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Executives

Will Roberts – VP, Corporate Communications

Vincent Milano – President and CEO

Bob Pietrusko – VP, Global Regulatory Affairs and Quality

Rich Morris – Controller and Chief Accounting Officer

Dan Soland – VP and COO

Tom Doyle – VP, Strategic Initiatives

Colin Broom – VP and Chief Scientific Officer

Charlie Rowland – VP and CFO

Analysts

Joel Sendek – Lazard Capital Markets

Rachel McMinn – Cowen and Company

Brian Rye – Janney Montgomery Scott

Meg Malloy – Goldman Sachs

Yale Jen – Maxim Group

Liisa Bayko – JMP Securities

Biren Amin – Stanford Group Company

Steve Willey – Thomas Weisel Partners

Brian Skorney – Susquehanna Financial Group

Jason Butler – Rodman & Renshaw

ViroPharma Incorporated (VPHM) Q3 2008 Earnings Call Transcript October 29, 2008 9:00 AM ET

Operator

Thank you for holding, ladies and gentlemen, and welcome to the ViroPharma teleconference call. At this time, all lines are in a listen-only mode. There will be an opportunity to ask questions at the end of today’s call, and instructions will be given at that time. Today’s conference is being recorded. And thank you for your attention.

I will now turn the call over to your host, Mr. Will Roberts.

Will Roberts

Thank you, Debbie. Good morning and welcome to ViroPharma’s conference call and webcast to discuss ViroPharma’s third quarter 2008 financial results and other business matters. This call is scheduled for approximately one hour.

Certain statements regarding future demand for Vancocin; the timing of clinical studies data; and our ability to receive regulatory approvals in the U.S., Canada, and the E.U. and subsequently commercialize our drug candidates; our ability to successfully integrate our recent acquisition of Lev; our ability to successfully commercialize Cinryze; and all elements of our 2008 guidance made during this conference call, are forward-looking statements.

As you know, forward-looking statements involve substantial risks and uncertainties and actual results may differ materially from those projected in such forward-looking statements. The development, marketing, and sale of pharmaceutical products are subject to risks and uncertainties. As a result, our actual results could differ materially from those results expressed in or implied by this conference call.

Please refer to the press release issued this morning and to our filings with the SEC, for more information regarding the risks and uncertainties that could cause future results to differ materially from those expressed in this conference call.

With that, I’ll turn the call over to Vinnie Milano, ViroPharma’s President and Chief Executive Officer. Vinnie?

Vincent Milano

Thanks, Will. And good morning and welcome to everyone listening to ViroPharma’s conference call today. With me on the call this morning, in addition to Will, are Bob Doody, also of Corporate Communications; Rich Morris, our Controller and Chief Accounting Officer; and my team mates on the ViroPharma management team, Colin Broom, Dan Soland, Bob Pietrusko, Tom Doyle, and our newest addition, our new CFO, Charlie Rowland.

These are very exciting times at ViroPharma with, among other things, the near term launch of Cinryze and the near term completion of our Phase 3 study of maribavir in stem cell transplant patients.

For our call this morning, I will begin by providing some comments about our progress since the last financial call, including our acquisition of Lev Pharmaceuticals and Cinryze. Bob will discuss the new Cinryze indication and label, and Rich will discuss our financial results for the quarter and year-to-date.

Let me first acknowledge that with the current market conditions it is important for a biotech company such as ours to have a healthy balance sheet and conservative cash management practices. These are important differentiating points of ViroPharma compared to many other companies.

Through our continued successful execution of our business strategies, we are positioned to grow the Company. First, we completed dosing in our Phase 3 study of maribavir in stem cell transplant patients. The strong momentum throughout the global organization is evident as we are rapidly progressing toward our stated goals of providing top line data from that trial in the first quarter of 2009 and completing our initial regulatory approval filings for this indication in the U.S., Europe, and Canada, in the third quarter of 2009.

The second pivotal Phase 3 study of maribavir in solid organ transplant patients continues to enroll strongly. We look forward to providing specific timelines on the completion of enrolment, data disclosure, and supplemental submissions, soon.

Our Medical Affairs team and our regional medical scientists have continued to do an outstanding job of interacting with physicians who treat patients with C. difficile providing medical education and assisting in limiting the impact of a C. difficile infection outbreak on an institution by institution basis.

In addition, our financial performance during the third quarter was exceptional. Vancocin, our drug for severe CDI, had another record quarter of sales, netting $66 million during the third quarter of 2008. We believe that this continued growth can likely be attributed to the early adoption of the forthcoming CDI treatment guidelines and the impact of our sales force. Thanks to those robust sales, we have again increased and tightened our Vancocin net sales guidance for 2008 to be between $235 million and $245 million.

The third quarter of 2008 represents our fifteenth consecutive quarter of profitability and positive cash flows. We ended the third quarter of this year with cash and cash equivalents of $668 million and working capital of $672 million. Of course, we have invested some of these funds subsequent to the close of the quarter as a result of our acquisition of Lev Pharmaceuticals. Rich will comment on our balance sheet post-close in more detail in a few minutes. However, I do want to remind you that even after the close of our acquisition of Lev, our balance sheet remains very strong.

Eight days ago, we announced the close of our acquisition of Lev, following their October 21st shareholder vote in favor of the acquisition. Since then, all who owned Lev stock received $2.25 per Lev share in cash and $0.50 per share in ViroPharma stock.

Our immediate goals include fully integrating Lev into our business and launching our newly approved therapy, Cinryze, into the HAE prophylaxis market. Our focus this year is to identify as many prophylaxis patients as possible, starting with the conversion of patients in the open label studies on to commercial therapy.

Although we will not go into detail today about the commercialization strategy, next week on November 5, we will conduct another conference call to do just that. Our goal will be to provide you with much greater detail at that time of our commercial launch plans, our comprehensive patient access program, Cinryze Solutions, as well as our pricing strategy for Cinryze.

I want to remind everyone listening of the importance of this therapy to these patients suffering from hereditary angioedema. HAE is a genetic inflammatory disease that currently affects at least 4600 patients in the United States. The inflammation caused by HAE is disfiguring, debilitating, and, some times, life-threatening. The disease is directly linked to the reduced functional levels of C1 esterase inhibitor, which is a naturally occurring inhibitory protein in the blood that is involved in the regulation of the inflammatory process. Most people have more abnormal functional levels throughout their lives and therefore will never experience an episode of angioedema. However, when there is insufficient C1 inhibitor, either because of decreased production or a production of functionally impaired inhibitor, the patient may suffer the dangerous manifestations of this disease.

The most severe attacks of HAE include laryngeal and upper airway inflammation, which can be life threatening. Patients who experience a laryngeal attack often must undergo intubation or even tracheotomy. Death from asphyxiation may occur in as little as 20 minutes, and historically up to 40% of all HAE patients would die of an acute laryngeal attack in the absence of treatment.

Unfortunately, all patients, regardless whether they had had laryngeal attacks in the past, are at risk from asphyxiation. There is no relationship between previous history of HAE severity and the severity of future HAE attacks. And, there is no way to tell whether the next attack a patient will have could be deadly without emergency medical intervention.

Attacks last up to five days, resulting in between 20 and 100 days of incapacitation per year, including absences from work and school. HAE patients live in constant fear of their attacks and frequently find their ability to accomplish daily activities significantly reduced or even eliminated.

For many of these patients, prophylaxis is essential. In fact, today, approximately one-third of the diagnosed HAE patient population chooses prophylaxis with anabolic steroids, which do not directly address the underlying cause of the disease and have dangerous side effects, including virilization, carcinogenicity, and other serious adverse reactions. They have chosen this route because of their fear of HAE attacks, because they and their family members have had severe attacks and because their lives are significantly impacted by the disease. So these patients opted for prophylaxis despite the fact that until now the only available prophylactic option did not adequately target the cause of their disease.

For these patients, finally, there is a new option. On October 10th, the FDA approved our product, Cinryze, to prevent these attacks by increasing the plasma concentration of the C1 inhibitor that these patients cannot make themselves.

With that introduction, I will turn the call over to Bob Pietrusko for a review of the label. Bob?

Bob Pietrusko

Thanks, Vin, and good morning to everyone on the call. Today, I will review for you highlights of the Cinryze label. Cinryze is a human C1 inhibitor indicated for routine prophylaxis against angioedema attacks in adult and adolescent patients with hereditary angioedema, or HAE.

Consistent with our expectations, the label indicates that patients can receive Cinryze every three or four days to control their attacks or, on average, approximately two times per week. Cinryze targets the underlying cause of HAE – low levels of functional C1 inhibitor. By increasing plasma levels of C1 inhibitor activity, Cinryze prevents these attacks from recurring. C1 inhibitor activity also inactivates plasma kallikrein and factor XIIa and is thought to modulate vascular permeability by preventing generation of bradykinin.

I want to briefly review the details of the few approved package inserts to allow for a perspective on the role of Cinryze to prevent this dangerous and debilitating disease in these patients. As you know, the purpose of the package insert is to reflect the clinically meaningful data from the clinical trials to help guide appropriate usage. And we are pleased with the final version of the label. The broad indication in adolescence and adults is reflective of the clinical experience across this broad age group. It is important to note that the FDA agreed with the need to include adolescents in the label as puberty influences and increases the frequency and severity of attacks.

The safety and efficacy of Cinryze prophylaxis therapy to reduce not only the incidence of attacks but also the severity and duration of HAE attacks should they occur was demonstrated in a prospective randomized double-blind placebo-controlled multi-center crossover study of 24 patients. The efficacy determination was based on the number of attacks during the 12-week period while receiving Cinryze as compared to the number of attacks during the placebo treatment period.

Prophylaxis with Cinryze was associated with a reduction in the mean number of HAE attacks from 12.7 to 6.1 attacks during the treatment period. This treatment effect was highly significant. Patients treated with Cinryze also had a statistically significant 66% mean reduction in days of swelling and statistically significant decreases in the average severity and duration of attacks should they occur.

One of the important messages, which we will be delivering to patients, physicians, and third-party payers is that Cinryze truly transforms the lives of these patients who live in fear of HAE and are always concerned that their next attack could be their last. Not only does this therapy prevent HAE attacks in patients altogether, it also reduces the severity and duration of these attacks, if they do occur, taking much of the fear away from these patients.

The package insert clarifies that Cinryze was generally well tolerated throughout its clinical experience. The most common drug-related adverse reactions observed at a rate of greater than or equal to 5% were generally minor, including upper respiratory tract infections, Sinusitis, rash, and head ache. No serious adverse events were related to Cinryze.

Cinryze is contra – indicated in patients who have manifested life-threatening, immediate hyper-sensitivity reactions to the therapy, none of which have been seen in clinical trials of Cinryze to-date. Also, with any blood or plasma-derived product, there may be a risk of transmission of infectious agents by viruses and, theoretically, CJD. The risk has been reduced by screening all plasma donors for prior exposure to certain virus infections and by manufacturing steps taken to reduce the risk of viral transmission, including the use of pasteurization and nanofiltration.

Any blood or plasma-derived product will carry labeling statements about possible risk of virus transmission. This language is known as class labeling.

The FDA has asked us to conduct a Phase 4 trial designed to evaluate higher than the labeled dosage schedule of Cinryze to better define the safety profile of intensified dose schedules that may be used by patients who do not see acceptable clinical benefit at the labeled dose.

You will note that thrombotic events have occurred in neonates receiving high dose C1 inhibitor therapy for another use other than HAE and well above the approved and recommended treatment dosage range. As such, the label recommends that treating physicians monitor patients with known risk factors for thrombotic events. The Phase 4 requirement will help evaluate whether there is a risk of such thrombotic events the higher than approved doses of Cinryze.

Our label is strong and appropriate, reflecting the efficacy of Cinryze across a broad age group of patients and will allow prophylaxis with this therapy in any appropriate adolescent or adult HAE patient. This is an excellent and important therapy and we are thrilled to have recently received approval from the FDA.

One of our next steps will be toward the acute HAE indication. We expect to complete some additional analyzes of the existing acute data and add the open label acute study data to the package with a goal of submitting the supplemental BLA as soon as possible this year. At this point, we do not believe that the FDA will require an additional study though the FDA must agree.

With that, I will turn the call over to Rich for a review of the third quarter financial results. Rich?

Rich Morris

Thanks, Bob, and good morning, everyone. First, Vancocin’s performance during the third quarter and nine-month period of 2008. In the third quarter of 2008, net sales of Vancocin grew 29% over the third quarter of 2007 to $66 million. For the nine-month period, net sales were $182 million, 17% higher than the $156 million in net sales in the nine-month period of 2007.

Next, our expenses. During the third quarter of 2008, as expected, our investments in our clinical pipeline increased over last year’s third quarter. R&D expense for the third quarter of 2008 was $15 million compared to $11 million in the third quarter of 2007. For the year-to-date, our R&D expenses reached $45 million compared to $23 million in the nine months of 2007. The increases in both periods were driven primarily by the increased cost associated with our maribavir Phase 3 studies.

Our selling, general, and administrative expenses for the third quarter of 2008 were approximately $14 million compared to $9 million for the third quarter of 2007. Our SG&A expense has grown from $24 million in the nine-month period of 2007 to $43 million year-to-date through September 2008. The growth in both periods was primarily due to increasing compensation cost resulting from increased headcount for our European operations and Vancocin sales force, our marketing efforts, and an increase in our medical education activities.

Our effective tax rate of 21% for the third quarter of 2008 was down significantly from 36% in the third quarter of 2007. Our tax rate for the nine months of 2008 was 25%, down from 32% for the nine-month period of 2007. The decrease in the effective rate for both the quarter and nine-month period of 2008 as compared to 2007 is primarily due to an increase in our estimated orphan drug credit related to maribavir.

Also, impacting our effective tax rate is a reduction in the valuation allowance associated with our deferred tax assets in the third quarter of 2008. We believe it is more likely than not that we will realize the benefits of these deferred tax assets.

For the full year of 2008, we expect our effective tax rate will be between 25% and 30%, which excludes the potential impact of the Lev transaction, any additional potential changes in our valuation allowance, or any other discreet items.

We reported net income of $27 million for the third quarter of 2008 compared to $21 million in the third quarter of 2007. The increase is due to the increase in net sales and our lower effective tax rate.

For the third quarter of 2008, we reported earnings per share of $0.33 per diluted share compared to $0.26 per diluted share in the third quarter of 2007.

For the nine months ended September 30th, 2008, we reported net income of $69 million as compared to $75 million in 2007. This decrease largely due to lower operating income period-over-period because of the increases in R&D and SG&A, partially offset by increased net sales and our lower effective tax rate.

And we reported earnings per share of $0.84 per diluted share for the nine months ended September 30th, 2008, compared to $0.96 per diluted share for the same period in 2007.

Our balance sheet as of September 30th improved further over that of June 30th. Our cash, cash equivalents, and short-terms investments reached $668 million and working capital increased to $672 million. However, those numbers have since been reduced as a result of our acquisition of Lev. The net cash outlay for the acquisition of Lev was $385 million. So, by all financial measures the third quarter of this year was excellent.

I will now comment on our updated guidance for 2008. First and foremost, our Vancocin guidance assumes no generic competition. Also, our revenue guidance excludes revenue from Cinryze in 2008. Whatever product shipments do occur, they will be subject to the mechanics of revenue recognition for this product – this new product, which are being finalized. Our new expense guidance, however, does include the impact of expenses associated with Cinryze.

Regarding Vancocin net sales, we had increased our guidance and tightened our range. We now expect net sales to reach a range of $235 million to $245 million for the full year of 2008.

We have also increased our guidance for combined research and development and selling, general, and administrative expenses to account for the added expenses associated with Cinryze. These R&D and SG&A expenses, excluding the impact of FAS 123R, are expected to be between $115 million and $125 million.

We expect that the FAS 123R impact to the expenses I just described will be approximately $9 million. So, including the impact of FAS 123R expense, the R&D and SG&A expenses are expected to be between $124 million and $134 million.

In summary, we had a strong quarter and nine months and great momentum throughout our organization. And we expect this continue in the fourth quarter of 2008.

I will now turn this back over to Vin for some closing comments. Vin?

Vincent Milano

Thank you, Rich. ViroPharma is in a very different position today than we were at just the end of the second quarter of this year. With the acquisition of Lev, we have accelerated our evolution as a leading biotechnology company targeting dangerous diseases with few, if any, treatment options.

We are a unique and well positioned Company with two FDA-approved product in Vancocin and Cinryze; a clinical pipeline led by our anti-CMV compound, maribavir, which has important near-term milestones, including top line data from our Phase 3 stem cell transplant study in the first quarter of2009; and regulatory filings in the third quarter of 2009 for this syndication; and a strong cash position with now 15 sequential quarters of profitability and cash flow positivity [ph].

This is a very important time for ViroPharma and our stakeholders as we will soon launch Cinryze, which should, among other things, enable us to continue to deliver strong financial performance. However, that importance pales in comparison to the importance that this drug will play in the lives of many patients with HAE. Our goal is to ensure broad access to Cinryze for patients who may benefit from routine prophylaxis against HAE attacks.

For patients suffering from the life long ramifications of HAE, the approval of Cinryze marks the start of a new life with less fear and concern over this deadly disease. We will work closely with the medical community and with the key advocacy organizations, including the U.S. HAE Association, to increase the awareness of HAE and knowledge of this new prevention option as a way to reduce or eliminate the threat of these deadly attacks.

For ViroPharma, the acquisition and approval of Cinryze follows on the heals of a very successful nine-month period, with great momentum throughout our organization. Our ability to provide new avenues for growth has strengthened as has the commitment of all of our team at ViroPharma as we seek to change lives with the products we develop and commercialize.

Thank you for you attention this morning and your continued interest in ViroPharma. Let’s now open up the call for questions. Operator, are there any for us this morning?

Question-and-Answer Session

Operator

(Operator instructions) The first question is from May-Kin Ho from Goldman Sachs. Please proceed with your question. May-Kin Ho?

Our next question is from Joel Sendek from Lazard Capital. Please proceed with your question.

Joel Sendek – Lazard Capital Markets

Thanks. A couple of questions. First, I just want to make sure I had the number right with regard to the cash for the Lev acquisition because I didn’t see it in the press release. You said $385 million?

Vincent Milano

Correct.

Joel Sendek – Lazard Capital Markets

Okay. Thanks for that. And then, I know you are going to do the call next week but can you just tell us – do you think the launch will occur next year? I know you are may be doing your guidance conservatively. Is it possible that the launch could occur this year?

Vincent Milano

Dan, would you like to answer that question?

Dan Soland

Sure. We’ll have a chance to talk a lot more about this next week as we are very busy tying up a few loose ends. And the plan is to launch in 2008.

Joel Sendek – Lazard Capital Markets

Okay great, thanks. And then just quickly on maribavir, the – for the solid organ transplant, is it possible that enrollment will complete this year?

Vincent Milano

Tom?

Tom Doyle

Good morning, Joel. The enrollment in the solid organ study is going well. And the next you’ll hear from us will be when we complete enrollment, but I am not going to put a date on that today.

Joel Sendek – Lazard Capital Markets

Okay. Thank you.

Vincent Milano

Thanks, Joel.

Operator

Our next question is from Rachel McMinn from Cowen and Company. Please proceed with your question.

Rachel McMinn – Cowen and Company

Yes, thanks very much and I, again, I have a Cinryze question without trying to get into too many specifics but can you talk about how many patients you have identified to you right now? You have talked about I think a little over 100 patients, somewhere around 115 patients in the clinical trial. So, I guess how many outside of clinical trials have been identified to you?

Vincent Milano

So, Rachel, I’ll let Dan provide some color. We are not going to be in a position today to roll out the number of patients that we’ve identified. We’ll talk about the number of patients that are in the study to give you some specifics on that. I think it’s safe to say and important to note that since the product was approved on October 10th and since we closed the acquisition, we’ve had a tremendous amount of interest from patients who have this debilitating and life-threatening disease. And so we are actively receiving those calls into our Cinryze Solutions. And I am going to put a plug in here for Cinryze Solutions – any HAE patient who is listening, please go to cinryze.com or dial 1-877-945-1000 and we’ll be very interested to begin working with you to get you Cinryze.

But, Dan, may be you can update the audience here this morning on the number or patients that are in the open-label studies.

Dan Soland

Sure. And was Vin mentioned, we are excited to give you more details next week, but in the open label – there are two open label trials. The acute trial there are over 50 patients, and in the prophylactic trial there are over 100 patients and we’ll be able to provide greater clarity on that later. We have a patient registry that has hundreds of patients and at the patient – at the HAE Association patient meeting in Chicago a week and a half ago the head of that organization suggested that there are now 6000 patients in the U.S. And as we mentioned earlier, we believe it’s at least 4600. And I guess the rest of the details will come next week.

Rachel McMinn – Cowen and Company

Okay. And then moving on to maribavir, the number of CMV events in the trial considering that dosing is completed, can you tell us how many events there have been to-date or at least give us a hint as to whether or not these are consistent with your (inaudible) assumption?

Colin Broom

Yes, Rachel, this is Colin. The – as you know, this is an aimless [ph], this is a double-blind study. We do know based on the number of serious adverse events and endpoints reported how many cases of CMV disease there are. Let me just say they are in line with our expectations. And the only caveat for that is that all these cases do need to be independently reviewed by our external blinded panel. And – but everything is in line with our expectations at this point.

Rachel McMinn – Cowen and Company

Great. And then, few additional questions, just one on tax rate. Can you expect it to be positively or negatively impacted by Lev? And then last question on Cinryze – I should have asked earlier – can you give us a sense of when you expect the product itself to be profitable?

Vincent Milano

Rachel, I am sorry, we are going to disappoint you with these answers but we are not prepared to answer either one of those questions this morning. We need to do the analysis of – on the effect of the acquisition from a tax perspective and that will be part of the work we do as we get ready to file our 8-K with the opening balance sheet, which I imagine –

Rich Morris

Which should be done by the end of the year.

Vincent Milano

Okay. So we will have some information on some of the financial statement activities and tax effects in that document. And in terms of profitability, we’ll be assessing our guidance decisions and what we share with investment community for 2009 in 2009. So, today it’s too early for us to comment.

Rachel McMinn – Cowen and Company

Okay. Thanks.

Vincent Milano

You are welcome.

Operator

We still have a few questions in queue. Our next question is from Brian Rye from Janney Montgomery. Please proceed with your question.

Brian Rye – Janney Montgomery Scott

Well, thanks for taking my question and good morning everyone. Just I guess one quick thing first. You mentioned that you are already seeing some benefit from the potential, I guess, implementation of the IDSA/SHEA guidelines. I was wondering if you have any further inkling as to when those guidelines might be actually implemented and given that you are already seeing a benefit what kind of additional incremental benefit you might see – you think you might see once they are actually implemented?

Colin Broom

Yes, good morning, Brian, this is Colin. Yes the – of course the IDSA/SHEA guidelines are now essentially at least in draft, been in the public domain for one year. They were presented one year ago at the IDSA meeting. But of course we have no influence on the publication of those guidelines and when they will come out; we will have to say soon. But I really cannot on exactly when that will likely be.

For those of you closely following the situation and publications on C. difficile disease, you might be aware of a review that appears in this current 30th of October New England Journal of Medicine by LaMont and Ciaran Kelly. A very good overview of C. difficile and its current issues. It also reviews the treatment and essentially clarifies and elaborates on the data already available on the superiority of Vancocin over metronitazole in severe patient population. So, that is a very useful and important review in the premier medical journal that’s available as from today.

Vincent Milano

And Brian, this is Vin, in connection with your comment about predictability of growth, we are not again in a position to provide you guidance beyond the fourth quarter of 2008, but what we can say with certainty is that the investments that we have made and will continue to make in medical education to help physicians understand some of the dynamics that Colin referred to and the treatment guideline changes are things that we’ll continue to do. This has been a very successful program for us. It’s one that the medical community looks to us to provide. As you know, we are the – we consider ourselves the stewards of this disease. And as we continue to fight for patient safety with our Office of Generic Drugs topic, we will continue to invest in the growth of Vancocin, both in terms of medical education as well as our sales force. So – but we are not predicting any – we are not going to share today any predictions on revenue growth beyond 2008.

Brian Rye – Janney Montgomery Scott

Okay, thank you, Vin. And then I guess just one last housekeeping question on the updated financial guidance. Obviously, the increase in expenses reflects the addition of Cinryze – of the Lev acquisition. I guess I am wondering if those are all recurring expenses or for any sort of one-time severance payments built into that $124 million to $134 million number?

Vincent Milano

They are all operating expenses. Anything that’s related to the transaction itself will be capitalized and be part of that 8-K filing that we do and the opening financial statement.

Brian Rye – Janney Montgomery Scott

That’s helpful. Thank you, Vin.

Vincent Milano

You are welcome.

Operator

Our next question is from Meg Malloy from Goldman Sachs. Please proceed with your question.

Meg Malloy – Goldman Sachs

Thanks very much. I guess one housekeeping question and one follow-up on Vancocin and that is on the housekeeping, if you could just break out the ESO expenses for R&D and SG&A and then on Vanco, if you could talk about the impact of the sales efforts, volume versus price growth. And any thoughts about adding or doing anything differently on the sales line – sales peoples line? Thanks very much.

Vincent Milano

Thank you, Meg. So, Rich, can you please answer her question one and Dan will take the second question?

Rich Morris

Sure. For the third quarter of 2008, the break-out is $842,000 for R&D and $1,562,000 for SG&A. For the first nine months, the R&D 123R expenses $2,177,000 and SG&A is $4,313,000.

Dan Soland

Meg, this is Dan. And I think what Vinnie was suggesting earlier is holding true that the extremely powerful clinical data that is now available for Vancocin is winning the hearts and minds of prescribing physicians. And along with the medical education effort that we have had ongoing the draft guidelines that have been out there for one year and a reiteration of those in the New England Journal of Medicine along with active promotion, including our sales force. And with regards to our sales force, we have early indicators that it is having a positive impact on growth in the area that we are testing. It’s early. We have not taken a decision yet, but we are cautiously optimistic that this promotional effort will benefit sales of Vancocin into the future.

Meg Malloy – Goldman Sachs

Thanks, Dan. And is there an update in terms of price versus volume growth in the quarter?

Dan Soland

So, most of the growth was due to volume increase and a slight impact by mix – a mix shift towards the 250s versus the 125s.

Meg Malloy – Goldman Sachs

Okay. Thank you.

Dan Soland

Okay.

Vincent Milano

Thanks, Meg.

Operator

Our next question is from Yale Jen from Maxim Group. Please proceed with your question.

Yale Jen – Maxim Group

Well, thank you to taking my question and congratulations for your good quarters.

Vincent Milano

Thank you, Yale, good morning.

Yale Jen – Maxim Group

Good morning. Just two quick questions. The first one is outlook, the guidance that for the – for this year it seems that the fourth quarter sales will be lower than the third quarter, is that due to seasonality?

Vincent Milano

Yes, the history of this product, if we – and this will be coming up in about 10, 12 days will be our four-year anniversary running the product – the fourth quarter has traditionally been lower than the third quarter. Now, traditionally the third quarter has been lower than the second quarter, we didn’t see that now. But so – there are some obvious impacts of the new guidelines on our sales effort. So we’ve captured the range of, let’s call it, the imagination on what might be more historical versus what might be more current.

Yale Jen – Maxim Group

Okay, great. And just a – also a question about Cinryze that for the – for all the patients that being in the pivotal studies all of those have rolled into the open label study?

Vincent Milano

So, the question, Yale, I just want to make sure we hear it correctly here is did the patients who were in the pivotal study –

Yale Jen – Maxim Group

All enroll into the –

Vincent Milano

All roll over into open label study.

Yale Jen – Maxim Group

Right.

Colin Broom

Yale, this is Colin. Most of those patients did roll over, but not all. Some went onto, for instance other studies.

Yale Jen – Maxim Group

Okay, so in other words that there may not be have – may not any patients that will be sort of roll into – from the study and roll into a pay paper, those getting an annual revenue from the early dose but patient cohort for this year?

Vincent Milano

That’s a different – I am sorry, yes, I think that’s a different question. So –

Yale Jen – Maxim Group

Right, this is a different question.

Vincent Milano

So, if we go from the pivotal study to the open label study to commercial, what we’ll do is we’ll spend some time next week on the commercialization call giving you our thoughts about the roll over, if you will, from the open label study. Its’ our belief that the patients who are in open label are – want to convert into paying customers, if you will.

Yale Jen – Maxim Group

Right.

Vincent Milano

Commercial customers. So, we will give you more details on that next week.

Yale Jen – Maxim Group

Okay, great, and thanks a lot.

Vincent Milano

Thank you.

Colin Broom

Thank you.

Operator

Our next question is from Liisa Bayko from JMP Securities. Please proceed with your question.

Liisa Bayko – JMP Securities

Hi, can you maybe update us on your life cycle management plans for Cinryze, injectible, other indications, et cetera

Vincent Milano

Good morning, Liisa, let’s take that from the – first from the opportunity from a disease perspective, Colin. And then may be we can give you some colors in terms of expanding outside of the territory of the United States. So, let’s start with the disease stuff.

Colin Broom

Yes, morning, Liisa.

Liisa Bayko – JMP Securities

Good morning.

Colin Broom

We are now looking – obviously we are focused on making Cinryze commercially available, that’s the focus of the whole team at this point. But we are looking at other opportunities. It’s rather premature to comment on what they will be but areas that we’ll be particularly interested in are those that are related to the transplant area, for instance. And yes, we do see a number of opportunities where Cinryze could be a therapeutic modality. But now watch this space. We’ll – this needs considerable more work before we come out wit a life cycle plan for different therapeutic areas. We are also looking at other alternative, for instance, formulations, which are very important to look at. For instance, can we administer a formulation subcutaneously, for instance, and other areas that we’ll look in. Of course, we also have a Phase 4 commitment – requirement rather, which we are putting together a protocol, which will look at dosing algorithms (inaudible) higher doses may be required in some patients.

Vincent Milano

And on the context of expansion of territories, Liisa, when we began our work before we purchased Lev we were focused solely on the United States market opportunity. And I would say today we are 99% or 98% focused on the U.S. opportunity, just beginning now to work through some other territories of the world and understand whether the opportunities are value. But our deal was based on a U.S. analysis only. We do think there are some potential other territories in the world. But that’s not a 2008 objective for us.

Liisa Bayko – JMP Securities

Okay, thanks for that update there. And then in terms of – you mentioned the number of patients that are in the trial, and I remember in a different call I think you talked about waiting list. Can you refresh our memories on what – how many patients are in the waiting list?

Vincent Milano

Dan?

Dan Soland

So, I think we can better update you next week, but one of the things that we did with the acquisition of Lev is we made capital available so that more products would be available for clinical trials. So we’ve tried to enroll all patients who were sitting on those waiting lists.

Liisa Bayko – JMP Securities

Okay, so does that bring the total then to 100 or it’s just 100 more?

Dan Soland

It reaches over 100 today. So, as I mentioned earlier, there is more than 50 in the acute open label trial and there is more than 100 in the prophylactic open label trial. And we can comment more on that later. And also as Vinnie said earlier is that we want to make sure that Cinryze is available to any patient who could benefit from this product.

Liisa Bayko – JMP Securities

So, once Cinryze becomes available for prophylaxis will the acute – the patients in the acute open label will they convert over as well, is that – ?

Dan Soland

So, many of the patients who are in the prophylactic trial have started in the acute trial. So we could see patients from the acute trial continuing to migrate into a more prophylactic sort of treatment.

Liisa Bayko – JMP Securities

Okay. And then just one final question, I know you’ll probably defer this next week, but just to give us a sense, in terms of revenue recognitions unique to you guys, is it one the situations you need to comfort with sort of the inventory levels and how much shift back there is before you can sort of start recording revenue so there’ll not be a delay?

Vincent Milano

Charlie, you want to – ?

Charlie Rowland

Yes, I’ll answer this for you. There is a number of factors that you’d have to consider to determine final revenue recognition. So it could be at the conservative size we recognize it based on scripts to – If we get comfortable because there is more data here and we just have to dig into it in terms of what the payer mix will wind up being. If we get comfortable with that we can actually recognize revenue based on shipments or – so we can end up somewhere in between. So we’re working through that and once we have final determination we’ll let everyone know.

Liisa Bayko – JMP Securities

Okay, and then just one final question, if I may. Can you just talk about the level of interest for the product at the recent HAE meeting that was in Chicago (inaudible)?

Vincent Milano

A good question. It was interesting that there were over 200 patients at this – at the HAE meeting in Chicago in the last week and a half and I can tell you that the interest was very, very high for this product.

Liisa Bayko – JMP Securities

That’s great. Thanks and congratulations on a great quarter.

Vincent Milano

Thank you, Liisa.

Charlie Rowland

Thank you, Liisa

Operator

Our next question if Biren Amin from Stanford Group. Please proceed with your question.

Biren Amin – Stanford Group Company

Yes, thanks for taking my question. I guess I’ll focus on Cinryze like most of the other questions. Can you talk – I’m sure you’ll discuss this on the next week’s call, but a little bit around the price elasticity for this product and maybe potential impact from patient feedback on the price for Cinryze?

Vincent Milano

So, Dan, may be I can l just reiterate some of the points you’ve already made, but the more detailed answers will come out next week when we have our commercial call.

Dan Soland

So, Biren, as we’ve suggested in past calls it’s likely that the price that – or the cost of drug per patient year will be similar to other recently licensed ultra orphan drugs and as Vinnie mentioned we’ll better described next week. And I’ll also reiterate that our objective is to be sure that any patient that can benefit from Cinryze have access to the drug and we have an active patient assistance program and also a program to help – assist patients with financial – who are experiencing financial difficulties?

Vincent Milano

And I think what we can add too is that the feedback from the research that we’ve done both before the acquisition and since we announced the acquisition, with patients, payers, physician alike, this is a life-giving, life-saving product. And that’s pretty unique. And so there’s a lot of interest because of the fact that these folks who can’t hold a job, or have to work in a shift in a store that they never would have done before – they can’t apply their skills, they have a very limited life – and they see this as a life-giving product. So there’s a lot of enthusiasm and so far the feedback on price, regardless of what we’ve discussed, with those audiences has not been a factor. But we’ll get into more detail on the next week.

Biren Amin – Stanford Group Company

Okay, and maybe if could just focus some more questions on Cinryze. With regards to the self-administration portion of – it wasn’t mentioned in the label, but will the FDA I guess require additional trial work before it is in the label or will it allow the Company to potentially educate patients on the potential for self-administration? So, I guess my question is what are your options with regards to this area?

Bob Pietrusko

Yes, one of the options is for patient information – patient labeling and we will work with the FDA to craft that information regarding information about Cinryze plus the administration of the product, and we’ll work with the FDA to make sure that the patients are fully aware of the administration process.

Biren Amin – Stanford Group Company

Okay. And I guess there is just one last question on Cinryze. The 6000 patient number from the HAE Organization, is that diagnosed patients or are there some assumptions built in to that number?

Vincent Milano

So before we answer that, Biren, I just want to add to your last question. Remember that home infusion by a home health nurses is a method of administration. So there is the visit to the physician’s office, and then a visit from a home health nurse at the patient’s house. So there are multiple ways for this product to be administered, two of which are within the label to that. Right, Bob?

Bob Pietrusko

Yes.

Vincent Milano

So, Dan, maybe on the assumptions in terms of calculating the 6000 –

Dan Soland

So, again, what I'll probably do is paraphrase what we've heard from Tony Castaldo, who is the head of the HAE organization, and you may want to go their website to gain a better understanding of how they came to this total number. But they have over 2000 members, and the actual count, I do not know. And they use a factor, and I believe the factor is of those number of members a factor times 2.3and that's because usually there's only one family member or one person in the household who is an active member. But there are other family members who are affected by the disease. So that's my understanding of how the HAE Organization comes to that number. But, please, you can always refer to their website.

Biren Amin – Stanford Group Company

Right. Thanks for taking my question.

Vincent Milano

Welcome.

Operator

Our next question is from Louie Ho [ph] from Thomas Weisel. Please proceed with your question.

Steve Willey – Thomas Weisel Partners

Good morning guys. This is actually Steve Willey. Just had a question on Cinryze. Can you maybe provide a little bit more color with respect to the analysis you plan to do on the acute data? Is it a function of determining safety, is it efficacy? I know in the BPAC transcript there are some questions with respect to breaking out disease and characterizing it as either moderate or severe. Could you maybe just provide some color there?

Vincent Milano

Bob, you want to take that?

Bob Pietrusko

Yes, I can take that and we’ve been working – had been working with Lev and looking at the information that came through on the complete response and basically it revolved around evaluation of the efficacy data; how does that look, how that can he described and looking at the statistical analysis and that is being evaluated. I can say that – a question came up regarding safety at the advisory committee and the feedback that was given at that particular meeting was that there wasn't anything regarding safety at that point in time regarding the acute information. So it's basically evaluating and looking at statistical evaluations of that. Also, as has been mentioned, there is some additional information from the open label acute study and there is additional information there that we also will be evaluating that would add more data, more evaluations that would add to the strength of that package.

Steve Willey – Thomas Weisel Partners

Any granularity with respect to the filing of that sBLA? Is that still just as soon as possible?

Bob Pietrusko

Yes.

Vincent Milano

Yes.

Steve Willey – Thomas Weisel Partners

Alright. And then just quickly jumping over to CMV, can you just – just may be talk about where you think you can take prophylactic dosing in GMP particularly in solid organ-transplantations. We have Valcyte right now about 80 or 90 days. Where can we go with the CMV drug?

Colin Broom

Well, this is Colin, and I can – let me just speak for the medical need. As you all know, the period of highest risk is around 100 days post transplant. That’s when there’s greatest immunosuppression. But there are number of patients who remain at high risk after that period. And you maybe aware of a current study ongoing where Valcyte in the first 100 days – it was 180 days, is being looked at. That data is not available yet but it's like be available during the course of next year, which should be very instructive for us. I think the natural tendency is even with a toxic agent like valganciclovirs to prophylax for longer so should the data with maribavir come out as positive as we hope it will. I bet a tolerated agent that’s equally effective, the natural corollary of that would be to continue dosing for further 100 days. So I don't know how far this could go. It depends on the evolving profile of maribavir, but it would be a natural tendency to continue dosing longer. And that is something we will want to specifically look at after our initial approvals.

Steve Willey – Thomas Weisel Partners

Great. Thanks a lot and a great quarter.

Vincent Milano

Thanks, Steve.

Colin Broom

Thanks, Steve.

Operator

Our next question is from Brian Skorney from Susquehanna Financial. Please proceed with your question.

Brian Skorney – Susquehanna Financial Group

Hey good morning guys. Congratulations on a really nice quarter.

Vincent Milano

Thank you, Brian, good morning.

Brian Skorney – Susquehanna Financial Group

Just a couple of real quick ones. First, just on housekeeping, can you give us some color on how R&D and SG&A expense increases will break down over the next quarter? I assume part – a big part of this is building out a sales force for Cinryze. Could you just give us some color there?

Vincent Milano

We actually don't break our guidance out, Brian, for that very reason to be able – to not be micro managed, if you will, to those specific numbers. I will say that with regards to the sales force, we are hiring 20 folks, most of whom, we are happy to say, have been hired. And so you think about a reasonable FTE rate for a couple of months of the year for sales. That would be the difference, if you will, quarter-over-quarter.

Brian Skorney – Susquehanna Financial Group

Okay, great. Second question, on the maribavir trials now, for the stem cells transplant, have all the treatment – on treatment safety assessments been completed by the safety advisory board?

Colin Broom

Yes, Brian, this is Colin. Yes, there – as you are aware, we have an unblinded independent safety review committee. They look regularly at the data and there will be a further assessment. But this has been an ongoing process throughout the trial and they have not identified any – obviously, have not identified any reason to discontinue the study, which is obviously very good news. So, no unexpected – any safety signals to-date.

Brian Skorney – Susquehanna Financial Group

Right, and this is the last question. Have you guys any inventory build in the channel for Vancocin? Can you give us any color as to how weeks are currently in the channel?

Dan Soland

So this is Dan and the normal inventory in the channel is running in our sort of normal variance that we’ve seen on a quarter-to-quarter basis.

Brian Skorney – Susquehanna Financial Group

Okay. And is that – I think in past, have you said – said that’s like around two weeks?

Dan Soland

I think we have said two to four weeks.

Brian Skorney – Susquehanna Financial Group

Okay.

Vincent Milano

As a reminder, we have fee-for-service agreements with two of the big three wholesalers in place. So it's a very managed – it’s managed today compared to what it was two years ago.

Brian Skorney – Susquehanna Financial Group

Sure. All right. Great that's all from me.

Vincent Milano

Thank you, Brian.

Brian Skorney – Susquehanna Financial Group

Thank you.

Operator

We have a question from Jason Butler from Rodman & Renshaw. Please proceed with your question.

Jason Butler – Rodman & Renshaw

Hi guys. Thanks for taking the question. I was just wondering if you could comment on whether continuing the acute – the open label acute trial is – will impact on the filling of the sBLA or whether you already have enough data today to file the sBLA?

Bob Pietrusko

Yes. The information we have from the acute trial – what is commonly done is an interim analysis of report, a cut-off on clinical data regarding the efficacy and safety at a certain point of time, we have that information and we have – we are in the process of collecting that information and evaluating it. So the further continuation of the trial will go on and it will not impact the supplemental BLA that’s being prepared.

Jason Butler – Rodman & Renshaw

Thanks.

Bob Pietrusko

Okay.

Vincent Milano

So, ladies and gentleman, we appreciate your time this morning. We’ve have actually run up to our scheduled time.

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Source: ViroPharma Incorporated Q3 2008 Earnings Call Transcript
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