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Forest Laboratories, Inc. (NYSE:FRX)

Q4 2009 Earnings Call

April 21, 2009 10:00 am ET

Executives

Frank Murdolo – Vice President, Investor Relations of Forest Laboratories, Inc.

Lawrence Olanoff – President, Chief Operating Officer

Frank Perier – Chief Financial Officer, Senior Vice President

Analyst

Ian Sanderson – Cowen and Company

Gene Mack – Lazard Capital Markets

Corey Davis – Natixis Bleichroeder

Scott Hirsch – Credit Suisse

Marc Goodman – UBS

Gregory Gilbert – Banc of America

Elliot Wilbur – Needham & Company

Richard Silver – Barclays Capital

David Buck – Buckingham Research

Timothy Chiang – FTN Equity Capital

Operator

Good morning, my name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Laboratories', Fourth Quarter 2009 Earnings Call. (Operator Instructions) Thank you. Mr. Murdolo, you may begin your conference.

Frank Murdolo

Thank you, Ashley, and good morning everyone. This is Frank Murdolo. Thank you for joining us today for this fourth quarter fiscal 2009 conference call. Joining me today is Larry Olanoff, our President and Chief Operating Officer; and Frank Perier, our Senior Vice President of Finance and Chief Financial Officer. By now, each of you should have seen this earnings release that we put out around 8’ O clock this morning. The release is also available at our website, www.frx.com.

By way of Safe Harbor statement, let me add that various remarks that we make about the future expectations, plans, and prospects for the company, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, and actual results may be different.

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

Lawrence Olanoff

Good morning everyone. I will start today's call by reviewing key company events for the quarter, then turn the call over to Frank Perier, who will review the financial details of the quarter and the year.

Our underlying business continued to perform well during the quarter for our key marketed products, although Lexapro sales declined in part reflecting the modest decrease in market share that we experienced earlier in the year. In contrast, we saw a solid prescription volume growth for both Namenda and Bystolic.

Excluding the $170 million charge, taken in the just completed quarter, in connection with the ongoing discussions with the U.S. Department of Justice Investigations, as described in the earnings release, earnings totaled $0.76 per share.

We along with our partner Cypress Bioscience were pleased to announce yesterday, that Savella will be shipped later this week. As you may recall, we submitted a supplement to the FDA for a minor cosmetic change to the tablet. The FDA has completed its review earlier than expected, and Savella will now be available at pharmacies beginning on April 28.

We will begin detailing next week with two of our primary care sales forces, two specialty sales forces, including one from Cypress, and our hospital sales force, approximately 1500 reps in total.

We have been meeting with managed care organizations and making presentations to the key plans. Our goal is to have Savella placed in an unrestricted formulary position, either Tier 2 or Tier 3 in the majority of major plans and to do at least as well as in gaining formulary access as we had with Bystolic.

As part of our marketing strategy, we are planning an educational campaign in collaboration with patient advocacy groups and will be distributing products and disease state information in physicians’ offices, pharmacies, and over the Internet. Our program will raise awareness of fibromyalgia, educate patients about new treatment options such as Savella, and encourage treatment compliance.

We have successfully employed this type of an approach many times in the past, including during the launches of Lexapro, Namenda, and Bystolic. As we have previously explained, Savella is the product with a unique clinical development program within the fibromyalgia world. One with a high clinical hurdle that considered the patient to be a respondent to therapy, only if the patient demonstrating concurrently clinically significant changes in multiple aspects of their fibromyalgia condition, including pain, mobile assessment, and physical function.

Savella is the only product approved for the management of fibromyalgia that used as complete responder analysis, prospectively at its primary endpoint and its information is uniquely reflected directly in our approved labeling. A further testament to Savella is that two large clinical studies with milnacipran completed post NDA submission. One in the U.S. and one in Europe completed by Pierre Fabre, duplicated these results on a responder and endpoint analysis.

Regarding our inline products, Lexapro sales in the quarter totaled $548.5 million, a decline of 5% year-over-year. Wholesalers collectively reduced inventories for Lexapro by about two days at the end of March as compared to the end of December, which would account for a decrease in Lexapro sales of approximately $30 million.

As we have previously mentioned, we put programs in place earlier in fiscal 2009, that we believe are now working to better preserve Lexapro market share considering this the current competitive market conditions including generic SSRIs.

Further last month we announced that the FDA approved our supplemental NDA for Lexapro with the indication of acute and maintenance treatment of major depressive disorder in adolescents of 12 to 17 years of age. This program included clinical studies in a patient population, which has in the past proven difficult to demonstrate positive results. We are enormously gratified that Lexapro now be available for the approximately $2 million depressed adolescents in the U.S. who can share the benefit which Lexapro has provided for depressed adult patients for the past seven years.

We expect that this additional indication will further help to stabilize the position of Lexapro in the market as we begin to detail two psychiatrists who diagnose and treat adolescent patients with major depressive disorder.

Namenda sales were $243.8 million during the quarter representing growth of 7.7% year-over-year. There was no change in the collective wholesaler’s inventory for Namenda at the end March as compared to December. We were very pleased to report last month that the U.S. Patent and Trademark Office has granted the full five years of patent term extension for the 703 patent that will expire now on April 11, 2015 instead of as originally anticipated on September 13, 2013, an additional 19 months.

The NDA for memantine ER is completed and waiting in the wings as we continue to monitor the patent litigation activities around Namenda. The timing of when we file this application will depend on how the litigation proceeds.

Bystolic, our fastest growing promoter product had sales in the quarter of $29.7 million, just under a two-fold increase from the quarter a year ago. Bystolic sales continued to perform at or above expectations and we continue to see an encouraging mix of patients including significant proportions of those switching from generic beta-blockers and those new to beta-blocker therapy.

Nearly 80% of patients can be categorized as continuing patients, which is indicative of the early success with Bystolic therapy. The number of new prescribers each week remains remarkably constant at between 1400 and 1500 writers, now over a year post launch.

This is on top of a growing base of over 80,000 prescribers, both primary care physicians and cardiologists are prescribing the product, and the share amongst cardiologist exceeds that of the national share for beta-blockers as a class. This observation is particularly important because like in many categories, primary care physicians will often rely on the opinions and recommendations of specialists.

Thus, we are seeing steady growth in prescription volume with the majority of prescriptions written for 5 milligrams. This indicates that most patients are achieving sufficient blood pressure reductions at or starting dose and that the product is performing as we expected. And we continue to see Bystolic’s share of mail order business to increase more so than retail. This may be yet another indication of physician and patient satisfaction with Bystolic as more patients move to automatically refill their prescriptions through the mail order route.

We continue to make substantial progress relative to Bystolic’s managed care coverage goals. Overall, our access without any step to edit or prior authorization restrictions covers over 85% of total beta-blocker volume in managed care settings, and with several recent Tier 2 additions, Bystolic now has unrestricted Tier 2 coverage on 12 major health plans.

The next important step for this franchise will be the submission of a supplemental NDA for the use of Bystolic in congestive heart failure, which will occur shortly. Regarding Benicar projected end-user net sales, which are recorded by our partner Daiichi, Sankyo were approximately $210 million in the quarter, with our partnership pretax earnings for the quarter totaling $50.5 million.

Overall, we were pleased with the strong sales and earnings performance during the quarter and for the full year and are enthusiastic about the progress that we are making and further building out our pipeline and bringing novel therapies to market.

I will now turn the call over to Frank Perier, who will provide more details on the financial results.

Frank Perier

Thank you Larry and good morning everyone. Fiscal fourth quarter revenues were comprised of $896.7 million of product sales, versus $898.7 million last year, $50.5 million of contract revenue from the Benicar agreement, down 13.2% versus last year as related to the contract terms in the tail of our agreement, as well as $12.7 million of interest income. Other contract revenue and other income in the quarter totaled $5.5 million.

Total revenues, which are inclusive of product sales, pretax earnings from Benicar, interest and other income, totaled $965.5 million, a decline of 2.6% from last fiscal year. For the full fiscal year, total revenue increased 2.3% to $3.92 billion while product sales increased 3.8% to $3.64 billion.

Gross margin the quarter came in at 76.8%, this level compares to 76.6% in last year’s fourth fiscal quarter. As described in our press release this morning, we have provided a reserve of $170 million or $0.45 per share in the quarter in connection with ongoing discussions with the U.S. Department of Justice arising out of the investigations led by the U. S. Attorney's Office for the District of Massachusetts, into marketing, promotional and other activities primarily in connection with Lexapro, Celexa, and Levothroid.

These discussions with the DOJ have not yet concluded, and there can be no assurance as to when they will conclude or whether they will lead to a negotiated resolution, for the amount of any settlement that may be reached. Accordingly, until the resolution, the investigation is resolved, there can be no assurance that the amount to be paid in a negotiated settlement will be at the level reserved by the company, or that a larger material amount will not be required. The company continues to cooperate with these investigations.

Turning to SG&A spending during the quarter, it was $515.1 million, of 57.3% from last year and included the $170 million charge related to the U.S. Attorney's Office Investigation. Excluding the U.S. Attorney's Office Investigation charge, SG&A spending increased by 5.4% and totaled $345.1 million.

In addition to our ongoing spending levels in support of inline products, this quarter included significant investment spending to support the continuing launch of Bystolic, as well as pre-launch activities for Savella.

For the full fiscal year, SG&A spending increased 27.7%. Excluding the charge related to the U.S. Attorney’s Office Investigation, as well as a charge relating to the termination of the Azor agreement in the first quarter, SG&A for the full year totaled $1.3 billion, an increase of 9.1% over last year.

Research and development spending was $123.8 million in the quarter, as compared to $144.9 million after excluding the Novexel, initial license payment of $110 million in last year’s fourth quarter. For the full year, R&D spending increased 4.2% over last year, after excluding total upfront license payments of $150 million in fiscal 2009 related to the Phenomix and Pierre Fabre agreements, and $180 million in fiscal 2008 related to the Novexel and Ironwood agreements.

As we have completed full year income allocation based upon the final financial results, the company’s effective tax rate for the fiscal year was 20.9% resulting in an effective tax rate of 22% for the fiscal fourth quarter. Excluding the effect of the U.S. Attorney’s Office Investigation reserve, the effective tax rate for the quarter was 20.6%.

Actual shares outstanding as of March 31st were 301,615,000, a reduction of $9.8 million shares from last year, due mainly to the company’s share repurchase program. We did not repurchased any stock in the fourth quarter and have the remaining authorization to repurchase up to $5.7 million shares.

Our cash and marketable securities balance as of March 31st was approximately $3 billion, an increase of $168 million from last quarter. Of this, $818 million or 29% of our cash and marketable securities are domiciled domestically with the remainder maintained by our international subsidiaries.

I’ll now turn the call back to Larry for a pipeline update and fiscal year 2010 guidance review.

Lawrence Olanoff

Thank you, Frank. As we move into fiscal 2010, our focus will remain on moving our significant product development pipeline forward. We plan to file an application for Bystolic for the additional indication of congestive heart failure, before the end of this quarter, based on the published seniors’ trial. If we are successful and are able to obtain approval on our first-pass review from the FDA, we could be launching this product for congestive heart failure in the first half of calendar 2010.

Early last month, we announced that after consultation with the FDA, additional clinical studies for Aclidinium will be conducted, provide further support for higher and or more frequent dosage regimens. We along with our partner Almirall, have now determined an alternate development pathway forward for Aclidinium and we’ll very shortly commence a clinical development program to establish the efficacy and safety of Aclidinium at these new dosing regimens.

More detail will be provided on this program later in the year. I would remind you that we view Aclidinium as a broad franchise opportunity and the tolerability experienced from Aclidinium – acclaimed studies previously completed, suggest that higher dosages are indeed possible.

In addition the new b.i.d program will facilitate and potentially accelerate our strategy to develop a twice-daily Aclidinium for Monurol combination, as well as a twice-daily Aclidinium steroid combination in the future.

Steroid combination in the future. We have access to a unique dry powder inhaler device for Aclidinium that will be convenient to use and easy to incorporate higher or more frequent dosages, as well as combination agents. The ease of use and functionality of the inhaler device is an important factor in delivering the correct dose to the lungs to ensure effective COPD treatment. With the dose counter and a unique control window that tells the patient that the dose has been inhaled correctly, we believe that the Aclidinium DPI will add to the competitiveness of the franchise.

Regarding Ceftaroline, the two Phase III studies for community-acquired pneumonia are ongoing and we anticipate announcing those results during the second quarter of 2009. Data from both the CAP studies is supportive and the two complicated skin and skin structure infection studies will serve as our planned NDA submission for initial marketing approval of Ceftaroline to be filed around the end of 2009. We are also still on track to file an IND for our Ceftaroline beta lactamase inhibitor combination product Ceftaroline 104, which has the potential to further expand the clinical utility of this franchise.

Working with our partner Ironwood pharmaceuticals, based on very strong Phase II-b results, we are conducting a comprehensive Phase III clinical program to evaluate Linaclotide safety and efficacy in patients with either IBS-C or chronic constipation. The chronic constipation studies were initiated in September, and we expect to see topline results for both these studies in the fourth quarter of 2009. The constipation predominant IBS trials, have been delayed while we were further discussing to study endpoints with the FDA and will now commence later in this quarter. Efforts are already in progress to expedite the recruitment of IBS-C trials.

Last quarter we completed two important product-licensing agreements that has added additional Phase III late stage assets to our expanding development pipeline. We collaborate with Phenomix for the development and commercialization of Dutogliptin, a DPP-4 inhibitor in development for the treatment of Type II diabetes.

Diabetes is a widespread and growing disease and we have been eager to find a product with a novel mechanism that we could acquire to market and develop and market. The first Phase III trial for Dutogliptin began in July and we expect to have topline results available in the second quarter of 2010.

We planned to initiate additional Phase III trials in the second half of this calendar year. Our Phase III program will be similar in size and scope to the Phase III programs reported for other DPP-4 inhibitors.

We had the benefit of being able to design the trials to include the collection of the cardiovascular safety data that the FDA now requires without delaying or extending target completion gain time for the development program. We also announced that the partnership with Pierre Fabre for the development and commercialization of F2695 or levomilnacipran, a once-daily administered selective Norepinephrine and serotonergic reuptake inhibitor for the treatment of depression. We are highly encouraged by the strong clinical antidepressants activities and good tolerability exhibited by levomilnacipran in a large Phase II study completed by Pierre Fabre. We will initiate the first three first Phase III clinical trials on this program later this summer.

Turning to the Cariprazine. In September we announced topline results from a Phase II clinical trial in patients with acute mania associated with bipolar 1 disorder, which showed that cariprazine produced significant system improvement compared to placebo within the first week of treatment and at each subsequent time point study. This potential indications may represent a significant opportunity for the compound in addition to the planned indication for schizophrenia

For the schizophrenia indication, our ongoing Phase II-b trial with our partner Gedeon Richter, we’ll examine in greater detail a range of lower doses based on the encouraging results of a first phase II proof of concept study.

This study is being performed in order to better determine an optimal dose range taken to the planned Phase III studies and the topline results will be available in the third quarter of 2009.

Depending on these results, we also expect to initiate a Phase III mania disorder study program by the end of 2009 to be filed thereafter by the start of the Phase III schizophrenia program. In addition this summer we will commence Phase II proof of concept studies with Cariprazine in bipolar depression and add-on treatment for major depressive disorder.

Lastly, Oglemilast, the PDE4 inhibitor program partnered with Glenmark is currently in a proof of concept study in COPD and we expect to report that Oglemilast data in the third – calendar quarter of 2009. There is a high unmet medical need for a well-tolerated oral antiinflammatory product in both COPD and asthma. Oglemilast targets the underlying cause of both diseases by blocking inflammation through a non-steroidal dependent mechanism and therefore would exert its therapeutic effect through a mechanism unique to existing classes of approved COPD products.

As I previously stated, we continue to believe that our late stage product pipeline could collectively represent several billion dollars of potential product sales in the long-term sufficient to replace the revenues lost due to the patent expiries for both Lexapro and Namenda.

However, we must operate with the assumption that not all of our late stage programs will ultimately result in either approved products or products that achieve our peak sales projections.

Accordingly, one of our strategic goals has been to double the commercial value of our late stage product pipeline by 2012 through the addition of new development opportunities both license and acquired and the advancement of our earlier stage preproof of concept programs. We have already added the first two major installments to assess pipeline goal that is Dutogliptin and levomilnacipran and we continue to advance our complete development pipeline, importantly our business development team continues to see interesting and commercially viable products in the marketplace and we have fully demonstrated the ability to compete effectively to secure important new products.

By example, during the five year period from 2004, through the end of 2008 we completed one co-marketing agreement, 13 product licenses through acquisitions and 4 drug discovery agreements. This list concludes the 11 products currently in development Bystolic, which was launched a year ago and Savella, which is being launched now. Thus we remain confident in our ability to achieve our 2012 product acquisition goal in parallel to advancing our established pipeline.

Moving to our financial guidance for fiscal 2010. This will be another significant investment year on the R&D line as well on the SG&A line as we continue to support our late-stage product pipeline products, and the currently markets while also continuing to fund a substantial launch effort between behind Bystolic and most recently Savella.

Overall this leads to projection in R&D spending of $575 million, which includes $70 million in potential milestones for existing products, an increase of 13% excluding upfront licensing payments we made last year. We are projecting an SG&A expense of approximately $1.3 billion, which includes continued strong support for Bystolic and increased spending to support the launch of Savella, partially offset by lower spending for Lexapro and Namenda, as we reallocate and balance our marketing resources and continue to control administrative expenses.

We are projecting topline product sales growth of approximately 6% and growth of nearly 4% for total revenues, which includes income from the Benicar agreement interest and other income.

Lexapro sales are projected to be approximately $2.3 billion, unchanged from fiscal 2009. This is based upon a price increase already realized and approximately a 1.5%, - 1.5 share point decline in market share and total prescription volume growth for the category of approximately 1.5%.

Namenda sales are projected to grow approximately 12% to just over $1 billion and Bystolic sales are projected to be approximately $195 million in second full year on the market. Sales for Savella projected to be approximately $30 million in the first 11 months on the market. Our projected tax rate will be approximately 21.5% for the coming fiscal year and we are projecting average diluted shares outstanding at approximately $303 million shares.

Rolling this up leads to an earnings per share projection of between $3.45 and $3.55 per diluted share. We view the increased R&D and SG&A spend levels as necessary strategic investments as we continue to manage the business with the long-term goal of ultimately developing and marketing a portfolio of new products that will collectively more than replace the earnings from Lexapro and Namenda after the market exclusivity for those products expire in 2012 and 2015 respectively.

Our first priority remains to provide for the future growth of the company’s revenues beyond this period. In addition to advancing our current pipeline of supporting our existing in future inline products, we’re also actively pursuing new product licenses and assessing potential acquisitions to add to our development pipeline and inline products. These additions have the potential to feed our existing therapeutic areas as well as allow us entering into new therapeutic areas, consistent with our opportunistic business model. This combined effort will continue to drive our decision-making and allocation of resources as we look forward into the next decades.

Frank Perier

Thank you Larry, I will now offer some fourth quarter sales figures for the smaller products. Aerobid, $3.7 million, AeroChamber, $4.2, Campral $6.7 million, Celexa Brand, $3.5 million, Cervidil, $13.8 million, Combunox $0.8 million, Esgic $0.8 million, Europe, $13.8 million, Generic $1.2 million, Infasurf, $3.1, Lorcet, $1.9 Monurol $0.3, Tessalon, including generic, $0.8, Thyroid, $14.4 million, Tiazac brand, $1.7 million, and Tiazac generic, $8 million.

And with that, I will ask Ashley the operator to start the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ian Sanderson with Cowen.

Ian Sanderson – Cowen and Company

Hi, good morning, thanks for taking the question. First on the Department of Justice Settlement Provision, why put a reserve in place at this time, given the, it sounds like little it’s actually known about where this may go? Secondly, on Lexapro, can you describe whether there is a net pricing change here? And whether that may relate to an increased allowance for contract discounting in ’09? And what you see is the potential rough terms incremental sales opportunity for adolescent depression? And then finally, I just wanted to clarify something on Cariprazine the Phase III studies that the plan is to move into Phase III for acute mania associated with bipolar, I just want to make sure that was correct?

Lawrence Olanoff

Yes and answer to your last question, yes we plan to trigger those initiation of the Phase III studies in acute mania associated with bipolar disease shortly after the receipt of the data in positive for the Phase II-b study in schizophrenia. The schizophrenia Phase III study will then follow shortly after that. Regarding your first question on the Department of Justice Investigation really can’t say anything further at this time beyond in our press release. The question on Lexapro as far as the managed care rebates and such in our projections for fiscal 2010. We’ve already taken into consideration the rebate structure and percentages and we believe that the first calendar quarter kind of already reflects what the rest of the year will look like in that regard. On the adolescent indication, we’re looking at some additional patients that now will be prescribed the product. We know that this impact is some background use of the product in that category, but we will be now the only approved proprietary antidepressant, the only other drug approved is essentially generic Prozac, which in our understanding is not that widely used and from a projection standpoint, rather than give you a number what I would say is we are looking at it in a way counterbalances impart any changes that we would expect in terms of our share in the general market.

Ian Sanderson – Cowen and Company

Actually and Larry, could I follow up you mentioned a revised detailing program to try to maintain your share against generic. Can you give any more information on that?

Lawrence Olanoff

Yeah, the programs that we dealt with in terms of retainage of share was not just a matter of detailing and we will obviously continue to provide details around Lexapro, as we launch Savella. Some of those may fall into the second position instead of first position. We still, have a aggressive program, but they also involve other activities in terms of additional deliberations with managed care around the caring physician and a fairly aggressive we think couponing program that we put into the field that felt would help with new patient starts and we continue to maintain those programs.

Ian Sanderson – Cowen and Company

Thank you.

Operator

Our next question is comes from Gene Mack with Lazard Capital.

Gene Mack – Lazard Capital Markets

Hi, thanks for taking the question. First on Lexapro, do you anticipate any more de-stocking by wholesalers for the upcoming quarter?

Frank Perier

Yeah Gene, thanks for the question. No, I mean what we’ve seen is basically about a two day adjustment in Lexapro inventories really bring Lexapro right down to just about two weeks and as you know those numbers do bounce around from quarter-to-quarter, but using not more than by a couple of days. So, I would expect that we should stay right around that the two-week number.

Gene Mack - Lazard Capital Markets

Okay and on linaclotide is there any I guess to Larry, is there any further clarity on what the NDA filing strategy might be there. We file for both indications simultaneously, or how will it go?

Lawrence Olanoff

Our current plans are still to file both indications. We’ll continue to watch in terms of the – how these programs progress, but we do plan for a very aggressive recruitment of the IBS trials. We’re using many of the same centers were we are running the chronic constipation trials. Their recruitments went very well. We are quite pleased with the results there. And we have some time between the topline results for chronic constipation because we have to accumulate additional safety data for this product in both those indications, just in terms of patient numbers required under general ICH consideration. So, at this time our plan is still to file for both indications.

Gene Mack – Lazard Capital Markets

Okay and that will be in sometime early in 2010 or.

Lawrence Olanoff

We really haven’t given guidance on it’s filing date something that I think we’ll be prepared to speak a little bit more towards the latter part of the year.

Gene Mack – Lazard Capital Markets

Okay and just a last question on Savella. You guys there is a pain, the Pain Meeting in San Diego in May. And as we expect to I know there’s one symposium there sponsored by you. Should we expect pretty broad presence at that meeting? Or is it going to be a little more relaxed?

Lawrence Olanoff

I can’t really provide, yeah, I not aware of the details of what our presence will be at that particular meeting we’ll be participating in clearly in a traditional meeting that have been inline in terms of the fibromyalgia area. I know meetings in the fall and then the spring but I’m not aware that particular meeting.

Gene Mack - Lazard Capital Markets

Okay, thanks.

Operator

Our next question comes from Corey Davis with Natixis.

Corey Davis - Natixis Bleichroeder

Thanks, I have two questions, mainly commercial questions on pipeline products. First just to followup on linaclotide, and why especially with IBS delayed you wouldn’t file a chronic constipation first and I think you said something about meeting extra safety data. Is that anything other than standard ICH guidelines? Or is there something specific to linaclotide that you want to do or the FDA has asked you to do?

Lawrence Olanoff

No it’s purely ICH guidelines, there is nothing, we’ve not seen safety signals with linaclotide nor the FDA asked us to do anything in particular beyond the ICH.

Corey Davis - Natixis Bleichroeder

So, then maybe I just press you a little bit more especially with no competitors out there, why would you really need the IBS claim to file the first indication?

Lawrence Olanoff

We’ve really not talked about opportunities whether we are going to file one versus the other. So, I’m not going to break that out at this point. All I can tell you is our current plan is to still in consideration to file both indications for you.

Corey Davis - Natixis Bleichroeder

Okay, fair enough. And then secondly, I have asked you this many times in the past, but as the heart failure indication on Bystolic gets closer, is there any chance you would reconsider the pricing on the 10 mg dose to be simply to be 2x the 5 mg dose especially since the 5 mg seems to be the vast majority of the hypertension sales.

Lawrence Olanoff

It’s a good question, but I can’t really comment on further at this time.

Corey Davis – Natixis Bleichroeder

Okay, and maybe get one more in for probably Frank. I think you said the increase in cash this quarter is $168 million, which doesn’t really jive with the idea of your annual cash flow being closer to a $1 billion. So A) Did I get that math right? And B) Is there an explanation for something anomalous in this quarter?

Frank Perier

Well, don’t forget the annual cash increase was also offset by share repurchase around $335 million and we also had license payments of about $150 million

Corey Davis – Natixis Bleichroeder

Where there any items like that in Q4?

Frank Perier

No.

Corey Davis - Natixis Bleichroeder

Okay thanks.

Operator

Our next question comes from Scott Hirsch with Credit Suisse.

Scott Hirsch – Credit Suisse

Hi, there. Quick question on the Bystolic. Just in reference to the Coreg CR, which ramp nicely and then flattened out. What makes you think the growth on Bystolic rounds here is it managed care coverage, or is that the primary care prescribing?

Unidentified Company Representative

Yeah, I don’t think. It's a good question, but I don’t think, you can make a comparison between the two products.

Scott Hirsch – Credit Suisse

Yes.

Unidentified Company Representative

Coreg is out there primarily for congestive heart failure, was priced accordingly. We came out with a very different strategy. We priced it as a hypertension price, we have what we believe is very good relationships with managed care and good positioning up a product, which we believe, will improve further as we move up into Tier 2 in a number of plans. And we just given a very large effort from and continue to do so from a promotional standpoint in the product is finding resonance. It also has somewhat different pharmacological properties than Coreg and that we believe makes that an ideal drug for use in hypertension. So all in all, we think we have a good product and a very good promotional strategy, which has driven the sales.

Scott Hirsch – Credit Suisse

Okay, and then a few on the spending side, can you let us know how much of the, I guess, the adjusted 345 SG&A from the quarter was call it variable launch spending or pre-launch spending for Savella?

Frank Perier

No, we haven’t given that level of – that level of detail on either actual or planned.

Scott Hirsch – Credit Suisse

All right, fair enough. Anything on gross margin with the mix with, Bystolic ramping Savella coming in here, is there are any gross margin changes that we should expect?

Frank Perier

No, I mean we’re looking at the fairly static gross margin year-over-year.

Scott Hirsch – Credit Suisse

Okay. And then finally, just on the share account. It actually has a little bit of variable difference to it. You said you still have I think $5.7 million or $6 million share authorization. What would determine share repurchase for you guys, you did a lot last year. You’re not really factoring in any into guidance at this point.

Frank Perier

You know it’s – we determine the capital allocation of excess cash resources based upon the strategic priorities of the company. From time-to-time, we will step in and repurchase shares in the market. However, given the current state of the capital markets, if they exist today and our stated objectives with regard to business development, we are trying to allocate more of our available resources towards business development than actual share repurchase.

Scott Hirsch – Credit Suisse

All right, thanks very much.

Frank Perier

Sure.

Operator

Our next question comes from Marc Goodman with UBS.

Marc Goodman – UBS

Yeah, my question has to do with R&D, which is flattish again this year relative to last year and year before and you have a pretty significant late-stage pipeline relative to what you had a year or two ago, especially Phase III, especially these big studies Dutogliptin things like that and I would think cost a lot of money. So, can you help explain what’s going on with the R&D line? And in addition to that just with respect to milestones this past quarter, you were supposed to have a milestone in the quarter, which you didn’t have. So is that getting moved into this new fiscal year? And $70 million that you’re talking about for milestones seems a little bit light. So just try to help us out with that? thanks.

Lawrence Olanoff

I’ll make some general comments and then Frank can add to that. First of all that, we are increasing the spend from R&D and we think the significant amount about 13% year-over-year in really numbers relative once you pull out last year’s milestone. Unanticipated one-time payments in terms of just to sign off. I think the important thing to think about the R&D line here is that we are dealing with somewhat different mix of products you mentioned due to dutogliptin has been one of the pretty significant spend and another product category to spent will be a little less by example with Ceftaroline has been and as we finished cap program will be less this coming year. So, when you look across products, we’re seeing major spends and dutogliptin and Linaclotide less so in, say, in Ceftaroline and aclidinium than was in the previous year. But then looking out into further time and a timing as a lot to do with this looking at big potential spends in cariprazine. We’ve also not taken in into account any potential spends that would arise that we were to license in new compounds. So that’s not obviously projected in R&D line and the last item that I would bring to your attention is with Linaclotide dutogliptin those spends essentially our halved by the fact that our partners are contributing and that’s been a good strategy for us to derisk the programs as well as help control our R&D spends but again I would bring to your attention the fact on an overall R&D line. We are increasing we think it’s a significant increase for next year. And that’s our primary objectives is to move our pipeline forward.

Frank Perier

And Marc just speak to the milestones as we indicated in the press release for the full year we had $59.5 million of milestone that we have paid that indicates that we have paid $16.9 million in fourth quarter so, what you are looking at is we had milestones in fiscal ’08 to $51 million milestones in fiscal ’09 or 59.5 and regarding to milestones of $70 million in fiscal ’10. So, I think the milestone as a percent of total R&D spend, is relatively static and again you’re looking at, still a 13% increase in R&D spend in a fiscal ’10, versus fiscal ’09 and, again as Larry indicated some of the newer deals we do have, we are sharing the costs development programs, which helps mitigate the increase but we are still spending significant R&D money as a percent of sales, to buildup it's pipeline.

Marc Goodman – UBS

Thanks.

Operator

Our next question comes from Greg Gilbert with Banc of America.

Gregory Gilbert – Banc of America

Hi, let me ask a basic question on that DOJ reserve in a way that I think you can answer. Is the way to think about that number that it is your best estimate right now, for what the settlement amount will be, or is there another way to think about the actual number?

Lawrence Olanoff

I think, actually the best way to think about it Greg. Is that, we need to consider exactly where we are based upon the fact and circumstances as they develop and, in consideration of the accounting rules, we had to – we have been, probably think is our best estimate at this time.

Gregory Gilbert – Banc of America

Okay. Moving on to Bystolic, does any portion of your guidance on that product, depend on the CHF claim later in the year?

Lawrence Olanoff

I think at this point, the majority of our guidance given the fact that, the timing of when that claim would actually a rough coming in – in terms of the 2010 calendar year and then our fiscal 2010 year, which ends in March – end of March 2010 really it was – you should think it's a our financial projections to be almost entirely hypertension.

Gregory Gilbert – Banc of America

Will that be a 10-month PDUFA?

Lawrence Olanoff

We are assuming yes.

Gregory Gilbert – Banc of America

Okay. Frank, are there any significant fluctuations by quarter for SG&A and R&D that you would call a lot at this point.

Frank Perier

Not, in SG&A not really. In R&D, it all depends upon the timing of the milestones, which is always a little bit of a guessing game. But I think maybe a little more heavily weighted towards to the first quarter for the milestones and then probably pretty even after that.

Gregory Gilbert – Banc of America

And then the underlying R&D spends sort of ramping and that each quarter over the year. As Phase III begin and such

Frank Perier

Well, yeah probably ramping a little – yeah, I would say they ramp up to a certain extend. But again a lot of the Phase III’s are a pretty much keyed up and ready to go and we have ongoing work as well. So, we’ll ramps slightly.

Gregory Gilbert – Banc of America

Okay, and lastly Larry. Are you going to ensure any color yet on how dutogliptin could be better than what’s out there?

Lawrence Olanoff

We think it could be better in many ways. Now we – in answer to your first question directly now, I think at this stage we are, I would make as we’re exploring in a number of areas but we will also regards this market as a very competitive one and very large market but that will be very competitive with the number of players out there and we’re not prepared to forecast anything until we have greater uncertainty.

Gregory Gilbert – Banc of America

All right, thanks.

Operator

Our next question comes from Elliot Wilbur with Needham & Company.

Elliot Wilbur – Needham & Company

Thank you, I didn’t hear you provide any update with respect to the filing of once daily memantine perhaps administered. I could just ask you to repeat that?

Lawrence Olanoff

Yes, that we had actually spoken that in the scripted part. What we said is that the filing is done, essentially done on the self, ready to go. We’re timing that filing relative to our ongoing patent litigation activity who have not given any specific guidance as to when the file will go in. We will be watching that very closely, over the course of this year.

Elliot Wilbur – Needham & Company

Okay, and can you remind me please when the 30 months day expires on millennium teen?.

Unidentified Company Representative

Yeah, we’re just checking date here.

Frank Perier

Double check that for you.

Unidentified Company Representative

And it’s April 16th, of next year of 2011.

Elliot Wilbur – Needham & Company

Right, and I guess the question would be, why shelf the filing giving that we’re getting relatively close to that date and given the increased propensity of generics of launch at risks doesn’t seem like it would leave you a lot of cushion to convert the franchise, if in fact you were facing an at risk launch.

Frank Perier

Well, we think we have sometime to make that decision between now and with the end of this year, but your point is well taken. I think the other thing that's ongoing now. We have multiple filers to our winners none of those filers can come out with any particular advantage. So, we have time now as case proceeds, to consider all options in terms of bringing this to more certain closure.

Elliot Wilbur – Needham & Company

Okay, and then with respect to Linaclotide, I mean any color you can provide in terms of when we should be expecting to get initial look at the topline Phase III results in IBS-C and I'm just curious as to what the sticking point was with respect to the primary end point discussion with the agency?

Frank Perier

Okay, as far the IBS-C, we haven’t put out of to get our timeframe, but I think you might be looking at in 2010. Our timeframe to have the topline results. We mentioned earlier that decline a conservation topline results to be available in the fourth quarter of this year. Regard the FDA, FDA had- had been spending a lot of time publicly talking about patient reported outcomes, for this category of disease, which would change the paradigm significantly from what they have expected in the past. We have very strong Phase II data so, the issue wasn’t our concern about any particular endpoint, but Getting some guidance for the HCS what endpoints, and what validation they would require. They realized that, all the work behind that type of activity is probably premature to declare any particular endpoints. So, they reverted back to our knowledge, to more traditional endpoints, which we’re quite comfortable proceeding with.

Elliot Wilbur – Needham & Company

And I assume that just some sort of the primary endpoints, some sort of composite endpoint then that includes some sort of visceral pain measurement?

Frank Perier

I think, what’s you can assume is that it includes a measure of pain, and a measure of bowel movement.

Elliot Wilbur – Needham & Company

Okay, and then just a lastly perhaps for Frank, I guess with respect to your sales guidance for both Namenda and Bystolic. I’m assuming those are based primarily on volume growth loan no potential benefit from an additional price increase during the course of fiscal 2010?

Frank Perier

The forecasts are based upon the price increases that are already in effect on those products.

Elliot Wilbur – Needham & Company

Okay. All right thank you.

Frank Perier

Sure.

Operator

Next question come from Rick Silver with Barclays Capital

Richard Silver – Barclays Capital

Follow up on Lexapro. Could you say that there was it’s a discounting or any comment, commentary on discounting in quarter. And how we should be looking at that going forward?

Frank Perier

Well again we had a price increase that went into effect essentially, for the full month of February on Lexapro of about 6%. So, we got, we basically got the benefit of just about the full benefit of that price increases we believe in the quarter, looking at our discount rate and then we’ve seen about a 50 basis points increase in the discount rate. When we kind of expect to comes and stay at that level for the remainder of the 2010. So, the discount rate is crept up slightly, but not dramatically.

Richard Silver – Barclays Capital

And not much quarter-to-quarter?

Frank Perier

That's about 50 basis points versus third fiscal quarter.

Richard Silver – Barclays Capital

Okay. And then just on, the doubling of your pipeline. Can you just remind us, how you’re defining the value and on, and then where you are today. In terms of reaching that goal of doubling by I think you said at the end of 2012?

Frank Perier

Yeah what we’ve said in the past as we, before we added in dutogliptin and levomilnacipran F2695 that we felt that the products, which still in that pipeline those products in their composite that we’re passed the proof of concept stage most of in Phase III with more than and that include Savella as well. With more than we are placed the revenues in the longer term that we lost due to Namenda and Lexapro patent expertise and that was also prior to getting the full extension on the Namenda pack. Where we are in go and we have done any kind of precise estimate. We haven’t really related those numbers to the community yet. But the reality is we’ve added two installments to that activity, were still in tying to advance some of our earlier stage candidate but we’re out there actively looking so I can’t give you numbers of compounds or actual dollar figures, but, you are looking at, we’re still looking at adding additional products. And many of which would be peak sales in the $502 billion range, which gives us even more diversity amongst the pipeline in terms of financial return as well as therapeutic categories over a wider areas. So, it’s about as much as I can say today. I think as the year goes along we will provide, that will be a little more color around that.

Richard Silver – Barclays Capital

So, while you’re not providing the dollars or the number is it should we be thinking of it in terms of numbers of products is a doubling or dollar value in peak sales and the doubling? What’s the metric that we’re talking about when we say doubling?

Frank Perier

Rich, what we really talking about the commercial value of those products.

Frank Murdolo

Right, the total revenue generating potential.

Richard Silver – Barclays Capital

And again, so the two in terms of doubling and the base where we’re starting the two, that you mentioned are dutogliptin and levomilnacipran is that correct?

Frank Perier

Yeah that those are the first two installments towards that doubling objective yes.

Richard Silver – Barclays Capital

Okay and then just a quick financial question for Frank. The interest income projection for ’10 is that fourth quarter of good run-rate or would you expect any significant change there.

Frank Murdolo

It actually might run a little bit later than the fourth quarter delivery again, we keep our portfolio pretty much in a very short-term basis. So really are subject to the changes in interest rates. And interest rates are down dramatically, on the fourth fiscal quarter of this year versus the fourth fiscal quarter of last year, with a little of sign of improvement. So, I would suggest that you might go ahead little bit later than what we had in the fourth quarter.

Richard Silver – Barclays Capital

Thank you.

Operator

Our next question comes from David Buck with Buckingham Research.

David Buck – Buckingham Research

Hi yes thanks. Some have been asked and answered, but a couple of quick once. First on Savella, the guidance for fiscal 2010 implies sort of a slow steady start. Can you talk about whether you see this product within your target range in terms of peak sales in the $500 million to, a $1 billion and just initially what do you think your market share is going to come from. Secondly, if we were look at Namenda look like that was also little bit late versus our model, was there any discounting there as well in the fourth quarter. And can you talk about what the outlook is for the year. And then for Frank, can you talk a little bit about tax rate going forward beyond 2010. What’s the outlook for maintaining that tax rate in the low 20’s. There are obviously, some proposals to change that pretty dramatically? Thanks.

Frank Murdolo

Yeah I’ll comment. If you go back little bit, on Namenda there has been no, material changes in our discounting rate. Those numbers with some minor fluctuation here in there are pretty much on our targets. If anything that product performed a bit better than we have originally anticipated and as we suggest that regarding to you to above the $1 billion for next years performance. As far as Savella, just in terms of the general model that we’ve used that product could be in the range that you suggested in the $500 million plus range overtime as product we, we’ve looked at the fibromyalgia market is approximately $1 million patients currently being treated if dollarized that’s probably a little more to the $1 billion in total revenue generating potential at current stage half of that is roughly proprietary products to our estimates and the other half are would be dollarized generic none of which are proof for that indication. We think there is a substantial more growth in available in that market, let just say starting out with the million plus patients, it actually as many of $6 million patients realistically half of those patients being treated you could see the growth potential and I would guide you, similar to our experience when we first entered to the Alzheimer's market where, the market was about a $1 billion in it's size and it's more than doubled in number of patients out there still remain to be treated and where we see the potential future growth for Namenda. And I will let Frank comment on the tax rate.

Francis Perier

Yeah David, and just on the tax rate, we giving guidance for fiscal 2010, and 21.5 on the tax rate pretty much inline with what our effective rate was for ’09 over the last several years, on I really not in a position in comment on out beyond that and I would say, absence, a dramatic shift in tax policy coming from, Congress, we feel confident and the ability to deliver that 21.5% rate in fiscal 10.

David Buck – Buckingham Research

And just a follow-up on that I guess have you heard any additional color behind the proposal do reform deferral?

Francis Perier

All right there has been lots of color coming from, both sides of the debate and, this is a very big issue and affecting all of American industries, in essence the way it was proposed. So, I think you are going to end up like with most things and some kind of compromise that hopefully will be follow up until all the players?

David Buck – Buckingham Research

Gotcha, and then one final on the cash on hand that you have the $3 billion I think you said about $800 million just in the U.S. what should we think of in terms of the firepower available for an acquisition, what size?

Francis Perier

Yeah, it all depends upon what the acquisition is and where it is, we've got total, cash investment resources available just over $3 billion. And we are still maintain a revolving credit facility of a $0.5 billion and I think the credit markets are starting to show some signs of life so, the ability to get additional long-term debt, maybe there so, we can take on a sizable, a fairly sizable transaction if the right transaction presents itself.

Lawrence Olanoff

Also, just to comment, if there is a transaction involved that in fact it’s located on both shores, both in the U.S. and in Europe, we potentially use part of that acquisition from our European funds.

David Buck – Buckingham Research

Okay. Thank you.

Operator

Our next question comes from Tim Chiang with FTN Equity Capital

Lawrence Olanoff

Enough operators we will make this our last question coming up now.

Operator

Okay.

Lawrence Olanoff

Thank you, Tim.

Timothy Chiang – FTN Equity Capital

Thanks, you guys, you mentioned on your press release about 1.5% growth in the antidepressant market. I’m just wondering is that something, that’s somewhat conservative it looks like that the growth in the antidepressant markets running North of 3% right now, on volume basis. Just want to get your thoughts on that?

Lawrence Olanoff

It maybe a little conservative in answer to your question, but in reality is that growth rate really very quite a bit over the course of the year. So, we are trying to look at a projected rate that's fits a full year model.

Timothy Chiang – FTN Equity Capital

And I guess, so your expectation is that the Lexapro share will to about 17% at year end is that right?

Lawrence Olanoff

It depends on how you are assessing the actual share but that's probably within reason.

Timothy Chiang – FTN Equity Capital

Yeah, and just one last question on the cariprazine Phase II studies, and I know, I went back and look at some of the trial data in the pervious Phase II studies, what sort of tolerability do you guys deem as expectable I know there’s I know in the schizophrenia bipolar mania space, there’s a lot of products but they are all riddled with side effects. I mean do you think this product will have significantly less nausea, less weight gain is that something you saw in the prior phase II studies?

Lawrence Olanoff

When we roll up both the schizophrenia and bipolar mania studies, which uses doses up to 12 milligrams a day and as I mentioned earlier we’re actually reducing the dose of schizophrenia that we continue to go potentially with the higher dose in bipolar the overall safety results we felt we are very good and the tolerability was very good especially from an adverse dropout standpoint. In terms of the categories we really haven’t seen any signals relative to any substantial weight growth or glucose metabolic instability, haven't seen anything on the cardiovascular side that gets us concerned and, the general level of other types of side effects EPS types side effects has been very reasonable. So yes we think we have a product so far with the very competitive position on a safety basis.

Timothy Chiang – FTN Equity Capital

Okay and you said that those results would come out by the middle of this year or?

Lawrence Olanoff

The results for the Phase II-b schizophrenia trial should be available on the third quarter of this year.

Timothy Chiang – FTN Equity Capital

Okay great thanks a lot.

Frank Murdolo

Okay operator, thank you, and thank you everyone for joining us this morning. Certainly we are here to take any additional questions that you may have throughout the day. Thank you.

Operator

This concludes today’s conference call you may now disconnect.

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