Sepracor Inc. (SEPR) Q4 2008 Earnings Call Transcript January 29, 2009 8:30 AM ET
Adrian Adams – President & CEO
Jonae Barnes – SVP, IR & Corporate Communications
Bob Scumaci – EVP & CFO
Mark Iwicki – EVP & Chief Commercial Officer
Mark Corrigan – EVP, R&D
Manoj Garg – Soleil Securities
Bert Hazlett – BMO Capital Markets
Gregg Gilbert – Bank of America
Chris Schott – J.P. Morgan
Ian Sanderson – Cowen
Welcome to the Sepracor Inc. fourth quarter and full year 2008 financial results webcast. With me this morning are Mark Iwicki, Executive Vice President and Chief Commercial Officer; Mark Corrigan, Executive Vice President of Research and Development; Bob Scumaci, Executive Vice President and Chief Financial Officer; and, Jonae Barns, Senior Vice President of Investor Relations and Corporate Communications. Before I proceed, I would like to ask Jonae to read our forward-looking statement. Jonae?
Good morning, everyone. Various remarks that we make about our future expectations, plans, and prospects constitute forward-looking statements for purposes of the SEC Safe Harbor Provisions. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, which are discussed in our most recent quarterly report on Form 10-Q, which is on file with the SEC and other reports that we file with the SEC.
In addition, these forward-looking statements represent the company's expectations only as of today. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so. Any forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to today.
During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our fourth quarter and full year 2008 operating results press release, which is available in the Investor Relations section of our Web site.
Back to you, Adrian.
Thank you, Jonae. And I would to again thank everyone for joining us this morning. The past few months have been extraordinarily challenging for our country, the economy, the investment community, and more specifically, the pharmaceutical industry. However, despite these challenges, I am very pleased to report that we delivered strong fourth quarter and full year 2008 results. As you know, we released our fourth quarter and full year 2008 results last evening along with a press release outlining our 2009 financial guidance and a strategic corporate restructuring plan aimed at leveraging the many opportunities that we have and, importantly, delivering earnings per share momentum on an ongoing basis.
We have a lot to discuss this morning. And before we begin, I would like to take you through the main areas that we’d like to cover during today’s webcast. First, I’ll review some of the key 2008 objectives and our accomplishments against those objectives. Bob Scumaci will then comment on our financial results. Bob will hand the webcast back over to me, and I will give an overview of our corporate restructuring plan. Mark Iwicki will follow with an overview of the commercial restructuring plan and the rationale behind it as well as review of the commercial performance and 2009 strategies across our product portfolio. He will then introduce Mark Corrigan, who will provide an overview of the progress we are making in research and development. And finally, I will comment on our financial guidance for 2009 and make some concluding remarks before opening the call to your questions.
Please now refer to slide number four. Throughout 2008, we were working towards five fundamental strategic objectives as we remained focused on delivering enhanced shareholder value over the course of time. With regard to our first strategic objective of continuing the development of peak performing commercial capabilities, I am pleased to report that despite the economic challenges facing our country, and more specifically, the pharmaceutical industry, we delivered solid product performance and significant improvements in enhanced sales force productivity. Mark Iwicki will review this in more detail shortly.
The second strategic objective relates to fully leveraging both our existing and new product franchises. And we believe that we demonstrated a solid performance against this objective. Last year, we had the exciting opportunity to launch two new products. We successfully launched OMNARIS Nasal Spray in April at the tail end of the allergy season. And then, ALVESCO HFA Inhalation Solution – Aerosol, sorry, was launched in a targeted way to specialists in September. Although still early, we are pleased with the progress with these two assets.
LUNESTA maintained a relatively stable prescription performance in 2008 despite the slower than anticipated growth in the overall insomnia market. And we were pleased of our (inaudible) AMBIEN CR in terms of market share performance. BROVANA achieved strong performance in both the retail and non-retail sectors with excellent growth momentum throughout the year and into 2009.
XOPENEX Inhalation Solution maintained a significant portion of retail volume despite its transition to more focused investment and changes in home health care reimbursement. XOPENEX HFA volume grew in 2008 versus 2007. And market share remained stable despite heavy competitive discounting by the levalbuterol HFA products in this category. And in July we announced the settlement with Breath, Limited of the XOPENEX Inhalation Solution patent litigation, which removed uncertainty and risks associated with that litigation for both parties.
We’re also extremely pleased with the success we achieved in 2008 in the pursuit of synergistic corporate development and licensing opportunities. Following the announcement of the in-licensing of eslicarbazepine acetate, now known as STEDESA from Bial, we entered into the exclusive US marketing development agreement with Nycomed for the OMNARIS and ALVESCO brands of ciclesonide. As part of the Nycomed agreement, we also gained the rights to additional ciclesonide pipeline products in various stages of development, which we believe will further strengthen our growing and now quite robust pipeline.
As you may all know, we also signed agreements in the second quarter of 2008 with the Arrow Group that we believe will provide Sepracor with an enhanced ability to develop various products in the ciclesonide franchise. In addition, they’re giving us access to a XOPENEX/ipratropium combination product candidate, which is a Phase III ready asset.
In June we also completed the acquisition of Oryx, which is now Sepracor Pharmaceuticals Inc., a specialty pharmaceutical company in Canada. This acquisition establishes a commercial platform from which we plan to potentially launch in Canada such products as LUNESTA, BROVANA, STEDESA, and other potential products from the growing Sepracor research and development portfolio.
Moving to slide five. We’re also delighted with the solid and steady progress in advancing our research and development pipeline. We advanced our clinical pipeline, one that we believe now is among the best in the specialty pharma sector, with 13 candidates now in various stages of development. We filed an investigational new drug application for SEP-900 [ph] and began a Phase I clinical study. SEP-900 is a potential first in-class DAA all-inhibitor for the treatment of neuropathic pain.
We also advanced SEP-018 [ph] as part of our LUNESTA franchise development program. This being our potential new formulation of LUNESTA. In addition, we were delighted to see that our corporate pharma Eisai began initiation of Phase III studies in eszopiclone in Japan. We began a large scale Phase III seasonal allergic rhinitis study for OMNARIS HFA and nasal administration, which includes approximately 700 patients. This study was initiated in late 2008 and is already fully recruited.
We also completed recruitment for the Phase II study of SEP-441 [ph], a modified release form of eszopiclone for the treatment of generalized anxiety disorder. This study is now complete and we anticipate having results during in this quarter. We remain on track to submit our NDA for STEDESA, our new anti-epileptic, this quarter. And we have advanced SEP-289 [ph], or triple reuptake inhibitor for major depressive disorder, into Phase II and we expect to have the results from this live study in mid-2009.
Our fifth strategic objective for 2008 was to deliver strong financial performance. I am pleased to report that our results exceeded GAAP and non-GAAP EPS financial guidance provided at the middle of last year. We’ve begun implementation of cost cutting initiatives in the fourth quarter of 2008. And we will continue to focus on delivering increased productivity and improving expense ratios as measured against revenues. We are determined to continue to deliver strong financial performance, earnings per share momentum, and enhanced shareholder value over time. And this will be reflected in the 2009 guidance we give.
Having made these opening remarks, let’s now move along to our financials beginning with a summary of our quarterly and full year 2008 financial results. Bob, please take us through these results.
Thank you, Adrian. Good morning, everyone, and I would like to begin on slide number six with our quarterly and full year 2008 financial results. I’m pleased to report that the fourth quarter revenues increased 8.7% in 2008 versus 2007 to $369.7 million. GAAP EPS for the quarter was $0.77 per diluted share versus a loss of $0.05 for the same quarter in 2007. Non-GAAP EPS increased in the fourth quarter of 2008 versus 2007 by 27.8% to $0.92 per diluted share. Our full year 2008 revenues were $1.292 billion, which was an increase of 5.5% versus full year 2007.
Our products, and royalty and licensing fee revenues for 2008 were as follows, LUNESTA revenues were $600.3 million; XOPENEX Inhalation Solution revenues were $441 million; XOPENEX HFA revenues were $74.2 million; BROVANA revenues were $57.3 million; OMNARIS, launched in April, had revenues of $14.6 million; ALVESCO, which was launched l in September had revenues of $16.8 million; and, a primary care [ph] launch is planned for the first quarter of 2009. Sepracor Pharmaceuticals, Inc. had revenues of $11.1 million. This represents revenues for the period from June to December, 2008. Royalty and license fee revenues was $77 million.
Our full year of 2008 GAAP EPS was $4.47 per diluted share versus $0.50 per diluted share for full year of 2007. Our full year 2008 non-GAAP EPS increased 7.4% to $1.60 per diluted share versus $1.49 per diluted share for full year of 2007.
I would like to highlight that our 2008 operating income on a GAAP basis increased 147% to $55.7 million versus $22.5 million for 2007. And 2008 operating income on a non-GAAP basis increased 20.9% to $167.4 million versus $138.5 million for 2007. Our cash and short and long term investments were approximately $765.8 million at December 31, 2008. And in our fourth quarter 2008, Sepracor repurchased $86.3 million of our outstanding 2,024 convertible notes.
Please now refer to slide seven, which illustrates our fourth quarter and full year 2008 revenue performance. For the three months ended December 31, 2008 total revenues increased 8.7% to $369.7 million, compared to revenues of $340 million during the same quarter in 2007. For the 12 months ended December 31, 2008 total revenues were $1.292 billion, which is an increase of 5.5% versus the 12 months ended December 31, 2007.
Please now refer to slide number eight, which illustrates the impact of our EPS due to the fluctuations in interest rates in 2008 versus 2007. I’m pleased to report that the full year of 2008 non-GAAP EPS versus 2007 represents and shows a 7.4% increase year-over-year. As you can see, the non-GAAP EPS for full year 2008, $1.60 per diluted share, was directly impacted by the significant year-to-year fluctuation in interest rates. Sepracor has taken throughout the year a very conservative position in its investment portfolio. This measure and the decrease of interest rates in our portfolio have created a 230-basis point differential in our full year 2008 interest income versus full year of 2007, resulting in a $20.6 million rate variance or $0.18 per diluted share. When adjusting for these interest rate variance, EPS for the full year ending December 31, 2008 increased 19.5% versus same period last year.
Please now refer to slide number nine, which reconciles GAAP to non-GAAP diluted EPS for the full year 2008. As I previously discussed, the release of the valuation allowance on our deferred tax assets, the after tax, in-process research and development charges, and the after-tax R&D milestone payments, a gain on the early extinguishment of debt and certain other items is detailed in this slide. And our reconciliation of GAAP to non-GAAP measures included in yesterday’s press release provide a reconciliation of GAAP to non-GAAP net income and EPS to the 12 months ended December 31, 2008 and 2007.
I would now like to hand the call back over to Adrian who will review our strategic corporate restructuring plan. Adrian?
Thank you, Bob. And please refer to our next slide, slide number ten. As I mentioned earlier, I am very pleased that we have made a significant progress in executing our in-store strategic objectives as I discussed in my opening remarks. However, the economic factors that are challenging for our country, the economy, and more specifically, the pharmaceutical industry, have led us to reassess the environment in which we are operating and expect to operate in the future. In light of the current environment and for us to proactively adapt to these changes so that we could continue to be competitive, we conducted an extensive review of Sepracor as an organization. And we have made the decision to streamline our organization into a more nimble, efficient, and effective business. This will also enable us to improve our cost structure so that we can continue to be competitive and successful in this difficult environment.
We deeply regret the hardship that this strategic restructuring plan will enfold on the employees affected. But we believe that the plan announced today is necessary and the right course of actions to streamline our operations into a more flexible business that will be well positioned to more fully leverage our product franchises, advance our research and development pipeline, and allow us to continue to pursue synergistic corporate development and licensing opportunities.
As I mentioned, one of the key drivers of this strategic corporate restructuring plan was to develop a more customer focused, competitive, and cost effective commercial model that more closely aligns with the current and projected healthcare environment. This has resulted in a decision to streamline the structure of the sales force organization and form commercial business units with geographically tailored field teams that have a regional profitability focus and sole territory product ownership.
Overall, Sepracor intends to reduce its workforce by approximately 20% or approximately 530 positions, of which approximately 180 are corporate positions and approximately 350 are field based. There will also be an additional elimination of approximately 410 contract sales organization, sales representative positions, which will result in the total number of sales positions being reduced to approximately 1,325. These reductions, together with other anticipated cost saving initiatives across the organization, have resulted in Sepracor projecting a reduction in operating expenses of approximately $210 million, of which approximately $20 million is the result of cost savings realized during the fourth quarter of 2008, and approximately $190 million is expected in 2009. This is being done while maintaining the important focus on the key potential shareholder value drivers, particularly in research and development.
I would like now to hand the call over to Mark Iwicki to summarize our plans for the commercial restructuring and to go into some detail on the performance and objectives for our commercialized products in the coming year. Mark?
Thank you, Adrian. And good morning, everyone. Please now refer to slide number 11, which is an overview of Sepracor’s new commercial model. Current industry trends along with the macroeconomic environment are having an impact on the markets into which we sell our products. This has led us to the decision to launch a new commercial model and restructure our sales and marketing organizations. We also think the current reach and frequency model that utilizes mirrored territories, and which is so prevalent in the pharmaceutical industry, is losing momentum. We believe that Sepracor can gain operating leverage with the new streamlined commercial model that’s more effective and efficient at supporting our current and future portfolio. We, like other pharmaceutical companies, began working on this change in 2008.
Our new commercial model will be organized into two business units. One for primary care and the second for specialty markets. The specialty markets business unit will have responsibility for BROVANA and the institutional channels for our brands. The primary care unit will have responsibility for LUNESTA, XOPENEX Inhalation Solution, XOPENEX HFA, OMNARIS, and ALVESCO. We believe this model will create better synergy between our marketing, managed care, and sales organizations, and give us a tighter focus on profitability. Key support functions such as commercial analytics, new products planning, and our organized customer group will service both business units.
We will have three sales teams, and in each team, the representatives will have territory brand ownership with no mirrored territories. Thus, fostering high empowerment and a focus on profitable performance. Training and development programs will support our representative of the future model, which blends customer value creation and business acumen. We believe this new model will foster an entrepreneurial spirit and fast acting high performance culture. It will also drive decision making to lower levels in our field organization. We’re going to have more variable compensation that is linked directly to a single rep’s performance, and incentives for our managers to make local business decisions to drive profitable growth in their areas.
I would now like to review our brand performance and highlights for 2009. Please refer slide number 12. The overall insomnia market has become increasingly challenging due to significant generic utilization that is driven by managed care and pharmacy chains. The sedative hypnotic market showed steady declines in growth over the course of 2008 and the overall growth rate was slower than anticipated, and is now trending to a mid single digit growth rate. Despite this, volume for LUNESTA in 2008 has remained relatively stable over the year. And we continue to improve contribution margin. Our priorities for LUNESTA for 2009 are to differentiate our product from other agents, particularly generic zolpidem. We continue to have a strong managed care position for LUNESTA, with unrestricted access now being available for approximately 81% of all managed care lives.
As I just mentioned, one of the key drivers of the strategic restructuring plan was to develop of more customer focused, competitive, and cost effective commercial model that more closely aligns with the current and projected healthcare environment. We believe that this new model will help drive productivity gains in LUNESTA and our other commercial products. We also significantly reduced our DTC spend during the second half of 2008, and made strides in improving LUNESTA DTC efficiency, which provides media plans and new direct marketing initiatives.
Please refer now to slide 13. OMNARIS is our intranasal corticosteroid that we launched in April for the treatment of seasonal and perennial allergic rhinitis. The current market for inhaled corticosteroid nasal sprays is estimated to be $2 billion in the US. We believe that the OMNARIS launch is off to a good start. Quarterly updates have been strong. And as you can see on the chart on the left of the slide, market share and volume continues to rise quarter-over-quarter.
I’d like to highlight the fact that there’s a significant amount of switching between products due to a lack of effect and tolerability issues with other currently marketed products. Our market research indicates that over 40% of patients used two or more products in the past year. Our priorities for 2009 are to continue to drive differentiation, and we will keep the focus on the “Sticks and Stays” message, which has high recall.
OMNARIS is formulated in a hypotonic suspension, which we think is an important improvement over other aqueous formulations. A hypotonic suspension improves the ability for OMNARIS to stay where it’s (inaudible) by using the nasal mucosal’s natural pressure gradient to help absorb OMNARIS. OMNARIS is also a low volume spray, especially compared with market leading products like NASONEX and fluticasone. Together, these features can help produce one of the most bothersome tolerability issues with nasal sprays, the dripping of the solution into the throat rather than the nose. OMNARIS delivers strong efficacy, impressive tolerability, and has been proven in clinical trials to be effective against the key nasal symptoms.
We will seek to optimize our managed care access while preserving profitability through selected contracting and our loyalty card program. The card program reduces patients co-pays down to a Tier 2 out of pocket co-pay level. In the current economic environment where patients are seeking to cut their expenses as much as possible, we expect this offer to be highly motivating.
Turning now to slide number 14. BROVANA is a long acting beta-agonist approved for the maintenance treatment of broncho constriction in adult patients with COPD. BROVANA has the potential to significantly improve the lives of patients suffering from COPD, and through its twice-daily dosing regimen reduces to their dependence on repeated administration of short-acting beta-agonists. BROVANA’s performance in the fourth quarter was strong as volume continues to grow. I’m very pleased to report that this growth is coming from both retail and non-retail sources, and that BROVANA has again reached the new peak of performance.
Our priorities for 2009 will include leveraging COPD Treatment Guidelines, which advised adding long-acting beta-agonists in the maintenance treatment of patients with moderate to severe COPD. This emphasis should help in penetrating the market. With our new specialty markets business unit, we plan to be better able to drive BROVANA growth with top prescribers [ph], hospitals, and other key channels. We have strong managed care and home healthcare formulary coverage and currently have unrestricted access in approximately 93% of managed lives. We will emphasize BROVANA’s key clinical benefits, particularly that BROVANA helped COPD patients maintain lung function for a full 12 hours potentially enabling them to participate in activities during the day rather than keeping them home tied to a nebulizer.
Moving now to slide number 15. I’d like to comment on the performance XOPENEX Inhalation Solution. Year-over-year XOPENEX Inhalation Solution volumes remain relatively steady in the retail market. The impact on revenue for full year 2008 versus 2007 can be primarily attributed to reduced home healthcare sales as reimbursement rates fell sharply since CMS implemented the bundled reimbursement methodology in July 2007. As a result of this reduced reimbursement rates, commencing January 1, 2009, we expect units of home healthcare will be negligible. Our priorities for XOPENEX Inhalation Solution in 2009 are to continue to implement a targeted approach with the highest volume prescribers, also to continue our non-personal promotion activities with these key physicians.
These efforts are focused on top docile prescribers as well as loyal XOPENEX prescribers where our share continues to remain strong. We timed the launch of differentiating data platform that highlights the benefits of XOPENEX compared with generic Levalbuterol. Product profitability will remain a hallmark of our efforts and the asthma focused sales team should enable a strong effort in 2009. This team of 295 sales professionals will be concentrating their efforts on XOPENEX Inhalation Solution, XOPENEX HFA, and ALVESCO.
Please now refer to slide number 16, which illustrates XOPENEX HFA’s volume and share. The short-acting beta-agonist HFA NDI market has been challenging for XOPENEX HFA due to heavy switching and discounting in the class, particularly at the retail level. We have seen that volume and share were up in 2008 versus 2007. And I’m pleased top report that retail volume for XOPENEX HFA increased 9% in 2008 versus 2007.
I would like to note that the CFC to HFA transition is now essentially complete. Our priorities for 2009 are to emphasize strong consistent detailing to physicians who have been significant prescribers of XOPENEX HFA or XOPENEX Inhalation Solution. And Sepracor’s efforts remain focused on educating healthcare professionals on the fact that XOPENEX HFA is the only differentiated molecule in the branded short-acting beta-agonist HFA market with advantages over Levalbuterol products.
Our priority is on higher margin channels, and as a result, we made contribution improvements in 2008. During 2009, we plan to drive share and targeted accounts where we have a preferred position in place. And we’ll continue to optimize the channel mix to realize greater volume and higher margins for XOPENEX HFA. In addition, our asthma team will deliver a competitive share of voice to our top prescribing doctors.
Moving now to slide number 17. The current US market for inhaled corticosteroids for the treatment of asthma is approximately $1.4 billion. We expect growth in the ICS mono therapy market, as PCP has become more familiar with the NHLBI Asthma Guidelines. In the NHLBI Asthma Guidelines, mono therapy ICS is recommended as first line therapy for patients with mild to moderate persistent asthma. We are encouraged to see early positive results when educating physicians on the role of ICS.
As mentioned earlier, we launched ALVESCO HFA in September. The initial focus of the launch has been on key specialists. Our field force has been calling on pulmonologists, allergists, and pediatricians, and we have seen positive uptake among these physician specialties. We intend to broaden our detailing efforts during the first quarter of 2009 to include high volume primary care physicians.
ALVESCO HFA contains the active ingredient ciclesonide, a unique corticosteroid pro-drug that’s activated into des-ciclesonide after oral inhalation, and has a potent anti-inflammatory activity. We will continue to differentiate ALVESCO and plan to leverage the small particle size and greater lung deposition along with the pro-drug benefits.
At this time, I’d like to hand the call over to Mark Corrigan, who will provide an update on our progress in the R&D area. Mark?
Thank you, Mark. On today’s call, I will take you briefly through the pipeline, comment on key upcoming events for R&D and Sepracor, and highlight some of our key year term events. As you can see from the chart, we’ve eliminated from the graphic the marketed products that you heard about from Mark. Although considerable on the activities, we are honoring FDA commitments, pursuing pediatric claims, product improvements, or (inaudible) development activities continue.
Turning to slide 19. This depicts the advancement potential of our projects over the course of 2009, provided that our base two data turn out positively and we receive timely helpful guidance from the FDA. You have heard us describe STEDESA, our new once-a-day anti-convulsant in some detail on our last call and with the presentation of the Phase III results in Seattle in December. We remain on track for Q1 NDA submission.
OMNARIS HFA, which has the potential to be the first HFA NDI nasal corticosteroid on the market, has fully enrolled in its first seasonal allergic rhinitis trial. XOPENEX Inhalation Solution in combination with ipratropium progresses towards IND, and discussed with the FDA about moving into Phase III.
I’ll comment on SEP-441 and SEP-289 in the following slides. SEP-018, our new formulation of LUNESTA advances this year into further clinical trials. SEP-162 has a potential to move to Phase III given FDA consent. SEP-432 should complete Phase I and move towards testing in ADHD or depression. And finally, SEP-9 [ph] continues to move through Phase I.
Turning to slide 20 and looking at progression down the road map of 2009, we anticipate key announcements every quarter. The STEDESA eslicarbazepine acetate NDA submission is on track for the first quarter. SEP-441, the Phase II proof of concept results are expected to come in Q1. OMNARIS HFA should yield results from stage three SAR study in the first or second quarter. The EMEA decision on the new active substance status for LUNIVIA’s MAA is expected in the second quarter. SEP-289 should complete Phase II in the second quarter and study results should be announced mid year.
In the fourth quarter, we have the potential to initiate a Phase III study for SEP-162, and in that same time frame we expect to be in the position to submit our post-approval supplement on the LUNESTA coating change. We have several other potential events, including completing the European LUNESTA Venlafaxine study, initiating a Phase III study of OMNARIS HFA for perennial allergic rhinitis, initiating a Phase III study for SEP-44, and initiating a Phase II clinical trial of SEP-900.
Looking at the target product profile set on slide 21. SEP-441 has the opportunity to overcome the long term safety issues and developing tolerance associated with older drugs in the benzodiazepine class such as Xanax, while at the same time, approving on the efficacy on the profile on the SSRIs. Anxiety remains the most prevalent psychiatric disorder with a large potential market of $4.3 billion, dominated principally by older drugs, the SSRIs and NSRIs. SEP-441 offers an interesting target profile with balanced action at the alpha-2 and alpha-3 subunits, which is different from the other Z-type hypnotics that are alpha-1 selective. SEP-441 also has the potential for once-a-day dosing. We are looking forward to seeing the results from our Phase II study of 441 in the coming months for the potential for Phase III initiation in the fourth quarter.
Turning to slide 22. Also anticipated around mid year are the Phase II results from our triple re-uptake inhibitor, SEP-289. This has a potential to be a first in class treatment for major depression, which is still an area of great unmet need. In the United States, the market for major depressive disorder is valued at $8.4 billion and served principally by the SSRIs and SNRIs. We are particularly excited by this candidate because of what we believe to be its unique, balanced, triple mechanism of action.
The Ven diagram depicts the major in neurotransmitters and clinical syndromes associated with them. The opportunity to target all three, particularly hitting the (inaudible) non-access dopaminergic targets offers an opportunity for a truly novel approach for treatment of major depressive disorder. We currently have an ongoing Phase II study of 289 in-patients with or without melancholic or atypical features.
Turning to slide 23. Finally, I would like to highlight OMNARIS HFA MDI. When CFC MDI products were available, they commanded significant market share because of their improved tolerability that (inaudible) nasal side effects. In fact, prior to the CFC MDI phase out, intranasal aerosols represented approximately a quarter of total prescriptions. We had the opportunity to be first into the $2 billion intranasal corticosteroid market with this HFA presentation of ciclesonide. OMNARIS HFA is an opportunity to further improve on the tolerability advantages of OMNARIS nasal spray by delivering a presentation with no run off or dripping. These tolerability issues are by approximately 20% of the patients who discontinue due to safety issues. OMNARIS HFA Phase III seasonal allergic rhinitis trial is fully enrolled in the midst of a strong non-season – allergy season, and we expect results (inaudible) this quarter. And we’ll be on track to commence the perennial allergic rhinitis Phase III study in the second half of the year.
Please now refer to slide number 24. In concluding, we have an aggressive portfolio of potential NDA submissions over the next seven years with a terrific balance of products, some with predictable pharmacologies leading to improved therapeutics such as the ciclesonide franchise opportunities, and some potential first in class products such as SEP-289 and SEP-900.
And with that, I’d like to hand the call back over to Adrian. Adrian?
Thank you, Mark. Please now refer to slide number 25. Our 2009 total revenue guidance is to achieves revenues between of $1.15 billion and $1.25 billion. This represents an approximately 7% decline over 2008 revenues if one assumes the mid point of the revenue guidance. Sepracor’s primary reasons for reducing revenue projection related to uncertainties with respect to the healthcare and competitive environment, potential increase generate competition in the markets, in which Sepracor competes, and the potential adjustment period as Sepracor strives to become a more efficient and profitable organization.
A breakdown of the guidance by products is as follows. LUNESTA, to achieve revenues in between $515 million to $560 million. XOPENEX Inhalation Solution, between $370 million and $385 million. XOPENEX HFA, between $65 million to 75$ million. BROVANA, between $75 million to $85 million. OMNARIS, between $25 million and $40 million. And ALVESCO, between $10 million to $15 million. Sepracor Pharmaceuticals in Canada, revenues of approximately $20 million, and revenues from and royalties and license fees approximately $70 million. Sepracor projected sales, marketing, and GA expense will be approximately $600 million in 2009 or approximately 50% of its projected 2009 revenues, between the midpoint of it’s 2009 guidance range, a reduction of approximately $160 million or 21 % compared to 2008.
Sepracor projects its non-GAAP research and development expense would be approximately $210 million in 2009 or approximately 17.5% of the projected 2009 revenues, again, between the midpoint of this 2009 guidance range, a reduction of approximately $27 million or 11% compared to 2008.
I would like to note that no adjustments on this slide have been (inaudible) and revenues or SG&A discussed above. Fully diluted non-GAAP EPS guidance is between $2.10 and $2.70 per diluted share based on $160 million weighted average shares outstanding. At the midpoint of the range, this will represent an approximately 50% increase over 2008. Cash, short, and long term investments as of December 31st, 2009 are anticipated to be approximately $525 million to $600 million.
Now turning to slide 26, which is the full year 2009 versus full year 2008 non-GAAP EPS reconciliation. This slide illustrates the GAAP to non-GAAP EPS reconciliation for our full year guidance. 2009 special items and our reconciliations relate to R&D milestones towards (inaudible) payable upon written acceptance of the NDA, a one-time buy out of various related streams included in our IRO licensing agreements, and the restructuring charge in connection with the corporate restructuring plan discussed earlier.
Also included for the first time in our recurring items is an interest expense related to the bifurcation of our convertible debt due in 2024. Please also note that the tax expense for non-GAAP purposes represents tax payments anticipated in 2009. As you can see, we have also included in the projected timings of non-GAAP adjustments.
With respect to special items in the first quarter, our adjusted earnings include the restructuring charge and we anticipate the R&D milestone payments to be up. If IRO exercises its royalty buy off options, we will make up the IRO royalty buy off payment in the fourth quarter of this year.
Please now refer to our final slide, slide 27. In closing, as part of our long term planning for Sepracor, we have mapped out a strategy for building Sepracor into the future. And I believe that the strategic corporate restructuring plan announced yesterday will help up us to proactively adapt and remain competitive in this rapidly changing environment that we are all working in. In doing this, we have ensured the total focus in the more streamlined organization is on the key drivers over the next few years, both in commercial and research and development. With this in mind, we have some fundamental near term corporate objectives that have enabled us on this longer term plan, which are our 2009 corporate priorities, and indeed, opportunities.
A top priority in 2009 is to drive strong top line product performance. And we believe streamlining our operations into a more efficient, effective, and profitable organization will help us to achieve this. We will continue to focus on delivering enhanced productivity and improving expense ratios as measured against revenues. One of the key drivers of the strategic restructuring plan discussed today is to develop a more competitive, industry leading, and cost effective commercial model that more closely aligns with the current and projected healthcare environment. Our goal is to generate efficiencies from this plan to achieve cost savings that build a strong foundation for the future.
Our research and development pipeline has grown considerably over the last year and existing programs continue to advance. We are and will continue to look for opportunities to strengthen our pipeline and enhance current franchises. We have successfully completed several corporate developments and licensing agreements. And we will continue to actively pursue corporate development and licensing opportunities to enhance our existing portfolio and confident Sepracor’s focused strategic direction.
Finally, we began implementation of cost saving initiatives in the fourth quarter of 2008 and delivered strong EPS results, which exceeded all previous guidance. We are determined to continue to deliver stronger financial performance, sustainable earnings momentum, and enhanced shareholder value over time. We are pleased that all of our key cost ratios are moving in the right direction.
In summary, we believe that we are well poised to take Sepracor into a new phase of momentum and look forward to reporting to you on how we are executing against that plan we have put in place. At this point, I would like to open the call to questions and answers. Operator, can you please give the instructions.
Thank you, and ladies and gentlemen, the floor is now open for questions. (Operator instructions) And the first question today will come from the line of Manoj Garg with Soleil Securities. And your line is open.
Manoj Garg – Soleil Securities
Hey. Good morning, guys. I have two questions for Bob. Bob, we’re showing some variance between the prescription trends and the reported sales on both LUNESTA and XOPENEX. Can you comment on inventory fluctuations as well as ASPs?
Let me give you an inventory off the top. LUNESTA, overall, showed about a million units decreased from 9/30 to 12/31. Okay. And then the UDV, went down about 5 million units at the inventory level, okay, from 9/30. Now on the average selling prices, I really can’t comment on the average selling price. But I think it given the (inaudible) prices for UDV, it’s $3.55, and at the end of last year, it was $2.97, so you can run the calculations. And then LUNESTA’s $4.63, and in January it was $4.22.
Manoj Garg – Soleil Securities
Okay. Great. And then second question, longer term, what level of operating cost did you think Sepracor could ultimately achieve with this product portfolio?
Well to be honest here, good question. Obviously, we don’t give forward projections beyond the year that we’re in. But as I continue to comment certain – in the course of 2008 and on this call, particularly at the last two guidance, I think we have been very focused and I hoped you’re pleased with the results on delivering enhanced – a better cost structure and improvements in our ratios over the course of time. I think in streamlining our organization, we’ve obviously balanced out the current portfolio and the opportunities that we have, that Mark referred to, with what we considered to be the really key value drivers from the research and development perspective.
Clearly, as we balanced out the costs of Phase III initiation of trials and R&D, as the program starts to wind down, we will do that (inaudible) in the balance right from overall cost structure point of view. So we can’t give projections in the future other than an outright commitment to continue to make sure that all cost ratios move in the right direction whilst never losing sight of the key value drivers of the future.
Manoj Garg – Soleil Securities
Great. Thank you.
Thank you. Our next question in queue, that will come from the line of Bert Hazlett with BMO Capital Markets. And your line is open.
Bert Hazlett – BMO Capital Markets
Thanks. I have a couple of pipeline questions. First, on 441 in GAD, we’re expecting the results shortly. I guess the study’s complete. What are you expecting from this study and what are the key determinants for a go, no go decision to move this into Phase III? I’ve got a couple of other ones, but I’ll stop there for a second.
I’ll come up first, and then Mark will add. I think in our discussions over the course of 2008, I think we made reference to the fact that within the research and development organization, when we begin to do a Phase II study, we do large Phase II studies compared to other companies. And one of the reasons for that is that we obviously know that the expense of movement to Phase III is significant. So we’d like to answer as many, many questions as we can in Phase II. And that’s why we’re anticipating the results of 441 during this quarter. With that, Mark maybe you can enhance the question.
Sure. As you know the – the patient population of generalized anxiety disorder, our primary outcome measure is the MA, and we’d be looking for a statistically significant separation in the DMA from the placebo group to those who’s versus placebo. With that said, we’re obviously – it being a Phase II or looking – going to take look at the data in a number of different ways. I think what we’re looking right there for that, obviously, on the safety side, we want to ensure that the profile of – as (inaudible) as we’ve seen it being remarkably safe in insomniac patients also is mirrored in the GAD patients.
As we’ve mentioned on the call, Bert. We’re excited about the prospects for our 441 on the submission of positive Phase II results. As you may know, I think there’s been very little innovation in the anxiety market over the course of time. And I think if one can bring a safe and effective product into this marketplace, I think that’s a potential exciting opportunity. So we look forward to the Phase II results during this quarter.
Bert Hazlett – BMO Capital Markets
Okay. Just two other quick ones. On 162 versus 289 in terms of depression, just reading the charts there, I don’t want to read to much into that, but it looks like you’re ready to move 162 forward into Phase III. Is that signaling any particular enthusiasm between those two programs? Again 289 is not done yet in Phase II. But I’d love to just to – I don’t want to read too much into what the charts are here, but I guess do you expect to move both of those compounds forward into Phase III? And then secondly, you’ve characterized XOPENEX Ipratropium as Phase III ready, what are the gating items to move that one – to moving that one forward?
Okay. We think of 162 and 289 very differently. 162, I think is as close as (inaudible). We take a lot of solutes in the parent and the heritage of it. We have a (inaudible) down with the FDA. We’ve had a number of dialogues with them about whether we can move aggressively into Phase III. And we have a profile we understand and I think we would need to ensure what’s going to be competitive even with mitigating some of the development costs and timelines.
So we view it somewhat differently than 289. 289 is a first in class product. It’s a completely novel pharmacology with the introduction of the dopamine component. We are looking at a number of measures in that Phase II study, the primary end point is the Hamilton Depression Rating Scale, but we’re looking at items like weight loss and cognition, and other areas we may improve. So we think of them somewhat differently.
Having a franchise of triple reuptake inhibitors, with 432 coming behind it, we would – really I think there’s a tremendous amount of excitement in the field. And as we’ve discussed before, we are in the fortunate position where the FDA said move ahead with 162, and we feel confident about its commercial potential. At the same time, 289 happens to hit on most of its end points, we would be in the fortunate position, probably, of seeking a partner to help us develop both going forward.
That’s a good point Mark, I was just going to comment also that clearly, from the looks of our overall CNS portfolio, there is an integrated program in both the anxiety and depression areas. I think we’ve set 162, which we move into Phase III. This is part of a coordinated plan where we’ll also be assessing the potential for fixed combinations of 162 with some of our assets. In particular I think, looking in the potential for 162 with LUNESTA and potentially 162 with 441. So it is a broad ranged strategy that will be dictated by obviously ongoing interactions with the FDA and ongoing assessments of our overall research and development pipeline.
On the XOPENEX ipratroprium, which we are very pleased to get access through that product. Clearly, we want to make sure that we submit an (inaudible) for that product, and that we are in a fortunate position that subject to that discussion of moving into Phase III, dependent on obviously the priorities overall, in our overall research and development pipeline. We’re in very – the great affairs of having quite a number of opportunities, and more certainly, as Mark referred to as, if we have positive results from SEP-441, positive results from 289, clearly we believe that a good strategy going forward since we have no commercialization that is outside North America. We should look for a potential partnership with some of those products that we’re sure – not just with commercialization, but also in development as well, which will we all hope is in terms of managing our cost ratios on a going forward basis whilst making sure we focus on those key value creators.
Bert Hazlett – BMO Capital Markets
Thank you. I appreciate it.
Thank you. And the next question in queue will come from the line of Gregg Gilbert with Bank of America, and your line is open.
Gregg Gilbert – Bank of America
Thanks, Good morning. For Adrian and Mark Iwicki, an important industry question that a lot of people seem to have is how much sales could fall when SG&A is reduced. So can you give us a little more color or granularity as to how you came up with your new revenue assumptions?
I’ll give a holistic comment first, and Mark can add to it. Clearly upon looks of the pharmaceutical industry, Gregg, you’ve been very good at assessing the overall industry trends one has seen, quite a lot of restructuring across the industry. And we believe fundamentally that if all looks of the old model where lots of mirrored territories and frequency of contact on individual doctors that we believe that that particular model is no longer sustainable. Access issues with doctors and the need to, perhaps, have closer discussions with doctors have driven a lot of the philosophies that we’ve built, which is incorporated within this new commercial model.
Key to this, of course, is making sure that individual sales people have responsibility for developing the relationships with the individual doctors and a sole responsibility for doing that. We have projected, therefore, within our revenue guidance as you can see a 7% decline year-over-year, a number of components within that. But we believe the model that we’re putting in place is not only industry best practice, but in particular, will drive at accountability and focus that will lead to efficiency, effectiveness, and high levels of profitability in relation to our overall product portfolio. Mark?
I think, Gregg, just to add to what Adrian said, if you look at some of the selling organizations that would be thought of as being the highest performing even in the healthcare industry, medical device, equipment, biotechnology, you see a model that’s similar to what we are moving to, which is, as Adrian said, one of territory ownership where managers get to make trade off decisions and work on profitability in their areas. And we really believe that this will give us a lot of great leverage. As you know, the market is challenging right now with growth rates overall and a lot of generic penetration. But we really strongly believe this is the best way forward. We’ve worked with our own internal sales teams to put this together. And we’re excited to get into it here in 2009.
Gregg Gilbert – Merrill Lynch
Thanks. And then for Dr. Corrigan, can you talk about how the R&D organization and/or strategy is affected by the planned restructuring? And more specifically, based on the mechanism and history, what are your expectations for whether eslicarbazepine has activity in neuropathic pain? Thanks.
You know what, I would be less than candid if I didn’t say that I think that any kind of restructuring activity is going to have an impact on R&D. We’ve been pretty careful about addressing where that’s going to be, and in broad strokes, we haven’t really changed very much of our external spend. And we’re returning, in many ways, the shape, the size of the organizational bunk that we were two years ago. And so, I think that those are – we’re going to clearly have to manage this. But again, we’re – we think we can hit our key R&D deliverables. We do not think that that will affect the milestones that we’ve outlined that, as Adrian has put it, are critical value drivers.
Turning to your question as to eslicarbazepine in the broad sense, (inaudible) sodium channels are a good place to look for, I think, mitigation of pain response. But the track record for – well for Tegretol it’s not bad, but for Trileptal, not so good in this arena. So I really think that we can speculate on it, but we will be seeing the data when our partner, Bial, concludes its large studies. And I think that’s going to be the proof of the pudding. And so, again, do sodium channels influence pain mechanisms? Absolutely. Will we know a lot more when Bial releases their data? As you know, there are two trials, and the first in neuropathic pain and the second is in post-herpretic neuralgia. And I think, we’re best served probably by waiting to see what those clinical results are.
Gregg Gilbert – Merrill Lynch
And, Gregg, just to add to that, I think I’ve been quite consistent I think over the course of the last number of years in saying that we have a very good, deep, and broad research and development pipeline. I think we have a lot of opportunities. And I think the research and development organization that we’ve put in place and the streamlined organization, broadly, from Sepracor’s perspective, has not been put in place to – without a strong eye on making sure that we can deliver those strong, strong value drivers, potential value drivers from an overall R&D pipeline point of view. I think we’ve got that balanced right. And I think we’ll be looking for further opportunities to bring products to market over the course of the next couple of years, with an obvious eye on maintaining our ratios.
Gregg Gilbert – Merrill Lynch
Thank you. The next question in queue, that will come from the line of Chris Schott with J.P. Morgan. And, your line is open.
Chris Schott – J.P. Morgan
Great. Thanks. Just making a follow up on the SG&A front, after the re-basing we’re seeing in 2009, just talk a little bit about how we should think about SG&A going forward, I guess, particularly with the launch of the Bial product in 2010. Is that product that you can launch from your existing sales force? And should we think about SG&A starting to creep up again after 2009 or is that $600 million level the one you’re hoping to maybe hold the line on going forward?
Hey, Chris. This is Mark Iwicki and thanks a lot for the question. I don’t think we want to comment today on going out any farther than 2009. But I think, in general, we have designed our new commercial organization with the eye on the future. We know that we have (inaudible) coming its first indications will be focused on specialists and we believe that we’ve actually lined our teams up perfectly to be able to handle that opportunity. We also know that the way that we’ve designed it, if we would have to be flexible we can do that as well within the structure. But we’re really confident that we’ve designed the organization to be able to handle the products that we have coming in the near future.
One point, again as we’ve been consistent and I mentioned in the call today, I think in making these changes and looking for a more streamlined organization with a strong focus on improvements in our overall cost structure, we will continue to look for those opportunities going forward whilst never losing sight of the opportunities that are there in each of our individual markets.
Chris Schott – J.P. Morgan
Great. I know you’ve – there are a lot of changes in your sales force with today’s announcement. But can you also – in terms of the specific products that you’re going to see the largest hit in terms of maybe their number of details or overall investment, can you walk us through that a little bit more detail?
I think the best way to probably think about it is we are moving away from the traditional reach in frequency model, and we’re going to have three sales teams, one for LUNESTA and OMNARIS, a smaller team for the XOPENEX franchise and ALVESCO, and a dedicated team for BROVANA.
So while the numbers do move around for the individual products, we’re really confident and believe strongly that the ownership model we’re putting in place will help bridge some of those differences between the reach and frequency. And we plan to really – and sent our teams for top performance, and believe that this is the right model for us to be in to have robust revenue for the products moving forward.
Chris Schott – J.P. Morgan
Great. And maybe just one final question, cash and investment target for 2009, is that $525 million to $600 million? Just again go through what’s driving that drop? Is that just more repurchase of the convert or just more clarity on that would be great?
Sure. We’re assuming that the remainder of 2024 will be put in October. So there is a $360,000 – $360 million balance, I believe. That will be paid off in October.
Chris Schott – J.P. Morgan
Okay, perfect. Thank you.
Thank you, and the next question in queue, that would come from the line of Ian Sanderson with Cowen, and your line is open.
Ian Sanderson – Cowen
Good morning, thanks very much for taking the question. First, a technical question for Bob, what reported tax rate are you assuming in 2009? And then what is the cash tax rate? Secondly, I think for Mark, the ALVESCO sales projection for 2009, if you could repeat that. It appears to show virtually no growth over 2008, and wondering if given that you’re just rolling this out to primary care right now, what that assumption reflects? And then finally, for the $20 million of the cost savings that was seen in 2008, where did most of that show up on a line item perspective?
Yes. Let me take the first one on taxes and try to clarify this. For the GAAP tax rate for 2009, depending on where you are in the range, the low end of the range is about 43% and at the high end of the range is just about 41%, a little lower than 41%. Now that differs from the 38% we talked about because we included now, where we didn’t before in the tax rate, the $61 million milestone payments buy outs from Arrow. And also there are permanent differences related to the ISOs and ESPP on the 123(NYSE:R). So the rate would range from 43% to 41%, and it changes only because of the overall dollar impact on the ISO and ESPP over the period over the income stream.
Now, the cash – the non-GAAP tax rate, we use at 2.5%, which is our actual cash tax liability. And that would remain that way probably for the next few years. And that principally will relate that 2.5% to the Federal AMT taxes. And now, just to give you some other information relative to our taxes, at 12/31 2008 we had Federal NOL still at $866 million, Federal AMT credits of about $12 million, state NOLs of about $9 million, and we a have tax credit of $48 million related to the Federal R&D tax credits. So we’re going to have a difference between our GAAP and non-GAAP probably into 2012 relative to this NOL balance.
Ian Sanderson – Cowen
Ian thanks for the – sorry, do you want to do more?
No. I was going to the other case, but go ahead.
Thanks for the question on ALVESCO. You’re right that the range we gave is a similar level of revenue to 2008. We stopped the product in fall and we’ve only launched to specialists today. We are bringing the primary care launch onboard. And we will be burning down that stocking level. So what I’m really pleased about right now is that we’ve seen very nice prescription uptake especially with the key specialists. I think the revenue range we’ve given for 2009 is going to be a good strong performance for us. And you’ll start to see quarter-by-quarter that we’ll be growing our prescriptions in the market place.
Ian Sanderson – Cowen
Okay. And actually follow on to that, for OMNARIS, do you plan a broader DTC effort behind that in ‘09 or what we’ve seen is basically where you’re going to go with that.
Clearly, what we don’t want to do from a competitive point of view is getting any specific details on our promotional tactics. Again, as we’ve mentioned in discussions we’ve had on OMNARIS, which is a nice opportunity I think. There is the potential for post DTC advertising, which is seasonal. I think one of the big differences between this product and obviously other products that have DTC advertising is that it could be done in a very pulsed fashion. And as that has been part of some of our thinking in relation to the opportunity with OMNARIS, yes. But I don’t want to go into any of the specifics at this point in time other than any activity will be in a very pulsed and targeted manner.
Bob, do you want to comment on–
Sure. On the $20 million and it’s broken down into a couple of different areas, the primary focus was in R&D that we were able to do. And I’ll get into that. I just want to make it clear that this $20 million in no way relates the activities related to the restructuring charge. Okay. So these were efficiencies that we found in our P&L starting early in the fourth quarter. R&D, probably half of the $20 million; sales and marketing, also piece G&A; there are some in distribution; and, there were also some cost of goods. So I think there is a broad range of where the $20 million came from.
Clearly, I think in those comments on R&D, some of the cost savings there that came into the fourth quarter, in a way, impede our ability to be able to deliver and execute against those key milestones that we’ve identified as being key value drivers during the course of 2009. With that, obviously, we can follow up with individual questions after this call. I’d like to thank you all for joining us this morning, and we look forward to updating you on the progress on our next quarterly conference call. And we are excited about the future and excited about the potential for 2009 and beyond. Thank you so much.
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