Forest Laboratories Management Discusses Q3 2013 Results - Earnings Call Transcript

Jan.15.13 | About: Forest Laboratories, (FRX)

Forest Laboratories (NYSE:FRX)

Q3 2013 Earnings Call

January 15, 2013 10:00 am ET

Executives

Frank J. Murdolo - Vice President of Investor Relations

Francis I. Perier - Chief Financial Officer, Executive Vice President of Finance & Administration and Member of Disclosure, Legal Compliance & Risk Management Committee

Elaine Hochberg - Chief Commercial Officer, Executive Vice President of Marketing and Member of Disclosure, Legal Compliance & Risk Management Committee

Marco Taglietti - Senior Vice President of Research & Development, Member of Disclosure, Legal Compliance & Risk Management Committee and President of Forest Research Institute (NYSEARCA:FRI)

Analysts

David Risinger - Morgan Stanley, Research Division

Liav Abraham - Citigroup Inc, Research Division

Timothy Chiang - CRT Capital Group LLC, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

Operator

Good morning. My name is Nishay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Laboratories Third Quarter 2013 Conference Call. [Operator Instructions] Mr. Frank Murdolo, you may begin your conference.

Frank J. Murdolo

Thank you, Nishay, and good morning, everyone. Thank you for joining us today for this third quarter fiscal 2013 conference call. Joining me today is Frank Perier, our Executive Vice President of Finance and Administration and our Chief Financial Officer; Elaine Hochberg, our Executive Vice President, Sales and Marketing and Chief Commercial Officer; and Marco Taglietti, our Senior Vice President of Research and Development and President of the Forest Research Institute. By now, each of you should have seen the earnings release that we issued earlier this morning. The release is also available at our website www.frx.com.

By way of Safe Harbor statement, let me add that various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and actual results may vary. These remarks involve a number of risks and uncertainties, including the difficulty of predicting FDA approvals, the acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the timely development and launch of new products and the risk factors listed from time to time in Forest Laboratories' annual report and quarterly reports.

Let me now turn the call over to Frank, who will comment on the business during the quarter.

Francis I. Perier

Thank you, Frank, and good morning, everyone. We just completed another very productive quarter. Our Next Nine R&D and commercialization strategy continued to achieve important milestones, plus we completed 3 important new business development transactions.

For R&D, in November, we and our partner Gedeon Richter announced that we submitted a New Drug Application to the FDA for cariprazine for the treatment of schizophrenia and bipolar mania. This NDA submission marks 9 for 9 submissions of our Next Nine R&D pipeline strategy, an achievement that we are extremely proud of. Marco will provide a complete update on our R&D pipeline later on the call.

On the commercialization side of our Next Nine, in December, we moved forward with the launches of Tudorza and LINZESS. These are 2 new product launches that we are very excited about, and Elaine will provide more details on their progress in just a few minutes.

On the business development front, in October, we announced that we entered into a broad strategic alliance with Moksha8 in Latin America. Moksha8 is a leader in the commercialization of CNS medicines in the Latin American market. Our alliance includes an exclusive license from Forest and Moksha8 to commercialize Viibryd and potentially other Forest products in Latin America.

In November, we entered into an agreement with Adamas Pharmaceuticals for the development and commercialization of fixed-dose combination of Namenda XR and donepezil HCI as a once-daily therapy for the treatment of moderate to severe dementia of the Alzheimer’s type in United States. And in December, we completed an agreement with Glenmark Pharmaceuticals on a collaboration for the development of novel agents for the treatment of anti-inflammatory conditions. So overall, a very productive quarter.

Let me turn the call over to Elaine, who will review our sales performance for the quarter.

Elaine Hochberg

Thank you, Frank, and good morning, everyone. We are indeed very excited about our 2 recent product launches and in a few minutes, I will be pleased to speak with you about how the new launches are progressing for both Tudorza and LINZESS. As most of you are aware, for the past year, we've been speaking about the 6 major therapeutic categories that we are building: cardiovascular and metabolic, CNS, pain, GI, respiratory and anti-infectives. With 2 actively promoted products now in our respiratory franchise and with more products to come in all of our other franchises, going forward, our quarterly updates will be to discuss our sales results around the 6 franchises.

Generally speaking, prescription demand for our products in the third quarter was strong relative to the second quarter. Sales levels for certain products, however, were affected by year-end rebates to commercial and government health care programs. But again, underlying demand was robust.

So let's start with our respiratory franchise. Our respiratory franchise will ultimately consist of 3 products: 2 currently on the market, Daliresp and Tudorza; and aclidinium/formoterol, which is in Phase III of development. Broadly speaking, we have an oral PDE4 inhibitor that reduces the risk of exacerbation and 2 inhaled bronchodilators that blocks the muscarinic receptors and improve lung function. Forest's respiratory franchise reflects a strategy to carefully build a suite of products that meet the needs of patients across a full spectrum of COPD in both the retail and hospital settings. This morning, I'll focus on Tudorza, which we launched in December, and then on Daliresp.

For Tudorza, sales of $12.2 million in December were primarily trade stocking. The wholesale acquisition price for Tudorza is $7.25 per day, an approximately 16% discount from Spiriva pricing. We officially began detailing Tudorza on December 10. Prescription levels after just several weeks, 2 of which by the way were holiday weeks, are above our expectations in both pulmonology and primary care. And physician response to both Tudorza aclidinium and our dry powder inhaler device has been excellent.

Our sales force has reached 40% to 50% of the audience after just several weeks of promotion, which on one hand is in line with expectations, but on the other illustrates just how early we are in the launch of Tudorza. We still have many, many more physicians to see. Access to pulmonologists and primary care has been excellent due to the relationships we have successfully built for those specialties while detailing Daliresp. We're very encouraged by what we're seeing in the numbers and what we're hearing from the physicians so far. Our promotional level is anchored by a 1,400-person strong sales force, covering over 80,000 physicians and 8,000 specialists and a heavy advertising and sample efforts are all underway and are above those of other companies in the COPD market.

Now recall our positioning strategy centers on several marketable attributes. First is Tudorza's ability to produce maximum bronchodilation at the first dose on the first day and that effect can be sustained over time, maximum bronchodilation at the beginning and maximum bronchodilation with this product at the end. Second is associated with an acceptable level of adverse events, including dry mouth relative to placebo. And finally, it's administered through our novel, preloaded, multiple dose dry powder inhaler called the Pressair. This new device contains a dose counter. It's activated with a low inspiratory flow rate and importantly, signals patients when the dose is delivered. No other device on the market possesses that combination of attributes. As the first long-acting anticholinergic approved for COPD in more than 8 years, Tudorza provides an important treatment option for patients with COPD.

In late August, we began our launch of Tudorza to the managed care community, with the goal of establishing broad Tier 2 access for Tudorza and securing comparable copays to other respiratory products. As of January, we have secured 47 formulary wins. Tudorza has already been added to Tier 2 on ESI Medco Commercial and Part D, covering 51.8 million lives and 46 regional plans with a total of 13 million lives. And we anticipate achieving broad, unrestricted access for Tudorza going forward.

Let's turn to Daliresp. The use of Daliresp continues to increase in both pulmonology and primary care. Sales for the quarter were $17.5 million. Importantly, however, prescription demand for the quarter was up over 14% versus the prior quarter. Since the start of the fiscal year, weekly prescription volume for Daliresp is up almost 60%. Total prescription market share was up over 50 basis points to 1.7% during that same period.

Now we're anticipating a positive seasonal effect on demand for Daliresp as we enter the heart of the winter months. This year's flu season, as many of you probably already know, is especially severe as influenza can trigger COPD exacerbations and ultimately demand for therapies like Daliresp.

Our ongoing and focused efforts to educate and inform physicians about how, when and where to use Daliresp for COPD are yielding good results. And the hospital launch of Daliresp during 2012 provides a synergistic opportunity to discuss Daliresp with pulmonologists, leading to increased use of Daliresp amongst hospital-based specialists. Adoption by pulmonologists who are essential to the success of any COPD medication continues to increase as well. Early in 2012, we expanded our coverage to those pulmonologists practicing in hospitals, and we're encouraged by all the results so far. Market share in pulmonology is up well above our national share and reached an all-time high of 3% in the third quarter. As of November, the number of pulmonologists writing Daliresp is twice the number, twice the number versus that in November '11, 2011.

With the leading cohort of Daliresp prescribers, which includes both specialists and primary care physicians, we have a market share of 7.6%, well above the national average. We consider this a key indicator of future market share levels. In terms of refills, an indicator of physician and patient satisfaction, the rate for Daliresp is similar to that of other products in the COPD market at approximately 2.4. Over 34,000 physicians have already prescribed Daliresp, 24,000 or nearly 70% of them, more than once. And we continue to add roughly 400 new writers each week. By the end of this year, we fully expect the number of total Daliresp users to reach 50,000.

For managed care, commercial Tier 2 and Tier 3 unrestricted access is approximately 74%. Daliresp, by the way, was recently added to Cigna Medicare Part D national formulary, covering 650,000 lives, as well as MCS Healthcare, Health Plan of Ohio and Medicaid in Alaska and Wisconsin. After just over 1 year promotion, our Part D coverage is strong, and that should pave the way for future sales growth.

Now turning to our gastrointestinal franchise, which currently consists of our recently launched product, LINZESS, a product that has 2 indications. LINZESS recorded sales of $19.2 million in December, which were primarily trade stocking. In terms of performance, it's of course early days, but I have to say we are extremely pleased. We've been promoting LINZESS since only December 17 and now -- and through 2 holiday weeks in that time period. So it's, of course, entirely too soon to draw conclusions of our performance.

That said, I would like to make 3 points. First, prescription levels are well ahead of expectations. Second, market share uptake in gastroenterology and primary care is very strong. And finally, while reliable prescribing comparisons to other compounds like Amitiza and Zelnorm are not possible yet, I have to say we like what we see. The Forest and Ironwood sales forces, which cover over 80,000 physicians, are working very well together. Both sales forces are gaining access to gastroenterologists and primary care physicians, 80% of whom we are calling on or were calling on before the launch of LINZESS. Our direct to patient awareness campaign is in high gear, with millions of patients being reached directly by mail and the Internet, at pharmacies and in physician offices.

LINZESS is distinguished pharmacologically and clinically for OTC and prescription laxative, including Amitiza. LINZESS works differently than Amitiza in 2 ways. First, it increases fluid secretion in the colon. Second, it reduces visceral hypersensitivity. LINZESS has been shown to have a clinically meaningful effect on abdominal pain and constipation. And unlike both Zelnorm and Amitiza, it is approved for men and women, and it has no use limitations or drug holiday requirements. Now our plan at launch is to displace a portion of both the prescription market and the OTC market. Both markets are important, but the real story here, and we've said this before, is about OTC.

To enable demand during the early phase of the launch, we're in the process of introducing a patient access program. Now this program is designed to bridge the gap between now and when we ultimately achieve widespread formulary coverage for LINZESS. This program is well conceived and designed specifically to maximize our user base and adoption during the first year. In terms of managed care, approximately 100 scientific presentations have been made to health plans, including all major national accounts during calendar year 2012. And we expect to achieve unrestricted access to LINZESS with the majority of health plans over the next 12 to 18 months.

Let's move to the CNS franchise. Our CNS franchise continues to evolve with the on-boarding of new products and smart line extensions. We're building a product portfolio to address a broad spectrum of mental illnesses, including Alzheimer’s disease, depression, anxiety, schizophrenia and bipolar disorder. Viibryd, as you know, is an important treatment for patients with mild to moderate depression. With levomilnacipran, we plan to focus on patients with moderate to severe depression, a population often treated with SNRIs and for whom current agents are, in many cases, not effective or well tolerated.

Finally, cariprazine is being developed for schizophrenia and bipolar mania as well as treatment-resistant depression and bipolar depression. Rounding out the CNS product line, we have Namenda, for which we have 2 line extensions. Here again, I'll concentrate on our marketed products, Viibryd and Namenda.

Turning to Viibryd. Sales for the quarter were $40.6 million. Prescription demand for the quarter was up 12% versus the prior second quarter. Viibryd is in a strong position as we enter the winter months when there are more SSRI prescriptions written and filled than during any other time of the year. Over 1.32 million, 1.32 million prescriptions have been written for Viibryd since its launch.

Since the start of the fiscal year, weekly prescriptions are up 46%. Total prescription market share is up 0.65%, up almost 20 basis points during the same period. New prescriptions share nationally and with psychiatrists is 0.79% and over 1.25%, respectively. And with a leading cohort of Viibryd prescribers, we have a market share of 3.3%, which is 6x the national average market share and bodes well for the future.

Approximately 75,000 physicians have prescribed Viibryd, with 77% prescribing it more than once, and we're adding over 800 new writers each week. By next year, we fully expect the user base for Viibryd to approach 120,000 physicians. For managed care, we currently have approximately 60% of lives covered in commercial unrestricted Tier 2, Tier 3, and we anticipate further formulary additions on national and regional plans as we go forward.

For Namenda, sales were $345.8 million in the quarter, with growth of 1.6% year-on-year. Prescription demand for the third quarter was up just under 1% versus the prior quarter, which represented a trend break from the quarter-to-quarter trend in the first half of the year. Market share for Namenda is consistent and stable at 35%. Our retail business is relatively stable. Our long-term care business is gradually recovering. The base of Namenda users is stable at 38,000 each week, and formulary coverage for Namenda is still strong. Our promotional effort remains strong and is focused on educational programs to physicians, nurse practitioners and consultant pharmacists, all of whom care for Alzheimer's disease patients in both the retail and long-term care settings. We continue to remain confident about the Alzheimer's market and the Namenda revenue stream over the next several years.

Looking forward towards mid-calendar 2013, we are preparing for the launch of Namenda XR, which is a high-dose, once-a-day formulation of Namenda that has been studied in combination with all acetylcholinesterase inhibitors and which will sustain sales beyond 2015. And as Frank mentioned at the beginning of the call, we've entered into an agreement with Adamas Pharmaceuticals for the development and commercialization of a fixed-dose combination of Namenda XR and donepezil, which we are currently planning to launch during calendar year 2015.

Over 70% of Namenda patients already take Namenda together with an acetylcholinesterase inhibitor like donepezil, which creates a substantial market opportunity for the fixed-dose combination product. Studies show that when used together, Namenda and Aricept improve cognition, function and behavior in some patients with moderate to severe Alzheimer's disease. This new fixed combination, which reduces the pill requirement from 3 tablets to 1 and the dosing frequency from 2x per day to once per day, can benefit physicians, caregivers and patients with a very difficult disease.

Let's move to our pain franchise. Our pain franchise also continues to evolve. With our currently marketed product, Savella, and in development, the Grünenthal NRP receptor compound GRT6005 for the treatment of pain. We, of course, continue to look for additional opportunities in this therapeutic category to address a broad spectrum of pain indications.

Savella sales in the current quarter were $25.6 million. While the fibromyalgia market has proven to be a more specialty-driven type of market than a broad-based PCP category, a recent study by Mayo Clinic researchers suggests that fibromyalgia may be underappreciated. This could, over time, result in an increase in the diagnosis and treatment of this condition. Today, Savella's share among specialists is stable and comparable to that of Cymbalta and Lyrica. Our promotional effort is therefore focused on a core group of users. And on the managed care front, this quarter, Savella was moved from non-preferred restricted to preferred unrestricted status on Coventry Medicare Part D. Currently, commercial Tier 2, Tier 3 unrestricted access for Savella is approximately 81%.

Let's move to cardiovasculars. Our cardiovascular franchise consists of Bystolic and eventually, the fixed-dose combination of Bystolic and valsartan, which is currently in development. Bystolic sales in the quarter were $108.8 million, representing growth of 20.1% year-over-year. Fiscal year '13 has been an absolutely excellent year for Bystolic. Market share is up approximately 30 basis points from 4 to 4.3 since the start of fiscal year '13, and prescriptions are up over 15% versus prior year.

The rate of growth in the most recent third quarter was stronger than it was in the second quarter. Market share in cardiology is approaching 5%. Over 300,000 physicians have used Bystolic multiple times and in over 1.9 million patients. And after 5 years on the market, we're still adding several hundred new writers each and every week. We are very pleased with the performance of Bystolic and are starting to lay the groundwork for the launch of the fixed-dose combination of Bystolic and valsartan, which we fully expect will expand the pool of eligible patients for Bystolic and generate even more first- and second-line use for Bystolic.

Finally, let's wrap up with our anti-infective franchise. This franchise consists of Teflaro, which is currently on the market, and the combination compounds, ceftazidime/avibactam and ceftaroline/avibactam, which are currently in development. Also in early -- earlier development is BC-3781, novel pleuromutilin antibiotic. Collectively, this product line covers both gram-positive and gram-negative pathogens and multiple infection types treated both in the general ward and ICUs.

Sales of Teflaro in the quarter were $11.5 million compared to $6.5 million in the year-ago quarter and 15% above September quarter. Days of therapy have now surpassed 11,000 per week in December, higher than Zyvox, and representing over 20% increase since the start of the year. We've created a broad user base of 3,600 hospitals, which is higher than CUBICIN. 80% of the high-volume hospitals have used Teflaro, and 85% have purchased multiple times, with 40% purchasing more than 10x.

The total number of hospitals with Teflaro on formulary is approximately 1,300, and 53% of those have no restrictions on access to Teflaro. We've secured substantial formulary wins since launch, representing significant days of therapy potential at each institution as well as in nearby hospitals that they influence. Perceptions by physicians of Teflaro are very positive, with 90% reporting high level of satisfaction with the product, and 70% of IDs expect to increase their use in the next 12 months. The use of Teflaro for skin infections, which represents at this point 2/3 of total use, continues to expand in line with expectation. In terms of CAP, and as I mentioned earlier, this year's respiratory season is severe and should result in greater demand for antibiotics, Teflaro is still finding its space. It's also our first full season under the CMS core measures.

Finally, our success reaching pulmonologists through Daliresp and now Tudorza without -- with combined promotional activities, provides an important opportunity to cross-sell Teflaro to pulmonologists for pneumonia infection. There is absolutely a great deal more experience with the drug today in markets than there was a year ago. As we have said, product adoption in hospitals does take time, but developments this quarter continue to reinforce our ongoing belief that Teflaro is on its way to realizing its potential.

Okay. That is the brief on our various franchises. Now let me turn the call back to Frank for an update on the financial results.

Francis I. Perier

Thanks, Elaine. Before we move on to review the financial results for the quarter, I'd really want to reiterate Elaine's commentary on the positive underlying performance for the quarter that we've seen really across the product portfolio. I would also like to remind everyone that our fiscal third quarter, which is the fourth calendar quarter, is the quarter where managed care contract rebates peak, largely driven by Medicare Part D coverage gap liability.

With nearly 2/3 of Namenda's retail business in Part D, contract rebates have a significant impact in the third quarter. Managed care contract rebates decline in the fourth quarter as a new contract year starts. Namenda's underlying unit volume demand, in fact, remained steady. Daliresp and Bystolic were similarly impacted, although to a lesser degree. We expect the discount rates to improve next quarter and the full benefit of price increases that we've taken to be reaped in the new contract year.

Turning now to earnings. The reported GAAP earnings per share are a loss of $0.58 in the third quarter of fiscal 2013 compared to income of $1.04 in the third quarter of fiscal '12. Included in the third quarter results were upfront license and agreement payments totaling $76 million or about $0.29 per share net of tax. Non-GAAP EPS in the third quarter of 2013 is a loss of $0.21 compared with income of $1.08 in the third quarter of fiscal 2012, excluding acquisition-related amortization in both periods and upfront license payments in this period.

Turning to revenue. Total revenues for the fiscal third quarter, which are inclusive of product sales, pretax earnings from Benicar, interest and other income, totaled approximately $722.7 million versus $1.2 billion last fiscal year. Fiscal third quarter revenues were comprised of approximately $678 million of product sales versus $1.2 billion last year; $38.3 million of contract revenue, which includes $36 million from the Benicar agreement; and interest and other income totaled $6.4 million. Wholesale inventories decreased by approximately 2 days this quarter compared to last quarter to just under 2.5 weeks. The impact to sales was approximately $10 million.

Gross margin in the current and prior-year quarter came in at 74% -- 77.4%. SG&A spending during the quarter was $428.4 million, up 8.2% from the $396.1 million in last year's third quarter. The current level of spending reflects the resources and activities that we believe are required to support our currently marketed products, particularly our newest products, Teflaro, Daliresp and Viibryd, as well as the recent launches for Tudorza and LINZESS. For the quarter, Ironwood share of the net loss from our partnership was $8.3 million.

Research and development spending for the current quarter was $325.3 million compared to $191.3 million reported in the third quarter last year. Research and development spending is primarily in support of an expanded late-stage development program spread out over multiple pipeline projects. The current quarter includes upfront licensing agreement payments of $76 million and milestone payments of $44.5 million compared to $24.6 million of milestone payments in the prior year's quarter.

The company's reported effective tax rate for the quarter was a benefit of 16.6% compared with -- compared to a reported tax expense rate of 22.5% in the prior year. We now expect the reported annual effective tax rate to be a benefit of approximately 17.5% for the full fiscal 2013.

The company now expects that non-GAAP earnings per share for the fiscal year ending March 31, 2013, will be at the lower end of the previously guided range of $0.45 to $0.60 per share. Total revenue is now expected to be between $3.1 billion and $3.2 billion.

In May 2010, the Board of Directors approved a share repurchase program of up to 50 million shares on the company's common stock. There were no shares repurchased during the current quarter. We have 14.4 million shares remaining under that 2010 share repurchase authorization. Actual shares outstanding as of December 31 were approximately 266.1 million, an increase of approximately 600,000 shares from the last year's third quarter.

Our cash and marketable securities balance on December 31 was approximately $3 billion, a decrease of $113 million from the quarter ended September 30, 2012. Of the total $3 billion, approximately $150 million or about 5% of our cash and marketable securities are domiciled domestically, with the remainder maintained by our international subsidiaries.

Let me now turn the call over to Marco, who will give you the pipeline update.

Marco Taglietti

Thank you, Frank. Good morning to everyone. Let me take the opportunity to wish everyone a wonderful new year. [Italian]

As Frank mentioned at the beginning of the call, this past quarter was especially exciting for the R&D organization as we submitted the NDA for our ninth project of the Next Nine, 9 for 9. We now have 2 NDAs awaiting action of the FDA: levomilnacipran, which we filed in September; and cariprazine, we just filed in November. So we are well underway to successfully deliver on R&D's mission of creating sustainable growth beyond 2012, a lot of hard work and major effort to continue to deliver.

Let's start with our CNS pipeline review. As planned and despite Hurricane Sandy, in November, we and our partner, Gedeon Richter, were pleased to announce the submission of the NDA for cariprazine for the treatment of schizophrenia and acute mania associated with bipolar I disorder. We expect to hear back from the FDA on the approval status of the NDA during the fourth calendar quarter of 2013. Cariprazine is also under development in Phase II studies for bipolar depression and as an adjunct treatment in MDD. We expect to report the top line result from these studies around the end of calendar 2013 and mid-2014, respectively.

And as I mentioned in September, we and our partner, Pierre Fabre, were pleased to announce that we submitted the NDA for levomilnacipran, a once-daily selective serotonin and norepinephrine reuptake inhibitor for the treatment of depression. We expect to hear back from the FDA on the approval status of the NDA for levomilnacipran during the third quarter of calendar year 2013.

As Frank and Elaine have already mentioned, in November, we entered into an agreement with Adamas Pharmaceutical for the development and commercialization of a fixed-dose combination of Namenda XR and donepezil as a once-daily therapy for the treatment of moderate to severe dementia of the Alzheimer's type in the U.S. Based on a development plan agreed to by Adamas and the FDA, this fixed-dose combination is expected to launch in 2015 following FDA approval. Finally, additional programs with Viibryd are being conducted in pediatric patients, but also additional studies to expand the range of claims of the product in adults.

With regard to respiratory, with approval of Tudorza in hand, we and our partner, Almirall, now focusing our attention on the fixed-dose combination of Tudorza and formoterol. The Phase III studies with the fixed-dose combination began in September 2011, and we anticipate first top line result from the trials to report out during the second quarter of calendar 2013. And assuming positive results, we plan to submit NDA in the first quarter of calendar year 2014. Also in our respiratory, we continue to support the launch of Daliresp, and we are conducting additional post-marketing studies to meet FDA post-approval requirement and to further characterize the profile of Daliresp in the approved indication.

With regard to gastrointestinal pipeline, our work continues for linaclotide on the Phase IIIB post-marketing studies underway, which will help to better characterize the chronic constipation and IBS-C indications. We are also developing the overall program to meet the post-approval requirement that we have agreed to for the pediatric studies for LINZESS.

Let's go to our anti-infectives pipeline. As we have previously mentioned, we entered into an agreement with Nabriva Therapeutics for the development of their novel antibacterial agent BC-3781. BC-3781 belongs to a novel class of antibiotics, pleuromutilins. It exhibits microbiological activity against a wide range of gram-positive pathogen including MRSA and penicillin-resistant Strep pneumonia, as well as certain gram-negative organisms often implicated in respiratory infections.

Based on its profile, BC-3781 may have utility in the treatment of both acute bacterial skin and skin structure infection and community-acquired bacterial pneumonia, among other conditions. It would complement our existing hospital antibiotic franchise because both of the intravenous and oral formulations are expected to be available, providing an opportunity to treat patients after they are discharged from the hospital. In 2011, Nabriva announced positive result from a Phase IIb studies in 207 patients with skin infections. We expect to advance BC-3781 into pivotal Phase III studies during calendar year 2013.

With Teflaro approved and launched, our focus is moving now to the combination with avibactam. Avibactam is a new broad-spectrum beta-lactamase inhibitor that we are developing in combination with ceftaroline and with ceftazidime. Development of ceftaroline/avibactam is a joint collaboration between Forest and AstraZeneca. Phase III clinical studies are ongoing in complicated intra-abdominal infections and complicated urinary tract infections. With regard to ceftaroline/avibactam, we plan to start Phase III trials in skin infection in calendar year 2013.

For cardiovascular, as previously announced for Bystolic, we have initiated a Phase III clinical trial to study a fixed-dose combination of Bystolic and valsartan for the treatment of patients with hypertension. A multicenter, randomized, double-blind, placebo-controlled study of approximately 3,700 patients to evaluate the safety and efficacy of Bystolic and valsartan in patients with stage 1 or 2 essential hypertension began last January. We expect to report preliminary top line data from the study during the second calendar quarter of 2013.

And to finish very briefly, our Phase III study for azimilide, an antiarrhythmic agent to be used in patients with a certain cardiac defibrillator, is ongoing. A Phase II program with TPP-399, a glucose activator that we licensed from TransTech, is ongoing. We are entering Phase IIb with GRT6005 and opioid with the dual mechanism of action on both mu-receptor and ORL-1 receptors. We're also conducting Phase I with RGH-618, an mGluR5 receptor inhibitor that we licensed from Gedeon Richter. And lastly, in December, we entered into an agreement with Glenmark to collaborate on the development of a novel mPGS-1 inhibitor, prostaglandin E synthase inhibitor, to treat chronic inflammatory condition including pain. Glenmark is going to be conducting the development activities required to support first in-human dosing with the lead clinical candidate from the product.

This is all with regard to our development pipeline. Frank, I now turn the call back to you.

Francis I. Perier

Thank you, Marco. So just to recap, we had a successful third quarter having launched Tudorza and LINZESS and completed the submission of the NDA for cariprazine. This quarter, we have 7 new drugs that we are actively marketing: Bystolic, Savella, Teflaro, Daliresp, Viibryd, Tudorza and LINZESS, that collectively will demonstrate strong growth and market acceptance. With the completed NDA submissions for levomilnacipran and cariprazine and assuming the regulatory approvals, we are well on our way to delivering 9 for 9 of our Next Nine new product launches since the beginning of calendar 2008.

We have one of the strongest product portfolios and pipelines in the industry, in large part due to our core competencies in our key therapeutic focus areas. The substantial investments that we are making to support our products are both prudent and necessary to help them reach their full potential. This gives us great optimism about our future prospects, and we believe that we are well on track to secure the sales and earnings to build long-term growth well into the future.

Let me turn the conclusion over to Frank.

Frank J. Murdolo

Great. Thank you, Frank. And just before we move to the Q&A, let me read out the sales for our third quarter for some of our smaller products here: Campral, $5.7 million; Celexa, $3.9 million; Cervidil, $13.7 million; Esgic, $0.6 million; European sales, $34.4 million; generic sales, $7 million; Lexapro, $20.3 million; Lorcet, $0.7 million; Monurol, $1.2 million; thyroid products, $8.3 million; Tiazac, $0.5 million. And just lastly, for information, the Benicar third-party sales were $246.9 million.

And operator, if you can hold just one second, we'll start the Q&A shortly. Okay. Operator, thank you. If you would open the lines now for our questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of David Risinger with Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

I have a number of financial questions, but they should be pretty straightforward. First, Frank, if you could just tell us the rebate charge for Namenda in the December quarter and how that compared to the year-ago December quarter so we can understand how much of an inflection there was. Second, I think that you had mentioned $8.3 million of Ironwood share of losses on LINZESS. So my question is should we assume that if we double that, the quarterly operating loss on the LINZESS product was $16.6 million on sales of $19.2 million? Or was that $8.3 million figure some sort of true-up? Next, on LINZESS, should we assume that it can grow in the March quarter sequentially...

Frank J. Murdolo

Dave, we'll limit you to 3 questions. Pick number 3 carefully.

David Risinger - Morgan Stanley, Research Division

Okay, sorry. The third one is simply should we expect LINZESS to grow in the March quarter even though stocking was $19 million in the December quarter?

Francis I. Perier

Okay. Let me -- so let me address the Namenda question first. And as we -- and I'll address it with a slightly different answer. In the third quarter, our overall contract rebate percentage was about 23% for Namenda, which is very high. As we look at our fiscal fourth quarter, which again is the beginning of the contract calendar year, that drops down to about 10%. So you get about a 12.5 point move in the contract discount rate from quarter-to-quarter. That equates to just about $75 million on the exact same volume quarter-over-quarter. So again, that's one reason why, again, we feel pretty confident about the Namenda numbers.

David Risinger - Morgan Stanley, Research Division

And was that an inflection versus the year-ago December? I just didn't understand why December of '12 would be dramatically different from December of '11.

Francis I. Perier

Well, you have -- again, what happens when the contracts restart, you have the benefit of your Medicaid Part D contract liability restarts in January. And across all of your managed care contracts, you get the benefit of the price increases that we've taken in the prior year. So between those 2 things, you have a very large impact quarter-over-quarter 3Q versus 4Q. And you also have an impact, as we look at the percentage of lives in Medicare Part D in our retail plans, it's run -- been running this year at about 64% of lives. Whereas last year, it was just below 60%. So you had a shift in patients going from commercial plans to Part D plans, which will likely continue as we go out in the future.

Frank J. Murdolo

[indiscernible]

Francis I. Perier

The $8.3 million for Ironwood, again, that is their 50% share of the loss in the quarter from the partnership. And then with regard to LINZESS, yes, we do expect it to grow -- produce some sales in the fiscal fourth quarter.

Operator

And your next question comes from the line of Liav Abraham with Citi.

Liav Abraham - Citigroup Inc, Research Division

Just following on from David's question. Perhaps you can provide a little additional color on ogle product sales trends. The trends seem relatively weak for a number of products, not only in Namenda, Viibryd, Savella, Daliresp. I know you did comment on this to a certain extent on the call, but seasonal trends seem a little weaker than the third fiscal quarter of previous years. In order to meet your sales guidance for the year, this implies that you have to show very strong growth in fiscal Q4 to meet group sales guidance. How confident are you on the sales trends for the fourth fiscal quarter? That's my first question. And the second question relates to operating expenses as we enter calendar '13. Can you -- given that you've moved some of your R&D costs from fiscal '14 into fiscal '13 and given where you are in your clinical trials and in your pipeline, would it be reasonable to expect a flattening to perhaps a decline in particularly in R&D costs in fiscal '14?

Francis I. Perier

Okay. Let me take the second question first. I think as we -- we have accelerated the enrollment of certain programs. But Marco has also described a very robust development program that is ongoing as well. So I would not guide anyone toward an expectation in R&D, that the running rate for R&D, which is principally the clinical program and operations, would be going down next year. And I'm not really going to provide a whole lot of color about '14. We're in the middle of that whole planning and bucketing process right now. With regard to sales trend, I think Elaine really tried to elucidate the fact that we believe that the underlying sales trends for the business are actually very good. And all of our products really do get impacted by both the price and the Part D impact in Q3 versus Q4. So you get that same kind of pricing benefit just by the simple rollover of the calendar year and the initiation of the next contract year for all of your managed care contracts, including Part D contracts. So I think we feel pretty good about kind of where we are relative to our estimates.

Operator

And your next question comes from the line of Ronny Gal with Bernstein.

Unknown Analyst

[indiscernible] for Ronny. Just had a couple of questions. First on Namenda, as you're looking towards bringing the XR and the combo product on, can you comment on how you would price these products? Then what do you think the market split will be for them?

Elaine Hochberg

Ronny, we haven't finalized it. But probably, there would be a select discount as we bring the new products forward. We do believe that each of those individual products offers certain benefits that the market will want, and we'll follow our age-long strategy to try to get as much access to the new invention as quickly as possible, but prudently so.

Unknown Analyst

Great. And then on the sales force, what should we think as the natural SG&A growth as we -- as you look at the portfolio maturing and starting to launch the additional products over the next few years?

Francis I. Perier

Well, I think the expectation should be grounded on the fact that we just launched 2 big new primary care drugs in December. So in the current fiscal year, you're going to get really 3.5 months worth of promotional expense in -- for Tudorza and LINZESS. Couple that with the fact that we also filed 2 NDAs. So you're going to have hopefully, pending approval, 2 additional product launches next year for cariprazine and levomilnacipran, both CNS drugs. So I think in our expectation is that while we modestly expanded the field force last year by about 300 reps, we anticipate expanding the field force again in fiscal '14 by about -- at about that same level, another approximately 300 reps. So the simple fact that we're promoting a very broad pipeline of 8 products, all young in their product development or their product commercialization life cycles and putting the resources that you need to drive those drugs in the marketplace, will put continuing pressure on the SG&A line. And I think that's kind of the expectation that people should have.

Unknown Analyst

Got it. And then just lastly on Moksha8, assuming you exercise the option to acquire Moksha8, what additional investments do you think you're going to need to make so that you can meet your sales expectation for Viibryd? And then what other products besides Viibryd are you currently pursuing in Brazil?

Francis I. Perier

Again, that decision about whether we will actually go through and exercise the option or not is about 2 years down the road. And so we'd be in a better position based upon where that business is and how it's achieving its forecasts to give you a much more informed answer closer to when we're making that decision. But we're very excited about this business. Moksha8 has made tremendous inroads in both the Brazilian and the Mexican marketplaces. It's the 2 principal markets where the business is now operating. They will be launching Viibryd for us. And as we indicated, we have certain other products that we currently commercialize here in the U.S. that we're working towards moving down in the Latin America as well. So we're very excited about this unique collaboration.

Operator

Your next question comes from the line of Tim Chiang with CRT Capital.

Timothy Chiang - CRT Capital Group LLC, Research Division

Panel meetings for levomilnacipran and cariprazine to be held this year?

Francis I. Perier

Do we expect panel meetings for levomilnacipran and cariprazine...

Marco Taglietti

We don't know yet. It is -- we just submitted. They are doing the first assessment. Of course, we plan and we are getting ready for it, but we really don't know. It's a little bit too early to know. This division has the history, the psychiatric division, to try to minimize the number of advisory board meetings and to really focus one if there is a major, major issues or concern or new product. So we don't know yet.

Timothy Chiang - CRT Capital Group LLC, Research Division

Okay. And then just one follow-up for Frank. Frank, what's a more normalized tax rate for you? I know you're getting a tax benefit right now. But I think in the past, tax rate's been somewhere in the low 20% range. Is that probably a more normalized rate?

Francis I. Perier

Yes. I think that still continues to be our operating target for the tax rate. As we're working through the planning process for '14, I mean, there will be some pressures on that and hopefully some opportunities to get it back to that level.

Operator

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

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Frank, on gross margin, it looks like it was down about a full point versus the last quarter sequentially. We were assuming the new launches were higher than average margin products. So can you comment on what depressed the margin a bit sequentially, whether that was launch quantity effect or for LINZESS and Tudorza or some other factors? And my second question is just on Tudorza. Are head-to-head studies part of the R&D and marketing strategy for that brand? And maybe you could comment, Elaine and Marco, more philosophically on that subject as it relates to Forest's overall strategy with supporting brands that have been launched recently.

Francis I. Perier

Greg, I think quarter-to-quarter, gross margin was largely in line and particularly year-over-year, we saw basically the same gross margin. So cost of goods percentage have stayed relatively static, and the current products are coming in at about the same gross margins as -- the overall mix on gross margin doesn't move the number that much. Regarding head-to-head, I don't think we have...

Elaine Hochberg

We have a very big program planned, and we have considered a whole host of options. And as the competitive set expands, we will adapt our rather rich program to address the market needs.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Would you say, Elaine, that in the early days of the Tudorza launch that dry mouth or inhaler convenience or other factors have been sort of the biggest drivers, putting the payer stuff aside?

Elaine Hochberg

I will tell you that the early feedback we're getting from physicians in the field is actually what we wanted. It's a triumvirate. We're hearing that they like the efficacy, that they say they actually resonate to the story of first dose, first day, through the period. They actually also like the size [ph] profile. And then of course, they fell in love with the device. You put all 3 together, it's like nirvana. They feel like we've developed something completely what they needed. So I would say to you, you cannot weight it on any one of those by themselves. It is the triumvirate together coming right back at us that is a powerful story.

Operator

Your next question comes from the line of Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

And Frank, I have sort of a philosophical question. Forest has now launched a bunch of new products, and obviously the most important launch has been Tudorza and LINZESS. And it's obviously very early in their launch phases, but I guess my question is this. Thus far, the financial performance of the company this year being a trough year has been disappointing. And while we see that the underlying prescription demand for many of these products is solid and we've had managed care rebates, et cetera, et cetera, but the bottom line is that the numbers have come in below expectations. My question is, how much time do you think your board and your investor base will give you to execute on your top line and margin goals? Or to consider an alternative strategy, which is maybe we shouldn't be spending so much and we should think about a plan B. I'm just curious if you can give us kind of a time line. Obviously, I recognize it's earlier, just launching new products. But is this a 6-month issue? Is it a 1-year? Is it a 5-year? I'm just sort of wondering if you can give us a sense for your own timing.

Francis I. Perier

Sure, Jami. Just to reiterate, we're literally weeks into the launch of, certainly, the product that the street has the largest expectations for in our portfolio, which is LINZESS, as well as Tudorza, which internally we have fairly high expectations for. So -- and we continue to drive the rest of the portfolio as well, which is performing quite well. As far as the investment community and the board, the board continually assesses strategically where we are, and it's not kind of a point-in-time exercise that we go through. But I do believe that we need to have at least a year marketing these products, these -- the last -- the latest 2 products we just launched, Tudorza and LINZESS, to certainly get a directional trend on where they're going and how big we expect they can be and whether they can achieve the street's and our internal estimates of their potential. I think that, that certainly would be an adequate time line. And it has been a difficult year from an earnings standpoint. I'm not going to apologize for it. It has. And we're not pleased that we're so close to the bottom end of the range, but we're doing our best to get this year behind us and move on to hopefully a stronger fiscal '14.

Jami Rubin - Goldman Sachs Group Inc., Research Division

So just a follow-up. Frank, you're saying that 1 year from now -- and I'm not saying now is the time to make the decision. It's early in the launches of those 2 important products. But so should -- is it then -- should I assume that 1 year from now that if some of these -- if these key products are not hitting your kinds of internal goals that you've set for yourself that you would consider an alternative strategy?

Francis I. Perier

I said that it would certainly be up for review, and I think that review would have to consider all options. So I think it's fair.

Operator

Your next question comes from the line of the Corey Davis with Jefferies.

And your next question comes from the line of Ken Cacciatore with Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just on Bystolic. I was wondering if you are in active discussions now with Watson and Amerigen, if you can comment on that, or just comment on the likelihood of resolving the outstanding litigation. And then on the in-line product issue that you're getting questions about, just wondering, besides the Part D situation in the quarter, how much of an impact of the launch of LINZESS and Tudorza have on the in-line portfolio? How much in terms of human resources and spending pulled away from them and put on those products? Can you give us some context as we try to understand besides just the Part D issue, why the tempering of growth in the in-line portfolio?

Francis I. Perier

Sure, Ken. With regard to the Bystolic patent challenge that we've been working our way through, again, outside of what we said publicly, I really can't comment on the matter that's really under active litigation. But of the 7 generic challengers, we've been able to settle with 5, and we will work actively to find the resolution of the remaining 2. I'll turn it over to Elaine to speak about the commercial resources.

Elaine Hochberg

Ken, good to talk to you. Let me just reiterate 2 things I've said about both Viibryd and even Daliresp, which one could say are in-line products now relative to the new. Both of them grew over the previous quarter in double digits. We're talking about prescription which married with factory demand. Now that being said, we have tremendous capacity in our field forces. Over the last several years, we had a focus on this coming time period, and we have been able to school our field force to be able to helpfully support the second and third position in-line products. So though, of course, in a launch period a lot of attention goes to the new products begin to get the message out to doctors, there is a very assiduous effort and attempt to fully shore up the other brands right behind. And we're seeing that happen, and I do believe we would not be getting the kind of ramp into the fourth quarter that we will be getting where we not able to exert that very well-honed skill.

Operator

Your next question comes from the line of Seamus Fernandez with Leerink Swann.

Seamus Fernandez - Leerink Swann LLC, Research Division

This is Seamus Fernandez. Just a couple of quick questions. Marco, can you just walk us through your confidence and conviction behind the ability to satisfy potential questions around the lowest effective dose given the fact that you do have 2 doses in your Phase III clinical study? And then separately, Frank, you mentioned that you have $150 million of domestic cash. Would you anticipate a need to draw down on any domestic reserves in order to kind of support current working capital needs?

Marco Taglietti

So I guess -- you didn't mention the drug. I guess you're talking about levomilnacipran?

Francis I. Perier

No, he's talking about...

Seamus Fernandez - Leerink Swann LLC, Research Division

The LAMA/LABA, the combination.

Marco Taglietti

The combination, LAMA/LABA. Actually -- sorry, I really didn't catch it.

Francis I. Perier

Dose, effective dose.

Marco Taglietti

Oh, the dose [indiscernible], of course. Well, first of all, let me just say our strategy, this actually was discussed substantially with the FDA. I think it's actually sort of a win-win situation for us. First of all, we have 2 doses of the LABAs. One dose is the highest dose is with this currently approved with formoterol. So that is -- it makes up -- that dose is sort of a very safe dose, something that if we show that there is a higher efficacy in the lower dose, it's exactly what has been approved. And therefore, we feel very confident that if that will be the right dose, that FDA will have a high level of comfort with it because there is a tremendous experience with that dose, with 12 microgram twice a day with formoterol. We also tested a lower dose, cutting in half the dose of the formoterol. And before cutting in half the dose of a LABA, because as you know, there is a certain amount of concern at FDA. We did these based on our Phase II, in which we felt that the 12 was somewhat higher, but the 6 performed pretty well. So if 6 showed to be adequately effective, I think that, that will be another -- will be a strong dose to get into the market because it will be half of the currently approved dose, so even more likely for FDA to be even more comfortable than 12. And therefore, we think that actually the choice of these 2 doses is, again, is a win-win. Whatever -- whichever of the 2, which of course we don't know right now, will be the winner, we will be in an excellent shape. We expect actually, however, only 1 dose to be approved, not 2, only 1 dose based on -- at the end of day, based on the efficacy and safety profile. Does it address your question?

Seamus Fernandez - Leerink Swann LLC, Research Division

Yes.

Francis I. Perier

Yes, I mean, presently, and with regard to working capital, we don't presently expect to have to -- to have any domestic working capital shortfall.

Operator

Your next question comes from the line of Irina Rivkind with Cantor.

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

I just have one, which is about your commercialization strategy for Namenda XR. With the BID dose still on the market, how are you planning on introducing the XR? Are they going to coexist or you're going to withdraw one?

Francis I. Perier

I think the strategy right now is, again, given the fact that the IR version of Namenda has 35% share of the Alzheimer’s market, and as you've heard, it's a very large Medicare Part D drug. We have concluded that removing IR is probably not a good strategy with the government. And so we would anticipate that they would coexist in the market. As Elaine indicated earlier, part of that launch strategy for the XR version of Namenda would be the price that -- or considering pricing at somewhat of a discount to the IR version, so that it makes it more available for your long-term care facilities and your Part D plans.

Elaine Hochberg

So Irina, we have talked about this before, and we have talked about conversion strategies within the range of 20% to 30% for the XR that would appeal to that part of the population that is looking for that particular tablet in use. And we do believe that there's a healthy existence and believe me, beyond XR, there will also be the Adamas combination product, which will also be in part a conversion strategy as some of that business is also growth opportunity. So it's a complex triad that serves different parts of the marketplace.

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

So when you're all said and done, how much of Namenda revenues now do you expect to keep with both IR Namenda and XR?

Elaine Hochberg

Well, of course, it's our hope to maximize not only our retention but the ability to grow a good portion of it into the new product.

Operator

And your last question comes from the line of Mario Corso with Mizuho USA.

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

Quick question on the therapeutic area kind of outline and format. I'm just wondering if as you present the commercial business that way, if that's kind of the right way to think about your business development activities now as well kind of more focused on the key therapeutic areas that you're already in. And then one clarification on LINZESS. I wasn't sure whether the response to the question was supposed to convey that, yes, the next quarter will have sales and basically that it won't be negative, or that sales can or will grow from the $19 million we saw in the prior quarter.

Francis I. Perier

Sure, Mario. With regard to the LINZESS question, the answer was that, yes, if we will have some sales in the fourth quarter, they won't be -- they won't grow over the third quarter, again because with both Tudorza and LINZESS, your first sales in this quarter are really trade stocking sales that now the channel is starting to draw down. So that was the answer to the question.

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

The therapeutic focus.

Francis I. Perier

And with regard to therapeutic focus, I think that as you look at the deals that we've been doing, they do align pretty well with the therapeutic categories that we're currently operating in. Adamas and Novexel, both Novexel and the DC [ph] deal -- I'm sorry, from the Nabriva deal, again, they certainly do align with the therapeutic categories that we're in. And interesting, Moksha8 also aligns with, functionally, how we're trying to expand in a smart way our commercial footprint to become a more global company.

Marco Taglietti

And when I look at the R&D, we, in transition, we are aligned very strongly in therapeutic areas, so kind of continue to expand to reach within the therapeutic areas. But we are still keeping the flexibility eventually to expand in new areas when profit, we find the right opportunity. So I think we are doing -- we play in both games: strengthening the therapeutic areas and remaining flexible and open-minded.

Frank J. Murdolo

Thank you, Marco. I think that's it for now. Thanks, everyone, for joining us this morning. And operator, we'll now end the call.

Operator

This concludes today's conference call. You may now disconnect.

Marco Taglietti

Thank you.

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