Sepracor Inc. Q3 2008 Earnings Conference Call Transcript

Sepracor, Inc. (SEPR)

Q3 FY08 Earnings Call

October 28, 2008, 08:30 AM ET

Executives

Adrian Adams - President and CEO

Jonae R. Barnes - Sr. VP, IR

Robert F. Scumaci - EVP and CFO

Mark Iwicki - EVP and Chief Commercial Officer

Mark H.N. Corrigan, M.D. - EVP Research and Development

Analysts

Ian Sanderson - Cowen And Company

Greg Gilbert - Merrill Lynch

Christopher Schott - JPMorgan

Richard Silver - Barclays Capital

Marc Goodman - Credit Suisse Securities

Annabel Samimy - UBS

Robert Hazlett - BMO Capital Markets

Aaron Gal - Bernstein Research

Angela Larson - FAG

Michael Tong - Wachovia Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to Sepracor's Third Quarter 2008 Earnings Conference Call. Hosting the call today for Sepracor is Mr. Adrian Adams, President and Chief Executive Officer. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions].

And it's now my pleasure to turn the floor over to our host, Mr. Adrian Adams. Please go ahead, sir.

Adrian Adams - President and Chief Executive Officer

Thank you, operator and good morning everyone, and thank you for joining us for our third quarter 2008 financial results webcast.

With me this morning are Mark Iwicki, Executive Vice President and Chief Commercial Officer Mark Corrigan, Executive Vice President of Research and Development, Bob Scumaci,Executive Vice President and Chief Financial Officer, Jonae Barnes, Senior Vice President of Investor Relations and Corporate Communications.

Before I proceed, I would like to ask Jonae to read our forward-looking statement. Jonae?

Jonae R. Barnes - Sr. Vice President, Investor Relations

Good morning, everyone. Various remarks that we make about our future expectations, plans and prospects constitute forward-looking statements for purposes of the SEC Safe Harbor Provision. Actual results may differ materially from those indicated by these forward-looking statement as a result of various important factors which are discussed in our most recent quarterly report on Form 10-Q which is on file with the SEC and other reports that we file with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so. Any forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to today.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our third quarter 2008 financial results press release, which is available in the Investor Relations section of our website.

Back to you, Adrian.

Adrian Adams - President and Chief Executive Officer

Thank you, Jonae and I would like to again thank everyone for joining us this morning. I know that the last few months have been extraordinarily challenging for our country, the economy, the investment community and more specifically the pharmaceutical industry. However, within Sepracor we are confident that we have the people, products, portfolio and focused strategy to take us into what we hope will be a successful future for all our stakeholders.

Now as you know we released our third quarter 2008 results this morning, and before we begin, I would like to take you through the main areas that we would like to cover during this morning's webcast.

First, I will review some of the key 2008 objectives we have achieved so far this year and within the third quarter. Bob Scumaci will then comment on both the third quarter and nine months financial results. Mark Iwicki will follow with a review of the commercial performance of our product portfolio. He will then introduce Mark Corrigan who will provide an overview of the progress we're making in research and development. And finally I will comment on our financial guidance for 2008 and make some concluding remarks before opening the call for questions.

Please now refer to slide number 3. Throughout this year we've been working against four fundamental strategic objectives as we've looked to deliver enhanced shareholder value over the course of time. The first strategic objective relates to the continued development of peak performing commercial capabilities with a focus on enhancing sales force productivity while continuing to improve our expense ratios measured against product revenues in an efficient and effective way. Mark Iwicki will be commenting on the progress we've made in this area during his part of the presentation.

The second strategic objective relates to fully leveraging both our existing and new product franchises with important productive focus being given to each of our products across what is now a broad portfolio of six products. This year, we'll have two new product launches which include OMNARIS nasal spray which was launched in April. And ALVESCO HFA which was launched into specialty markets in September.

The third strategic objective relates to continuing to make solid and steady progress and advancing our research and development pipeline. A pipeline that we believe is among the best in the specialty pharma sector. I am pleased to announce today that as part of our ongoing integrated LUNESTA franchise management program SEP-0227018 a potential new LUNESTA formulation has moved into development and has a potential target launch at 2011, 2012.

Dr. Mark Corrigan will give an update on the progress we are making with all the components of this evolving and integrated program later in the webcast.

We also remain on track to submit our new drug application for eslicarbazepine acetate, a new anti-epileptic early next year.

A large phase II two proof-of-concept study for SEP-441, a new low dose modified release relief form of eszopiclone for generalized anxiety disorder is nearing completion with patient recruitments having being completed one month ahead of schedule. And SEP 289 for depression is well advanced in phase II. We expect to have results delivered in the first quarter and first half of 2009 respectively for these two important assets.

SEP-162 our dual reuptake inhibitor product candidate is also on track with a potential to enter Phase III in 2009 subject to discussions with the FDA on development plans. And we have also just begun initiation of Phase III clinical studies for OMNARIS HFA.

And finally the four strategic objective is the pursuit of synergistic corporate development from licensing opportunity.

In early 2008 we announced the in-licensing of the eslicarbazepine acetate from Bial and we entered into the exclusive U.S. marketing and development agreement with Nycomed, for OMNARIS and ALVESCO brands of ciclesonide.

As part of the Nycomed agreement, we also gained the right to additional ciclesonide pipeline products in various stages of development which we believe will further strengthen our growing and now robust pipeline.

As you may know, we've also signed agreements in the second quarter with Arrow that we believe will provide Sepracor with an enhanced ability to develop various products in this ciclesonide franchise. In addition to giving us access to XOPENEX/ipratropium combination product candidate which is phase III ready. This product could be launched as early as the second half of 2011.

In June, we also completed the acquisition of Oryx, a specialty pharmaceutical company in Canada. This acquisition establishes a commercial platform from which we plan to potentially launch in Canada, such products as LUNESTA, BROVANA, eslicarbazepine acetate and other potential products from the Sepracor R&D portfolio.

Having made these opening remarks, let's now move along to our financials, beginning with our third quarter financial results.

Bob, please take us through these results.

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

Thank you, Adrian. Good morning, everyone. I'd like to begin on slide 4 with our third quarter financial results.

For the third quarter 2008, total revenues were $307.7 million, an increase of 9.6% versus third quarter of 2008. LUNESTA revenues were $154.7 million versus a $160.7 million in the third quarter of 2007.

XOPENEX Inhalation Solution revenues were $77.9 million versus $91.6 million in the third quarter of 2007. The reduction of XOPENEX Inhalation Solution revenues for the third quarter 2008 compared with the same period last year was primarily attributable to continued impact of the CMS decision during the second quarter of 2007 to institute a new form of immuno [ph] XOPENEX Inhalation Solution and generic albuterol Inhalation Solution products. XOPENEX HFA, revenues reached $18.5 million versus $17.1 million in the third quarter of 2007.

BROVANA continues to progress well in the third quarter. BROVANA reached $14.8 million versus $2.4 million in the same period last year. BROVANO continues to gain retail and non-retail volume.

The third quarter GAAP EPS was $0.17 versus third quarter 2007 GAAP EPS of $0.34 per diluted share and our non-GAAP EPS was $0.10 per diluted share, for the third quarter versus $0.34 per diluted share in the third quarter of 2007.

Please now refer to slide 5 that illustrate the reconciliation of GAAP to non-GAAP net income and EPS for the third quarter 2008 and 2007. As you can see, we further released $11.9 million or $.010 per diluted share of our deferred tax assets, adjusted for a gain and the early extinguishment of debt of $2.3 million or $0.02 per fully diluted share, offset by adjustment for the recurring items consistent with our second quarter release of $6.8 million or $0.05 per diluted share.

Please now refer to slide 6, which illustrates our overall financial performance for the nine month period ended September 30th, 2008. For the nine months ended September 2008, total revenues were $922.6 million, which was an increase of 4.2% versus the nine months ended September 30th, 2007. LUNESTA revenues were $438.4 million through September 30th, 2008 versus $451.1 million in the same period for 2007.

XOPENEX Inhalation Solutions revenues were $303.3 million versus $344.7 million for the first nine months of 2007. XOPENEX HFA revenues advanced to $52.7 million versus $50 million in the first nine months of 2007. BROVANA which was launched in April 2007 had revenues that reached $38 million versus $7.9 million in the first nine months of 2007.

And OMNARIS launched in April 2008 and ALVESCO launched in September 2008 reached a combined $25.8 million for the first nine months of 2008.

GAAP EPS for the nine months ended September 30th 2008 is 300 to $3.70 per diluted shares versus $0.54 per diluted share for the same period in 2007 and non-GAAP EPS $0.69 per diluted share versus nine months of 2007 non-GAAP EPS of $0.82 per diluted share. Cash short and long term investments were $787 million at September 30th, 2008.

Please now refer to slide number 7, the slide that illustrates our overall revenue performance for the nine months of 2008; the slide illustrates our third quarter and nine months revenue performance.

As previously discussed, our third quarter revenue was $307.7 million, a 9.6% increase over the third quarter 2007. As illustrated, consistent with our second quarter 2008 was a change in product mix of our portfolio and the decreasing share of XOPENEX Inhalation Solution as the proportion of total revenues and the importance of our growth products LUNESTA, XOPENEX HFA, BROVANA, OMNARIS and ALVESCO.

These growth products together with our Alliance and other revenues accounted for 75% of our revenue as compared to 67% during the third quarter 2007. Sepracor revenue, excluding XOPENEX Inhalation Solution grew by 21.5% quarter-over-quarter. For the first nine months of 2008 our revenues were $922.6 million, a 4.2% increase from the first nine months of 2007. When excluding XOPENEX Inhalation revenues, the growth of revenue was 14.6% over the first nine months of last year.

Please now refer to slide 8 which reconciles GAAP to non-GAAP net income and diluted EPS for the first nine months ended September 30th 2008. As I previously discussed the release of evaluation allowance on our deferred tax assets and after-tax in-process research and development charges and the after-tax on the milestone payment and certain other items as detailed in this slide in the reconciliation of GAAP to non-GAAP measures, included in today's press release provide a reconciliation of GAAP to non-GAAP net income and EPS for the nine months ended September 30th 2008 and 2007.

Later in the presentation, we'll be providing you a reconciliation of GAAP to non-GAAP diluted EPS for our full year guidance.

Now turning to slide nine; EPS for the first nine months of 2008 was directly impacted by dramatic year-to-year fluctuation in market conditions. Sepracor has taken throughout the year a very conservative position in its investment portfolio. This decision and the decrease of the interest rates on our portfolio has created a 211 basis point differential in our nine months investment returns versus same period in 2007 resulting in $13.9 million rate variance of $0.12 per diluted share. If adjusted for this interest rate variance EPS for nine months ended 2008 decreased 2.4% versus the same period last year.

I would like now to hand over the call to Mark Iwicki, our Executive Vice President and Chief Commercial Officer who will review our commercial performance and plans. Mark?

Mark Iwicki - Executive Vice President and Chief Commercial Officer

Thank you, Bob and good morning everyone. I'd like to begin with a review of our product portfolio. Please refer to slide number 10.

As I mentioned on our last call in April 2008, we launched OMNARIS Nasal Spray which is indicated for the treatment of nasal symptoms associated with seasonal allergic rhinitis and perennial allergic rhinitis. Allergic rhinitis is a large category; a market we believe presents considerable opportunity for a unique and differentiated product like OMNARIS.

In September, we began the specialty launched for ALVESCO HFA with the help of our newly deployed Sepracor managed contract field team comprised of approximately 400 sales professionals. We are taking a targeted approach to pulmonologists, allergists and pediatricians. The early results of both launches are encouraging.

ALVESCO HFA is a new inhaled corticosteroid indicated for the maintenance treatment of asthma in adult and adolescent patients, 12 years of age and older. We believe that ALVESCO is a differentiated product with line extension potential. The initial response to ALVESCO has been positive.

We have two products with continued growth potential in our portfolio. We believe LUNESTA has an opportunity for some upside potential as market shares stabilizes. We also see BROVANA having strong growth momentum and out goal is to drive upside opportunities across various channels.

We have two products for which we will focus our investments with the goal of ensuring optimized contribution. Our plan for XOPENEX Inhalation Solution is to capitalize on our loyal customer base and generate field force efficiencies with the launches of OMNARIS and ALVESCO.

With XOPENEX HFA, we planned to further focus our resources during the CFC transition and concentrate resources on doctors and patients that have demonstrated preference for the XOPENEX family of products.

Now I'd like to focus on some efficiencies we are realizing from our promotional spend across our portfolio of products. As depicted in the graph, in the upper right hand position of the slide, year-to-date we've reduced our promotional expenses by 6.6%. As you can see, we've decreased our spending by 8% on our focused investments and 2% on our growth products, while we've shifted and increased our allocation of promotional resources to our launched products by 10%.

Of particular note, depicted in the graph positioned in the lower right hand corner of the slide, the chart shows that the revenue generated per $1000 spend on promotional expenses of our products year-to-date has increased by 8.4%.

Moving now to slide 11, the insomnia market has been challenging and the overall growth rate this year has been declining. The insomnia market is now trending to a mid single-digit growth rate, compared to a high single-digit growth rate that was forecasted at the beginning of the year. As depicted, in the upper left hand of the slide volume for LUNESTA this year has remained relatively stable and we continue to make strong efforts to improve contribution.

Our priorities for LUNESTA for the rest of the year are to continue to differentiate our product from other agents, particularly generic zolpidem and to maintain our focus on field force productivity. We have significantly reduced our DTC spend in the second half of 2008 and made strides in improving LUNESTA DTC efficiency, with revived media plans and new direct marketing initiatives.

In addition, as illustrated in the chart in the lower left hand corner of the slide, LUNESTA is closing the market share gap with AMBIEN CR and has lost less market share even with our decision to considerably reduce the amount of spend on retailing and DTC.

We've closed the gap and improved contribution despite IMS audits that suggest AMBIEN CR has significantly more product details and DTC then LUNESTA.

Please refer now to slide 12. OMNARIS is our new intranasal corticosteroid that we launched in April for the treatment of seasonal and perennial allergic rhinitis. We believe that OMNARIS is of to a good start and we are excited to make this great product available to help the millions of patients that suffer from allergic rhinitis. The weekly uptake has been strong and as you can see on the chart on the left of the slide, market share continues to rise.

Market data to date is showing strong prescription growth among key specialties, and OMNARIS has strong growth with both allergists and ear, nose and throat specialists.

This is the first time that we have called on ENTs and we're really pleased that our share has grown quickly in this key specialty.

As shown in the bottom right hand of the slide, we have been very competitive with our top tier targets and have gained the largest market share with doctors in deciles eight to ten which are the highest prescribers.

We have changed our reps on additional clinical data and are fully focused on driving growth during the fall allergy season.

Turning now to slide number 13; BROVANA is a long acting beta-agonist approved for the maintenance treatment of bronchoconstriction in adult patients with COPD. BROVANA has the potential to significantly improve lives of patients suffering from COPD and through its twice daily dosing regimen, reduce their dependency on nebulizer therapy. BROVANA helps COPD patient maintain lung time function for a full twelve hours enabling them to participate in activities during the day rather than keeping them at home tied to a nebulizer.

We are excited that doctors and patients alike are seeing the positive benefits of BROVANA treatment. BROVANA's performance in the third quarter was strong as volume continues to grow. This strong showing in particularly... is particularly encouraging as there are some seasonality in the COPD market during the warmer months. I am pleased to report that this growth is coming from both retail and non retail sources and that BROVANA has again reached a new peak of performance.

In addition to OMNARIS and ALVESCO, our new Sepracor managed contract sales team has started retailing BROVANA. This team will provide us with the opportunity for increased reach to targets for BROVANA with higher call frequency.

During the remainder of this year, we'll continue to emphasize BROVANA's key benefits. We'll also devote resources aimed at maintaining and expanding our formulary status with managed care organizations and home healthcare providers.

Turning down to slide 14; as you can see are focusing our BROVANA retailing efforts on the top prescribing doctors which are deciles eight to ten. The prescribing practices in the Nebule solution market are highly concentrated with approximately 13% of prescribers accounting for about 60% of the RX volume. Sepracor is concentrating its resources on these key prescribers. And as you can see depicted in the upper left hand corner of the slide, 53% of our primary details are in these top deciles.

The bottom left chart shows that we've gained greater share in the top targets. Our share is 2.4% with these high targets which is four times the share of deciles one to four. We believe this streamlined effort will make BROVANA a key contributor to overall performance in the future.

Moving now to slide number fifteen; I'd like to comment on the performance of XOPENEX Inhalation Solution. XOPENEX Inhalation Solution revenues year-to-date have been impacted by medicare part B reimbursement and the price decline in the home healthcare market. As well as the fact that generic albuterol and DUONEB have gained some share.

Year-to-date XOPENEX Inhalation Solution volume remained steady in the retail market. We've seen share strengthened during recent weeks due to our increased promotional efforts and the start of the fall season. The impact on revenue for the third quarter '08 versus '07 can be primarily attributed to reduced home healthcare sales as reimbursement rates have fallen sharply since CMS implemented the bundled reimbursement methodology in July 2007.

We will continue to implement our very targeted approach with the highest volume prescribers and expect to continue non-personal promotion activities for key positions. Our efforts are focused on top decile prescribers as well as loyal XOPENEX prescribers and our share with these doctors remains strong. In addition, the launch of OMNARIS and ALVESCO gives us a good opportunity to optimize XOPENEX Inhalation Solution sales and marketing spend with the focus on significantly improved efficiency.

Please now refer to slide number 16, which illustrates XOPENEX HFA's performance year-to-date. The short-acting beta-agonist HFA MDI market has been a challenging market for us due to heavy switching and discounting in the class, particularly at the retail level. We are encouraged to see that volume and share are up year-to-date versus the same period in 2007 for XOPENEX HFA.

In addition, we've seen a recent increase in volume during the fall season. Our managed care position remains strong with unrestricted access for 93% of managed care lives. Our objectives for the rest of the year are to emphasize strong consistent detailing to physicians, who are then significant prescribers for XOPENEX HFA or XOPENEX Inhalation Solution. XOPENEX efforts remained focused on educating healthcare professionals on the fact that XOPENEX HFA is the only differentiated molecule in the branded short-acting beta-agonist HFA market with advantages over albuterol products.

These educational efforts will take on increasing importance as the phase out of CFC containing short-acting bronchodilators is completed by the year end 2008. Our focus is on higher margin channels and we've made contribution improvements year-to-date for XOPENEX HFA.

Moving on to slide number 17; as mentioned earlier we launched ALVESCO HFA in September. The initial focus of the launch has been on key specialists. Our field force is calling on approximately 14,000 pulmonologists, allergists and pediatricians.

We are really pleased to report that volume and share are growing nicely and by the seventh week, TRx market share among allergists was 1.2% and 0.7% amongst pulmonologists. Some key launch programs include our patient experience program and currently over 7,000 targeted healthcare providers have received that start program enrollment kit.

These start kits have been well received by doctors as they give patients a free trial of ALVESCO and provide healthcare professionals with an opportunity to observe firsthand the patient's experiences with ALVESCO. We plan to extend our detailing efforts to primary care physicians in the first quarter of 2009.

Please now refer to slide 18. As I mentioned earlier, promotional expenses for the first nine months are down on the comparable basis to the same period last year. We're focusing our resources on top prescribers in key growth brands and seeing solid performance from these products. As mentioned earlier, LUNESTA's performance seems to be stabilizing despite a reduced but more targeted spend on detailing and DTC.

BROVONA's volume has moved to its highest level since launch and we're anticipating further growth base on our retailing efforts targeted at the highly concentrated sector of Nebule solution prescribing market.

XOPENEX Inhalation Solution and HFA are both holding ground in challenging markets. We're seeing positive OMNARIS launch momentum, especially with key specialists and high prescribers.

The ALVESCO specialty launch activities are underway and we're preparing to expand our reach to primary care beginning in the first quarter of 2009. We've seen strong improvements in field force productivity, increases in calls per day, frequency to targets and share improvements in many territories are signs we are beginning to build momentum. We believe our primary care and specialty field forces should be a continued strength for Sepracor.

During the first three quarters of 2008, we have made significant changes to our marketing mix for individual brands and across our portfolio. These changes are fostering streamlined sales and marketing plans and driving margin improvements.

During 2008, we launched OMNARIS and ALVESCO and continued to promote out inline brands, all this while reducing sales and marketing expense versus 2007. Resources will be further allocated towards launch and growth products and our goal is to continue to improve contribution for all brands.

At this time, I would like to hand the over to call to Mark Corrigan who'll provide an update on our progress in the R&D area. Mark?

Mark H.N. Corrigan, M.D. - Executive Vice President Research and Development

Thank you, Mark. On slide 19, you will see our pipeline charts which are modified to reflect our growing franchises.

On today's call, I will take you briefly through the pipeline, discuss the direction we've been taking with the LUNESTA franchise development program, update you on European regulatory process and comment on key upcoming events for R&D at Sepracor

Starting with our respiratory program; this is our respiratory pipeline. The XOPENEX family as marketed products of inhalation solution and HFA which you heard about from Mark. XOPENEX Inhalation Solutions in combination with ipratropium for COPD, is phase III ready to start clinical studies next year.

Thanks to our technology license from Arrow we are advancing ciclesonide inhalation solution as a standalone product and in combination with BROVANA.

Finally for ciclesonide franchise we've just commenced phase III for OMNARIS HFA and we'll be conducting clinical trials for both seasonal and perennial allergic rhinitis.

Turning now to slide twenty; our CNS pipeline. The LUNESTA franchise development program reflects what work we are doing on a new formulation of LUNESTA SEP-018. I will describe that in detail later. SEP-2093 eslicarbazepine acetate for the adjunctive treatment of Epilepsy. We anticipate filing the NDA early next year, and commencing the U.S. immunotherapy clinical Program.

For anxiety, we have low dose modified release SEP-441. This exciting program has completed enrollment and we're looking forward to results from our large phase II trial early next year. Our anti-depression clinical portfolio is deepening, is led by our triple reuptake inhibitor 289, is the first of three triple reuptake inhibitors with SEP-432 and SEP-425 advancing in phase I. SEP-162, our dual reuptake inhibitor is Phase II, III ready as we complete our experimental medicine studies and anticipate dialogue with the FDA about the scope of the necessary ongoing program.

Finally, our approach to non-narcotic treatments for pain, includes SEP-425 as well as the first in class D-amino acid oxidase molecule SEP-900. Not depicted on the slide, is our further discovery efforts that continued to produce product candidates.

Turning now to slide 21, our LUNESTA franchise development; which is an integrated program consisting of four main components. First, is label expansion. These are the studies in insomnia associated with co-morbidity. Notably, these have been included in our MAA filing for Lunivia and in the European Union to provide further differentiation for our product label there.

The second, our product improvements to adjust the bitter taste experienced by a minority of patients taking LUNESTA. This is tablet coating optimization that we're seeking to potentially have them in market in our fourth quarter of 09.

Thirdly, our new formulation for which we've filed an application and conducted clinical studies targets further mitigation of the adverse event profile as well as targeting other potential benefits.

Finally, given the exciting formentation [ph] benefits as we've seen by studying LUNESTA in a combination with Prozac [ph], we have been investigating possible best in class approaches for the treatment of depression and anxiety by utilizing combinations of 162 and LUNESTA and 162 and SEP-441 respectively.

Turning to slide 22, European regulatory action on LUNIVIA; last week, we were pleased to announce that we've received a positive opinion recommending approval for LUNIVIA NAA based on quality, safety and efficacy. We are excited that the label allows for short and long term use, but the CHMP did not recommend new active sub status. We're considering applying for reexamination of the NAS status, not withstanding being granted the positive opinion and we have 15 days from when we received the regulatory action to file.

The procedure for reexamination is as follows; to sponsor or submit a letter of intent. The CHMP assigns a new rapporteur and co-rapporteur, the sponsor submits detailed grounds for reexamination. And finally the CHMP grants an opinion within 60 days of submitting detailed grounds for reexamination. That puts us into the first quarter of 2009 assuming no clock stoppage.

Turning to slide 23; finally, I would like to review our key recent and anticipated R&D events at Sepracor. OMNARIS HFA program, phase III initiation has begun. Last week we received a positive opinion for LUNIVIA's MAA by CHMP. We had a positive PMDA meeting for LUNESTA in Japan. In Japan not only had we have the positive meeting with the Japanese health authorities, we have started clinical enrollment in both of the Phase III studies.

For SEP-432, we plan to have Phase I single dose maximum tolerate dose results. For SEP-018, we plan to have formulation study results. For SEP-162 we plan to discuss with the FDA our plan for phase III initiation.

In the first quarter of '09, we are looking forward to the phase II proof-of-concept results on SEP-441 and we anticipate an NDA submission for SEP-2093.

Looking ahead around the middle of the year, we anticipate the completion of phase II for triple reuptake inhibitor SEP-289.

With that, I hand the call back over to Adrian. Adrian?

Adrian Adams - President and Chief Executive Officer

Thank you, Mark. And please now refer to slide number 24. Mark has given a brief update on the excellent progress we are making across research and development.

A major focus of our activities over the course of the past few years has been to broaden and deepen our pipeline with near and longer term value enhancing opportunities that take us beyond the projected plant [ph] expires of XOPENEX and LUNESTA.

This chart shows that not only how we have a good track record of launching products in nearly every recent year but that we have the potential to launch nine new products over the course of the next six years in addition to OMNARIS and ALVESCO this year.

This is potential product launch schedule that is among the best in the specialty pharma sector.

Please now refer to slide number 25. This slide covers our financial guidance for full year 2008. We have tightened the revenue range of our full year 2008 financial guidance to between $1.275 billion and $1.325 billion. The mid point of this revenue guidance represents an increase of approximately 6% over 2007.

Our SG&A expense guidance is now at $765 million versus $780 million which was previously given on the last conference call. As Mark mentioned, we are making progress in gradually reducing our promotional expenses in a productive way. Our research and development expense guidance in now $260 million versus $275 million which was previously given on the last conference call and this figure includes the charge of $10 million related to the Bial milestone payment.

The new guidance for operating expenses does not include any of the special or recurring items incurred during the nine months ended September 30th. 2008 detailed in the GAAP to non-GAAP reconciliations discussed earlier and attached to today's press release or any additional changes from these major recurring items projected for the remainder of the year with the exception of the charge related to the Bial milestone payments as noted above.

The diluted GAAP EPS guidance is between $4.20 and $4.40 based on a 160 million weighted average data... weighted average shares outstanding. By debt diluted non-GAAP EPS guidance is between about $1. 27 and about $1.47 based on the 116 million waited average shares outstanding, while cash, short and long-term investments at the end of 2008 will be approximately $810 million.

In 2009, our tax provision and our cash payments for income taxes will vary dramatically due to the continued utilization of federal and state annual carry forwards. We'll be providing you an update to the 2009 effective tax rate, when we provide our 2009 guidance early next year.

Now turning to slide 26; this slide illustrates the GAAP to non-GAAP EPS reconciliation for our full year guidance. As you all know, no additional special items are forecasted for the fourth quarter. However, the EPS does adjust slightly for each item because we are utilizing 160 million shares in our full year EPS calculation. Recurring items will increase by approximately $0.06 per diluted share in the fourth quarter.

Please now refer to our final slide, slide number 27. As part of our long-term planning for Sepracor, we've laid out a clear strategy for building Sepracor into the future and we're now executing against that plan. With this in mind we have some fundamental near term quarter objectives that are enablers of this longer term plan.

We are striving for solid performance from all key growth private products and from the recent product lunches of OMNARIS Nasal Spray and ALVESCO HFA. We will continue to focus on delivering enhanced productivity and improving expanse ratios as measured against all products revenues.

Year-to-date we've increase sales on marketing expanse ratios against all product sales and we plan to continue to decrease these expenses going forward. Our research and development pipeline has grown considerably this year and existing programs continue to advance.

We now have a new LUNESTA formulation SEP-018 that is in phase II with launch potential in late 2011, 12. This is part of an integrated LUNESTA franchise development program we've been working on for some time.

We are also on track to file an NDA for eslicarbazepine acetate in the first quarter of 2009. There are many additional upcoming research and development milestones with a large scale phase II study for SEP-441, our new low dose modified released eszopiclone for the treatment of anxiety that is expected to report later in the first quarter of 2009 and SEP-289 our triple reuptake for depression that is expected to report late in the third quarter of 2009. We also plan to discuss with the FDA this quarter the potential for SEP-162 advancing into phase III development in the second half of next year.

Our respiratory portfolio has expanded this year with rights we acquired for product candidates and enabling technologies. We have successfully completed several corporate development and licensing agreements, in particular in licensing eslicarbazepine acetate from Bial, the Nycomed agreement, the Arrow agreements and the acquisition of Oryx in Canada.

In summary, we believe that we are well poised to take Sepracor into a new phase of momentum and we believe we are executing well against the plans we put in place in the first half of this year.

At this point, I would like to open up the call for questions-and-answers. Operator?

Question And Answer

Operator

Thank you. And ladies and gentlemen, the floor is now open for questions. [Operator Instructions]. Our first question is from the line of Ian Sanderson with Cowen And Company. Please go ahead.

Ian Sanderson - Cowen And Company

Good morning. Thanks for taking the question. First of all on the LUNESTA franchise development program, besides improved tolerability what are the other core potential improvements of 018 and are there patent claims filed covering these improvements?

And in general on the LUNESTA franchise what do you believe needs to happen for the insomnia treatment market growth to resume?

Adrian Adams - President and Chief Executive Officer

Mark, you just take the first one and I'll take the second.

Mark Iwicki - Executive Vice President and Chief Commercial Officer

Ian for competitive reasons at this point in time, we were not going into the level of details around the other potential improvements. But I think you can see it. First of all LUNESTA we think has got a lot of very attractive product characteristics. But in general that one looks sleep hypnotics [ph] improving the overall tolerability, our primary goal.

Secondary, we'll look for any potential benefits such as next day functioning which the FDA has commented on as important to look at in a sleep hypnotics. And then we will be looking at other types of efficacy parameters, the usual ones being sleep latency and sleep maintenance and the next day adverse effect side.

Adrian Adams - President and Chief Executive Officer

And as you mentioned Ian, we have put in a number of patent applications that have been filed and at the appropriate time we will communicate the outcome of that. I would like to stress that this has been part of an ongoing integrated program that has many different avenues and we are very pleased with the progress today. But in particular a potential launch schedule of the new formulation in the 2011, 12 time frame.

In relation to the insomnia market, I think that's a very good question, Ian. I think as Mark mentioned during the call, I think this year the market has not grown as well as we had anticipated. We'll probably then exit this year with a growth rate in the mid-single digits.

As we look forward to next year, Mark has also commented on our strategy moving forward, particularly in driving enhanced productivity, breadth and depth of prescribing in our target, our high defile of prescribing physicians.

We do believe as we go into next year that there is some enhanced potential for Sepracor and that those efforts together with the potential changes and the dynamics from a competitive point of view, we believe could lead to further opportunities for LUNESTA. And again I think there is no doubt that this year there has been some impact across all chronic disease areas in this economy where patients go to pharmacists will find that a lot of patients in chronic diseased areas are missing prescriptions and then going back into the system which is affecting a lot of products.

But we remain very encouraged, we have a lot of different plans in place for next year. And we're hopeful that will further stimulate the market, close the gap with AMBIEN CR even more and place us very well in relation to the opportunities that we have next year.

Ian Sanderson - Cowen And Company

Just a quick follow up. I believe at one point you indicated that at the end of this year you would be taking step back to look at LUNESTA, whether this was a franchise that you are going to continue to invest heavily on the promotional side. Should I assume given this franchise extension program that is now off the table?

Adrian Adams - President and Chief Executive Officer

No. I don't think you should assume that that is off the table. I think what we've commented on a number of occasions Ian is the fact that's we obviously invested significantly in LUNESTA. And that is why LUNESTA has done extraordinarily well since its launch in 2005.

Mark has made several comments in relation to our promotional strategy this year with a different mix of direct-to-consumer advertising and print advertising and retailing resources. We've also had a very close eye on contribution margins with LUNESTA. Clearly we see continued opportunities as we go into next year. And obviously from a LUNESTA franchise development perspective we've been working on those different strategies for sometime in addition to the fourth quarter of next year where we anticipate the new film coated version of LUNESTA coming out, SEP-018 which is obviously a franchise development opportunity, new formulation.

And we believe that LUNESTA will continue to offer significant opportunities, particularly in the event if we are able to get further [indiscernible] accepted for this franchise. So we're going to move forward with the continuing, with very focused productive effort in high decile doctors leveraging the loyalty that is with LUNESTA and continue to invest in a targeted way, given the growth of the market.

Ian Sanderson - Cowen And Company

Thank you.

Operator

Our next question is from line of Greg Gilbert with Merrill Lynch. Please go ahead.

Greg Gilbert - Merrill Lynch

Hi, I have a few...First for Mark Iwicki. You mentioned contribution improvements a few times I believe for LUNESTA and XOPENEX MDI. Can you discuss specifically what you mean there and how you're achieving those improvements?

Mark Iwicki - Executive Vice President and Chief Commercial Officer

Greg, it's a great question. We're not going to go into the details of exactly what the spend is, but I am sure everyone has seen some of our focus that we put forward on LUNESTA. We have brought down our DTC spend, we believe it's a very effective spend; we have a new mix of print versus TV. We also have focused on our professional promotion resources out for LUNESTA and that is significantly improving contribution. We've made the same kind of marketing and sales mix changes across all of our brands.

So that as Adrian said, we have a very focused promotional support of the brands. We're also doing everything we can to leverage our existing franchisees, XOPENEX Inhalation Solution and XOPENEX HFA and because of our new sales force that gives us a great chance to reinvest in a very productive way just against the top targets for those brands. And we expect that with the combination of the fall season and that increased effort that will see some improvements with volume and share for those brands as well.

Adrian Adams - President and Chief Executive Officer

And some of those products also have additional contribution, due to some of the shifts of the marketing spend and sales efforts to the OMNARIS and ALVESCO franchise.

Greg Gilbert - Merrill Lynch

Anything within the pricing part of the equation of that you've changed as a strategy?

Mark Iwicki - Executive Vice President and Chief Commercial Officer

At are high level, no Greg. We've focused very hard to keep our managed care asset where it has been. It's very strong for the majority of our products. And we're going to continue to evaluate that strategy for LUNESTA as we see what happens to AMBIEN CR next year. But no, we've not had significant changes there.

Greg Gilbert - Merrill Lynch

Okay. On the business development front, Adrian what are your near term business development priorities right now and for Bob, how large a cash deal could Sepracor do in today's financing environment?

Adrian Adams - President and Chief Executive Officer

I think as we've mentioned on the number of calls, Greg it's a very good question I think. We've had some considerable success on the corporate developments and licensing in terms of [ph] our goals, as they stand now are a little bit different and more defined than they were at about 12 months ago.

Clearly, if we were able to identify an inline product, which is synergistic with our current product portfolio that would be a nice opportunity for us to bring in even more fully leverage the sales and marketing infrastructure.

Secondly, we are very excited about the evolution of our research and development pipeline and particularly with the addition for LUNESTA 018. With the likely results of a number phase II programs next year, we would very much like to share the risk in commercialization efforts potentially with those phase II assets. So, if we are able to identify a partner, particularly a partner outside North America with some loose assets, that would also be willing to share in the development.

That is a goal for corporate and licensing avenues and also we continue to assess on an ongoing basis particularly in the market environment as where at this point in time the potential for opportunistic M&A type opportunities that again give us the opportunity of leveraging the organization. And in particular if we are able to move to situation of adding some of the specialty areas to our portfolio.

On second piece, it's a little bit complicated due to the fact that depending on who you buy they might have the cash balance or net cash balance that could provide additional ability to utilize our cash. I think Sepracor's balances as you know we have some debt later this year and put on the 2004 [ph] during in the forth quarter of next year. So we would have to ensure that we have the ability to pay those off before we able to use any cash for an acquisition.

Greg Gilbert - Merrill Lynch

And one last one if I could sneak it in. When would you expect to hear back on the patent term restoration issue for LUNESTA? Thanks.

Adrian Adams - President and Chief Executive Officer

There we anticipate back on that sort of shift in the near future. And we have no feedback that suggests that's our base assumption [ph] that we will have LUNESTA till the second half of 2014 is not a guess.

Greg Gilbert - Merrill Lynch

Thank you.

Adrian Adams - President and Chief Executive Officer

Thank you.

Operator

Next go to line of Christopher Schott from JPMorgan. Please go ahead.

Christopher Schott - JPMorgan

Great thanks. Just two questions. First on LUNESTA, can give us inventory levels end of the third quarter any impact on the quarterly sales from changes of LUNESTA inventory this quarter. And then on your R&D spend. I think you highlighted your presentation today, it seems you got a lot of your CNS pipeline moving to other states development in a number of late... there's respiratory candidates [ph] as well. How should we thinking about spending level on R&D next couple of years as we prepare [ph] to move in the Phase III development.

Should we expect a very significant increase in R&D. I think you just mentioned ex your partnership potential assets some expenses but again when you move forward with all these assets if you don't have a partner in place? Thanks.

Mark Iwicki - Executive Vice President and Chief Commercial Officer

I'll comment on the second part of your question and Bob will comment on the in the first year. You're quite right. I think it's actually a very nice challenge to have that we have a very nice robust pipeline on both the CNS and respiratory side of things with the number of programs potentially moving into phase III go off as they start to come through.

And clearly, we're obviously very aware of the fact that phase III developments can be expensive. So in that regard, I'll obviously I want to quote for next number of years. We have the ability of phasing in those Phase III development programs in line with the managing the ratio of R&D spend as a proportion of overall revenues. And also quite clearly, we believe that if the results of our Phase II studies come out as we hope they will, but that will enhance the possibility and probability of getting a partner certainly outside of the North America for which we have no presence.

So a key part of our strategy is to obviously look for opportunities of driving our revenues forward, look for opportunities of further improvements in our ratios particularly on a sales and marketing point of view whilst continuing to invest in R&D on a going forward basis, but with a key assumption that we will phase programs in but also look to partner those assets to share the risk and share the development cost.

Sure now LUNESTA inventory levels from 9/30 2007 to 9/30 2008, there is a slight decrease which equates to about $2 million in overall revenue and from second quarter to third quarter there is an increase which equates to about $5.5 million of sales.

Operator

And we'll move to Rich Silver with Barclays Capital. Please go ahead.

Richard Silver - Barclays Capital

On the last question about inventories, Bob can you also give us the numbers for the other products as well.

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

Sure I'll give you LUNESTA... I mean UDV is relatively flat from 9/30/07 to 9/30/08 and it's actually on the download trend from 6/30 to 9/30 and that equates to about $4 million on the download trend.

NDI is up slightly and that's normal seasonality. It's up slightly from last year as well. And BROVANA is up plus slightly and OMNARIS and ALVESCO still in their launch phases, but OMNARIS is down slightly from 6/30.

Richard Silver - Barclays Capital

And can you also talk about ALVESCO in terms of how much stocking there was in that quarter?

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

Yes ALVESCO is at normal stocking. You've got to just remember that that's... there is two doses. So there is compared with ALVESCO, OMNARIS would be almost double the amount.

I think we're well positioned from an inventory standpoint, it's distributed deep at the pharmacy level. And I think we've achieved all we wanted to on our regional launch.

Richard Silver - Barclays Capital

It was most of that stocking the $17 million?

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

Yes you have to assume most of it stocking.

Richard Silver - Barclays Capital

Okay. And then just as we look at the EPS guidance, just so that I understand apples-to-apples versus previous adjusted guidance of 127 and 147 versus what as previous, just to make sure we're correct on that.

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

Yes it was still in the same the... we've adjusted it downward slightly, but we're still in the original in the previous guidance.

Richard Silver - Barclays Capital

So what was the previous range, apples-to-apples?

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

I don't have the exact numbers and I'd be hard pressed to give it to without a reconciliation on our press release.

Richard Silver - Barclays Capital

Okay. And then just lastly, as I back into the SG&A for the fourth quarter using the low end of your new guidance range, would imply a $175 million. Is that a normal base or is that artificially low? I mean how should we be thinking of building the SG&A as we look into '09?

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

I think that's a pretty good trend going forward.

Richard Silver - Barclays Capital

Okay. Thanks very much.

Adrian Adams - President and Chief Executive Officer

And as I mentioned Rich, as I mentioned on the call as we move into next year, we'll be looking for further opportunities to enhance and improve our ratios particularly in the SG&A.

Richard Silver - Barclays Capital

Yes. And just one last one, Bob sorry. On the adjusted EPS, just to be clear, is the range adjusted downward or is the high end lowered?

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

High end lowered.

Richard Silver - Barclays Capital

High end lowered okay. Okay, thanks very much.

Robert F. Scumaci - Executive Vice President and Chief Financial Officer

Thanks Rich and its different to hear you're on now associated with Barclays rather than Lehman.

Richard Silver - Barclays Capital

Good to be here.

Operator

Our next question is from Marc Goodman with Credit Suisse. Please go ahead.

Marc Goodman - Credit Suisse Securities

Yes, I just wanted to make sure I understand this LUNESTA new formulation. Can you give us a sense of how many different formulations you've worked on and do you feel like you've come up with the best one that we're taking in or do you have a few that you might be taking into clinical just so we understand the timeline that you're laying out, I mean this is the... this is the one we've decided, is this an internally developed product? Did you get outside help; is your delivery attached to it? Just trying to understand the work behind that.

And then secondly on the new coating LUNESTA, you're talking about that... I just want to make sure I understand that's fourth quarter '09 launch. So you've obviously finished optimizing the coding. Can you give us a sense of how much... how many patients have the bitter taste and how much have you lowered that side effect?

Adrian Adams - President and Chief Executive Officer

I'll start with the second part of that question there, very good question and we're pleased that you're asking them as we are excited about the LUNESTA franchise development program.

Clearly upon... it looks like LUNESTA and looks at the bitter taste that seems to be apparent in a minority of patients. It is also clear that with the bitter taste, that there are certain proportion of patients who have that bitter taste almost immediately when taking the LUNESTA and we estimate that all those patients that do complain of a bitter taste will run about... 30% of those complain about that immediately.

So we've recognized that with the tablet with this products improvement which in essence is caught in that which will...from a regulated perspective would be a change become effective strategy that will address that particular components of the bitter taste issue and that's why we have a confidence in relation to the fourth quarter 2009 opportunity. And again, it's a part of bridging a build platform and from overall LUNESTA franchise development perspective from the

Marc Goodman - Credit Suisse Securities

Third part of your question [ph].

Adrian Adams - President and Chief Executive Officer

Sorry.

Marc Goodman - Credit Suisse Securities

So has it completely gone away? I mean have you done like a small little clinical taste test and it's completely gone away or is it only in 2% now or?

Adrian Adams - President and Chief Executive Officer

While we've obviously as we rolled... but I had some look at overall database will be sharing updates or and hopefully looking at for publications outside or around that particular time and at that time we'll share the details within that. But clearly, we're very pleased with the film coating that we put on there and pleased with the results that we're seeing so far.

Marc Goodman - Credit Suisse Securities

And when are we filing that?

Adrian Adams - President and Chief Executive Officer

We hope to be filing that too in the second or third quarter of next year.

Mark Iwicki - Executive Vice President and Chief Commercial Officer

The answer to your second question, I think Adrian has characterized the adverse event here of the bitter taste. It has a number of components both on initial components and we can address through the coating as well as potentially a longer acting component that we're attempting to address. We have used some external collaborators with regard to the development of this. We've taken forward of approximately eight different types of formulations into clinical and we believe now it's a point where we are selecting what we believe is the best wrap [ph] for it.

Marc Goodman - Credit Suisse Securities

Thanks.

Adrian Adams - President and Chief Executive Officer

Thank you.

Operator

Our next question is from the line of Annabel Samimy, with UBS. Please go ahead.

Annabel Samimy - UBS

Hi, thanks for taking my question. I also had a question on the 018 [ph] LUNESTA. I guess we're seeing a market now that's being taken over by generics and you have got a few more other drugs in development. And you've gotten FDA that's become a little bit more stringent on some of your products and looking at maybe comparative studies. So can give us an idea of how your development plan might shake out or how it might look and how do you get your 2011, 2012 launch timeline?

Adrian Adams - President and Chief Executive Officer

As we've mentioned I think for competitive reasons, we don't want go in to the overall detail of the clinical development program or the components of that. What we have said is that obviously with this formulation we have to put in several patent applications. We're focused on bringing it out in the 2011, 12 timeframe and they are number of possibilities that we see in relation to positioning of that product. And also are positioning opposite what will then be the currently available LUNESTA form.

So I think, as these programs are progressed, as we get further data and as we move forward with our regulatory strategy with these, we will share data that we feel comfortable with from a competitive point of view. Obviously, it is in our interest in the broader aspects to look at several strands of work but also somewhat which actually keeps us well within our current NDA.

Mark H.N. Corrigan, M.D. - Executive Vice President Research and Development

I think Adrian hit on a key point there, which is, I believe that the regulatory hurdles space by new active mark varies [ph] in this space are going to be extraordinarily high and there I believe we have an advantage of improvement safe and effective treatment that we're making some improvements upon without changing the underlying chemical approach.

Annabel Samimy - UBS

Sorry, are you suggesting that you might be conducting some comparative studies with your own consent?

Mark H.N. Corrigan, M.D. - Executive Vice President Research and Development

We have a number of options avail to us, some are very simple but we believe will likely effective us. And also some that will lead to some other aspects of benefits. So we're very pleased with the options that we have, pleased with the patent applications that we filed and we'll look forward to update and everyone as we progress towards years 2011, 12 there.

Annabel Samimy - UBS

Okay and very quickly a follow-on for BROVANA. It looks like the non-retail component has increased a little bit more than 50% now of total sales. Do you see that as increasing further, can you give us some breakdown in return what you think going forward about how those sales shape up?

Mark Iwicki - Executive Vice President and Chief Commercial Officer

Sure, Annabel, it's Mark. It's been hovering in that 50%, 55% range. What's encouraging is that those segments continue to grow. I would expect it to probably stay in that range although it's very hard to predict exactly. We're very encouraged that we've seen great up tick in the home HealthCare arena where BROVANA's been added to appropriate patients in that COPD as well as the retail piece of the business that also has growth. We're going into a stronger season right now and we're really encouraged by that performance of BROVANA.

Annabel Samimy - UBS

Okay, thank you.

Mark Iwicki - Executive Vice President and Chief Commercial Officer

You're welcome.

Operator

And the line of Bert Hazlett of BMO Capital Markets. Please go ahead.

Robert Hazlett - BMO Capital Markets

Do you hear me folks?

Adrian Adams - President and Chief Executive Officer

Yes, good morning Bert.

Robert Hazlett - BMO Capital Markets

Thanks, good morning everyone. Just a little bit more on LUNESTA, I just want to be just make sure I understand that, for the coating formulation that you would be filing for in the middle of next year, that novel formulation that you should potentially have another three years of exclusivity assuming approval in 2010?

Adrian Adams - President and Chief Executive Officer

I think within the coating formulae there's simple film coat on the top of it. We would anticipate that that would lead to have any extensions from a patent form of R&D than a further exclusivity periods. We see that as being an improvement in the tolerability profile that will obviously be potentially out some different and additional messages from an overall promotional point of view.

On the other strains [ph], specifically with 018, obviously with the patents applied for in the event that those patents were to be issued. There is the potential for a potential extension of LUNESTA franchise. So, again I think it all depends on the paths that we've applied for that continued work. But we're obviously pretty excited about the evolution today.

Robert Hazlett - BMO Capital Markets

Okay and then just on the anti-depressant franchise. Again a number of opportunities there as well. The ones you've moved forward I guess this we could potentially think you're most enthusiastic about... but there are a number of opportunities here. Do you really feel that you'll be able us to take forward all these or and if you don't take them all forward, are they tended for partnering or when should we anticipate business decisions being made upon and some portfolio rationalization?

Adrian Adams - President and Chief Executive Officer

As you'd expected any research and development activities not only to develop lead compounds but also backup compounds and backup compounds not only backup in the clarity of definition but also potential for a profile which might add further enhancements over the course of the time.

Clearly as you well know in the R&D area, you can place say lot of investments in a number of products and you can assume not all of them actually come through fruition, that's the benefit of having back ups, as I said.

In the event that we were to successfully conclude phase III with one of those assets and commercialize that even better with a partner in the rest of the world, then clearly if we have other opportunities that are progressing through our pipeline that we feel may be better placed with potential partner and we will assess that at that particular point in time.

But it's classic back up mentality here where we had a portfolio of products with the different target profiles that we believe provide a broader range or broader array of possibilities whilst also covering potential risk profile. But Mark, you want to add anything to that?

Mark Iwicki - Executive Vice President and Chief Commercial Officer

I think you covered it. Thanks.

Robert Hazlett - BMO Capital Markets

Thanks. Just one more on LUNESTA and the decision in Europe, has this materially changed the distribution agreement at all and if so, how and when would you expect milestones and royalties to begin based on what you know now?

Adrian Adams - President and Chief Executive Officer

I think it doesn't materially change that, it has been a best on what we know now which we've mentioned we were pleased with the positive opinion and as Mark mentioned, I think in particular I think LUNIVIA could well be the only hypnotic with a long term use claim in Europe.

That said obviously, we do believe that the NAS possibility is one that we believe will obviously enhance the commercialization potential of the assets and we're considering our stance opposite that at this point in time.

So we and our partners GSK would be working diligently with that in mind.

Mark Iwicki - Executive Vice President and Chief Commercial Officer

The best time to this [ph] scenario is that regulatory actions conclude in around the first of [indiscernible]. And then depending on the national systems of pricing and reimbursement, a potential launch in the third or fourth quarter of next year.

Robert Hazlett - BMO Capital Markets

Okay. Thank you.

Adrian Adams - President and Chief Executive Officer

Thank you.

Operator

And next from line of Ronnie Gal with Bernstein. Please go ahead.

Aaron Gal - Bernstein Research

Yes, thank you for taking my questions. Looking a little bit at your cost option [ph], it looks like you've taken about a $100 million on an annualized basis out of SG&A and the R&D is going up about $60 million on an annualized basis. I'm just wondering, if you kind of look at the drops [ph] you would like to turn to put phase III, how do you think about your capacity to support more R&D on your own? I mean can you actually take some of those large primary care products into phase III.

How are you thinking about that on up kind of like the next two years or are you essentially gated by your ability to find a partner, business partner?

Adrian Adams - President and Chief Executive Officer

I don't think in we're gated by the development of a partner with any one of those assets. As you may well know, I think we've had a very good track record as an organization in developing assets and bring in them to market through Sepracor dedicated resources and I think as you also know, I think it's within the R&D evolution as programs evolve and cost come down on certain aspects and you transition walls to other parts of the pipeline, I think you manage your costs accordingly.

And clearly as we develop our guidance for next year and in particular look at all these assets that we potentially have coming through of the course of next number of years, we will look for opportunities to phase that stock development, but phase it with a knowledge that we have an infrastructure from an R&D perspective that is very capable of developing... successfully developing phase III assets.

Clearly with a portfolio and pipeline that we have, we have a lot of opportunities and there is no doubt that if we were able to share some of that development risk and share some of that development particularly from a outside North American point of view, clearly that would not only help our ratios but also enhance our ability to be able to bring these assets to market to even more quickly.

So I think... so we feel that that's a very nice challenge to half [ph]. We feel we have a very good R&D organization that has delivered a number of successes and we have a lot of confidence in R&D organization to be able to leverage the assets that we currently have in development recognizing the overall risk profile that is inherent in any pipeline of products.

Aaron Gal - Bernstein Research

So roughly just in kind of ballpark figure, how... what is the cost of taking an anxiety of depression drug through phase III?

Mark H.N. Corrigan, M.D. - Executive Vice President Research and Development

Well, I think that's an interesting question. I think it's actually different for some of the assets that we have. And one of the approaches to 162 for instance is to attempt to a path forward that is leaner than it's typical. However, ultimately you're going to be guided by the number of patients you need to study and phase III is usually at least a thousands patients with upper patient cost. It's usually between $10,000 and $20 thousand per patient. So two phase III anti-depression trails are going to run you in the neighborhood of probably $40 million. All in anti-depressant anxiety drug development phase III probably range between that on the strip down version of that....on the another hand with a little less through number of significant phase III piece can be a sizeable $80 million.

Aaron Gal - Bernstein Research

Okay and on a separate point about the edge of the say the market, what is your best take about how this market will behave looking at '09, '010. I know that all the guys are selling a better route, trying to make a point that their products are now differentiated and will behave like branded drugs and will be able to have stable price and even pricing increases over next two years. From your context in the market, are people essentially still prescribing albuterol and this is going to be essentially a run to the bottom on pricing given the managed care or is this essentially shifting back to a branded market?

Adrian Adams - President and Chief Executive Officer

That will certainly I think, I'll ask Mark to add to my comments and we'll certainly over last a year so as the market is being transitioning from CFC to HFA. I think in some ways it's been a little... atypical versus the normal dynamics of promotional sensitivity that would be in play. As I've mentioned in the past, there is a lot of ritual prescribing of albuterol within this marketplace and for a patient to receive XOPENEX HFA and be able to ask as to why that to ask as to why is that. So we believe that with the heavy discounting and retail activities that's been in place and there's been in place and it's been a slightly atypical market. That said, all strategies are articulated by markets as being to focus our efforts on XOPENEX HFA and the yes with XOPENEX loyalist.

We've been very pleased with the share stability of XOPENEX UDB Inhalation Solution in the retail sector and our strategy is to build off that loyalty as we move into next year. And we do believe based on one of the comments you've made that we will move into a phase and of course to 2009 2010. But more conventional promotional marketing and that's where the benefits of XOPENEX HFA and DI. The educational efforts that we have in place on the back of what is a very significant proportion of XOPENEX loyalties and we will move we will move into a situation where that would be more conventional marketing and we see that with a continued opportunity with XOPENEX HFA MDI.

Mark would you like to add something to that?

Mark Iwicki - Executive Vice President and Chief Commercial Officer

Yes, the one or two points that I would is, we believe strongly that XOPENEX HFA is differentiated from albuterol. Label claims that are different, there is data that we promote but we really believe strongly that XOPENEX HFA is a great product and that we can differentiate it in the marketplace. As Adrian said and I think everyone knows right now it is scrambled for albuterol products to take the CFC market share away and a lot of pricing has been used to get that especially at the retail level.

And that's not really a market that we can access very easily because those are switches just among albuterol products. So we believe that when that dynamic is over we will be able to continue to differentiate XOPENEX HFA. We have also recently increased the promotional effort during the summer months; that's the lower season for HFA and we were launching OMNARIS and now for the fall season we move some resources back to both of our XOPENEX products. And we we're really excited about the possibilities for XOPENEX HFA in 2009.

Aaron Gal - Bernstein Research

Mark, if I can just push you on this point one bit. So I guess you obviously want to have much easier time if you're competing against in three branded albuterol products that are essentially behaving as albuterol products as oppose to albuterol generics with a race to the bottom of pricing. Is this the dynamic you're seeing next year that is, will your competition be able to establish themselves as branded enough they will able to the best economical interest to continue to market this or we essentially going to move back to somewhere with a generical albuterol market with pricing going down to commodity price in those.

Mark Iwicki - Executive Vice President and Chief Commercial Officer

Well what I prefer to do is just focus on what our strategy is, which is differentiates our XOPENEX HFA from the competitors and the marketplace. Be very hard for meet us speculate on what those competitors are going to do with their pricing strategy or their manage care. But I can tell you that a lot of that switching happens right now at the retail level from prescriptions that are written for albuterol.

I think overtime it's the branded products that will have to be written again, I think that does favor XOPENEX HFA. I think we have a very, very strong franchise with XOPENEX Inhalation Solution and I'm optimistic that we will not only be able to grow XOPENEX HFA in a focused way but that we'll be able to make it a profitable product for us long-term.

Aaron Gal - Bernstein Research

Thank you.

Adrian Adams - President and Chief Executive Officer

We have time for two more questions.

Operator

And next we'll line up Angela Larson with FAG. Please go ahead.

Angela Larson - FAG

Good morning and thanks for taking the question. Just kind of looking at the Canadian acquisition and the opportunity to take LUNESTA and BROVANA to the Canadian market. What is the status of those products with the regulators and how long might it take to move some of those forward?

That's a good question. You're right, obviously part of our strategy around the acquisition of Oryx Pharmaceuticals in Canada was to provide a spring board for future year products. So, we are working now in relation to revisions in relation to the LUNESTA and the BROVANA U.S. submissions to footfalls into Canadian formats and we would hope to be in a situation over the next three to six months to before going forward to the Canadian HPB authority's submissions of both those forward assets.

And clearly, we're looking the possibility of those assets becoming a relevant contact if the regulatory of process goes well during the course of the early part of 2007 onwards.

In addition, obviously we are very focused on putting in the NDA for eslicarbazepine acetate to the FDA in the early part of next year. In tandem with that we're also be working to develop a submission for eslicarbazepine in Canada as well.

So we see those as being good opportunities. The Canadian business is a very focused and very successful business so far, a nice spring water and I think if we bring those products through in the end of '09, beginning 2010 product line, I think that will obviously be a very key part of what was the objective in acquiring Oryx.

So those plans are well in place and I think we have some good time lines in place as well.

Angela Larson - FAG

Great, thank you.

Adrian Adams - President and Chief Executive Officer

One more question?

Operator

And that would be from the line of Michael Tong with Wachovia Capital Markets. Please go ahead.

Michael Tong - Wachovia Capital Markets

Thanks for taking the question. Just a couple, for modeling purposes can you provide some guidance on the net pricings on a per prescription basis for ALVESCO and OMNARIS. And then secondly as you gear up for the ALVESCO launch in primary care in the first quarter of '09, can you give us a flavor as to what the sales force structure is going to look like as well as the priority products under promotion at that point?

Adrian Adams - President and Chief Executive Officer

I'll comment on the second part of that question and Mark I want to reinforce that. I think second question obviously we've lost ALVESCO into a... into the specialist population in the later part of this year with a view to moving into primary care and I think one of the points we're trying to emphasize throughout our presentation and we've made comments on this during the early part of this year is that our key tactical focus from an our overall commercial point of view is to develop a very, very strong competency in relation to targeted efforts.

And that is going to be a very important part of our ALVESCO primary care physician launch. And that is to make sure that we direct our strong sales force to hold doctors that are in the high decile prescribing areas, and that's going to form the base of our continuing move from an overall commercial perspective.

There is no doubt that if one looks at the environment in which we're operating at this point in time, a lot of the changes that have taken place in the... amongst the big pharma sales organizations, there's a recognition that in the end we're as time matters most with physicians that a very targeted approach with those high decile doctors as this a way to go. We've begun and put a very strong platform in place for that this year.

We're seeing some very good improvements in overall calls and tart et cetera and that's one of the basis of what we believe will be a continued activity to develop a best practice commercial model as we move into next year and beyond.

As far as the sales per prescription, what I can do... they are both single unit doses per prescription, and I can give you the VAT prices. The VAT price for OMNARIS is $75.59 and the VAT price for ALVESCO is $130.

Michael Tong - Wachovia Capital Markets

Thank you.

Adrian Adams - President and Chief Executive Officer

Okay. Thank you and operator that concludes our call for this morning. Thank you so much everyone for joining us, particularly during these turbulent times. And I look forward to updating you on our progress on our next quarter conference call at the end of January or beginning of February of next year. You all have a good day and thank you.

Operator

And ladies and gentlemen. That does conclude today's teleconference. An audio replay of today's call will be available for one week starting today at 12 PM Eastern Standard Time. The dial-in number is 320-365-3844 and the pin number is 963625. Please disconnect your lines at this time and have a wonderful day. .

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