Cohen.

Ian Sanderson - Cohen

Hi, good morning. Thanks for the questions. A couple, first Bystolic and any update on the patent situation and what steps you and Jannsen plan to take there?

Secondly, have the JNC-8 guidelines been published? And do they specifically mention Bystolic and if so, has there been any impact on formulary coverage?

Frank Perier

I guess first on the patent, Ian, I guess, as we disclosed, we have received this letter from the patent US PTO. We will be meeting with the US PTO to take them through what our position is and we continue to remain very confident with ourselves. Jannsen and Forest remain very confident in the validity of this patent, and we expect to prevail.

Ian Sanderson - Cohen

Am I correct in assuming though as it stands currently Bystolic is out there without a patent?

Frank Perier

No, no. That is not true. The patent still exists.

Ian Sanderson - Cohen

Okay. And the JNC-8 guidelines?

Frank Perier

I am not aware if they have been published yet, and if they have, they have not had any impact on formulary acceptability for Bystolic, which so far has been very good. As we have indicated in the scripted part of the call, we have now covered 85% of beta blocker volume in an unrestricted fashion.

Ian Sanderson - Cohen

And then finally do you have any discussions with the FDA regarding the seniors data and the approvability for the CHF claim?

Larry Olanoff

Yes. We announced that earlier. We had spoken with the agency earlier this year in terms of whether that single study would support a filing for that claim and they indicated to us they would seriously consider that filing.

Ian Sanderson - Cohen

Okay. And then actually if I could ask a question on Oglemilast. Any timing on that Phase II data there?

Larry Olanoff

We are looking for I think top line data on that project in the second half of calendar 2009.

Ian Sanderson - Cohen

Okay. Thank you.

Operator

Your next question comes from the line of [David Buck] of Buckingham Research.

David Buck - Buckingham Research

Yes, thanks. Quick Bystolic question also a couple milnacipran questions. The Bystolic number in the quarter looked like it may have included some stock gain or price just went up dramatically I guess from the June quarter. Can you give us some sense of what inventory build you might have had in the quarter?

Frank Perier

It included neither of the above.

David Buck - Buckingham Research

Neither one. Okay. So, 61 per script roughly should be the price to use?

Frank Perier

Well, we said our price is $1.50 [lab].

David Buck - Buckingham Research

Okay.

Frank Perier

On the daily basis

David Buck - Buckingham Research

Okay. And on the interaction with milnacipran; to what extent did you discuss blood pressure elevations and what was the agency's position on your data on those?

Larry Olanoff

We do not comment on the specifics our interactions with the agency at this stage. But again, the agency recent lack of action has not related to any requests from them for any additional data.

David Buck - Buckingham Research

Okay. And when specifically should we be expecting the report of the third study and also the blood pressure safety study?

Larry Olanoff

On the third study our plan is to un-blind that study and it is still in progress in terms of data cleanup and such. Un-blind that study and have topline results before the end of this year, and I am anticipating the blood pressure data will probably be available in that general timeframe.

David Buck - Buckingham Research

Okay. So I guess the expectation is from your interactions with the agencies that they would still make a decision before those data are available?

Larry Olanoff

We do not really have a precise timeframe. They have told us that they would work on this clinical data question and work to resolve that within the matter of weeks.

David Buck - Buckingham Research

Okay. Thank you.

Larry Olanoff

I should also comment that at this point we have no reason to believe that any additional data will be required for them to complete their review or probably for action.

David Buck - Buckingham Research

But they obviously did not give you any sense of whether it would be a complete response or a [wide] approval?

Larry Olanoff

No, they never do.

David Buck - Buckingham Research

Okay. Understood. Thanks.

Operator

So our next question comes from the line of Frank Pinkerton of Banc of America Securities.

Frank Pinkerton - Banc of America Securities

Great. Thanks for taking the question. Can you please just reiterate what you said your cash balance was it and did that include a shift from long-term market securities into cash? And then also on that topic walk through commercial paper and your floating rate notes, which of those do you think you might have problems given dislocation in the market?

Frank Perier

Yes, Frank, our total cash balance is $2.6 billion. Of that we have cash and cash equivalents which we believe are all very liquid of just about 40% of that balance, just over $1billion, and as you look at everything that we have got in cash and cash equivalents and short-term investments, that is 70% our $2.6 billion .And there are dislocations in the marketplace, but we remain very liquid.

Frank Pinkerton - Banc of America Securities

[Then] from a standpoint of write-downs or anything we are not expecting any on that $2.6 billion?

Frank Perier

Based upon what we know today, no.

Frank Pinkerton - Banc of America Securities

Okay, great. And then I guess second line of questions, can you just walk through what you are seeing from a standpoint in the business development community out there with asset prices. I read several articles regarding venture capital private equity firms that may hold assets moving into Phase III or potentially into filing without the ability to get to market. Are any of those up for sale and are any of those attractive?

Larry Olanoff

It is a good question, and it is phenomena we have seen even prior to the major change in the credit markets in that company's -- some companies which have a reasonable amount of cash on board, have many project says they want to fund and some of the orphan projects perhaps that may be of interest to us have been kind of held dormant and will require another sponsor to come in to kind of jump-start them. So that phenomena has always been out there that I expect to a greater extent that is going to happen more often.

We have heard of occasional situation and clearly we are keeping our eyes open to those situations, but our intent in number of our deals now like with linaclotide is to work with a partner, even one who is fairly well funded and work in a collaborative basis on the development. So that we co-fund the development potentially, co-fund the promotion part of the project as well.

Frank Pinkerton - Banc of America Securities

Okay, great. And kind of last question we traditionally thought of pharmaceutical as being recession proof, but I mean a lot of people could argue we have never been through a recession with PBM formulary they are strictly in place as they are today. So, how does Forest think long-term, if we are in say a rough patch in calendar year 2009? Think about the trade off with other generic drugs and classes against products like Bystolic and Lexapro and what is the ability to detail versus economic sensitivity? Thank you.

Larry Olanoff

Yeah, I think there are a number of factors that go into that equation. One is the price of your product. And Bystolic is I think very reasonably priced. I think another is the value you add for that price. There is always going to be pressure and perhaps more so in terms of patient co-pays in a market where there is less disposable income. But I think there is also a consideration even at the managed care level that the total costs to the patient and to the plan goes higher if in fact the generic leads to a worse outcome than the proprietary product in question.

So we try to provide that kind of information down. And sometimes at a fairly detailed pharmaco and economic analysis we try to provide that to managed care plans, and I think through the physician we try to provide additional detail as to the added value of our products which then can be communicated to the patient. And then…

Frank Pinkerton - Banc of America Securities

Well, thank you.

Operator

Your next question comes from the line of Marc Goodman of Credit Suisse.

Marc Goodman - Credit Suisse

Could you just remind us what the marketing [hook] is of milnacipran as compared to these other products? I know you talked about you are just going to focused on fibro, whereas Lilly obviously is focused on a couple of different indications. But what is the real message here? And how many reps are you going to have relative to what Pfizer and Lilly has out there?

And then one other question, if you could just update us on your plans with the Namenda once-a-day product, any filing plans with that and is [nuramaxine] still a product in the pipe pipeline? Thanks.

Larry Olanoff

Fine, okay, well, I will start from the back and work to the front. [Nuramaxine] is no longer in under active development by us. As far as the once daily Namenda product, what we said in the past is that that timing of that submission will really relate to where we are in our deliberations over the patent lawsuit.

That filing would be available to submit over this next year if we choose to, but we have not announced our plans as to when we will actually file. Regards to milnacipran, we planned -- I do not think we provide a detail in terms of the number of sales were ups but looking at targets specifically for fibromyalgia, we think we can cover those targets with the combination of a specialty sales force and at least one primary care sales force and will be in addition to getting some help at the specialty level through our collaboration with Cypress.

We could look at as potentially as many as two primary care sales forces as well. That is something we will make a firm decision on as we go into the launch phase. But really that the number of targets both on the primary care and specialty side is not at the levels we would take into as an antidepressant or a broad use pain product. So we are very comfortable that we can provide the details here with the existing sales force. I think that is the bottom line.

As far as the messages, we have talked in general in terms of how we plan to promote this product. We are not going to give out specific messages at this point that pending the approval and other activities that we need to pursue in preparation for the launch. But we do believe that if the product starts off pharmacologically different than Cymbalta in a sense that this is the first product out there for this use, that is going to be a predominantly a norepinephrine reuptake inhibitor over a serotonin reuptake inhibition, which at least in some circles, some people believe that that may lead to a value in terms of the pain relief in the overall value of the product in this particular disease.

We went in with a development plan, which is unique relative to our competitor's in that we looked at real use -- real medical relevant type parameters, which is response oriented as opposed to simply numbers on a scale and we would hope that that data will be well represented in our approved labeling. And part -- some other nuances as well in terms of product advantages. So we assume that there will be a clear competition between Cymbalta and milnacipran taking into account the fact this is still a pain market to an extent and there will be switches going on. A lot of patients may see both drugs over the course of their illness and maybe not together but over the sequence.

And then as far as Lyrica we think and I think the community is beginning to believe more and more that that is going to be a combination play for anyone with an SNRI.

Operator

Your next question is from the line of Dave Windley of Jefferies & Co.

Dave Windley - Jefferies & Co

Hi. Thanks for taking the questions. On the [QD] I know you just made some comments there and I believe you said, Larry, that the filing of the QD would depend on progress on generic litigation. Did I hear that correctly?

Larry Olanoff

That is correct.

Dave Windley - Jefferies & Co

And…

Larry Olanoff

And we are -- and then the timing of where we think that it will come into the market.

Dave Windley - Jefferies & Co

Right. And can you give us an update on where that litigation stands right now or do you not like to comment on that.

Frank Perier

Yeah. We generally do not comment on where we are with patent litigation. Its suffice to say we've got a number of parties that have filed.

Dave Windley - Jefferies & Co

And have you heard on -- [some way] have you heard on patent term restoration on Namenda at all or when do you expect to hear on that?

Larry Olanoff

We haven't heard as yet, but we could hear any day at this point.

Dave Windley - Jefferies & Co

Okay.

Larry Olanoff

It should be within the window would be a normal timeframe to hear on the [PT].

Dave Windley - Jefferies & Co

Okay. And then on RGH-188, can you give us a sense of what is your anticipated cycle time is on the Phase IIs?

Larry Olanoff

Yeah. We now defined I think an effective dose to take in for bipolar into a Phase III program, but we were going to hold the start of that Phase III program until we are ready to start the schizophrenia program in parallel. And the schizophrenia Phase IIb program results should be available to us in the second half of 2009.

Dave Windley - Jefferies & Co

Okay. Thank you very much.

Operator

Your next question comes from the line of Angela Larson of SIG.

Angela Larson – SIG

Good morning. Thanks for taking the questions. I just wanted to clarify on milnacipran, the communication between and you the FDA is not a complete response and it is not their typical request for 90 day extension?

Larry Olanoff

That is correct.

Angela Larson – SIG

Okay. And then can you give us a little bit of color on the Bystolic marketing environment, the need for samples, and discounts and compare it to some of your other marketed products?

Larry Olanoff

As far as samples, we tend to be very aggressive with our sampling across all our programs, so Bystolic is similar in that regard. As far as detailing where we have got the biggest share of voice out there, there is only one other product that is being currently detailed. And as far as the discounts, so far against what we had originally budgeted, they are falling in line very nicely, so the discount is -- with a starting price, lab price of $1.50, you are not looking at very deep discounts.

Angela Larson – SIG

Okay. Great. Thank you.

Operator

Your next question is comes from the line of Andrew Finklestein of Leerink Swann.

Andrew Finklestein - Leerink Swann

Hi. This Andrew Finklestein on for Gary Nachman. I was just hoping you could comment on your thinking about the viability of aclidinium, depending on whether its BID or QD and monotherapy versus combination use? How you see the opportunities in those settings?

And then also on the gross margin whether the level you exceeded in the first half which you said were well above your expectations, whether that is a function of product mix and how sustainable those are in the second half of the year?

Larry Olanoff

I will ask Frank to comment on the gross margin and I will get back to you on aclidinium.

Frank Perier

Yeah the gross margin, we saw a little bit of variability in gross margin over what we had expected. We probably expect gross margin to kind of come back to where we guided.

Larry Olanoff

On aclidinium as I stated for the reasons I stated earlier we think aclidinium can be a very competitive product against Spiriva even on a monotherapy basis. So we really do see the future of this franchise in the combination products, and especially with the lab combination with going down the road other combinations as well. So we are looking at this as a long-term investment on our part across a wide range of products as part of our franchise.

Operator

Your final question is from the line of Ronnie Gal of Bernstein.

Ronnie Gal - Sanford Bernstein

Hello. Hi. And thank you for taking my question. A couple of them. One of them, can you discuss a little bit the opportunity in the Bystolic -- I am sorry, in the Lexapro juvenile indication? How will that influence essentially the future of the franchise in the next couple of years as you see it?

Larry Olanoff

The question I heard was about Lexapro in adolescent depression. We pursued this. We are the only company we know of doing a program at this stage in adolescent depression or pediatric depression for that matter. We think this is as a great opportunity for us, but financially its modest, incremental sales, maybe $100 million.

But I think beyond that it puts us in a very good position in terms of dealing in the future with formularies having that indication and really being the only product out there that is approved for that indication aside from a generic [Fluoxetine], it will give us an opportunity to also talk directly to pediatricians about the use of the drug in there adolescent population.

Ronnie Gal - Sanford Bernstein

And a quick follow-up on something slightly different; I notice you made some share repurchase this quarter but at least for the share being where it is, do you think this is an activity you might want to accelerate given the current stock price or this is something you really intend to maintain roughly at the current rate you are currently going?

Larry Olanoff

We really do not give any predictions on what our future plans are for share repurchase. Its something that we consider on an ongoing basis. I would remind you that the company has bought back to 20% or more of its shares over the last few years. So we have been an aggressive share repurchaser, but we have not done it according to any particular plan.

Ronnie Gal - Sanford Bernstein

Thank you very much.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions-and-answers. I will now turn the call back over for any closing comments.

Frank Murdolo

Thank you, operator. With that we will end the call and we are happy to take any additional calls if you call in directly. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect.

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