Cephalon Inc. Q1 2009 Earnings Call Transcript

Cephalon Inc. (CEPH)

Q1 2009 Earnings Call

May 05, 2009 05:00 pm ET

Executives

Chip Merritt - VP of IR

Frank Baldino - CEO

Lesley Russell - Worldwide Medical and Regulatory Operations

Kevin Buchi - CFO

Bob Roche - Worldwide Pharmaceutical Operations

Jerry Pappert - General Counsel

Analysts

Jim Birchenough - Barclays

Chris Schott - JPMorgan

Gary Nachman - Leerink Swann

David Amsellem - Piper Jaffray

Louise Chen - Collins Stewart

Greg Gilbert - Banc of America

Corey Davis - Natixis Bleichroeder

Bret Holley - Oppenheimer & Co

Eric Schmidt - Cowen and Company

David Windley - Jeffries & Company

Presentation

Operator

Good day, everyone, and welcome to the Cephalon First Quarter 2009 Earnings Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Chip Merritt, Vice President of Investor Relations. Please go ahead, sir.

Chip Merritt

Thank you. Today we will review Cephalon's financial performance for the first quarter of 2009. Before we begin, let me remind you that certain statements on this call may be forward-looking and are subject to risks and uncertainties associated with the company's business. These statements may concern among other things guidance as a future revenues and earnings, operations, transactions, prospects, intellectual property, litigation, development of pharmaceutical products, clinical trials and potential approval of our product candidates.

The company also may discuss certain non-GAAP financial measures within the meaning of Regulation G during today's call. The information required by Regulation G is available in either the earnings press release or the newsroom section of our website at www.cephalon.com. Additional information and risk factors affecting the company's business and financial prospects and factors that could cause Cephalon actual performance to vary from our current expectations is available in the company's current Form 10-K on file with the SEC.

During this call, we will update full year 2009 guidance and introduce second year guidance. Please note that guidance will remain in effect unless the company provides subsequent modifications or updates. Our earnings press release is available on the Internet at www.cephalon.com. Investors with further questions should contact me at 610-738-6376. This conference call is being webcast on the Cephalon home page and will be archived for one week after the call.

Speaking on today's call will be Dr. Frank Baldino, Chief Executive Officer, Dr. Lesley Russell, Worldwide Medical and Regulatory Operations and Kevin Buchi, Chief Financial Officer. Also joining us today are Bob Roche, Worldwide Pharmaceutical Operations and Jerry Pappert, General Counsel. Following remarks by Frank, Leslie and Kevin, we will be pleased to answer your questions. Now, Frank Baldino.

Frank Baldino

Thanks, Chip and good afternoon everyone. Despite the economic downturn, and financial crisis that has hampered the results of many companies, we are very pleased to report another solid quarter. Typical of years past, the first quarter started off slow due to seasonally light prescription activity, but finished strong with AMRIX, PROVIGIL and TREANDA, all achieving record weekly sales levels late in the quarter.

Total sales for the quarter of $514 million and adjusted net income of $101 million put us on track to deliver our previously announced guidance of 13% top line growth, and 24% bottom line growth for 2009. We were also building a strong pipeline of new medicines for the future. During the quarter, we announced two exciting new opportunities.

First, we acquired an option to buy Ception Therapeutics, including their lead compound reslizumab

, currently in Phase IIB/III clinical trials for the treatment of pediatric patients with eosinophilic esophagitis. Second we launched a takeover bid for the Australian public company, Arana Therapeutics. Arana's lead compound ART621 is being studied in the Phase IIA clinical trial for the treatment of rheumatoid arthritis, and recently completed a Phase IIA clinical trial for the treatment of stable plaque psoriasis.

These two opportunities are in addition to the recently announced Acusphere and ImmuPharma deals. In addition, we had positive results from five different clinical studies. A Phase III B comparative study of FENTORA versus Oxycodone, a Phase IIB study of systemic lupus erythematosus with LUPUZOR, a Phase IIB study of NUVIGIL in bipolar depression, a Phase III study of NUVIGIL in OSA and Comorbid Major Depressive Disorder

Overall, 2009 is off to a great start. I'll ask Dr. Lesley Russell, Cephalon's Chief Medical Officer in charge of clinical development to take a few moments and discuss the NUVIGIL clinical program. Leslie?

Lesley Russell

Thank you, Frank. As you know, we have a broad range of clinical programs under way, studying NUVIGIL in a number of indications. I'll start with the positive jet lag study we recently announced. In this study, we evaluated NUVIGIL, as a potential acute treatment for excessive sleepiness associated with jet lag disorder. Operating under a special protocol assessment, 427 healthy adults who previously experienced jet lag symptoms were randomized in a double blind placebo controlled study.

Subjects were flown from the East Coast of the United States through six hours of time zone changes to arrive in France early in the morning, where they were escorted to a sleep center. Subjects were then given NUVIGIL or placebo once a day for three days. The primary end points were the Multiple Sleep Latency Tests or MSLT and the Patient Global Impression of Severity, PGI-S scale. Patients taking 150-milligram dose of NUVIGIL showed a statistically significant improvement over placebo, as measured by both the MSLT and the PGI-S with P values of less than 0.0001 and 0.05 respectively.

The treatment effect on the MSLT for those on 150 milligrams of NUVIGIL was the largest we have seen in a clinical trial to date. The study results met the requirements of the SPA and we plan to file our sNDA for the first acute indication for NUVIGIL in the third quarter of this year. We expect a standard 10 month review period with the potential for new indications in 2010.

Another encouraging clinical trial result announced in the first quarter was seen in the NUVIGIL Phase IIB trial in patients suffering from bipolar depression. This eight week, double blind, placebo controlled study evaluated the safety and efficacy of 150 milligrams of NUVIGIL or placebo, administered as adjunctive therapy once daily to 257 patients with bipolar one disorder, experiencing a major depressive episode despite treatment with mood stabilizers.

Patients treated with NUVIGIL showed improvement of their depressive symptoms as measured by the primary end point, the 30 item inventory of depressive symptomology, clinician rated scale, with a P value of less than 0.05. After end of Phase II discussions with the FDA, we plan to begin our Phase III program later this year. If we can show similar results in our Phase III studies, we will submit a supplemental NDA for this new indication and may have the opportunity to treat the millions of people suffering from bipolar depression.

Our study for the treatment of excessive sleepiness in adults for obstructive sleep apnea and comorbid major depressive disorder has concluded with positive results. Our illustrated chart and our label, patient's in this study exhibited residual excessive sleepiness despite regular use of CPAP therapy for their obstructive sleep apnea. We know that patients with a diagnosis of depression are much more likely to have a diagnosis of sleep apnea than those without depression.

We are pleased to have demonstrated a clinical benefit of NUVIGIL in this patient population, and we will be able to make a promotional claim to this effect. Another excessive sleepiness program, we are conducting is in patients with traumatic brain injury or TBI. After the millions of patients living with TBI, 55% experience excessive sleepiness one month after injury with 20% of the total still experiencing excessive sleepiness one year after injury. Operating under an SPA, enrollment has begun in the 620 person Phase III clinical trial examining the effect of NUVIGIL in individuals suffering excessive sleepiness associated with this condition.

We anticipate completion of this study in the second quarter of 2011. If the results are positive, NUVIGIL could have an indication to treat excessive sleepiness associated with TBI towards the end of 2012. We are also actively recruiting for NUVIGIL Phase IIB clinical program as adjunctive therapy in schizophrenia. The positive symptoms of schizophrenia are managed reasonably well with the atypical antipsychotic drugs.

However, the negative symptoms represent a large unmet need that we believe NUVIGIL could address. We shared some promising Phase IIA data with you last year that encouraged us to move ahead in this indication. Turning to our final NUVIGIL clinical program, enrollment has begun in 160 patient Phase II clinical program evaluating NUVIGIL for the treatment of fatigue associated with cancer treatment.

In summary, we believe that NUVIGIL may have the opportunity to treat patients with a number of clinical conditions, and we are well underway with an extensive clinical program to provide new data to support numerous new indications. Back to you, Frank.

Frank Baldino

Thank you, Leslie. As can you surmise, our goal is to broadly develop NUVIGIL to treat a variety of medical conditions, which will ultimately help millions of patients. The protection of the compositions of matter patent on the Form I polymorph of armodafinil justifies the investment in these clinical trials. We're planning on launching NUVIGIL in the next few months.

Our sales force is trained and performing all the necessary pre-launch activities to ensure a successful launch. We're particularly pleased to offer NUVIGIL at a discount to PROVIGIL. We'll also launch a co-pay assistance program to help reduce the increased financial burden on patients. Ultimately, we believe that the improved wakefulness throughout the day that NUVIGIL offers combined with the potential for additional indications will enable this product to become very successful.

TREANDA has just completed its first year in the market and the feedback from both physicians and patients has been very positive. During the first quarter of 2009, we received the unique J Code for the product, which helps streamline reimbursement for treating physicians. And we have been added to several treatment guidelines which should help with the continued adoption of TREANDA.

TREANDA is off to a fantastic start and continues to exceed expectations. More importantly, we are changing people's lives. It is extremely gratifying working for a company that directly impacts the health and well-being of people around the world. Here are the stories of two patients who have been touched by TREANDA. A treating physician started two patients on TREANDA. First patient was an 83-year-old female that had been treated with at least five prior therapies and had a huge mass in her neck that was complicating her ability to eat and to speak.

The doctor initiated treatment with TREANDA and after two cycles, the patient had no palpable disease. She is now on cycle four and thriving. Second patient was also in her 80s and had been treated with eight prior therapies and had lesions throughout her chest. After one cycle of TREANDA, the lesions had disappeared. Both patients tolerated the drug well. Furthermore, the physician said that he was amazed with the results in both of these heavily pretreated patients.

The doctor went on to tell us that in the past he believed the place for this drug was in lymphoma and he never use it in CLL. After the experience he had with the two patients listed above, his mind has changed. He said he will now use it up front before FCR and CLL and will use it in his relapsed indolent NHL patients. Lastly, he has four other partners that have not used TREANDA to date.

After they witnessed the results they all identified at least one patient that could benefit from TREANDA. These are examples of how TREANDA is changing the lives of patients and providing physicians with another therapy in their treatment arsenal. We believe that TREANDA offers significant benefits for patients suffering from both CLL and rituximab-refractory indolent NHL, and we are only beginning to penetrate these markets.

Turning to our pain franchise, AMRIX is responding very well to the sales force expansion that we executed late last year. Early in the first quarter, we witnessed the usual seasonal down tick, which was likely compounded by our sales force realignment. However, based on the steady stream of weekly record AMRIX prescriptions late in the quarter, culminating with the achievement of the 10,000 scripts per week milestone, the realignment is clearly beginning to pay off.

Physician awareness of AMRIX is continuing to grow. Last month's publication, the current medical researcher opinion provided full results from the AMRIX pivotal trial. This is the first time full results were made widely available, and more and more doctors inform us that patients are recognizing the benefits of once daily dosing and all day efficacy, and low rates of somnolence.

We believe AMRIX will continue to be a significant growth driver for the company. FENTORA continues to be steady sales contributor as we work towards adding additional indications. We submitted our FENTORA REMS to the FDA, which initiated 180 day review period. Our REMS program has branded secure access. Secure access is the first controlled access system applied to an opioid and is designed to reinforce responsibilities of all parties in assuring safe distribution, prescribing, dispensing and use of FENTORA.

We will implement secured access upon FDA approval and then monitor its success. We believe that through our program, we will reduce the exposure of opioid analgesic patients to FENTORA, which will allow us to move forward our sNDA for broader FENTORA label. Over the last several months, we announced a number of transactions. We acquired rights associated with an injectable formulation of celecoxib. In fact, an IND was filed on March 31st for this product.

We exercised a previously announced option to obtain worldwide rights for LUPUZOR from ImmuPharma. Exercising the option was based on the positive outcome of a Phase IIB study in systemic lupus erythematosus. We acquired an option to purchase Ception Therapeutics with its lead compound reslizumab for eosinophilic esophagitis in children. We'll have the opportunity to review the clinical results from their Phase IIB/III trial before we make a final decision.

And we made an offer to acquire the Australian Company Arana, with antibody therapeutic pipeline has concentrated in the areas of cancer and inflammatory disease. These transactions are a great addition to our pipeline. The size of our pipeline at present precludes us from discussing every compound on today's call. But I will discuss a few. Patients with acute myeloid leukemia bearing the FLT3 mutation were enrolled in our study of Lestaurtinib, have all completed therapy.

We'll be evaluating response rate end points, survival and remission duration shortly. If this study is positive, we plan to submit the data to FDA later this year for potential launch in 2010. Our Phase II trial of myeloproliferative disorders or MPD, based on the ability of Lestaurtinib to inhibit JAK2 is actively enrolling and we expect study completion by mid-year.

And our Phase I programs with CEP-11981 of VEGF/Tie2 kinase inhibitor CEP-18770, the proteosome inhibitor are ongoing. We plan to begin the Phase I work with CEP-9722, our PARP inhibitor, later this month. And as I mentioned earlier, we filed an IND for CEP-33222 injectable celecoxib. To summarize the TREANDA and AMRIX launches are well under way and continue to drive solid near term growth.

We'll soon launch our next major product, NUVIGIL. Our business development and R&D efforts have been productive and our pipeline is more robust than ever. Thanks for the efforts of Cephalon employees each day our medicines improve the health and well-being of more and more people all around the world. Now, Kevin will discuss our financial performance during the quarter.

Kevin Buchi

Thank you, Frank. Today we released our first quarter 2009 financial results. We reported sales of $514 million, which is a 19% increase over the first quarter of 2008, and is in line with our previously issued guidance of 510 to $530 million. We also reported basic adjusted income per common share of $1.47 compared to $1.12 one year ago. This is an increase of 31% and exceeds the high end of our guidance range.

Compared to the first quarter of 2008, CNS franchise sales increased 19% to $270 million. Pain franchise sales were down slightly to $122 million. The growth of AMRIX which delivered a 169% sales increase to $26 million nearly offset the decline in our Fentanyl based products. Oncology franchise sales were $77 million, an increase of 179% due to strong sales of TREANDA, which reached $50 million.

Our oncology franchise, which didn't exist a few years ago, now represents 15% of our total sales. Other sales were $46 million compared to $54 million a year ago. Our sales in Europe were hurt by a 10% or almost $10 million due to a weakening of European currencies. Our goal is to maintain wholesale inventory levels of between two to three weeks for each of our key products. From the end of the fourth quarter, total inventory levels for our branded products remained relatively unchanged between two to three weeks.

Adjusted R&D in the first quarter of 2009 increased from $73.7 million to $101.7 million, primarily due to the clinical trials of medical affairs expenses resulting from NUVIGIL studies and increases in Acusphere inception expenses. Meanwhile, adjusted SG&A was largely unchanged from one year ago. Our adjusted tax rate for the quarter was 35% which is in line with our guidance. I'd like to highlight certain financial aspects of our recent business development activities.

In January, we obtained the option to purchase Ception for a total of $100 million, which was recorded as our investment in Ception. We are required to treat Ception as a variable interest entity and consolidate their results. The $100 million investment is eliminated against Ception's equity and consolidation. However, as discussed last quarter with respect to Acusphere, the activity associated with our variable interest entities is backed out of net income to arrive at net income attributable to Cephalon for both US GAAP and adjusted net income.

Second, in connection with our tender offer for Arana, we entered into a foreign exchange forward agreement and an option agreement to manage the exchange rate risk associated with cash payments and future Arana stock purchases. Due to the strengthening of the Australian dollar, we recognized a gain on these contracts. In making our quarterly adjustments, we excluded $6 million of income representing the currency gain, Arana dividend income and the acquisition costs of the Arana tender offer. During the quarter, we exercised our right to acquire worldwide license rights related to LUPUZOR.

In cons junction with this, we excluded $30 million as acquired in process R&D. Other adjustments that were made to arrive at adjusted net income include, we excluded $26 million associated with the ongoing amortization of acquired intangible assets and accelerated depreciation related to restructuring. We excluded $10.5 million associated with the implementation of FSP APB 14-1, the new accounting requirements that instrument C convertible securities.

We excluded $21.4 million to reflect the tax effect of pretax adjustments. Our cash flow from operations was particularly strong this quarter at $173 million. This was the result of solid operations, coupled with the receipt of a $67 million IRS tax refund associated with the termination of our Alkermes co-promote agreement and (inaudible) payment. Our cash balance at the end of the quarter was $615 million, which includes $72 million of cash held by our consolidated [VIEs].

Based on our current outlook our 2009 sales guidance remains unchanged between $2.175 and $2.225 billion. Our guidance for adjusted net income for the full year remains between $452 and $459 million and our guidance for basic adjusted income per common share remains between $6.50 and $6.60, reflecting a basic share count assumption of 69.5 million shares outstanding.

Guidance for the CNS franchise remains between $1.16 and $1.19 billion. The pain franchise is lowered to between $530 and $555 million. Oncology is raised to between $300 million and $320 million, and our guidance for other product sales is lowered between $150 million and $175 million, primarily due to a stronger dollar.

R&D and SG&A expenditures remain between $440 million to $460 million and $840 million to $860 million respectively. Our assumed tax rate for the year is approximately 34%.

The company is introducing second quarter 2009 sales guidance of between $515 million and $535 million, adjusted net income of between $96.6 million and $103.5 million and basic adjusted net income per common share of between $1.40 and $1.50 based upon 69 million shares outstanding and a tax rate of approximately [4%].

That concludes our opening remarks. We will now open this call to you and your questions.

Question-and-Answer Session

Operator

We will take our first question from Jim Birchenough with Barclays.

Jim Birchenough - Barclays

Just wondering on the PROVIGIL number for the quarter, it was down 10%. I'm having trouble reconciling that with the price increase and what seemed to be relatively flat volume trends. Could you maybe describe what happened with PROVIGIL in the quarter?

Kevin Buchi

We're looking. One second. Prescriptions were down slightly versus quarter four.

Frank Baldino

Q1 versus Q4, prescription volume was down, price was up.

Jim Birchenough - Barclays

I guess what I'm seeing is $281 million in sales in the fourth quarter reduced to $253 million, which was a 10% decline. I saw scripts down 2%. Seemed like the price increase more than offset that. So I'm still struggling with the magnitude of the decline.

Frank Baldino

Well, I'm looking at U.S. only, right. There was an exchange effect associated with the European piece. U.S.-only, PROVIGIL sales were down around 10%, and that in my view was a 5% increase average in price and about an 18% decline in volumes.

Jim Birchenough - Barclays

And then maybe just looking ahead to the second quarter, there was the comment that towards the end of the first quarter, we saw trends accelerating and getting to record weekly levels. I am trying to reconcile that with guidance that's essentially flat for the second quarter in terms of sales.

Kevin Buchi

I think if you look at what's going on in the second quarter, virtually all the PROVIGIL promotion has been pulled at this point in time. I shouldn't say virtually all the promotion. All the promotion has been pulled at this point in time, in anticipation of the NUVIGIL launch coming up in the next several months. We certainly got growth with AMRIX, and we've got excellent growth with TREANDA.

The CNS franchise probably isn't going to do much this quarter, and so that's really the basis for a modest increase in sales in the second quarter. Then as NUVIGIL starts to take hold as we start to move that out and start to promote it, you're going to see very solid growth we would expect in the third and fourth quarter.

You're seeing a similar trend with earnings, because on the expense side, you've got all the expenses associated with NUVIGIL launch in the second quarter. Those will start to moderate third and fourth quarter. The combination of product growth and fairly flat expenses should yield very substantial earnings growth in Q3 and Q4.

Jim Birchenough - Barclays

Just a final question. I'm going to look ahead one more quarter to the third quarter on the NUVIGIL launch. Could you maybe just go through a bit more detail on how you're going to use this obstructive sleep apnea comorbid depression study to support renewed promotion at the psychiatrist level?

Frank Baldino

Why don't we talk a little bit about that. Lesley talked about the whole regulatory opportunity we have with this study as a promotional claim, and then maybe Bob could provide some color on what this could mean from a sales and marketing perspective.

Lesley Russell

I think the predominant use of the study is to be able to talk about sleep apnea and the effects of NUVIGIL on wakefulness and OSA to psychiatrists who see a lot of patients who have the comorbid state of OSA and depression. I think that was the reason for looking specifically at the sub-group.

When we look at the results of the study, we showed clear clinical benefit for NUVIGIL in this population, with very nice effects on the clinical benefit endpoints and sleep scales. So, I think that allows promotional claims showing that NUVIGIL provides a very nice clinical benefit for this sub-group of patients.

Don't forget, this is a sub-group of our already indicated population. So it just adds a little bit more depth into a specific sub-group, but we already indicated for OSA.

Frank Baldino

It does bring us, again, Bob, to those physicians that treat depression and OSA. I want to talk a little bit about that audience, answer Jim's question more directly.

Bob Roche

Our intention obviously is to take these data to the high prescribing psychiatrists that have been strong supporters of ours for years and allow them to really begin to understand about how this product can help a whole new element of their patient population. We've done a lot of research, and a lot has been done by other organizations that indicate the really heavy preponderance of patients with sleep apnea who are comorbid sufferers of depression.

Our sales reps obviously will be very well trained in the use of these data and what they can and cannot say, but with these data, we will be I think very comfortable in opening up discussions with this group of physicians that we have not been in direct contact with for quite some time.

With the new data that we're anticipating in the bipolar area and in schizophrenia, somewhere down the road, this really provides a very nice entrée back into those psychs' offices.

Operator

And we'll go next to Chris Schott with JPMorgan.

Chris Schott - JPMorgan

First question on TREANDA. Can you just elaborate a little bit more on the usage we're seeing here between CLL and NHL that would be in the market about a year? Are you seeing the mix shifting at all from your perspective, I guess, towards more NHL in a couple of quarters there?

Frank Baldino

I think the actual mix, we really don't have a breakdown on for you. It changes like weekly here. But I think the first label was CLL. We're making great inroads there. (inaudible) indication is something we're growing into. We're very pleased to have the performance we've had there.

At this moment, all the great sort of sales results you've seen to date are largely driven by the CLL indication, which tells me anyway there is plenty of upside in the NHL indication with the label we have in addition to CLL. So we're starting to see some movement there. We're starting to see some good uptake there, but by far the use is largely in CLL.

Chris Schott - JPMorgan

As we think about R&D investment looking out beyond 2009, would the strong growth you see in the pipeline and some encouraging data points certainly here on NUVIGIL, should we be thinking about R&D as a percent of sales increasing from current levels as we think kind of over the next few years with this large Phase III program on NUVIGIL starting to roll out here.

Frank Baldino

I think we haven't given any guidance beyond 2009, and I don't think we're going to do it today. But, just to remind you that we've just conducted in 2009, finished up some very large studies on NUVIGIL and we just initiated as Leslie said some very large studies on NUVIGIL for the remainder of this year and a lot of these expenses in R&D are front end loaded a bit. Kevin you want to comment on that a bit.

Kevin Buchi

We've got a lot of great opportunities ahead of us between the recently in licensed products with Ception, LUPUZOR and the ART621, the TNS, as well as all the work we can do around NUVIGIL. It's difficult to say exactly how much money we're going to be spending until you tell me which one of these are going to work and which aren't. As Frank said we're not ready to provide guidance for next year yet, but we do see a awful lot of opportunity ahead of us, which is great news.

Frank Baldino

The other thing too is we have an opportunity to pick and choose how we spend our money going forward. So we've done a good job of that in the past and suffice to say that there wasn't remarkable increase in R&D spend over the past couple of years and we don't envision it going forward.

Chris Schott - JPMorgan

Maybe just one final one, just can you just give us a quick update in terms of as you're looking at in licensing and M&A opportunities out there, just the latest on the environment you're seeing. Are you still seeing attractive prices out there? Are we seeing prices maybe stabilize or improve at all, and again just kind of willingness from some of the potential sellers to just enter into discussions, just a quick update would be great?

Frank Baldino

We see the opportunities here as being very great. We said in the past that this is a unique moment in history for acquirers of biotechnology products and licenses of biotechnology drugs and we don't see any change in that in the past couple of months. In fact, more and more companies are actually coming to the floor, presenting us with opportunities and I'm sure you're hearing it from every other company you follow and cover. It's still difficult to raise money.

It's very difficult to address the public markets in a meaningful way. It's very difficult to use any kind of debt structures. In the past six months, certainly looking forward to the next six months, you'll see a whole lot of change there. So, the normal sources of capital are just not available for these folks and they're doing their best to survive and form collaborations of relationships and we're very proud to be among the group that they talk to. So we see more opportunities coming for sure.

Operator

We'll go next to Gary and-a-half man with Leerink Swann.

Gary Nachman - Leerink Swann

Our understanding is that the clinical experience program for NUVIGIL just kicked off. Could you remind us how extensive that will be and with NUVIGIL pricing out there at discount, what are the expectations in terms of how formulary is going to treat this product? I'm assuming you started having those discussions.

Frank Baldino

Gary you're talking about the top star program, are you not?

Gary Nachman - Leerink Swann

I guess if that's what it's called.

Frank Baldino

Okay. So there is a lot of programs here going on as we get pre-launch activities. So Bob, why don't you tell him where we are and the purpose of top launch and then answer the rest of the question.

Bob Roche

The top star program is really an innovative way in which we can get early physician trial and then important feedback from their patients on NUVIGIL'S impact in their patient's lives. Over the last few weeks, we've just begun to identify and enroll doctors into this program and when we actually initiate, it we'll have physician numbers in there which could tally over 5,000 that will be enrolling patients into the program that they then will have direct visibility to in terms of the results. Those results will also be compiled and can be shared on a broader basis. We're just getting the program rolling. It was always seen as being a lead in to the launch of NUVIGIL and remains an important element in kind of our pre-marketing strategy.

Gary Nachman - Leerink Swann

Okay. And then regarding the conversations you're having with formularies at this point, now we know it's at a discount to PROVIGIL.

Bob Roche

Yes, and as you can imagine, that's generated a lot of excitement. The formularies and the physicians and pharmacists and bean counters that we're talking to, they all see the economic benefit that NUVIGIL will be able to provide and those who are thoughtful are also I think able to understand the clinical benefit that's brought about through wakefulness throughout the day. And the combination of those two elements is indicating to us at this stage anyway that both managed care organizations and PBMs are certainly considering we believe will be willing to provide in many cases preferential positioning for NUVIGIL on their formularies.

Gary Nachman - Leerink Swann

Okay. Does that mean it could end up being Tier 2 in some cases or Tier 3 at most formularies.

Bob Roche

Well PROVIGIL is a Tier 2 product in a number of plans and Tier 3 and we would anticipate NUVIGIL would be, if our efforts are successful slightly advantaged in a tier-wise fashion.

Gary Nachman - Leerink Swann

Very helpful, Bob, thank you. And AMRIX sales, that was actually flat with the last quarter, which was surprising I guess given the strong Rx trends and it sounds like again no inventory changes, so Kevin, how do you explain that and also update on the formulary status on that product.

Kevin Buchi

Well I think if you look at the prescription trends for AMRIX, you know, it got off to a little bit of a slow start. Principally, we believe because we went through a major sales force expansion, sales force realignment at the end of last year. You know, that caused everyone to be in new territories and it takes a while I think for people to get back up to speed. By the time you got to the end of the quarter, the growth trend was clearly back. We had weeks where we're hitting 10,000 scrips a quarter, which is terrific. So, I think it was a seasonal type of trend. Very similar to the trend we saw with PROVIGIL this year and we see frequently.

Bob Roche

It's Bob here. The overall sector of SMRs declined in terms of total business during that period of time and AMRIX continued to gain share both in the branded sector and in the overall prescription tally. So, although we would certainly have liked to have seen strong growth throughout the quarter, I think what we're seeing now is indicative of what we should expect and be very pleased with the realignment and the promotional focus that we put on this product.

Kevin Buchi

Just to add one more point. I mean, the realignment was a major realignment. We did think about launching NUVIGIL in 2009, so we did the alignments around AMRIX, did the contracts with our third party sales force incentive. We had to realign the entire territories of the pain and CNS organization. We did so with the foresight of being in an excellent position to launch NUVIGIL this year as well. So we didn't had to do it twice.

So there probably was a little bit more of an enhanced negative bump if you will in the first quarter, getting ready for something I think you would all agree is a good investment of our efforts looking forward in 2009 for NUVIGIL and AMRIX itself. So sometimes, we make decisions that currently appear to put things a little slower but in the long run I think it's going to really pay off for all of you.

Gary Nachman - Leerink Swann

Lastly, what's your expectation, at what point do you stop supplying Barr with generic ACTIQ. Just remind us of that? Thanks.

Frank Baldino

I think our position on this has been pretty clear. We've enjoyed our relationship with Barr over the years. We have a contract with them and we intend to honor that contract.

Gary Nachman - Leerink Swann

That expires later this year or next year?

Frank Baldino

I think the contract runs through a certain date of September, in September of 2009.

Operator

And we will go next to David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray

Hi, thanks. Just on PROVIGIL, my question is are you done with price increases for the drug ahead of the NUVIGIL launch or should we expect another one before the rollout?

Frank Baldino

Well, I think just a matter of policy, we prefer not to comment on future price increases. So, it's a difficult question for us to answer.

David Amsellem - Piper Jaffray

Okay. Then a question on the upcoming FDA panel meeting on risk management for opioids. Do you think that an outcome there will be a pathway for generics to get to market with the REMS in place? Do you think that REMS or lack of one is what's holding up the approval for ANDAs for ACTIQ?

Frank Baldino

This is the May 27, May 28 meeting you're talking about, right?

David Amsellem - Piper Jaffray

That's correct, yes.

Frank Baldino

I believe that the rapid actings are actually excluded from that meeting. I don't believe we are part of that meeting.

Lesley Russell

That class runs for the extended release opioids that are being discussed at that meeting.

Frank Baldino

So, it's a different category of opiate.

David Amsellem - Piper Jaffray

One last question, a little surprised by the long timeline for the traumatic brain injury study for NUVIGIL. Is that a function of an expectation for slow enrollment?

Lesley Russell

I think we certainly started late, because we were waiting to get, as Bob put in place, with the agency, and that took longer than anticipated. So, unfortunately, it pushed the start out a little bit. We're doing everything we can to actually bring the timelines in earlier than I said, but clearly we need to look at enrollment and see how it goes.

It's really a factor of late start rather than anything else. We felt it was important to have an agreement in place with the agency, because it's really a very new indication for NUVIGIL. So that required some sort of discussions with them, but I'm glad we have it in place.

Frank Baldino

It's a large study. It's over 600 patients. We thought the SPA would be critical in that particular indication. So, we're happy we waited, and it's going to cost a little bit of time, but Lesley has shown herself to be pretty good on catching up with some of these things.

Operator

We'll go next to Louise Chen with Collins Stewart.

Louise Chen - Collins Stewart

Just had a question on the PROVIGIL and NUVIGIL switch. Just want to understand how we should be thinking about maybe an exit market share for NUVIGIL as a percentage of the overall PROVIGIL/NUVIGIL franchise by the end of the year.

Frank Baldino

That's going to be really hard to give you specific share points and time. I know everybody wants to hear those numbers, and it's very difficult to provide them to you. Suffice it to say that we've got a plan, suffice it to say that this plan we think is a really good one, and we are going to do our darnedest to get as much business as we can and move things forward.

It's very difficult to predict for you at this time what our market share would be. I would just like to reinforce to you that we have a good market on PROVIGIL, and there is nobody else in this space at this time. So we think NUVIGIL will do really well going forward.

Louise Chen - Collins Stewart

Could you talk about the market opportunity for CEP-701?

Frank Baldino

Yes, we've certainly looked at that market very carefully and are excited about the prospects that CEP-701 can provide. Not going to provide you with what our financial expectations are at this stage, but I'm sure we'll have an opportunity to talk about that sometime in 2010 when we launch the product.

Operator

We'll go next to Greg Gilbert with Banc of America.

Greg Gilbert - Banc of America

Lesley, a broader pipeline question. Can you offer a sneak peek of what we'll learn about the pediatric EE product, the lupus product and the Arana portfolio over the next 6 to 12 months and just focus on what you think are the more material developments that you're looking for?

Lesley Russell

Obviously, the reslizumab data is in the eosinophilic esophagitis inception. So they will be the ones that report the results on that or at least I believe they will be. They're on track. I think their timelines are on track to have some data. Hopefully beginning next I think are their presumed timelines. So we look forward to hearing that.

For the LUPUZOR, you've heard the interim analysis on the Phase IIb study, which is what triggered our option to buy that. We are currently acquiring in the rest of the data on that interim analysis. I don't have an exact timeline on that, but again that would be some data coming out probably towards the end of this year.

With the Arana ones, you saw what little psoriasis data they released. They are in the middle of a Phase IIa study in rheumatoid arthritis. To be honest, we're not privy to how that study is going right now.

Greg Gilbert - Banc of America

Okay. Is there an opportunity to significantly truncate the timeline of development for the Celecoxib product, given the wealth of data that exists for the oral form?

Lesley Russell

We're certainly going to do the most expeditious clinical program that we can for that. The IND has been filed. It's now open. We go into Phase I very shortly. That's clearly just a dose escalation study. Everyone knows that Celecoxib is an analgesic. I don't think we need too much Phase II data. So, we would plan on doing pretty much probably going into straight into a randomized program.

So, I think there is opportunity to have a reasonably streamlined program. We clearly need to talk with the agency about how much safety data is required. We have to factor that into any timelines too, but it's an acute use of a drug. So, that helps us as well.

Greg Gilbert - Banc of America

So, conceivably, you could be in Phase IIIs in 2010 on that?

Lesley Russell

I think our timeline that we go into Phase III is in 2010.

Greg Gilbert - Banc of America

Lastly a legal question. When do you expect your motion to dismiss in the Modafinil antitrust case to be ruled upon now that there is a new judge involved?

Gerry Pappert

This is Gerry Pappert. Very good question. It's difficult to predict for a couple of reasons. Judge Goldberg is relatively new to the federal bench. He was a state court judge and what we believe has happened is that some of Judge Surrick's cases have been reassigned presumably because Judge Surrick is at that point where he can elect to take senior status and have a reduced case load.

So, I don't know sitting here today the volume of cases currently in Judge Goldberg's docket. We do know that this group of cases presents judge Goldberg with a heavy volume of new paper and a number of fairly complex issues. I think we can all assume that it will take Judge Goldberg at least a reasonable amount of time to get up to speed and assimilate all the new information in these new cases.

So it's very hard to predict, but again I think it's reasonable to assume that it will take Judge Goldberg at least a certain amount of time to get used to this new assignment.

Greg Gilbert - Banc of America

Have there been any other developments around the issue that helped frame the case for you and your confidence in it?

Gerry Pappert

There have not, no. The assignment of the cases to Judge Goldberg was the only development. Prior to that, our motions for dismissal all remained pending before judge.

Operator

We'll go next to Corey Davis at Natixis.

Corey Davis - Natixis Bleichroeder

Thanks very much. Couple of questions. With respect to numbers and guidance, you just beat the high end of your guidance by I think $0.07 and you kept the same guidance for the year. So, the question is was there something that you didn't expect to the upside this quarter that won't be there in subsequent quarters or is this just Kevin being his usual too conservative stuff?

Kevin Buchi

Clearly, it's the latter, Corey. I wasn't going to bring it up on the call, but since you did.

Frank Baldino

Just let me explain Corey. They're too conservative with an oxymoron protein count. You're right, we did beat for the quarter. We beat by $0.07, that $7 million pretax. When we're looking at a total top line for the year of $2 billion and a very a billion and change in expenses. So the percentage is relatively small. It certainly gave me confidence for the year. I think the year's going to be absolutely fine. It's a good start for the year. With three months behind you and nine months ahead of you. I think it's early to be adjusting guidance for the year, especially in an environment where we have new product launches, products growing, and a lot of uncertainties still going forward. So, I'm confident about the year. I think the year's going to be fine, but I didn't see any reason to propose raising guidance at this time.

Kevin Buchi

Besides, Corey, just to point out and I know you know this that our guidance is in excess of 20% growth from the bottom line anyway. We think that's pretty good performance for us. So--

Corey Davis - Natixis Bleichroeder

That's kind of where I was going with this. If you can't beat on the bottom line, are you going to choose to maybe spend it away because you think that the 20 plus percent is kind of a maximal multiple optimizing growth rate?

Frank Baldino

No, I don't think so, Corey. I think with a PE of 11, I think if we gave 10% growth that would probably be a fair. So, it's really not that sophisticated, Corey. It's simply that we've only got three months behind us, they are nine months ahead of us. There's a lot of stuff happening in this industry. It's a great start to the year but it is just that, it's a start. It's not the end.

Corey Davis - Natixis Bleichroeder

Secondly, on NUVIGIL pricing, I think we all know that the AWP discount, but if you add in the gross to net discounts and presumably a lower day count, I get to an effective per prescription discount of about 35% to 40% relative to PROVIGIL. Is that in the ballpark or too high.

Kevin Buchi

I think theoretically it's in the ballpark, Corey. I think you got to be a little careful what the day count was. That's what it is for PROVIGIL today. We don't know how they're going to use NUVIGIL once it's out there. We would anticipate that it will be a true once a day formulation and once a day product here and if it turned out to be that then you'll be right on.

If it's not quite that, the day count could be a little lessor a little more, rather and then I would predict a lower percentage discount. So it's really hard to get your arms around the exact numbers until we get some history on NUVIGIL is being used. And we'll know that probably in the first few months, we'll get a good feel for that.

Corey Davis - Natixis Bleichroeder

Last question relative to what I was looking at, gross margins looked a little bit late. So, was it just me being off or was there a product mix that I should be aware of?

Kevin Buchi

I'm not aware of anything bizarre that happened. There were some changes in royalty expenses associated with some of the products that stepped up, I believe it was AMRIX and TREANDA, which may have driven some of your numbers off a little bit, Corey, but it wasn't a big effect.

Operator

We will go next to Bret Holley with Oppenheimer.

Bret Holley - Oppenheimer & Co

Yeah, hi. I'm just trying to get just some kind of information on the impact of your business on the weak economic environment and wondering the lack of co-pay assistance with PROVIGIL have any negative effect on sales in the first quarter?

Kevin Buchi

Well, we never provide a co-pay assistance for PROVIGIL historically, Bret. So yeah, but that's a big part of the plan going forward with NUVIGIL. Obviously we will be providing some co-pay assistance for patients which we think will be very important in this particular environment. So, we haven't had any co-pay assistance, and we're also not detailing PROVIGIL very much and haven’t for the last 30, 40 days or so. So it's hard to answer your question in the context of the transition we're going through.

Bret Holley - Oppenheimer & Co

Yeah, I guess I was just wondering. Did the lack of co-pay assistance, did you have input from physicians and/or patients that they weren't able to afford your drugs in the first quarter.

Kevin Buchi

I think one thing's for sure is that at the end of the day, the patient and that cash register in the pharmacy really feels the burden of the payments of their prescriptions. So anything we can do to lighten that burden will help them and there's absolutely no question in our mind that if this had been available for PROVIGIL during the years where we were actively promoting it, during the years where it was a very strong growth driver from a volume perspective, it may have had a positive difference. But in this environment, now we hadn't done historically, we decided not to do recently and we're focusing exclusively on NUVIGIL for that opportunity.

Bret Holley - Oppenheimer & Co

I guess a follow-up. The lack of detailing for PROVIGIL was just instituted in the second quarter, it didn't have any effect on first quarter; is that correct?

Bob Roche

Yeah, that is correct. We actually pulled all promotion from PROVIGIL after Q1. Because of some of the reorganization activities that were referred to earlier on this call, the actual call numbers for PROVIGIL did drop a little bit in the early part of the quarter. But there wasn't any really significant impact I think on PROVIGIL sales from either that or the co-pay assistance or lack thereof in Q1. And as Frank says it's really all focused now on NUVIGIL and the launch of that product and doing absolutely everything we can to ensure that physicians have a good experience in prescribing it and that it's available to patients and that they have a terrific experience when they take it.

Operator

We'll go next to Eric Schmidt with Cowen and Company.

Eric Schmidt - Cowen and Company

A question on Lestaurtinib, I was kind of intrigued by some of the comments made on this drug, it had been sort of the forgotten compound, and Frank you've mentioned it in your introductory comments. Bob I think you've said you were optimistic for the market opportunity when launched in 2010, not if launched in 2010. So given this is an open label study I'm just wondering if you're increasingly optimistic for success in the AML space.

Frank Baldino

I'm going to let Leslie answer that one, Eric.

Lesley Russell

I haven't looked so I don't know. No, we're going to the end of the study. We're going to know the data in the relatively near future. You know, if the first 40 or 50 patients that was presented, gosh, a few years back now holds, we should be optimistic. That said you never know until we see the data and as I said it's coming shortly.

Eric Schmidt - Cowen and Company

Okay. And a couple of maybe time line updates. Is there a specific date for the launch of NUVIGIL commercially?

Kevin Buchi

We have stated in the past I think formally that our launch will be early in the third quarter and as I said, earlier in this call, Eric, that we remain on or ahead of schedule for that NUVIGIL launch.

Eric Schmidt - Cowen and Company

You're not going to share with us the specific target date?

Frank Baldino

I think early third quarter was what we told everybody, and we remain on or ahead of schedule for the launch.

Eric Schmidt - Cowen and Company

Is there any update on the COVERS program and your discussions with the FDA?

Frank Baldino

Lesley, I think in the opening remarks, when we talked about filing that, why don't you give Eric some update.

Lesley Russell

We filed the formal REMS on April 2. It's got a 180-day review period for PDUFA action date, October 3. We anticipate ongoing negotiations with the agency. They clearly are interested in what we've proposed. There is the other REMS meeting coming up at the end of May. I'm sure that they're interested to see what we're proposing. We presume we'll have some negotiations and talk to them and probably go down there in the not too distant future, but the formal timelines are six months review.

Eric Schmidt - Cowen and Company

What's the time line for getting the OSA comorbid depression claim.

Lesley Russell

We can make the claim. It's basically based on the outcome of the study. It's within indication. So, regulatory and medical people are working to actually what the claim will say, but it will have to go down to [DD], but it's not a formal submission through the division.

Operator

And due to time constraints, our last question will come from David Windley with Jeffries & Company.

David Windley - Jeffries & Company

Relative to an earlier question on the supply agreement to Barr, setting that somewhat aside, what is assumed in the guidance relative to the competitive set for ACTIQ for the balance of the year, beyond the expiry of the contract?

Frank Baldino

David, as you know, we've been assuming in our guidance over the last year or so now that another generic would come onto the market at some point in time. Our financial guidance continues to envision another generic version of ACTIQ coming to market sometime in the second half of the year.

David Windley - Jeffries & Company

Okay. Along with that, the assumption that the current generics in the market continue to be in the market?

Frank Baldino

Yes, that's correct. We're assuming there will be a fourth, if you will.

David Windley - Jeffries & Company

On the NUVIGIL, some comments relating to that, contributing to growth in the second half, what are the assumptions for NUVIGIL scrips in relation to switch from PROVIGIL as opposed to new patients on treatment in this franchise?

Frank Baldino

I am going to let Bob bring you some answers there.

Bob Roche

We are going to be launching this product, doing so very vigorously. We believe that NUVIGIL is a better product than PROVIGIL. The feedback that we've received from our customers in the marketplace is that that they view it as a better product than PROVIGIL.

The managed care plans that I was referring to earlier that we've spoken to see a really nice benefit both in terms of patient care and in terms of their own economics to NUVIGIL over PROVIGIL. We think that all of these factors are going to compile and really build for a strong groundswell of support for this new product. We're not going to talk specifics in terms of switch numbers or anything like that.

David Windley - Jeffries & Company

Okay. In relation to the co-pay assistance, Bob, do managed care plans put up any resistance or negotiate against, say, a second Tier formulary position if the company is planning on using some kind of co-pay assistance? So, I'm just wondering what their resistance is to that?

Bob Roche

That's not my experience and the two are really quite separate. Right, the co-pay assistance is something that you either provide directly to the patient or that can be allowed to the patient at the pharmacy setting. It really doesn't come into the discussions with the managed care plans, per say.

David Windley - Jeffries & Company

Understood. This can have an impact on the volume they have to reimburse. And last question, you mentioned realignment of sales force earlier in the year. Did that include addition or subtraction of reps including on the contract force?

Bob Roche

Yes. It involved addition of salespeople. Right now we've got CNS team of 390 sales reps plus management plus field support. We have a primary care team of 340 reps plus management, plus all sorts of field support in addition to our pain care team and our oncology team. So, 670 or so, close to 700 salespeople, pardon me, close to 800 salespeople will be out there selling NUVIGIL as soon as we bring it to the market and we believe that this is the right configuration, the right numbers to ensure maximal penetration.

David Windley - Jeffries & Company

And that 340 is a contract force; is that right?

Bob Roche

That's correct, that’s our primary care team and they'll be promoting both NUVIGIL and AMRIX.

Chip Merritt

That concludes today's call. Thank you all for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!