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Executives

Pat LePore - Chairman, President, Chief Executive Officer

Veronica Lubatkin - Chief Financial Officer

John MacPhee - President of Strativa

Paul Campanelli - President of Generic Division

Tom Haughey - Chief Corporate Counsel

Larry Kenyon - Executive Vice President of Finance

Allison Wey - Senior Director of Investor Relations

Analysts

Richard Silver - Barclays Capital

David Buck - Buckingham Research Group

Greg Gilbert - Banc of America/Merrill Lynch

Bob - Goldman Sachs

Ken Cacciatore - Cowen & Co.

Jim Malloy - Caris & Co.

Elliott Wilbur - Needham & Co.

Par Pharmaceutical Companies Inc. (PRX) Q4 2008 Earnings Call March 3, 2009 9:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter and full year 2008 results for Par Pharmaceutical company Incorporated earnings conference call. My name is Gerry and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

I would now like to turn the call over to Ms. Allison Wey, Senior Director of Investor Relations; you may proceed ma’am.

Allison Wey

Thank you. Good morning and welcome to Par Pharmaceutical’s earnings call to discuss the company’s fourth quarter and full year 2008 results. A copy of the press release is available on our website at www.parpharm.com. Our fourth quarter P&L statement was added the website this morning. In addition we are conducting a live webcast of this call, which is also available on the website.

We are joined this morning by Pat LePore, Chairman, President, CEO; Veronica Lubatkin, Chief Financial Officer; John MacPhee, President of Strativa; Paul Campanelli, President of the Generic Division; Tom Haughey, Chief Corporate Counsel and Larry Kenyon, Executive Vice President of Finance.

Pat will provide opening remarks; Veronica will provide detail of the financial results and Larry will provide some directional guidance for 2008 on a few key metrics. After Pat concludes his remarks, we will then open the call for questions.

Please note that today’s conference call and webcast may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent any statements made on this call contain information that’s not historical; these statements are essentially forward-looking and are subject to various risks and uncertainties detailed in the company’s filings with the SEC.

I will now turn the call over to Pat LePore.

Pat LePore

Thanks Allison. Good morning everyone and thank you for joining us today. I’d like to start out by talking a little about 2008, which was really a transformative year for Par. It was a year in which we made substantial changes to our operating model that we believe ultimately will position us better to compete in both a generic and specialty pharmaceutical market places.

From a financial perspective, it was a year of ups and downs as we faced increasing pricing pressure in our generic business, combined with the lack of new product launches in the first half of the year. Ultimately however, we fell within the range of our guidance and more important, gained positive momentum over the last two quarters that should bode well for 2009.

Adjusting for all the one-time items, Par finished the year on the plus side at $0.21 for the quarter and $0.05 for the full year; and so as you can see, after a very poor second quarter, the company earned $0.47 over the last half of the year and so we start 2009 with a right sized business, strong share in our 2008 launch generic products, steady sales of Megace ES, and an organizational structure aligned to our strategic initiatives.

I’d now like to point out some of the 2008 highlights by division, and then come back later to talk about 2009. On the generic side, the second half launches of dronabinol and sumatriptan, and the reintroduction of meclizine were significant contributors to our results, reinforcing the importance of gaining market exclusivity in our model.

We also filed two ANDA’s, with potential first-to-file status in the fourth quarter, and we made significant progress in divesting non-core ANDAs. Of course, much of management’s time during the second half of the year, was spent on our restructuring efforts, including a transition from an internal to an external generic development model and divestiture of non-profitable or marginally profitable product.

As for Strativa, total revenue for the division grew from $84.7 million in ‘07, to $87 million in ‘08, adding over $10 million in operating income in 2008, excluding milestones. Megace ES had modest net sales growth from $75.3 million in ‘07 to $76.4 million in ‘08. Although Megace ES is in the mature stage of its lifecycle, it has and continues to be a great foundation for our specialty business that represents a good proxy for future pipeline, and acquired products.

Strativa is also making significant progress on its leading pipeline products. Both Loramyc and the oropharyngeal, the enhanced charmed product that’s licensed from MonoSol Rx last June, completed studies with positive results, now moving towards pre-launch activities in the middle or later part of this year, in anticipation of mid-2010 launches. We remain excited about the market opportunities for both of these products.

Finally, we continue to evaluate in deal with these numerous business development opportunities with several in-process. Division remains profitable and the sales and marketing organization is more than ready for the next product to come its way.

Now I’d like to provide an update on the restructuring announced last October. Since that time, we have discontinued about 50% of the generic portfolio, representing approximately $40 million in net sales. However, we see little to no impact on total gross margin dollars and in fact, our gross margin percentage should improve over time. Since we are still selling through our inventory on some of these products, we won’t see the full benefit to the gross margin percentage until the second half of ‘09.

We’ve already seen an impact on R&D expense by winding down our internal development function. We still have several ongoing projects in various stages of development that should be completed this year and hopefully result in additional ANDA filings. The cost savings will be significant; approximately $40 million in ‘09, $45 million in 2010.

I will now turn the call over to Veronica to cover the details of the financial results.

Veronica Lubatkin

Thank you, Pat. Good morning. In taking you through our results for the full year of December 2008, I will start with a few fourth quarter highlights. In summary, total revenues for the three months ended December 2008, were $161 million, up $6 million or 4% from total revenues of $155 million for the three months ended December 2007.

Reported net loss for the fourth quarter was $32 million or a loss of $0.96 per share. This is compared with net income of $4.3 million or $0.12 per diluted share for the same period in 2007.

There are a number of one time items included in the fourth quarter results, and they include restructuring charges of $15.4 million and other severance and related costs of $3.8 million; $49 million in connection with the Pentech litigation, including $5 million of legal costs classified in SG&A; $5 million net gain on sale of ANDAs and other product rights; and $5 million investment write-downs, and an $8 million gain on early debt extinguishment.

Adjusting for these one-time items, reported net income for the fourth quarter ‘08, was $5.6 million or $0.17 per diluted share. By comparison, net income in the fourth quarter of 2007 included a $3 million pretax gain from Par’s remaining investment in Optima pharmaceutical, and $4.6 million of additional share-based compensation expense, related to Par’s employee stock option tender offer. Adjusting for these one time items, net income for the fourth quarter of 2007 would have been $5.3 million or $0.16 per dilute share.

Adjusting for one time items, income from continuing ops for the fourth quarter of ‘08 was $7.1 million or EPS of $0.21, versus 2007 fourth quarter of $6.5 million or EPS of $0.19. For the full year 2008, total revenues were $578 million, decreasing $192 million or 25% from total revenues of $770 million for the full year ended December ‘07. The company reported a net loss of $47.8 million or $1.43 per share for the full year, compared with reported net income in 2007 of $49.9 million or $1.43 per diluted share.

Adjusting for one time items, income from continuing operations for 2008 was $1.8 million or $0.05 earnings per diluted share, versus 2007 of $55.1 million or $1.59 earnings per diluted share.

Revenues for the generic products for the full year ended December 2008 were $491 million, decreasing $194 million or 28% from generic revenues of $685 million in 2007. Lower generic revenues in 2008, were primarily driven by pricing pressures, including for fluticasone, which decreased $91 million, propranolol down $39 million, amoxicillin products down $13 million, tramadol down $14 million, ranitidine syrup decline $12 million, cabergoline down $13 million and a decline in many of the company’s other generic product, as well as lower royalties which decline by $15 million, primarily from lower sales of ondansetron.

Increased competition adversely affected both volume and pricing on these existing products. The declines were partially offset by higher sales metoprolol, which increased $31 million. The July launch and relaunch of Meclizine, contributing increased sales of $23 million and dronabinol, contributing sales of $14 million and the fourth quarter 2008 launch of sumatriptan, with sales of $18 million.

Revenues for Strativa of $87 million for the full year 2008, increased $2 million over 2007, driven by higher Megace ES sales and increased script related to the co-promotion of the Androgel.

The company’s gross margin of $177 million for the full year 2008 declined $92 million from $269 million in 2007 and the gross margin percentage decreased from 35% to 31% in 2008, driven primarily by pricing pressures experienced throughout 2007 and 2008; increased sales of lower margin products such as metoprolol; lower sales of higher margin propranolol, the $5 million write-down in the third quarter 2008 of the product intangible and decreased royalty income, partly offset by higher sales of higher margin meclizine, dronabinol and sumatriptan.

Revenue highlights for the fourth quarter 2008 include, the launch of sumatriptan, contributing sales of $18 million, sales of meclizine of $11 million representing exclusive market position and reflecting some script decline since the launch of roughly 10%. Par re-launched meclizine in July 2008.

Sales of dronabinol of $6 million, representing a roughly 30% market share following Par’s launch in July of 2008. Propranolol, sales of $49 million, an increase of $8 million over the third quarter of 2008, competitive pressures against cabergoline in the fourth quarter, lower sales for products being discontinued, including certain one time charges of roughly $3 million to $4 million; and timing of trade buying for Megace ES. Megace ES which benefited the fourth quarter between $2 million to $3 million.

As a percent of net revenues the gross margin of 31% in the fourth quarter is lower than the third quarter of 2008, 35% driven by lower sales of higher margin meclizine and dronabinol related to third quarter launches, which had included some sell-in, as well as a meclizine decline in the fourth quarter scripts.

Competition against cabergolin in the fourth quarter; higher sales of lower margin metoprolol; certain one time activity that occurred in the fourth quarter, including the sell-off of discontinued product inventories at reduced margin and lower sales of discontinued products, tempered by the launch of higher margin sumatriptan in November of 2008; and the non recurrence of the third quarter ‘08 products intangible impairment of $5 million related to the line trimming of the company’s generic product line.

Moving on to operating expenses, the company’s R&D cost of $60 million for the full year December 2008 declined $18 million or 23% from $78 million for the full year 2007, driven mainly by lower cost for Strativa, including the non recurrence of 2007 up-front payments of $19 million to acquire the rights to Loramyc, Pafuramidine and Zensana, tampered by payments paid to Alfacell m related to the end licensing of Onconase in 2008 of $5 million and to MonoSol Rx for the right position in the formulation of ondansetron of $2.5 million, and costs related to Zensana in 2008.

Expenditures related to the company’s generic portfolio also declined $8 million, including the non-recurrence of the 2007 upfront costs associated with the third party development agreement of $2.5 million.

Fourth quarter R&D expenses totaled $12.8 million and included roughly $1 million of restructuring related depreciation expense and does not yet reflect the impact of savings to be generated by the generic business downsizing of internal R&D.

Total selling, general and administrative expenses of $138 million for the year ended 2008 was essential flat with 2007, driven mainly by lower compensation cost, including the non recurrence of the fourth quarter 2007 stock option tender offer and the result in lower stock option cost of roughly $7 million. Lower expenses related to sales and marketing of Megace ES, tempered by higher legal fees of $17 million and higher severance costs.

Fourth quarter SG&A expenses totaled $39 million, and included legal expenses related to the Pentech litigation and severance costs that we consider to be nonrecurring. Settlement and loss contingencies of $49.8 million for 2008, is comprised mainly of $44.7 million related to the Pentech unfavorable court decision and $4.8 million in connection with Par’s department of veteran affairs contract.

Restructuring costs; in 2008, Par announced its plan to resize its generic product division as part of an ongoing strategic assessment of the businesses. In connection with its plan of restructuring, Par incurred expenses of $15.4 million in the fourth quarter of ‘08, made up mainly of severance and charges related to asset impairments. We anticipate that approximately $6 million of this cost will result in cash expenditures in 2009.

Gain extinguishment on senior subordinated convertible notes. In October 2008, Par repurchased senior subordinated convertible notes that were to mature on September 30, 2010 in the aggregate principal amount of $58 million, for approximately $50 million, including accrued interest. Par recorded a gain of approximately $8 million pretax in the fourth quarter of 2008, related to this debt extinguishment.

During the year ended December 31, 2008, Par recognized a gain on the sale of product rights of $9 million, related to the sale of multiple ANDAs and other product rights, included in the $5 million in the fourth quarter ‘08.

Par recorded losses from three separate investments, totaling $9.5 million during the year ended December 31, 2008, which represented other than temporary impairment of Par’s investment, triggered by the severity of the losses and the duration of the period that the investments had been in a loss position, as well as general economic and capital mark conditions. The company’s effective tax rate for the full year ended December 2008 and 2007, were 38% and 35% respectively.

The company generated strong cash flows in 2008. Cash provided by operations was $66 million in 2008, which reflects continuing operations as adjusted primarily for depreciation and amortization of $32 million and share based compensation of $18 million and was driven by the liquidation of working capital, mainly lower inventory levels, which declined $42 million, and increases in amounts that will be paid under distribution agreements, related to higher sales of partner product, mainly metoprolol, tempered by higher net accounts receivable balances of $19 million, driven by timing of sales in the quarter, mainly related to the November 2008 launch of sumatriptin.

Cash flows used in investing activities of $46 million included the $20 million invested as part of Par’s agreement with spectrum pharmaceuticals, pursuant to which Par increased its share of the profits of sumatriptin to 95% in addition to capital expenditures of $17 million. Cash used in financing activities was primarily driven by the $50 million repurchase of the senior subordinated convertible notes during fourth quarter 2008.

Fourth quarter DSO for 2008 is in-line with expected churns and 2007 had about 63 days and as of the fourth quarter 2008, inventory churns are approximately five times per year, versus about 3.5 times per year at the end of the fourth quarter of 2007.

I will now turn the call back to Pat.

Pat LePore

Thanks Veronica. Before I provide some commentary on ‘09, I’d like to first of all thank Veronica for all her hard work. As many of you know, Veronica is going to be moving onto another career from Par and I want to thank her for all her hard work over the last three years.

I want to introduce Larry Kenyon who will become our new Chief Financial Officer through this transition. I’m going to ask Larry now, to give you some ranges of key financial metrics that will help you monitor our progress in this year. Larry.

Larry Kenyon

Thank you Pat and good morning everyone. While we do not intend to provide detailed EPS guidance for 2009, we do understand that it is important to provide some benchmarks for performance, given the actions taken in 2008 to right size the generics business. It has been previously noted, the effects of last year’s restructuring will not be fully reflected in 2009, but will be significant.

Pat indicated earlier that although total revenues will be down due to the discontinuation of unprofitable products, gross margin percentage is expected to improve. Our estimates indicate that the gross margin percentage will reach its highest levels in five years. These estimates assume the total competition in 2Q, continued cabergolin competition, and base erosion of approximately 2% to 3% per quarter.

In the areas affected by the restructuring, where we have more day-to-day control we expect to see SG&A expenses essentially flat, which includes pre-launch spending of approximately $10 million in 2009 and a reduction of approximately 10% to 13% in general and administrative expenses. Additionally, R&D expenses are expected to be lower by 40% to 45% in 2009, net of potential milestone payments.

As always in this industry, but especially in the current environment, cash flow is extremely important to Par. We are comfortable with our cash and working capital position at the end of 2008, and we expect that the business will continue to generate the necessary cash to support our operations and our planned business development activities in 2009, without interruption.

With that, I will turn the call back over to Pat.

Pat LePore

Thanks, Larry. The focus in 2009 will continue to be on efficiency and profitability. With each passing quarter we’ll see more of the benefits from the restructuring take hold. We now have a rescaled generics business, better able to withstand the uncertainties of product launches and the business has significantly reduced the rate of erosion on its base business, has gained stable market share in its launch of products, continues to maintain a valuable pipeline of first-to-file/first-to-market products.

For Strativa you can expect to see continued stability of Megace ES, NDA filings of Loramyc and thin film, commercial preparation for both of these products and business development acquisitions and licenses to accelerate the growth of this business.

As I said at the beginning of our call we head into 2009 with a right sized business, strong share in our 2008 launched generic products, steady shares of Megace ES and an organizational structure aligned to our strategic initiatives.

I’ll now open the call to your questions.

Questions-and-Answers Session

Operator

(Operator Instructions) Your first call comes from the line of Richard Silver with Barclays Capital. You may proceed.

Richard Silver - Barclays Capital

Hi, can you hear me?

Pat LePore

Yes.

Richard Silver - Barclays Capital

Can you just go through, maybe the tax rate on the adjusted earnings of $0.21 and also the adjustments in SG&A and R&D and cost of goods for the fourth quarter?

Veronica Lubatkin

Okay, so just addressing the effective tax rate of 38%, it’s really the federal rate plus the state rate. It’s a very straightforward 38%.

Richard Silver - Barclays Capital

Okay and the other adjustments to get to the $0.21?

Veronica Lubatkin

You’re saying the adjustments to get to the $0.21 per share of continuing operations? Okay, so included in the $0.21 per share for adjustments are the $15.4 million of restructuring costs.

Richard Silver - Barclays Capital

And that’s in SG&A?

Veronica Lubatkin

So if you look on the face of the P&L in the 10-K, it is actually a line in SG&A called restructuring costs, so the $15.4 million is right on the face of the P&L. You see that? Okay.

Richard Silver - Barclays Capital

Yes. Now we got that. Okay.

Veronica Lubatkin

Then we have in the settlement and contingencies you have the Pentech litigation, as well as the government pricing contingencies of $5 million that was recorded in the third quarter.

Richard Silver - Barclays Capital

It’s just the exclusions from SG&A and cost of goods and R&D that we’re looking for and just the tax rate as applied. We have what you’re giving us, we have that. So it’s the exclusions and it’s also the tax rate to get to the $0.21?

Veronica Lubatkin

Okay, so the tax rate is 38%, included in the cost of goods sold for the full year. Are you talking fourth quarter or full year?

Richard Silver - Barclays Capital

Fourth quarter.

Veronica Lubatkin

Fourth quarter. In the cost of goods sold, there’s $1 million of inventory write-off. In the R&D, there is roughly $1 million of accelerated depreciation, related to the resizing of the generic business. In the SG&A line there is $2.7 million of costs, plus $4 million of Pentech legal expenses.

On the settlements line, there’s $49 million which represents Pentech of about $45 million and $5 million of the VA, which was recorded in the third quarter and then of course, the gain on sale of product rights in the fourth quarter was $5 million from the sale of ANDAs. Did that answer your question?

Richard Silver - Barclays Capital

Yes, I’m sorry. Did you say that this was posted this morning because we couldn’t find that?

Veronica Lubatkin

Yes, the fourth quarter P&L was posted this morning on our website.

Richard Silver - Barclays Capital

Okay, I’m not finding that.

Veronica Lubatkin

That’s going to be the fourth quarter reported results.

Richard Silver - Barclays Capital

Okay and then just on the SG&A guidance for the year, you had mentioned a $10 million to $13 million decrease in G&A and then there was an increase from did you say launches?

Veronica Lubatkin

Yes, I believe what Larry meant was that there’d be pre-launch spending related to the Strativa launches late in the year, and then there’ll be a reduction in the remaining SG&A.

Larry Kenyon

10% to 13%.

Richard Silver - Barclays Capital

Okay, and you didn’t provide any revenue guidance, is that correct?

Veronica Lubatkin

That’s correct.

Richard Silver - Barclays Capital

Alright, I’ll step back. Thank you.

Operator

And your next question comes from the line of David Buck with Buckingham Research Group. You may proceed.

David Buck - Buckingham Research Group

Yes, thanks. Just to follow-up on the 2009 outlook; I know you’re not giving revenue guidance, but can you give some color on the strategy for paragraph four launches, whether in fact, you’re still not planning on any at-risk launches, and can you give some sense of whether you expect any new first-to-file type launches or new paragraph 4s?

Then also on revenue, can you talk a little bit about the sustainability of sumatriptan and what you’re assuming for generic Toprol, in terms of competition in the second quarter. Are you assuming KV comes back into the market or just a new entrant? Thanks.

Paul Campanelli

Okay Dave, this is Paul, I’ll take them one at a time. Regarding launches at risk, I mean obviously we’re not going to speculate at this juncture. I think 2009, regarding potential launches, is going to be a bit of a conservative year in terms of products that we anticipate coming to the market.

We anticipate a handful of potentials, anywhere from three to six products, but I will tell you that these are going to be small alprazolam ODT like launches, so I think it’s going to be a bit of a conservative year regarding the new product launches for 2009. Your second question, I’m sorry, was that…

David Buck - Buckingham Research Group

The sustainability of sumatriptan and then assumptions for generic Toprol is it KV coming back or is it another entrant?

Paul Campanelli

With respect to sumatriptan, I think as most people are aware we launched the pre-fill syringes and the starter kit in November. We had exclusivity until February 6 of this year, which represents the compound patent expiration of sumatriptan. At that point in time we anticipated competition coming to the market.

Having said that, in mid January there was a citizens petition filed with the agency regarding auto injectors in sumatriptan. The citizens petition I’m referring to really has nothing to do with Par’s product. It’s an unrelated citizens petition; having said that, it basically slows down potential competition.

So I think the way we have to look at it, it is a citizens petition and it’s a month-by-month evaluation of potential upside for Par and I think that’s right now the best that we can do. So we anticipate its competition in February. It’s about a month after the compound, and we’re still standing around, so it’s kind of a wait-and-see.

And then I’m sorry, Toprol with KV?

David Buck - Buckingham Research Group

Yes, is it KV or is there another entrant, I guess is the assumption for competition?

Paul Campanelli

Well, I think right now our immediate assumption is that we anticipate Watson entering the market shortly.

David Buck - Buckingham Research Group

Great, thank you.

Operator

And your next question comes from the line of Greg Gilbert with Banc of America/Merrill Lynch. You may proceed.

Greg Gilbert - Banc of America/Merrill Lynch

Thanks; I have a couple of quick ones. I’ll ask them one at a time. First for you Paul, how much of Toprol sales in the fourth quarter would you attribute to stocking as opposed to real pull through?

Paul Campanelli

Greg, I don’t think I would say there was much stocking at all. I mean, right now the way we were looking at Toprol for the fourth quarter, we had built upwards to about a 33% share, so I mean we’re just basically building on a couple of new accounts that we’re able to capture, so I don’t see any stocking.

Greg Gilbert - Banc of America/Merrill Lynch

Okay and then how much higher is the net price now versus what it was in 4Q for that product?

Paul Campanelli

Well Greg, I don’t like going into my specific pricing strategies on these type of calls. All we can say is that it’s priced accordingly as an exclusive.

Greg Gilbert - Banc of America/Merrill Lynch

Okay. I guess what I’m getting at, I know you’re not going to speak to price specifically, but scripts look like they’re going to be about double in Q1 versus what they were in fourth quarter and I assume the price is higher. Just wanted to make sure I wasn’t missing something.

Paul Campanelli

I wouldn’t go so far as to say that. Are you talking about Par scripts?

Greg Gilbert - Banc of America/Merrill Lynch

Yes.

Paul Campanelli

I don’t think Par scripts are double. I think that’s a little on the aggressive side at this time.

Greg Gilbert - Banc of America/Merrill Lynch

Okay. What are you factoring in for new meclizine entrants?

Paul Campanelli

I would tell you at this point in time, we don’t see any competition for Q1 and I think, again it’s a quarter-by-quarter situation.

Greg Gilbert - Banc of America/Merrill Lynch

So you would be factoring some in ‘09, it’s just a question of when?

Paul Campanelli

That’s correct.

Greg Gilbert - Banc of America/Merrill Lynch

Okay and then on Lotrel, did you settle there in when could you launch?

Paul Campanelli

Yes, we did in fact settle, so in terms of one of our paragraph fours that we had previously spoke about, we did settle with Novartis and that will become a very early 2011 event.

Greg Gilbert - Banc of America/Merrill Lynch

Okay and lastly for Pat, what are your most pressing BD priorities right now for both brand and generic? Thanks.

Pat LePore

On the generic side, Paul’s challenge is to continue to fuel the pipeline through external development deals and to finish up the ones we have going on internally. Once you bolt those onto the current pipeline we feel we have a pretty good runway on the generic side of the business.

For John, on Strativa clearly we’d love to find a marketed product to put into the bag tomorrow, so that’s our first priority. Once completed we can move more towards later stage development opportunities and then maybe perhaps move on to different therapeutic areas outside of supported care.

Greg Gilbert - Banc of America/Merrill Lynch

Okay, thanks.

Operator

And your next question comes from the line of Randall Stanicky of Goldman Sachs.

Bob - Goldman Sachs

Hi, this is actually Bob on for Randall this morning. I just had one follow up on Toprol and then on Megace ES. On Toprol can you just remind us of the arrangement with AstraZeneca as it currently stands? Specifically, do they have an obligation to supply you product or is there any discretion to how much product they can actually supply you with right now?

Then on Megace ES, obviously it’s been a challenging reimbursement environment to say the say least. In ‘08 it looked like 4Q actually saw a little bit of a pick up; is this a fair run rate as we thinking about Megace in 2009; and then I know you were able to take price once in 2009 with Megace ES I believe. Is there any opportunity to take price again in ‘09? Thanks.

Paul Campanelli

Bob, this is Paul. With respect to the arrangement with AstraZeneca, as you can imagine I don’t want to get into the specific details surrounding the contract. All I can tell you is that I do have a comfort and a commitment on the part of AstraZeneca to supply Par our fair share of product.

Bob - Goldman Sachs

And then on Megace?

John MacPhee

Yes, this is John. Your first question about Megace ES, as it relates to the environment it was challenging in 2008, we’ve talked about that on previous calls. You should know a little better going into 2009 with some formulary changes, although that’s probably going to be tempered by the general economic condition, and we consider it to be a pretty static environment in ‘09 compared to ‘08.

I think the prescriptions in Q3 and Q4 of ‘08 do represent a fair run rate for you to think about in ‘09. I’ll just take you back to a comment that Veronica made in her comments though. When it comes to sales, coming into the end of the year and our holiday shutdown, wholesalers did increase their inventories by approximately two weeks, so you have some of that in the net sales number reported for Megace ES in Q4.

The prescription demand in Q4 would translate to approximately maybe $17.5 million to $18 million in sales for Q4. I think that that’s a fair run rate to work with. We did as you know; take one price increase in 2008 of 12%. We are planning one price increase in 2009. I think that that will be successfully implemented.

Bob - Goldman Sachs

Very helpful. Thanks.

Operator

And your next question comes from the line of Ken Cacciatore with Cowen and company. You may proceed.

Ken Cacciatore - Cowen & Co.

Hey guys, I just wanted to confirm and maybe I misheard it; did you say revenue down in 2009 is the first question? Then on gross margin, once we worked through the divestitures of these other older products that it could be highest in five years and I’m just looking back; so are you thinking around the 40% level?

Then the last question on Lotrel, your settlement is for 2011. Are you anticipating that the marketplace will stay relatively as is for Lotrel through 2011, are you anticipating others will be entering the market? I’m trying to understand why it’s pushed out so late when you have already a generic, kind of a certain extent type of minimizing your risk? Thank you.

Larry Kenyon

This is Larry. I’ll take the first couple of questions you asked there Ken. I think it’s pretty common knowledge that the steps taken by the company in the second half 2008 are reducing the non-profitable product lines, and the generic business will result in lower revenues in 2009 overall, but the dollar level is expected to stay pretty flat and so as a result you’re going to wind up with a higher gross margin percent.

When we referred to the highest levels in five years, 2007 what you saw was the peak year with I think 37.5% if I recall correctly, but in the last five years that is the peak and if everything comes in the way that we think, then we’re expecting to have a good year on the gross margin side. I’ll have to have Paul talk about Lotrel.

Paul Campanelli

Yes Ken, regarding Lotrel, I think every patent strategy and positions are different, so I’m not sure that I’d go so far that Teva actually minimized our risk. Again, all cases are different. So when I look at our position, essentially what we did was focus on certitude. So we’re actually very excited about entering the market in very early 2011.

Ken Cacciatore - Cowen & Co.

And what do you anticipate that landscaping to look like?

Larry Kenyon

In terms of number of competitors or dollars?

Ken Cacciatore - Cowen & Co.

Yes correct, competitors.

Larry Kenyon

I would imagine there’d be two competitors in that timeframe.

Ken Cacciatore - Cowen & Co.

Okay, thank you very much.

Operator

And you next question comes from the line of Jim Malloy with Caris & company. You may proceed.

Jim Malloy - Caris & Co.

Hi, thanks for taking my questions. I have a follow-up on Toprol. It’s been kind of a perfect storm for your guys on competitors leaving the market and certainly a boon in that product. Can you talk a little bit about your expectations of why is the company Watson coming back in the second quarter and what your reason is for why you think it might be second quarter, and is there a way to quantify every week that you don’t have another competitor on the market, what kind of top line impact can that have?

Paul Campanelli

Well Jim, this is Paul again. With respect to competition entering the market, the reality is that we hear and see the same things that you do. So, I think what we’re doing is simply following our competitors earnings calls with respect to publicly traded companies.

So I think again, if you were to listen to our competitor, their belief could be in the late March, early April timeframe. So that’s pretty much where our focus is, because it’s unpredictable, we don’t really know. So I think that’s the best that we can respond to at this point in time.

Pat LePore

This is Pat. I think that you all recognize that this is a low-percentage product for us, as the AG.

Jim Malloy - Caris & Co.

It’s certainly a higher percentage now that you’re the only generic out there than prior and prices have gone up and share has gone up. Is that a fair statement? Is there a way to quantify what your thoughts are?

Pat LePore

We don’t talk to the arrangement that we have with our partner, but obviously if the price goes up, we’re going to make more money on it, but it’s still starting at a much lower level than Watson would be for instance or KV.

Jim Malloy - Caris & Co.

Additional settlements or processes in the court similar to the Pentech that we should be looking for to perhaps hitting ‘09?

Pat LePore

Could you repeat that?

Jim Malloy - Caris & Co.

Sure. I guess any additional sort of Pentech type of settlements that might hit in ‘09?

Larry Kenyon

Obviously you can look in our litigation disclosur; there are a lot of cases. We don’t have a lot of commercial ones like Pentech, but we don’t anticipate anything similar to Pentech, but we have all the disclosures about government accruals and the like. So I think we’ve already talked about the paragraph four settlements, which are obviously more positive than the Pentech. Jim, I don’t know if you have any follow up to that?

Jim Malloy - Caris & Co.

No, thank you very much for taking the questions.

Operator

And your next question is a follow-up question from Richard Silver with Barclays Capital. You may proceed.

Richard Silver - Barclays Capital

While you’re not providing revenue guidance, can you give us some sense of whether the R&D decline would go a long way toward offsetting the sales?

Larry Kenyon

Richard, maybe you could repeat that question?

Richard Silver - Barclays Capital

The R&D decline that we’re looking for year-over-year, as we look at revenues, if revenues were to be down year-over-year, would this more than offset?

Pat LePore

I don’t know the corollary there. We’re going to reduce our R&D expense significantly in ‘09, probably by half, $20 million or so. The revenue is just unpredictable. We just don’t know how long we’re going to have exclusivity on meclizine or sumatriptan or what’s going to happen with toprol. It’s so hard and that’s why we’re trying to give guidance just on things we can control day to day.

Richard Silver - Barclays Capital

You make certain assumptions though on meclizine, don’t you?

Pat LePore

We could have a competitor tomorrow. It’s so unclear, that I think we want to get away from trying to forecast to the investment community. We don’t believe it serves you well or our stockholders as well. We’d rather give you clarity on what we can control.

Richard Silver - Barclays Capital

Okay, but did you say you assume there wouldn’t be competition at least through the first quarter.

Pat LePore

That’s right.

Richard Silver - Barclays Capital

Alright, thank you.

Pat LePore

You’re welcome.

Operator

And your next question comes from the line of Elliott Wilbur with Needham & company. You may proceed.

Elliott Wilbur - Needham & Co.

Thank you, good morning. Can you hear me all right?

Veronica Lubatkin

Yes, we can.

Elliott Wilbur - Needham & Co.

Okay, thanks. Just with respect to the discontinued products, can you just remained us again what the revenue run rate was for these product, trailing 12 month basis and also what the associated margin was for those products?

Then a question for Paul, with respect to the potential three to six new product launches in ‘09, I’m assuming obviously that catapress is not one of those and I would want to confirm that, and then two, is there anything that’s new that you could share with us on that product?

Veronica Lubatkin

The revenue from the products that are due to be discontinued, and again not all of them have been discontinued at this point, was somewhere in the range of $25 million to $40 million. Of course I’m estimating that today not knowing the competitive landscape for the products moving into next year, so I’m taking a guess here at a run rate on those products, so $25 million to $40 million.

We were also estimating that the margin from those products was minimal and for some of those products over time, due to competition, would have lost money and of course increase the risk for other write-offs, like inventory write-offs, when competition comes.

So again, over time we expect the impact from eliminating those products to be minimal, but in the fourth quarter, we started to see some of those products come down. So although the margins were minimal, over the landscape of the next 12 to 18 months, as we’re discontinuing them, we are going to take some hit to the margin line.

Elliott Wilbur - Needham & Co.

Okay. Just to follow-up to that Veronica; the revenue range that you provided, did that represent the bulk of the product to be divested?

Veronica Lubatkin

No, it did not represent the bulk of the products.

Elliott Wilbur - Needham & Co.

Well, I’m thinking about in terms of, while you’re not providing specific revenue and just for us thinking about the base, can you give us some sense of what the total amount is that we should be thinking about, removing from the base related to these discontinuations or divestitures?

Veronica Lubatkin

Yes, it includes products like fluticasone and amoxicillin, which were at the end of their life and then probably anywhere from $5 million to $10 million in total sales, again with minimal margins associated.

Elliott Wilbur - Needham & Co.

Okay, then the catapress question?

Larry Kenyon

The product that I’m referring to does not include catapress, and unfortunately I don’t have any update regarding the regulatory status. It’s unpredictable and it’s stuck behind the citizens petition right now.

Elliott Wilbur - Needham & Co.

Okay, and then I have one last question for Pat as well. Can you just give us a sense of what the next steps or what you’re next move may be with respect to the recent decision in the Pentech litigation?

I know you’ve talked historically in the past about transactions and deals and the like, and being able to support something close to $150 million in terms of a no-end value, but that settlement amount is a relatively large number versus the cash you have currently on hand.

I’m wondering how we should be thinking about your strategic flexibility, at least relative to that prior number that you gave in terms of the potential deal size, given this potential settlement?

Pat LePore

I think it reduces the range somewhat, probably now towards more the $50 million to $80 million range. We feel comfortable that we could do a deal of that size, all cash and still have enough cash and cash flow generation to support the needs of the company. If an opportunity came along that was bigger that we felt really good about, we could always use equity or find other ways to do a transaction.

Elliott Wilbur - Needham & Co.

Okay. I would assume that you will in fact appeal the decision.

Tom Haughey

Yes, it’s Tom. Obviously we’re weighing our options. We have a hearing with the court to go over the options. We’re going to issue a notice of appeal on Thursday.

Elliott Wilbur - Needham & Co.

Alright, thank you.

Operator

And you have a follow-up question from the line of Greg Gilbert with Band of America/Merrill Lynch. Please proceed.

Greg Gilbert - Banc of America/Merrill Lynch

Yes thanks. Who did you sell your generic product to if you sold any yet?

Paul Campanelli

You’re referring to the non-core assets?

Greg Gilbert - Banc of America/Merrill Lynch

Yes.

Paul Campanelli

Yes, I would tell you Greg, there’s a host of small start-up companies, very small type companies that have some cash resources, so there’s probably at least a dozen companies, very, very small type generic players.

Greg Gilbert - Banc of America/Merrill Lynch

And then on the 2% to 3% generic price erosion that you’re using, are those year-over-year shrinkage rates or is that sort of sequential quarter-to-quarter?

Paul Campanelli

That’s a quarter-to-quarter, Greg.

Greg Gilbert - Banc of America/Merrill Lynch

Paul, just from a bigger picture standpoint, is that what you would have used say a year ago or are you noticing any differences in the pricing environment?

Paul Campanelli

I think a year the numbers, they would have been higher. So we’re seeing a bit of a settling, but I think we’ve come a long way to the bottom here Greg, so I think that’s the 2% to 3%, which is making us comfortable.

Greg Gilbert - Banc of America/Merrill Lynch

Good to hear that and lastly on the Alfacell product, what are the next steps and any decisions that Par has made there?

John MacPhee

Yes Greg, so this is John. Par has no further financial obligation to Alfacell, because Alfacell’s looking at their strategic options. So what we’re doing right now is just providing counsel to Alfacell and Alfacell is going through a process to attempt to determine what their next best move is, and that is yet to be determined.

Greg Gilbert - Banc of America/Merrill Lynch

Are you saying that Par is not interested in pursuing that?

John MacPhee

What I’m saying is I want to make sure everyone understands that we don’t have an obligation financially to pursue it. We will listen to our partner and their plans and then make a determination at that time.

Greg Gilbert - Banc of America/Merrill Lynch

Do you have enough info to speculate or estimate how much that trial that the FDA wants to see would cost and perhaps how long it would take, without stating your intentions?

John MacPhee

No, I’d rather see the question go to Alfacell I think, but it would be a Phase III clinical trial, so it would be a significant trial, I’ll say that.

Greg Gilbert - Banc of America/Merrill Lynch

Okay, thanks.

Operator

This concludes the question-and-answer portion of the conference. I would now like to turn the conference over to Pat LePore for closing remarks. You may proceed sir.

Pat LePore

Thank you and thank you everyone for participating in today’s call. I just want to summarize by going back to the beginning here when I started the call, talking about 2008 as a difficult and challenging year, but a transformative year for the company; a year which made me and our Board very proud of the team as we responded to the difficulties in ’08.

I think we responded earlier in the year than most and really had to protect the future of the company and position both of our businesses for the long term. I do think we’re now in a good spot to compete, and compete very well in both of those businesses.

So again, I want to say that it was a tough year, but we made the hard decisions, we responded, we got a lot of those things behind us, and we’re moving into 2009 feeling very good about our prospects. So until next time, again, thank you for participating and we’ll talk to you after next quarter. Thank you.

Operator

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

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Source: Par Pharmaceutical Companies Inc Q4 2008 Earnings Call Transcript
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