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Cephalon, Inc. (NASDAQ:CEPH)

Q2 2006 Earnings Conference Call

August 03, 2006 5:00 pm ET

Executives

Chip Merritt - Investor Relations

Robert W. Grupp - Vice President, Public Affairs

Frank Baldino - Chairman, Chief Executive Officer

Kevin Buchi - Executive Vice President, Chief Financial Officer

Paul Blake - Worldwide Medical and Regulatory Operations

Bob Roche - Worldwide Pharmaceutical Operations

Analysts

Greg Gilbert - Merrill Lynch

Eric Schmidt - Cowen & Company

Mike Rockefeller - Morgan Stanley

Adam Greene - JP Morgan

Larry Neibor - Robert W Baird

Gary Notman - Leerink Swann

David Buck - Buckingham Research

David Windley - Jeffries

Corey Davis - Natexis

Roney Gold - Bernstein

Presentation

Operator

Good day everyone, and welcome to the Cephalon Second Quarter 2006 Earnings Announcement. Today's call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to Mr. Robert Grupp, Vice President of Public Affairs for Cephalon. Please go ahead, sir.

Robert W. Grupp - Vice President, Public Affairs

Thank you. Today we will review Cephalon's financial performance for the second quarter of 2006. Before we begin, let me remind you that certain statements on this call may be forward-looking and are subject to the risks and uncertainties associated with Company business. These statements may concern among other things, guidance as to 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 may also 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 the news room section of our website at www.cephalon.com. Additional information and risk factors affecting the Company’s business and financial prospects and factors that would cause Cephalon’s actual performance to vary from our current expectations is available in the Company’s current Form 10-K on filed with the SEC.

During this call, we will introduce third quarter 2006 guidance and update full-year 2006 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 Chip Merritt, area code 610-738-6376. This conference call is being webcast via 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 and Kevin Buchi, Chief Financial Officer. Also joining us today are Dr. Paul Blake, Worldwide Medical and Regulatory Operations, Bob Roche, Worldwide Pharmaceutical Operations, and Chip Merritt, Investor Relations. Following remarks by Frank and Kevin, we will be pleased to answer your questions. Now, Frank Baldino.

Frank Baldino – Chairman, Chief Executive Officer

Thanks, Bob. Good afternoon, everyone. Cephalon ended the second quarter with significantly improved sales performance of PROVIGIL, the launch of the new product VIVITROL that is generating a lot of excitement and approval letters in hand for three promising new products. We entered the third quarter focused on securing approval for NUVIGIL, SPARLON and FENTORA and initiating our launch program for OEM for each of these products.

We remain optimistic about the outlook for positive reactions on these applications. Following approval we’ll have doubled the size of our U.S. product portfolio from four to eight products this year. Clearly our investments in new products are close to paying off. The exceptional second quarter results reported today were driven by strong sales in our U.S. business. We’ve more than doubled our earnings compared to the same period last year.

PROVIGIL prescriptions increased 17% compared to the same quarter last year. To further accelerate the recent resurgence in PROVIGIL, we entered into an agreement with Takeda Pharmaceuticals North America to co-promote PROVIGIL to primary care physicians, a largely untapped market for us. The Takeda agreement gives us immediate access to 500 salespeople who understand sleep medicine that can quickly leverage their existing relationships primary care physicians. The compensation is performance-based providing each Takeda sales rep ample motivation to detailed PROVIGIL. Takeda sales force began selling PROVIGIL in early July, we now have a combined sales force of more than 900 bringing the PROVIGIL story to a much broader market.

One of the big events in the second quarter was the approval and launch of VIVITROL for chronic alcohol dependence, this launch occurs against the backdrop of rapidly growing recognition of chronic alcoholism as a disease that can be treated with the help of pharmacotherapy such as VIVITROL. The recent broad based media interest of VIVITROL and the new treatment option provides is particularly gratifying. In late June, VIVITROL was featured prominently in the New York Times magazines in-depth article on breakthroughs and efficient pharmacotherapy.

VIVITROL was described in the article as part of a complete paradigm shift in treatment a scenario in which patients can look the physicians for treatment. In addition to driving demand, a key part of the VIVITROL launch is to make this product easy for physicians to use, accessible to patients, and readily reimbursed. Since the launching of product in late June, we've expanded a number of physicians enrolled in the VIP3 program to more than 2000. What is most interesting is about 75% of these physicians will inject the patient themselves. There are also 650 nurses enrolled in this system ready to provide injection support where needed.

Preliminary feedback from our reimbursement group has indicated that the value of this product has been well-received by the reimbursement community. Initially our sales team has focused its efforts on additional specialists with success, we plan to broaden our sales efforts to reach a wider audience of physicians, including psychiatrists, and in the long run, primary care physicians.

Also in June, we received the FDA’s approvable letter for FENTORA our new fentanyl buccal tablet based on proprietary OraVescent drug delivery technology from our CIMA LABS subsidiary. With no additional safety or efficacy data requested, the FDA has said labeling for this product is essentially final. We have submitted our reply to the approval letter and we anticipate approval by late September. FENTORA will be the first and only tablet that delivers relief quickly enough to manage the rapid onset and intensity that characterizes breakthrough pain in patients with cancer. Currently available short acting oral opioids, which are swallowed and absorbed through the gastrointestinal track can take up to 45 minutes to begin to provide relief. FENTORA’s unique effervescing action provides for a rapid and efficient delivery resulting in direct absorption into the bloodstream. Our next goal for FENTORA is to expand the indications for the product beyond breakthrough pain and patients with cancer to the treatment of breakthrough pain associated with other chronic pain conditions such as neuropathic pain and lower back pain. Studies in these and other areas are underway.

As you know, the agency is currently evaluating the new information that we submitted concerning a single case of potentially serious skin rash in our SPARLON studies. Following the advisory committee meeting in March, we gathered new data, discussed the case with the physicians who originally treated the patient, and consulted with leading dermatologist, we submitted this new information to the FDA in support of our belief that the child in question did not have Steven-Johnson syndrome. We are awaiting FDA action on August 22nd on our SPARLON application. SPARLON continues to be the subject of interest and enthusiasm for the ADHD treatment community. Our long term data were presented for the first time at the American Psychiatric Association meeting in May.

As open label long-term safety study consists of more than a year’s data that yielded a very benign safety profile. We continue to believe that SPARLON offers an important new option for the treatment of ADHD in children. We received an approval letter on NUVIGIL at the end of May, followed by a response at the end of June, and a waited reply by the FDA. FDA approval of NUVIGIL await final labeling and we expect to launch it later this year. We believe NUVIGIL offers meaningful advantages over PROVIGIL and exploring opportunities to expand its label.

During the quarter, we announced a disappointing results of our clinical program with GABITRIL for generalized anxiety disorder. Nonetheless we remain on track and enthusiastic about our clinical studies in oncology, Dr. Gill Robos (ph) of Cornell’s Weill Medical College presents the findings at the European Hematology Association meeting of the Phase I, II clinical trial examining the use of Trisonex in combination with low dose Ara-C, or Cytarabine for treating elderly patients with advanced myelodysplastic syndrome and AML. Chemotherapy regimens containing Cytarabine are effective in the treatment of AML, but the use in the elderly patients is limited because of significant side effects.

The results of Dr. Robos’s trial indicate that a combination of low-dose Cytarabine and Trisonex may offer a similar degree of benefit to standard chemotherapy with less severe toxicity. Other highlights in oncology include poster presentations at the American Society for Clinical Oncology meeting in Atlanta, including one on investigational use of Trisonex relax or refractory of myeloma in combination with other agents showing objective response in 43% of the patients. Another poster discussion focused on TREANDA in combination with rituxan, suggesting that the addition of TREANDA may provide benefit over use of rituxan as a single agent for non-Hodgkin's lymphoma.

Also during the quarter CEP-701 received orphan drug designation in Europe for treating acute myeloid leukemia after receiving the same status two months earlier in the United States. Our Phase II/III study with CEP-701 is progressing according to plan. We are very pleased with the development of our oncology business.

In summary, we delivered an exceptionally strong quarter. We look forward to continuing strong PROVIGIL growth, the impact of VIVITROL, and the introduction of three new products in the months ahead. Now, Kevin will discuss our financial performance during the quarter.

Kevin Buchi – Executive Vice President, Chief Financial Officer

Thank you, Frank. Today we reported our second quarter 2006 financial results, which included sales of $430.7 million an increase of 58% over the second quarter of 2005 and basic adjusted income per common share of $1.61, an increase of 124% over last year. Sales came in $40 million or more than 10% over the high end of our sales guidance range. Roughly half of this increase was the result of stronger than forecast gross sales. The other half can be attributed to lower than anticipated gross to net sales discounts primarily related to the number of patients who switch from Medicaid to Medicare Part D at the beginning of the year. The conservative nature of our initial assumptions around the impact of this industry-wide change became apparent when we received the first quarter Medicaid invoices during the second quarter.

CNS franchise sales increased 34% to $194.6 million. PROVIGIL prescriptions increased 17% verses the second quarter of 2005 to more than 657,000. Paying Franchise sales ACTIQ were $172.2 million an increase of 87% over the second quarter of 2005. Other sales were $64 million an 82% increase over the same period last year. Normal fluctuations in wholesale inventory levels continue with June 30 wholesale inventory levels of approximately two weeks. As planned, adjusted R&D expenses declined in comparison to last year and adjusted SG&A increased in comparison to the prior year as we continue to increase the size of our sales force, we initiated marketing activity for PROVIGIL and made further preparations for several upcoming product launches.

Our adjusted effective tax rate for the quarter was 35%, generally in line with our guidance. During the quarter, there were several adjustments that were made to arrive at adjusted net income. The most significant of these were a $15 million upfront payment related to the previously announced collaboration agreement with Pharmacopeia a $12.4 million charge for the impairment of our rights to GABITRIL in Europe recorded because of the termination of our program for generalized anxiety disorder. $20.9 million to exclude the ongoing amortization of acquired intangible assets, and $9.6 million related to the adoption of the new stock option accounting rules associated with FAS 123(NYSE:R).

The company is introducing third quarter 2006 sales guidance between $425 million and $440 million. Adjusted net income of between $77 million and $83 million, and basic adjusted net income per common share of between $1.25 and $1.35 based upon 61.3 million shares outstanding. In the third quarter, we expect the gross to net sales adjustments to moderate and anticipate somewhat higher spending due to increased investments in SG&A, associated with PROVIGIL and prelaunch spending for FENTORA. As you've known for some time, we've anticipated the generic competition would occur in the fourth quarter. However, based on the FENTORA approvable letter and subsequent FDA discussion, we now believe that FENTORA will be launched early in the fourth quarter rather than later in the fourth quarter, therefore we expect Barr’s generic ACTIQ will be available early, as well. We are modeling generic ACTIQ competition for the entire fourth quarter combined with a full quarter of FENTORA launch costs.

The decrease in sales in the fourth quarter coupled with an acceleration of launch costs from 2007 into 2006 creates an aberration in fourth quarter earnings, but will positively impact 2007. Next year we will benefit from the full year of FENTORA sales and accelerated PROVIGIL growth driven by our sales force and the impact of Takeda’s efforts in the primary care market.

We are raising our 2006 sales and earnings guidance. Our revised 2006 total sales guidance is now $1.525 billion to $1.575 billion a $50 million increase over our previous guidance. Our guidance for adjusted net income is increased by $10 million to between $250 million and $260 million and our guidance of basic adjusted income per common share is increased by $0.20 to between 410 and 430, assuming 61 million shares outstanding.

We continue to exclude Cephalon in our guidance this year. Guidance of the CNS franchise has increased between $725 million and $775 million. The same franchise has increased by $25 million to between $475 million and $525 million. And our guidance range for other product sales has been narrowed to $285 million to $305 million.

R&D expenditures remain targeted at $315 million to $335 million. SG&A expenses are increased to $590 million to $610 million to reflect the earlier than anticipated launch of FENTORA and compensation to Takeda for their promotional activities. Our assumed tax rate for the year remains at approximately 38 percent. In short, we've raised our earnings guidance again for 2006 and we anticipate strong sales in earnings will continue in 2007. That concludes our opening remarks we will now open this call to you and your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We’ll pause for just a moment to assemble our roster. Our first question comes from Greg Gilbert, Merrill Lynch.

Greg Gilbert - Merrill Lynch

Thanks, I have couple, Frank, first a quick one, care to offer prediction for what happened to SPARLON on August 22nd?

Frank Baldino

Predictions are hard when you have to consider the FDA. But we feel pretty confident and when we are looking at here and we are encouraged by the data we submitted to the agency. And we continue to believe (indiscernible) has never occurred. So we’re positive.

Greg Gilbert - Merrill Lynch

Is there a level of dialogue now that’s encouraging or discouraging?

Frank Baldino

You know, Greg, that’s a good question, but as you know we don’t discuss any discussions or conversations with any regulatory agency including the FDA. I think that’s a good policy and we're going to stick with it today.

Greg Gilbert - Merrill Lynch

Fair enough. Kevin, could you provide VIVITROL sales, are you not going to do that going forward?

Kevin Buchi

We didn't record any VIVITROL sales in the second quarter, Greg. It’s just too early to have a history of product returns. It was launched very late in the quarter. And so we’re not prepared to comment on it at this time.

Greg Gilbert - Merrill Lynch

Will you going forward provide that when they become significant though?

Kevin Buchi

Yeah, we’ll both provide you some insight with the quarter results.

Greg Gilbert - Merrill Lynch

And lastly, Kevin, can you estimate first what you thought demand-based sales for ACTIQ would have been for the quarter all else equal?

Kevin Buchi

I think the sales we’re looking at in the quarter were demand sales fundamentally, Greg, there wasn’t much else moving around. What other sales are you talking about, Greg?

Frank Baldino

Are you concerned about inventory movement and those kind of things?

Greg Gilbert - Merrill Lynch

You said inventory didn’t sound like it moved around a whole lot.

Kevin Buchi

Very minimal.

Greg Gilbert - Merrill Lynch

Can you run through again what you said about the up side you split it in two different buckets?

Kevin Buchi

Oh, sure. The sales that we recorded were about $40 million above the high end of our guidance. And what I said was about half of that was attributable to just gross sales, demand if you will. The other half was attributable to higher, larger numbers of patients who anticipated moving out of Medicaid on the Medicare part D.

Greg Gilbert - Merrill Lynch

Thanks, I'll get back in line.

Frank Baldino

Thanks, Greg.

Operator

We'll take our next question from Eric Schmidt, Cowen & Company.

Eric Schmidt - Cowen & Company

Let's see. First question for Kevin on the full-year product sales guidance. If I just do the math and take the two quarters you reported in the midpoint of your Q3 range, it looks like you’re forecasting a Q4 that would be down by about at least 90 million. I can’t imagine that’s all ACTIQ, maybe it is. Maybe you could just clarify.

Kevin Buchi

Bear in mind that ACTIQ sales in the second quarter were $172 million, and we’re forecasting a full quarter generic penetration.

Eric Schmidt - Cowen & Company

You forecast $172 million of ACTIQ this quarter?

Kevin Buchi

No, I’m saying second quarter actual sales of ACTIQ were $172 million and we’re saying that that product will be fully generic in the fourth quarter. So, yeah, we’re expecting a sharp decline in ACTIQ sales.

Robert Roche

As planned and as we’ve disclosed in the past, Eric.

Kevin Buchi

And of course, FENTORA will be taking off during that quarter, as well.

Eric Schmidt - Cowen & Company

Okay. Let me take some of that offline later. Question then for Frank is on the NUVIGIL and PROVIGIL franchise. If you could just update us on your thoughts, assuming NUVIGIL was approved and launched later this year, what the strategy might be in terms of timing and when you’d look to potentially execute on a switch and how you'd price the drug initially.

Frank Baldino

Yeah, I think, first of all the pricing stuff, Eric, probably not going to be very public on that until we actually announce the pricing. As I’ve said in the past, we expect NUVIGIL to be approved, we expected to be on the market in 2007. We believe it’s an important new product improvement over PROVIGIL, it will originally be positioned for excessive sleepiness, and we intend to launch a switch for PROVIGIL sometime around the 2009 time frame. Between now and then, we'd of course like to expand a label on NUVIGIL, and we think the product will do well in the long run.

Eric Schmidt - Cowen & Company

Okay.

Frank Baldino

Hopefully that answers your question.

Eric Schmidt - Cowen & Company

Not as much as I’d like, but thank you very much.

Frank Baldino

What else are you looking for, Eric?

Eric Schmidt - Cowen & Company

Just in terms of when you might and try and execute on that switch, Frank?

Frank Baldino

Well, I think 2009 is the year we’ve targeted for that. That gives us three years to execute, fully execute a switch with confidence before PROVIGIL, we lose PROVIGIL in 2012. So we’ve modeled it out. 2009 seems about the time to do it. And we think by that time we’ll have a broader label and a better product.

Eric Schmidt - Cowen & Company

Okay, congrats on a great 2Q, thanks a lot.

Frank Baldino

Thanks.

Operator

And we'll go next to Mike Rockefeller of Morgan Stanley.

Michael Rockefeller - Morgan Stanley

Hi, Frank. Two questions on FENTORA. One you said you expect class I response from the FDA. I was just wondering, has the FDA come back and say that you actually will get a class 1 response? And if not when do you expecting to do that and number two just wondering how you expect this product to fit in to the short ACTIQ end market given that it's largely generic and with a generic version of ACTIQ on the market?

Frank Baldino

The second question is something that Bob Roche is here to answer for you. You know, don't forget the label for will be for due some breakthrough pain, breakthrough in cancer patients, breakthrough pain. Not just short acting opids. And Bob, you want to provide some clarity for him?

Robert Roche

Yeah, I’d be happy to. The FENTORA label, we anticipate providing some significant benefits to ACTIQ. And we will certainly make the most of these -- of these differences promotionally. We’re also extremely excited about the trials, which Paul, Blake, and his team have currently ongoing in neuropathic pain and back pain, back pain especially, excuse me, that we anticipate having results for very shortly after we're able to launch the product and then communicate via all the means are within our disposal to the medical community. So yeah, this is going to be a product, which is going into a market with generic ACTIQ as well as many, many other products out there. Keep in mind that with the price that ACTIQ is currently enjoying today, a generic version would actually still be a very expensive product. And gives us a lot of leeway to price FENTORA in a fashion we believe will be very favorably compared to generic, to ACTIQ and its generics.

Frank Baldino

The other question was about FENTORA, the timing of the approval. I'm going to pass that to Dr. Blake.

Paul Blake

Yes, the agency indicated to us this is going to be a class I response. They asked us very few questions. We were able to satisfy them fully in short order. So, with every indication this is going to be class I and prove during this quarter.

Michael Rockefeller - Morgan Stanley

Okay, thank you very much.

Operator

And our next question comes from Adam Greene, JP Morgan.

Adam Greene - JP Morgan

Thanks, good afternoon. I was hoping you could comment on the FTC probe on PROVIGIL settlements. Is it a full investigation, or is it just exploratory nature or what exactly is going on? And also on generic ACTIQ, hoping you could kind of remove some confusion out there, just what needs to be done for product to get to the market? Is there any chance that the generic is not out there at the same time that the FENTORA is approved?

Frank Baldino

On the second part of the question, the process to get a generic on the market is to get approval from FDA to launch a generic product. That approval has not been obtained by Barr nor Cephalon for its authorized generic at this time. When that happens, the generic can be launched. Regarding -- to be conservative as Kevin said earlier, we are modeling ACTIQ generic in the fourth of this year and you guys should follow suit. Regarding the FTC probe, I’m going to pass it over to John Osborn, but just to introduce the subject to say that we're submitting information to the FTC in a voluntary fashion, we're not operating under a subpoena here of any kind. John you want to add some clarity in to this so?

John Osborn

Sure, Frank. Hi Adam, we've received a request to voluntarily provide information, and we are doing so. It was something that we anticipated, I think the FTC has been fairly clear that after the Supreme Court rejected the appeal and insurance file they'd be taking a look at other firms that settled. And that is what this is all about. Having said that, I think there's been a bit of confusion in the marketplace and in the class about (indiscernible) split case which has gotten a lot of attention. And just to be clear on that, they were operating in a completely different context. The only similarity is that we both settled litigation related to patent infringement. They have an existing consent to create their settlements to acquire the approval of the federal trade commission, and ours do not. So we'll be co-operating, obviously, with the commission, we'll be providing information, but we still feel very confident that we've done everything in accordance with existing law.

Adam Greene - JP Morgan

Is it a frequent back and forth between the two? Or is it something that they've asked you for the information a while back and that's been it?

John Osborn

No, they -- we put out an 8-K that clarified that they decided to review the case and they've asked us for a number of documents and other information. And we would provide it over time.

Adam Greene - JP Morgan

Thank you.

Operator

Our next question comes from Larry Neibor, Robert W Baird.

Larry Neibor - Robert W Baird

Thank you, good afternoon. Would you give us some idea of how many patients are currently receiving or have received VIVITROL injection?

Frank Baldino

I think we're going to leave that for the prescription and sales data we're going to provide in the third quarter. But I can ask Bob Roche to talk to you a little bit what’s been happening in the VIVITROL launch. Bob you want to fill him in?

Robert Roche

Yeah, we have to. We have 120 sales people out there calling now on several thousand addiction specialists. We're working in very close coordination with our partners Alkermes, and their field base team to identify the positions, their patients, and provide this combination with the means by which the drug can get administrated in the most expeditious fashion. I’m very, I’m very positive about the prospects we have here, I’m getting terrific feedback from our sales force on this. I've been out in the field myself with our salespeople on several occasions, and I think the enthusiasm for the product is very high and that will translate into terrific results in the very new future.

Larry Neibor - Robert W Baird

Give us some idea of how extensive the reimbursement is for the product?

Frank Baldino

I think in my opening remarks, we stated that the reimbursement issues have been well received by the market and by the reimbursement folks involved. And I think that sort of sums it up.

Larry Neibor - Robert W Baird

Finally, given your confidence in SPARLON end of this month, can we assume that Johnson & Johnson is preparing to launch the product?

Frank Baldino

In fact, we talked to them routinely about this, and they are pretty excited about the introduction of SPARLON. They see it as a product with unique advantages of other products in the space and its safety profile is that’s really one of the great selling points of the drug. And they hope to launch it in the near future with us. So they’re enthusiastic, and they’re part of the process.

Larry Neibor - Robert W Baird

The sales force training scheduled?

Frank Baldino

Bob, where are we on that with J&J.

Robert Roche

J&J's sales force has already received preliminary training on SPARLON. They're clearly already very well versed in marketplace dynamics as a whole. My anticipation is that given our expectations for approval and launch, there will be another opportunity in all likelihood for them to bring their team together. And perhaps on regional and much smaller case basis and we’ll plan to do the same thing ourselves.

Larry Neibor - Robert W Baird

Thank you.

Robert Roche

You bet.

Operator

And we'll go next to Gary Notman, Leerink Swann.

Gary Notman - Leerink Swann & Company

Hi, good afternoon, a couple of questions. First for ACTIQ, you took up pricing significantly and prescriptions have been declining. Is there a direct correlation there? And if not what is causing the continued declines in prescription? How formulary they are responding for the price increases?

Frank Baldino

That's a really good question. I think first of all, we took aggressive price increases in ACTIQ in the last year as you know, and undoubtedly, that has caused some decrease in prescription trends that we’re seen over this year. And the reason why there isn’t any growth in the drug is because it’s about to go generic in just a few months and it’s time to move on to other products. Fortunately we got a lot of new products and FENTORA is going to be a big drug in the space. And all of our efforts are focused on that.

Gary Notman - Leerink Swann & Company

Okay. So, I guess what's the plan to grow the market again once FENTORA is approved? I mean are you confident you could do that? Or has the market sort of peaked already?

Frank Baldino

I think, I remember, when we talked about FENTORA in the past, it’s really a different market than the ACTIQ marketplace. We try to demonstrate that this is not a situation where we’re switching ACTIQ for Fentora, Fentora is going to go into a market, for patients who don’t need the sticks. It’s got a lot of benefits that Bob’s going to talk to you about in a second. And we think it's going to find an opportunity in the 800,000 cancer patients who aren’t using the sticks today. Remember, although the sales of ACTIQ are very strong, we sell ACTIQ to roughly 50,000 or 60,000 patients only with breakthrough cancer pain. There is over 800,000 patients with breakthrough cancer pain. So the FENTORA market will focus on those folks that don't need the sticks in cancer pain and with a broader label in the future, we will hopefully address the 3 million patients who suffer from breakthrough lower back pain and breakthrough neuropathic pain. So it's a completely different market that we’re going after FENTORA and ACTIQ. Bob, you want to talk a little bit about the benefits?

Robert Roche

Yeah, I’m happy to. And the label that we've already negotiated with the FDA as I mentioned earlier provides some really significant advantages over ACTIQ both in terms of the peak plasma levels and what we reckon is at least a proxy for speed of onset. But one of the things that physicians have told us that they like best about OraVescent version of the product, because it doesn’t have a stick. And patients are really very reluctant to be walking around town with a stick hanging out of their mouth, this is probably is not a lot surprising. With FENTORA it is very discrete, the product can be used extremely easily, and we believe that is only one of the many ways in which we can successfully differentiate it from ACTIQ.

Gary Notman - Leerink Swann & Company

Okay, and could you address the formulary question, how they responded to the price increase on ACTIQ?

Robert Roche

Well, I mean, I think it’s really quite remarkable that a product like ACTIQ is continuing to perform as outstandingly well as it is. And if you look at the performance about a year ago, we were averaging somewhere around 8200 to 8300 scrips per week of ACTIQ. And if you saw the numbers last week they were around 8150. I mean with 50% price increases plus compounding, we've only knocked a few percentage points at most off the growth path for the product. So I mean, what this demonstrates for me that ACTIQ is very, very resilient asset that patients do find absolutely a niche for this compound and I’m 100% convinced and we are going to able turn that into benefits for FENTORA and build an even greater market for that in the future.

Gary Notman - Leerink Swann & Company

Okay. And last question as a follow on. If you have to do additional safety work, are you guys committed to that? and also what are the chances that you have another advisory panel given the data that you presented to the FDA?

Frank Baldino

These are all really good questions, and unfortunately there is no answer to any of them. Whether or not the FDA requires another panel meeting is unknown. I find it unlikely; but you never know what the agency's going to do. And the data we submitted to them shows that we never had a case of SJS and this one child and if you don't have something, it’s hard to do a study showing anything more than that. So Paul, you want to add anything to that?

Paul Blake

Thank you. It’s within the FDA's to call another advisory committee meeting if they need, but we think we've given, them convincing clear, and use information so it should be required. In regards collecting any more safety information we're always doing that with all of our products once they're on the market. We're clearly continued to do that.

Gary Notman - Leerink Swann & Company

So have you started doing some additional safety studies in anticipation?

Frank Baldino

I think your question really is trying to figure this out for you. We are doing additional studies to try to characterize the risk associated with the rash and SPARLON; I think that's your question?

Gary Notman - Leerink Swann & Company

Yeah.

Frank Baldino

Okay, Paul you want to touch that?

Paul Blake

We don’t really need to do any of those specific studies because we think we've answered the question and we do have experience on the market in Europe since 1994 and the US since 1999, we’ve got millions of patient years with exposure, and approximately 50,000 patient years of the pediatric exposure. We do have a program of studies phase IIIb studies looking at further aspects of SPARLON’s benefits as well as collecting more safety data as I mentioned earlier. We always do that with all products.

Gary Notman - Leerink Swann & Company

Okay, that's helpful, thank you.

Operator

We’ll take our next question from David Buck, Buckingham Research.

David Buck - Buckingham Research

Yes, thanks for taking the questions. A few quick ones. First for Frank or Bob Roche on VIVITROL IMS did come out with multi sales of about $1.2 million, can you give a sense of what do you think that’s actually indicative of what the demand was? Secondly, Frank, you talked about NUVIGIL and the switch strategy starting in 2009, there's obviously some concern about the FTC’s interest in settlements and in particular your settlement, can you give some sense, give sense of timing of how long if there was an issue raised by the FTC this process would unfold?

Frank Baldino

David, you might have to remind me of some of the earlier ones, but I remember the last one you asked me. And John will notice as good, I believe the Schering-plough case is a good example of a timing of this kind of thing. That's now in its 8th year. And it's still not resolved or been resolved positively for Schering-plough against the FTC has lost all its approaches to that. And eight years is probably a good number to think about. And don’t forget we only have PROVIGIL for six more years. So, I think the math gives the answer to your question, John you want to add to that a little bit?

John Osborn

Yeah, I agree with that, David. As I said in response to the earlier question from Adam Greene, we are voluntarily providing information. The FTC has the prerogative to take a look at our settlements, obviously. They would need to make a determination that they've had a problem with our settlements; they would then have to decide to move forward. There’s a lengthy process of either administrative challenge or core challenge with all of the discovery and process that that entails. There would perhaps or even likely be appeals. So as Frank said I guess you could certainly look at Schering-plough as a benchmark, it also that took about nine years to resolve. But you know, even beyond that as a practical matter, it’s, I just frankly don’t see a practical remedy here regardless of how this proceeds that would limit or undue or negate the impact of these settlements, I just don’t see that happening. The four firms that were the first to file have now agreed with us to drop their case. And I don't see an ANDA from any other firm being approved until these four firms have had the prerogative of 180 day exclusivity, and I don't see that starting until 2012.

David Buck - Buckingham Research

That’s helpful. I'll remind you Frank of the other questions.

Frank Baldino

Thank you, David.

David Buck - Buckingham Research

Okay VIVITROL the initial IMS monthly sales, which can be unreliable at times, it was about 1.2 million, do you think that's indicative. And the last quick was just GABITRIL what’s the plan for detailing or any investment or whatsoever, prescriptions are declining about 45%, and I guess sales growth or price was about 12% for the quarter. What’ the plan for GABITRIL next year?

Frank Baldino

For GABITRIL we haven't been detailing for any degree for the last two years. So, what you're seeing is just normal product erosion, actually slowing down a bit. If you look the careful note we’re very happy with where the product is. And this is where it's going to go. Regarding VIVITROL, Bob, you want --

Robert Roche

Yeah, he may be commenting on some DTD data from IMS that represents some wholesaler shipment information. Keep in mind that you're never going to see prescription data because this is not a retail product. That is all being handled or at least in the initial phases through our third party service provider that we call VIP3. What you're seeing perhaps some shipment data from some wholesalers which is, probably not representative of what's going on out there in the main or as a whole keep in mind also that most of the product is being shipped through specialty pharmacy groups, which are in some cases part of the wholesaler operations and some cases not.

Frank Baldino

So it's hard to know exactly what you're looking at David, but as Kevin said earlier we're going to be providing detailed information in the next quarter.

David Buck - Buckingham Research

Okay. Thank you.

Operator

And we'll take our next question from Dave Windley, Jeffries.

David Windley - Jeffries

Hi, thanks for taking the questions. Kevin on the last quarter I think you said you expect gross margin to be about the same as the first quarter and it was up. Could you describe the reasons and also your expectations for the back half?

Kevin Buchi

I mean I would actually view gross margin second quarter as being pretty much in line with first quarter numbers.

David Windley - Jeffries

Okay.

Kevin Buchi

They improved slightly and that's really because, you know, the gross of net improved so the sales numbers a little bit by that if that makes any sense. Going forward, I would use the 14%-15% between pretty consistently providing as a real good proxy as to what to expect for the rest of this year.

David Windley - Jeffries

And 14% to 15% being your costs, your direct costs.

Kevin Buchi

That's correct.

David Windley - Jeffries

Right, okay. Can you remind me how will mechanically the impact of the Takeda deal run through your P&L? through books and where do those costs go, et cetera?

Kevin Buchi

The payments that we will make to Takeda as compensation to their efforts will flow through and selling expense to us.

David Windley - Jeffries

Okay. I'm sorry?

Kevin Buchi

I was just saying it was basically selling expense to us.

David Windley - Jeffries

Okay, and then finally, you as you said trend your other product sales to the lower end of your range. Anything, any movements that we should be aware of in that buckative products?

Kevin Buchi

No, I don't think so. I mean the business, most of that business is the business coming out of Europe. I think the products are generally doing quite well. We’re seeing some nice growth with some of the products that we acquired for (indiscernible) is one we have high hopes for and some of the base products in France are also doing fairly well. I wouldn't anything out toward right and unusual in the trend.

David Windley - Jeffries

Okay so the trimming just being conservative or?

Kevin Buchi

I think just refining the guidance numbers, just narrowing the range.

David Windley - Jeffries

Okay, thank you.

Kevin Buchi

You’re welcome.

Operator

And we'll go next to Corey Davis, Natexis.

Corey Davis - Natexis

Thanks, Frank or Kevin if all goes well in the second half of this year and your stock performs well, does it make sense at some point to delever the balance sheet and what would be the best mechanism to do that?

Frank Baldino

From your lips to God's ears. We said about a year ago that a major focus if we get that kind of performance in the currency would be to reduce our debt; Kevin has been very vocal on this externally, as well. That clearly remains a goal of ours and I think it’s something that we can readily achieve. So yes, yes, and yes.

Corey Davis - Natexis

And with respect to FENTORA and reimbursement, you referred to the fact that ACTIQ has been pretty resilient, but would you expect that FENTORA is going to enjoy the same level of reimbursement that ACTIQ has right now given that generic ACTIQs would be out there?

Frank Baldino

I think on the FENTORA front, we’re going to announce pricing when we launch the drug, but just in the back of your mind, we’re going to have every lever that we can pull to our advantage to encourage, prescriptions of this product will be utilized, price notwithstanding. And also remember, as I just said and Bob just reinforced, that a lot of the market for FENTORA is different from the market for ACTIQ different patients, different opportunities. So we don’t see them as competitors, we see them as two products in the breakthrough gain space but for different patients in the long run.

Corey Davis - Natexis

And last question, if SPARLON did get a final approval on August 22nd, how soon could you turn around a launch? Would it be able to catch the back to school season?

Robert Roche

Yes, I certainly the majority of the back to school season, Corey, a late September launch wouldn’t let us bring it out there, obviously, you know to catch the initial flow of students, but we would certainly not want to miss that entire season whatsoever and would look to get some significant SPARLON penetration before the end of the year.

Kevin Buchi

Suffice to say, Bob, though, I think we are well prepared for SPARLON launch as early as possible after you get an approval. Is that right?

Robert Roche

Absolutely.

Corey Davis - Natexis

Great, thanks, guys.

Operator

And we'll take our final, excuse me our final question from. Roney Gold (ph) - Bernstein.

Roney Gold - Bernstein

Hi guys. Congrats on a great quarter. Probably on a FENTORA, what date did you resubmit FENTORA to the FDA?

Frank Baldino

What, I'm sorry, what?

Roney Gold - Bernstein

On what date did you resubmit FENTORA to the FDA?

Frank Baldino

Well do you know the date we responded for the approval letter?

Robert Roche

I do, it was July the 25th.

Roney Gold - Bernstein

Okay. So we expect 60 days after that or something along those lines?

Frank Baldino

I’m sorry but.

Roney Gold - Bernstein

I’m sorry we should expect 60 days after that?

Chip Merritt

I think Paul said earlier dangers indicated to us that that’s the case. Remember, there were no major outstanding issues, the label, like you said in the earlier releases and reaffirmed today and in the prepared remarks that the label’s been finalized with the agency. So we are expecting approval in that timeframe.

Roney Gold - Bernstein

Great. Couple of quick follow-ups. On third quarter ACTIQ sales, is there any reason that why in those sales would go down from the second quarter significantly?

Kevin Buchi

I mean we don't provide as you know product sales guidance at that level of detail quarter-by-quarter. But if you look at the, if you look at how the product has been trending generally. If you've seen relatively flat, maybe slightly down trend it scripts, and we would expect that to continue.

Roney Gold - Bernstein

Okay. And last, Frank, if you will have to provide the ACTIQ product full bar, about roughly when do you expect to be able to do that?

Frank Baldino

Well, I think there is several, several dates envisioned than the agreement with bar, but since FENTORA has been moved up substantially, the dates for bar have moved up substantially. We are prepared to send them sticks shortly so they could be prepared to launch the drug as we said earlier in the fourth quarter this year.

Roney Gold - Bernstein

So we including your approval and the shipping, you expect a shipment by October 1st, or you'll be able to ship to them by October 1st?

Paul Blake

We’re going to give sticks. Our responsibility on the FPC degree, I sure every way possible under our control that have Barr on the market within when FENTORA is launched. Remember the major date that we talked about from the very beginning whether we have to make sure Barr is on the market either December 6th, according to our consent degree and subsequent negotiations or the launch of FENTORA. So since is FENTORA is moving up in the pace, which we're very happy and bodes well for the future, so will our need to get Barr on the market. That's why Kevin said earlier, it's in everybody's best interest to model fourth quarter generic erosion of ACTIQ. Make sure they have sticks to accomplish that.

Roney Gold - Bernstein

Great. Thank you, guys.

Operator

And Mr. Grupp, I’d like to turn the conference back over to you for any additional or closing remarks.

Robert Grupp

No I would just like to say that concludes our second quarter earnings call. And we thank everybody for your participation. Have a good evening.

Operator

And once again, ladies and gentlemen, that does conclude this conference call, you may disconnect at this time.

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Source: Cephalon Q2 2006 Earnings Conference Call Transcript (CEPH)
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