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KOS Pharmaceuticals, Inc. (KOSP)

Q2 2006 Earnings Conference Call

August 08, 2006 8:30 am ET

Executives

John Howarth - Vice President, Investor Relations and Corporate Affairs

Adrian Adams - President and Chief Executive Officer

Kevin Clark - Executive Vice President and Chief Financial Officer

Juan Rodriguez - Senior Vice President, Controller and Corporate Administration

Analysts

Scott Henry - Oppenheimer Funds

Greg Froehlich - Merrill Lynch

Lei Huang - Lehman Brothers

Ken Trbovich - RBC Capital

Jim McCluney - Goldman Sachs

Ian Sanderson - Cowen And Company

Operator

Good day everyone and welcome to the Kos Pharmaceuticals Inc. Q2 2006 Conference Call. Just to remind you, this call is being recorded. At this time, I would like to turn the call over to Mr. John Howarth. Please go ahead.

John Howarth - Vice President, Investor Relations and Corporate Affairs

Thank you Amanda, good morning everyone. Welcome to Kos’s Q2 2006 Earnings Conference Call. Joining me on this morning’s call, are Adrian Adams, President, Chief Executive Officer, Kevin Clark, Executive Vice President and Chief Financial Officer and Juan Rodriguez, Senior Vice President, Controller and Corporate Administration.

I hope you’ve all had a chance to review today’s earnings release. If you have any additional questions following this conference call, please feel free to call either Nichol Harber or me. I would also like to call your attention to the slides that accompany our remarks this morning. You can access the slides by going to the Investor Relations section of our website and clicking on the icon marked Second Quarter Conference Call.

Before we begin to discuss our results, you should be reminded that this conference call will contain forward-looking statements that are intended to fall within the Safe Harbor provisions under the Private Securities Litigation Reform Act. Several factors could cause actual events to differ materially from the forward-looking statements including those factors listed in the forward-looking information, certain cautionary statements section of the Company’s annual report on Form 10-K, filed with the SEC for the year ending December 31, 2005 and factors identified in other reports filed with the SEC. I would now like to turn the conference call over to Adrian, who will highlight the key business and financial accomplishments for Q2. Adrian, please go ahead.

Adrian Adams - President and Chief Executive Officer

Thank you Jack, and good morning to each and every one of you. We are delighted this morning to report yet another solid quarter for Kos, a quarter with strong financial momentum that includes record revenues and significant cash generation in addition to excellent progress on the research and development, commercial, and corporate development fronts. Everything has been successfully implemented in line with our short, medium and long-term plans for growth. Evolutionary plans that we hope will lead to Kos becoming the sustainable best in the specialty pharmaceuticals sector.

Slide number III shows a summary of our Q2 2006 financial results. As you can see, revenue for Q2 of 2006 increased 25% to a record $223.7 million. Net income came in at $13.9 million for the quarter with GAAP earnings per share at $0.28. However, adjusting for the SkyePharma licensing fee and certain other one-time events, net income for Q2 was $28.9 million or $0.59 per share as compared to net income of $25.9 million or $0.55 per share for the comparable quarter a year ago as adjusted for one-time items. We also generated approximately $20.6 million in cash from operations in Q2 bringing our cash and marketable securities balance to $482.8 million at the end of the quarter.

Slide number IV illustrates a breakdown of our record revenue performance in Q2 of 2006. On a reported basis and as I mentioned before, we generated revenues of $223.7 million in the quarter a 25% increase over the $179.4 million of revenue reported in Q2 of 2005. As you’ll recall from our year-end and Q1 conference calls, Kos has entered into IMA agreements with each of the three major pharmaceutical wholesalers. Those agreements as well as the agreements that we have signed or may sign with our smaller wholesalers will have a one-time impact in 2006 on Kos’s reported revenue as our wholesaler customers adjust their inventory levels. An approximately inventory reduction of $4 million took place in this quarter and I am happy to report we believe that inventories are now at or below the carry on levels provided for in the individual inventory management agreements.

Turning to slide V, GAAP earnings per share for the quarter were $0.28 or net income of $13.9 million. These earnings per share included certain one time event namely the upfront payment associated with the Flutiform transaction, which reduce reported EPS by $0.32 and IMA impact of $0.5, a one time tax benefit of $0.7 and an additional charge for a change in accounting for stock option of $0.1. Excluding these one-time events, earnings per share would have been $0.59 compared with the street consensus of $0.42.

As illustrates on slide number VI, Kos remains in an extremely strong financial position. As of June the 30th our cash and marketable securities balance totaled $482.8 million, a $70 million increase since year end and an almost two fold increase over the last 12 months. This substantial increase on cash balance was achieved despite the fact that over the past 15 months Kos’s spend over $110 million on product accusations. With minimal debt a large cash balance and favorable earnings in cash flow outlook, I am happy to report that Kos is in the strongest financial position in its history. Positioning those well for continued aggressive business and corporative development activities and continued investments in all aspects of the buoyant Kos business.

Slide VII contains highlights of all commercial performances during the Q2 on the first half of 2006. For cholesterol franchise total prescriptions grew 4% more specifically the total prescriptions for extended units, which is a measure that represents the total number of dispensed tablets grew 5.4% in the first half of 2006. Niaspan and Advicor remain highly differentiated products in a market that is rapidly turning towards broader dyslipidemia control, greater use of combination products and with that an increasing emphasis on the benefits of increase in HDL or the good cholesterol. Total prescriptions for Cardizem LA increased 3.4%, while extended units for the products increased 5.4% during the first half of this year significantly ahead of the market growth. Asthmacort also delivered continued positive prescription growth among the target doctor universe compared to last year.

We are focused on delivering again several important commercial objectives during the remainder of 2006. These objectives include initiating the expansion of our sales force, to further reinvigorate the momentum of prescription trends, and the evolution of our cardiovascular and respiratory product portfolios. As previously announced the expansion in our sales force is a strategic decision that in turn impacted our decision, not to extend the Takeda co-promotion beyond the end of 2006. This puts Kos in an excellent position to fully maximize on the enhanced commercial opportunities ahead of us in 2007 and beyond. More specifically, this planned expansion to a sales force size of around 1000 will help us to fully leverage Niaspan’s returns to Medicare Part D coverage to drive continue growth with Advicor in addition to preference for the potential launch of Niaspan CF in early 2007 and the Icatibant in 2007 also.

This is an exciting time for Kos. As showed on slide VIII, more recently announced partnership with SkyePharma is another excellent example of Kos’s expanded business model that includes measured and therapeutically aligned investments to fortify our searching development pipeline for corporate development and scientific in-licensing activities. Under the agreement with SkyePharma, Kos has the exclusive marketing rights to Flutiform in the United States and the rights of first negotiation for Canada. This is a wonderful opportunity for Kos, particularly, since it is a Phase III asset. Flutiform is a fix dose combination product that combines Formoterol, considered by some of the best long acting better agonists, with Fluticasone, considered by some the best inhaled product of steroid. The product has patent protection through 2019. Flutiform is rapid relief for the common symptoms of asthma and offers 12 hours of bronchodilation which represents twice daily dosing and a faster on set of action to some of the competitive products within minutes.

Flutiform thus far has been shown to have a good safety and efficacy profile, and its metered-dose inhaling device is preferred by many asthma patients over the dry powdered inhalants. There are currently two double blind pivotal trials enrolling in the mild to moderate patient population. In addition to one open-label twelve month safety study that has been conducted in parallel with the clinical trials in centers in Europe and North America. These trials began in February 2006 and are recruiting well. We are pleased to say that SkyePharma is on track to filing NDA in the second half of 2007 and strategically we believe this provides an excellent growth opportunity with a potential launch early in 2009. Flutiform has high revenue potential in the strongest growth sector within the asthma market, a market with revenues projected to be over $12 billion in 2009.

Flutiform will compete in the fastest growing segments of this market in the fixed combination model. Combinations are not only more convenient for patients that carry two separate inhalers but also have been shown to optimize the efficacy of the individual agents. Flutiform should broaden our already established presence in the asthma and respiratory disease market with Asthmacort and in return will provide Kos with coverage in both the mono and combination market. In addiction a recently completed market research positioning study indicated that over 80% of specialists rated Flutiform superior to Advair. We are very pleased with SkyePharma’s clinical developments of Flutiform for the asthma indication and are excited about the Flutiform opportunity and what is a large and expanding market.

As showed on slide IX Icatibant represents another exciting Phase III opportunity. Last November Kos and Jerini singed an exclusive North American collaboration license agreement for the development, marketing, and distribution Icatibant a first in class drug for hereditary angioedema. We believe that Icatibant’s profile to be safe and efficacious, as well as convenient for patients to self-administer at the onset of an attack. Icatibant is a potent bradykinin B2 receptor antagonist targeted for use in patients with hereditary angioedema and market which we believe to have significant on that need. As indicated on the slide, Phase I and II studies have been conducted with rapid symptom reliving 100% of patients and with no serious adverse events reporting. Incaibant has orphan drug status and have been granted fast track designation by the Food and Drug Administration. We expect preliminary Phase III results to be available in the Q3 of this year and expect an NDA filing to occur by year-end with the first market launch planned for 2007.

Slide X outlines our progress towards delivering leadership in our targeted research and development areas and highlights several milestones in research and development. We are delighted with the increased productivity of our R&D exhibits. On July 30th and ahead of schedule we filed a supplemental new drug application with the FDA for a new dosage range of Niaspan CF products including our optimized Niaspan CF product. We anticipate approval by year-end 2006 and believe we remain on track for a Q1 2007 launch. Subsequent to that announcement we reported positive results from a clinical study on the benefits of combining aspirin with optimized Niaspan CF. The study shows that 2,000 milligrams of optimized Niaspan CF when given with aspirin results in a 44% further reduction in the incidents duration and severity of blushing relative to optimized Niaspan CF alone which has itself shown to reduce severity by 42% and duration of blush by 43% compared to currently marketed Niaspan. These clinical results have driven other ongoing product development programs details of which will be shared at the appropriate time. In addition to the lifecycle management issues for to Niaspan there has also been important lifecycle management initiatives taken with Advicor.

During the quarter we submitted an application with the FDA for a first line and label for Advicor and we hope to hear their decision by year-end 2006. Advicor also received final approval in the United Kingdom and Advicor 1040 was approved and launched in the United States. We are excited about the launch of 1040 since it may help broaden the patient face for Advicor in addition to provide the opportunity for patient’s to receive a highly effective dose of this broad dyslipidemic agent. On the clinical trial front both Simcor and the Icatibant completed phase-III trial enrolment with results due in Q3 for Icatibant and in Q4 for Simcor. We remain on track to file Simcor in Q1 of 2007 with a potential launch in 2008. Finally, the company has decided based on inconclusive results from the intermittent claudication proof-of-principle study to discontinue its development of Niaspan Lovastatin for the indication of peripheral arterial disease. Results suggested however that some important patients or groups may benefit, such as women, smokers, subjects on the 65 years old and those who exercise very little. Slide #11, summarizes the sequential development and at enhancing the flush profile with Niaspan from 1988 to the present.

The left panel illustrates the improvement achieved overtime with each step in development and ploughs the progressive improvement in the flush growth. As you can see currently available Niaspan itself decrease flush by 80% compare with immediate release Niacin. This was the basis of the 1997 approval of Niaspan. The recently communicated result from trails with optimized Niaspan CF and optimized Niaspan CF with aspirin have shown further sequential reductions in the overall flush profile of Niaspan. The right panel shows the actual severity dated from the two most recently completed studies and show sequential 42% improvement in severity by reformulating as with Niaspan CF and then by adding Niaspan to aspirin to optimize Niaspan CF. As shown on slide #12, we have a number of upcoming events with importance to Kos. As we indicated to you during our year end call 2006, is a year of transition and a big year for the conclusion of several important Phase III trials that can provide data for new drug applications. This slide briefly summarizes some of our growth catalyst in the short-term. With respect to clinical data results as indicated earlier we expect data from the Phase III trials of Icatibant in hereditary angioedema and the Simcor to be available by year end. With respect to regulatory approvals we’ve submitted a supplemental New Drug Application for a new range of Niaspan CF products including the optimized CF products in Q2.

In conjunction with our partnership with Duramed we expect an NDA to be submitted with Icatibant in Q4 2006 and for Simcor in Q1 of 2007 and finally we have submitted for publication the ARBITER 3 and COMPELL study results and the two Niaspan CF flush studies. Turning to slide #13, this illustrates the planned evolutionary growth of Kos from our foundation in 1988 to building the base of our business, to delivering value through product acquisition and research and development productivity until where we are now, in transitioning to the next exciting phase of growth for Kos and becoming the sustainable best. So as you can see we remain focused on growing our business and creating new and exciting growth opportunities through this transition period leading to what we believe will be the next strong period of growth for Kos. And before I turn the call over to the operator for the Q&A session I would like to take a moment to provide some additional remarks concerning our interim audit for historical stock option grant practices as well as the informal enquiry received by the southeast regional office of the Securities and Exchange Commission.

We have commenced an internal enquiry of our historical stock option grant practices and related accounting with the help of company counsel and advisers. Our eternal review is still ongoing. We have also received a letter dated July the 25th 2006 from the southeast regional office of the Securities and Exchange Commission, requesting documents relating to the grounds and exercise of company stock options during the period from January the 1st 1997 to the present. Of course, we intend to cooperate fully with this informal enquiry. Based on the review today, the company believes that certain stock option grants were accounted for using incorrect measurement dates. Our review has not found any path or practice inappropriately identifying ground stage with hindsight to provide officers and directors with in the money grants.

Although, the review is ongoing the company has preliminary determined that it will report cumulative prior period non-cash stock based compensation expense charges an amount that are not presently anticipated to exceed $10 million for this 10-year period in the aggregate after taxes. We will be restating certain of our previous financial statements to reflect this charge. Although, we don’t have a specific time parameter in terms of our restated financial statements for this periods as soon as practicable, depending completion of our internal review. I will now turn the call over to the operator for our Q&A session, thank you, operator.

Question-and-Answer-Session

Operator

[Operator Instructions]. Our first question comes from Scott Henry of Oppenheimer.

Scott Henry - Oppenheimer Funds

Thanks for taking the question, I just -- couple of things on a couple of different issues. First, could you update the share buy back, I know you are planning on doing that on a quarterly conference call basis.

Adrian Adams

Yeah, from the share buy back as we indicated in our last earnings we obviously put in place plans to potentially do issue a buy back. We obviously mentioned at that particular time that we would look on an ongoing basis of the environment and the landscape and make decisions in relation to when that would be initiated. Kevin, do you want to comment further on this?

Kevin Clark

Sure, good morning to you. We did not make any purchases in the quarter as you recall we did not received for authorization for the program until actually well into the quarter. Given earnings blackout period and some other considerations we were not in a position to execute on the plan during the quarter. But that said we will remain very committed to this program and you will see as executing them.

Scott Henry - Oppenheimer Funds

Thank you and on a separate issue, one of the things we tracked is the revenue prescript for Niaspans and you know it has been picking up very strongly in 2005 Q1, it dipped from say $95 to around $89. It bounced back up to a $101 for the current quarter. I am wondering, do you think Q2 is a good indication of how sticky the price increases and where we should be looking at revenue prescript.

Adrian Adams

Well, obviously as we have indicated in past calls, I think the prescription trends in the early part of this year were soft. We’ve been through some of the potential reasons for that now least of which is the issues we have with the partly coverage with the CMS. What I was looking at revenues and growth statistics, we would also like to remind people of the IMA agreements we have put in place, obviously if one looks of the impact of those IMA agreements they account for around about $35 million of sale would have taken place were it not for those IMA agreements. So the most recent times we’ve seen some good weekly trends in relation to the prescriptions, so we anticipate that obviously or highly differentiate position in the market place, we will give good progress in the future.

Scott Henry - Oppenheimer Funds

Thank you, if I could just ask one final question on the stock options enquiry just for clarification, I mean your company statement certainly is along the lines that you have not systematically taken advantage of stock options grants, the fact that this investigation goes beyond 2002 and 2003 into ‘05, ’06, does that give any color on that issue because I know systematically it became very much harder after those days.

Adrian Adams

I mean obviously we don’t want to comment beyond what we’ve articulated today are indeed 8-K, I would like to emphasize that obviously our internal investigations as I mentioned on the call revolve around this, being around about $10 million over a 10-year period.

Scott Henry - Oppenheimer Funds

Thank you for taking the questions.

Adrian Adams

Thank you very much.

Operator

Our next question comes from Greg Froehlich of Merrill Lynch.

Greg Froehlich - Merrill Lynch

Hi, this is Greg Froehlich for Greg Gilbert. First on revenue, did the $4 million hit from the inventory reductions primarily impact (inaudible) spread across the other products and then where do you stand on entering into IMAs with the smaller wholesalers?

Kevin Clark

Good morning, Greg the $4 million spread across all of the products in terms of where we are with other wholesalers, we had signed some handful I would say in the aggregate those agreements represent you know, a very minor amount of our volume, I think what I would say on the IMA agreement at this point is, as you recall when we first talked about this issue in February, we said that about $45 million was the total potential impact to our earnings from IMA agreements. That included $35 million which we had identified as being the excess inventory if you will among the big three wholesalers that is all behind us. As I have noted a minute ago, we have only signed IMAs with the few of the smaller wholesalers, it’s still possible that overtime $5 million to $10 million revenue impact if we were to sign agreements with all of our smaller wholesalers, but I do believe that this quarter, the Q2 is the last time the IMA agreements will have a measurable impact on our financials and it’s probably the last time you will hear us talk about it.

Greg Froehlich - Merrill Lynch

Okay, that’s possible and on SG&A, I know you can’t discuss the specific terms of the customer deals with the (inaudible) can you give us a rough idea of the portion of SG&A that was we realty driven in this quarter?

Juan Rodriguez - Senior Vice President, Controller and Corporate Administration

Yeah, the combined royalties for this quarter will are right around $42 million to $43 million mark.

Greg Froehlich - Merrill Lynch

Okay, great and on the pipeline what you stand on discussions for the inhale insulin product, thanks?

Adrian Adams

We have two every active discussions ongoing as we speak. Obviously as we have always mentioned our preferred stances to core development -- our inhaled insulin. We’re very pleased obviously with the noise that’s being generated around the Exubera and we hope that Exubera has a very nice success story. We hope that because we believe that the combination of all formulation and device offers a very highly differentiated position, potentially in the market place. So we’ll see how these discussions go. We’ve always retained the right to obviously develop it ourselves and our total focus in the organization at the moment in addition to pushing forward these discussions with interested parties is to get this product ready by Phase III in 2007.

Greg Froehlich - Merrill Lynch

Thank you.

Operator

[Operator Instructions]. Our next question comes from Lei Huang of Lehman Brothers.

Lei Huang - Lehman Brothers

Hi, thank you. I also have a few questions. You didn’t touch on guidance for 2006, so can we assume that means the guidance is maintained for the year?

Kevin Clark

In terms of guidance I would say that our earnings guidance for the year which, $1.70 to $1.80 on a GAAP basis, we remain very comfortable with. In terms of revenue guidance I think we spoke in February about a range of $880 to $900. We are looking to be a little bit under that at this point in time, I think our comfort level is more in the range of $860 million but again very comfortable with the earnings.

Lei Huang - Lehman Brothers

And can you just remind us, that $1.70 to $1.80 that excludes any impacts on any share repurchasing you might do?

Kevin Clark

That’s right.

Lei Huang - Lehman Brothers

Okay, and then just on the Advicor first line submission, can you provide any addition color around that whether you had to do any studies or the purpose of it, how it differentiates versus your existing product line?

Adrian Adams

Yeah I think if we go back to the approval of Advicor at the end of 2001, all of the dates of the NDA submission were in the first line patients. Obviously the label that we achieved for Advicor was obviously for utility of Advicor as a second line therapy. With the evolution of combination therapy and in particularly ongoing evolution of Advicor, we have further discussions with the FDA on the appropriateness and efficacy and safety profile of Advicor. Full discussions have led us to our submission to the FDA, and we are hopeful that will lead to a positive decision by the FDA but we will see by the end of this year. So no further data, just the reinforcements of the analysis that has been done in the past and obviously the benefits of other studies that have taken place such as (inaudible) over the course of time.

Lei Huang - Lehman Brothers

Got it and then just last question. If you can provide any update on your sales force expansion, thanks.

Adrian Adams

Yeah, as I mentioned during the call, in line with our decision, our strategic decision to increase the size of our sales force to around about 1000, that was a decision that was made alongside a decision to not proceed with the corporate mall beyond the end of this year. Interesting, if you look it our exit position at the end of this year from a sales force point of view and from a co-sales force point of view. The actual number of sales people that we will have in place is far more than double what we had in place when we initiated the corporate mall with Takeda. We believe that our sales force totally dedicated to course products will lead to a good level of productivity and we are looking forward to 2007 and beyond.

operator

Our next question comes from (inaudible) Bank of Montreal.

Unidentified Participant

Thanks and thanks for taking the question. My question is also on the sales force, how do you expect the transition to work with Takeda, both of you winding down period in the fourth quarter for instance where you, you know where they stop detailing and I guess looking forward, into 2007 and the launch of CF and then the launch of Icatibant and potentially others, the first line indication hopefully, -- do you believe that the additional resources contemplated right now will be enough or a 1000 sales people enough or do you need more going into 2007 and beyond, thanks.

Adrian Adams

On the latter part, yes we do. I think obviously with our co-promotion with Takeda which has been its third year, give out some good overall work and relationship with Takeda. I would emphasize that obviously this year it’s peak year of royalty for Takeda so it is very much in their interest for us to end this year at the highest possible level. Therefore, we are totally aligned in terms of driving the (inaudible) for the highest possible level of success at the end of this year.

Obviously from a transitional point of view as we recruit a plan put in place or enhanced sales force there will be some transitional aspects, but we are confident, but the sale force we have in place will obviously drive enhanced productivity. I would remind people that over the course of time, the thing that is differentiated KOS pharmaceuticals from all of at specialty pharmaceutical companies has been our ability to implement with excellence against smart sales and marketing. Calling on the right doctors, doctors with high prescription productivity calling them with quality education, a quality sales force and delivering high frequency with those target doctors. That’s been the key to our success. It would remain the key to our success and I think it’s that’s going to drive, enhanced good qualities of CF in the future and ongoing sort of differentiation with National --.

Unidentified Participant

I just have one follow up. Could you remind us of the terms of the Takeda agreement in terms of the tail that remains in particular how long the tail remains? Thanks.

Kevin Clark

Burt, this is Kevin, the tail is a three-year cap.

Unidentified Participant

Okay, and decreases each year sequential?

Kevin Clark

That’s right.

Unidentified Participant

Thank you.

Operator

Our next question comes from Ken Trbovich of RBC Capital.

Ken Trbovich - RBC Capital

Thanks for taking the question, couple of quick ones on the accounting side. Could you guys give as a background as to why there was a tax benefit in the quarter?

Adrian Adams

What we had in the quarter -- you may recall that you know year end press release and conference call. We talked about in accrual for potential state tax liabilities. I think that was in the amount of five and half million or $0.11 a share. What you see in this quarter is a partial reversal of that accrual.

Ken Trbovich - RBC Capital

Okay, and then could you help us to understand why there were no FAS123R our option expenses in the quarter as well?

Adrian Adams

There were, the option expenses was about $0.14 cents a share. For all the numbers you have seen the GAAP number and the $0.59 a share adjusted number are both after a $0.14 a share chart.

Ken Trbovich - RBC Capital

Okay and then could you explain the APB adjustments?

Kevin Clark

Ken, the APB 25 adjustments relates to the matter that you know, we have been talking about this morning relative to the stock option review and the differences and measurement dates.

Ken Trbovich - RBC Capital

Okay, so that affectively is the adjustment you anticipate at this point forward to restatements?

Kevin Clark

This is the you know, what you see in the quarter is the piece of potential to the second quarter of ‘06.

Ken Trbovich - RBC Capital

Just for the quarter. Okay and then finally with regard to the Takeda Co-promotion agreement, I guess the couple of question -- could you help to understand how the tail payments for the in the reduction in the royalties will compare to the added sales force cost you’ve already, you know, obviously built in the expectations for the current year?

Kevin Clark

Yeah, well first off all, on the $42 million for the quarter, that is not just Takeda, that is all of our royalty expenses including other parties. The tail payments provide for progressively lower payment to Takeda over the next three years. If you go back to our February conference call we talked about royalty expense declining from something on the order of 17% of sales this year to about 5% of sales two years out. That we estimate will be offset by about a 4% increase on the percentage of sales basis in our sales and marketing cost from the sales force expansion. So net -- net we see quite a bit of margin expansion from the decline in the termination of agreement.

Ken Trbovich - RBC Capital

Okay and then just one final question on that front. What should we expect in terms of the call volume or the promotional call volume as a result of the transition? It sounds like if the sale force is double from where it was at the time this was implemented that there may not be much of a change in the actual call volume. Could you give us a sense of that?

Kevin Clark

Well I think, when we one talks specifically about call volume, when this talk about the dynamics of detail and priorities, and obviously with Tekada co-promotion they would detail (inaudible) reporting various detail acquisitions whether it be position one, position two, position three. obviously the benefits of having, cost dedicated sales representatives is that our auctions to detail of products in higher level detail acquisitions is enhanced. If you tie that together with the approach I identified early which has been a great success for KOS all the time and smart sales and marketing. We believe that the productivity levels that we will be delivering during the course of next year will be sustained.

Ken Trbovich - RBC Capital

Okay, thank you.

Operator

Our next question comes from Jim McCluney, Goldman Sachs.

Jim McCluney - Goldman Sachs

Great, thank you very much and good morning. I just wanted to clarify a couple of things here, the Flutiform payment Kevin is included in the $70 to $88 GAAP guidance.

Kevin Clark

No, it is not.

Jim McCluney - Goldman Sachs

Okay and I just wanted to make sure I heard the comment correctly on revenues that it was around 860 for the year.

Kevin Clark

That’s right.

Jim McCluney - Goldman Sachs

And this lastly, I need certain thoughts about some of the price increases for the quarter especially with relation to asthma cores which -- it seems like it’s a pretty strong reversal against the 13% decline in prescriptions.

Kevin Clark

When you say a 13% decline in prescriptions --

Jim McCluney - Goldman Sachs

There was 13% decline in prescriptions in the quarter.

Kevin Clark

One thing we have always mentioned on asthma core by the way, just for clarification is obviously I will struck you with asthma core falls after just prior to when we acquire the product there have been four years of sequential decline in prescriptions with the product, our strategy was is very simple and that was to retentive growth in our target group of physicians. So over the course o time you will see a slowing in the overall decline asthma core you will still see a decline in the overall market and obviously in our target group of doctors we return the product back to grow and obviously with enhanced detailing. In fact, and we have just signed an agreement with PDI and external group will be giving extra emphasis behind the asthma core. We anticipate further activities in the target doctor population.

Jim McCluney - Goldman Sachs

Great thank you. So will the price increases in quarter then, please?

Kevin Clark

Well, do you (inaudible)?

Jim McCluney - Goldman Sachs

I do. On Asthmacort for the quarter by 13% and (inaudible) about 10%.

Kevin Clarke

I would emphasize, but if one looks at the comparative positions from a pricing perspective with asthma core, we still remain very competitively priced in this area which is a good position to be in when you overlay that with growth you know, target with the doctors.

Jim McCluney - Goldman Sachs

Thank you.

Kevin Clarke

Thank you.

Operator

We now have a question from Ian Sanderson, Cowen and Company.

Ian Sanderson - Cowen And Company

Thanks for taking the question. First, you mentioned that you’ve seen $35 million of impact from the IMA agreements in the first half of the year. In Q1, you indicated there is $26 million in Q2, it’s $4 million of -- missing $5 million somewhere and I don’t where that goes. And secondly, how much of the sales force expansion was reflected in Q2 SGNA number?

Kevin Clarke

Ian, this is Kevin. First on your second question, the sales force expansion. We are preparing for but have not started yet so there was no expense related to that in Q2. In terms of the IMAs, let me review a little bit of what we talked about at the end of Q1. During that quarter we saw the big three wholesalers reduce their inventory levels by $26.5 million. In addition to that, they raised their target level of inventory by $4.5 million. The way the IMA agreements work, they don’t provide that the wholesalers will carry some specific dollar of inventory. What they provide is that they will carry one month worth of inventory based on their estimates of forward sales. From the beginning of the year until the end of Q1 in the aggregate the three of them raised their targets by $4.5 million. So the combination of raising their targets and lowering their inventory by the $26.5 million took them from being 35 over goal to beginning of the year to $4 million over goal at the end of the quarter and that is what -- that $4 million is what was eliminated in this quarter.

Ian Sanderson - Cowen And Company

Okay. So you saw no -- so they were really pretty close to add goal at the end of Q1, you saw no net inventory work down in Q2, is that the correct interpretation?

Kevin Clarke

What we saw was an elimination of the 4 million of --.

Ian Sanderson - Cowen And Company

Okay, thank you.

Adrian Adams

Thank you Ian.

Operator

And at this time we have a question from Scott Henry of Oppenheimer.

Scott Henry - Oppenheimer

Thank you for taking the follow up question. Just a couple -- specific questions with regards to the Icatibant data. Is there a specific venue where we would see that place there will be a press release?

Kevin Clarke

I mean obviously as soon as we get the days we are in collaboration with our partner, we will obviously be sending out a press release with those results in relation to – well, now that would be in association with a specific conference hall meeting. That decision is yet to be made. We believe that given the higher medium necessary, in this area, it’s going to play important for us to get this data out as soon as possible. So we look forward to getting those results during the Q3 of this year and look forward to submission as we mention by the end of this year, we are very excited about Icatibant not just for the collaboration but in particularly for the patients who suffer greatly with this condition.

Scott Henry - Oppenheimer

Thank you and just final question, just with regards to the Advicor 1040 strengths. Do you expect will there be any material stocking of that in Q3 or should it be a relatively small number.

Kevin Clarke

It should be relatively small number. We are excited about the 1040 milligram strength because obviously it allows us to group more patients on to a single tablet. Before this they have to take either two 520 milligram tablets or 1020 tablets to get efficacy. The 1040 milligram strength will allow more patients to get up to very good efficacy and very good HDL increase levels and our sales force are very excited about this and we are going to -- good positive reaction, almost all customers, Advicor is a very effective dislipidemic agent.

Scott Henry - Oppenheimer

Thanks again guys and it looks like a good quarter.

Kevin Clarke

Thank you very much

Operator

We now have a follow up question from Lei Huang of Lehman Brothers.

Lei Huang - Lehman Brothers

Back to your brand new guidance of the $860 million, is that still assuming the $45 million of IMA impact or does that assume just a $35 million?

Kevin Clarke

Well, the $860 would be a reported number for the year, though an actual number not an adjustment.

Lei Huang - Lehman Brothers

But would that -- does that mean it’s including the IMA impact?

Kevin Clarke

That’s right.

Lei Huang - Lehman Brothers

Just the $35 million that you have accumulated so far then?

Kevin Clarke

Well it assumes the actual for the first two quarters which include the $35 million in our actual estimate for the next couple of quarters, as I said, we are not anticipating any measurable impact from IMAs going forward.

Lei Huang - Lehman Brothers

I got it and then just lastly you mentioned several times your target physician group for Azmacort, can you just remind us what type of doctors that is?

Adrian Adams

Yeah, I think it’s a combination of high prescribing primary care physicians, who are high prescribers of cortico steroids as you know. The sophistication of databases in the United States allow you to identify them but also a subgroup of pulmonologists and allergists as well. So very focused activity against high prescribing potential doctors who, how they are deep interested in cortico steroids.

Lei Huang - Lehman Brothers

Thank you

Adrian Adams

Thank you

Operator

And now we have a question from Greg Froehlich with Merrill Lynch.

Greg Froehlich - Merrill Lynch

Well if, can you talk a little bit more about the additional studies that you’re considering for Niaspan CF and to help us put the data release so far in the context. How much improvement in flushing the patients on regular Niaspan generally experience when they may take the drug aspirin.

Adrian Adams

Yeah, I mean first of all just to be very clear obviously when Niaspan was launched in 1997, it was launched against the basis of the enhancements of the flush profile was immediate (inaudible) Niacin was up to 80%. So very significant improvement versus the immediate response of Niacin around -- over the course of the last number of years we have been very focused on developing better tolerability profile with Niaspan, and the first of -- to be articulated early this year with the optimized strength of Niaspan CF, that study has -- as was outlined indicated a 42% to 43% reduction in the duration and severity of flush. We then initiated a study to look at the benefits of utility of aspirin with the maximum dose of optimized Niaspan CF and (inaudible) to ensure some further reduction in the duration and severity of flush, so we’re very pleased with the evolution of this particular within the context of the evolving market place. Obviously as you would expect from company like Kos Pharmaceuticals, we take these data, we assess these data and look to develop -- further developmental programs with this and obviously as we mentioned on one of our slides, I think it is our intention to take the data from the optimized Niaspan CF study and the data for utility with aspirin and integrate that within a development program leaving to potential assets and to the future.

Greg Froehlich - Merrill Lynch

Okay, last question. Any idea when you might complete the review of stock option grants and do you expect the June Q to be delayed, thank you?

Kevin Clarke

We do expect the June Q to be delayed at least for some period of time, but we envision that the internal investigation which is pretty far long will be completed as soon as possible. We will file the Q as soon as possible and any other statement as soon as possible and we will keep everybody posted on the status.

Adrian Adams

I would like to again put this into a perspective as we articulate during the call, this relates to -- more estimates, more internal estimates around about that $10 million over a 10-year period.

Operator

We have one more question, it comes from Robert Hazlett of the Bank of Montreal. Mr. Hazlett, your line is open.

Adrian Adams

I think is he has had his questions answered.

Operator

Okay, at this time I would like to return the conference back over to Mr. Adams.

Adrian Adam

Well, thank you operator. We appreciate everybody’s interest in hearing about Kos’s quarterly accomplishments as well as our broad prospects for the second half of 2006 and beyond. As you’ve seen the first half of 2006 have shown strong growth on both top and bottom lines and we have confidence in our ability to achieve continued success in the second half of 2006 as we worked towards accomplishing the strategic goals we set ourselves going forward and in particular pioneering medicines for a better life thank you everybody.

Operator

A rebroadcast of this conference is available starting today at 12:30 Eastern Time and will run until August 12th at midnight Eastern Time. You may access the rebroadcast by calling 719-457-0820 or by dialing 888-203-1112. Please reference the pass code 6754547. This concludes our conference call for today. Thank you for participating and have a nice day.

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Source: KOS Pharmaceuticals Q2 2006 Earnings Conference Call Transcript (KOSP)
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