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Sucampo Pharmaceuticals Inc. (NASDAQ:SCMP)

Q3 2008 Earnings Call

November 12, 2008 5:00 pm ET

Executives

Kate de Santis - VP of IR and Corporate Communications

Dr. Ryuji Ueno - Founder, Chairman, CEO and CSO

Jan Smilek - VP of Finance and Acting CFO

Stan Miele - SVP of Sales and Marketing

Analysts

David Moscowitz - Caris & Company

Gary Nachman - Leerink Swann

Matthew Stanton - Cowen & Company

Mike Yee - RBC

Jim Malloy - Caris & Company

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2008 Sucampo Financial Results Conference Call. My name is Michelle and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms. Kate de Santis, Vice President of Investor Relations and Corporate Communications. Please proceed, ma'am.

Kate de Santis

Thank you, operator and good afternoon everyone. With me on today's call are Dr. Ryuji Ueno, Sucampo’s Founder, Chairman and Chief Executive and Scientific Officer; Jan Smilek, Vice President of Finance and Acting Chief Financial Officer; and Stan Miele, , Sucampo’s new Senior Vice President of Sales and Marketing.

Stan joined Sucampo in February 2006 and was promoted to his new position last month. He has over 18 years of sales and marketing experience in the pharmaceutical and medical device industries and we look forward introducing him to the investment community in person as time permits.

Other members of Sucampo’s management team are here as well and available to answer your questions during the q-and-a portion of this call.

The format of today’s call is as follows. Jan will provide a summary of our financial results for the quarter, Stan will follow with an update on our commercial activities surrounding AMITIZA and then Dr. Ueno will conclude with a brief update on upcoming clinical and preclinical milestones that we expect to see for the remainder of 2008.

Before we begin, please note that various remarks we make on this conference call about Sucampo's future expectations, plans and prospects will constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may be identified by the words project, believe, anticipate, plan, expect, estimate, intend, should, would, could, will, may or other similar expressions. These statements involve risks and uncertainties and we encourage listeners to review them as they are found in the company’s filings with the Securities and Exchange Commission. These filings can be accessed through the for investors page of Sucampo's website at www.sucampo.com.

In addition, any forward-looking statements represent the Company's views as of today, November 12, 2008. These statements should not be relied upon as representing the company's views as of any subsequent date. While Sucampo might elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so.

I would like to turn the call over to Jan for a discussion of our financial results. Jan, please go ahead.

Jan Smilek

Thank you, Kate. We announced our third quarter 2008 financial results this afternoon just after the close of the US financial markets. If you have not seen the press release, you can find it on our website at www.sucampo.com

Let me review the financial highlights of the third quarter of 2008. Sucampo reported a net loss of $2.4 million or $0.06 per diluted share in the third quarter of 2008 compared with a net loss of $0.5 million or $0.01 per diluted share into third quarter of 2007.

We attribute the loss to three main factors. Firstly to a deferral of an additional $1.9 million of research and development revenue resulting from the change in estimated completion date of our OBD trials of AMITIZA that we discussed during the second quarter of 2008.

As of September 30, 2008 we deferred a total of $3.6 million of research and development revenue, relating to the ongoing AMITIZA trials that are funded by Takeda. We expect to recognize this revenue mostly into second half of 2009.

Secondly, our product gross revenue for the quarter was impacted by lower restocking orders for AMITIZA 8 mcg that reflects the draw down of the inventory from the initial stocking completed during the second quarter. As you remember, we recognized the royalty of approximately $1.9 million in the second quarter of 2008 for a portion of the initial stocking orders for AMITIZA for IBS-C and specifically the portion with no rights of return.

The impact of the lower restocking orders on our royalty revenues was approximately $870,000 during the third quarter of 2008 and as of September 30, 2008 approximately 54% of the initial stocking remain to be draw down. We expect this inventory to be fully utilized by the end of the first quarter of 2009.

The product growth revenue for the quarter was also reviewed by approximately $644,000 resulting from a change in estimated rebates, discounts and other expenses.

Finally, part of the loss can be attributed to our continuing investment in our international operations, which contributed the significant achievements during the third quarter.

The R&D expenses for the quarter include approximately $1.2 million for the Phase II Japanese trial of AMITIZA for CIC, and cost for our pending European marketing approval application for AMITIZA.

Dr. Ueno will provide more detail on the progress of our ongoing discussion with potential international partners that were facilitated by these achievements.

Let me briefly discuss the operating expenses, which increased by $5.6 million to $19.3 million in the third quarter from $13.7 million in the third quarter of 2007. R&D expenses for the third quarter were $11.4 million, an increase of $3.8 million from the $7.6 million in the third quarter of 2007.

The higher spending levels were associated with our increased clinical activity, for development of AMITIZA, primarily in respect to our ongoing pivotal Phase III studies of AMITIZA for OBD and ongoing trials for cobiprostone and preparation for the trial of SPI-017. I have already mentioned expenses relating to our international efforts.

G&A expenses increased by $1.8 million to $3.9 million during the quarter from $2.1 million in the third quarter of 2007. The increase in expenses in the third quarter was primarily the result of an adjustment of approximately $900,000 recorded during the third quarter of 2007 to reduce previously recorded one-time expense related to founders' stock-based award. The remaining $900,000 increase in the G&A expenses was attributed to increased operational headcount and overall costs associated with the compliance and regulatory requirements of being a publicly traded company with increasing international operations.

Let me finish by highlighting our strong financial and liquidity position. Sucampo's cash, cash equivalents and investments totaled $124.1 million at September 30, 2008, as compared with $135 million as of June 30, 2008. The decrease during the quarter is attributable primarily to $9.7 million in estimated tax payments for 2008 as well as due to other changes in operating assets and liabilities.

I will now turn the call over to Stan Miele, our Senior Vice-President of Sales and Marketing. Stan?

Stan Miele

Thank you, Ueno and good afternoon everyone. The third quarter was another busy period for both the Sucampo and to Takeda commercial teams. Following the FDA approval of AMITIZA 8 microgram for IBS-C, we have maintained an active sales and marketing campaign. Ongoing activities include sales force promotion, which includes patient experience programs, journal advertising, public relations outreach, pharmacy programs and web based patient education strategies.

Initial feedback remains encouraging and we continue to increase our visibility within the GI community and with primary care physicians to differentiate AMITIZA is the only product approved for both CIC and IBS-C. We are encouraged by the most recent IMS monthly data that demonstrates that total AMITIZA pill count in both dosages increased 2% from August 2008 to September 2008 and 3.3% from September 2008 to October 2008; this represents the third consecutive monthly increase.

In addition, total retail AMITIZA prescription increased 6.4% quarter-over-quarter and 16.8% year-over-year. As of the week ended October 31st, IMS data indicate that 8 microgram retail prescriptions now account for 16.3% of total scripts. We are also seeing a continued increase in the average number of pills per 8 micrograms script from approximately 55 initially to 61 to 62 in the most recently reported weeks. We are seeing growth in the 8 microgram strength that is somewhat more robust than the story told by scripts alone.

Also, since the launch of the 8 microgram for IBS-C, we have seen a steady increase in the number of physicians, who have written at least one prescription of AMITIZA. It is our goal to convert the new writers into more consistent prescribers. As you probably know according to IMS retail prescription numbers, total retail prescriptions for the constipation market were down nearly 5.1% for the second quarter of 2008. Despite this trend, AMITIZA prescriptions held fairly steady during this period.

We believe that there are few factors that account for these recent trends. AMITIZA has created a unique position in the constipation and IBS-C market place. The primary care market is slowly beginning to understand the differences, in the two different strengths and where and how to appropriately prescribe. Additionally things are stabilizing, as the Takeda impact integration continues to take shape. They are now roughly 1200 sales personnel in the Takeda sales team up from 900 all of whom are promoting AMITIZA in the retail segments.

The managed care environment is ever evolving, not dissimilar to other therapeutic disease stage. Some management care plans do encourage patients and physicians to use over-the-counter treatments rather than prescription therapy. Currently, Sucampo is working with Takeda to create both pair and pull through strategies to more aggressively address this trend.

Our own Sucampo sales force, which targets long-term care facilities and key opinion leaders within the academic medical centers, continues to perform well. Sales for these segments are not reflected in the IMS retail prescription data, but are available from IMS in the hospitals, Department of Defense in long-term care segments. Sucampo continues to see an increasing portion of the total AMITIZA sales coming from these institutional segments.

AMITIZA sales in these segments increased 7.7% for the third quarter versus the second quarter of 2008. Year-over-year, the increase was 75.5% in these segments. As AMITIZA 8 microgram and 24 microgram have no upper age restrictions and a favorable adverse event profile, it is ideally suited for the long-term care market.

Our sales team success in implementing our novel account management business model firms that Sucampo continues to play a vital role in this success of AMITIZA.

I will now turn the call over to Dr. Ueno. Dr. Ueno?

Dr. Ryuji Ueno

Thank you, Stan, and good afternoon, everyone. As I said in today's press release, I am pleased to see continued success of AMITIZA in this difficult economic environment.

We continue to invest in research and development and in our international operations. The results of these investments were demonstrated by the clinical achievements of the quarter, including positive data from the Japanese Phase IIb trial of lubiprostone. These events allow us to make further progress in our ongoing discussions with potential partners for AMITIZA in Japan, Europe and Latin America.

Now, I would like to provide an update on our clinical development program starting with AMITIZA. As we have previously announced our Phase IV study of patients with renal impairment is complete, and we submitted our final clinical study report to FDA in April.

Our Phase IV study in patients with hepatic impairment is also complete, and we continue to plan to file the results with FDA within a couple of months.

Our two pivotal Phase III trials of AMITIZA 24 microgram in the opioid bowel dysfunctional patients remain ongoing, and enrollment is on schedule. We anticipate completing patient enrollment into this trial before the end of 2008. We also anticipate having the results from these pivotal Phase III trials about the middle of 2009.

According to IMS data, more than 200 million prescriptions were written for opioid-based drugs in 2006 in the United States. Many studies indicate that a high percentage of patients receiving opioids are likely to experience significant constipation and other symptoms of opioid bowel dysfunction.

If Sucampo is ultimately successful in getting approval for oral AMITIZA for this indication, it would provide Sucampo with another substantial growth opportunity.

As we previously reported in September, Sucampo announced the successful results of our Phase IIb trial of AMITIZA for CIC conducted in Japan. The study demonstrated a statistically meaningful dose related increase in mean change in spontaneous bowel movements from baseline together with improvement of various other symptoms associated with the constipation.

These successful results have facilitated partnership discussions for AMITIZA in Japan and Asia. We plan to initiate Phase III clinical trials in Japan by the middle of next year.

Now, on to cobiprostone, one of our next-generation prostone compounds. Cobiprostone has a novel mechanism for action, a chloride channel activator, which is different from acid reducers such as proton pump inhibitors and H2 antagonists. Without affecting acid production in the stomach, cobiprostone has the ability to prevent ulcer formation by enhancing the barrier function and repairing the stomach mucosa.

The enrollment into a Phase II clinical trail of cobiprostone for the prevention of non-steroidal anti-inflammatory drugs, NSAID-induced ulcers, continued during the quarter. We anticipate that enrollment into this trial will be complete before the end of 2008.

Also, as previously announced, we continued enrollment into a single-center proof-of-concept Phase II trial evaluating the safety and efficacy of cobiprostone for the treatment of portal hypertension in patients with liver cirrhosis.

Cirrhosis is a chronic degenerative liver disease in which scar tissue replaces normal healthy tissue, blocking the flow of blood through the organ. The obstruction in blood flow from cirrhosis is a common cause of portal hypertension. This study is being conducted at the University of Texas Southwestern Medical Center in Dallas and is progressing.

I am very pleased with the preclinical progress of our new prostone compound, SPI-017. We expect to move it into Phase I clinical trial for peripheral vascular disease and Alzheimer's disease within the next few months.

I would like to conclude my comments by saying that Sucampo's financial position is healthy and sound. AMITIZA sales are strong, and our R&D pipeline is advancing. The recent positive results in the Phase IIb study of AMITIZA in Japan and AMITIZA's progress of review for approval at the regulatory agencies in Europe have facilitated our discussions with potential partners in Japan, Europe and Latin America.

That ends our prepared comments for this afternoon, and we'll now be happy to answer your questions. Operator, would you please review the procedure to ask questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Moscowitz from Caris. Please proceed.

David Moscowitz - Caris & Company

Thanks. Good evening, everyone. Question about the OBD revenue deferment; it sounds to me like the trials are still on track and yet you are deferring that revenue. I don’t quite understand what happened in the quarter with that?

Jan Smilek

This is Jan. What we have done, as you may remember from the first and second quarter, at the beginning of the second quarter, we have actually have changed the estimate when that trial is going to be completed. And that change resulted in the deferral in that month, but he deferral actually continues until we hit from an accounting point if we hit a cumulative expenses that are going to be higher than a straight line cumulative expenses that are resulting from that change in estimates. So, we believe that we are going to continue to defer some revenue until probably through early first quarter of 2009 and at that moment the revenue will start to be utilized and as I said, most of that revenue is going to be utilized in the second quarter of 2009, or just second half of 2009.

David Moscowitz - Caris & Company

Just to confirm: I thought I heard Dr. Ueno say is the results from OBD would be available on mid-2009.

Stan Miele

Lead from the two pivotal studies and we have also a safety expansion, but I will let Dr. Ueno to address that.

Dr. Ryuji Ueno

I am talking about the two pivotal data that will be available sometime in the middle of next year, but safety expansion is to continue.

David Moscowitz - Caris & Company

So the safety expansion is going to continue potentially until late September?

Dr. Ryuji Ueno

Yes. Late September.

David Moscowitz - Caris & Company

Okay. And could you give us the reported revenues of AMITIZA by Takeda in US dollars, please?

Jan Smilek

Takeda reported their six months revenue. Their fiscal year-end starts on April 1st and for the first six months they've reported $100 million in that revenue.

David Moscowitz - Caris & Company

That’s in dollars?

Jan Smilek

Yes.

David Moscowitz - Caris & Company

Okay, but they are off counters, is that correct?

Jan Smilek

Their fiscal year ends on March 31st.

David Moscowitz - Caris & Company

Right. So do they nor provide a quarterly breakdown of AMITIZA sales?

Jan Smilek

They were both in the range of a $50 million, I think what we've said in the first quarter, they were less than $50 million, maybe $49 million in the first, in the second quarter for us they were over $50 million or around $51 million.

David Moscowitz - Caris & Company

Okay. It looks like, based on the royalty revenues that we see, that you were a little bit later than what we and some others are expecting, can you explain that?

Jan Smilek

Well, mostly that resulted from, as I said before, resulted from the utilization of the initial stocking and that was about $900,000 impact, as we quantified it, but also about $644,000 adjustment that we posted to change the estimate and rebates and other discounts relating to the sales that we trued up this quarter.

David Moscowitz - Caris & Company

If I look at the AMITIZA revenue, they reported in the second quarter, which was $10.9 million and a $7.7 million that you reported this quarter, that’s inconsistent with what Takeda's reporting, which you just indicated was $50 million per quarter.

Jan Smilek

As I explained at the last quarterly call, we had different revenue recognition rules, so we have recognized immediately the initial stockings revenue, or product launch revenue relating to that initial stocking. And there was $1.9 million during the last quarter, so if you take 10.9 and deduct the $1.9, you are about $9 million in revenue that theoretically could have been reported by us during the second quarter. If you take $900,000 and add it to $7.7 million and plus that to $644,000 you are somewhere around $9.3 million, if I calculated correctly for the third quarter. So there has been some increase and the numbers will be consistent pretty much with what Takeda reported, which have different revenue recognition, and the contract allows us to recognize the revenue upfront and the initial stockings.

David Moscowitz - Caris & Company

The demand based revenue from the Sucampo perspective was $9 million in the second quarter and $9.3 million in the third quarter?

Jan Smilek

Somewhere in that range.

David Moscowitz - Caris & Company

Approximately?

Jan Smilek

Okay.

David Moscowitz - Caris & Company

Can you talk about recent price increases that you had for the drug, for the Takeda?

Stan Miele

Hi. This is Stan. As you know we did have a price increase at the time of the 8 mcg launch for IBSC and we have some ongoing discussions with our partners the Takeda to determine when the next price increase would in fact occur. But as of right now, we are only looking at the price increase that occurred this past May, and we will have further discussions with them to determine if and when a price increase would occur next.

Operator

(Operator’s Instructions) Your next question comes from the line of Gary Nachman with Leerink Swann. Please proceed.

Gary Nachman - Leerink Swann

Hi, good afternoon. How long has Takeda had this 1,200 reps promoting AMITIZA? How much of that is primary care versus GI specialist? And when do you think we will start to see more of pickup in prescriptions and is there a plan to start a DTC advertising anytime soon? I think we are past the six months point now.

Stan Miele

Hi, Gary this is Stan. Thanks for your questions. Let me make sure that I address all of those. I will start with, how long has the alignment been with new to Takeda organization. As you know, they are effective the 1st of October. There are 1,200 representatives, and there was an integration process with TAP. If you take a look at the alignment configuration 500 of those reps have AMITIZA in a primary position and they call on both gastro's as well as primary care and internal medicine physicians.

Five hundred additional reps have AMITIZA and a secondary call position as well, but that's primarily with primary care physicians and then they have an incremental 200 representatives that call on also gastroenterologists as well as some other specialty segments such as some overlap in the hospital arena.

So that's where the current configuration is, in terms of how they are appropriately aligned and we feel that there is adequate coverage with the GI specialist as well as the PCP market and this point in time.

One of your other question as it relates to direct-to-consumer. As you know, and I think this was mentioned during the last earnings call as well, that there is obviously an ongoing campaign as it relates to direct-to-consumer in the print arena and we have some ongoing discussions with Takeda as it relates to the electronic medium but no final decisions have been made at this point in time.

Did I answer everything? Or was there one additional questions?

Gary Nachman - Leerink Swann

Yes. Now that they have the 1,200 reps in full force, understanding that the whole categories are done and you have held up, when do you think you will get see more of a pick up in prescriptions?

Stan Miele

Well, I think if we, again, if we a take a look at some of the positive information if we take a look specifically at the pill count for example we are beginning to see some trends moving in the right direction,. If we take a look at quarter-over-quarter a 5.2% increase in total prescriptions. We are seeing some movement and I think a couple of things we have to keep in mind, the first is we finally have some approved DDMAC materials that did not get into the hands of our representatives until the 1st of October. So we have that information now. And I think now that the integration has began to stabilize with the TAP and Takeda integration, I think we should begin to start seeing some additional positive trends.

And then lastly, I think we can also look at some positive news as it relates to the extended units or the pill counts. Because I think that’s indicative of the fact that we have the right dosage out there, physicians are beginning to understand the differences between the 24 mcg and the 8 mcg, and so they are also dosing appropriately, its working. So they are filling their prescriptions, and we are also seeing some movement with managed care, where we are seeing a little bit more of a three-month purchases through mail order.

Gary Nachman - Leerink Swann

Okay. So what is the price product that we should be using? If you could break it down between the 8 and 24, and not just an aggregate, that will be great.

Jan Smilek

I'm sorry, the price...

Gary Nachman - Leerink Swann

The average price per prescription that we should be using given the change in prescription outlook?

Jan Smilek

I'm sorry we'll get back in touch. Why don't you just give me a call offline and then I'll address that.

Gary Nachman - Leerink Swann

Okay. One more question, Dr. Ueno, could you speak to what your priorities are in terms of the use of cash? You have a really nice cash balance right now and how aggressive are you at this point in terms of looking for new products for the long-term care. It seems like Stan has done a good job with the sales force and they are getting some traction. Now where are you with that? Thanks.

Dr. Ryuji Ueno

Ken. This is Ryuji Ueno speaking. As you know we have a pretty good cash position and I'm a little bit conservative now because of the current economy but our priority is currently the international expansion. As you know, we have finished the Phase II study in Japan, so we need to invest to the Phase III study in Japan. And also, we are doing the process of the -- approve our process in 10 countries in Europe. So we are now doing a lot of our search and activity, how to launch the product in EU. Basically we are planned to have our own sales force at least in UK and Ireland.

So these are the main investment but at the same time I'm still working on the new compounds because I don't know whether you know or do not know, I myself am very enthusiastic to develop SPI-017, because that compound shows a very good preclinical result so far, for Peripheral Arterial Disease or Alzheimer's Disease or other Neurodegenerative Disease. So, at least we can say we finished preclinical studies and we can move into the Phase I level for both IV formulation and oral formulation. So, this is a early stage. It doesn’t cost too much, but I am very much excited to proceed the research.

And the last thing are, even by doing that I think we can still keep the current cash position, because we are now trying to activate our talking on partnering. So, if this can be successful, of course I am always thinking about the worst case scenario. So, the expense to cover this international or new compound development can be done within our capacity, but if we can make further partnering then still we can do a little bit more such as in-licensing program to activate our sales force.

As you can find by that today's our earnings call, our sales force, which is taking care of long-term care and institutional market has made a big jump from last year over 70% increase. We are targeting a right audience is what I found by deploying the sales force into the market. In order to make more profitable use of our sales force, if we add one more compound to our sales force directly it will change the profitable structure and the current Takeda contract allow us to carry one more compound without affecting the reimbursement from Takeda. So, that’s what I am working and I am now searching for the in-licensing product?

Stan Miele

Gary, this is Stan. I just wanted to follow-up as well. The price that we are using per prescription is roughly $190.

Operator

Your next question comes from the line of Matthew Stanton with Cowen & Company. Please proceed.

Matthew Stanton - Cowen & Company

Hi, yes, actually my questions have been answered. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Mike Yee with RBC. Please proceed.

Mike Yee - RBC

Thanks. Can you remind me, what if any data we have seen previously or at least what is the rationale or events that it works specifically well in OBD patient population? The second question is in regards to the ongoing pivotal studies. What exactly is a primary endpoint there and have you embedded that endpoint with the FDA in terms of probability?

Dr. Ryuji Ueno

The OBD trial?

Mike Yee - RBC

Yes.

Dr. Ryuji Ueno

Maybe Gayle Dolecek the Head of R&D, he will answer for you.

Gayle Dolecek

Yes, for OBD trial, yes the primary endpoint is an increase in spontaneous bowel movements at week eight and that has been agreed to in the Phase II meeting with FDA and that endpoint was set with the agency. So, that has been embedded with the agency.

Kate de Santis

And with the preclinical rationale?

Mike Yee - RBC

For any clinical rationale?

Dr. Ryuji Ueno

Clinical rationale for FDA, OBD?

Mike Yee - RBC

Yes, clinical rationale, what evidence in the clinic at all have we seen.

Dr. Ryuji Ueno

You mean the form of preclinical study?

Mike Yee - RBC

Preclinical or clinical evidence that.

Dr. Ryuji Ueno

Okay.

Mike Yee - RBC

OBD type population?

Dr. Ryuji Ueno

Yes, the OBD type of patients, in the animal study if opioid is given, the transit time is delayed. But AMITIZA can counteract on that. So, that is one of the rationales and also opioid are increased absorption of chloride. However, AMITIZA counteracts on such opioid absorption of the chloride by activating the type 2 chloride channel. So, without affecting the analgesic activity of opioid, AMITIZA can counteract the opioid absorption of the fluid in intestine and colon that is rationale.

Mike Yee - RBC

Is there any sort of agreement going back to endpoint, in terms of clinical meaningfulness, and what are your assumptions in terms of power infinite study because certainly I think other competitors in this space have had various mixed results in terms of outcomes there?

Dr. Ryuji Ueno

You mean in case of at a large case they missed the endpoint. So, you are asking about the power?

Mike Yee - RBC

Powering or your assumptions in terms of what are you expecting in terms of an increase?

Dr. Ryuji Ueno

Though it's the power is calculated based on our [TIC] studies because in case of the OBD the average number of our movement is about one point something per week, that is very close to the CIC patient group and our product AMITIZA’s case the activities very much dependent on the baseline number of our movement. So, in this case we utilize the -- if the weekly bowel movement is somewhere around 1.5 and in order to get significant increase and the power was calculated.

Stan Miele

That's correct.

Mike Yee - RBC

And so what is your ultimate estimate, is it power to show over three?

Dr. Ryuji Ueno

Power to show that statistical significance from the baseline, and the total number of patients is 840.

Mike Yee - RBC

Okay. Thanks.

Operator

Your next question comes from the line of [Jim Malloy] with Caris & Company. Please proceed

Jim Malloy - Caris & Company

Hi. Thanks for taking my question. I had a question on the timing of potential European or Japanese partners. If you could walk through your thoughts when they might come on line and your thoughts on the structure of that deal might look like. Are you looking for more up-front payments or are you looking for more percentage down the road?

Dr. Ryuji Ueno

We can't say that. The definitive time is very difficult. But our talking has advanced from the last quarter call, and we are in a term sheet level. So, we are now trying to search the best partner rather than just to find a partner. That is our basis.

And from the breakdown, we are now talking about our European activity or Asian activity. And we have two subsidiaries. These are all 100% subsidiary of Sucampo. And the goal is each subsidiary should be hopefully cash-positive and profitable eventually. And so that's the reason why we need to have both milestone and good revenue stream by the royalty.

Jim Malloy - Caris & Company

Right. Obviously, you need to start to know what the partnership is going to look like beforehand. But given a preference, do you prefer sort of more upfront or do you prefer to take a little more risk on the operation to get a higher percentage of the sales?

Dr. Ryuji Ueno

At least for the Japanese alliance, we are targeting both.

Jim Malloy - Caris & Company

Okay.

Dr. Ryuji Ueno

More upfront and more --.

Jim Malloy - Caris & Company

Good. Could you talk about the current trade levels of product in the pipeline? How many weeks are there currently and what's the goal to target amount of weeks there in the pipeline?

Stan Miele

Hi, this is Stan. Well, as you know, Takeda manages all the inventory for AMITIZA. The 24 mcg is certainly at a reasonable level all within inventory management agreement norm. And there continues to be this drawdown for the 8 mcg. And as John expressed, that is moving forward nicely. So, we do anticipate on the 8 mcg all of that inventory to be fully utilized certainly by the end of the first quarter 2009.

Jim Malloy - Caris & Company

And what sort of a target level, is it about a week of product in the pipeline channel?

Dr. Ryuji Ueno

Yeah, I'm sorry. Well, I am just going through my notes here just to confirm exactly what we have. Again, it's more of a Takeda issue in terms of the exact levels that they have on hand. But again, we would have to confirm with our partner.

Jim Malloy - Caris & Company

Okay. I guess maybe following up on the partner question, obviously hard to know how these things will actually play out. Would you prefer to have partners in place when you get into the Phase III what's sort of your ideal in a perfect world?

Dr. Ryuji Ueno

As you know, the Phase III needs a lot of resources. Our basic policies are before starting the Phase III, if we can get the possible partners that is a ideal situation, but if the Phase III can be done within a capacity is a separate issue, but as you know the hurdle of FDA is now going to be higher and higher. And all Phase III trials is going to be more and more expensive. So like our company, I think ideally, we would like to make a partnering before entering into Phase III.

Operator

Your next question comes from the line of David Moscowitz. Please proceed.

David Moscowitz - Caris & Company

Thanks for the follow-up. The number of reps they have added that’s pretty astonishing. I mean going from 900 to 1,200, that’s a 33% increase. Can you talk about what those discussions are like? I understand that they are restructuring and hopefully coming out of that. That’s a large amount of reps to add and the expense of 300 reps on an annual basis for product this size is also, it’s a pretty strong statement, so can you talk about that a little bit, please?

Stan Miele

Well, I think one way to look at it is that and just for clarity sake, there are 1,200 reps, but obviously each of those reps have more than one product, as well. So I think when you look at it from a strategic standpoint, and again I cannot speak on behalf of Takeda, but if we know for example the 500 reps that have AMITIZA in a primary position, our discussions with them centre around primary detail equivalents and then the amount of base time they have with AMITIZA in front of the doctors. And so, I think, irrespective of the total number of reps, it's really a, are they achieving a minimal requirement for the primary detail equivalents, as they have more than one product in their bag

David Moscowitz - Caris & Company

That’s a good answer. Could you help us to understand what the DTE delta was, so what was the detailed equivalent change from pre-October, want to know?

Stan Miele

They are certainly meeting the minimum requirements of what was in their existing agreement that we have as part of our supplemental agreement. So, that number has not changed dramatically. And so, at this point in time we have sorted that in even pace, but we are making sure that they achieve the minimum requirements for the detailed equivalents.

David Moscowitz - Caris & Company

Okay. Thanks.

Operator

At this time there are no additional questions in the queue. I will now like to have a call back over to Ms. Kate de Santis for any closing remarks.

Kate de Santis

And I will hand it over to Dr. Ueno.

Dr. Ryuji Ueno

Thank you very much for joining us this afternoon. We look forward to keeping you updated on our progress in the week, in the months ahead. Thank you very much everyone.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Sucampo Pharmaceuticals Inc. Q3 2008 Earnings Call Transcript
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