Penwest Pharmaceuticals Q4 2008 Earnings Call Transcript

Penwest Pharmaceuticals Co. (PPCO)

Q4 2008 Earnings Call

March 04, 2009 11:00 AM ET

Executives

Jennifer L. Good - President and Chief Executive Officer

Frank P. Muscolo - Chief Accounting Officer and Controller

Analysts

Robert Hazlett - BMO Capital Markets

Ian Sanderson - Cowen and Company

Scott Henry - Roth Capital

Tim Chiang - FTN Midwest Securities

Arthur Friedman - Sterling Equities

Wayne Rothbaum - Quogue Capital

Presentation

Operator

Good morning. My name is Artevier (ph) and I will be your conference operator today. The matter discussed herein contain forward-looking statements that involve risk and uncertainty, which may cause the actual results in future periods to be materially different from any future performance suggested herein.

For this purpose any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing the words believe, anticipates, plans, expects, intends, potentials and similar expressions are intended to identify forward-looking statement. Important factors that could cause results to differ materially include risk related to the commercial success of Opana ER, including our reliance on Indo Pharmaceuticals, Inc. for the commercial success Opana ER and risk of generic competition, their need for capital.

Regulatory risk relating to drugs and development include the timing and outcome of regulatory submissions and regulatory actions, uncertainty of success of collaborations, the timing of clinical trials whether the results of clinical trials will warrant future -- whether clinical trials warrant submission of an application for regulatory approval of -- or warrant the regulatory approval of the product that is a subject of the trial. Whether the Pen's and Pen applications owned by us will protect the company's products and technology, risk relating to the potential disruption of the company's operations that could result from the staff reductions announced on January 22, 2009, actual and potential competition and other risks as set forth under the caption "risk factors" and Penwest quarterly report on form 10-Q filed with the Securities and Exchange Commission on November 10, 2008 which risk factors are incorporated herein by reference.

The forward-looking statements contained in this press release be only as of date of the statements made. Penwest disclaims any intention or obligation to update any forward-looking statements. TIMERx is a registered trademark of Penwest. Our other trademarks referenced herein are the property of their respective owners.

Thank you. Ms. Good, you may begin your conference.

Jennifer L. Good

Thank you, and good morning everyone. Welcome to our review and discussion of Penwest Results for the Fourth Quarter and Year Ended December 31, 2008.

Joining me on the call today is somebody who'll be new to you but is not new to Penwest. I am pleased to introduce Frank Muscolo, our Corporate Controller and Chief Accounting Officer. Frank has been with Penwest for 11 years and during that time has had the primary responsibility for managing our internal budgets, cash flows, finalizing our numbers and public reporting. Frank is a CPA with a strong background in both accounting and finance.

With the departure of Ben Palleiko, Penwest's Chief Financial Officer, I wanted you all to know that from an accounting and financial perspective, it is business as usual at Penwest. This has been a very active and productive period for our company. I will take a few minutes to provide an update on our business as well as to discuss our focused calls for 2009. I will then ask Frank to discuss the financial results for the quarter and year ended December 31, 2008 as well as our financial guidance for 2009. I will then make some closing remarks and open the call for any questions you may have.

As we announced in January, we have defined our business plan for 2009 with four key goals. Maximizing the value of Opana ER with our partner Endo Pharmaceuticals, advancing the development of A0001, monetizing the value of the company's proven drug delivery technologies and drug formulation expertise, and aggressively managing the company's overhead and other cost.

In determining these goals, the board considered how to create shareholder value and move the company forward in the most efficient and cost effective way, particularly given the challenging environment in which we are all operating. The board has been discussing this for some time. The board has considered this matter not only among itself but also together with external financial advisors. Through these discussions we challenged all aspect of our company's business and strategy, looked at various alternatives, considered the views of many of our shareholders, narrowed our priorities and aggressively reduced expenses. As a result we establish this plan for 2009.

Although we have seriously considered the views of some shareholders who have argued the company should essentially be shutdown, the board is unanimous in its strong conviction that it would be a mistake to halt our efforts on these initiatives prematurely and we believe we are executing this year on a solid business plan that can build value for our shareholders not only in 2009 but also over the long term.

This plan is sharply focused with well defined goals and milestones. The board will be evaluating the company's progress on each of these goals throughout this year. The board and I agree that we both deliver on certain aspects of the plan than our course will need to be revisited and hard decisions will need to be made. That said I'll now discuss in more detail how we are building value through each of our four priorities this year.

Beginning with maximizing the value of Opana ER, for the fourth quarter of 2008, we recorded royalty revenue from this product of $4.4 million. When Endo released its earnings late last week, they reported a very strong increase in sales for the Opana franchise.

The Opana ER net sales for the fourth quarter of 2008 increased 77% as compared with the fourth quarter of 2007.

The total sales for Q4 2008 for Opana ER were $40.4 million compared with $22.9 million in the fourth quarter a year ago. For the year-ended December 31, 2008 net sales for Opana ER increased 69% to 143 million compared with 84 million in the same period a year ago. So this product is still on a very nice growth trajectory.

Endo discussed on its call last week that the managed care coverage is broad and largely in place for Opana ER. They believe this can translate into volume increases in 2008. Endo's sales force remains committed to this product and Opana ER represents one of the key revenue drivers for Endo in their increased sales guidance for this year.

We are pleased with the continued growth of this product. I want to provide a brief update on the patents protecting this product and the relative litigations.

Penwest and Endo announced on February 20th, that we have settled the Opana ER patent litigation with Actavis. The essence of this settlement is that for the two strengths that Actavis was first to file on, 7.5 milligram and 15 milligram, which is currently a very small part of the market. We will not use our existing patents to stop Actavis from launching a generic on or after July 15, 2011 and earlier under certain circumstances.

For the other four major strengths on which Impax Laboratories was first to file, we will not use our existing patents to stop Actavis from launching on or after July 15, 2011, but since they are not first to file someone else will have to launch first. Right now Impax was first to file in all other strengths, so Actavis would not be able to launch until Impax has had their 6 months of marketing exclusivity. This agreement still needs to be reviewed and approved by the FTC to be final. An important point regarding this agreement as that it relates only to the patent in suit, it does not pertain to all pending applications.

We believe this is a good outcome for Penwest because it removes the Actavis litigation from the equation, doesn't change the dynamics around when the majority of the product gets genericized, and leaves in play the upside for additional patents that may be issued.

And finally with regard to maximizing the value of Opana ER, as we announced last quarter we have taken the business development lead on identifying partners outside the US to market Opana ER. We jointly own these rights with Endo 50-50 and the economics of any deal will be split with them. Our efforts are underway in multiple territories and the licensing of this asset in ex-US territories will be a high priority for us to share. These efforts have been going well and I believe we can find a deal by the end of the first half of this year.

Now turning to A0001, the company's lead internal development program. This is a molecule we're developing for the treatment of mitochondrial diseases. These diseases are devastating, potentially life threatening illnesses for which there are no FDA approved treatments. The company is focusing its efforts on various mitochondrial respiratory chain diseases that are orphan and for which the company has received Orphan Drug Designation from the FDA.

We license this compound from our collaborator, Edison Pharmaceuticals, in July 2007, and since then have kept this product on the initial critical path timelines that were established.

We announced last week that dosing is underway for the Phase 1b trial. The trial is designed to evaluate the safety and tolerability of A0001 and characterize the pharmacokinetic profile following repeat dosing.

We plan to enroll a total of 30 healthy volunteers in the trail and we expect to announce the data from this trial late in the second quarter. This safety trial represents the final hurdle before being able to advance A0001 into an efficacy study in patients. Our clinical team has been busy working with the experts in this field to design a Phase 2a program. We currently plan to initiate our Phase 2a study in the second half of the year, with the trial targeted to be complete by yearend. The data analysis of this trail may spill into the early part of next year. We should be in a position on the next earnings conference call to discuss our plans for a Phase 2a program and the timeline in greater detail.

Therefore on A0001 we are on a passed this year to turn over the card on the proof of concept around both safety and efficacy. We estimate the external costs of advancing this program to this stage will be approximately 4 to $5 million. This is the drug that is based on exciting science that has shown a lot of promise in preclinical studies and that addresses an important unmet medical need.

Based on this together with the potential value to shareholders of such a drug and the limited time and cost needed to see to what we have, the board and management feel that it's important to advance A0001 through this phase of development.

We had success during the fourth quarter in our drug delivery efforts with the signing of a second deal with Otsuka Pharmaceutical. Under the terms of the agreement, we'll receive undisclosed upfront fees, reimbursements of research and development cost, and potential milestones and royalty payments. We also continued the development efforts on the two deals we had previously signed, the first of which we signed with Otsuka in late 2007 and the second we signed with Cobalt in the first half of 2008.

We have completed our formulation work on the first Otsuka compound and we are currently in formulation development work for the other two deals. This formulation development work will take most of 2009 to complete.

Because these are not our own pipeline products, I will not be providing any additional information or timelines on them until we either achieve a successful contractual milestone triggering a financial payments or the program is terminated.

We believe this Drug delivery business makes sense on the context of Penwest's overall business model. These drug delivery agreements are a means of leveraging our proven technology which is known and recognized in the industry, leveraging the capabilities of our formulation team as well as enhancing their own scientific expertise and finally, providing cash to cover current salaries and fixed overhead in the business. Plus, we realized the upside of these compounds continue to advance through development milestones that trigger additional financial payments and through commercialization during which we receive royalties.

I would note that this drug delivery business has resulted in Penwest receiving approximately $40 million from Mylan under our agreement with them for Nifedipine which has been on the market now for 10 years. Our collaboration with Endo and Opana ER also originated from our drug delivery licensing efforts.

So these deals can provide a good return on investment for our shareholders if the compound advanced to market. Financially we judge this business currently on its ability to breakeven on a cash basis annually, which does not include the royalties received from prior deals. If we are not able to achieve cash flow breakeven then we will revisit the decision as to whether we will continue with this business.

Breakeven can be achieved with two standard deals per year. With two deals we should be able to cover the full salaries and benefits of eight scientists / BD folks within the company as well as the portion of the fixed overhead of the laboratories. In fact this business did breakeven on a cash basis in 2007 and in 2008 on a fully loaded basis. We therefore believe it makes good sense to continue with the provider that the deals from us continue.

This business provides some funding to the company and additional revenue stream, the potential upside of marketed drugs and scientific learning that we can apply to the development of our own pipeline candidates.

Finally, I want to spend a few minutes talking about the financial discipline with which we're managing the company, which I believe is clearly reflected in our fourth quarter results.

For the fourth quarter, we reduced our operating expenses by 3.1 million or 30% compared with the fourth quarter of last year. We have reduced spending significantly in both G&A expenses and in R&D.

These are not -- there are not any significant unusual factors contributing to this number, the decrease is real and sustainable.

In our guidance for 2009, we've guided towards G&A and R&D cost of 21 to 24 million. This represents a decrease of approximately $10 million from the 2008 levels.

We expect to achieve these savings by the reduction in our staff over the past year from 74 employees to 48 by focusing R&D portfolio on our most high potential program and by aggressively managing all other overhead expenses. These efforts have been meaningful and I believe our infrastructure and overhead have been optimized to execute on our business plan in a cost effective manner. We expect that these efforts will bring us close to breakeven from an earnings perspective in 2009 and will not require us to raise capital to execute our current plans.

I will now turn it over to Frank to discuss our financial results in more detail for the quarter and year as well as to provide our financial guidance for 2009.

Frank?

Frank P. Muscolo

Thank you, Jennifer, and good morning everyone. I will spend a few minutes to review our results for the year as well as the guidance we outlined in today's press release.

The net loss for the fourth quarter of 2008 declined significantly to 2.2 million or $0.07 per share compared with a net loss of 9.3 million or $0.40 per share in the fourth quarter 2007. The decrease in the loss primarily reflects the increased revenues from Opana ER as well as a 30% reduction in our total operating expenses.

For the year ended December 31, 2008, our net loss was 26.7 million or $0.89 per share compared to 34.5 million or $1.48 per share for the full year 2007. This decrease in the loss was again due to increased revenues and decreased operating expenses.

I will take a few minutes to review each of these components in more detail. Total revenues for the fourth quarter were 5.1 million compared with 872,000 in the fourth quarter of 2007.

This increase in revenues was primarily due to 4.4 million of royalties recognized from Endo on its sales of Opana ER. As a remainder our royalty from Endo is currently being paid at an 11% rate, half of our contractual royalty rate, while we paid down the 28 million of unfunded development cost Endo is entitled to recover.

As of yearend, there was approximately 23 million remaining of unfunded development cost and based on Endo's sales projections, we expect that by year end 2009, Endo will have recovered substantially all of that amount. Royalty calculations will then revert to the full royalty rates in our agreement which range from 22% to 30% based on annual net sales of Opana ER.

Partially offsetting our increased revenues from Endo was a decrease in royalties from Mylan Pharmaceuticals in the fourth quarter on it sales of a 30 milligram generic version of Procardia XL.

For the full year of 2008 our total revenues were 8.5 million compared to 3.3 million for 2007. The increase of 5.2 million is due to the Opana ER royalties that we began recognizing in the third quarter of this year, as well as increased revenues recognized in 2008 for licensing fees and research and development reimbursements on to the drug delivery collaborations Jennifer mentioned. Also contributing to this increase in revenues was an increase in product sales to Endo for bulk TIMERx.

The increase in revenues was partially offset by the decline in royalties from Mylan. Selling, general and administrative expenses in the fourth quarter were $2.4 million compared to $3.4 million in the 2007 period. This decrease of approximately $1 million was primarily a results of lower legal expenses recorded as a result of the company's previously disclosed agreement with Endo regarding Endo bearing a legal cost for the generic Opana ER litigation as well as lower stock based compensation, market research expenses and lower employee salaries and benefits expenses.

SG&A expenses for the full year 2008 were $12.1 million, a decrease of $2.2 million from $14.3 million in 2007. This decrease was due to lower legal expenses largely related to the previously mentioned agreement with Endo, as well as a decrease in several other overhead expenses.

Partially offsetting these decreases was a $1 million reserve established in connection with a previously disclosed $1 million loan the company made to Edison in the first quarter of 2008.

Research and development spending for the fourth quarter was $4.2 million compared to $6.5 million in the fourth quarter of 2007. This decrease of $2.3 million was primarily due to lower expenses on the development of nalbuphine ER, a decrease in our contractual payment to Edison, and lower compensation expense as a result of staff reductions. The sponsored research payments to Edison were essentially complete by yearend.

For the full year 2008, our R&D expense was $21 million, a decrease of $2.5 million from the $23.5 million in 2007. This decrease was primarily due to lower expenses related to the development of nalbuphine ER and other early stage product candidates, as well as lower compensation expense as a result of staff reductions. Partially offsetting these lower expenses were increased expenses related to the development work on A0001 and increased contractual payments to Edison which as I mention were essentially complete as of the end of 2008.

There is one final financial item I want to briefly explain that will be laid out in more detail in our 10-K filing. As results of our annul review of our shareholder activity under IRS Section 382 and change in control as defined by those rules occurred in 2008 as a result of open market purchases made by significant shareholders during the year. Under the 382 rules this change in control will impose limitations on our ability to utilize our net operating losses or NOLs for federal and context purposes. At this time, we estimate that through the date of the change in control, our NOLs will be limited to approximately $72 million. This is complicated analysis but essentially it means that we believe we may begin to pay income taxes in 2011.

Now, I'll take a few minutes to discuss our guidance for 2009 and our cash position. For the full year 2009, we expect revenues to be in a range of 22 million to 24 million. I do want to point out that this revenue guidance is largely based on projections that we have received from Endo of 2009 sales for Opana ER and our actual revenues will of course be highly dependent on Opana ER's actual sales.

The company expects SG&A expenses in 2009 to be in a range of 9 to 10 million compared to 12.1 million incurred in 2008 and R&D expense to be in the range of 12 to 14 million for 2009 compared to 21 million in 2008. As a result of both the increasing revenues from Endo for Opana ER sales as well as our diligent efforts to reduce expenses, we expect our net loss for 2009 to narrow to approximately 1 to 3 million compared to a net loss in 2008 of 26.7 million.

For 2008, our net cash used in operating activities was 26 million. As of December 31, 2008, we had cash and investments of 16.7 million compared to 23 million at December 31, 2007. We project that in 2009, our cash and investments will not dip below 10 million.

For 2009, we expect our operating activities to be largely cash neutral. However, we also need to make principal payments on our term loan of approximately 5.5 million during the year. At yearend 2008, we had 9.6 million of principal remaining on our term loan GE capital. This term loan is expected to be fully paid off at September of 2010.

We're very confident that we can manage our cash balance and execute on our current business plan without needing to raise additional capital.

Now let me turn the call back to Jennifer for some closing remarks.

Jennifer L. Good

Before Frank and I take your questions, I would just sum briefly up by saying that I think we have articulated a focused business plan with well defined milestones for 2009, and we demonstrated progress during the fourth quarter and early in 2009 on all the priorities laid out in our plan. We will continue to be accountable to our self and to you as we execute on that plan. I will now be happy to open up the call to any questions that you may have.

Question-and-Answer Session

Operator: (Operator Instructions). Your first question comes from the line of Bert Hazlett. Your line is open.

Robert Hazlett - BMO Capital Markets

Thanks Jennifer. I have a couple of questions. First just on CFO and the timing. Is Frank slotted to move into that role or are you just going to continue to operate with you in the kind of a dual role at this point?

Jennifer Good

So -- at this point in time we don't anticipate hiring a CFO; you know Frank's always handled all the accounting and finance side of things. And as you know I've stayed active around that front as well. So, in this year, while we're trying to operate lean and really only have staff in place to align up with those four business initiatives, I don't anticipate a need to fill that spot. So I would say that job will be spilt between Frank and myself.

Robert Hazlett - BMO Capital Markets

Okay. Secondly on this settlement with regard to Opana ER in 2011; listening to your partner in those conference call, I think there are at least, I heard, at least two separate dates and three separate characterizations of when generics actually might be expected on the market in terms of their planning purposes. As you see things evolving, whether it's these -- the patent portfolio you currently have or the patent portfolio that's in the construction at the US PTO, when are you planning on generic versions of Opana ER hitting and I have a follow-on in the second.

Jennifer Good

Okay, Bert, so I do think there was some confusion that came out of the Endo call. First of all with regards to the two minor strengths, the 7.5 and 15 which I think represents only about 3 to 5% of the market currently, Actavis assuming there's no other patents to get issued, they would be able to launch in July of 2011.

On the other four major strengths, they cannot launch before July 2011, so they don't have an ability to trigger essentially someone's exclusivity but they need to wait for in fact who's in the first to file opposition to have their six months of market exclusivity before they can launch.

So essentially what happened is Actavis got taken off the board from the perspective of being able to move quicker, trigger exclusivity on the four major strengths. And then any additional patents which were prosecuted primarily the Endo clinical patents are those basically sort of -- that creates a whole new game here because they are that part of the settlement.

Robert Hazlett - BMO Capital Markets

And how important or how meaningful is exactly that element here? I mean, is that essentially -- is this just basically holding Actavis on the sidelines until those things manifest themselves or is this really a 2011 when the franchise starts eroding?

Jennifer Good

No. I mean, I think those clinical patents as most of our investors and the analysts who cover the company, those patents are meaningful. I think if they get issued, they go much beyond our current patent which is in plan, most of these litigations, which is 2013. Those patents will range from 2022 to 2023 and present a whole host of clinical claims, which likely will meet to be invalidated. So, I think those patents are very meaningful. Endo as you know submitted those to the US PTO late last year and that's working its way through this process -- through that process.

Robert Hazlett - BMO Capital Markets

And Jennifer continue on Opana ER, when do you and Endo expect to be able to discuss additional formulations; again it's all around maintenance of this franchise and we'll talk about 0001 in a little bit -- but maintenance of this franchise is critically important, why to date haven't you discussed incremental improvements, incremental formulations or combinations, et cetera, for this franchise, I don't understand it.

Jennifer Good

Yeah, well Bert, as you know it's not appropriate for us to discuss that because we're not in the marketing lead. Endo did get that question on their call and Dave felt -- Dave said for competitive reasons they weren't going to be discussing that either. So obviously I respect their position. I think it's clear that to both companies, I'm not only Penwest but also Endo, this is an important part of both companies' revenues and franchises, Endo clearly knows how to think about life cycle management. So, I think it's fair to assume that's going on. But I just really can't comment on that if Endo doesn't want to talk about it.

Robert Hazlett - BMO Capital Markets

Right. Well we'll keep our fingers crossed then Endo at some point will want to talk about it. Then I guess on the expense management front, the letter from the shareholders quite frankly does resonate on that front. In particular with the overhead we can kind of understand expenses on clinical programs but with regard to overhead I'd love any incremental comments that you would have that's you are materially focused on incremental overhead beyond clinical development. Thanks.

Jennifer Good

Yeah. So, you can -- I think you can see through our efforts which began in roughly March of 2008, there was a very acute focus on how we reduce the overhead of the company. I think you can see from the numbers, we did a lot of that our guidance for '09 is down $10 million on operating expenses. We will continue to focus on overhead and other cost savings opportunities and I think as we move through different aspects of our business and either are able to execute and create value and/or not will present opportunities to decide whether it make sense to continue the overhead.

So, it is something that we stated as one of our four key goals, we'll stay accountable to it and will continue to report on it as we move through. But we do think the current overhead is the right structure for executing on these four goals.

Robert Hazlett - BMO Capital Markets

Okay, thank you. Thanks for the comments.

Jennifer Good

Yeah. Thank you, Bert.

Operator

Your next question comes from the line of Ian Sanderson. Your line is open.

Ian Sanderson - Cowen and Company

Thanks for taking the question. First on the settlement agreement on Opana ER, does the settlement agreement with Actavis explicitly prevent impacts from transferring their exclusively to Actavis as of July of 2011. So, if they are able to do that, does that essentially put an outside generic launch date for your settlement discussions with Impax if they are occurring?

Jennifer Good

So, Ian, I don't want to comment on the specifics but essentially Actavis is out of the litigation and they can do nothing else with oxymorphone ER with Opana. So, I don't want to get into the specifics but the scenario you're painting, I don't it's possible.

Ian Sanderson - Cowen and Company

Okay. And then for Opana rights outside the US I think you had discussed this before but can you refresh me on what's the economic sharing provision with Endo on those rights?

Jennifer Good

Yeah, now it's real simple. We own those rights jointly with Endo, so any revenues which come in will be shared 50-50. We anticipate doing something that looks like a straight licensing agreement where neither companies really incur any additional expense. It's all going to be licensing fees upfront from milestones and royalties which we'll end up sharing with Endo. And probably --

Ian Sanderson - Cowen and Company

Okay.

Jennifer Good

-- some kind of supply agreement that will support our partners.

Ian Sanderson - Cowen and Company

And is your assumption that the -- that pivotal trials will have to be done in the local markets rather than transfer by US trials?

Jennifer Good

Every territory is a little bit different. Actually -- and at least two of the territories we're active in, I don't think any additional trials are going to be required. The only market where it seems that question is sort of alive is Europe. And even then Endo did some comparative work in their clinical program around OxyContin and morphine. So, that's going to be a question that the partner would have to ask the regulatory authorities. But I have not seen that as an issue presented anywhere else.

Ian Sanderson - Cowen and Company

Okay. Are there any additional royalty offsets to Endo for paying the Opana ER patent litigation cost or they prefer selling that for free?

Jennifer Good

No -- yeah they're essentially going to carry the cost of litigation. We renegotiated that earlier -- somewhere in the middle of last year and they're essentially responsible for all cost of litigation.

Ian Sanderson - Cowen and Company

Okay, and there's no other royalty offset there?

Jennifer Good

No other royalty offset.

Ian Sanderson - Cowen and Company

Okay. And then for the Drug Delivery Services breakeven calculation, do you include the Procardia XL royalty revenues?

Jennifer Good

We do not; we literally only look at that based on -- for instance, last year, the two deals that were assigned with Cobalt and Otsuka, the cost it took to actually move those deals ahead, the cost of the business development, people that were working on it. We fully burdened it with the cost of our labs and made sure the business broke even. So there's no -- we don't include any royalties from prior deals into that business when we look at it.

Ian Sanderson - Cowen and Company

Okay. And finally could you repeat the term loan balances and the repayment requirements?

Frank Muscolo

Yeah, the term loan, it expires where -- it fully gets paid down in September of 2010. And we had -- I believe it was 9.6 million that was outstanding as of the end of this yearend.

Ian Sanderson - Cowen and Company

And was the interest also met (ph)?

Frank Muscolo

We'll see; the interest cost for the year would -- was $1,278,000 million.

Ian Sanderson - Cowen and Company

Thank you.

Frank Muscolo

You're welcome.

Jennifer Good

Next question?

Operator

Your next question comes from the line of Scott Henry. Your line is open.

Scott Henry - Roth Capital

Thank you for taking the questions and I do have a couple. For starters we shareholders have filed protest against your strategy via adding Board seats and the referendum on the strategy in general. I mean the filings are at 40% and the feedback I get is over 50% although shareholders can only speak for themselves. And this a big deal. I mean the CEO and the Board are not acting in the benefits of the shareholder and I don't think one can express such a -- how much of a big deal this is, I mean this is not happening broadly in the market. Have you responded to these protests and do you believe you have any legal means to block these referendums that they put forward and in fact would you want to block a referendum from your shareholders?

Jennifer Good

Scott, I guess, there are a couple answers; one, as I mentioned in my comments, we respect and seriously consider the views of these shareholders but we believe it would be a mistake to halt their efforts on these initiatives prematurely this year. As far as our strategy -- as far as this call goes, I think our stockholders want me and this management team primarily focusing on the business at hand and executing on what we've laid out. As I said the board has considered the matters raised by Perceptive and Tang. We've also considered the positions of several other major shareholders who have come forward and spoke with us about it. The Board has been considering these issues even before they were raised before certainly Tang but even Edleman (ph) and has concluded that the best value for our shareholders is the plan that we've laid out.

With regards to their Board nominations, our nominating committee is going through its normal process of considering these nominees for election at the meeting and to say anything else would be premature.

Scott Henry - Roth Capital

Okay. I guess with the reference to that it is clearly gray and we don't know how people feel until they vote. So my thought would be why not try and write on it, why not put a referendum out there, ask the shareholders how they feel, because to me if the board and the CEO doesn't care how the shareholders feel, that's a significant problem.

Jennifer Good

Yeah, well I hope this call doesn't take that away. The Board and senior management, myself, absolutely care how the shareholders feel, and there's been a lot of discussion with shareholders not only by myself but by several members of our board and not just the two shareholders how have been vocal but other shareholders as well. So we absolutely care how shareholders feel, I think the positions have been considered and that's where we are for now.

Scott Henry - Roth Capital

Okay. Well actions will speak louder than words, so we will see. Shifting topics to A0001, just a question, is this molecule in fact alpha-tocopherol or vitamin E?

Jennifer Good

It is absolutely not vitamin E, it's a co-Q10 derivative. I'm not going to comment on the actual molecule because that has not been made publish -- public, and we need to agree that with our partner Edison. But it is not a vitamin E derivative.

Scott Henry - Roth Capital

Is there a compound of matter patent on this molecule?

Jennifer Good

There is no composition of matter patents, we explained that when we licensed it. Our protection for A0001 will come from the orphan drug and protection that we get around the molecule that is why when we structured the deal with Edison, we also have rights through a follow-on compound from the same platform, the same area that is an NCE compound. So, the thought would be that if we validate the science around A0001, then we would have the right to the NCE that could be studied in broader markets beyond orphan drugs.

Scott Henry - Roth Capital

Okay. And just shifting gears a little bit, and I bring this up because it happened since the last conference call but I think it was in November; the board put forth a retention package in the event of a buyout such that members of management including yourself would get a significant payout in a buyout. Now given that the shares have went from $20 all the way down to $0.50 at the time, under a takeout which would be largely well below when management assume their roles, why the reason for such a reward; I would be curious the reasoning that went into that agreement?

Jennifer Good

Yes -- no, okay it's a good question. So the retention agreements have been in place for three years, they were actually expiring and so what -- the Board essentially extended the retention agreement. They did a fair amount of work of the compensation committee to index the market and our peer group which is listed in our proxy centrally came to what they believe were market payouts for the executive and extended the agreement that were already in place. So these were not new agreement, these were things that were put in place three years ago and were expiring and essentially rolled forward.

Scott Henry - Roth Capital

Well either one could argue that the price of those agreements was considerably higher when the shares were at $0.50 than they were at $20 under relative valuation. So, do you see a trend to the questions, is and that I hear your optimism and I hear you talk about how you and the Board believe in what you are doing. But the problem is the alignment just isn't there. I mean I'm looking at Thompson 1 and I don't know if this is accurate. But I show you're holding 5867 shares or $10,000 worth of shares. Now that may not be accurate, I welcome you to correct it. But as well in the past years I have seen very few board, if at all, or yourself, I mean how can shareholders believe in your enthusiasm when there is no backup of money other than packages for management itself?

Jennifer Good

And so, Scott, the numbers they are a little bit higher but not; and your point is, I think, fair. People here are obviously heavily optioned; there was a large portion of our Board that took their fees only in stock options for many, many years. Obviously a significant portion of the whole senior management's team's compensation is in stock option. As a matter of fact for this year we were not awarded raises of any kind, bonuses were pretty lean and again awarded stock options.

So, the philosophy of our compensation committee has always been to reward management essentially if the stock has -- goes up, which it hasn't done in the last year or two, and so we have not been rewarded on a stock basis. So, I think people here are heavily invested in making this work; a big chunk of our compensation's been rewarded that way.

Not to mention people here want to make it work just because that's what we do. We are vested in this story, people -- most of this team's been in place quite a while and committed to trying to be successful here.

Frank Muscolo

Well, I believe one of the problems with stock options is they reward aggressive behavior and they challenge management, they think about upside as apposed to downside and this is exactly the problem it creates with A0001. You end with the lottery ticket strategy and no preservation of capital. And in my opinion, management and the board to have any credibility and I use 'any' very broadly, they would have to be purchases to say, we're not saying this, we're doing it, again, actions versus words is the difference. But I guess that's not really a question but a statement.

Shifting to the next question then, I mean there's this talk that well, we will revisit this at the end of the year and that is okay. But since you've arrived, there were about 20 million shares outstanding and no debt. And now there are 40 million all in debt. So there's a cost of delaying action. And I just want to get your thoughts on that, if you're weighing in the cost of waiting versus doing something today?

Jennifer Good

Yeah. So first of all your share count's incorrect, but second of all the Board of course factors in the cost of waiting versus making action now, that was a heavy part of the discussion, and the outcome of the Board unanimously was it made sense to move ahead through the year. Not all of these deliverables are only measurable at yearend. Trust me, at every Board meeting we report and have intense discussions around each of our clear milestones here. So I don't want to leave the impression from this call that the Board's sort of not going to re-look at this until year again -- yearend again, that's absolutely not true. At every Board meeting they're discussed and we've got timeline behind each of these.

Scott Henry - Roth Capital

Okay. And then moving into some of the specifics and I'm almost done. There were comments in the opening that the delivery business is breakeven, Edison is going to lose 5 million a year, it all sounds very good and it sounds appealing but the reality is the company lost close to $30 million in '07 and '08. So if everything's breakeven, where is that money going?

Jennifer Good

Well Scott, we just gave guidance for 2009. I am not sure if you read it or listened to it, but it's essentially for close to a breakeven on a net loss. So we can look back and recreate the financials of last two years or we can look ahead and align the business goals we've laid out with our actual guidance which I think matches the actual goals. So I think that's a more appropriate focus and if you want to offline go back and dig through the last two years and understand the doubts there, we're happy to do that with you.

Scott Henry - Roth Capital

Well I guess again it comes down to the idea of losing 1 to 3 million in your business which is why you put out this guidance. When you pull out 18 or 19 million which I assume you are accounting for an Opana royalty stream, the business is really losing 20 million a year?

Jennifer Good

Yeah, most companies have operating expenses.

Scott Henry - Roth Capital

But they tend to manage the revenues, I mean, though Opana royalty stream has no management. But I think that's it for my questions and I do thank you Jennifer taking -- for taking them all.

Jennifer Good

Yeah, you're welcome.

Operator

Your next question comes from the line of Tim Chiang, your line is open

Tim Chiang - FTN Midwest Securities

Hi, thanks. You know I wanted to ask you about the term loan, is there any chance that you could renegotiate that term loan this year. I noticed that your target is to have about $10 million of cash on the balance sheet at yearend. So seems like if you do pay off the $5.5 million to -- you are not going to have much margin for error there?

Jennifer Good

So Tim, if I understand which way you are leaving, I don't think we plan to renegotiate it. I think our business plan comfortably makes our debt payments this year and we've got plenty of room to not get below $10 million and if your question was around could we prepay the debt, that is allowed for -- in our agreement now just with some slight penalty. So I don't envision that we would need to go and renegotiate that term loan.

Tim Chiang - FTN Midwest Securities

Okay. And than just one follow-up. Could you just provide me what the royalty step-ups are again up to about 600 million in Opana ER sales?

Jennifer Good

Yeah, but Tim, these haven't all been disclosed if you remember it. What's been disclosed is on the first 150 million of annual net sales. We receive a royalty of 22% on every dollar above 150 million, it steps up to 25%. And then there's undisclosed rate points between 150 million and $1 billion. That essentially go, and 1% increments up to 30%. So that's what's been disclosed around the royalty rate.

Tim Chiang - FTN Midwest Securities

Okay. And then just one question on the R&D expense tied to A0001. I think you mentioned a number of 4 to 5 billion and expense to that product, but how much of that would be just tied to the first initial safety study?

Jennifer Good

Yes, a smaller piece of it. The first safety study is about a little over $1 million. We're also running a longer-term tax (ph) study on those numbers and then we obviously have the clinical plan and then some other minor drug substance things that go with it.

Tim Chiang - FTN Midwest Securities

All right, thanks a lot Jennifer.

Jennifer Good

See you -- you bet Tim.

Tim Chiang - FTN Midwest Securities

Okay.

Operator

Your next question comes from the line of Arthur Friedman. Your line is open.

Arthur Friedman - Sterling Equities

Yeah, hi Jennifer. I have a -- just a few quick questions. One is on the Mylan Pharmaceuticals. About -- what do you expect the royalty to be for '09 that you're getting and if does it keep decreasing throughout the year? Could you give a little color on that?

Jennifer Good

Yes. This product's been around for about 10 years. It is a generic patent (ph) that's in the marketplace and since then, I think about there years ago, there were additional generic patents. So that has been on a slow steady decline. Frank, do you know what it was on 2008 approximately?

Frank Muscolo

Yeah, 2008 is at 1.8 million for Mylan.

Jennifer Good

Yeah, and I would expect that to continue to trend down slightly although not dramatically and we are certainly well ahead.

Arthur Friedman - Sterling Equities

Okay. But it still is revenue coming in, that's my point?

Jennifer Good

Yeah, absolutely.

Arthur Friedman - Sterling Equities

Okay. Then the second question I had, in terms of -- you mentioned 48 people who are on the staff, could you just give a rough idea of like how many of those people are in research and how many are in sales?

Jennifer Good

Yeah. So we don't have any sales post but we have roughly 30 folks that are broadly considered R&D and roughly about 14 that are considered general and administrative.

Arthur Friedman - Sterling Equities

Okay and are the 30 people all working on the A0001?

Jennifer Good

No, those 30 people split down between supporting our drug delivery business I mentioned to you, there's about 8 folks there. We also still have obligations around Opana and Opana supporting that. In R&D we threw our tax service, our manufacturing guy in. We also have quality -- some quality obligation. We also have some regulatory obligations around keeping the drug master files current. So, there is another sample of people supporting the Opana infrastructure and then there is this drug development capability that's moving A0001 ahead as well as working with that as in around the NCE.

Arthur Friedman - Sterling Equities

Okay. And one last question, thank you for that. One last question, when you get your royalty payments on the Opana ER, have they been coming in on time, I mean there's no -- in terms of the economy, there's no impact or delay in when you're receiving those that would impact your business?

Jennifer Good

No, Endo's required to pay those to us within 60 days and fortunately they have a nice strong balance sheet and so they've paid us on day 60 every -- each time. So there's been no delay.

Arthur Friedman - Sterling Equities

Okay. So, in other words, I just want to summarize what I'm hearing. So, in terms of the financials and your planning and your payment to staff and everything your -- the royalty payment from Endo comes in and its stable in terms of timing?

Jennifer Good

Yes. Correct.

Arthur Friedman - Sterling Equities

Okay. Thank you very much.

Jennifer Good

Yeah, thank you Arthur.

Arthur Friedman - Sterling Equities

Yeah, and good job on the cost cutting from my perspective.

Jennifer Good

Thank you.

Operator

Your next question comes from the line of Wayne Rothbaum. Your line is open.

Wayne Rothbaum - Quogue Capital

Hi, good morning.

Jennifer Good

Good morning Wayne.

Wayne Rothbaum - Quogue Capital

Thanks for taking my question. Just a quick question on A0001. The -- with -- I know you're mentioning or talking about it not being vitamin A, but just there's -- maybe there's a discrepancy on the FDA Orphan Drug website, they classify it as vitamin A. So is there a mistake at the -- on the FDA's part or is there a reason why they would classify that as vitamin A and you guys aren't classifying it as vitamin A?

Jennifer Good

No, I mean -- well first of all this is a good chemist question, Wayne. So, if you would like to talk to Dr. Amale Hawi, who is our Ph.D. in organic chemistry, she can explain this. But these are -- as I mentioned this is a analogue of co-Q10 which is broadly related to the vitamin E class, family class, but it is not vitamin E. So FDA may loop them all under vitamin E broadly as a nutritional perspective but the actual molecule is not the vitamin E molecule.

And again if you want to follow-up more with -- we've got obviously Ph.D. chemists around here, they could probably explain that better that I can.

Wayne Rothbaum - Quogue Capital

Okay. So because it's a derivative then they're just putting under the classification even though it's a derivative of separate NCE?

Jennifer Good

Yeah, it's a derivative of coenzyme Q which is related to vitamin E. So they're all in the same sort of family but it is not vitamin E.

Wayne Rothbaum - Quogue Capital

Okay.

Jennifer Good

Okay?

Wayne Rothbaum - Quogue Capital

Thank you.

Jennifer Good

Yeah, you bet.

Operator

At this time we have no questions in queue.

Jennifer Good

We appreciate your joining us this morning to discuss our financial results and 2009 guidance. I am in the office today and will be happy to discuss further any aspects of our business with you. Thanks for your time and I hope you all have a nice day.

Operator

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

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