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Executives

Allison Wey - Senior Director of IR

Pat LePore - Chairman, President and CEO

Veronica Lubatkin - EVP and CFO

John MacPhee - President of Strativa

Paul Campanelli - EVP and President, Generic Division

Tom Haughey - EVP, General Counsel and Secretary

Analysts

Gregg Gilbert - Merrill Lynch

Bob Jones - Goldman Sachs

David Moskowitz - Carris & Co

Elliot Wilbur - Needham & Co

Ken Cacciatore - Cowen & Company

Adam Green - Stanford Group Company

David Buck - Buckingham Research Group

Rich Silver - Barclays Capital

Par Pharmaceutical Companies Inc. (PRX) Q3 2008 Earnings Call November 7, 2008 9:00 AM ET

Operator

Welcome to the Third Quarter Par Pharmaceutical Earnings Call. My name is Sandy, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end today’s conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like the presentation over to your host for today’s call, Allison Wey, Senior Director of Investor Relations. Please proceed.

Allison Wey

Thank you, Sandy. Good morning, and welcome to Par Pharmaceutical’s earnings call to discuss the company’s third quarter 2008 results. I hope you had a chance to review the press release, which we issued yesterday afternoon. A copy of the press release is available on our website at www.parpharm.com. In addition, we’re conducting a live webcast of this call, which is also available on the website.

We’re joined this morning by Pat LePore, Chairman, President and CEO; Veronica Lubatkin, Chief Financial Officer; John MacPhee, President of Strativa; Paul Campanelli, President of Par’s Generic Division and Tom Haughey, Chief of Corporate Counsel.

Pat will provide highlights for the quarter and comment on recent corporative events. Veronica will then follow by providing details of the financial results and comment on the guidance. Then we will open the call for questions.

Please note that today’s conference call and webcast may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent any statements made on this call contain information that’s not historical, these statements are essentially forward-looking and are subject to various risks and uncertainties detailed in the company’s filing with the Securities and Exchange Commission such as Form 10-K, Form 10-Q, and Form 8-K reports.

I will now turn the call over to Pat.

Pat LePore

Thanks Allison. And welcome everyone. I'd like to start today's call by reviewing the highlights and significant events of the quarter. Speak a bit about the restructuring announced a few weeks back and provide some color on the initiatives moving forward. I'm going to keep my comments at a broad level and allow for specific questions for John, Paul, and Veronica later on.

First, I want to address our financial performance in the quarter. After a disappointing Q2, our people and our business responded very well. We feel the results of the third quarter has put us back on track to represent a positive turning point for the organization. Significantly reduced erosion in our generic-based business, combined with the launch of dronabinol, meclizine were key drivers of a solid quarter that resulted in an adjusted earnings per share of $0.26.

Megace ES also provided a solid contribution to the quarter even though prescription volume was essentially flat with sales declining quarter-over-quarter, primarily due however, to a retraction in wholesaler inventories. As you know Megace ES in it fourth year in the market and is maturing. That said, it is a successful foundational product for Strativa that covers its direct and allocated cost, and more important it provides a framework and expertise to build our specialty brand business going forward.

With regards to Strativa's pipeline, Loramyc continues on track towards the year end, early '09 filing with the FDA. We plan to begin pre-launch activities once the filing is complete.

Next our two Ondansetron development programs. Zensana, an oral spray formulation recently completed bioequivalency studies with mixed results. Bioequivalence to the [reference] of Zofran was achieved in some of the studies and not achieved in others. We are working with NovaDel to carefully review and better understand the results before determining the next steps for the Zensana program.

And a more positive note, our second Ondansetron formulation is an oral thin film, which we licensed from MonoSol RX earlier this year is producing very good results. Two bioequivalence studies have been completed in this program. Both demonstrated bioequivalence to the [reference] of Zofran. Additional studies are underway. Assuming that these ongoing studies are also successful, the NDA should be filed by early to mid 2009.

And finally Strativa continues to be very active in the business development space, looking at larger opportunities within and outside of our current platform. Strativa has identified several exciting business development prospects and we are actively working to bring additional products into its portfolio.

As you know, just a couple of weeks ago we announced a restructuring of our generic business, in an effort to make that business more profitable and competitive for the long-term. Indeed the actions that we took, we believe, give us the best chance to succeed in this business for the foreseeable future.

Some of the specific actions and results are as follows. One, we are in the process of divesting non-profitable and marginal profitable products from our portfolio. By the middle of next year we will have reduced the total number products by 40% to 50%. These discontinued products represent $40 million in net sales but will have a minimal impact on gross margin dollars.

Number two, we significantly reduced our generic R&D investment driven by two factors. First, past investments have resulted in a solid pipeline of first-to-file, first to market products that we will look to maximize the value of, over the next several years and second, the simple assessment that the return on investment going forward would not be as robust as in the past.

Three, we will continue to fund generic RD with a budget of over $20 million in 2009 with focus more on external development opportunities. For now, we have a significant number of projects, both internal and external being aggressively worked on. All these changes will result in a reduction in staff of approximately 190 people.

And last, the annualized cost savings of approximately $45 million is significant. Much of the savings will be realized in 2009 with the full benefit in 2010, freeing up funds to give us more flexibility to pursue business development opportunities for Strativa and the ability to be opportunistic on the generic side.

Yesterday we launched sumatriptan injectables. We are exclusive on three of the four SKUs all of which are being supplied by GSK. While too soon to tell, we are pleased with the early indications by the trade. To state certain launch was a result of a settlement with GSK and is indicative of the type of settlements we are hopeful for securing the future value of our other first-to-files. Before I turn the call to Veronica, I want to emphasize to you that we are committed to the generics business and intend to compete and be a player in this space for a long time.

As you saw with our restructuring of our business however, we will continue to challenge ourselves to make sure we are operating as efficiently and profitably as we can, taking into account the market environment and the assets what we can control.

Going into 2009, I believe our base business will continue to stabilize. However, timing of new generic product launches is always uncertain. And I think that makes the case for the actions we took last month.

Now, I will turn the call over to Veronica.

Veronica Lubatkin

Thank you Pat. Good morning. I am taking you through the results for the third quarter and year-to-date ended September 2008. I will start with a few highlight and then move on to a more detailed discussion of revenue and gross margin results versus last year and last quarter.

In summary, total revenues for the three months ended September 2009 were $149 million declining $64 million or 30% from total revenues of $213 million in 2007. Reported net income for the third quarter ended September 2008 was $1.7 million or $0.05 per diluted share. This is compared with net income of $1.3 million or $0.04 per diluted share for the same period in 2007.

There are a number of one time items included in these results, which I will discuss in more detail in a few moments. Adjusting for these one-time items net income for the third quarter was $9 million or $0.26 per diluted share. By comparison, net income in the third quarter of 2007 included $16 million of cost related to business development activities in support of Strativa. Adjusting for these one-time item net income for the third quarter of 2007 was $11 million or $0.32 per diluted share.

On a year-to-date basis total revenues for the nine months ended September 2008 were $417 million decreasing a $198 million or 33% from total revenues of $615 million for the nine months ended September 2007.

The company reported a net loss of $16 million or $0.47 per diluted share for the nine months ended September 2008, compared with reported net income in 2007 of $46 million or $1.30 per diluted share. Adjusting for Strativa milestones and upfront payments made in 2008 and 2007, and after adjusting for the additional one-time items in the third quarter of 2008 the year-to-date 2008 net loss was $3.1 million or $0.09 per share, compared with net profits of $48.5 million or $1.39 per share in 2007.

Revenues for generic products for the three months ended September 2008 were $129 million decreasing $59 million or 31% from generic revenues of $188 million for the three months in 2007. Lower generic revenues in 2008 were primarily due to pricing pressure, including from metoprolol, which declined $31 million, fluticasone down $24 million, propanolol down 8% and a decline in many of the company’s other generic products, driven by pricing pressures experienced in 2007, and the first half of 2008.

Partially offsetting these declines were two products launched in the quarter including meclizine with net sales of $11 million and dronabinol with net sales of $8 million. Revenues for Strativa were $20 million for the three months ended September 2008, down $5 million or 20% from revenues of $25 million in the same quarter of 2007, due to lower net sales of Megace ES, which has been impacted by a more challenging reimbursing environment overall, including a change in reimbursement status that was implemented by a major Medicare part D plan earlier in 2008, some trade pipeline contraction and tempered by a July 2008 price increase.

The company's gross margin of $52 million for the three months ended September 2008 declined $15 million from $66 million for the three months ended September 2007, driven by the sales in royalty impact, just discussed as well as the impairment write-down of product intangible, related to line trimming of the company's generic product portfolio of approximately $5 million in the quarter.

The company's gross margin percentage increased from 31% in the third quarter of 2007 to 35% in the third quarter of 2008, driven primarily by the launches of higher margin meclizine and dronabinol and lower sales of low-margin products such as metoprolol. These gains were tempered by the product intangible impairment just discussed loyalty, lower royalty income and lower sales of higher margin products such as propanolol, and Megace ES.

As a percent of net revenues, the gross margin of 35% in the third quarter of 2008 is higher than the second quarter of 2008 of 22%, driven by launches of higher margin meclizine and dronabinol in the third quarter of 2008, the nonrecurrence of certain activity that occurred in the second quarter of 2008, including the sell off of excess and discontinue product inventories that reduced margin and shelf stock adjustments driven by price changes that occurred in the second quarter, and a price increase for Megace ES that was effective July of 2008; tempered by the product intangible impairment of $5 million related to the line trimming of the company's generic product line in the third quarter of 2008.

Revenues for generic products for the nine months ended September 2008 were $352 million decreasing $198 million or 36% from generic revenues of $549 million for the nine months ended September 2007.

Lower generic revenues in 2008 were primarily due to pricing pressure, including fluticasone which declined $95 million, propanolol down $41 million, various amoxicillin products down $16 million, tramadol down $10 million, ranitidine syrup which declined $10 million, cabergoline down $9 million and a decline in many of the company's other based generic products due to pricing pressures experienced in 2007 and into 2008.

As well as lower royalties, which decreased by $13 million primarily from lower sales of Ondansetron. Increased competition adversely effected, both the volume and pricing on these existing products. These declines were partially offset by higher sales of metoprolol, which increased $22 million and the third quarter 2008 launches of meclizine and dronabinol.

Revenues for Strativa of $65 million for the nine months ended September 2008 were essentially flat versus 2007, driven by Megace ES, principally due to the reimbursement environment tempered by higher price in the period.

The company's gross margin of $126 million for the nine months of 2008, declined $85 million from $211 million in 2007 and the gross margin percentage decreased from 34% to 30%, driven primarily by pricing pressures experienced throughout 2007 and 2008, increased sales of lower margin products such as metoprolol, lower sales of higher margin propanolol,. The $5 million write-down in the third quarter 2008 of a product intangible, as discussed earlier, and decreased royalty income. Partially offset by increased sales of higher margin meclizine and dronabinol as well as higher price for Megace ES.

Moving onto operating expenses, the company's research and development expenses of $14 million for the three months ended September 2008, declined $19 million or 58% from $33 million for the three months ended September 2007. The decrease is driven by lower Strativa related research and development expenses, including a $15 million payment in 2007 related to Loramyc and a $1 million payment to Hana Biosciences in connection with Zensana, tempered by 2008, $1 million payment to MonoSol RX,. As well as lower generic development costs of $5 million including the nonrecurrence of one-time costs associated with the third party development agreement in 2007 of $2.5 million.

The company's R&D cost of $47 million for the nine months ended 2008 declined $14 million or 23% from $61 million for the nine months ended September 2007. Driven mainly by lower cost for Strativa, including the nonrecurrence of 2007 upfront payments of approximately $19 million tempered by payments made to Alfacell related to the licensing of ONCONASE and to MonoSol RX for licensing of the thin film formulation of ondansetron, as well as cost related to the development of Zensana.

Expenditures related to the company’s generic portfolio also declined $4 million including the nonrecurrence of the 2007 upfront costs associated with the third party development agreement of $2.5 million.

SG&A cost of $31 million for the three months ended September 2008 decreased $3 million or 10% from $34 million for the three months ended September 2007, driven mainly by lower compensation related costs and lower expenses related to sales and marketing behind Megace ES, tempered by higher legal fees. Total SG&A expenses of $99 million for the nine months ended September 2008 declined $2 million or 2% from $100 million for the nine months ended September 2007 mainly driven by lower compensation related costs including a nonrecurrence of severance costs that were incurred in 2007, lower sales and marketing behind Megace ES, tempered by higher legal fees. The higher legal fees were driven in part by increased product litigation including paragraph 4 activity around the company's first-to-file pipeline.

Also during the three months ended September 2008, the company record a contingency of approximately $5 million including interest in connection with the company's contract with the Department of Veterans Affairs. During the quarter and year-to-date period ended September 2008, the company recognized gains related to the sale of multiple ANDAs of $2 million and $4 million respectively.

Also during the third quarter of 2008 the company recorded a loss of $2.5 million, representing an impairment of the company's investment in a debt security issued by Ford Motor Credit Company. The company also recorded a loss of $2 million in the 2008 year-to-date period from a separate investment.

By comparison the company recorded an investment loss of $6 million in the nine months ended 2007 related to a fund that invested in various floating rate structured finance securities. Related to this investment loss during the nine months ended September 2008, the company reached a settlement in connection with the fund and received $2 million which the company recognized a gain in the year-to-date period.

Also in 2007 the company sold approximately 1.1 million shares of its investment in Optimer stock for approximately $6.8 million and recognized a pretax gain of approximately $1 million in 2007.

The company's effective tax rate for the continuing operations for the three months ended September 2008 and 2007 was 34% and 35% respectively. The tax rate for the nine months ended September 2008 and 2007, were 25% and 35% respectively. The company's currently under audit with the IRS for tax yeas 2003 to 2006. In the third quarter the company recorded a charge to tax expense of approximately $3 million related to certain tax credits relating to prior years. The full year expected effective rate is subject to fluctuation based on the level of pretax profit and the impact of permanent items on the tax rate.

The company generated strong cash flows in the third quarter and September year-to-date period in 2008. Cash provided by operations was $36 million for the nine months ended September 2008, which reflects continuing operations as adjusted primarily for depreciation and amortization of $23 million and share-based compensation of $10 million and was driven by the liquidation of working capital mainly lower inventory levels. Which declined $36 million driven primarily by lower sales demand for certain products, and timing of receipt of certain finished goods and higher payables, due to distribution partners increasing $8 million, related to higher sales of partnered products mainly metoprolol, and tempered by higher net account receivables balance of $24 million. Primarily driven by timing of sales in the third quarter but which have been collected in the fourth quarter.

Cash flows used in investing activities in the year-to-date period o2008 included a $20 million payment related to amendment of the company's agreement with Spectrum Pharmaceuticals. Pursuant to which the company increased its share of the profit from 38% to 95% for the commercialization of the generic version of GSK’s Imitrex, sumatriptan.

The company launched sumatriptan in November 6, 2008. Also, it should be noted as disclosed in a subsequent event section of the third quarter of 2008 10-Q, in October 2008 the company repurchased senior subordinated convertible notes in an aggregate principal amount of $58 million related to three separate unsolicited offers for approximately $50 million including accrued interest. The Company will report pretax gain of approximately $8 million in the fourth quarter of 2008 related to this debt extinguishment.

Third quarter 2008 DSO of 73 days is several days higher than expected turns and compared to year end 2007, driven by specific overdue invoices that existed at the end of the September and are collected as of this date and other items that the company is currently pursuing for collection.

As of the third quarter 2008, inventory turns were approximately 4.7 times per year versus 3.5 as of the end of 2007. Turns have improved driven mainly by the timing of receipt of goods in 2007 and improved inventory management.

At this point, I'll make a few comments with respect to the full year guidance as previously issued during our second quarter earnings call. The company's projections, although there can be no assurances are based on its results for the first nine months of 2008, as well management's estimates regarding the impact of product competition on existing products, and the market opportunity for certain of Par’s generic pipeline products and recently launched products including the dronabinol and the relaunch of meclizine, both of which commenced sales in the third quarter of 2008.

We previously projected full year 2008 earning per diluted share from continuing operations, to be in the range of a loss from continuing operations of $0.06 to earnings of $0.38 per diluted share excluding any pre-launch spending and milestones related to Strativa’s pipeline products.

Impacting 2008 are several additional factors affecting our business. The most notable of these factors is the company's October 2008 announcement regarding the restructuring of its generic business not contemplated in its previous EPS guidance. As you know, the company announced last month that it plans to resize its generic unit as part of an ongoing strategic assessment.

In conjunction with this action the company intends to significantly reduce its internal generic research effort and trim its current generic product portfolio. These actions will result in a workforce reduction of approximately 190 employees and the company expects to take a related severance charge in the fourth quarter of 2008, including stock compensation related charges of approximately $10 million. Also in connection with the reduction in the company's internal generic research operations, the company expects to record write-offs related to related facilities and equipment in the fourth quarter of 2008, totaling approximately $16 million.

The company recorded charges of approximately $5 million in the third quarter of 2008 related to line timing of the company's generic products, which included the write-off of certain product intangible and some inventories. The restructuring related charges just discussed were not contemplated in our previously issued guidance, and will be excluded from our update today of full year EPS guidance.

The expected impact on fully diluted EPS in 2008 of these charges is approximately 56% per share. However, the following additional factors, which impact the company's performance for the full year 2008 will be factored into the update of EPS guidance we will issue this morning.

Megace ES full year revenues and gross margin will be impacted by a more challenging reimbursement environment than previously forecasted. Also, in the third quarter of 2008 Megace ES experienced some trade inventory contraction. Generic based erosion for the third quarter of 2008 was stable versus second quarter of 2008 and more favorable than that which we experienced in the second quarter.

In addition the Company's expected to be exclusive with meclizine in the fourth quarter of 2008, which is also better than expected previously. We experienced inventory write-offs in the third quarter of 2008 related to a delayed product launch of roughly $2.5 million pretax, which had not been previously forecasted.

On a full year basis, we expect R&D to be roughly $53 million to $55 million, excluding Strativa and licensing fees. SG&A is expected to be roughly $130 million to $134 million, which is delight ly higher than previous full year guidance, mainly due to higher legal and professional fees. And it should be noted that this guidance excludes any prelaunch spending behind Strativa pipeline products.

There are a number of additional factors impacting our business in 2008. The impact of which is essentially offset and therefore have minimal impact on full year guidance, including the filing pre-tax items. The contingency of $5 million recorded in the third quarter of '08 related to the company's contract with the Department of Veterans Affairs, $8 million gain on debt extinguishment to be recorded in the fourth quarter of '08, impairment loss of $2.5 million on a company's investment in a debt security issued by Ford Motor Credit Company, income of $2 million in the third quarter of 2008 from the sale of non-core ANDAs and additional tax expense of $3 million, related to certain tax credits relating to prior years.

In summary, with respect to our full year expected EPS guidance, excluding the impact of Strativa prelaunch spending and milestones, and excluding the impact of restructuring charges recorded in the third quarter and expected to be recorded in the fourth quarter of 2008 as discussed, the company expects that EPS results from continuing operations for the full year 2008 to be in the range of a loss from continuing operations of $0.06 per diluted share to income of $0.21 per diluted share.

And now we will begin the question-and-answer session of today's call and take the first question.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Gregg Gilbert of Merrill Lynch. Please proceed.

Gregg Gilbert - Merrill Lynch

Good morning. A couple for Veronica. Can you quantify the effect of the wholesaler inventory reduction on Megace ES sales?

Veronica Lubatkin

It's roughly a week. The inventory levels for Megace ES has ranged about two weeks to a little over three week throughout last year or so, but a week is worth a little over $2 million in net sales.

Gregg Gilbert - Merrill Lynch

Okay. So perhaps if I can follow on with John that implies a $380 to $390 per script type of level. Is that a realistic level to use going forward in light of the contracting or should that go up or down?

John MacPhee

What I would say is that the wholesale acquisition, the direct price for Megace ES is about $527 I think it is, and I think you should use it a net price that is maybe about 20% less than that for you're modeling, a little bit more than 20%, between 20% and 25% lets say, less than that.

Gregg Gilbert - Merrill Lynch

Thanks. And Veronica you mentioned or Pat maybe mentioned the R&D budget for generics of $20 million or more for next year. Can you comment on the R&D budget for Strativa?

Veronica Lubatkin

The R&D budget for Strativa will be mainly milestone driven.

Gregg Gilbert - Merrill Lynch

Yeah.

Veronica Lubatkin

And so, that really depends on the progress of the pipeline products.

Gregg Gilbert - Merrill Lynch

How much can we think about for sort of internal R&D related to Strativa, if we are trying to exclude milestones?

John MacPhee

This is John. As it relates right now to internal R&D, the only R&D project to keep in mind is Zensana, and what we'll spend in 2009 depends upon our review of the results that we are currently undertaking with NovaDel. So there could be some -- what I would describe as modest R&D expenses associated in Zenzana in 2009.

Gregg Gilbert - Merrill Lynch

And then finally and then I'll get back in line, Veronica, the 30 -- roughly $30 million or so quarterly run rate for SG&A excluding items that you expect in the fourth quarter. Is that a good level to think about going forward, or does the restructuring eat into that line?

Veronica Lubatkin

Restructuring charges will be taken primarily in the fourth quarter of 2008. So if you are talking about going into 2009, there wouldn't be a very high level of continuing restructuring charges, and in fact we will expect savings….

Gregg Gilbert - Merrill Lynch

I didn't mean charges. I meant sort of a good run rate to use for core SG&A beyond the fourth quarter?

Veronica Lubatkin

Yes. So there will be savings on the SG&A line as you move into next year, but I would take the run rate of about $30 million.

Gregg Gilbert - Merrill Lynch

Okay. Thanks I'll get back in line.

Operator

Your next question comes from the line of Randall Stanicky of Goldman Sachs. Please proceed.

Bob Jones - Goldman Sachs

Hi. It's actually Bob Jones on for Randall this morning. Just a couple of quick questions. Can you give us an update on how we should be thinking about the 2009 pipeline opportunities that you outlined in Q1 of about $100 million to roughly $135 million, how much of that are we now expecting in 2009?

And then also on the debt buy back in the quarter, can we expect that you'll continue to look for opportunities to buy back debt? I think there is still around $140 million left out there.

Veronica Lubatkin

Yeah. A lot of that is really related to availability of cash and the strategy going forward. So, I think it's been important to us to hold on to cash as we assess potential opportunities on the Strativa side. So we probably wouldn't speculate at this point on the ability to utilize more cash for that purpose.

Bob Jones - Goldman Sachs

And then on the 2009 pipeline?

Paul Campanelli

This is Paul, Bob. In terms of the pipeline, I would say there are -- the way I would view 2009 is more of a -- potentially more of a maintenance year for Par. Right now we have several Paragraphs 4s that we are evaluating options on.

Bob Jones - Goldman Sachs

Okay. So I guess if we are looking at the generic business then, excluding some of these pipeline opportunities, is this quarter – the performance in this quarter, is that a good starting point for us as we look into 4Q and obviously more into 2009?

Pat LePore

I think we'd be better prepared to answer those questions as we, when we report year-end results and we are still in the process of putting the '09 operating plan together.

Bob Jones - Goldman Sachs

Fair enough. Thanks.

Operator

And your next question comes from the line of David Moskowitz of Carris. Please proceed.

David Moskowitz - Carris & Co

Yes thanks. I have a number of questions. Number one, the sumatriptan launch, can you just talk about that in relation to your expectations, how is that going? I know it's early?

Paul Campanelli

David Hi. This is Paul. It's early. We are still securing some smaller accounts, but I would tell you the 6-milligram prefilled syringe where we are -- what I would say semi-exclusive with [Sandoz], that part has secured our fair share.

David Moskowitz - Carris & Co

Okay.

Paul Campanelli

So we are pleased with respect to the 6 milligram. Regarding the others where we are exclusive, so obviously we would take that 100 percent of the generic opportunity.

David Moskowitz - Carris & Co

Okay. So, you are relatively in line with your expectations?

Paul Campanelli

Yes. I would say so.

David Moskowitz - Carris & Co

And last quarter, I think you guys gave the gross margin on the generic business. Would you guys be willing to do that this quarter?

Veronica Lubatkin

I think last quarter we projected forward a bit, that we thought the gross margin for the base business would be in the high teens, and that was with some expected erosion coming off the second quarter. The third quarter did better than that, and so the generic base business margins were closer to the low 20s, which was an improvement over what we believe they did.

David Moskowitz - Carris & Co

That’s fine. Thank Veronica. That's the base business not including like Marinol and meclizine?

Veronica Lubatkin

Right.

David Moskowitz - Carris & Co

Is that related to what looks to be a better pricing environment out there, or is that just a mix of products that you guys now have?

Pat LePore

I would say it's more of a mix and a part is basically pushing back on the trade.

David Moskowitz - Carris & Co

Got you. Can you give us an update on the Catapres patch? I understand the facility was inspected with no [483s] in July. Can you tell us if there are any other barriers that you foresee in terms of getting that product approved in the near-term?

Pat LePore

David. It's so hard to predict what's going on. I mean there’s a -- as we all know the FDA inspect the facility, the inspection came out well, and I believe that -- we’ve actually recently launched a product out of the facility unrelated to Par. It's really tied back to the application review and as you know there are so many ANDAs backlog at the FDA, we just really can't predict when the FDA is going finalize the review.

David Moskowitz - Carris & Co

Okay. And in terms of potential competition on that product, do you guys see yourselves being exclusive there or do you think there would be one or more competitors?

Pat LePore

We always predict competition, Dave. There are other companies with applications in at the FDA, so we certainly would be predicting competition.

David Moskowitz - Carris & Co

Great. And one last question. On the business development of Strativa, what sort of size deal are you looking for? I think investors certainly value the cash position as you do currently, and the deals that you have done in the past have been very much risk adjusted. I guess the question is how should we think about the risk level of the deal that you might be willing to enter into going forward?

Pat LePore

David, I think given the current environment and with our balance sheet, the debt, that the convert is coming due in 2010, we are looking anything up to probably $150 million that we could feel comfortable doing.

David Moskowitz - Carris & Co

Okay, thanks.

Operator

Your next question comes from the line of Elliot Wilbur of Needham. Please proceed.

Elliot Wilbur - Needham & Co

Good morning. First question for Veronica and Pat, I suppose. With respect to the new EPS guidance range for '08, the high end of the range $0.21 versus the prior high end $0.38, I want to make sure I fully understand what has changed with respect to the high end. I'm assuming it's primarily timing of new product launches but I just wanted to make sure that I have all the variables there.

Veronica Lubatkin

Yeah. As I've said we did experience a delay in a product launch that led to inventory write-offs in the third quarter of 2008 but beyond the inventory write-offs obviously we still had from the high end, the delay of that launch itself. We have a little bit lower on Megace ES, basically driven by the reimbursement environment, and I guess offsetting that would be a little bit better performance on the generic side.

Elliot Wilbur - Needham & Co

Okay. And then a question for Pat. With respect to Zensana and ondansetron opportunity, I mean how should we be looking at the spray versus the thin film? I mean are those complimentary products really or is that just more -- two shots on the same goal, not really sure how to think about it.

Pat LePore

I think we are assessing what the marketing strategy would be as we speak. They both get approved, obviously we can choose to market them both, position them differently for different patient types or we can choose just to market one over the other. So I would say at this point we are still formulating that strategy. Maybe John can add on to that a bit.

John MacPhee

Yeah. John MacPhee. We see them both as complimentary products. The antiemetic market is one where patients are really suffering, and are very sick and we think both the thin film and the spray bring real benefit to those patients. So, should they both get to market, it would be our intention to market them both and we feel we can position them both..

You asked about how to think about these. Right now the development program for the thin film is going extremely well. There are two parts of the studies and we expect to file in early to mid '09. Zensana as Pat said, does have mixed results and we are taking a bit of a short time up here to look at those results with NovaDel and then decide how to carry forward the program.

Elliot Wilbur - Needham & Co

Then I have a question for Paul as well. With respect to sumatriptan, in terms of assessing the possibility of subsequent competition on those product lines, I mean, number one can you tell us which of the four strengths or dosages you are not exclusive on, and then, think about again subsequent competition, I mean is the -- some of the standards injectables is not or cannot AB-rated to the -- [STATdose] product. Is that correct?

Paul Campanelli

I am not sure I don't understand your question, again on the AB-rate?

Elliot Wilbur - Needham & Co

With respect to the standard I'm not sure if it’s a prefill syringe or its kind of a straight injectable 6-milligram form, but is that -- would you be able to get an AB-rating on that product versus the products that are sold in the STATdose form?

Pat LePore

When generic competition come out in February, they will have an A rating which -- injectables don’t technically AB-rating. Those are tolerable dosage classification but it would behave similar to an AB-rating. So yes, in February if we have competition, they would have automatic substitution.

Elliot Wilbur - Needham & Co

Okay. And which of the four --

John MacPhee

So the question on exclusivity we are semi exclusive with [Sandoz] on the 6-milligram prefill syringe, and we are alone on the 4-milligram and 6-milligram starter kit and the 4-milligram prefilled syringe.

Elliot Wilbur - Needham & Co

Okay. One final question. With respect to the discontinued products, I'm assuming that none of those would fall in the basket of products that you disclosed in the regulatory filing. Is that a fair assumption?

John MacPhee

Yes. That's correct.

Elliot Wilbur - Needham & Co

All right. Thank you.

Operator

Your next question comes from the line of Ken Cacciatore of Cowen & Company. Please proceed.

Ken Cacciatore - Cowen & Company

Hi guys, I first have a quick housekeeping question. On the $5.4 million charge you keep referring to, where do we find that on the P&L or where should we be taking that out?

Veronica Lubatkin

It's in cost of goods sold.

Ken Cacciatore - Cowen & Company

Cost of goods sold.

Veronica Lubatkin

If we have not taken an impairment charge on it, you would see it in the COGS the amortization of the product intangible. So we basically accelerated that amortization by taking an impairment in the period. So it's in cost of goods sold.

Ken Cacciatore - Cowen & Company

Okay. Thank you. And on Antivert, just maybe some thoughts on the sustainability of that product?

Veronica Lubatkin

That class of -- the reason that we took the charge in the period was due to the line trimming of the generic portfolio.

Ken Cacciatore - Cowen & Company

No, I am sorry. I'm asking about Antivert, you obviously put a good quarter, and I was wondering should we be anticipating this level of sales going forward?

Paul Campanelli

Yeah. I think regarding the meclizine product that we believe that it will be stable at least through the fourth quarter of this year.

Ken Cacciatore - Cowen & Company

Okay, great. And then can you give us a sense of how many products you are actually discontinuing? I mean the sale level is helpful and I guess my question would be, when you talk to some of the smaller Indian manufacturers they always say that the biggest problem or issue that they have is that they didn’t have a full line of product to be able to compete when they are introducing new products. So, I was wondering -- obviously this is the right business decision from a profitability standpoint, but could you just touch on. Does it hurt you in terms of contracting going forward as you trim the line or is that really something we shouldn't be concerned about?

Pat LePore

I was just actually at a large wholesaler show yesterday and actually we were basically commended. So from the standpoint I don't see trimming the portfolio as impacting our ability to sell through the classes of trade. And I think frankly that's going to be, kind of a way for the future where companies are going to be culling out on possible products .so I don’t see that as an issue. We still have 50% of our portfolio very healthy in allowing us really to compete again and we are pleased with that.

With respect to the number of products that we are culling out of the portfolio, it will probably be somewhere around 50%, maybe a little bit less by the time we get through mid 2009.

Ken Cacciatore - Cowen & Company

Okay. Great. Thank you.

Operator

And your next question comes from the line of Adam Green of the Stanford Group.

Adam Green - Stanford Group Company

Thanks good morning. Following up on Elliot’s question on Imitrex, what percentage of that sale of $200 million plus sales, what percentage of that is the 6-milligram prefilled syringe that you share with Sandoz?

Paul Campanelli

It's about 80%.

Adam Green - Stanford Group Company

80%?

Paul Campanelli

About 80.

Adam Green - Stanford Group Company

Okay. And then on meclizine, of the $15 million in the quarter, was that any of that stocking because the scripts really haven't changed that much?

Veronica Lubatkin

They are very minimal amount of stocking. I think the trade had sufficient levels so the scripts really weren’t affected at all throughout the period.

Adam Green - Stanford Group Company

Okay. And the gross margin on that product, those are high gross margin products?

Veronica Lubatkin

High gross margin, yes.

Adam Green - Stanford Group Company

And then lastly Treximet, have you been sued on that product yet or has the dead line passed for that?

Paul Campanelli

No. We have not been sued yet.

Adam Green - Stanford Group Company

But the deadline, do you know if it has passed yet?

Paul Campanelli

No. It's still early, still early Adam.

Adam Green - Stanford Group Company

Okay. Thank you.

Operator

Your next question comes from the line of David Buck of Buckingham Insurance Group. Please proceed.

David Buck - Buckingham Research Group

Yes. Thanks. A couple of questions. First I guess for Paul on the generic launches that you talked about in 10-Q, you mentioned potential launches for 2009, 2010, including some which were settled and some that are based on exclusivity. Can you give a little more color on the settlement what that drug is or drugs? And what's the latest expectation for competition coming on metoprolol and what is your expectation for Sumatriptan competition when you get to February of next year? Thanks.

Paul Campanelli

In terms of the settlement in the paragraph IVs David, at this time we don't feel real comfortable getting to the details of that. Obviously, our counsel and our business development teams are looking at evaluating all options, and I think right now we are looking to maximize these paragraph IVs and we are looking at it from a lot of different angles. Unfortunately we really can't get into the lot of details moving forward.

Regarding metoprolol toll competition, we know there are two other companies that have ANDAs out there. However, there's been technical challenges on manufacturing this product. I think a lot of people are aware that there has been situations of nonsupply regarding metoprolol. At this time we feel comfortable through the end of December without competition. And having said that, we believe that we will see people in the market coming in sometime in 2009.

David Buck - Buckingham Research Group

Okay. And --

Paul Campanelli

Sumatriptan, there are -- but I believe [Secotral] sitting with a tentative the approval on the FDA website, so we know we have at least one competitor that would be at least able to come to the market in February assuming that they are finally approved, but there is at least one [TA] sitting on the FDA website.

David Buck - Buckingham Research Group

And the 10-Q remark just a followup, was there an actual settlement or a strategy to settle potentially some cases? Are there some settlements that you are not disclosing?

Veronica Lubatkin

The new product launches on the table that we disclosed previously as well as the comments in the 10-Q lay out the product launches as if they expire at the 30 month stay with the launch day, but of course we know that these launches will be subject to change based on the outcome of settlement activity.

David Buck - Buckingham Research Group

Okay. Thanks.

Operator

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

Greg Gilbert - Merrill Lynch

Thanks for the follow up. Veronica, did you mention the name of the product that was written off in the quarter in cost of goods and if not, could you?

Veronica Lubatkin

I did not. In our previous guidance in the top end of the range we had indicated that there were two major products included in the range. So Sumatriptan and clonidine. We launched Sumatriptan. So you can deduct from there the products.

Greg Gilbert - Merrill Lynch

And then for Pat and Paul what is the process and the time line for the product divestiture process? And if we skip forward and remove $40 million at some point from the P&L, should we assume you have some level of cash for those products? Can you put some context around that for us?

Paul Campanelli

Sure. In terms of the product divestiture, the process started yesterday so we have gone through certain companies that you have interest in acquiring.

Pat LePore

I mean they clearly can be an asset for companies that may be in API. they are predominantly commodity based products, but I think Veronica has indicated some dollars or revenue for non-core assets that we divested and we would imagine that there could be a couple million dollars coming into the company based upon, what I would say asset purchase agreements that we can put in place over the next 12 months.

Greg Gilbert - Merrill Lynch

So nothing that big. All right. And other than settlements, are you considering other options to monetize your paragraph IV portfolio, perhaps an aggregate?

Paul Campanelli

I think what we are doing is we are looking at all options. There are, whatever maximizes the value for Par, but having said that, we are very bullish in our patent paragraph IV litigation strategies. We are very bullish we are not walking away and we are prepared to litigate. But if there are other ways to maximize the value for, we are going to review all options.

Greg Gilbert - Merrill Lynch

Thanks very much.

Operator

And your next question comes from the line of Rich Silver of Barclays Capital. Please proceed.

Rich Silver - Barclays Capital

Back to the discontinued products, did you say how many products are or I think Ken had asked that question?

Pat LePore

It's 50%, it's going to probably be --because its a wide range right now and could be 30 to 40 to 50 products.

Rich Silver - Barclays Capital

Worth $40 million?

Pat LePore

Yes.

Rich Silver - Barclays Capital

And then on the cost savings, you said I think it was about $45 million, it wasn't clear to me what the plan was for the cost savings in terms of how much would actually be falling to the bottom line and how much would be essentially reinvested.

Pat LePore

Well, none of it is predetermine to be reinvested anywhere. It will fall to the bottom line, and we'll just note that they will have a better ability to resource opportunities for both Paul and for John, but there is not going to be allocation of that savings to any particular budget, if that is what you are asking.

Rich Silver - Barclays Capital

Okay, so should we -- as we look at that savings, can we assume as we are looking at out to '10 that that would be actual increased profitability for the company?

Pat LePore

Yes. Full annualized, yes.

Rich Silver - Barclays Capital

Okay. Thank you.

Pat LePore

Yes .

Operator

And your next question comes from the line of David Buck of Buckingham Insurance. Please proceed.

David Buck - Buckingham Research Group

Yes, thank you. Just a follow up maybe for Pat. On the restructuring, what led to the decision? Can you talk about whether there was a search for a buyer for the generics business and then you decided to restructure and just can you give background on what happened there?

Pat LePore

I think it was just a -- in the course of assessing our business as we are doing all the time considering what is going on externally, what's going on internally, coming off of a bottoming out if you will in the second quarter, this was a move that we had to make. So I think it was a lot of factors but basically looking at the asset that we have against the structure just didn't work. And the uncertainty of new product launches on the generic side, I think compelled us to do this. We couldn't continue with the size of the operations that we had, hoping and waiting for these product launches to hit, and so I think it was just a natural course of action.

David Buck - Buckingham Research Group

So was there a sales process or not?

Pat LePore

There was not a formal sales process, no.

David Buck - Buckingham Research Group

Okay. And on the flip side there's a large merger that will be closing shortly in the generic group. Do you expect to be a bidder on any asset from that merger?

Pat LePore

I think Paul can probably answer that. If there are products that we think fit.

Paul Campanelli

Yeah. We certainly, our business development teams are out communicating and whenever appropriate we certainly would like to participate in that, if there is an opportunity, Par would participate.

David Buck - Buckingham Research Group

Okay. Thanks.

Operator

Ladies and gentlemen, this concludes the question-and-answer session and now I would turn the call over to Mr. LePore for closing remarks.

Pat LePore

Okay, well. Thanks again everybody. I just want to close by saying from where I sit, I feel Par is in a much better position today to meet the changes and the challenges in the market, tomorrow, and the future than we were just a few months ago. The focus will continue to be on efficiency and profitability by maximizing the investments we made in purchase files, constantly rationalizing the product portfolio. Seeking opportunistic external R&D projects and accelerated Strativa platform, with a strong balance sheet, a healthier and more nimble generic business and our valuable business in generic pipeline, Par is a stronger and more viable company today for the long term.

Thank you all for participating in today's call. We look forward to speaking with you again soon.

Operator

Ladies and gentlemen, this concludes the presentation and you may now disconnect. Have a great day.

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Source: Par Pharmaceutical Companies Inc. Q3 2008 Earnings Call Transcript
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