Executives
Chip Merritt - VP, IR
Frank Baldino - CEO
Lesley Russell - CMO
Bob Roche - EVP, Worldwide Pharmaceutical Operations
Kevin Buchi - EVP and CCO
Analysts
Chris Schott - J.P. Morgan
Corey Davis - Natixis Bleichroeder
Adam Greene - Stanford Group
Jim Birchenough - Barclays Capital
Greg Gilbert - Banc of America
Gary Nachman - Leerink Swann
Bret Holley - Oppenheimer & Company
Gene Mack - Lazard Capital Markets
Eric Schmidt - Cowen & Company
Manoj Garg - Soleil Securities
Cephalon, Inc. (CEPH) Q4 2008 Earnings Call February 12, 2009 5:00 PM ET
Operator
Good day everyone and welcome to the Cephalon's Fourth Quarter 2008 Earnings Conference Call. Today's call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to Mr. Chip Merritt, Vice President of Investor Relations. Please go ahead sir.
Chip Merritt
Thank you. Today, we will review Cephalon's financial performance for the fourth quarter and full year.
Before we begin, let me remind you that certain statements on this call may be forward-looking and are subject to risks and uncertainties associated with the company's business. These statements may concern among other things, guidance as to future revenues and earnings, operations, transactions, prospects, intellectual property, litigation and other legal matters, development of pharmaceutical products, clinical trials and potential approval of our product candidates.
The company also may discuss certain non-GAAP financial measures within the meaning of Regulation G during today's call. The information required by Regulation G is available in the earnings press release and in the Newsroom section of our website at www.cephalon.com.
Additional information and risk factors affecting the company's business and the financial prospects and factors that would cause Cephalon's actual performance to vary from our current expectations is available in the company's current Form 10-K on file with the SEC.
During this call, we will introduce first quarter 2009 guidance and update our full-year 2009 guidance. Please note that guidance will remain in effect unless the company provides subsequent modifications or updates. Our earnings press release is available at www.cephalon.com.
Investors with further questions should contact me at 610-738-6376. This conference call is being webcast via the Cephalon homepage and it will be archived for one week after the call.
Speaking on today's call will be Dr. Frank Baldino, Chief Executive Officer and Kevin Buchi, Chief Financial Officer. Also joining us today are Dr. Lesley Russell, Chief Medical Officer; Bob Roche, Worldwide Pharmaceutical Operations; and Jerry Pappert, General Counsel. Following remarks by Frank and Kevin, we will be pleased to answer your questions.
Now Frank Baldino.
Frank Baldino
Thanks Chip. And good afternoon everyone. 2008 was a sensational year for Cephalon. On the adjusted basis we reported record top line and bottom line results. In fact, over the 10 years we have grown our revenues from $16 million to just under $2 billion.
Among our 2008 accomplishments are, we secured US approval for TREANDA in the treatment of CLL, and a second approval for indolent non-Hodgkin's lymphoma patients who have progressed during or till six months of treatment with Rituxan.
TREANDA was one of only 21 new chemical entities approved by the FDA in 2008. We received European Commission approval for Fentora and are now beginning to launch that product.
We were issued a patent for Amrix that expires in 2025. We filed an IMPD, a European equivalent of an IND for our PARP inhibitor, CEP 9722. We were added to the S&P 500 index, a remarkable accomplishment for a company which launched its first product PROVIGIL only 10 years ago.
Cephalon was recently named to the Forbes list of America’s best big companies and was one out only 25 S&P 500 listed companies whose share price actually appreciated in 2008. Cephalon has the right strategy, the right people and the right vision to continue to advance medical treatment for patients and deliver results for our shareholders.
Over the past decade we have expanded our business beyond CNS to clinical pain, drug delivery and oncology. Cephalon’s strategy has always been built around the concept of product diversification, reduces business risk and helps to ensure stable and predictable growth of sales and earnings. We intend to continue on this path and we will enter new specialty markets as opportunities present themselves.
Our latest endeavor is in the inflammatory disease. Late last year, we announced an agreement which gave us an option to license LUPUZOR worldwide. LUPUZOR is the potential treatment for systemic lupus erythematosus. Just last week based upon positive results from interim analysis of our phase IIb placebo-controlled study, we announced that we exercised the option and plan to advance the product into phase III registration studies.
Data from the interim analysis of the phase IIb study showed that 200 micrograms of LUPUZOR administrated every four weeks demonstrated a statistically significant improvement versus placebo. The p value of 0.015 and the number of responders as measured by a decrease of at least 4 points in the systemic lupus erythematosus disease activity index was slide I 2k at 12 weeks.
Lupus is a chronic potentially life threatening auto immune disease. The Lupus Foundation of America estimates that 1.5 million Americans and at least 5 million people worldwide suffer from lupus. If we are successful in developing this medication, we anticipate seeking approvals broadly throughout the world.
And recently we have paid an option to acquire Ception Therapeutics. Ception is developing reslizumab, a humanized monoclonal antibody to interleukin-5. Interleukin-5 has been shown in number of studies to play a crucial role in the maturation growth and movement of the eosinophils. The first indication being pursed is for the pediatric eosinophilic esophagitis, an inflammatory condition in which the wall of the esophagus becomes lined with numbers of eosinophils. The inflammation decreases the ability of the esophagus to stretch and to accommodate the passage of food.
In severe cases this results a need to receive nutrition through gastric feeding tubes. This eosinophilic esophagitis can cause sever abdominal pain, vomiting and failure to thrive. Reslizumab is currently in phase II, III study in pediatric patients suffering from EE. We anticipate that this study will be completed in the fourth quarter of this year and if the data are positive, we anticipate exercising our options to acquire Ception and then filing a BLA with the FDA in 2010.
If approval is secured, we expect each of these compounds to enjoy long periods of exclusivity. We believe that these types of transactions will be important to enhance long-term growth and continue to drive shareholder value.
Let me give you a brief update on the latest addition to our oncology franchise genre. It was only three years ago that we first entered the oncology market. In 2008, the American Society of Clinical Oncology named Cephalon an upcoming company in oncology, and then TREANDA to its list of 12 major advances in cancer treatment and prevention.
Oncology division of FDA approved only two new therapeutics in 2008. TREANDA was one of them and was approved for two separate immunological indications. COO in March and indolent NHL in late October. This product is up to a fantastic start.
During the year, we called on over 7,000 oncologists, educating them about the benefits of TREANDA. In the first three quarters of launch, TREANDA recorded $14 million, $25 million and $36 million of sales, respectively.
Beginning in January, physician reimbursement was enhanced by the availability of a unique J code for TREANDA. In 2009, we expect the enthusiasm around TREANDA to continue through our clinical studies and the work of other investigators. One widely followed study is Dr. Rummel and the Steele Group’s study of TREANDA's use in first line indolent NHL. At the December of 2008 ASH Meeting, Dr. Rummel provided interim look at this data with very encouraging results.
We believe that the Steele Group will conclude this important study later this year. The feedback that we hear from the physicians is that TREANDA is easy to use, effective and relatively safe. Based on these key attributes we believe that adoption of this unique medication will continue to grow steadily.
Our CNS franchise generated over $1 billion of net sales in 2008. PROVIGIL was launched here in the United States in 1999. We added Gabitril franchise in 2000 and now we are preparing to launch NUVIGIL in the third quarter of this year. PROVIGIL was a great product, and we believe that NUVIGIL will prove to be even better. The clinical program supporting NUVIGIL will begin reporting new data later this year.
We expect to complete the study of treatment of excessive sleepiness in 250 adults with obstructive sleep apnea and comorbid depression around the end of the first quarter. These patients exhibit residual excessive sleepiness despite effective use of CPAP therapy.
We believe that there are many patients suffering from this comorbidity. In fact, an observational study of over 118,000 veterans with the diagnosis of depressions, they were three times more likely have a diagnosis of sleep apnea and those without depression.
Positive results from our study will provide us with an opportunity to demonstrate the enhanced way promoting effect of Nuvigil for treating the sub-group of obstructive sleep apnea patients. They have just completed enrolment in our 420 persons, phase III clinical program, examining the effects of NUVIGIL on jet lag sleep disorder. Jet lag disorders effects approximately two-thirds of these national travelers and can lead to disturbed sleep, decreased alertness and impaired day time function.
The first acute study with NUVIGIL could lead to an indication for jet lag disorder in 2010 and help the many international travelers who suffer from this acute circadian rhythm disorder. We received a special protocol, we will begin enrolling in our 620 person clinical trial, examining the effects of NUVIGIL in people suffering from excessive sleepiness associated with traumatic brain injury. This study is scheduled to complete in the third quarter of 2010, and if the results are positive, NUVIGIL could have an indication to treat excessive sleepiness in this population, by the end of 2011.
These studies are being conducted to explore the benefits of NUVIGIL and the treatment of excessive sleepiness. We are also exploring the number of opportunities to determine if NUVIGIL has utility beyond excessive sleepiness. By the end of the first quarter of 2009, we anticipate that they will be available on our phase II study, of NUVIGIL as adjunctive therapy in bipolar depression. In this study, we are looking at depressive symptomatology as measured by the IDS-C30 scale. The results of this study will determine the feasibility of conducting a larger phase III program which could begin later in 2009.
NUVIGIL phase IIb clinical program as adjunctive therapy in schizophrenia should yield results in the first quarter of 2010. It's early on, but if all goes well, NUVIGIL can have an indication to treat the negative symptoms of schizophrenia in 2012. This can help 1.5 million Americans suffering from the negative symptoms of schizophrenia.
And lastly we started enrolment in the phase II clinical program of over 160 cancer patients looking at the potential benefits of NUVIGIL in the treatment of cancer related fatigue. With an extensive clinical program supporting NUVIGIL, and a patent that extents to 2023, we believe that NUVIGIL will be a very successful product that will ultimately benefit more patients than PROVIGIL.
Acceptance of AMRIX in the marketplace continues to grow. Fourth quarter 2008 prescriptions for this once-a -day skeletal muscle relaxant grew 24% over the third quarter of 2008. Our initial entrance of the primary care proved very successful, enabling us to identify physicians who treat skeletal muscle spasms. Understanding that AMRIX is promotionally sensitive, we recently expanded the number of sales representatives detailing AMRIX from 570 to 840. It helped raise awareness and reach more of these physicians.
Now that the sales force realignment and holiday season are behind us, we expect AMRIX growth to continue throughout the year. We are moving ahead with our risk evaluation and mitigation strategy, our awareness program for FENTORA. This program is designed to educate and engage physicians, patients and pharmacists in the safe use of FENTORA, specifically to reduce the use of FENTORA by opioid naïve patients.
We will submit our REMS program to the FDA by the end of the first quarter, and attempt to implement immediately after FDA approval. We are confident this program will allow us to demonstrate a reduction in a number of opioid naïve patients receiving FENTORA. If successful, we will be in a position to further our discussions with the FDA on additional indications for this product. With the effective REMS in place and a broader label, we believe that FENTORA will present a tremendous benefit for those opioid tolerant patient suffering from breakthrough pain.
2008 was a record year for European business as well. European sales grew 12% to $370 million, thanks to the strong sales of ACTIQ, PROVIGIL and Myocet as well as the strong euro during most of the year.
In 2008, we continued to produce quality drug candidates to meet our goal of filing at least one IND a year. An investigational medicinal product Dossier, the European equivalent of INV was filed in the fourth quarter of 2008 for PARP inhibiters CEP-9722. We anticipate filing an INV for CEP-26401 our H3-antagonist later this year. At that point, we will have five new Cephalon discoveries.
To summarize, the strength of our core business coupled with two successful new product launches produced a record year for the company. Our internal research pipeline together with our ability to move quickly in acquiring promising assets continues to position Cephalon well for further expansion. We are proud of the fact that we continue to make a positive impact on patients’ lives and delivery growth that rewards shareholders.
Now Kevin will discuss our financial performance during the period and also our guidance for the first quarter of 2009.
Kevin Buchi
Thank you, Frank. Today we reported our 2008 financial results. We generated record sales and earnings both of which exceeded our guidance for the year. Sales increased 13% over 2007 to $1.94 billion and basic adjusted net income per common share for the year was $5.39. Adjusted net income for the year was $366.6 million, an increase of 20% over 2007. We delivered solid top-line growth, continue to invest in our business through clinical and commercial development while simultaneously improving operating margins.
CNS franchise sales increased 15% above 2007 to over $1 billion. Pain franchise sales were over $500 million. This was a decrease of 2% from 2007, due to continued generic erosion of ACTIQ nearly offset by the strength of AMRIX. AMRIX sales increased to $74 million in 2008 from $8 million in 2007.
Oncology franchise sales doubled to $186 million over 2007, with TREANDA contributing $75 million of revenue. And other sales were $208 million compared to $212 million for the same period last year. In 2008, excluding payments of $444 million associated with federal and State settlements, net cash provided by operating activities amounted to $442 million.
Also in 2008, we retired $218 million of debt. As a result, we ended the year with cash and cash equivalents of $524 million. In 2009, we expect to continue to generate significant cash from operations.
Our goal is to maintain wholesale inventory levels of between 2 to 3 weeks for each of our key products. During the fourth quarter, inventory levels crept up by a few days, but remained within this range.
When compared to 2007, R&D expense as adjusted for certain pro forma items increased $28.3 million due primarily to the increased spend associated with NUVIGIL clinical programs. Adjusted SG&A increased $72.9 million for the year versus 2007, primarily due to the launches of AMRIX and TREANDA. Our adjusted tax rate for the year was 35% in line with our prior guidance.
During the quarter, there were several adjustments that were made to arrive at adjusted net income. The most significant of these were, we excluded $99.7 million associated with the impairment of the VIVITROL intangible assets and Acusphere fixed assets.
We excluded $17 million associated with the acquisition of Licensed Technology from Acusphere and $15 million for licensed rights to LUPUZOR from ImmuPharma. We excluded $28.1 million associated with the ongoing amortization of acquired intangible assets and accelerated depreciation.
We excluded $17.2 million associated with the loss-on-sale of equipment related to the VIVITROL termination. We excluded $13.2 million associated with termination payments to Takeda and Alkermes and related severance, and restore the tax effect of these items and other charges.
There are three accounting items that I would like to highlight for you. In November 2008, Acusphere became a variable interest entity to which we are the primary beneficiary. As a result we are consolidating that company’s results. The same treatment will play at Ception beginning in January 2009. Since we have no direct equity ownership in either company, the gain or loss is attributed to minority interest. As a result, there is no impact on our adjusted net income as a result of the accounting for these entities.
During the fourth quarter of 2008, we changed our method of accounting for inventories previously valued using a LIFO method to FIFO. Use of the FIFO method makes consistent with the majority of our competitors. We have adjusted prior periods to reflect this change.
Starting in 2009, APB 14-1 requires that we impute additional interest expense for our convertible debt. This additional non-cash interest which we estimate to be approximately $46 million in 2009 will be excluded from our adjusted net income. We are updating our full-year 2009 guidance to reflect changes in mix of our sales and expenses.
Total sales guidance remains unchanged between $2.175 billion and $2.225 billion. Guidance for the CNS franchise is between $1.16 billion and $1.19 billion. The Pain franchise is between $535 million and $560 million. The Oncology franchise is between $265 million and $280 million, and our guidance for other product sales is between $170 million and $195 million. Adjusted R&D and SG&A expenditures are targeted to be between $440 million and $460 million, and $840 million and $860 million, respectively.
Operating expense guidance increased compared to our previous guidance predominantly as a result of BIE accounting for Acusphere inception. Consequently, we will eliminate approximately $50 million of expense as non-control and minority interest.
Guidance for adjusted net income remains between $452 million and $459 million, which equates to basic adjusted income per common share between $6.50 and $6.60 assuming 69.5 million shares outstanding. Our assumed tax rate for the year is approximately 35%.
We are also introducing first quarter 2009 guidance. Our sales guidance for the first quarter is between $510 million and $530 million, consistent with previous years, our sales guidance does not include other revenues.
Adjusted net income guidance is between $90 million and $97 million, this equates to a basic adjusted income per common share between $1.30 and $1.40 based upon 69 million shares outstanding and a tax rate of approximately 35%. Due to the continued growth of key products like TREANDA and AMRIX, we expect sales and earnings to increase as the year progresses.
In summary, 2008 marked another strong financial year for the company. Our current cash position and our ability to move quickly and acquire promising assets should enable us to benefit from present economic conditions. Our guidance displays our confidence and our ability to deliver solid financial results again in 2009.
That concludes our opening remarks. We will now open this call to you and your questions.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions). And we will first go to Chris Schott from J.P. Morgan.
Chris Schott - J.P. Morgan
Great. Thanks. Just a couple of questions. Maybe if Frank, start by talking a little bit about the kind of M&A environment you are seeing out there. How active should we expect Cephalon to be as the year goes along? And one more thing, can you just remind us, when we think about expenses in 2009, how much can you reflect in your expense guidance as it relates traditional deals maybe on announced so far.
And my second question is.
Frank Baldino
Chris, one at a time. I am getting older, I can't remember. I think the environment from an M&A respective is pretty rich, because we had a lot of great companies out there, that were not attainable or were not available in any way when other sources of capital available to them. And now they find themselves with excellent clinical trials, with excellent clinical results leaving difficulty, finishing those trials, difficulty raising money, we can even see themselves through the PDUFA date. They are super companies and super management teams and that’s a group of companies that were just not available to the M&A space, only 9 months ago. So, we see this as a real opportunity for us and we’ve done a few deals and we will continue to do more deals in the future.
As far as our P&L is concerned, we have guidance for 2009, we expect [offers] in that guidance. So, we’ve got enough flexibility in our spend, that we can accommodate deals that we have done, that we have announced to you guys so far, and accommodate the spend that we have for the products we have in development, especially the [Myocet] and NUVIGIL trials that are on-going for the company right now.
What was your second question?
Chris Schott - J.P. Morgan
Sure. Just as we kind of are thinking kind of heading into the NUVIGIL launch. How should we just think about PROVIGIL, detail support as we think about 2009. Will there be a period of time that you back away from PROVIGIL ahead of the launch or what will that occur maybe simultaneously with NUVIGIL being introduced in July.
Frank Baldino
Well we have Bob Roche with us today, who knows all of the answers to these questions. I am going to pass it on to him.
Bob Roche
Hey Chris, Bob Roche here. Yes, I mean as we look at the launch of NUVIGIL in the second half of the year in early quarter three, I think is where we are focusing right now. You would anticipate that we would begin to back away from any kind of promotional support to PROVIGIL within about I say 10 to 12 weeks prior to our anticipated actual launch timeframe. And what this would indicate is that the samples for PROVIGIL would be stopped being given, we would stop actually doing all the dinner programs that kind of things for PROVIGIL continue along in the weight promoting franchise Wayne, that would be in pre-marketing support for NUVIGIL, PROVIGIL per se is the past and NUVIGIL is the future, it's really the mentor of the organization now moving forward.
Chris Schott - J.P. Morgan
Okay, great, Thank you very much.
Operator
Our next question comes from Corey Davis with Natixis.
Corey Davis - Natixis Bleichroeder
Thanks very much. I just have some boring questions. First one is, probably for Kevin. I am sorry I didn't understand the accounting for Acusphere and Ception. The effect on the P&L, and if you do a lot more of these deals. It sounds like it could have a big effect on the GAAP numbers. Could you just give us like a summary for dummies as to how it affects the P&L and why it is or is not included in your adjusted numbers and why it's not likely load off balance sheet vehicles?
Kevin Buchi
Sure, I would be happy to. And there was not a need to call you a dummy just for the record. Basically, what you do, this accounting has changed in name, it's called BIE Accounting, but it really hasn't changed a lot from the old minority interest concept. The fundamental concept here is that you have some level of significant control over another entity and so you are required to consolidate that entity, that means that all of the line of income and expense associated with identity appear in our P&L as if they were ours.
What you then do is you have another line in there, which equates to the minority interest line. At least we have no equity ownership in these things currently, you basically back out the 100% of the effect. So that is true both on a GAAP and on an as adjusted basis. It won't have anymore impact on GAAP and non-adjusted.
Corey Davis - Natixis Bleichroeder
That’s why the number is positive towards the bottom of the P&L.
Kevin Buchi
Exactly, because you are taking the loss that they have generated and you are taking it off your P&L. (Inaudible) all the detail if you will, but there is a recognition, there is still not your loss.
Corey Davis - Natixis Bleichroeder
LIFO to FIFO, I got a couple of questions already as to why you switched, I know you said just going to the end of three standard, but what effect would that have in this quarter’s numbers.
Kevin Buchi
I think there were a couple of reasons that we switched. First of all we have been using LIFO for our US business but not internationally and we have not been able to use LIFO for tax purposes. Secondarily, and probably more important is we look forward to IFRS accounting. (Inaudible) LIFO and so it seem to be a prudent thing to do in anticipation of the future. In terms of the effect, it was about $4 million and that was also a part of the reason for changing now, it wasn't particularly material. So, it seem like it's the time to change.
Corey Davis - Natixis Bleichroeder
And last question, Frank, I kind of gotten into habit of asking you this every quarter, but operating margin expansion as you go forward for the next couple of years is I think an important part of your growth, but as you approach the launch of NUVIGIL could that see a temporary slow down or is that all kind of already baked into your forecast and should we see that growth operating expansion till the rest of this year?
Frank Baldino
That’s a good question, because we have got a lot of products going on here. We guys [inaudible] of Treanda launching, and AMRIX expansion and NUVIGIL launch in the third quarter of 2009. That’s all in our guidance, we envision the need to do that, we envision the need to do that last year before we gave our 2009 guidance. So, the expense associated with NUVIGIL, AMRIX continued expansion as well as the TREANDA launch cost are all baked in. So, that is nothing new to report there and that is in the numbers, it's in the guidance for the year.
Corey Davis - Natixis Bleichroeder
Okay, great. It sound like things are going well.
Chip Merritt
Things are going great.
Operator
And our next question comes from Adam Greene with Stanford Group.
Adam Greene - Stanford Group
Thanks, good afternoon. First I want to clarify that you are still assuming additional generic ACTIQ players early this year? Then also you can remind us again what your assumption is if your supply agreement with Barr, now Teva on generic ACTIQ, is realistic scenario that you could, I think there could be no generic ACTIQ players in the market later this year? I have a follow-up.
Frank Baldino
We get this question a lot Adam, so we have to really give you same answer. So I apologize if there is nothing new to report. Guessing what generic is going to do is pretty tough. Unfortunately they don't call us first and that’s with you in this environment with the focus on the risk management plans, [Dates] is requiring for a lot of people and not even having risk maps approved for a lot of generic companies in this particular space yet. It’s unlikely that a generic will come on to market from that perspective. But nonetheless the typical bill suspenders approach that we have on the financial side of our business, we have in vision and other generic coming in maybe this year. When are we, give a quarter to that Kevin or we just say later this year.
Kevin Moley
I think later this year I think we assumed when we provided guidance initially as you know that they would come on sometime during the first quarter and we have not changed that guidance I guess implicitly we are still assuming that.
Adam Greene - Stanford Group
But is it in your first quarter guidance now?
Kevin Moley
No we are not anticipating a generic in the first quarter, we are half way through it.
Adam Greene - Stanford Group
And then any update with the agreement with Barr, the dispute there or hasn’t anything come officially yet?
Frank Baldino
We do not have a dispute with Barr, I think we have a (inaudible) at the decree with Barr for the ACTIQ supply.
Adam Greene - Stanford Group
Exactly.
Frank Baldino
We have a contract with Barr, and we will honor that contract.
Adam Greene - Stanford Group
Okay, and let's get a follow-up on AMRIX, it seems that the value per script on AMRIX has actually gone up again. Seems pretty high relative to the actual cost per pill. What's the average number of pills per script you are seeing, what's a good number going forward for dollars per script?
Kevin Moley
We are running right about 30 tablets per script and that's been inching up marginally as we have gone quarter-by-quarter through 2008. And I think we are pretty comfortable right now that, that seems to be a projectible value and that multiplied by the average VAT cost per tablet there. We are running at the script totals that we are seeing of around $265 to $270.
Adam Greene - Stanford Group
Yes thanks a lot.
Operator
We will now take a question from Jim Birchenough from Barclays.
Jim Birchenough - Barclays Capital
Yeah hi guys a couple of questions just first is a big picture question on thinking about the generic PROVIGIL in 2012, what sort of attrition do you assume in 2012. And how do you plan to make up those revenues do you think you have got the products right now and how is that they can make-up for any shortfall in 2012, are you going to need to license additional products to make-up for what you may loose in 2012?
Frank Baldino
Hi Jim this is Frank. I think the plan is that we have sufficient revenue growth with AMRIX and TREANDA, NUVIGIL et cetera, Fentora hopefully by that point of time to really overcome any kind of envisioned or perceived downside effect of PROVIGIL going generic. We really do not see any issue there whatsoever. I think the big issue for us here is getting, continuing our M&A activity, we have Ception product which should see the light of day in 2012.
We have the LUPUZOR product for SLE following thereafter. We got a number of products in development 701 etcetera. Some of this stuff is going to work -- not all is going to work, but that coupled with our core business coupled with the growth we envision should easily cover PROVIGIL going generic in 2012.
The other thing you have to remember if we do our job right or if Bob does his job right, the PROVIGIL number in 2012 that will be genericized will be very, very small. So we do not expect a big business to be lost by that generic erosion at that time.
Jim Birchenough - Barclays Capital
But I guess that’s part of the question is just maybe it’s a question for Bob but when you think about the generic PROVIGIL versus what could be a dominant brand in NUVIGIL, what sort of switching do you think would happen from the NUVIGIL to the generic?
Bob Roche
Well that’s a good question, and I think that what we would anticipate is clearly when there is a generic modafinil molecule available, PROVIGIL is going to be pretty well snookered there. So our objective really is two fold. First of all to make PROVIGIL as small as we possibly can. And during the two and a half year or so expected period of co-exclusivity that we expect to enjoy with NUVIGIL and PROVIGIL my team has some tremendously creative, and I believe effective plans to ensure that just that happens. So that's objective number one.
Objective number two obviously, is to grow NUVIGIL into its own sustaining and vital brand right? And that's going to occur through a number of means. One, clearly the transition of some business from PROVIGIL to NUVIGIL, but as we get the new indications that Leslie and her team are developing in jetlag and TVI and the others, we are fully anticipating that these will help to drive NUVIGIL's business, in and up itself right so. We think that NUVIGIL is going to be a really strong and powerful brand. PROVIGIL will be relatively small at that period of time. Generic PROVIGIL will come on the market but we do not believe given the new indications that NUVIGIL will have that the pharmacies will really be able to switch PROVIGIL for NUVIGIL in a generic form.
Frank Baldino
And Jim just a follow-on with that question and I know you know this but just in case we have listeners down, NUVIGIL and PROVIGIL but not A, B rated so this can’t be an automatic substitution at levels of pharmacy. There has to be an active discussion with the physician actually to make that switch, but that the payer try to do that, than that would be and off, I do not want to say off label, just a different drug. That demand of different drug being used, so some of the indications will be certainly be off label. PROVIGIL is approved for excessive sleepiness, narcolepsy, obstructive sleep apnea, and sleep disorder. So remember any substitution outside of that universe would be considered off-label and payers just simply can't do that.
Jim Birchenough - Barclays Capital
I am going to ask one more quick question and jump back in the queue. Just on the TREANDA opportunity from the Rummel data. Give a sense what percent of NHL patients are getting R-CHOP or RCVP. And do you expect to get the Rummel data in the label at some point?
Frank Baldino
Well Lesley must know how many of the first line NHL patients receiving R-CHOP, today? There got to be some percentage.
Lesley Russel
I think the vast majority of first line patients in lymphoma that need chemotherapy get either R-CHOP or either R-CVP. So that’s a vast majority. And sorry your second part of your question was.
Jim Birchenough - Barclays Capital
Do you expect to get the Rummel data into the label at some point?
Lesley Russel
I think we got to first of all see the quality of the data and see whether it meets the FDA standards of that alone. Probably unlikely, so that we are planning and about to kick off the first line study that we are going to conduct and hopefully the combination of the two programs would get us somewhat.
Frank Baldino
I think, Jim, everybody is waiting as we are for the Rummel data to be completed once that happens we will know where we stand. We can then be a little more forthcoming with you and everybody else. So it’s really a question whether we are going to pursue aggressively listing of the results, our label expansion and et cetera. And one thing, Lesley I don’t think mentioned that we are about to launch our study in first line and that will help as well. So let’s see what the data looks like, it's always good to have good data before you make decisions. And based on that data, we will lay out a plan and we will execute the blip.
Jim Birchenough - Barclays Capital
Thanks for taking the questions.
Operator
Greg Gilbert from Banc of America has our next question.
Greg Gilbert - Banc of America
Thanks a follow-up for Lesley. On that first line study that you are going to do yourself, don’t you think you will have some difficulty in enrolling a study like that given what is known about the Rummel data, so far, regardless of its quality and robustness?
Lesley Russel
I think, there are few mixed opinions out there. I think many physicians use R-CVP which is clearly better tolerated than R-CHOP that lacks azomycin. I think it is also on the philosophy of the practicing oncologists. We have some who say they completely buy the Rummel data and some of them say they would like to see a comparison done here. So I think we will be able to do the study and I think that although there are some very positive outcomes of the Rummel data, the US practicing physicians still won't get their hands on that.
Greg Gilbert - Banc of America
Okay, and for Kevin and Frank. Frank you mentioned the M&A environment being rich at the moment, but how much additional capital are you comfortable deploying in 2009 all things considered, with your cash flow, your current financial position et cetera?
Frank Baldino
We generated a lot of cash here and every quarter we generate a lot more cash. So we are pretty comfortable that we have got enough cash to execute the plan in hand. We are not talking about buying, spending billions of dollars here to buy companies. We think there is opportunities in the range that we have been very comfortable with. If you look at our behavior historically, the biggest thing we have ever done is about $450 million. So we are not buyers of billion dollar entities and we try not to overpay for things. So I think with the cash flow we have and then the targets that we are looking at, we are very comfortable with our ability to have the cash to acquire those targets.
Regarding this, the second part of your question was that whether we are comfortable on the spend side of all this. We have got guidance out there, we have got obligations to our shareholders to continue to drive and grow earnings in 2009 and beyond, and we intend to do that. So the biggest break on our, on M&A sort of activity is our, own earnings growth expectations.
Greg Gilbert - Banc of America
No it was not really about the spend, if this is a once in a life time opportunity to sort of roll-up a lot of good technology that was not previously available. I am just curious as to how current you would be to spend more than your guidance if the right opportunities came up or but it was great additional capital as well?
Frank Baldino
A great class, I think the real answer to that question is it depends on the opportunity, if you have a compelling opportunity that’s transforming that changes Cephalon from the success level that it had so far to something that’s light years ahead. We will be delighted to come to the street and explain why we have done what we have done.
Kevin Buchi
We have got $500 million in cash currently on the balance sheets. We generated some free cash flow in 2008. You expect the 2009 numbers to be a little higher north of $400 million and we have got a couple of $100 million available kind of on the line of credit. So we have access to reasonable amounts of capital. From Frank's point, we have not typically been a company that’s gone out and done huge deals. We have done deals which have been more product focused than company focused. But, it’s the opportunity to buy Pfizer, $500 million comes along, we'll take a serious look at it.
Greg Gilbert - Banc of America
I don’t think we will like that one. Lastly for Bob can you comment on the timing and size?
Kevin Buchi
It’s an infrastructure play.
Greg Gilbert - Banc of America
Bob, the timing and size of your early access program for NUVIGIL any color you can share there.
Bob Roche
Yeah that’s going to kicking off in the second quarter. And we are anticipating, the anticipating the numbers to be pretty significant, I don’t know that we have actually shared the extense of the program with the street but --
Greg Gilbert - Banc of America
The answer is can't.
Bob Roche
It's certainly going to be in the several thousands of physician range and the idea will be for us to provide these physicians with the material they need to get the several individuals on to NUVIGIL and then there will be a means by which the data can be shared back with the combined number of participants in the program to give them a really good sense of what NUVIGIL is meaning for the patients that are being treated with right across the nation.
Greg Gilbert - Banc of America
Okay, thanks guys.
Operator
Our next question comes from Gary Nachman from Leerink Swann.
Gary Nachman - Leerink Swann
Hi. Just a follow-up on that last one. First, Bob, for the clinical experience program, I am assuming that’s likely to affect PROVIGIL prescription if it's going to be that robust, is that a fair statement?
Bob Roche
Yeah, I think that if you got a couple of thousand docs putting a couple of patients each on the product you can do the math yourself. During the course of a calendar quarter we have got 100s of 1000s of PROVIGIL scripts being written right now. We are not anticipating if this is going to have a severe deleterious impact on that number but right now Gary I have really got my guys focused on the NUVIGIL opportunity and ensuring that we get off to a good start with this product. That we give physicians a good opportunity to use it and that the patients who are receiving it have the best possible experience that they can.
Once the NUVIGIL launch timeframe actually comes around, PROVIGIL as I mentioned before is really going to be the past and NUVIGIL the future. So, not a big impact on PROVIGIL scripts I would say.
Frank Baldino
It was about 600,000 PROVIGIL scripts a quarter. We are talking about, couple of thousand docs in the mix here trying NUVIGIL on a portion of their patients. I think this is going to have a meaningful impact but, it’s a good question to ask.
Gary Nachman - Leerink Swann
Okay and also what happens if the OSA plus depression data is not positive, does that change your plans or timing at all as far as the launch. Or everything would be on track.
Kevin Buchi
Who wants to answer that question?
Frank Baldino
First of all, I will just give it my view here I think we got a really good label at NUVIGIL that we are very excited about. We really liked the fact that it has a late afternoon effect, in other words it lasts longer and that’s really one of the big issues with the patients today. I mean the daily consumption of PROVIGIL is roughly 1.3, 1.4 tablets a day. If you can move that to NUVIGIL one tablet a day, has a lot of benefits, less dose, less exposure, and complete coverage throughout the day. We like that story with NUVIGIL. There is data with that story and have with NUVIGIL. And that's what we are really driving the launch of NUVIGIL around. If we can get other things in there as well that’s just a bless. So we don't see this as a phenomenon with that data. But it should be nice to have more differentiation but we are happy with what we got.
Bob Roche
That’s exactly right and then as I mentioned earlier the two and a half co-exclusivity period is one that we are going to leverage in every way possible. Right out of the blocks NUVIGIL is going to be the single isomer providing wakefullness throughout the day. We are going to be able to talk some pharmacokinetic differentiation, we are going to be able to talk dosage differentiation, we are going to be able to talk average daily tablets differentiation. Add to that, the story that’s going to be coming out of the OSA depression study, add to that the data that are going to be coming out of a variety of other Phase IV programs that we are currently using. This is all going to layer-in as we go through the launch period, right. Launch is not a date, launch is a process and that this really begins when we first make NUVIGIL available commercially.
Gary Nachman - Leerink Swann
Okay that’s helpful. And on TREANDA, what do you think the split is currently for use in CLL versus NHL, now that NHL is approved? And do you think in some cases you are actually getting some used frontline for NHL already?
Frank Baldino
Bob, what’s the answer?
Bob Roche
Sorry I was rattling in my previous answer.
Gary Nachman - Leerink Swann
You want to take a few seconds alright.
Bob Roche
We're not seeing much in the way of frontline NHL use at this point. NHL is building as a percentage of the total usage of TREANDA. Ultimately it’s going to be the dominant area of usage. But until we get the Rummel data, until we get the results from our own studies, we just do not have a great deal upon which to hang our hats for frontline NHL. Sure there is a little bit that’s going on out there, but it’s really not factored significantly into our 2009 numbers.
Gary Nachman - Leerink Swann
Okay, but as far as [refractories] in NHL, did you get a nice benefit in the fourth quarter? Did you see a nice shift over or is it still more skewed to CLL at this point?
Bob Roche
The business is still predominantly CLL. We are building NHL, I think certainly by the end of 2009 it will be the dominant portion of our business and needs to be for us to reach the objectives that we are setting forward.
Kevin Buchi
Yeah I think what we are really seeing out there is a lot more use in NHL since the drug has been approved and then prior to that. And we expect that to be the dominant part of the growth for TREANDA going forward. Now CLL still has more growth in front of it. And so does NHL. NHL has a heck of a lot more growth than CLL has.
So there is considerable upside on the TREANDA story, than what you’ve seen so far and that’s something we’re really excited about. The first line stuff is just like icing on the cake here, and I know everybody is interested in that and everybody wants us to gauge how we are going handle that. We are just really happy we have refractory NHL and CLL. And we can grow this into a very meaningful drug. We will all be celebrating if there is a first line opportunity here?
Gary Nachman - Leerink Swann
Okay. And Lesley you are on track for the Step 701 data by mid-year. Frank I don’t think you mentioned that in your prepared remarks?
Frank Baldino
I have given up.
Lesley Russell
Yeah we are still on drive, that data towards the end of the first half of this year. So watch this space.
Gary Nachman - Leerink Swann
Okay, I mean is it possible to have it in time for ASCO or it’s probably going to be a press release.
Lesley Russell
No it won’t be -- ASCO is beginning of June isn’t it? The data should be available around about that time. We haven’t submitted it to ASCO assuming now every thing is on board and we have it all we’ll probably target an ASH submission.
Gary Nachman - Leerink Swann
And than lastly for Kevin just a quick one. What was in other income, there was a 6 million benefit sort of have to do with currency?
Kevin Buchi
Yeah it was foreign exchange, yeah 6.4 million.
Gary Nachman - Leerink Swann
Okay thanks.
Operator
Our next question comes from Bret Holley from Oppenheimer & Co.
Bret Holley - Oppenheimer & Company
Hi, yeah. Hi thanks. Lesley, I was curious about the comment about the U.S. physician attitudes towards the Rummel data. I am just wondering what limitations they might see in the data from Rummel’s trial? Is it the investigator assessment of the progressions, or are there particular aspects of the trial they have questions on?
Lesley Russell
I think it is that they haven’t themselves used TREANDA Rituxan in the first line setting. It's not like they are disbelieving the data. In fact, some are very positive about it. I think you have heard these sessions going from the data. So I'm just saying that I would like to -- products that are validated again over here. So I think it is a little bit of a mixed opinion, all very positive about Treanda, and they will like the drug, and they clearly think that it will be beneficial when combined with Rituxan. And I think that they just want to see for themselves a little bit too.
Frank Baldino
And there a lot of reasons why we are doing a first line study ourselves. One is to answer that very question, We get physicians comfortable with the drug used in the first line setting and experimental first line setting.
Again the other physician is the leading key opinion leader in this space. They want to see the drug working on their own patients in their laboratory, their office. And I think we are going to provide them with that opportunity, so that's one of the reason we are doing the first line study ourselves.
Bret Holley - Oppenheimer & Company
Yeah. I had a question about it. Any progress that you have made towards potentially extending the market exclusivity of Treanda, can you say anything about that?
Frank Baldino
Working on it. We continue to work on it. It's obviously a very important focus for our drug development, it's a very important focus for our intellectual property team and we are working on it.
Bret Holley - Oppenheimer & Company
Okay. And my last question is about price increases on PROVIGIL. I know the price increased just recently, I’m just wondering how we should think about. Obviously, I am not going to say you are not going to raise prices again, how should we think about prior to NUVIGIL's launch and after NUVIGIL's launch?
Frank Baldino
I think our objective here is, and especially this environment is to make a new drug, NUVIGIL available to patients at a lower price. I think it helps them financially in this environment, and it helps us in our desire to move the business, transition the business over to NUVIGIL, so our expectation is to have NUVIGIL available at a lower price than PROVIGIL going forward. And that's probably all we can say at this point in time.
Bret Holley - Oppenheimer & Company
Okay, thank you.
Operator
Our next question comes from Gene Mack from Lazard Capital Markets.
Gene Mack - Lazard Capital Markets
Hey, thanks for taking the question, and I joined last, so I apologize if you already dealt with this. But looking into the NUVIGIL launch over the later part of the year, is there any conferences we should be thinking about where you guys will be specifically local?
Frank Baldino
Is there any what?
Kevin Buchi
I'm sorry would you repeat the question?
Gene Mack - Lazard Capital Markets
Are there any conferences where your presence will be NUVIGIL, is there any launch activities around particular conferences this year?
Bob Roche
No, and we are not focusing on any particular, you are talking about physicians' conference?
Gene Mack - Lazard Capital Markets
Yeah.
Bob Roche
Psychiatric Association. No, we're not focused on any one of those, but I can safely say that once NUVIGIL has been made available and we are in active launch mode that every CNS-related congress presence at, which Cephalon is in attendance will be focused on NUVIGIL.
Gene Mack - Lazard Capital Markets
Okay, and then what point does the label for NUVIGIL, given the trials that are going to be reading out this year, at what point do you think you will have critical mass for differentiation with the dosing and the afternoon arm effect. You feel like you have got pretty good differentiation there, but in terms of new indications, what point do you have critical mass?
Lesley Russell
I think the first new indication will be the jet lag indication, which would be sometime in 2010. I think the OSA on comorbid depression data comes out around the middle of this year, now don't forget we are already approved for OSA, so we actually are approved for that indication already.
So this is just subgroup of those patients showing that it works, so the right promotion those with comorbid depression, so those are the two big pieces of data coming out this year. Assuming success with our bipolar depression, we go into Phase III that gets you a new indication, obviously assuming success in the 2012 timeframe, so the data begins to just grow and be built on, and TBI I think comes in 2010 with potential indication in 2011. So you can see how we are building up indications within the label.
Gene Mack - Lazard Capital Markets
Okay, can you just speculate a little bit on where inventories might go, because it seems like at the end of the third quarter, things had creped up a bit towards the end of the third quarter, then a bit around the two, three-week period, and now they have crept up again, and I'm just wondering, how far that might go and is this an anticipation of additional PROVIGIL prices increases? And that's it for me.
Bob Roche
No. I don't think it's anything like that. I think the amount of creep that we are seeing in inventories is the nature of a day or two here, day or two there. We are still comfortably within the two to three-week band that we target. Having said that, I would not be surprised to see inventories come down a little bit in the first quarter, that would not be a surprising thing for me though.
Gene Mack - Lazard Capital Markets
Great, thanks so much.
Bob Roche
You are welcome.
Operator
Our next question comes from Eric Schmidt from Cowen & Company.
Eric Schmidt - Cowen & Company
Thanks, good afternoon. I think just two minor questions for Kevin, otherwise I am all set. On ACTIQ, was there any quarterly impact in Q4 from the return on reserves?
Kevin Buchi
Nothing hugely material, I think there was $4 million somewhere around that, $4 million in reserves accrual in the fourth quarter.
Eric Schmidt - Cowen & Company
Okay. And then in 2009 on a quarter-by-quarter basis in the expense lines, do you expect much seasonality, or roughly flattish going forward? I am just trying to get my quarterly numbers in line?
Kevin Buchi
I would expect it to be relatively flattish throughout the year.
Eric Schmidt - Cowen & Company
Thank you.
Kevin Buchi
You have bit of a bit of a bump in the second quarter associated with NUVIGIL launch activities. So ex that, I think it's relatively flat.
Frank Baldino
Historically, our first quarter has been the weakest of the four quarters, and our fourth quarter is among the strongest of the quarters.
Kevin Buchi
Because sales ramp every year.
Frank Baldino
Yeah, so I mean yeah, they are flat. It's little low in the first quarter, and ramping nicely through all four quarters.
Eric Schmidt - Cowen & Company
But ramping slower than product sales, you’re saying?
Frank Baldino
Our expenses have tended to be higher earlier in the year, if I am not correct Kevin?
Kevin Buchi
Typically what happens is, the expenses tend to be fairly flat throughout the year, sales grow throughout the year, so earnings grow throughout the year. And that's kind of the trend we are on this year as well, Eric.
Certainly, second quarter you might expect a little bit of an increase associated with launch activities. Beyond that, you are not going to see a huge change in operating expenses quarter-to-quarter during the year.
Eric Schmidt - Cowen & Company
Got it. Thanks.
Kevin Buchi
You are welcome.
Operator
And it is now 6 ‘o clock and we have time for one more question, that question will come from Manoj Garg from Soleil Securities.
Manoj Garg - Soleil Securities
Hey guys, glad I was able to get in there. Two quick questions, one for Kevin on the accounting and then one for Bob on just managed care. First for Kevin, can you explain why only part of the minority interest was accounted for going from GAAP to adjusted?
Kevin Buchi
It's because the minority interest is capped by the initial value we quote. In 2008 and 2009, that limitation no longer applies.
Manoj Garg - Soleil Securities
Okay so that's something just for the fourth.
Kevin Buchi
Highly accounting, Manoj, it is incredibly complicated.
Manoj Garg - Soleil Securities
Right.
Kevin Buchi
I am afraid. And it was just required to do it.
Manoj Garg - Soleil Securities
Okay, no, fair point. And then for Bob, thanks for the color on the pre-launch activities, can you also shed some light on how I guess either quantitatively or qualitatively, how the managed care discussions are going?
Bob Roche
How our managed care discussions are going? Yeah I mean we have a number as you know, Manoj of really highly qualified National Accounts guys in the field right now who are supportive of our efforts on the CNS pain side on one hand and the oncology on an other hand.
The CNS pain guys are going to be very, very busy this year because with the launch of NUVIGIL and with AMRIX being a product in a highly competitive space where contracting is an order of the day. This is not behavior that we have ever really spent a lot of time with PROVIGIL or any of our products over the year.
So we are going to be doing some contracting. We are going to be doing some programs and plans with managed. Our intention always is to reduce the tier of co-pay usually from a three to a two if we can. Or define some other metric, which can help benefit our products.
There will be contracting for NUVIGIL as well we anticipate. And these are all efforts which have already begun and for which we are already in close discussions with many of the managed care plans, certainly a significant plan.
Manoj Garg - Soleil Securities
Okay, great. And that’s helpful.
Bob Roche
Good.
Chip Merritt
Okay that concludes today's conference call. Thank you all for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!