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KOS Pharmaceuticals, Inc. (KOSP)

Q1 2006 Earnings Conference Call

May 09, 2006 8:30 a.m. EST

Executives

John Howarth, Vice President, Investor Relations and Corporate Affairs

Adrian Adams, President and Chief Executive Officer

Kevin Clark, Executive Vice President and Chief Financial Officer

Juan Rodriguez, Senior Vice President, Controller and Corporate Administration

Analysts

Greg Froehlich - Merrill Lynch

Timothy Chiang - FTN Midwest Securities

Scott Henry - Oppenheimer Funds

Robert Hazlett - Harris Nesbitt

David Steinberg - Deutsche Bank

Ian Sanderson - SG Cowen & Company

Ken Trbovich - RBC Capital Markets

Presentation

Operator

Good day everyone and welcome to the Kos Pharmaceuticals Incorporated First Quarter Earnings Conference Call. Just a reminder, this call is being recorded. At this time, I would like to turn the call over to Vice President, Investor Relations and Corporate Affairs, Mr. Jack Howarth, please go ahead sir.

John Howarth

Thank you Rachel and good morning everyone. Welcome to KOS’s first quarter 2006 earnings conference call. Joining me on this mornings call, are Adrian Adams, President and Chief Executive Officer, Kevin Clark, Executive Vice President and Chief Financial Officer and Juan Rodriguez, Senior Vice President, Controller and Corporate Administration.

I hope you’ve all had a chance to review today’s earnings release, if you have any additional questions following this conference call, please feel free to call either Nichol Harber or me. I would also like to call your attention to the slides that accompany our remarks this morning. You can access these slides by going to the investor relations section of our website and clicking on the icon marked first quarter conference call.

Before we begin to discuss our results, you should be reminded that this conference call will contain forward-looking statements that are intended to fall within the Safe Harbor provisions under the Private Securities Litigation Reform Act. Several factors could cause actual events to differ materially from the forward-looking statements including those factors listed in the forward-looking information certain cautionary statements section of the Company’s annual report on Form 10-K, filed with the SEC for the year ended December 31, 2005 and factors identified in other reports filed with the SEC. I would now like to turn the conference call over to Adrian who will highlight the key business and financial accomplishments for the first quarter. Then Kevin Clark will present the first quarter results and information on the share repurchase program and we will then open the call up for your questions. Adrian will return at the end of the question and answer period to wrap up the call. Adrian, please go ahead.

Adrian Adams

Thank you Jack, and good morning to each and every one of you. Ladies and gentlemen, I am delighted this morning to report results for the first quarter of 2006, a quarter in which we accomplished many of the transitional goals, we spoke to you about this past February. As announced in our release this morning, overall revenues grew at a double digit rate, our financial results were inline with our expectations. And we continue to deliver excellent corporate development on licensing the transactions has with Flutiform, a late phase opportunity that we believe has very significant potential. We’re also making good progress in research and development and our board is authorized a share repurchase program that Kevin will cover later in this call.

Please refer now to slide #3. This slide shows a summary of our overall first quarter 2006 financial and recent highlights. As you can see, net revenues for the first quarter of 2006 increased 11% to $170.8 million. However, adjusting for the IMA impacts for around $26 million, the actual growth in the quarter would have been 29% compared with the same period in 2005.

We’ve indicated to you in our last earnings call that the reported GAAP loss for the quarter would be in a range of $0.05 to $0.10 per share, the actual loss came in at $0.06 per share. In other words, within guidance and a gain of adjusted for the impact of the IMAs and FAS 123R, earnings per share would have been around $0.28 per share. Within the quarter, we generated $18.7 million in cash from operations, and our cash and marketable securities balance increased to $438 million. In addition and very importantly the company remained debt free. With regard to prescriptions, our Cholesterol franchise total prescriptions grew 6%, Cardizem LA total prescriptions grew 8% and Azmacort prescriptions grew nicely among our targeted doctor universe.

Turning now to slide #4, we are delighted with the increased productivity of our research and development practices. The Phase III studies for Simcor, our Niaspan Simvastatin combination product have now fully recruited and results from these studies should be available by the end of 2006. Simcor remains on track for NDA submission in the first half of 2007. The Niaspan Lovastatin ICPOP study, the first of two Phase III design support and intermittent claudication indication of market with huge unmet need is also being fully recruited and data again is expected later this year. As you may recall, we announced earlier this quarter the results for the COMPELL study and the optimized Niaspan modified formulation study. The COMPELL study should put efficacy profiles of Crestor and a combination of Zocor/Zetia known as Vitorin into appropriate perspective compared with Niaspan based therapy and this will be presented at the 14 International Symposium, for April’s growth as to how they grow this June.

The sNDA for the Niaspan modified formulation is on track to be filed in the third quarter. We are also pleased to report that we’ve received FDA approval for the Advicor 1000/40 mg strength of Advicor and we look forward to commercializing this suite. In addition, we also received an approvable letter from the UK Commission on Human Medicines for marketing Advicor in the United Kingdom. In the year of intellectual property, as it relates to a Cholesterol franchise, a new Niaspan pattern was recently issued bringing the total now to 7 patterns on Niaspan. In addition, 2 Advicor patterns were added in Canada and there are an additional 6 Niaspan patterns applications currently pending in the United States.

Moving on to connection to our customers, we were pleased with the decision from the Centers for Medicare and Medicate Services, the CMS announcing that Niaspan will not be excluded from part deformers. We also submitted the COMPELL and ARBITER 3 studies for publication. And finally, our corporate developmental licensing efforts produced another licensing opportunity synergistic with our current product portfolio, an exclusive licensing agreement between SkyePharma and KOS for Flutiform in the United States. Flutiform could be launched as early as 2009 into the multibillion dollar asthma market. Given the importance of this opportunity for KOS, I thought it would be useful to spend a few more minutes reemphasizing the scope and potential for Flutiform.

Please refer now to slide #5. Flutiform is a fixed gross combination product that combines Formoterol considered by some of the best long-acting better agonists with Fluticasone, considered by some of the best inhaled product of steroid, and this has patent protection through 2019. The initial target indication is adult asthma and additional indication will be a search for the product in the Chronic Obstructive Pulmonary Disease COPD and Pediatric asthma. Flutiform offers 12 hours of bronchodilation, which represents twice-daily dosing and a faster onset of action within minutes than some of the competitive products. Flutiform is rapid release to the symptoms of asthma giving patients confidence that the medication is working which in turn increases compliance and decreases the potential for overdosing. Flutiform thus far has been shown to have a good safety and efficacy profile and its metered-dose inhaling device is preferred by many asthma patients over Dry Powder Inhalers. We believe that Flutiform is an excellent product opportunity for KOS.

Slide #6 details the outline agreement with SkyePharma. KOS will have the exclusive marketing rights for Flutiform in the Unites States and the right of first negotiation for Canada. KOS will pay $25 million upfront for the rights to this product and SkyePharma could receive up to another $140 million in milestone payments based on certain regulatory and sales targets. SkyePharma will also receive a mid-teen royalty rate. As mentioned, we will also be assessed in the developments of Flutiform for the COPD and Pediatric asthma indications. These strategic rationale for this licensing is very compelling as outlined in slide #7. This product should broaden and already establish presence in the asthma in respiratory market; is a good stick with the asthma core detail and revised coverage in both the mono and combination markets. Strategically, this provides an excellent growth opportunity as early as 2009 with high revenue potential in the strongest growth sector within the asthma market, a market with revenues projected to be over $12 billion in 2009. So as you can see our partnership with SkyePharma is synergistic and provides win-win financial terms for both companies and it’s a wonderful opportunity for KOS with our product potentially to achieve PPS sales of $0.5 billion or more. But there’re not too many Phase III inline consumer opportunities in this therapeutic category around and KOS as secured.

Now let’s turn back to current portfolio. Please refer to slide #8. This slide shows that our Cholesterol franchise continues to grow year-over-year when comparing to first quarter of 2006 to the first quarter of 2005. Specifically, as I mentioned earlier, total prescriptions grew 6% and extended unit volume grew 7%. As you may know, extended units we show actual tablet growth are a better indictor of growth, since we have a growing proportion of our business, in the retail in the mail order sector. This is in important to understand, since a mail order prescription is three times the size of a retail prescription.

Slide #9, summarizes the decision by the CMS to keep Niaspan on Medicare Part D formers. We believe this correct decision reinforces the importance of Niaspan and its therapeutic benefit for the treatments of dislipidemia. As you recall, we initially projected the partial loss of Part D coverage to have an impact of approximately 1% to 3% of our Niaspan business. The actual impact on prescriptions has been difficult to quantify. And the whole CMS agreed to cover Niaspan prescriptions until the end of May; we believe there are significant number of Part D patients may have switch plans in the early part of the year.

In addition, because of this, we were not able participate in the obvious first quarter growth of the lipid market. We believe the Part D actually had positive impacts on many chronic disease markets. There may also be a halo effect on our interactions with doctors and this may’ve impacted first quarter prescribing trend. This in part also impacted our ability to fully leverage the positive clinical trends in HDL modulation and the growing body of positive clinical evidence to support of Niaspan, specifically the ARBITER 3 study presented at the American Heart Association meeting in November of last year.

Following the positive CMS decision, we’ve communicated the decision to all our customers, physicians, patients, caregivers and managed care groups. The perfect clarification of CMS’s position represents a growth opportunity going forward. And we are as usual, totally focused on growing prescriptions of the results of this action, a great and absolutely correct win, for doctors, patients and KOS Pharmaceuticals.

Turning now to slide #10, Cardizem LA is also seeing a positive prescription trend when comparing to first quarter of this year to the first quarter of 2005. With total prescription is going 8% and extended units go in an even more impressive 11%. On our next slide, slide #11, we continued to be pleased with the overall performance of Azmacort. We have not only significantly slow the overall decline of this product but have actually return the product back to growth within our target group for physicians, overall, a very busy and productive first quarter of this year. Now I’d like to turn the call over to Kevin, who will discuss the financials for the first quarter and the proposed share repurchase plan. Kevin?

Kevin Clark

Thank you, Adrian. Good morning I’m very pleased to have the opportunity today to share with you the highlights of our first quarter financial performance. I’m also very excited to be able to discuss our share repurchase program. Slide #12, contains the summary of our revenue performance of the first quarter of 2006. On a reported basis, we generated $170.8 million of revenue in the quarter, and 11% increase over the $153.3 million of revenue reported in the first quarter of 2005.

As you recall from our yearend conference call, KOS has recently signed inventory management agreement IMAs with each of the three major pharmaceutical wholesalers. Those agreements as well as the agreements that we are in the process of signing with our smaller wholesalers will have a one-time impact in 2006 on KOS’s reported revenue as our wholesaler customers adjust their inventory levels. During the first quarter, we estimate that wholesaler inventory reductions reduce the company’s reported revenues by approximately $26.4 million. Adjusted for that reduction, revenues for the quarter would have been $197 million, a 29% increase over last year; significantly revenues for our core Cholesterol franchise totaled $142.6 million on an IMA adjusted basis, a 15% increase over 2005. This increase was achieved despite the negative impact on Niaspan associated with Medicare part D.

Turning to slide number 13, GAAP earnings per share for the quarter reflect a loss of $0.06 per share on an after tax loss for the company of $2.7 million. This loss was anticipated and is within the range of the $0.05 to $0.10 per share loss for the first quarter discussed when we provided 2006 guidance in February. As you know, Q1 2006 was the first quarter that KOS was required to account stock-based compensation expense under FAS 123R. First quarter EPS prior to the non-cash FAS 123R charge total $0.08 per share again within the guidance range, we discussed in February. Excluding the FAS 123R charge and the estimated $0.20 per share impact resulting from IMAs, earnings for the quarter would have totaled $0.28 per share.

As illustrated on slide #14, KOS remains an extremely strong financial position. As of March 31, our cash and marketable securities balance totaled $438 million, a $25 million increase since the yearend, and a $153 million increase in the last 12 months. This substantial increase in our cash balance was achieved despite the fact that over the past 12 months KOS has spent over $100 million on product acquisitions. With no debt, a large cash balance and favorable earnings in cash flow outlook, KOS is in the strongest financial position in its history.

Turing to slide #15, as noted by Adrian and as described in our press release, KOS has received board authorizations form and is announcing this morning, the initiation of a 7 million share stock repurchase program. This buyback represents potential repurchase of shares totaling approximately 15% of our current shares outstanding. The initiation of this substantial repurchase program which would be affected through open market purchases is a reflection of our financial strength and of our high level of components in the future of the company. Our repurchase program is designed to return value to the shareholders and enhance our long-term earnings per share growth rate.

As you recall that during our yearend conference call in February, when we discussed the anticipated earnings impact of expensing the cost associated with stock based compensation. We indicated that we were exploring varies strategies for reducing the impact of FAS 123R on our reported results. This buyback which will offset several years worth of share issuance under our incentive programs, is one such strategy. Importantly, we believe that the initiation and execution of our stock buyback program will not impact our ability to continue to make investments to drive the growth of our business. Our record level of R&D spending, planned expansion of our sales force and the announcement of the Flutiform transaction are all evidence of our financial flexibility and our commitment to our aggressive pursue of shareholder value creation. With that, let me turn the call back to Adrian for discussions of a number of upcoming events.

Adrian Adams

Thank you, Kevin. Please now refer to the slide #16, as we indicated to you during our yearend call, 2006 will be a year of transition and a big year for the conclusion of several important Phase III trial but provide data, to new drug applications. This slide briefly summaries, some of our growth catalysts in the short-term. With respect to clinical data results, we expect data from the Phase III trials of Icatibant in hereditary angioedema to be available in the third quarter. As I mentioned earlier, we also expect Phase III data from Simcor and our ICPOP intermittent claudication study to be available by yearend.

With respect to regulatory approvals we expect to submit a supplemental New Drug Application for the optimized modified formulation of Niaspan in the third quarter. In conjunction with our partnership with Duramed we expect an NDS would be submitted for Icatibant in the fourth quarter of this year and for Simcor in the first quarter of 2007. And finally we’ve submitted the publication both the ARBITER 3 and COMPELL studies.

Turning to slide #17, this illustrates the plant evolutionary growth of KOS from our foundation in 1988 to building the base of our business, to delivering value from product acquisitions and R&D productivity until where we are now in transitioning to the next exciting phase of growth of course and becoming one of the sustainable best. This time it leads me to our final slide, slide #18. This slide sums of what we believe is a strong investment thesis for KOS.

We believe that we are well positioned to execution of strategies from the market and clinical trials will continue to improve in all favor, particularly, now that the issue surrounding Medicare Part D have been resulted. There is also increasing the awareness of benefits of HDL therapy building on the original benefits LDL and triglyceride therapy. This in turn should move the marketing increasingly towards fixed combination therapies. With the pending genericization of pravastatin and simvastatin, we continue to believe positions will take a cost effective approach to treating patients and begin to add Niaspan to generic acceptance thereby capitalizing on the potential life like CV benefits of Niaspan based therapy.

We also have a highly differentiated product franchise and we’re the only approved HDL therapy on the market which continues to be supported by a growing body of clinical evidence. Niaspan’s proven safety and efficacy profile as well as lifecycle management initiatives should preserve an increase on a strong market position even if and when the competitive landscape changes. The end of the day proven safety and efficacy is what positioned for most for their patients. Most importantly however, on lifecycle management programs for Niaspan has yielded positive results in the form of the new optimized modified formulation of Niaspan which we expect to launch in the first quarter of 2007 together with a new range of Niaspan products. Our overall financial strength will be key to expanding our commercial presence and continue measuring investments in our sales force and a smart targeted approach to detailing will also expand our productivity. Our strong balance sheet with excellent P&L leverage going forward should give us the ability to continue to deliver value-added investments and acquisitions and to fully exploit our current franchises.

Finally, we believe we have us growing research and development pipeline focused on value enhanced and lifecycle management initiatives, new solid dose products such as Simcor and a second generation inhaled insulin products. This productivity will enhance our objective to launch at least one or two new products per year beginning in 2007 and into the next decade. We are also making promise that the developed new chemical entities for the HDL and atherosclerosis areas through our sponsored research option with ISTA Pharmaceuticals. So as you can see, we remain focused on growing our business and creating new growth opportunities through this transition period leaving into what we believe will be a strong period of growth for KOS Pharmaceuticals.

I’d like to now turn the call over to the operator for the Q&A session, operator please go ahead.

Question and Answer Session

Operator

Thank you (Operator’s Instructions).

And our first question today will come from Greg Froehlich, Merrill Lynch.

Greg Froehlich - Merrill Lynch

Good morning thanks for taking the question. First on the inventory reductions, I think you previously talked inventory will come down by $38 million in the first quarter. I guess how many recent inventories were still out in the channel at the end of the quarter. And you still expected the total of that $45 million for the year?

Kevin Clark

Good morning Greg this is Kevin. As we indicated, the impact for the quarter was $26.5 million. At the end of the quarter, we had about $4 million of inventory above goal less in the big three distributors. And, we continue to estimate as we did back in February that when we finished signing agreements with the smaller wholesalers the debt will be about $5 million to $10 million in total. So we estimate that the total remaining impact is in anywhere from $9 million to $10 million.

Greg Froehlich - Merrill Lynch

Okay and do you expect most of the impact hit the second quarter?

Kevin Clark

Depending on the timing of the signing agreements with the smaller wholesalers we certainly believe that the $4 million that remain with the large wholesalers which is really just one wholesaler will be behind us in the second quarter and I suspect a portion of the smaller wholesaler amount as well.

Greg Froehlich - Merrill Lynch

Okay great and when can we expect to see more data on the optimized nice and modified formulation?

Adrian Adams

Well as you, as you know I think we’ve presented the top-line data, last earnings release obviously our key focus is to get this data published and obviously the reason we’ve not sure, the overall results is not to prejudice not publication. So we anticipate that data being published during the second half of this year. And we are excitingly looking forward to the roll light of that optimized formulation in the first quarter of next year. And as you know, the results overall showed a 41% reduction in the overall severity of the flush and 42% to 43% reduction in the duration of flush, significant to the 0.001 level, so we are excited about that.

Greg Froehlich - Merrill Lynch

Okay and lastly when do you expect to launch the newer, the higher dose form of Advicor and what you are expectations to that product?

Adrian Adams

We anticipate launching up the formulation during the next few months. We’re very excited about 1000/40 milligram strength. The overall goal in dislipidemia therapy and our strategy with our customers is to get more and more patients of to the highest effective dose that gives some of the protection that they require the life saving benefits that we are offering. We believe the 1000/40 milligram strength of Advicor which by the way was the dose that we are used in the Advicor study, which demonstrate the superiority over Lipitor or Zocor. We believe that is going to help us to even broader and further, the Advicor patient base with regard to, the impact in overall financials obviously we would not able to specific guidance in relation to Advicor, but we will certainly this will have more patients to get not just Advicor therapy but also more effective dose. So we are very excited about it. And I think our doctor will be as well.

Greg Froehlich - Merrill Lynch

Okay thank you.

Operator

And we will next move on to Tim Chiang with FTN Midwest Securities.

Timothy Chiang - FTN Midwest Securities

Couple of questions; what more do you have to do between now and the time that you files Niaspan, modified formulation, I guess the trials already done?

Adrian Adams

The trial that we have presented…

Timothy Chiang - FTN Midwest Securities

Yeah.

Adrian Adams

You’re right, it’s obviously is already done and we are focused on obviously publishing that. So we will be submitting the sNDA for that during the early part of the third quarter, we anticipate this will be relative to simple turn around, with the sNDA hence on confidence in rolling out this new formulation in the early part of next year. I’d also like to emphasize in keeping with our good success over the course of time, I think we are ongoing life cycle management initiatives in support of our overall business strategy, and we will be communicating also over the course of next year or so.

Timothy Chiang - FTN Midwest Securities

Adrian, if I can just ask one follow up to that with the stock buyback program, maybe this is a question for Kevin, why did you decide to use the line of credit so it’d be just Jaharis claiming when you got in excess of $400 million of cash in your balance sheet?

Kevin Clark

Right, good morning Ken.

Timothy Chiang - FTN Midwest Securities

Hi Kevin.

Kevin Clark

We, as you probably know that the, that standby credit facility has been in place for number of years, it was entered into in December of 2002 and was replacement for a prior credit facility that Mr. Jaharis said provided to the company. Under the terms of that facility, we are obligated to get the lenders consent really to enter into any, any capital market transactions whether it’s issuing securities incurring debt, for or repurchasing stock. We’ve gotten those consents, we have gotten consent to repurchase. As noted we’ve also gotten the consent of the lender to enter into third party financings if we choose to do that and in exchange for that, we have agreed to take down the loan on, mend it in more favorable terms. I think you noticed that with the interest rate has been lower. As I said, that facility has been in place for a longtime, when it was put in place it was probably a much more favorable line of credit that we could have achieved on our own, the consent rights are in the agreement and Mr. Jaharis is entitled to benefit of the loan, under the terms of the agreement, and so that’s the reason for it.

Timothy Chiang - FTN Midwest Securities

Okay great thanks, is there anyway you can revert product breakouts between Azmacort and Niaspan as well?

Adrian Adams

In terms of, providing the revenue breakdown for the quarter?

Timothy Chiang - FTN Midwest Securities

Yeah.

Adrian Adams

The Niaspan for the quarter was about, on a reported basis, it was about a $100 million and Azmacort about $20 million, $23.5 million.

Timothy Chiang - FTN Midwest Securities

Okay, thank you.

Adrian Adams

You’re welcome.

Operator

And next we’ll move to Scott Henry with Oppenheimer Funds.

Scott Henry - Oppenheimer Funds

Thank you, first a couple of questions on the financial and can we assume that you are reaffirming your guidance for both sales and earnings that you have previously given out as well, will you give any guidance for Q2 as I know you had guidance out there for Q1? Those are the first questions.

Kevin Clark

Good morning Scott, well in terms of your second question it is, we are not going to comment specifically about the second quarter, its not going to be really our practice going forward to provide quarterly guidance, we thought it was appropriate to do it for the first quarter given everything that we anticipated going on. As far as the year goes we continue to manage the business with the objective of meeting or exceeding all the financial targets that we spoke about in February, we are optimistic that we can do that at the end of the day of course, the primary factor behind the whether we can deliver that level of guidance, our guidance level of earnings is going to result in how we do on scripts, obviously, we were not entirely pleased with script trends in the first quarter the Part D issue had we think a lot to deal with that. But with that behind us with other positive things going on in our business including the 1000/40 approval we are optimistic that we can bring script trends where they need to be achieve our objects.

Scott Henry - Oppenheimer Funds

Thank you, and just as a follow up, one other question just, have you given any timeline for the share repurchase and then more from a product side with regards to the Niaspan trend, they have somewhat flatten really low single digit growth, do you think you will be able to reverse those and do you expect much impact if at all from Generic Zocor? Thank you.

Adrian Adams

I will cover the second part of that question, as we mentioned during the call, the CMS initial decision that was made towards the end of last year we believe did have an impact on those driving trends during the first quarter of this year, interestingly enough Part D we believe actually had a positive impact on the prescription trends in the chronic disease area, in fact if you look at the trends in the Cholesterol market more specifically we saw an increase in growth of that market as it moved into the first part of this year unlike the second half of last year. Because of this CMS decision, we were not able to participate in that grow. In addition to that, some of the patients that obviously we are on Niaspan, the past wouldn’t be covered under Part D started to switch to other plans and we believe, that is one of the reasons why our prescription trends here in the first quarter of this year, were softer than anticipated. Having roughly a positive decision from CMS and this was a great win, the KOS handed its patients and doctors were obviously optimistic that prescribing trends will, will get better and in the end looking this change in relation to our highly differentiated position and obviously be all the data in relation to clinical trends as move in our favor.

Kevin Clark

On the buyback in terms of time, our authorization from the board is, is not time limited, as you know often you see authorization that have a one year time limit or some other time limit or is, is open ended, I think as I suggested during, during the formal presentation one of our, the corporate financial objective sort of underlying this program is to offset over time, is a growth in our share balance that results from, from long-term incentive programs. That not to say we are going to try to match it share-by-share, quarter-by-quarter but I think you are going to try to see us do that over time and as to, how quickly we buy the 7 million, we have a lot of flexibility in that regard, it could be something we do over quite sometime and that could be something we do, more quickly depending on market conditions and our capital funds.

Scott Henry - Oppenheimer Funds

Thank you for talking my question.

Operator

And next we’ll to move to Bert Hazlett with Harris Nesbitt.

Robert Hazlett - Harris Nesbitt

Thanks, good morning everyone. My first question is regarding the Takeda and then Adrian may be you could talk a little bit more about how you expect the agreement to play out, first of all does the royalty vary during the year, inter-year and secondly are you searching for a new partner to replace the Takeda or you going to go at quite building your existing infrastructure out?

Adrian Adams

Bert it’s nice to hear your voice, so congratulations on your, your move.

Robert Hazlett - Harris Nesbitt

Thanks.

Adrian Adams

And a good luck in the future like, obviously in relation to the Takeda relationship as we mentioned, we are assessing whether or not to proceed with that and we mentioned that we would be coming to a view on that, so during the second quarter of this year. We also enhanced in our last earnings call that we would be increasing the size of our sales force, in absence, we are going to be adding around that 250 more sales people to our Cholesterol selling area. And what that does in any event is actually increase our flexibility going forward, in relation to selling of national, I think and we need our broad range of products. As I have mentioned on several occasions, I think what we began the co-promotion with Takeda, we have around about 400 people selling products for the KOS only, when Takeda cannot the other than extra 1250 which was kind of equivalent to run about 500 specific people. So with the enhanced sales force that we’re going to exiting this year with, we will more than cover in the eventual archives that will not to continue with Takeda, however we’ve not made that decision yet. We believe that we are in many ways, increasing our tactical and strategic flexibility in this, in this area, when it goes to the question is to whether or not we would consider, any other co-promotion opportunities, the else that is, of course we would consider that, but it would have to be a valid compelling argument and like, we believe with our smart targeted sales and marketing approvals that is do well for its over the course of time, that we can continue to evolve quite nicely and maximize the opportunities that come next year with, obviously with the Simcor submission and the roll-outs of the modified formulation of Niaspan, so all options around the table but we focus that we’re on is controlling our own destiny. And on the first point…

Kevin Clark

Yeah, Bert, on the royalties the Takeda royalty does not vary during the year, it’s a, it’s a specific percentage.

Robert Hazlett - Harris Nesbitt

Okay thanks you for the comments. Just, continue to hear a, kind of appraising comments with regard to the patterns that are pending in the US. In your view, is there anything that could block another entry of a modified release of Niacin from the market?

Adrian Adams

As I mentioned in the call, as you well know Bert, over the course of last number of years we’ve not commented on our intellectual property position, suffice to say that let me reemphasize we have now have 7 patents covering Niaspan and 6 additional patents potentially pending in the United States. I’ll not go into details on what those patents covered, suffice to say that we have a good track net quarter over the course of time and ensure that we vigorously depend and grow our intellectual portfolio. And that is all I want to say on IP.

Robert Hazlett - Harris Nesbitt

Okay thanks and then just with regard to ICPOP just briefly what are we expecting for the data in terms of top-line later this year?

Adrian Adams

Well, I mean in the end like, as we said that the intermittent claudication program which is a full Phase III program, as two Phase III studies the ICPOP study and TROPIC Study. The ICPOP study is fully recruited and in doing trials in intermittent claudication in essence what you are trying to demonstrate is obviously, time to pay to painless walking. And so in essence, the key tests relates to treadmill test which are being used in all of our particular science. So the data from ICPOP study obviously the first, the first trial which will be available in the fourth quarter of this year. We will give us all that top-line data and more specifically against the key end points that tend to be used for obviously approvals in the area of intermittent claudication. This is the first study and the second study TROPIC is recruiting as we speak. That would emphasize that, this market is an area with high on that need. And with patients who obviously in essence have atherosclerosis in the leg and they need agents that can actually give them more walking without pain and we believe that’s Niaspan in combination with a statin potentially gives us about that opportunity of giving patients what they need, and we will see what’s was there to show in the fourth quarter of this year.

Robert Hazlett - Harris Nesbitt

Okay, thanks for the comments.

Adrian Adams

Thanks.

Operator

And next we will move to David Steinberg with Deutsche Bank.

David Steinberg - Deutsche Bank

Thanks and good morning, couple of questions, first just on the Takeda co-promote again, if the relationship does end, could you just tell us how many actual details are made per year by the Takeda reps and then how many details per year will be made by your new reps, and a bit more details made by the Takeda reps than your new sales people have, would you consider hiring some more sales reps to fill that void?

Adrian Adams

When obviously, when it comes down to decisions in relation to hiring more sales people and, we were always assessing on a going forward basis as to what degree of sales force cycle we need and as we move in towards the end of this year, we believe that enhanced sales force that we are putting behind Niaspan and Advicor in the event that we were not to continue with Takeda, we believe will be adequate to actually make sure that we retain the share of voice within our target group of positions. And I would emphasize that again in our market share evolution with in the cardiologist, we have retained a market share around about 7.5% and then in the internal medicine primary curve positions and endocrinologists, we continue to grow our market share quite nicely. So, our sales force in essence, has an average call rate detail and around about 7 to 8 details a day which is around about the industry average but these are all along high prescribing positions. So we are confident that we will be able retain a good level of share of voice as we move into next year, but I emphasize that we’ve not made the decision yet on Takeda, although we retain very good flexibility going forward.

David Steinberg - Deutsche Bank

Okay and then just another question.

Adrian Adams

But David just it was good to see you at the other day and…

David Steinberg - Deutsche Bank

It was nice.

Adrian Adams

In answer to question of, would you be disappointed, if we did the deal this year, what was my response?

David Steinberg - Deutsche Bank

Very disappointed.

Adrian Adams

And what did I say.

David Steinberg - Deutsche Bank

And 2 days later you did it, very good.

Adrian Adams

All right.

David Steinberg - Deutsche Bank

Congratulations, just another question, what’s your, you’ve given forecast for next year on the January call, saying I think growth could be in the range of 30% to 34% although its not formal guidance. I was wondering what you thought the underlying prescription trends would be to achieve that kind of growth next year?

Adrian Adams

Yeah just to clarify, I think we didn’t give formal guidance but we did say that we would expect obviously earnings to be increased by between 30% and 40% as we been moved to been to next year. We’ve always have not given any guidance on prescriptions, the only part we did there as we move into 2007 as we do see and here is been a year of opportunity with the low lights in the first part of this year of the optimized formulation of Niaspan, not in addition to a new range of Niaspan products and all of this dares to the way anticipate going out during the course with a lot of products this year, in supports of the NDA submission of Simcor, we believe that goes well for our positioning and are highly differentiated positions within the marketplace. So, in the end with both strengths and particular with the optimized formulation of Niaspan, then we hope that positions will see a broader where submissions being from Niaspan based therapy. So, that is the guidance we’ve given so far.

David Steinberg - Deutsche Bank

Okay, fair enough and just two quick ones. Any price increase in the quarter and also just could you give us your thoughts on your IP position in Cardizem LA, is it still and exclusivity involved and what are the key patents there that would potentially bought generics?

Adrian Adams

Yeah on the second part of that and I want to look over the price increases are like obviously with Cardizem LA when we announced that transaction with Biovail, we also buildings about contract, a protected clause in the event that we were to get a generic entry prior to or early of an anticipated that has not happened yet the partners have been challenged as we expected and obviously we anticipate prosecutes in those patents with our partner Biovail and our planning perspective within that contract that we put forth was with the protection through to 2008. However, in the eventualities there would be an earlier entry to that. And obviously, we have a protected clause within the, within the contract.

Juan Rodriguez

David, hi this is Juan Rodriguez. Just to cover the price increases during the quarter for Niaspan and Azmacort price increase were about 12% Azmacort about 9% and the rest of the products about 15%.

David Steinberg - Deutsche Bank

Okay, great thank you.

Adrian Adams

Thanks David.

Operator

We will next move to Ian Sanderson with Cowen.

Ian Sanderson - SG Cowen & Company

Great thanks for taking the questions. First on Niaspan in the Medicare Part D impact in the quarter, I think on the last call you’ve mentioned that you thought it would really on with the 1% to 3% of Niaspan sales. And do you think enhance, I did that impact was greater than the 1% to 3% of sales? And secondly for those patients with low HDL in a Medicare Part D program, what drug do you think was substituted for Niaspan and do you have any evidence and that was in-fact the case?

Adrian Adams

Yeah, I think as we mentioned during the call, I think we did, say it was pretty difficult to estimate any precision in this area we did estimate that perhaps 1% to 3% of patients of Niaspan prescriptions would be impacted by Part D. It is always difficult to quantify exactly what the impact is be, suffice to say we do think there was a, there was a significant impact in the first quarter and as I mentioned there were two areas that were of concerns was, one obviously is that, during the second half of last year where the overall lipid market did soften down to north during the first part of this year we were not able to participate in that growth. In addition, I think there are some patients who obviously switched a lot early then we anticipated. When it comes down to, where patients were transferred to, I think that part of data is challenging to the GAAP, the only data that we have is looking at all your lipid therapies, and it doesn’t see to any other long therapy particularly benefited from many suites from Niaspan. So, in our real focus is obviously on driving the business going forward, we were delighted with this return to full coverage, we saw the way was a tremendous partnership win with the CMS and that’s our focus going forward, you will also note that during in the first quarter and that’s on an ongoing basis the Advicor business and prescriptions have performed better. So in the event, I think very difficult to quantify precisely, however we’ve got that behind us and now we got full coverage is, provided this halo effect where the amount of noise that was created around this is actually virtue of our advantage. So, now we are focused on communicating the message that were highly differentiated from that we have full coverage and that all managed care position broadly covering over 96% of lives in the managed care environment remain strong.

Ian Sanderson - SG Cowen & Company

Okay thank you, and can you breakout the impact of the stock-based compensation on the reported SG&A and R&D lines for Q1 and should we view those as represented of the quarterly impact going forward?

Juan Rodriguez

Yeah this is Juan Rodriguez; we don’t have those numbers currently available to tell you again on a total basis after tax is right around $6.9 million actually.

Ian Sanderson - SG Cowen & Company

Okay.

Juan Rodriguez

I don’t have the fixed points with me; we don’t have the breakdown by units.

Ian Sanderson - SG Cowen & Company

Okay, and then finally well actually, Adrian you’ve made reference on several occasions to quote a new range of Niaspan products besides Niaspan MF and Simcor, at some point we are going to hear about with the others are, if there are others?

Adrian Adams

Yeah, I think obviously would be communicating that through in the lot of part of this year, I think as we’ve been developing the Niaspan and Advicor portfolio, I think we’ve been looking for all opportunities to enhance the offerings that we give to develop and I think those will form of this with some enhancements that we are making for the Niaspan range which will be to the benefit of doctors and patients and obviously KOS Pharmaceuticals, and we will communicate that as we get near to the time and for competitive reasons obviously, we don’t want to share too much.

Ian Sanderson - SG Cowen & Company

Okay and then finally, in later this year repurchases, where the funding obligations to Jaharis have looking forward?

Adrian Adams

Yeah the next funding obligation to Jaharis is depending on demonstrating certain milestones right around $4 million.

Ian Sanderson - SG Cowen & Company

4?

Adrian Adams

But again its miles, yes. So, its milestones type.

Ian Sanderson - SG Cowen & Company

Okay thank you very much.

Adrian Adams

Thank you.

Operator

And we do have time for one more question. And, we will hear from Ken Trbovich with RBC Capital Markets.

Ken Trbovich - RBC Capital Markets

Good morning.

Adrian Adams

Good morning

Kevin Clark

Good morning.

Ken Trbovich RBC - Capital Markets

Just couple of quick question with regard to the MF formulation, could you give us some clarification I guess the sNDA this time around is really labeling discussion because as I would call, you had already gotten approval for the formulation itself late last fall?

Adrian Adams

I think for competitive reasons, we don’t want to go into any detail around this and but suffice to say that obviously our goal in ruling out the optimize formulation of Niaspan in the first part of next year is to make sure that a broad base of doctors have access to the data and publication. In support of demonstration, the superior affects that this formulation has on the severity in duration of flush. And obviously I think, the awareness broadly on the aspects of flush with Niaspan which has been pretty well mastered by a large of positions, I think the awareness is so high on that. But in the event of a position how they choiced between cost conventional Niaspan on an optimized form that has a better tolerability profile potential that we believe that they got to move in favor of the optimized formulation, I think the natural momentum that pours with knowledge with experience I think will drive interest in that brand. Beyond that, I think for competitive reasons we don’t want to going to any more details.

Ken Trbovich - RBC Capital Markets

Okay and then just with regard to Icatibant, could you give us a sense if the data turns out as they had in earlier studies to be at compelling what sort of marketing plans or commercial strategy would you implement and then certainly if the mix product and wanted to better understand how that would sit into call cycle in terms of the targeted positions and then finally from an accounting perspective, given the inventory management issues how should we expect your account for the initial inventory loads when we see the introduction of the Adivcor 1000/40 as well as the Icatibant and, and potentially the new milestone on that?

Kevin Clark

On Icatibant, so I think this is, this is actually very nice opportunity for, for KOS, I think it’s a specialty product and in a market with high on that need and as we have mentioned with this, with this product we anticipate this been a first quarter for ‘07 launch, it has been designated orphan drug status and fast track approval by the, by the FDA so the date that will become available in the third quarter of this year from the Phase I and Phase II studies, well obviously upon the base of that submission which we anticipate giving those the, the approval. The other reason why this is a very attractive opportunities but these patients are high on that need, a lot of these patients requiring therapies where they get passed on such of action and by the way Icatibant delivers that in an all set of action within 30 minutes of a subcutaneous injection. Because of this high interest to patients and because those patients are well defined, those patients tend to migrate to the senses where they get the best possible treatment. So you can access this migrant patients with a relatively small but very qualified medical science layers on tight personal, so anticipate been able to drive market share with this, with probably, they are very focused on the, relatively small business unit, I think that is going to be our strategy with this product going forward, we think it’s a very nice opportunity and hope its synergistic with our evolving franchisee in the respiratory allergy area.

Adrian Adams

Ken, on the accounting question regarding new product introduction sales, it sometimes difficult to get some of adequacy of course of the inventory drop channel, but, our ,main concern is to make sure that we have added our product distribution throughout the channel, we do have some flexibility within our agreements that we know maybe we will take, the inventory levels, beyond as quietly above, what’s currently contemplated, as it relates to new product introductions for example, but, I do not expect any, unusual or significant accounting issues in relative those new product introduction on a, on our revenue recognition.

Ken Trbovich - RBC Capital Markets

Okay and then just one final accounting question, I’ll let you guys go, with regard to the options a few thing, one for that it will be attached when you implement the use of the, the line of credit, how, how should we look at that in terms of the impact on fully diluted share account, it looks like it could be 600,000 700,000 once that would be issued that obviously the diluted impact of that would be lower, how with regard to the purchasing power of the 30 million relative to the dilution that would result in the one, how do those two play out?

Adrian Adams

Well, this is the warnings as we noted in the press release will be exercisable at the higher of the closing bid price on Friday were the trailing 30 trading day average, so for all intension purposes they are being issued at the money and like any other warrantor option it will come into the fully diluted sharecount calculation as and if that one comes into the month.

Ken Trbovich - RBC Capital Markets

Okay thank you.

Adrian Adams

And it’s a 2 year warrant it expires in June of ‘08.

Ken Trbovich - RBC Capital Markets

Thanks, that’s appreciative.

Adrian Adams

As there’s the loan.

Operator

And that does concludes the question and answer session. I would like to turn the call back over to Mr. Adrian Adams for any additional or closing remarks.

Adrian Adams

Thank you, operator and thank you everybody for participating in this teleconference. This morning we covered the wide range of subjects as we articulated in our press release and in this call, I think we remained very confident about the business in the future, this is an exciting year for KOS as we transition to the period of launching round about one or two product per year going forward from 2007. We remain very confident conference this is a big year for data, and all the aspects of our plans that we’ve been carefully putting in place or of course the next lots number of years, have been executed with, with excellence and we remain confident of the future. We will continue delivering good growth, continue to drive the business to become the sustainable best and continue pioneering medicines for a better life. Thank you very much.

Operator

And that will conclude today’s call. Thank you for your participation.

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Source: KOS Pharmaceuticals, Inc. Q1 2006 Earnings Conference Call Transcript (KOSP)
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