Sepracor Inc. Q2 2009 Earnings Call Transcript

Sepracor Inc. (SEPR)

Q2 2009 Earnings Call Transcript

July 24, 2009 8:30 am ET

Executives

Adrian Adams - President and CEO

Jonae Barns - SVP, IR and Corporate Communications

Bob Scumaci - EVP and CFO

Mark Iwicki - EVP and Chief Commercial Officer

Mark Corrigan - EVP, Research and Development

Analysts

Chris Schott – JP Morgan

Manoj Garg – Soleil Securities

Robert Hazlett – BMO Capital Markets

Frank Pinkerton – SunTrust Robinson Humphrey

Ian Sanderson – Cowen & Co.

Greg Gilbert – Merrill Lynch

Adam Greene – RBC Capital Markets

Richard Silver – Barclays Capital

Marc Goodman – UBS

Bill Tanner – Lazard Capital Markets

Presentation

Operator

Welcome to the Sepracor’s second quarter 2009 earnings conference call. Hosting the call today from Sepracor is Mr. Adrian Adams, President and Chief Executive Officer. At this time all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. (Operator instructions)

It is now my pleasure to turn the floor over to our host Mr. Adrian Adams. Please go ahead sir.

Adrian Adams

Good morning everyone, and thank you all for joining us for our second quarter and first half 2009 financial results webcast. With me this morning are Mark Iwicki, Executive Vice President and Chief Commercial Officer; Mark Corrigan, Executive Vice President of Research and Development; Bob Scumaci, Executive Vice President and Chief Financial Officer; and, Jonae Barns, Senior Vice President of Investor Relations and Corporate Communications.

Before I proceed, I would like to ask Jonae to read our forward-looking statement. Jonae.

Jonae Barns

Good morning everyone. Various remarks that we make about our future expectations, plans, and prospects constitute forward-looking statements for the purposes of the SEC Safe Harbor Provisions. Actual results may differ materially from those indicated by these forward-looking statements as a result of 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.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our second quarter 2009 operating results press release, which can be found on our website in the For Investors section.

Back to you, Adrian.

Adrian Adams

Thank you, Jonae. And again I would to like to thank everyone for joining us this morning. We have a lot to discuss this morning, but before we begin, I would like to take you through the main areas that we would like to cover during todays were passed.

First, I will review how Sepracor is tracking against some of the key 2009 corporate objectives that we put in place at the beginning of the year and what accomplishments we have achieved here to date, in addition to highlighting those that we are continuing to work towards.

Bob Scumaci will then comment on the second quarter and first half 2009 financial results. Bob will handle the cost over to Mark Iwicki, who will follow with an overview of our commercial performance and ongoing priorities.

He will then introduce Mark Corrigan, who will provide an update on some of our research and development activities. I will then comment on our raised financial guidance for 2009, before making some concluding remarks, and opening the call up for your valued questions.

Please now refer to slide number 4. I am very pleased to report that falling solid fourth quarter of 2008 and strong first-quarter 2009, we have again delivered very strong second quarter 2009 results. These strong results are even more encouraging in light to the fact that they immediately follow our strategic corporate restructuring plant, which was largely completed in the first quarter, and we're achieved in an environment that remains challenging from both an economic and industry perspective.

This speaks to the singular focus we have within Sepracor, aimed at successfully executing against the goals and expectations we set. I continue to believe that almost streamlined more efficient and more focused organization has and will continue to enable Sepracor to remain competitive in today's changing environment, while providing this a platform to continue to leverage the many potential occurrence and future opportunities that face us.

Our 2009 commercial structure and strategy is aimed at optimizing product growth for this year and beyond. It isn't in intended to enable improved operating leverage and productivity and to allow us to better adapt to the rapidly changing dynamics within the pharmaceutical industry, in both the short and medium term.

We believe that our new commercial model, which appears to have been embraced by the Company faster than they have projected, has shown enhanced performance thus far as evidenced by solid prescription trends in product sales, as well as enhancing operating ratios as measured as a percent of revenues from the quarter.

As I mentioned, Mark Iwicki will be going into greater detail on our commercial performance later on in this call. A priority in 200 9 is to drive strong topline product portfolio performance, which I'm pleased to see reflected, in our second quarter financial results and is something that has contributed to a third consecutive quarter’s strong financial performance.

We will continue to focus on delivering enhanced productivity and we're very pleased with the progress we're making so far across the organization. From an R&D perspective during the quarter, and despite the disappointing results from our Phase II clinical study with SEP-289, we continue to execute against most of our near-term goals.

The FDA accepted for filing the STEDESA, NDA for adjunctive treatment of partial-onset seizures in adults with epilepsy. And the review appears to be going well. The PDUFA action date for STEDESA is January 30, 2010. We also initiated a monotherapy study in the United States in the second quarter, and the near future plan to submit STEDESA for regulatory approval in Canada.

I'm also pleased to report that during the quarter, we had announced the successful completion of a large Phase III study of OMNARIS HFA nasal aerosol in patients with seasonal allergic rhinitis. And the study, specifically significantly met its primary and key secondary endpoints.

We are on track to begin the second large Phase III study of OMNARIS HFA, in patients with perennial allergic rhinitis, during the third quarter in 2009. We also continue to look for opportunities to strengthen all pipeline and enhance the current franchises through our many ongoing corporate development and licensing efforts we have done at this point in time.

Mark Corrigan will discuss our product and research development programs will briefly address our LUNESTA pediatric studies and the recently announced filings from the Phase II study of SEP-289 later in the call.

Turning briefly to some of our financial highlights, I'm extremely pleased to report that with enhanced productivity, improved expense ratios, excellent cost controls, and focused execution, we delivered strong revenue growth and very strong non-GAAP EPS results this quarter, which Bob will be discussing in more detail in a few minutes.

First half 2009 non-GAAP EPS results grew by approximately 162% over the same period last year. We have also significantly strengthened our balance sheet through the combination of profitable cash generation and debt reduction. As a result of the trends we are currently seeing, we are now increasing our revenue and EPS guidance for the year, and I will review this later in the call.

We are determined to and believe we are making excellent progress in continuing to deliver strong financial performance, sustainable earnings momentum, and enhanced shareholder value over time, and importantly to meet or exceed the expectations we set with our key stakeholders.

Having made all these open remarks, let's now more along to our financials beginning with a more detailed review of our second quarter and first half 2009 financial results. Bob, please take us through these results.

Bob Scumaci

Thank you Adrian and good morning everyone. I would like to begin with slide 5, which summarizes our second quarter and first half 2009 revenue results. As Adrian alluded to, I’m pleased to report that second quarter revenues increased by approximately 11%, versus the second quarter 2008 to $326.2 million, which includes $16.9 million of previously deferred license revenue, accelerated as a result of determination of LUNIVIA agreement with GSK.

First half revenues increased by 7% to $656.4 million, including the GSK accelerated deferred license revenue, versus the first half of 2008. Our product royalty and license revenues for the second quarter of 2009 were as follows.

LUNESTA revenues were $151.3 million. XOPENEX Inhalation Solution revenues were $89.9 million. XOPENEX HFA revenues were $14.8 million. BROVANA revenues were $19.1 million. OMNARIS revenues were $9.1 million. ALVESCO have no revenues in the second quarter of 2009, as we continue to sell through to launch inventory.

This inventory is reduced by approximately 20% in the second quarter. Sepracor Pharmaceuticals, Inc., royalty and license fee revenues were $42 million, including the one-time special item. For the first half of 2009, product, royalty, and license fee revenue were as follows.

LUNESTA revenues were $291.7 million. XOPENEX Inhalation Solution revenues were $208 million. XOPENEX HFA revenues were $34.9 million. BROVANA revenues were $37.7 million. OMNARIS revenues were $15 million. Royalty, license fee, Sepracor Pharmaceuticals Inc. revenues were $69.1 million, including the one-time special item.

Please now refer to slide 6, which shows GAAP and non-GAAP EPS for the quarter and first half 2009 versus the same period in 2008. The increases in non-GAAP EPS for the second quarter and first half 2009 were few primarily by the continued focus on increasing contribution margin of our major products, focusing on continued expense management and productivity.

I'm particularly pleased that during the first of the year, we are able to deliver such strong earnings momentum during the time in which we went through a corporate restructuring and transition to a new commercial model. As you can see in the bottom right table, the first half non-GAAP EPS for 2009 as compared to the first half non-GAAP 2008 increased by 162%.

Later in the call, I will walk you through the non-GAAP adjustments and reconcile our non-GAAP results to comparable GAAP measures. But the major item in our GAAP to non-GAAP EPS reconciliation was the one-time tax gain related to the tax valuation allowance, which we released in the second quarter of 2008.

This reconciliation is also available on our second quarter 2009 operating results, press release, which can be found in our website in the For Investors section.

Please now refer to slide number 7, which is a summary of the second quarter 2009 non-GAAP results compared to second quarter 2008. Our objectives to deliver sustainable earnings momentum through this improved expense ratios is demonstrated in the 23% improvement in SG&A’s percentage to revenue of 48% versus 71% in Q2 ‘08.

We believe that this improvement, which is primarily driven by reductions in sales and marketing expenses once again, demonstrates our commitment and progress towards achieving the projected overall fourth-quarter and full-year 2009 operating expense reduction of $210 million.

These expenses expense reductions fuel the growth in non-GAAP net income for the second quarter of 2009 to $82 million from $8 million moving EPS to $0.72 per fully diluted share versus $0.06 per fully diluted share in the second quarter of 2008.

Turning now to slide 8, you could see similar improvements for the first half of 2009 versus the first half of 2008. Again we believe that our performance in the first half of this year is an excellent indicator of our commitment to improving our expense ratios and delivering earnings momentum.

We will be looking for further opportunities to improve these ratios going forward. Please now refer to slide number 9, which reconciles non-GAAP to GAAP fully diluted EPS for the second quarter of 2009. Non-GAAP fully diluted earnings per share of $0.72, excludes the cash gain on the early extinguishment of debt of $0.05 per diluted share, which I will address later in the presentation.

The pretax restructuring charge of $0.02 per diluted share, interest expense associated with implementing FSP APB 14-1 in the first quarter of 2009, a milestone chart due to be BIAL upon the acceptance of the STEDESA NDA were formerly reviewed by the FDA, which occurred in May, and the accelerated deferred license revenue related to the termination of LUNIVIA agreement GSK.

The FSP APB 14-1 and non-cash expense is highlighted in both the special and recurring sections to designate the accelerated portion related to the early extinguishment in debt and the recurring portion.

As was the case in the first quarter, please note that the bifurcation relates specifically to the 2024 convertible debt and the interest expense will continue until the 2024 notes are repaid, which I anticipate will occur on the put date on October 2009, also included in the reconciliation of the recurring items, similar to those in the first quarter.

Turning now to slide 10, you can see a reconciliation GAAP and non-GAAP EPS for the first half of the year. Again this reconciliation is also available in our second quarter 2009 operating results press release, which can be found in our website in the For Investors section.

Please now refer to slide number 11. Sepracor has continued to be opportunistic in reducing the debt position over the last six months. In addition to the tender offer for the 2024 notes, completed in Q1 ’09, which reduced our debt by $134 million to $380 million, we further reduced our debt in the second quarter by $94 million, which leaves us with a total convertible debt outstanding of $286 million as of June 30, 2009.

As we noted in our last quarterly conference call, we continue to expect that the 2024 notes will be repaid in full on the put date in October 2009. Please note the numbers are adjusted for the impact of FSP APB 14-1.

The net gain of $9.4 million for the first half of 2009 will be netted against the accelerated bifurcated interest expense and recorded in our income expense on our statement of operations. Our cash, short, and long-term investments were approximately $770 million as of June 30, 2009.

In summary, I'm very pleased with the financial results we have delivered for the last three consecutive quarters and I look forward to a strong second half of 2009. I would like to now hand the call over to Mark Iwicki who will review our commercial operations.

Mark Iwicki

Thanks Bob, and good morning, everyone. Please refer to the next slide, slide number 12, which is an overview of our progress with the new commercial model. As most of you know we launched a new commercial model and restructured our sales and marketing organizations during the first quarter of 2009.

This new model was put in place in response to changing trends in the macroeconomic environment, which have impacted and continued to impact the pharmaceutical industry to increased generic usage and the clients and patient-doctor office visits.

This streamlined commercial model is intended to gain operating leverage to more effectively and efficiently support our current and future product portfolio. We believe that we are beginning to see the benefits of the new model flow through the top and bottom lines of our financial statement, and we have seen positive trends in our sales forces productivity during the past quarter, which was the first full quarter of post-restructuring.

Evidence of these positive trends can be seen in key field metrics such as, sales representative productivity, and the number of details to target adopters. In March of this year, we organized into two business units and eliminated the mired sales line model that is common in the industry.

Our sales representatives have individual territory ownership and we believe they are highly motivated to drive revenues across each of the brands for which they are responsible.

In fact this individual accountability has helped to increase overall detailing volume by 16% across our sales force. We are continuing our focus on profitability for our LUNESTA and XOPENEX Inhalation Solution products and our direct-to-consumer efforts are becoming more focused and streamlined to take advantage of online media.

This lower-class and broad reaching media, we believe, is a highly efficient tool that enables us to rapidly and cost effectively reach significant numbers of consumers. Finally, before I go into further detail on sales force productivity and product performance, I want to mention that we begun preparing for the potential launch of STEDESA next year.

We are currently planning for a first cycle approval, which could enable us to launch as early as the first quarter of 2010. We have begun the process of key opinion leader development, and are preparing our sales and marketing plans for launch. In addition, clinical data have been rolled out at several peer-reviewed scientific and medical meetings.

Please refer to slide number 13. As I mentioned, we have seen encouraging signs with improved field force productivity post-restructuring, which we believe is a testament in part to the enthusiasm our sales professionals have for the new commercial model.

This we believe empowers them with individual territory ownership and the opportunity to see on a regular basis how their individual contributions can directly impact our products top line performance.

Our sales reps are focused on their individual territory ownership, and we believe this individual ownership and responsibility is what is motivating them to drive revenues across each of the brands for which they are responsible.

In fact this individual accountability has helped to increase the overall average productivity in terms of net sales per representative by the equivalent of approximately 21% per rep.

As you can see from the graphs on this slide, on a comparative three-month basis from March to May 2009 versus March to May 2008, our representatives have improved not only in the number of prescriptions and sales per representative, but also in the number of audited details versus the same period last year.

Specifically, I would like to draw your attention to the graph in the lower left, the total number of audited details during the three-month period of March to May 2008 versus March to May 2009 increased from 104,000 details to 121,000 details respectively. This 16% improvement in the aggregate number of audited P1 details is particularly significant given that there are 17% fewer representatives in 2009 versus 2008.

Again, these are very encouraging trends and that we are seeing them so shortly after their restructuring plan was implemented. We have a very motivated team and are indeed delivering strong results with far fewer resources.

Turning now to our LUNESTA's performance during the quarter, on slide 14. Revenues for LUNESTA in the second quarter of 2009 were $151.3 million, which is an increase of slightly more than 2% versus the second quarter of 2008. First half revenues were $291.7 million, which is an increase of 2.8% versus the first half of 2008.

I would like to note that the solid performance that LUNESTA had in the first quarter and through the early phase of the sales force restructuring continued through the second quarter with an increase of approximately 8% versus Q1 2009.

The overall insomnia market continues to face challenges, due to significant generate utilization that is driven by managed care and pharmacy chains. We remain focused on capturing as much of a branded market with the LUNESTA as we can. Our promotional priority for LUNESTA is to continue to differentiate our product from other agent’s particularly generic zolpidem.

LUNESTA helps patients fall asleep, stay asleep, and wake up ready to take on the next day. As you can see on the graph, we have continued our focus on improved contribution for LUNESTA, quarterly revenue remain strong, while our promotional expenditures have been significantly optimized.

As you saw earlier in Bob’s part of the presentation, it is this continued focus on product contribution such as that seen with LUNESTA that has led to significant improvement in our SG&A ratio as measured against product revenue on a year-over-year basis.

Please now refer to slide number 15. OMNARIS is our intranasal corticosteroid that we launched in April 2008 for the treatment of seasonal and perennial allergy rhinitis. Revenues from OMNARIS Nasal Spray for the second quarter of this year were $9.1 million, and for the first half of 2009, revenues were $15 million.

As you can see from the graph on the left, OMNARIS is continuing to perform well even as we head into the, what is considered the low season for allergic rhinitis. The impact of seasonality can be seen in the market and for OMNARIS as we enter the summer months.

In contrast, you can see that OMNARIS has continued to gain ground in share of the intranasal steroid market even in the lower season. Depicted by the orange line OMNARIS’ share of the market continues to grow and reach new heights.

We believe that our new commercial model, the launch of our memorable direct-to-consumer advertising campaign and most importantly the products proven safety, efficacy, and tolerability have all contributed to the continued strength and growth of OMNARIS market share and the inhaled nasal steroid category.

Our key promotional priority for OMNARIS is to focus our field force efforts on the most valuable physicians. As part of this, we will continue to drive uptick with key physician specialists such as, allergists and ear, nose, and throat specialists.

We have reached a 3% market share with the key specialty of allergists and a 2% share with ENT’s. Both specialty shares have grown sharply since the launch of our new commercial model. In addition, we are seeing early positive indicators from the direct-to-consumer launch for OMNARIS, which started airing in the last week of March.

Consumer awareness of OMNARIS is building nicely and as I mentioned market share has remained strong even as we are now on the low season for seasonal allergic rhinitis products.

Turning now to slide number 16, BROVANA is our long acting beta analyst to prove for the maintenance treatment of bronchoconstriction in adult patients with COPD. Revenues for the second quarter of 2009 were $19.1 million, an increase of approximately 43% over the second quarter last year.

For the first half of 2009, revenues were $37.7 million, an increase of approximately 63% over the first half of 2008. Driving this growth and revenues for BROVANA are increases in both retail and non-retail volume. As you can see on the graph to the left total retail and non-retail demand for BROVANA unit sold increased by 53% for the second quarter year-over-year.

BROVANA has unrestricted access and approximately 93% of managed care lives and is widely available through home health care pharmacies. Our promotional priorities for BROVANA include a new specialty markets business unit, which we believe is helping to drive BROVANA growth with top prescribers, hospitals, and other key channels.

Moving now to slide number 17, I would like to comment on the performance of XOPENEX Inhalation Solution and XOPENEX HFA. As you can see from the two graphs to the left both our XOPENEX Inhalation Solution and XOPENEX HFA products demonstrated second quarter year-over-year revenue growth with the Inhalation Solution growing 5.3% and HFA revenues growing by 5%.

Our promotional priorities for XOPENEX franchise included new asthma sales team that will continue to focus on the XOPENEX family of products. Efforts out this new sales team are directed at top docile prescribers, as well as loyal XOPENEX prescribers, where our share continues to remain strong.

Our efforts remain directed to educating healthcare professionals on the fact that XOPENEX is the only differentiated molecule in the branded short-acting beta-agonist market with advantageous over generic albuterol. In addition, we plan to continue our efforts to drive share and targeted accounts where we have a preferred position in place and will seek to optimize the channel mix to realize greater volume and higher margins for both XOPENEX Inhalation Solution and XOPENEX HFA.

Please note as our home health care and therefore COPD business is now minimal XOPENEX Inhalation Solutions should experience significantly more seasonality in the low asthma season versus previous years.

Moving now to slide number 18, we launched ALVESCO HFA in September of 2008. The initial focus of the launch was on key specialists. We saw positive Rx growth trends throughout the specialty launch in late 2008 and into early 2009. During the tail-end of the first quarter, we broadened our detailing efforts to focus on a select group of high potential primary care physicians.

We continue to see ALVESCO share and volume build even during the low part of the asthma season. We have seen a strong trend in Rx volume and share with continued growth in key specialists such as allergists.

ALVESCO now has a 4.5% market share with allergists. We are very pleased with the sharp increase in shares since the launch of our new commercial model. Our promotional priorities will be to educate primary care doctors that ALVESCO is a unique corticosteroid prodrug that is activated into des-ciclesonide after oral inhalation, and has a potent anti-inflammatory activity.

We’ll continue our efforts to differentiate ALVESCO and plan to leverage the small particle size that we believe results in greater lung deposition along with the prodrug benefits. We plan on effective use of patient programs, including starter kits with co-pay reduction cards and continued use of other relationship management programs to continue to grow ALVESCO.

At this time I would like to hand the call over to Mark Corrigan, who will provide an update on our progress in the R&D area. Mark?

Mark Corrigan

Thank you Mark. Turning to slide 19, which depicts our current pharmaceutical product candidate development pipeline. As he announced during the second quarter, STEDESA was filed with the FDA and is now under formal review as an adjunctive treatment for partial-onset seizures in adults with epilepsy.

And we are currently enrolling patients in our US monotherapy study. Also during the quarter, we successfully completed our large-scale 707 patient Phase III study of OMNARIS HFA nasal aerosol, our nasal administrated HFA formulation of OMNARIS in patients with seasonal allergic rhinitis.

We intend to initiate a second large-scale Phase III study with approximately 1100 patients, this time in patients with perennial allergic rhinitis during the third quarter. We are on track to file an IND for the XOPENEX ipratropium combination products in the fourth quarter.

As most of you are probably aware, we did not achieve the outcome we had hoped for in our Phase II study of SEP-289. I'll be going into some detail later in the presentation on this. Our new formulation of LUNESTA SEP-018 is on track to deliver results on ongoing Phase II study before year-end.

As mentioned in our last call, the FDA responded to a briefing package related to SEP-162, a dual reuptake inhibitor, being developed for the treatment of depression and has agreed with our proposal.

We are currently evaluating the possible initiation of the Phase III registration trial for SEP-162. We are also currently working on a formulation of SEP-162 in combination with eszopiclone, which we refer to as SEP-164, as a potential treatment for depression and/or other indications based on the positive results we have observed in our Phase IIIB studies of LUNESTA in combination with antidepressants.

Our studies of SEP-432 and SEP-900 continue to progress, and we are currently conducting formulation work on our ciclesonide inhalation solution product candidates. I would like to now briefly address our recent announcements regarding the FDA's communication to place our two ongoing pediatric trials of eszopiclone on clinical hold.

As we announced, the FDA's decision was based on non-clinical data that they felt could be relevant to the administration of eszopiclone in children. I would like to emphasize that the non-clinical data resulting in the clinical hold is not related to carcinogenicity or genetic toxicology, not does the hold relate to any finds observed in the human pediatric clinical studies.

Finally, this clinical hold does not have any impact on the availability of current prescribing information for LUNESTA in the treatment of adults with insomnia. We hope to work with the FDA to address a potential resolution of their concerns regarding the non-clinical data.

I would like now to turn to slide 20 and SEP-289. As we announced earlier this month, our Phase II proof-of-concept study for our triple reuptake inhibitor SEP-289 did not meet its primary or key second efficacy endpoints in the treatment of depression.

In addition, the adverse event profile seen in this study was inconsistent with adverse events reported in previous clinical trials. Specifically, adverse events were not meaningfully different from placebo in this particular study. These safety and efficacy results taken, with what was to be found to be low serum exposure levels for 289 is demonstrated by multiple serum concentration measurements let us to surmise that these preliminary data are inconclusive as they pertain to 289’s viability as a treatment for depression.

Our assessment that patients did not achieve the amount of drug in their system that we felt would be appropriate to sufficiently test our hypothesis. We are in the process of conducting a further review to determine the underlying cost for the low serum levels in this study.

Specifically, we are looking at the investigation of medicinal product itself, the clinical population and the trial methodology. Once we have completed this review and have determined the cause of low serum concentrations we will be in a position to better assess what steps if any we will take with SEP-289.

That being said we still believe triple reuptake inhibitors remain an interesting target for the treatment of depression and remain committed to further exploring this unique mechanism, with our series of backup molecules including SEP-432.

Moving ahead to slide 21, recently Bial's European partner Eisai presented data on the drug at the International Congress for epilepsy in (inaudible). At the top of the slide is a brief summary that shows the relatively high retention rates observed in this year-long open label extension, specifically, an average retention rate of 73.5%.

Given these results, combined with STEDESA’s expected once daily dosing and relatively low adverse event profile, we believe STEDESA has the potential to cultivate a rate of compliance within the therapeutic area were compliance is essential to avoid breakthrough procedures.

At the bottom of the slide, we have created a checklist to illustrate where we are in the regulatory process with STEDESA. As you can see, we have received our 74 day letter and provided our response. Our next milestone in the regulatory process is the 120 day update, which we anticipate submitting soon.

Now referring to slide 22, you can see our anticipated upcoming milestones in R&D. During this quarter, we anticipate initiating the six-week OMNARIS HFA basically perennial allergic rhinitis study with approximately 1100 patients. We also anticipate submitting the regulatory package for STEDESA to be marketed in Canada.

In the fourth quarter, we expect to complete the European LUNESTA venlafaxine study and provide results. I would like to point out that this clinical study is different from the one be completed with LUNESTA and Prozac, as the trial's primary endpoint is in depression and the secondary endpoint his insomnia, whereas in LUNESTA Prozac study the primary endpoint was insomnia and secondary endpoints were in depression.

This study is anticipated to guide our SEP-164 strategy. We also expect to summit the post approval supplement for the LUNESTA coating change through the FDA. Lastly, in the fourth quarter, we expect to see preliminary results of SEP-018, our new formulation of LUNESTA. In the first quarter of 2010, we anticipate the initiation of Phase II for SEP-900 of potential initiation of Phase III for SEP-162 and the FDA action for STEDESA NDA.

With that I would like to hand the call back over to Adrian. Adrian?

Adrian Adams

Thank you Mark. I would now like to summarize the revisions we have made to our financial guidance for 2009. Please turn to slide number 23. At the beginning of the year, we shared with you three uncertainties within the marketplace that resulted in our original guidance.

These were firstly, whether or not the economic challenges facing the industry in 2008 would continue into 2009. Secondly, the uncertainty related to the timing of the generate of Ambien CR, and thirdly, the potential disruptive impact of the significant changes made with our sales force is part of the role out to the separate force in new commercial model.

While the general market and environmental conditions facing the industry remain challenging there has not been a launch of a generic Ambien CR and our new financial guidance does not anticipate this to happen during 2009. Furthermore, the sales force changes have exceeded our expectations and the disruption has been much less than anticipated.

These conditions together with the trends we are seeing across our portfolio are ongoing expense control and excellence in execution have led us to narrow both our total revenue and EPS ranges for the year, and importantly to raise our overall revenue EPS guidance ranges for 2009.

Our revised 2009 total revenue guidance is to achieve revenues between $1.225 billion and $1.275 billion. This range is an increase from our previous guidance of between $1.15 billion and $1.25 billion. The revised revenue guidance excludes the $16.9 million accelerated license revenue related to the GSK payment for LUNIVIA in Europe.

Our sales marketing and general administrative expense guidance remains unchanged at approximately $600 million for 2009. I think it is notable that our guidance for 2009 SG&A remains $159 million less than our actual SG&A expense from 2008, a meaningful decrease.

We also project our non-GAAP research and development expense will remain at approximately $210 million in 2009, which is again a decrease from 2008’s actual R&D expense.

Fully diluted non-GAAP EPS guidance has also increased to a range of between $2.55 to $2.90 per diluted share, based on 114.5 million weighted average shares outstanding versus our previous guidance of between $2.10 and $2.70 per diluted share, based on 116 million weighted average shares outstanding.

Of the midpoints of the range, this EPS momentum would represent an approximately 67% increase in non-GAAP EPS compared to 2008. We have also tightened guidance on our expected cash and long and short-term investments at year-end. We expect cash, short, and long-term investments as of December 31, 2009 to be approximately 550 million to 600 million, which includes the impact of the debt repayment during the second quarter of 2009.

With respect to our debt position, we anticipate ending the year with approximately 100 million in convertible subordinate debt outstanding with the assumption that all our 2024 notes will be rate paid [ph] in full on the update [ph] this October as Bob mentioned earlier. I would like to call attention to this significant projected reduction in our debt position from a $531 million in par value of debt that remained at the end of 2008.

Finally, I want to note that we are revising our cash tax rate to 3% from the previously anticipated 2.5% rate. This is due to higher overall income and income in states that we don't have net operating loss carry forwards.

Turning to slide 24, in addition to increasing our non-GAAP EPS guidance, we are also increasing our overall GAAP EPS guidance to between $0.88 and $1.12. As you can see on this slide, the list of special and recurring items that we listed on our first quarter conference call guidance reconciliation slide remains the same.

Please now refer to our final slide, slide number 25. I would like to close the presentation with a summary of the second quarter and first half 2009, and then highlight our corporate priorities going forward. I am pleased that we have delivered strong performance with earnings and revenue momentum for the last three consecutive quarters.

Post-restructuring, we have seen significant improvements in a number of key productivity metrics, which is now translating into strong financial performance. Year-over-year, we have continued to see improvements in expense ratios, particularly in SG&A and we will look for further opportunities to improve these ratios in 2010 and beyond.

Since the third quarter of 2008, we have seen solid balance sheet improvements including a reduction of 402 million in the principal amounts of debt over this time period. I am pleased to be in a position to increase financial guidance following strong execution and a strong first half of 2009 performance.

Our 2009 priorities going forward are firstly, to drive strong topline product portfolio performance with continued focus on efficiencies, effectiveness, and profitability. We will continue to focus on delivering enhanced productivity and we're very pleased with the progress we are making so far this year.

Secondly, to build upon the ongoing efficiencies and their effectiveness from the corporate restructuring in order to achieve better productivity, greater accountability, and cost savings to help build a solid foundation for the future. Post-restructuring, we are very pleased with the progress we have achieved with regard to the increased productivity across many areas within our organization.

The cost savings initiatives that we began to implement in the fourth quarter of 2008, we believe have contributed to the improved financial performance for the last three quarters and we're focused on continuing this trend during the second quarter of 2009.

Thirdly, to successfully execute high-priority R&D initiatives to strengthen our pipeline and enhance current franchises. We have made progress advancing certain of our priority programs as we remain focused on continuing to move STEDESA to the FDA regulatory approval process and advancing the OMNARIS HFA program.

Fourthly, to continue to aggressively pursue corporate development and licensing opportunities that enhance the portfolio and compliment Sepracor’s strategic direction. We are continuing to look for opportunities to strengthen our pipeline and enhance the current franchises.

And finally, to deliver sustainable earnings momentum and enhance shareholder value all the time. We are committed to and remain focused on delivering earnings momentum into the second half of 2009 and beyond.

In summary, we believe that we are well-positioned to take Sepracor into a new phase of momentum. My confidence level in the stability and execution capabilities within Sepracor has never been as strong as it is now and I look forward to reporting to you on how we are executing against the plan that we have put in place on an ongoing basis.

At this point I would like to open up the call for questions and answers. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen the floor is now opened for questions. (Operator instructions) Our first question comes from the line of Chris Schott with JP Morgan. Please go ahead.

Chris Schott – JP Morgan

Great. Thanks. Just a couple of quick questions. May be to start off with, just give us your various thoughts as it relates to business development given your growing cash balance here, the recent setback with 289. I guess are there areas outside your core respiratory and CNS franchises that you would look or would you look at products that might require any additional sales reps or at this point, you are looking more for products that would kind of just leverage your existing infrastructure.

Second, can you elaborate a little bit more on the pricing trends you are seeing with your core LUNESTA and XOPENEX franchises maybe beyond this price increases, can you talk about how you are managing rebates for these franchises. And may be along those lines, can you also talk about any inventory changes you saw for those products in the quarter. Thanks.

Adrian Adams

Thank you so much for your excellent questions. I think on the first point, I think a very good point, clearly we were disappointed with the results of the SEP-289 trial and clearly it puts even more importance on successfully executing more corporate development and licensing activities. Our goals from a corporate development and licensing point of view in many ways remain the same. You are quite right that our cash position is at very, very strong. We have a very focused franchise at this point in time and now that we have a very strong platform of capability and productivity from a sales force point of view, we can look for further opportunities of in-licensing products of a last phase development to support CNS and the respiratory area.

We are also very interested in in-licensing products that have current revenue bases. And in the event that we saw either companies or products that had either synergistic or new therapy areas provided they made strong sense from a shareholder and fiscal point of view, we will look at those opportunities and R&D looking at those opportunities as we speak right now. So we are very focused on this. Clearly, we are excited about the near term prospects we have with our pipeline with STEDESA and I am not synergic there. That, together with strong performance for our current portfolio does not remove our focus on successfully executing corporate development and licensing activities, and our cash position puts us in a very strong position for doing that since we are rapidly becoming an even more partner of choice. On the second point on pricing--

Mark Iwicki

Yes, this is Mark Iwicki. I think what we can say is that, we are really focused on improving contribution across the entire portfolio. We said quarter-after-quarter that we are concentrating on looking for the high margin pieces of business and we have done everything we can to improve contribution for LUNESTA, XOPENEX UDV, XOPENEX HFA. We do not believe this time that deep discounting to grow our market shares is really the best move for our product portfolio, and we have been really pleased with the outcomes that we have had to date. We view some innovative techniques like co-pay reduction cards and other mechanisms together to grow market share with our sales representatives. And so far, it’s been really strong development and contribution across the board.

Adrian Adams

Sure. On the inventory levels, let’s talk about LUNESTA for a second. We have had three consecutive quarters of decreases in our wholesale inventories. And in this quarter, we have a 1.6 million unit decrease quarter-over-quarter. On the UDV, which is seasonal of course, we have a 7.1 million unit reduction in inventory. MDI is down slightly and BROVANA and OMNARIS are relatively flat to some up tick in OMNARIS, but it’s just some minor ordering patterns and as I talked about before, ALVESCO had a decrease of 20% units quarter-over-quarter.

Mark Iwicki

I think we are very pleased that if one looks at some of the revenue momentum that we are seeing over the last number of weeks and months in particular, a lot of values are driven by volume enhancement.

Chris Schott – JP Morgan

Great. Thanks. And Adrian, (inaudible) on the business development comments, can you talk [ph] also on your willingness to take near term dilution to earnings associated with any transaction at this point.

Adrian Adams

No. I think my approach to corporate development and licensing is to assess all opportunities with a very open mind. And in the end, the most important aspect in corporate development and licensing is those any potential initiative whether it’s from a corporate M&A point of view, R&D, whether it’s from a product specific point of view does it makes sense to shareholders in both the near and medium term. And clearly, we are looking at a wide range of opportunities as we speak and each one of those opportunities has different perspectives. But all of them will be driven with enhancing shareholder value over the time and that is the Wholly Grail as far as our execution in corporate development and licensing is concerned.

Chris Schott – JP Morgan

Great. Thanks very much.

Operator

Our next question is from the line of Manoj Garg with Soleil Securities. Please go ahead.

Manoj Garg – Soleil Securities

Hey, guys. Good morning. My question centers around STEDESA and your enthusiasm around the launch of timing now. Could you update us on anything has changed regarding your comfort level now versus previously on the three [ph] pivotal studies?

Mark Corrigan

Yes. Hi, this is Mark Corrigan. One of the things that we Manoj is the character of the questions in the 74 day letter have increased our confidence on a couple of levels. Number one, that the FDA is under active review of it. We received a lot of questions which is we view as quite a positive sign. Secondly, of course, is the nature of the questions are such that we believe we have -- we can answer them within our current database and we are very positive about that.

And finally that the -- in the context of those questions, there was nowhere points made to the pivotal trials arising from foreign data. So again that issue, it had been in the back of our mind, it did not arise in the context of the 74 day letter. It is a disease where there is I think a real medical need for a product like this and its used in adjunctive setting that might allow a division that is not known for first cycle approvals to try and meet some of their PDUFA guidelines with regard to hitting certain number first cycle approvals. So that’s raised our confidence, its not 100% but we are feeling much better about it and as a company, we want to be ready to take advantage of that should we get first cycle approval.

Manoj Garg – Soleil Securities

Okay, great. And then just on the national prescription audit data, are you guys seeing at this mix between what they are reporting and what you are actually seeing?

Mark Iwicki

Manoj, this is Mark Iwicki. You know, that’s a great question and I believe we commented on this a few quarters ago. The IMS audits are a little challenging right now. We do find that sometimes they over report and even under report. I think in general for longer term forecasting of 12 to 24 months, they are still reliable, but for month-to-month when we actually look at our units that we sell out and that move through the change, we do see a bit of a disconnect.

Manoj Garg – Soleil Securities

Okay. That’s fair. Thank you.

Adrian Adams

Thank you, Manoj.

Mark Iwicki

You are welcome.

Operator

And next we go to the line of Robert Hazlett with BMO Capital Markets. Please go ahead.

Robert Hazlett – BMO Capital Markets

Thanks. I have a couple of questions. First on STEDESA, could you give us or modestly [ph] the size kind of scope endpoints of the US monotherapy trial and when you expect data to be available for that? And again, Mark, if you could talk a little bit about your confidence in not meeting that data going forward. Second question is manufacturing of that product. Long term stability has been establishing and could you remind us where the manufacturing is being done and then I have one or two commercial questions, but I will let you handle those first.

Mark Iwicki

Sure. The monotherapy trials, it’s a very long trial, its 18 months. So we don’t anticipate seeing the data until 11. We would be progressing along this route any way out a general development for AEDs moving from the adjunctive usage to the monotherapy usage. So we didn’t do this per se to support the trial, it of course is on going and should the FDA want to understand something about the A.E. profile, then at least there would be certain patients there, but we wouldn’t wait until the break and the conclusion of the study necessarily to take a look at the data if that’s something that the FDA did ask for. And of course, there were number of issues associated with that that you might immediately think about which is the A.E. profile monotherapy might be different from that end as an adjunctive agent.

Your second point, the endpoint reduction in seizure frequency and it is against historical controls. This was discussed in a special protocol assessment with the FDA and with our advisors prior to commencing the trial.

Adrian Adams

Yes, on the manufacturing, our partner BIAL will be manufacturing the product for us and we will receive in finished form. The stability studies, the long term stability studies are on going, they continue to go. We are looking for a 24 month dating in our filing with the FDA.

Mark Iwicki

I mean from a stability standpoint, it’s were noting that BIAL anticipates commercially launching the product in the second half of this year in Europe.

Robert Hazlett – BMO Capital Markets

Okay. Thank you. Just on the commercial side of things is there a point where OMNARIS is doing well enough that you would consider incremental ads to the DTC spend and how should we think about when -- how often that review is ongoing?

Mark Iwicki

Good morning, Robert. Well, we are really pleased with OMNARIS right now as you can see from the growth in prescriptions and market share especially as the season has moved to the lower season, we are just throughout. I think the marketing and sales teams are doing a great job of differentiating the product and selling it through. There is no doubt that the DTC campaign has also helped us with our performance and we do evaluate all the time what the right level is. Right now, we have been every efficient with our spend, if you would look at the audits, you would see that, in general, we are significantly less than the other branded products and yet we have relatively strong awareness in the marketplace and I think that’s because of a great job by the brand teams in developing a super commercial. And I think we want to see how we make it through the rest of the season and for sure we want to have a strong position for the fall allergy season.

Robert Hazlett – BMO Capital Markets

Okay. So shifting to ALVESCO for a minute, what do you think the specific points of resistance are to prescribing that product and we have seen a pick up relatively recently as you pointed out on the graph, do you think you have addressed those at this point or is more clinical data or more horsepower commercially necessary to really drive that product?

Adrian Adams

Well, I think that we had a nice launch to the specialists late last year. But I really wanted to emphasis the point that it was just the specialists and then we held off from the broader full launch in the first quarter because we knew that we are going to restructure the sales organization. And I am really pleased that since the new commercial model has been launched and ALVESCO has a major prominent position in our Asthma Sales team that the volume and the share has picked up nicely. So I believe that it’s really a matter of us continuing to focus on our strong execution, differentiating the product based on its safety, efficacy and tolerability features, and that we would be able to continue to grow. The season is in the low season right now, we still been gaining share and some volume even in the low season. And so I see that as a really good sign and we are going to continue these efforts for the rest of the year.

Robert Hazlett – BMO Capital Markets

Great. Thank you for the color.

Adrian Adams

You are welcome.

Operator

Your next question is from Frank Pinkerton with SunTrust. Please go ahead.

Frank Pinkerton – SunTrust Robinson Humphrey

Great. Thanks for taking the question. And just a follow-up on one, I think there was kind of previously asked or may be some more detail, when I look at LUNESTA and XOPENEX, the price prescript as you would backward calculate that from your sales continues to go up, could you just speak to rebating levels or what is actually driving that because I haven’t seen this kind of price increases that you have talked about?

Adrian Adams

Well, I think the color that I could give you is similar to what we have talking about which is that, we are very focused on increasing contribution. We are looking at every single contract that we have in the marketplace, we are evaluating those for profitability and we are making very sound business decisions to be able to improve that contribution.

Bob Scumaci

And let me just mention that there was a price increase in early January in LUNESTA and that is not reflected in the financial statements as of the end of June.

Adrian Adams

July.

Bob Scumaci

July, sorry July. The price increase has been in July, but it doesn’t -- it didn’t impact any of the financial statements as of June.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. Great. And then just, Adrian, you kind of did speak a little bit towards it, if you could hit it up again, what’s the change over in the sales force, how do you do morale and do you have the correct people now in place after a couple of years to take the organization forward, are we looking at any additional changes from a standpoint of either new business heads or revamping of this sales force?

Adrian Adams

I think if one looks broadly across the organization and more specifically within the sales force, I think we do regular human resource pulses within the business and get regular feedbacks from within the organization. I would say that the morale of the sales force at this point in time is the highest it’s been for some considerable time. We have some very talented, very focused and quality professionals who are particularly and energetically embarrassing the new commercial model. I think if you talk to any one of our sales professionals, I think the fact that they really control their own territory and can really direct their efforts and be rewarded based on that has given a sense of productivity, a sense of ownership and a sense of energy that we haven’t seen for sometime.

We are very, very confident of the new commercial model and I think the morale aspects and the satisfaction levels within the organization are very high. I think when it comes down to the broader aspects of leadership and talent within the organization, we are very pleased that our retention rates of our talented employees, it remains very low significantly below industry trends and I think that’s a reflection of the enthusiasm and satisfaction, and I think I am very happy with the broader aspects of leadership and I think the stability of the platform, the stability of the organization is the best that I have seen and that gives me confidence not just for this year as reflected in our increased guidance, but also moved into 2010. And we are going to be really focused on making sure we grow this organization in an environment where all people can flourish with high levels of satisfaction and enthusiasm.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. Great. And then I think I may be I heard wrong, but on 162, did you say that’s going to move into a Phase II trial or Phase III trial on the back half of the year and if that is a Phase III, is that included in the R&D guidance?

Bob Scumaci

Not this year. What we are contemplating is, as you may recall, we have proposed to the FDA moving to a single Phase III trial. They agreed with our proposal, they did add a lower to one of the study a lower dose and we are currently in some formulation work on the product and are considering whether we take that forward in 2010 not in 2009, the formulation work is in the guidance for this year.

Frank Pinkerton – SunTrust Robinson Humphrey

Great. Thank you.

Operator

Our next question is from Ian Sanderson with Cowen. Please go ahead.

Ian Sanderson – Cowen & Co.

Good morning. Thanks for taking the question. Just wanted to reiterate with LUNESTA inventory levels, its 1.6 million unit decrease, is that quarter-over-quarter or year-to-date and same with XOPENEX 1.7 and may be if you could put those into context of either percentages or inventory days.

Bob Scumaci

Yes. We just give the decrease and increase period over period, and the 1.6 million is quarter-over-quarter.

Ian Sanderson – Cowen & Co.

Okay. And can you give us rough percentage there?

Bob Scumaci

No. We are not going to go into that at this point.

Ian Sanderson – Cowen & Co.

Okay. And may be if you, if Mark could tell us a little bit about where do you stand on 432 in trials following the 289 next year [ph] and whether you are re-evaluating of the dosing there?

Mark Iwicki

Yes. That’s a great question, Ian. So 432, we move through the MVPK [ph] and so we would be gearing towards a food effect trial and we have got some other preclinical work that’s ongoing. Your point is really good, what is really beating up the data now to think about whether as we would take these products forward, would we take them forward in more of an experimental medicine paradigm with a PK/PD trial and measuring concentrations in patients as patients may respond very differently to the doper [ph] merger stimulation as compared with normal. So the short answer is, yes, we have -- are evaluating our scientific plan particularly human clinical plan in light of the data that we have on 289. Some of those issues on 289 are likely 289 specific as it may relate to the low CRM [ph] levels, however, the A.E. profiles are something that we think may be more mechanism depended (inaudible).

Ian Sanderson – Cowen & Co.

Okay. And then, Bob, just a quick question, the decrease in the projected shares outstanding for the year as well for the quarter, what drove that?

Bob Scumaci

Yes, there is two things specifically. One is the break [ph] down of 2010 debt which was dilutive in our overall calculation.

Ian Sanderson – Cowen & Co.

Okay.

Bob Scumaci

Then our overall shared distribution, auction then restricted stock distribution within the company.

Ian Sanderson – Cowen & Co.

Thank you.

Operator

Our next question is from Greg Gilbert with Bank of America, Merrill Lynch. Please go ahead.

Greg Gilbert – Merrill Lynch

Thanks. Good morning. Bob, to follow-up on the inventory question, are you at the bottom end of the range allowed for your IMAs at this point?

Bob Scumaci

No. We are not and our goal is to continue to decrease inventories for the rest of the year.

Greg Gilbert – Merrill Lynch

Okay. Do those IMA speak to units or weeks?

Bob Scumaci

Weeks.

Greg Gilbert – Merrill Lynch

Okay. But you are just not willing to share what those are.

Bob Scumaci

Correct. Yes, we are going to just continue with units.

Greg Gilbert – Merrill Lynch

Okay.

Bob Scumaci

I think it shows a better trend.

Greg Gilbert – Merrill Lynch

Okay. For Mark Corrigan, can you shed a little more light on the non-clinical issues affecting the LUNESTA pediatric program and why the FDA would not be concerned about those issues as they apply to adult usage and do you think the pediatric expansion is off the table at this point?

Mark Corrigan

The toxicologies that we have seen in the (inaudible) are similar to toxicologies that we observed in the adults. So they are not brand new. So I don’t think that the question is what the relevance to them to children may be different, and that’s one of the things we are discussing with the FDA at this point in time. But that’s what because the FDA is actually seeing these toxicologic results associated with them; we don’t think that they are going to be a relevant to the adult prescribing piece. You know, as far as the written request forgoes, we continue to take a position that we are following the written request working with the FDA in order to fulfill whatever requirements that they have put in front of us, and that hasn’t really been raised at this point by the agency or ourselves.

Greg Gilbert – Merrill Lynch

Just to be clear on that, Mark, that means you still could get the six month pediatric expansion or not?

Mark Corrigan

Yes.

Greg Gilbert – Merrill Lynch

Okay. And then lastly for Mark Iwicki, you mentioned the rebate by down cards, do you think that’s a sustainable trend in the industry and perhaps for Bob, does that come out in SG&A or gross to net. Thanks.

Mark Iwicki

Yes, it’s a great question and I am sure people saw the Wall Street Journal article. I think really truly only time will tell. I am not sure. I really like the idea of helping the consumer, the patient with the co-pay and I think having some of that let’s call the overall rebate money that’s put into the system go directly to the patient I think is a good thing. I think that’s good for the doctor, good for the patient, and helps them take medicines that are really going to benefit them. And so it’s been a good tool for us and our sales representatives to be able to compete strongly, once again, without at this time using a heavily deep discounted contracting strategy. So I think we will have to wait to see how it plays out. We are always evaluating our options and so far I think our brand marketing teams and our sales teams have done a very nice job using this and I am sure as you know, there are many pharmaceutical companies are now using these co-pay reduction cards.

Bob Scumaci

And as for the actual cost, the actual -- the co-pay reduction portion is grows in that item, but the actual program cost to run the program is part of SG&A.

Greg Gilbert – Merrill Lynch

Okay. Thanks guys.

Mark Iwicki

Thanks.

Operator

Our next question is from Adam Greene with RBC. Please go ahead.

Adam Greene – RBC Capital Markets

Hi, good morning. Follow-up on some previous questions on LUNESTA ASP, just going forward, is that 115, 116 we saw this quarter, is that still a good number to use or should we expect an increase following the July 1^st 10% price increase. And then you mentioned the focus on increased contribution as it was driving that, what exactly does that mean? Is that mean, you are walking away from customers that are, one big discounts or just can you clarify that a little bit more for us?

Bob Scumaci

Sure. We look at on all parts of LUNESTA’s contribution. We’ve really streamlined our promotional activities. I think it’s been commented on many times that we are not on television right now with DTC, we use some very efficient online media. We have also streamlined some of our other marketing and sales expenses which is really helping on the bottom line. And on the top line, we have been very strategic about our contracting approach. We have renegotiated some contracts which have been a benefit for us overall for the total contribution of LUNESTA, and we have been able to hold on to significant volume even while taking those actions. So I believe that we are doing a very nice job right now of optimizing the top line and the bottom line, and I believe that’s reflected in the performance we have had now for the three straight quarters.

Adam Greene – RBC Capital Markets

And ASP, is that a good number going forward or should we expect it to bounce around more, any help on that?

Bob Scumaci

We don’t really talk about it return prices, but the new ad prices is $5.08 for LUNESTA.

Adam Greene – RBC Capital Markets

Right and you say we saw no impact in Q2, so obviously it should affect that of those flow through?

Bob Scumaci

Yes, the whole increase doesn’t flow through.

Adam Greene – RBC Capital Markets

Right.

Bob Scumaci

There is a net impact, but that will be in the third quarter.

Adam Greene – RBC Capital Markets

Okay. And just second question, what are the NOLs right now?

Bob Scumaci

You know what, its better to take a look at those in the 10-Q. I think better to get the information there.

Adam Greene – RBC Capital Markets

Okay. Thanks.

Operator

Our next question is from Richard Silver with Barclays Capital. Please go ahead.

Richard Silver – Barclays Capital

Yes. Sorry, back to the LUNESTA inventory levels and just also your comment about IMS data, this in the second quarter, did you see more of the disparity between the IMS data and other sources versus the first quarter. And I guess the second question is, would the number that you reported in the second quarter be a good base for going forward or is there anything that may have been unusual in the second quarter?

Bob Scumaci

I will talk about the inventory for a second. I don’t think it was anything unusual. I think it’s been our goal from the beginning of the year to steadily reduce our inventory levels and I think they will continue to be reduced in the third and fourth quarter. Whether it’s the same amount or something little less, I am not sure yet, it all depends on the ordering patterns, but anticipated to decrease in the rest of the year.

What we have seen with LUNESTA IMS data is a bit of variable picture in what we would call the true up to the actual units that we are selling. I think IMS would be the best one to answer specific questions about the data. I know that they have put some fixtures in place for May [ph] order that causes some of the discrepancy. But as I said before, we are really using IMS for a longer term forecasting and we use some other data sources to really make sure we are fully accurate with the units that we have moving through the marketplace.

Richard Silver – Barclays Capital

Okay. And so the question about whether the second quarter number is a good base, you would say, your answer is yes?

Bob Scumaci

Is your question about whether or not the TRx that you are seeing is a good--

Richard Silver – Barclays Capital

And the sales number and then using TRx is to grow from that sales number.

Bob Scumaci

Yes. I think it’s a good base. Once again, it does move around a little bit month-to-month and we true that up internally. I think for long term forecasting which is the way that most models are build, I think IMS is still fine to those longer term models.

Richard Silver – Barclays Capital

Okay. And then on the operating expenses, in particular R&D, historically, the company has under spent relative to the beginning of any given years guidance. As we are looking into the second half, can you point to any programs that could in fact push the R&D spending up meaningfully to get to that full year number that’s still unchanged even though the second quarter appeared low relative to our numbers, obviously you didn’t provide guidance but relative to our numbers.

Bob Scumaci

No, I think this year is a little bit different than previous years. I think we came in with a solid number of 210 and I think that number is pretty solid for the rest of the year.

Richard Silver – Barclays Capital

And what is it in the second half that you could point to that might lead to that meaningful up tick in the second.

Bob Scumaci

The 1,100 patient perennial allergic rhinitis, OMNARIS HFA study.

Richard Silver – Barclays Capital

Okay. And on SG&A, anything there? I mean in terms of spending trends on SG&A, you mentioned you are much more streamlined with your DTC? Is there anything in the second half that where we could see meaningful changes in trend?

Bob Scumaci

Well, I don’t think there is a meaningful change. I think some of the trends will continue. There is specific programs in the back half of the year, but its so varied and complex that there is no one specific item.

Adrian Adams

And I think an important thing to note is, as we move into the August, September through the end of the year that is a very big season for us now with asthma, allergy products consuming a large portion of our spent and evaluating our programs with LUNESTA as well. There is some seasonality to our spent.

Richard Silver – Barclays Capital

And just lastly on the gross margin, seems to have an up tick in the second quarter versus first quarter. Should we assume that this is also a sustainably higher [ph] number or is it just a function of mix and it will be bouncing around between what we saw in the first and the second quarter?

Bob Scumaci

I think it will be bouncing around. I don’t think you could take the second quarter and extrapolate that out.

Richard Silver – Barclays Capital

Okay. Thank you.

Adrian Adams

Thank you.

Operator

Our next question is from Marc Goodman with UBS. Please go ahead.

Marc Goodman – UBS

Hi. Adrian, with respect to business development, how are you thinking about primary care versus specialty type products, the industry is kind of moving more to specialty and what are you thinking about it?

Adrian Adams

Clearly, if one looks at our overall product portfolio now, we have a mix of specialty and primary care orientation. I think, as Mark alluded to on the call, we are very pleased with the way the new structure is settled down, but in particular, I think if one looks at our focus in terms of detailing, capacity and direction, it increasingly is moving more towards a specialty focus. So as it relates to corporate development and licensing, clearly if we are able to in-license, acquire either products or companies with a specialty orientation that is in keeping with our ongoing strategic and evolving direct source more of a specialty field.

Marc Goodman – UBS

And no major changes in your thoughts of business development?

Adrian Adams

No major thoughts. Clearly, I think we have always remained very active and we have a lot of very active discussions as we speak. And clearly, the goals remain in-license last stage assets. We are also looking at M&A potential with companies all with the eye of enhancing shareholder value and making strong fiscal sense in the near to medium term.

Marc Goodman – UBS

And just, I guess just another question on that, and there was surprised not only your company but just some of the other kind of specialty pharma companies that need product that have infrastructure, they haven’t done more deals with a lot of these biotech’s of products, they haven’t been able to get public. There have been some deals this year, but I am just surprised to having done more. Are these companies just having a hard time coming to grip the evaluations or why these deals aren’t happening?

Adrian Adams

Well, I think I project that probably as we move into the second half of this year into next year, you will probably see a pickup in deal making. I think clearly with a lot of the challenges from an economic cash flow general pharmaceutical industry environments I think most people have been looking for some degrees of stability. I think we have been very active in looking at corporate development and licensing opportunities. I think we have also been very focused on making sure that the sound stability and financial and metric stability of the organization is strong which is the strongest its been for a long time. And I think that’s probably reflecting the number of other pharmaceutical companies. I think clearly a lot of the discussions that we are having with other parties, I think clearly I think we are at optimizing level on the corporate under licensing for the industry per se is that probably you will start to see a pickup in that activity over the course of the next six to nine months. I think it has been unusual, I would agree with you that, but I do not think that’s reflects (inaudible) basis.

Marc Goodman – UBS

And your focus in the United States or equally is focused in Canada now, and what are your thoughts on Europe?

Adrian Adams

I think we are particularly focused obviously on the United States. I think from a Canada point of view, our strong focusing calendar is looking for the submission of STEDESA in Canada and on with discussions on the potential submission for LUNESTA in Canada. Any activities outside North America relate to opportunities to plan [ph] assets and also to look for opportunity to bring in products from Europe into the United States. We are very focused in terms of North America. I believe passing it the key to success is not just a strong stable organization, but absolute focus in what happens -- in all aspects of the business but in particular corporate development and licensing.

Operator, we have time for one last question.

Operator

And that will be from the line of Bill Tanner with Lazard. Please go ahead.

Bill Tanner – Lazard Capital Markets

Thanks for taking the questions. There is couple of them, one on you mentioned the DTC spent on LUNESTA has been pulled back, just thinking about how we should be thinking about anticipation of what the Company might do with (inaudible) and perhaps to a lesser extent generic CR?

And then secondly just on 289, I don’t know if you are in a position to provide a little bit more detail with respect to the comment that the concentration of the drug wasn’t as high as expected, if you could somewhat quantitate that I am assuming that you are talking about the early end of the curve, and then finally just timing on the next steps as to the resolution of this? Thank you.

Mark Iwicki

Maybe I will handle the first question, this is Mark Iwicki. I think when it comes to future entrants into the market place whether that it CR (inaudible), we have plans in place and are prepared for those entrants. We have been very pleased with our revenue and prescription strength even without the DTC on the air.

I know that I have talked a few times about our strong efforts online, which is a very efficient way for us to still reach consumers and conduct compliance and persistency programs. I think we always have the option of altering our promotional mix, but I feel like we have a very strong sales and marketing plan in place right now and we are ready for competitors, should they launch.

Mark Corrigan

Yes on 289, I think we released that the exposures we saw were 50% on a mean basis in terms of concentration, mean concentrations to what we have predicted from the Phase I multi-dose (inaudible) study. And I kind of outlined our line of increase, we are looking at whether the 289 substance itself remains stable whether dissolution constant had changed on the clinical trial population, obviously we are interested, this is a population (inaudible) to -- for the protocol requirements had to undergo, had to fill a previous trial and whether the SSRIs or antidepressants they took before had up regulated any metabolic processing, so that they in fact had metabolic drug more rapidly or alternatively does the substance them self induce its own metabolism, those are all questions that are on the table and obviously then we are looking at assays that we had had. We are going to take some time to understand this. So, I can’t give you an immediate time frame for what we do and we will be obviously presenting the result at a scientific meeting in the future.

Adrian Adams

Thank you operator and thank you all for joining us this morning. As I mentioned, I am very pleased with the strong results we have just announced and the fact that this our third consecutive quarter of strong results and obviously confidence in -- as it builds into the increased guidance for the year.

And I look forward to updating you on our progress we make to the second half of this year and on the plans we are putting in place for building this business into the future over our next quarterly call, So, you all have a good day and I look forward to speaking with you again in the not to distant future. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. An audio replay of today’s call will be available for one week starting today at 12 pm Eastern Standard Time. The dial-in number is 320-365-3844 and the pin number is 106718. We ask that you please disconnect your lines at this time and have a wonderful day.

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