Sepracor Inc. Q2 2006 Earnings Conference Call Transcript (SEPR)

Sepracor, Inc., (SEPR)
Q2 2006 Earnings Conference Call
July 21, 2006, 8:30 a.m. EST

Executives:

Timothy Barberich, Chairman of the Board, Chief Executive Officer
William (Jim) O’Shea, President, Chief Operating Officer
Mark Corrigan, Executive Vice President of Research and Development
David Southwell, Chief Financial Officer, Executive Vice President, Secretary
James Roach, Senior Vice President, Medical Affairs
Robert Scumaci, Executive VP of Finance and Administration, Treasurer
Jonae Barnes, VP of Investor Relations and Corporate Communications

Analysts:

Corey Davis, Natexis
Greg Gilbert, Merrill Lynch
Richard Silver, Lehman Brothers
Marc Goodman, Credit Suisse
Matt Duffy, BDR Research
Lawrence Neibor, W. Baird & Co.
Jon Stephenson, Summer Street Research Partners
Adam Greene, JP Morgan
Andrew Swanson, Citigroup

Presentation

Operator

Welcome to Sepracor’s First Quarter 2006 Earnings Conference Call. Hosting the call today from Sepracor is Mr. Timothy Barberich, Chairman and Chief Executive Officer. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions following the presentation. If you would like to ask a question at that time please press * and 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from queue by pressing the # key. We ask that you please pick up your handset to allow optimum sound quality. It is now my pleasure to turn the floor over to your host, Mr. Timothy Barberich. Sir, you may begin.

Timothy Barberich, Chairman of the Board, Chief Executive Officer

Thank you. Good morning and thank you for joining us today for our second quarter ’06 earnings webcast. With me this morning is Jim O’Shea, President and Chief Operating Officer; Dr. Mark Corrigan, Executive VP of R&D; David Southwell, EVP and Chief Financial Officer; Bob Scumaci, EVP Finance and Administration; and Jonae Barnes, Vice President Investor Relations and Corporate Communications. Before I begin, I’ve asked Jonae to read the Safe Harbor statement.

Jonae Barnes, VP of Investor Relations and Corporate Communications

Various remarks that we make about our future expectations, plans, and prospects constitute forward-looking statements for purposes of the SEC Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as they result in various important factors which are discussed in our most recent quarterly report on Form 10-Q which is on file with the SEC, and other reports that we file with the SEC. In addition, these forward-looking statements represent the company’s expectations only as of today. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so. Any forward-looking statement should not be relied upon as representing our estimates or views as of any date subsequent to today. Thank you.

Timothy Barberich, Chairman of the Board, Chief Executive Officer

Thank you, Jonae. 2006 is a transition year for Sepracor. This will be our first full year of LUNESTA revenue and should be our first full year of operating projects. Today, we announced our third consecutive quarter of profits. Today, we have been successful in establishing a strong brand behind the world class profile of LUNESTA, and LUNESTA has been a key component for the growth rate that we have observed for the overall sleep market.

The introduction of LUNESTA and its long-term safety profile clearly spurred tremendous growth in the overall sleep market. Earlier this year market growth began to moderate with publicity around side effects of Ambien. While we don’t expect this to have a long-term effect on the development of the market, we will be reducing slightly our ‘06 guidance for LUNESTA. During the quarter, we observed a significant change in the competitive outlook for the future sleep market with the regulatory difficulties of Indiplon and the subsequent breakup of the Pfizer Neurocrine partnership. We do continue to see the sleep market as one of the largest primary care markets in the future and as a majority of insomniacs are not yet treated, this offers a spectacular opportunity for Sepracor.

The removal of Indiplon as a competitor provides an opportunity for us to continue to develop this market; however, that requires a sustained investment in both customer and professional communication programs. As a result, we will be guiding to a slightly higher SG&A for the balance of the year.

As you know, approximately 75% of patients with insomnia present with coexisting conditions. Last quarter, we outlined our extensive 3B4 program focussed on treating insomnia patients with coexisting depression, anxiety, arthritis, and menopause. Over the second half of this year in going forward, we will be leveraging LUNESTA’s differentiated safety and efficacy database which we have created, particularly in growing and penetrating the secondary insomnia market and reinvigoration the growth of LUNESTA.

The XOPENEX franchise remains strong with year-over-year growth of 40%. However, the uptake of XOPENEX HFA today has clearly been significantly below our expectations. On the other hand, we remain confident that XOPENEX HFA is uniquely positioned to take advantage of the inevitable transition from COC propellant to HFA. It is difficult to predict the timing of the transition; however, we do know that it will be completed by the end of 2008 and we will be adjusting our guidance accordingly.

During the quarter, our pipeline has continued to progress. The I&D for SEP-162 was filed in early June and we should initiate phase I studies in the coming weeks. We now have three important clinical assets under development. The NDA for Arformoterol is under review at the FDA and we are targeting a second quarter ‘07 launch.

Today, David Southwell will review the financial results of the quarter and provide guidance for the year. Jim O’Shea will review the progress of LUNESTA and XOPENEX and provide a review of commercial operations. Dr. Mark Corrigan will review our progress in R&D. We will then follow with questions and answers. I would now like to turn it over to David Southwell who will provide financial results for the quarter and the year.

David Southwell, CFO, Executive Vice President, Secretary

Thank you, Tim. For the three months ended June 30, 2006, Sepracor’s consolidated revenues were $264.4 million, of which revenues from pharmaceutical product sales were $256.4 million, XOPENEX brand level albuterol franchise revenues which were $117.3 million, and LUNESTA brand eszopiclone revenues were $139.1 million. Net income for the second quarter of 2006 was approximately $11.3 million or $0.10 per diluted share. Reported results for the second quarter of 2006 included charges of $10.6 million or $0.09 per share for stock-based compensation due to Sepracor’s adoption in January 2006 of SFAS 123R. These consolidated results compare with consolidated revenues of $185.1 million of which revenues from pharmaceutical product sales were $166.7 million, which was $83.2 million for sales of XOPENEX brand and $83.5 million for sales of LUNESTA, and a net loss of $7.4 million or $0.07 per share for three months ended June 30, 2005.

For the six months ended June 30, 2006, our consolidated revenues were $550.1 million of which revenues from pharmaceutical product sales were $533.9 million. XOPENEX franchise revenues were $256.7 million and LUNESTA revenues were $277.2 million. Net income for the first six months of 2006 was approximately $21.5 million or $0.19 per diluted share. Reported results for the first six months of 2006 included charges of $20.4 million or $0.18 per diluted share for stock-based compensation. These consolidated results compare with consolidated revenues of $304.1 million of which revenues from pharmaceutical product sales were $273.4 million for the six months ended June 30, 2005. That was $189.9 million for sales of XOPENEX franchise products and $83.5 million for sales of LUNESTA, and the net loss was $30.0 million.

As of June 30, 2006, Sepracor had approximately $944.5 million in cash and long and short-term investment. Jim…

William (Jim) O’Shea, President, Chief Operating Officer

Thank you David and good morning everyone. Firstly, overall revenues; the second quarter 2006 revenue was $264.4 million, up 42.8% on second quarter 2005, which brought six months sales to $550.1 of $80.9 over the same period last year. The principal drivers of revenue being the sales of principally XOPENEX UDV and LUNESTA, and I’ll start with XOPENEX.

On XOPENEX, another strong quarter for the overall XOPENEX brand, although sales as Tim said for XOPENEX MDI were disappointing with slower than expected retail share capture and with wholesalers still pulling down on the initial stock and quantities in December 2005; second quarter sales being $1.6 million and $7 million for the year so far. However, total sales of XOPENEX this quarter were $117.3 million, up 41% bringing the first half sales to $256.7 million, up 35.2 on the same period last year.

There were good sales for the UDV coming from both price and volume contributions and also some growth in inventory. For reference, we finished the quarter with approximately five and a half to six weeks of inventory at wholesale and retail pharmacies.

In terms of scripts for the UDV, we observed the nonseasonal decline in the underlying market with XOPENEX finishing the quarter with a new Rx market share of 24.2 and a TRx market share of 24.4.

On XOPENEX HFA MDI, although not reflected in sales, we did see progressive increase in market share capture during the second quarter finishing the quarter with a new Rx market share of the MDI market of 2.6% and a TRx market share of 1.8%.

Significant market share capture of the overall MDI market is proving difficult in the face of very low price, genetic CSV MDIs being readily available. However, we have already captured in this graph as you see over 30% of the HFA MDI new prescriptions and we do believe that when the inevitable phase out of the CSV does demonstrably begin, the XOPENEX HFA MDI will capture significant value.

Specifically, back on XOPENEX UDV at the specialty level in terms of market share, we finished the quarter with allergists and pediatricians losing a little ground, pulmonologists remaining flat, but with significant growth being seen with primary care doctors; market shares being 44.4% for allergists, 30% for pediatricians, 32.6% for pulmonologists, and primary care doctors increasing from 17% to 18.5%. In hospitals, following some seasonality influence, we had a 31.5% market share in May.

Finally, on XOPENEX, as you are aware, on March 24, 2006 a so called dealer issued a draft local coverage examination for nebulizers. That proposed a least costly alternative payment policy to XOPENEX. There was a 45-day comment period and that comment period as you ended on May 8th. The carriers are permitted to take as long as they need to review all of the submitting comments, and there are a lot, and our understanding is that they are still in the process of doing so. We do not have a timetable or a timeline as to when they will finalize that proposal reimbursement action, and that’s all we know at this stage on the LCA.

I would now like to turn to LUNESTA and the second quarter’s ‘06 performance. Revenue in the second quarter was $139.1 million, up 66.6% from the second quarter of 2005, which is the first quarter of launch and included stocking. This brought the six-month sales to $277.2 million, and for reference there was a further destocking at wholesalers this quarter, in that we ended the quarter with under five weeks of inventory at wholesalers and retail pharmacies.

In terms of the LUNESTA prescriber base, we continued to add new prescribers at the rate of 1000 to 1500 each week with to date over 256,000 unique prescribers since launch. At the prescription level, over 6.5 million prescriptions have been written since launch with May representing the highest month since launch with 561,000 prescriptions written. For reference, the refill rate in June was 42.9%. This has resulted in LUNESTA capturing 13.7% of new Rx and 13.5% of total Rx as of the week ending the end of the quarter, June 30, 2006.

On managed care access, the picture continues to improve with the latest dated for June 2006 showing that LUNESTA is in tier 2 or tier 3 in 82% of managed care lives with importantly tier 2 access improving significantly at the beginning of the year, almost four times. Also importantly, LUNESTA maintains twice of the second tier access of Ambien CR and with half the percentage of prior authorizations.

In terms of the underlying sedative hypnotic market, as Tim said, we saw some pull back this quarter particularly in April as the negative stories impressed on possible side effects or adverse events with Ambien. This resulted in a growth rate of 14% in TRx in April but with clear signs of a rebound in May and June, such that the overall growth for the quarter was 16.2%. This picture was repeated with new Rx with a drop 10% in April and then clear rebound in May and June; the goals for the quarter being 12.9%.

Finally, I would like to take a little time to review the future key market share drivers, which we believe can best be characterized in terms of phases of launch. We are now 15 months post launch and at the end of what we call phase I of launch. The objective of this phase was to rapidly establish brand awareness with consumers and physicians and to establish the key elements of the LUNESTA product profile; that is optimal sleep maintenance, availability for long-term use with no tolerance or rebound. The two we have used so far in this phase are the tentative and very aggressive marketing and direct to patient campaign, aggressive sales with utilization based on 900 primary care reps and primarily the clinical data contained within the NDA on primary insomnia.

We believe this phase has been very successful with very high product awareness, 6.5 million scripts written, and over 250 doctors already prescribing LUNESTA since launch and approaching almost 40% market share in a very aggressive competitive environment. However, we are acutely aware of the need now to move into phase II; that is to further differentiate LUNESTA from the competition. Phase II being a combination of an expansion or ramp up of our sales capabilities supplemented or leveraged by the rollout of our expanding unique clinical database on LUNESTA fueled by the phase IIIB/phase IV clinical program.

In terms of the expanded sales capabilities, this has already begun with a 50% upgrade in primary care capacity up to 30 and 50 primary care reps, which is also being supplemented with refinements in the doctor targeting to further improve productivity. The full impact of these actions we believe will be felt as we progress to the second half of this year and importantly when we combine the rollout of the phase IIIB/phase IV data.

Our plan on the phase IIIB/phase IV data is to roll out the real life/user experience data on LUNESTA that is powerfully illustrated in the so called RESST patient preference study which we reviewed in the last webcast and the two driving studies which Dr. Mark Corrigan will review later in his webcast. These studies we believe reinforce the safety profile that we’ve already established and clearly show patient preference or satisfaction for LUNESTA. These data will be combined with and supported by the roll out of the new clinical data that we now have on the effectiveness of using LUNESTA for the treatment of insomnia in key patient groups who have coexisting conditions such as depression, GAD, menopause, and RA (rheumatoid arthritis). These data we will believe will be of high interest and significant relevance to doctors as it is estimated that 80-90% of insomnia patients have coexisting conditions, which for example 70 to 90% of depressed patients have a sleep disorder, 60% of GAD patients, up to 60% of menopausal women, and up to 65% of RA (rheumatoid arthritis) patients have some form of sleep disorder. In all of these trials, the effectiveness and overall profile of LUNESTA is reinforced in a very relevant situation, which we believe will resonate with doctors and will further differentiate LUNESTA. And with that brief update, I would now like to hand over to Dr. Mark Corrigan.

Mark Corrigan, Executive Vice President of Research and Development

Thank you, Jim. This morning I will be reviewing the following R&D efforts -- the LUNESTA phase IV program including an update on our recently completed GAD and driving studies; our discussions with the FDA on the pediatric program, and update on our regulatory activities in Japan and Europe. We have Arformoterol under review at the FDA and our early stage pipeline SEP-289 and 162 are progressing nicely.

You have the seen the slide before. We completed a number of programs addressing insomnia arising from medical and psychiatric illnesses, and these data have been rolled out at scientific meetings last fall and this summer. Our large 600 patient study in insomnia patients with comorbid generalized anxiety disorder is complete ahead of schedule. We have also completed two studies examining the next day effects on driving ability. We anticipate initiating a large second study in depression next year. Other stage IV studies are under consideration. Finally, in response to the FDA’s request of pediatric studies, we have submitted a package of proposed studies to the FDA for their review and are awaiting their response. We anticipate initiating those studies next year.

The underpinnings of our strategy are reflected in this chart. The majority of patients presenting with insomnia have comorbid conditions, typically psychiatric, as represented in Dr. Buysee’s American Journal Psychiatry article by the bar to the left, mental disorder. While the path to regulatory approval is demonstrating safety and efficacy in patients with primary insomnia, the practicing physician is far more likely to see insomnia in the context with other disorders. Therefore, it’s essential to confront the safety and efficacy of any sedative hypnotic for the treatment of insomnia in the broader age of conditions in which insomnia arises. Further, understanding the effects of treating insomnia with LUNESTA on those comorbid conditions is of scientific and medical interest. We have shared with you the data presented in our recent publication in biological psychiatry of LUNESTA in combination with Prozac for the treatment of insomnia with comorbid major depressive disorders. We have just received top line results of LUNESTA in combination with Lexapro, a different antidepressant for the treatment of insomnia with comorbid generalized anxiety disorder. I’m quite excited about that. We will be finalizing the data tables and presenting them on an upcoming scientific forum. Together, major depression and generalized anxiety disorders constitute the most common psychiatric disorders presenting to the primary care provider and the psychiatrist.

Now, I’d like to share some information on the completed study designed to evaluate what would be the efficacy of LUNESTA 3 mg administered with Lexapro in patients with insomnia related to generalized anxiety disorder. The primary objective of this large multicentric study was to evaluate the subject of sleep efficacy of LUNESTA 3 mg administered concomitantly with Lexapro. In addition, we examined the co-therapy results in greater improvements in GAD versus Lexapro alone as well as evaluating the safety of the co-therapy; 600 patients were enrolled in this trial.

This is the schematic of the design. It was based on our depression study. It is a multicenter randomized double blind placebo control parallel group adjunctive therapy trial conducted to regulatory standards. There were 600 patients randomized, 300 for treatment on. They were treated for 8 to 12 weeks. Doses of both drugs were signed and titration of either was not allowed.

We have just received results on our preliminary analyses and they are very consistent with the results obtained in the comorbid pricing study, and we expect the effects of the combination therapy on both sleep and the underlying psychiatric disorder. We are excited about our finding and plan to present the data in an appropriate upcoming scientific meeting this fall.

Moving on, as important as establishing the efficacy and safety in comorbid conditions, it is further evaluating safety in real world conditions such as operating a motor vehicle the morning after taking LUNESTA. These are the first studies to our knowledge to investigate LUNESTA under driving conditions. There were two studies, one in normal volunteers and one in patients with insomnia.

These studies were randomized, double blinded placebo controlled cross-over studies in normal healthy subjects. The primary endpoint was on the road break reaction time evaluated the morning after treatment. Break reaction time was a test sensitive to psychotropic drug effects and provides results which are consistent with laboratory measures of psychomotor performance. A red line on the hood stimulates the brake light of an imaginary vehicle in front of the car. During driving on a closed circuit track, this light is illuminated at random intervals and the time required for the subject to press the brake pedal after seeing the light is measured, and this happens 25 times during the driving test, and the same methodology was applied to the first study in normal patients as well as patients with insomnia. Secondary endpoints were included assessing cognitive function and information processing.

Here are the results for both results. As you can see, there are no statistically significant differences between treatment groups in the primary endpoint, mean brake reaction time for either study. While these are terrific results, we stand by our current FDA label language regarding conservatism in addressing driving precautions associated with using LUNESTA.

On the ex-U.S. regulatory front, we’ve had significant success in our meeting with the PMDA, the Japanese FDA equivalent. No central nervous agent had been accepted for a “bridging approach,” that is submitting with small studies in Japanese patients clinical pharmacology studies as a bridge to a much large database in non-Japanese. We were successful in achieving agreement _ acceptable for LUNESTA in Japan with a comparative study against the market leader, Myslee or Ambien, greatly truncating our time and cost to an NDA filing. We look to filing the CTN or I&D in the fourth quarter and commencing pk study in early ’07.

In Europe, we are holding informal rapporteur meetings as we speak. We have had meetings with the Irish Medicines Board and today with the Portuguese Medicine Board with regard to pursuing a differentiated claim of long-term treatment of chronic insomnia, and you’ll see the dates as tentatively outlined with a potential European NDA or MAA submission in the second quarter of ’07.

Arformoterol, our long-acting beta agonist in nebulized form, is under review at the FDA. We continue to be excited about the addition of this important contribution for the treatment of COPD. We responded to the chemistry review letter and anticipate receiving further questions from other discipline reviews in advance of our action date. With the usual manufacturing preparation efforts and possible two-cycle regulatory process we are looking at launching it in the second quarter of ’07.

Our early stage pipeline continues to advance. SEP-289, our triple reuptake inhibitor for the treatment of depression has completed the single spending dose study and we are in the process of starting the multiple spending dose. We anticipate conducting an approval concept study next year. We submitted our I&D for 162, our dual reuptake inhibitor for depression that we believe has a potential for our best in class profile. We expect to start our single spending dose trial at the end of this month.

Finally, our investment in discovery has yielded several promising leads for triple reuptake inhibitors with variant monoamine blockade ratios promising novel therapy against several CNS disease targets. We continue to collaborate closely with ACADIA on our M1 program anticipating a lead compound in ’07. Over to your David.

David Southwell, CFO, Executive Vice President, Secretary

Thank you, Mark. For 2006, LUNESTA revenues this year, we are revising our guidance to $620 million to reflect a more conservative growth rate for the insomnia market. For XOPENEX the UDV, Unit Dose Vital, revenue guidance for the year remains at $500 million. As a result of the slower than expected conversion of the market away from CSV based inhalers we are reducing our metered-dose inhaler guidance to $20 million. Our lines revenue is estimated to be $35 million and the resulting total revenue guidance is revised to approximately $1.175 billion for the year. On the expense side, the selling, general, and administrative expense guidance, as Tim discussed, was revised to about $770 million, primarily reflecting increased marketing and promotion expense.

Research and development guidance remains approximately $185 million for the year. We are now guiding to primary earnings per share of approximately $1.25 per share based on weighted average shares outstanding for the year of 105 million shares. On a fully diluted share count of 116 million shares, this equates to EPS of approximately $1.13. Tim…

Timothy Barberich, Chairman of the Board, Chief Executive Officer

Thank you, David. We’ll now open the session for questions and answers.

Operator

The floor is now open for questions. If you have a question at this time, please press * and 1 on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the # key. Again, we do ask that you pick up your handset for optimum sound quality when asking your question. Thank you. Our first question is coming from Corey Davis from Natexis.

Corey Davis, Natexis

Thanks very much. I know you guys think LUNESTA is going to start to pick up again in the second half and you kind of outlined some of the reasons, but I’d ask more specifically how it’s going to pick up, and none of the competitors out there come close to your data package, but it just seems to me it could be put to better use in promotion, things like the depression data has been out there for a while now. How specifically can you use that in DTC or detailed age and how can you better tell that insomnia comorbidity study?

William (Jim) O’Shea, President, Chief Operating Officer

If I did a sort of top line summary of where we think we are in terms of going forward, we do believe we have the best data set. We do believe that if we broke it into two phases…and it goes down back a little bit, say about 15 months into this launch…our strategy here really was to obviously get the brand awareness; about 60% of the total population in the U.S. is now aware of that LUNESTA butterfly, and you see the figure that I’ve put forward in terms of descriptions and so on and market share. We do believe from our market research that the profile…really this was the element of the phase I…was to establish the basic profile around really differentiation on optimal maintenance, long-term effect, and so on. We believe indeed that has been established. You’ve also got to look at what the competition is doing, nothing is very stable. We have yet not really punched to our weight in terms of our data set. The phase IIIB/phase IV I outlined it in some aerial form has not really been rolled out to the sales force. We’ve used it at the APA at best and in some limited sense with our CNS force, but not with a primary care sales force, and that’s how we calculated phase II. So, what you’re looking at is now building on what we think is an establishment, a very firm base in terms of the profile, and we are now going to layer on the clinical data in phase IIIB/phase IV. We obviously have to do it responsibly and simply the phase IIIB/phase IV trial was designed to look at the use of LUNESTA in various patient settings, somewhere in patient preference settings; that was a very large trial of about 2500 patients, and the driving to these I think has come out clearly confirming the safety profile of LUNESTA. The other, which is key patient groups, we will roll out in relationship to the maturity of the publication strategy. The depression data indeed will be rolled out along with the patient preference study this year, and that will be I think for a very firm base to then rule out the other concomitant conditions, and we do believe this will start to differentiate upsells from the competition, because it is relevant data to the doctors.

Corey Davis, Natexis

And then secondly, for Mark, in that GAD study, did Lexapro separate from placebo as well?

Mark Corrigan, Executive Vice President of Research and Development

On the treatment of the underlying anxiety disorder?

Corey Davis, Natexis

Yes.

Mark Corrigan, Executive Vice President of Research and Development

You can’t say because the way it was designed…Lexapro plus LUNESTA versus LUNESTA plus placebo, so both Lexapro arms look effective in treating the GAD, but you can’t really say because they weren’t stacked up against a straight placebo on.

Operator

Thank you. Our next question is coming from Greg Gilbert from Merrill Lynch.

Greg Gilbert, Merrill Lynch

This is for Jim, were there any other factors to explain XOPENEX neb’s strong performance versus prescription demand other than buildup in inventory?

William (Jim) O’Shea, President, Chief Operating Officer

The contribution was from price and volume, the non-retail sector is important as you know in the past, but principally it is to do with the pipeline growth.

Greg Gilbert, Merrill Lynch

Also, Jim, what are your reps actually telling you about why they can’t gain any real share traction, forgetting about management’s assessment of share voice and stuff like that, what are the actual reps telling you about what the push back has been?

William (Jim) O’Shea, President, Chief Operating Officer

Are you talking of LUNESTA or MDI?

Greg Gilbert, Merrill Lynch

LUNESTA.

William (Jim) O’Shea, President, Chief Operating Officer

They’re actually saying that they’re getting very strong agreements from the doctors in terms of accepting the profile. What they’re looking at, and this is bluntly, is we need now to differentiate our profile from the competition, and we’re going to do that on the back of the clinical data. So, they’re basically saying that all we’ve been doing so far certainly resonates, but we’ve got to basically layer on the other data now to further differentiate from principally Ambien CR.

Greg Gilbert, Merrill Lynch

And lastly for Tim, given the broad forum you have today, I was hoping you could comment on the types of strategic transactions that the company is currently considering especially given the rumors that come up from time and time. It must get tiring to constantly hear rumors and not really be able to comment, so here’s your chance.

Timothy Barberich, Chairman of the Board, Chief Executive Officer

Unfortunately, I can’t really capitalize on my chance. You know, it’s obvious that a product like LUNESTA with worldwide rights in the primary care market is something that is attractive to a number people and to ourselves. So, rumors are understandable. In terms of where we’re going in terms of acquisitions of products and assets at various stages of their development life cycle, we’re aggressively looking at pipeline assets as well as commercial assets that could leverage the significant infrastructure that we have in place. Beyond that I really can’t make any comment.

Operator

Thank you, our next question is coming from Rich Silver from Lehman Brothers.

Richard Silver, Lehman Brothers

A couple of questions; on the inventory issue with LUNESTA, can you give us some sense…in the past you’ve said four to six weeks is the range that you would be projecting, is there any change in that, do you see that possibly going below four weeks?

William (Jim) O’Shea, President, Chief Operating Officer

I think it’s going to actually come below the six weeks I think, Rich. What we’re looking at is probably a better range and it’s impossible as you know to be absolutely precise because they’re independent bodies, though I think now our anticipation would be four to five weeks and would be a more reasonable range in terms of going forward.

Richard Silver, Lehman Brothers

And in the coming quarter do you see any reason for it to further decline or do you think at this point it’s relatively stable from what you saw at the end of this last quarter?

William (Jim) O’Shea, President, Chief Operating Officer

It’s obviously difficult to speculate, but I think relatively stable would be a best assessment.

Richard Silver, Lehman Brothers

David, on the SG&A number, you did say $770 million?

David Southwell, CFO, Executive Vice President, Secretary

I did.

Richard Silver, Lehman Brothers

Okay, could you just remind us what the number was, I know that we got the stock option expense that may or may not be part of that?

David Southwell, CFO, Executive Vice President, Secretary

Yeah the previous number was $755 million.

Richard Silver, Lehman Brothers

And on the depression study and the regulatory strategy, remind us that the second study which one that would be that you would include in a regulatory package?

Mark Corrigan, Executive Vice President of Research and Development

This is Mark. We’ve completed the first one, it’s published. We are going to be starting the second depression study next year, in the early part of next year, and it’s going to be conducted with a different antidepressant, whereas in the first we showed the benefit in treating the comorbid condition with Prozac. The second study we’re going to be looking at whether we have better effect to repeat it with Effexor. Obviously a positive result there we would see as very powerful for approaching regulatory authorities.

Richard Silver, Lehman Brothers

Lastly, any change in your expectation on how long it will take before we see the impact of the additional reps on the script data? I think in the past you’ve said upwards of two to three months from the May 1st start, do you still believe that that’s a reasonable timeframe and would you be disappointed if you didn’t see any impact by September?

William (Jim) O’Shea, President, Chief Operating Officer

I would always be disappointed if we don’t see the impact of adding further reps, that’s absolutely right. I think what we’re looking at is with the added capacity that’s now brought in the field really has to be duck tailed with the rollout of the clinical data to make it as effective as it should be, but in some ways I would see the productivity increasing right away through the second half.

Operator

Thank you, our next question is coming from Marc Goodman from Credit Suisse.

Marc Goodman, Credit Suisse

I have a couple of questions. First of all, can you just clarify exactly LUNESTA wholesale inventories, where was it again the last quarter and this quarter, how much of effect do you think it had on sales? That’s question one. Question two is, I would have thought within Indiplon gone you would be having the opportunity to take expenses down rather than take them up, so why did they have to go up and what are you spending the extra money on? The third question is, you were talking about Japan and I thought I heard you say a head-to-head study versus Ambien; can you just elaborate on that? If I heard that correctly, what would be the timing, obviously that will be very important given Ambien and some of these generic ones and obviously showing a better product from Ambien eventually would be fantastic, so if you can answer those?

William (Jim) O’Shea, President, Chief Operating Officer

This is Jim and I’ll take the inventory one first and then hand over. The end of last quarter we were just under 5.5 and now we’re just under 5, so we’ve dropped a full half week.

Timothy Barberich, Chairman of the Board, Chief Executive Officer

The second question was with the absence of Indiplon in the market one might suspect that we would be reducing our promotional expenses as opposed to moving them back up. We felt that the impact of Pfizer in the market would be a two-edged sword frankly. On the one hand it clearly put a lot of pressure on us in terms of share of voice, so that would have been a relatively negative impact. But on the other side, the way Pfizer approaches these markets they tend to expand the market dramatically and with them absent to a certain extent our plan was to…when they were in our plan we had increased our sales presence somewhat defensively and decreased our promotional spend. In the absence of a huge competitor such as Pfizer and its impact on the overall market, we think it’s important that we continue to sustain our investment in DTC and continue to grow the market. Obviously, we’re not the only one growing the market but clearly we are one of the leaders in this market and we see the opportunity for the market to respond.

Mark Corrigan, Executive Vice President of Research and Development

This is Mark and I’ll take your last question. In order to get approval in Japan, you have to do a comparative study. The real reason and the real sort of cue if you will is the opportunity to do that comparative study against Ambien allows us to set pricing in comparison with Ambien, which is the market leader and relatively high priced, and for us that was a real victory because the receiving product Amoban is available on the Japanese market, albeit at a higher dose and a lower price. So, for us to be able to compare against Ambien is less that we think we will necessarily beat them and that those data will generate into positive trials, although I do think we actually will have a superior profile particularly on the maintenance aspects, but I think it’s really important to drive the ultimate price that we will be able to achieve in Japan.

Marc Goodman, Credit Suisse

And what’s the timing of that study?

Mark Corrigan, Executive Vice President of Research and Development

Right now, we would like to start that study next year, but we haven’t got a firm timeline on that. But, I think next year is not an unreasonable time to see that study get underway.

Operator

Thank you, our next question is coming from Matt Duffy from BDR Research.

Matt Duffy, BDR Research

Hi, thanks for taking my question. Jim, a couple of questions for you. First one, could you talk about how the price increase that you took earlier in the year flows through your revenues?

William (Jim) O’Shea, President, Chief Operating Officer

As I mentioned on the last webcast, we didn’t see too much impact in the first quarter. We did see some impact from the price in January in this quarter, but we haven’t seen the full impact yet, and we expect it at more normal levels as we go out through the year.

Matt Duffy, BDR Research

Okay, very good. Then, can you just give us some details on where you are in terms of share voice right now but also where you think that may go over the next six months to a year?

William (Jim) O’Shea, President, Chief Operating Officer

In terms of insomnia?

Matt Duffy, BDR Research

Yeah, particularly in the insomnia market.

William (Jim) O’Shea, President, Chief Operating Officer

What we’re seeing is a very, very competitive market. It’s keeping very much the pressure on as you might expect in terms of ahead of the…expiry and genericization of Ambien and they are putting a vast number of reps on it. We’re obviously building up our…is actually keeping the pressure on. So, we’re holding in at about 30% I think literally of share voice.

Matt Duffy, BDR Research

And how do you see that evolving over the next six months to a year?

William (Jim) O’Shea, President, Chief Operating Officer

Yes, it’s difficult to see because obviously it’s not fitting into the shoes of some of the events post next April, which is the generic aspect of Ambien, so I wouldn’t like really to speculate on that. But our plans are that it doesn’t change, so we’re taking the base case and what we’re seeing now in terms of competition is what it will be going forward, so we’re actually planning for that.

Matt Duffy, BDR Research

Okay, and then just one last thing on the markets. As things sort of level out and you get past some of the press that’s coming in the first quarter, how do you see it over the next year to what’s your expectation of overall insomnia prescription growth?

William (Jim) O’Shea, President, Chief Operating Officer

Yeah, I think as Tim said, and in fact I mentioned, we saw a reaction to the bad press for Ambien in April, somewhat in May, but it actually is rebounding. We do expect that with the amount of effort being put into this market and also the roll out of the data such as we’re putting out in depression, GAD, and so on to really I think drive and eat into the huge need in this market. So, our expectation is still a very buoyant market for the next few years.

Matt Duffy, BDR Research

Okay, and then one question for Mark, the second depression study that you’re looking out for next year, do you think that’s the plan anyway for that to impact the label?

Mark Corrigan, Executive Vice President of Research and Development

I think we have to see what the data really looks like. I think in the face of very positive results the regulatory authority is going to be very interested in it. In the generalized anxiety disorder trial, you have to recognize there were number of these patients while not meeting full criteria for major depressive disorder that had significant depressive symptoms, and we’re going to be analyzing the improvement in those depressive symptoms with the co-therapy, and if the picture begins to emerge this is going to be effective on some of the underlying disorders, we’re going to be talking with the agencies about it.

Operator

Thank you, our next question is coming from Larry Neibor from RW Baird.

Lawrence Neibor, W. Baird & Co.

Thank you, good morning. When you pulled back on your DTC spend for LUNESTA your market share also began to decline, are you facing a future where you will have to continually spend heavier?

Timothy Barberich, Chairman of the Board, Chief Executive Officer

That’s a good question. Maybe I’ll take a crack at it and perhaps Jim can elaborate. We did spend very heavily in the back half of last year on DTC, but it was intended to be used to establish a very strong brand that we could leverage in the future. So, we don’t see the level of spending accelerating certainly from where we were at peak, but there is a certain level below which you get less efficiency from patient advertising programs. So, there is a certain weakness level and it can pulsed from time to time depending on market share and depending on data and how we pull that into our product profile and our other professional marketing programs. So, I think if you look at the second half of this year with new guidance that’s probably the kind of level that we might maintain for quite sometime into the future.

William (Jim) O’Shea, President, Chief Operating Officer

Just to elaborate a little bit, what we’re getting are much better ideas to go through the campaign and further into the product launch of the response rates of the various components of the launch, and DTC is but one. What we’ll do is try to balance all the elements of the campaign to get the best response. As Tim said in many ways we were very, very high at the beginning on direct to consumer, direct to patient, and indeed we got the results with a very high awareness of it. We then very quickly knew we had to duck tail that even more where the rubber meets the road, which is the direct and doctor level, and that really is the campaign now. We’ve pulled back as you said a little bit on DTC, but what we’re looking at now is clearly an integrated process going forward with more data in terms of being able to decide where we put our next buck, but the level I think we wouldn’t see to be significantly above at the level we saw after launch.

Lawrence Neibor, W. Baird & Co.

If I could ask a second question; your reduction in guidance for XOPENEX HFA MDI, there some speculation that you’d be able to pick large contracts in the second half of the year for that product, and I was wondering what’s changed.

William (Jim) O’Shea, President, Chief Operating Officer

The simple fact is I think we actually overestimated the timing that plays out of the CSVs. If you actually do go back and talk to other manufacturers you’ll see that there were clearly spot outages in the beginning of this year. We anticipated they would be continuous and actually growing; they haven’t, and in fact what we’re looking at is that the phase out of CSVs will be a little bit longer. In saying that, we are being very aggressive in terms of contracting to position ourselves for when the inevitable happens, which is the phase out of CSVs to HFAs. So, in many ways we see the MDI program as an investment program at the moment that will bear we hope very clear fruit later.

Operator

Thank you, our next question is coming from Jon Stephenson from Summer Street

Jon Stephenson, Summer Street Research Partners

Thanks for taking the question. First on the pricing increase, going back to the first quarter price increase on LUNESTA, you mentioned on the Q&A session that you still haven’t seen the full effect of that. I just wondering if you could give us more information as to why you haven’t seen the full effect of that yet, and then I do have a followup as well.

William (Jim) O’Shea, President, Chief Operating Officer

Really we haven’t seen the full effect of it. I think there still are some price flows that we can enjoy. We are being also aggressive on LUNESTA in terms of positioning. You saw the two slides I put up there in terms of managed care positioning where we’ve been very, very aggressive and very successful, tier 2/tier 3, and we’re continuing to do this. I think what we need to do is build a barrier in front of Ambien CR and at present we are doing that in terms of managed care systems, but that can have a price. The prices in fact obviously are escalating with performance and any contract we put into place is a performance based contract, but what we’re looking at is a part of our strategy of really making sure that managed care is in place such as the rep force can really have full effect. So, we’re looking at increasing aspects of the contracting side as well.

Jon Stephenson, Summer Street Research Partners

On the HFA side, I’m a little bit surprised by the degree to which you took down the guidance on that front. It seems that based on the IMF script demand you are seeing a fair amount of traction on that front, albeit at a lower starting point, and you kind of alluded to contracting the position on LUNESTA but also on HFA, I mean is the pricing coming down significantly, is that part of it or could you talk more on the dynamics of the why the numbers are coming down so significantly on that product?

William (Jim) O’Shea, President, Chief Operating Officer

Yeah, we have seen reasonable uptake in terms of the retail side, as you know, not as much as we anticipated and we’d like it certainly to be more. But what you are gathering I think is that we’re now seeing clearly the period and the moment being an investment period in terms of positioning this product, in terms of getting the profile out to doctors, and also positioning ourselves very aggressively on the contract side such that we’re in the pole position when CSVs do fade out in terms of HFAs. And what you’re seeing there is there is a price to be paid for that, and when you look at the average price that really is the price we’re enjoying in the retail sector and the prices we’re enjoying in the contract sector, and there’s a price to be aggressive in the contract sector.

Jon Stephenson, Summer Street Research Partners

If I may just one last question, you alluded to some medical meeting presentations, I think it was on the GAD side but also on the RESST and the driving studies, could you give us some specifics as to what potential meetings we might expect data?

Mark Corrigan, Executive Vice President of Research and Development

I think the RESST has been presented. The first of the driving studies was in July in Chicago. The followup driving study in insomnia patients is anticipated at a full meeting and maybe if you will…I forget the name, it used to be the hospital community psychiatry meeting…and the GAD study we’re still looking at where we’re going to have the most impact with that. Obviously, we want to complete our analyses fully so that we’re ready to go with it, but I’m going to probably hold that in advance until we are clear on that.

William (Jim) O’Shea, President, Chief Operating Officer

I think that’s right. We’ve been very aggressive in the past in terms of positioning at the two major meetings in this area, the ATA and the ATFS, we’ve had very high presence in the market at both of those, but what we’re looking at is sprinkling basically the data in other cuts of the data as well all the way through I think the continued meetings throughout the U.S., and we’re also taking into account the timing of when we want to use the data in terms of the publication dates and also the dissemination of the data at meetings such that we optimize our availability to use the data in a promotional sense.

Operator

Thank you, our next question is coming from Adam Greene from JP Morgan.

Adam Greene, JP Morgan

Thanks, good morning. Following up on Jon’s question, in the last call you said you expected to see the dollar Rx increase going forward on LUNESTA. It was pretty much flat in the second quarter versus the first quarter; do we see it increase in here going forward, do we see the impact of the price increase more prevalent in the third quarter and fourth quarter? Next, the spread between Ambien CR and LUNESTA and Rx here appears to be widening recently, can you explain what’s going on there and is $15 million more in SG&A and really going to make a difference there?

David Southwell, CFO, Executive Vice President, Secretary

As you say in the first quarter…many reasons being…we are seeing some favorable flow on the price rise, a 9% price rise initiated in the second quarter, and I think we actually see the same sort of movement we’re seeing in this quarter going forward, because we’re still going to be quite aggressive and quite active in the managed care front going forward into this year, but we will see a more normalization of the price rise flow as we go through the year.

Timothy Barberich, Chairman of the Board, Chief Executive Officer

And the second question was about whether the $15 million SG&A is going to be enough to offset the widening CR?

David Southwell, CFO, Executive Vice President, Secretary

Our intention is yes.

Adam Greene, JP Morgan

What are you going to spend that $15 million on primarily, is it DTC increase or where is it going towards?

David Southwell, CFO, Executive Vice President, Secretary

As you can imagine we have a competitor that’s probably listening into this call and it’s very difficult, and I really wouldn’t want be itemizing where I would be spending my promotional dollars. If you take it, it’s going to be spent wisely across the marketing front, and I guess that’s probably as much as I want to say.

Operator

Thank you, our next question is coming from Andrew Swanson from Citigroup.

Andrew Swanson, Citigroup

Thanks, I have a couple of questions. The first question is coming back to inventory once more time; I mean to some extent I think this is out of your hands, and I’m just wondering is there any fundamental reason why for a sleep drug that’s not growing, wholesalers couldn’t take level down to two weeks by the end of the year or something of that nature.

David Southwell, CFO, Executive Vice President, Secretary

That’s always possible, but what we’re looking at, as every major company is trying to get something, even in the pipeline, and you’re right we can’t control the wholesalers, but I’m giving you the anticipation of what they’re telling us, is that we’re looking at between four to five weeks for being a reasonable bet going forward.

Andrew Swanson, Citigroup

Okay, and then moving over to the formulary acceptance that you’ve certainly demonstrated here in the second quarter, has that had any real impact on price per prescription for LUNESTA?

David Southwell, CFO, Executive Vice President, Secretary

There is a price to be paid tier 2 and tier 3, and what you’re always balancing obviously is some effect in terms of ASP, but that could be more than made up in terms of market share which translates into volume, but that’s the game you play in primary care, and I think we’re actually succeeding in it.

Andrew Swanson, Citigroup

You mentioned a couple of times the effects that have been seen with Ambien and their impact on market growth, whether it sleep driving or sleep eating, and you could refer to them as Ambien effects, is that the state that you’ve seen and not had reported back to you from physicians any of those effects under any circumstances with LUNESTA?

Timothy Barberich, Chairman of the Board, Chief Executive Officer

No, obviously we keep a pharmacovigilant database and frankly we get occasionally reports that tend to slide and follow on with the media, but we’ve seen no emerging pattern that has linked LUNESTA use to any sleep eating or the parasomnias reported with Ambien.

Andrew Swanson, Citigroup

Finally, just a very brief question on options back dating; clearly you know whether or not this is a practice that has been happening and I’m just wondering if it has not happened why has it not been a sort of more forceful statement from the company to demonstrate that and if it has been happening, what sort of sanctions, any communication that you’ve have with the SEC in terms of how do we think about moving forward?

Timothy Barberich, Chairman of the Board, Chief Executive Officer

Clearly, you probably understand that we really can’t comment beyond what is in the press release, and that’s all we can say about that.

We will take one more question and then we’ll close the session.

Operator

Our last question is coming from…

Timothy Barberich, Chairman of the Board, Chief Executive Officer

Thank you for joining us this morning. We appreciate you taking the time to call in and we look forward to reporting our progress at the next earnings webcast.

Operator

Thank you. This does conclude today’s teleconference. An audio replay of today’s call will be available for one week starting today at 10:30 EST. The dial in number is 973-341-3080, and the pin number is 7577066. Please disconnect your lines at this time and have a wonderful day.

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