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Executives

Chip Merritt - VP of IR

Frank Baldino - CEO

Lesley Russell - Chief Medical Officer

Kevin Buchi - CFO

Bob Roche - Worldwide Pharmaceutical Operations

Jerry Pappert - General Counsel

Analysts

Eric Schmidt - Cowen and Company

Greg Gilbert - Banc of America

Dave Windley - Jefferies and Company

David Amsellem - Piper Jaffrey

Louise Chen - Collins Stewart

Corey Davis - Natixis

Gary Nachman - Leerink Swann

Annabel Samimy - Thomas Weisel

Tom Russo - Baird

Chris Schott - JPMorgan

Cephalon, Inc. (CEPH) Q2 2009 Earnings Call August 4, 2009 5:00 PM ET

Operator

Welcome to the Cephalon second quarter 2009 Earnings Call.

At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Chip Merritt, Vice President of Investor Relations.

Chip Merritt

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

The company also may discuss certain non-GAAP financial measures within the meaning of Regulation-G during today's call. The information required by Regulation G is available in either the earnings press release or the Newsroom section of our web site www.cephalon.com.

Additional information and risk factors affecting the company's business and financial prospects, and factors that would cause Cephalon's actual performance to vary from our current expectations is available in the company's most recent Form 10-K and/or Form 10-Q on file with the SEC.

During this call, we will update full-year 2009 guidance and introduce third-quarter guidance. Please note the guidance will remain in effect unless the company provides subsequent modifications or updates. Our earning press release is available on the internet at www.cephalon.com.

Investors with further questions should contact me at 610-738-6376. This conference call is being webcast via the Cephalon homepage and will be archived for one week after the call.

0Speaking on today's call will be Dr. Frank Baldino, Chief Executive Officer, Bob Roche, Worldwide Pharmaceutical Operations, and Kevin Buchi, Chief Financial Officer. Also joining us today are Dr. Lesley Russell, Chief Medical Officer, and Jerry Pappert, General Counsel. Following remarks by Frank, Bob, and Kevin, we will be pleased to answer your questions.

Now, Frank Baldino.

Frank Baldino

I am proud to report that Cephalon delivered double-digit growth of both sales and adjusted net income, compared to the second quarter of 2008. Sales in the second quarter of 2009 increased 11%, reaching $539 million, and adjusted net income increased 31% to $111 million. Both well above the high end of our guidance range.

During the second quarter, we continued to execute on our growth strategies. On June 1st, we launched NUVIGIL. It is off to a great start. We filed an sNDA for NUVIGIL for the treatment of excessive sleepiness associated with jet lag disorder.

We generated strong growth of AMRIX and Treanda and late in the quarter with NUVIGIL. We surpassed 90% ownership in Arana Therapeutics, which has a rich pipeline of biological therapeutics in inflammatory disease and cancer.

For the fourth consecutive year, we launched a meaningful new pharmaceutical product, NUVIGIL. I have asked Bob Roche to provide some details on our performance.

Bob Roche

Thank you, Frank. NUVIGIL is off to a great start. Our team did a terrific job of planning and executing the launch, and the early results in terms of total prescriptions and overall market response bear that out. We have promoted NUVIGIL with a simple message of wakefulness throughout the day, and based on initial market feedback, this message has resonated very positively.

In addition to our promotional efforts in the field, we have also initiated patient sampling programs, discount programs for patients, a significant number of key opinion leader/speaker presentations, and a contracting plan with certain health care payers.

There were three basic sampling programs. The first is our normal distribution of samples to physicians. The second is a free seven-day coupon available to patients at www.nuvigil.com and being distributed by our sales team. The third is our T.O.P. START Program.

Now, the T.O.P. START Program is for PROVIGIL naive patients, diagnosed with excessive sleepiness associated with shift work sleep disorder, narcolepsy, or treated obstructive sleep apnea. The program give these patients the opportunity to record their experience with NUVIGIL and provide their direct feedback to their doctor.

Remember that under normal circumstances a physician does not hear back from a patient from one visit to the next, ometimes a month or more. With T.O.P. START he can access direct patient feedback approximately every two weeks. Approximately, 4,000 patients have registered to-date in this program, which was intended to be carried out during the early launch phase. We expect to wind it down throughout the remainder of the year.

We have also implemented an innovative Co-Pay Assistance Program. This program provides up to $50 of co-pay assistance per prescription, offsetting much of the financial burden that faces many patients. To make things easier for patients, this program is administered automatically in many pharmacies, making co-pay assistance coupons or cards unnecessary.

We are also reaching out to health care payers and managed care plans reporting NUVIGIL, and where it makes economic sense, we will enter into selective contracts with these payer programs.

We have developed a data base of approximately 50,000 individuals who requested that we send them information on NUVIGIL when it became available. Just recently, we mailed to these people a launch kit, with a free seven-day coupon and information on our Co-Pay Assistance Program. We anticipate that these kits will lead to additional prescriptions for patients who can benefit from our product.

In the near future, we will implement the Wake Information Support and Education Program, an online, multifaceted, professional education and support campaign designed for physicians in the sleep/wake field. In addition to information on sleep and wakefulness issues, physicians can, with just a click of a mouse get information on NUVIGIL, order samples, request coupons, ask questions, or request to see a sales representative. We believe programs like this are especially important for today's time-challenged physicians.

Our expectation is that overtime demand for NUVIGIL will continue to grow and that ultimately our clinical development program will result in additional indications. All of this should lead to steady growth in our wakefulness franchise for years to come.

Frank, back to you.

Frank Baldino

Thank you, Bob. As you know, we have a broad range of clinical programs underway studying NUVIGIL and a number of new indications, with the objective of filing four sNDAs in the next five years. The first of these, for excess sleepiness associated with jet lag disorder, was filed on June 30. The study results met the requirements of a special protocol assessment or SPA that we have with the FDA. We expect a standard 10-month review period with the potential for our first new indication in 2010.

We are currently enrolling patients in the 620-patient Phase-III study to examine the effects of NUVIGIL in individuals suffering excessive sleepiness associated with traumatic brain injury. We have an SPA in place and anticipate completion of this study in the second half of 2011. If the results are positive, NUVIGIL could have yet another excessive sleepiness indication in 2012.

Based upon the encouraging clinical trial results we reported with NUVIGIL as an adjunctive therapy in bipolar depression, we are planning to begin a Phase III program in the quarter this year, consisting of two trials of approximately 450 patients each.

Last year, we reported positive Phase-IIA results, showing NUVIGIL has the potential to improve negative symptoms of schizophrenia when used in conjunction with a number of antipsychotic drugs. The resulting Phase-IIB clinical program has recruited 234 of the 280 planned patients to-date. We expect the study to be completed in the second quarter of 2010.

We have also begun enrollment in the early stage clinical program designed to evaluate NUVIGIL for the treatment of fatigue associated with cancer treatment. The Brief Fatigue Inventory will be the primary endpoint for this 160 patients study and we anticipate completion in the fourth quarter of 2010.

We have in place and are executing upon the comprehensive strategy to build a successful franchise. Clearly, we believe NUVIGIL will be a strong contributor for years to come.

Turning to our oncology business, TREANDA continues to perform exceptionally well. We have surpassed the $200 million a year run rate and believe the product is still in the early stages of growth. At present, TREANDA's predominantly used to treat CLL. The clinical trial supporting FDA approval for CLL indication was published yesterday in the Journal of Clinical oncology. This peer-reviewed publication will further educate oncologists on the role TREANDA plays in treating CLL.

TREANDA is also indicated for patients with indolent Non-Hodgkins lymphoma, who have relapsed following treatment with a Rituxan-containing treatment. We expect the publication detailing the results of the pivotal TREANDA study in indolent NHL within the next six months. The adoption rate in this indolent NHL subgroup is now outpacing that of CLL, and we expect use in this population to surpass use in CLL near the end of this year.

Feedback we receive from both physicians and patients suffering from CLL or refractory indolent NHL, has been consistently positive. As a result of encouraging interim data from the European StiL study in frontline indolent NHL, we have begun our own clinical trial examining TREANDA plus Rituxan in the frontline setting for indolent non-Hodgkins lymphoma. Enrollment is ongoing in this 300-patient Phase-III study. We anticipate having complete response rate data in 2011. If these data are positive, we plan to discuss with the FDA the submission of an sNDA for potential frontline indication. With TREANDA we are creating new hope for patients and a valuable tool for oncologists.

We continue to see solid performance from AMRIX, which now accounts for approximately 13% of the branded skeletal muscle relaxant market. Once-daily dosing, all day efficacy and low rates of somnolence are well received by patients suffering from painful musculoskeletal conditions.

We just received a notice of allowance for an additional patent covering AMRIX, which strengthens our intellectual property stake surrounding this product.

FENTORA continues to contribute to our topline, as we pursue a path to additional indications, earlier this year we submitted our REMS to the FDA and are working with the agency to further ensure the safe distribution prescribing use of FENTORA. We believe that if we are successful in reducing the exposure opioid-naïve patients to FENTORA, we'll be in a better position to obtain approval for broader FENTORA label.

On the mergers and acquisitions front, we continue to actively seek out promising opportunities. Our most recent acquisition was of Arana Therapeutics. Arana is a therapeutic company with a number of biologicals in various stages of development and a strong research platform.

Arana's lead candidate is ART621, the first domain antibody to ender the clinic targeting TNF. And there is a Phase-II clinical program for rheumatoid arthritis. Arana's other biologicals include a RANKL inhibitor, ART010 for bone metastasis, ART104 targeting a glycolipid for colorectal cancer, and ART150 targeting granular (sides) for melanoma and CLL, and ART123, an Anti-IL12/23 Crohn's disease. We are excited about the biologics technology platform and expertise that Arana brings to Cephalon.

Around the other clinical opportunities our option to purchase Ception with its lead compound Reslizumab for the treatment of eosinophilic esophagitis in children and eosinophilic asthma pending results from the Phase-II/III study for EE around the end of this year. Lupuzor for the treatment of Systemic Lupus Erythematosus, which will enter a large Phase-IIIB study in early 2010.

Our phase II trial in myeloproliferative disorders with Lestaurtinib should conclude in the next few months. A Phase-I clinical study with CEP-18770 a Proteasome inhibitor should conclude in the third quarter. A Phase-I clinical study with CEP-11981, a VEGF/Tie2 kinase inhibitor should conclude in the fourth quarter, and CEP-33222, an injectable formulation of celecoxib, which entered Phase-1 this quarter, and we just entered Phase-I with CEP-9722, our PARP inhibitor.

Through our recent acquisitions and our own research efforts we have amassed a considerable pipeline, spanning numerous therapeutic categories, including a wide range of antibodies, antibody fragments, peptides, and small molecules. We look forward to sharing some exciting research with you and will host an R&D Day in New York on November 10, to provide greater detail around each of our research programs.

To summarize, NUVIGIL, TREANDA, and AMRIX are performing very well and will drive near-term growth. Our business development efforts have been productive, and our pipeline is more robust than ever. We continue to grow the business to the benefit of our patients and shareholders.

\

Now, Kevin will focus on our financial performance during the quarter.

Kevin Buchi

Thank you, Frank. Today we released our second quarter 2009 financial results. We reported sales of $539 million, which is an 11% increase over the second quarter of 2008 and exceeded our previously issued guidance of $515 million to $535 million. Adjusted net income for the period was $110.7 million, which is a 31% increase over the year-ago quarter and exceeded the high end of our guidance.

We also reported basic adjusted income per common share of $1.56, compared to $1.25 one year ago. This is an increase of 25%. Compared to the second quarter of 2008, CNS franchise sales increased 16% to $290.6 million. This included net sales of NUVIGIL at $16.8 million.

During the quarter, NUVIGIL shipments totaled $31 million. A substantial portion of the gross-to-net difference represents a reserve for material dispensed for the T.O.P. START Program and other ongoing sample coupon programs. We expect the reserves for this product to decline as a percent of sales as we move forward.

Pain franchise sales were down 8% to $123.6 million. Sales of AMRIX grew by 80% over the period to $30.9 million. This was offset by a decline in our fentanyl-based products.

Oncology franchise sales were $82.2 million, an increase of 86% due to strong sales of TREANDA, which reached $58.8 million. Other sales were $42.7 million, compared to $55.1 million a year ago. Modest increases in European volumes were more than offset by weakening of the European currencies.

Our goal is to maintain wholesale inventory levels to between two to three weeks for each of our key products. From the end of the first quarter, total inventory levels for our branded products declined modestly, but remained within this range.

NUVIGIL continues to move smoothly through the distribution channel. During the quarter, we shipped approximately $31 million of product to the wholesalers. This included initial launch quantities, as well as subsequent reorders. Approximately, half of this total remains as wholesale, while the other half was shipped to the retail pharmacies.

We estimate that by the end of June, over 15,000 pharmacies had stocked NUVIGIL. Even with the initial stocking of NUVIGIL, the dollar value of our CMS products at wholesale decreased during the quarter.

Adjusted R&D in the second quarter of 2009 increased from $80.4 million to $100.3 million, primarily due to the NUVIGIL clinical trial program, VIE accounting, inception of Acusphere, as well as our other expenses.

Meanwhile, adjusted SG&A was largely unchanged from one year ago, as higher NUVIGIL marketing expenses were largely offset by lower PROVIGIL marketing expenses and other cost controls.

Our adjusted tax rate for the quarter was 33.7%, which was in line with our yearly guidance of approximately 34%.

Again, this quarter, we treated Ception as a variable interest entity and consolidated their results. The results associated with variable interest entities was deducted from net income to arrive at net income attributable to Cephalon for both US-GAAP and adjusted net income.

Because of our increased ownership of Arana, our accounting treatment for this company changed during the quarter. Up until May 27, Arana was treated as an available-for-sale investment. After that date, we owned more than 50% of Arana, and in accordance with FAS 141R, Arana was consolidated into our financials.

As a result of the exchange of our note for the elimination of any financial obligations with respect to injectable CELEBREX, Acusphere will no longer be treated as a variable interest entity going forward. The major adjustments that were made to arrive at adjusted net income include, we excluded $30.5 million associated with cost of sales, primarily due to the ongoing amortization of acquired intangible assets and accelerated depreciation related to restructuring. We excluded $32.6 million of net gains in other income related to the acquisition of Arana Therapeutics Limited.

We excluded $13 million associated with the implementation of FASB APP 14-1, the new accounting requirements for Instrument C convertible securities. We excluded $12.8 million associated with our acquisition of Arana and charges related to ending our agreement with Takeda. We excluded $9.4 billion associated with Acusphere deconsolidation. We excluded $9.3 million to reflect the tax effective pretax adjustments.

Once again, we generated substantial cash during the quarter. So far this year our cash flow from operations was $313.5 million, more than double the first six months of 2008. We ended the quarter with $1.4 billion in cash and short-term investments. We intend to use our cash on hand to fund existing obligations and to make opportunistic acquisitions.

Based on our current outlook, our 2009 sales guidance remains unchanged at between $2.175 million and $2.225 billion. We raised our guidance for adjusted net income for the full year to between $457 million and $464 million. Our guidance for basic adjusted income per common share calculated to between $6.30 and $6.40, reflecting a basic share count assumption of 72.5 million shares outstanding.

Guidance in the CMS franchise remains between $1.16 and $1.19 billion. The pain franchise remains between $530 million and $555 million. Oncology is raised to between $315 million and $335 million, and our guidance for other product sales remains between $150 million and $175 million.

R&D expenditures were lowered to between $425 million to $445 million, and SG&A expenditures remain between $840 million to $860 million. Our assumed tax rate for the year is approximately 34%. Consistent with last year, we expect the fourth quarter to be our most profitable.

The company is introducing third quarter 2009 sales guidance of between $540 million and $560 million, adjusted net income of between $108 million and $116 million, and basic adjusted net income per common share of between $1.45 and $1.55, based upon 74.9 million shares outstanding, and a tax rate of approximately 34%.

Question-and-Answer Session

Operator

(Operator Instructions)

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

Eric Schmidt - Cowen and Company

Frank, on TREANDA, I think you mentioned that NHL now is the primary driver of growth taking over from CLL a quarter ago. Yet on a quarter-over-quarter basis there wasn't as much growth as we saw in this first quarter of the year. Is CLL struggling a little bit, or did you have a bolus of patients who are now off the drug in CLL? Just looking for some more insight there.

Frank Baldino

We think the product is doing pretty well, Eric. I think the CLL growth has attenuated a bit, because we've made a big movement into that space and we'll continue to grow going forward. But as I stated we're looking for NHL to be the growth driver for the next couple of years. It's the larger market as you know, so it will surprise there. Then we're hoping to get some data published, and don't forget, the CLL publication came out yesterday, so all this has been done without any tools of the trade out there, so to speak, with some solid data. Now, that that's out, I think that will continue to drive growth and NHL should be out by the end of the year that publication, and that will continue to drive growth. So, we see it as a great success, having earlier than expected penetration of CLL space, but looking for more growth to come from the NHL market. To your question about, has CLL attenuated to any great degree? Bob, you want to comment on that for Eric there?

Bob Roche

I think that certainly the growth in the CLL space has slowed. It remains the majority of our business and actually the vast majority of the business to date. We have penetrated into the various different lines of therapy at different rates as you would expect, in frontline therapy, considerably less than second line, considerably less than third line. So there is obviously a lot of opportunity in building up the business in those various lines of CLL therapy on one hand, which we're definitely going to be able to do more easily now with the publication in hand. On the other hand, as Frank mentioned, it's NHL which has really got the upside here. So as this product continues to grow, it's going to be driven I think to a small degree by continued growth on the CLL side, but really the prospects look terrific on the NHL side, and with the upcoming data that we're expecting as the year goes on, I'm confident that we're going to be able to continue that growth.

Frank Baldino

To Eric's CLL question, though, we talked earlier today, Bob, about seasonality that we're seeing.

Bob Roche

I think overall there is some minor seasonality in the oncology business. Less than you'd expect to see in certain of the other therapeutic areas, but the summertime is a little bit slower. I'm fully expecting that as we go through August and into September that the growth rates for TREANDA will continue to meet our expectations.

Eric Schmidt - Cowen and Company

Second question is on the pain franchise, couple of moving parts in the second half of the year. I guess you'll see your first competition in breakthrough pain and also we're aware that the supply agreement with Barr expires on ACTIQ in September. Can you share Bob your thoughts on the competition and Frank if you could just tell us what you might do once you get back rights to Barr?

Bob Roche

I can tell you, Eric, it's been lonely out there in the breakthrough cancer pain space for the last 10 years. We're actually welcoming some additional voices in that market. As you're aware, our success in penetrating into the market has been relatively modest. I'm very hopeful actually that with more promotion, more physicians will become convinced that this is a treatment modality that really needs to be used in this patient population.

Vis-à-vis the competition per se, I think ONSOLIS was going to be a terrific product and a good competitor. I personally like our chances. I think we've got a delivery system that physicians know well. We've got strengths of products that really can cover the entire span. We've got a lot of experience out there with FENTORA that that we're certainly banking on us as being a strong support for the product continuing to move forward.

But I think in general, we're hoping for some market expansion. We're expecting FENTORA to maintain a dominant share position and continue to grow hopefully as we move toward those expanded indications sometime in the future.

Frank Baldino

Regarding your question on the Barr agreement, Eric, we spoke about this in the past on these earnings calls and in our filings. We have an agreement with Barr that stipulates a date in September, and we will honor that agreement with Barr as per planned.

The consequence and outcomes of that, there are many and we'll have to see how that shakes out over time. But all we can say now is that we'll honor the agreement we have and the dates in the Barr agreement that were obligated too.

Eric Schmidt - Cowen and Company

I assume you do expect that agreement to end in September.

Frank Baldino

I think the agreement will be honored to its fullest extent, and I think the ongoing discussions between parties will also continue.

Operator

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

Greg Gilbert - Banc of America

Kevin, I think you answered this with the sales description, but do you have an idea of what portion of the NUVIGIL scripts are coming from vouchers and coupons that essentially represent free product for now?

Kevin Buchi

Yeah, I mean obviously the percentage has been decreased fairly significantly as we go through the quarter. At the time of launch it was much higher. On average through the quarter, I think the number was roundly 40% of prescriptions...

Bob Roche

Right. But as Kevin mentioned, that number is coming down and we expect it to continue to do so as we continue to progress through the launch phase.

Greg Gilbert - Banc of America

Is your outlook for NUVIGIL for '09 any different than it was pre-launch?

Kevin Buchi

Well, clearly, we were encouraged by the success of the launch. I think we haven't given guidance beyond this quarter for that particular franchise, and I don't think we want to be in that position to do so. Clearly, when you look at launches in this space, we're very happy with the performance so far, and we'll have to see how it shakes out at the end of the year. We hope to stay on this quick pace.

Bob Roche

Clear, Kevin. We give guidance of PROVIGIL, NUVIGIL combined. And we haven't change that guidance. Obviously we're as enthusiastic about however the launch is going as everyone else is.

Greg Gilbert - Banc of America

Okay. And then, Frank, on the hills of the recent offering, how likely is a deal or deals in the coming quarters and is your next deal likely to be another pipeline addition or something more commercially oriented? Thanks.

Frank Baldino

Well, as you know, Greg, there's a lot of opportunity out there. This is -- the healthcare sector really hasn't improved all that much and there's some great, great things for us to consider. We've [gotten a] great number of them under consideration, so we can't speculate beyond that.

Suffice to say, we're very active and very interested in moving forward on several fronts, whether it be products, whether it be products in the market, whether it be products in development. We haven't excluded anything. We just want to continue to build strength with the franchise going forward.

We do have obligations for cash. As Kevin noted on the last conference call and we have the Ception deal which has data coming due this year. That data is positive then we’ll have to exercise that. We've got a note due in next year, et cetera. And the Arana transaction came much faster than we expected, yet the 90%.

So, a lot of the cash obligations we were anticipating actually happened earlier than expected. So, we're happy to have the cash on hand to pay down on those, and we are looking at other things as you mentioned.

Operator

We'll go next to Dave Windley with Jefferies & Company.

Dave Windley - Jefferies and Company

Kevin, I missed the date that you mentioned that Arana began to be consolidated. Did that happen during the second quarter or subsequent two?

Kevin Buchi

Dave, it happened during the second quarter. It happened during May. I think May 24, 25 was a...

Dave Windley - Jefferies and Company

So how much of the R&D that you reported in the second quarter was a function of folding them in?

Kevin Buchi

Hold on. Give me one second; I can get that number for you. It's about roundly $2 million.

Dave Windley - Jefferies and Company

Okay. So small number, but nonetheless, down a little bit on the core Cephalon sequentially, was that a result of concluding several studies earlier in the year, or were there some abandonment's of programs in the earlier pipeline?

Bob Roche

Probably there weren't any abandonment's. All programs kind of went to their logical conclusion. It was simply a function of the timing of start and finish of clinical programs, nothing unusual.

Dave Windley - Jefferies and Company

A couple of quick ones, follow-ups. On the ACTIQ agreement with Barr, how much inventory could Barr buy up to the termination date of the current agreement and could they buy into the future significantly?

Frank Baldino

Let Gerry Pappert, our General Counsel, answer that question for you.

Gerry Pappert

I believe in general terms they are able to buy what they allegedly need. And of course there are a number of steps I think that have to be taken in the normal course of dealing between the parties. So no, we would -- I wouldn't think that they -- I would take the position that they can't buy into the future in any great amount.

Dave Windley - Jefferies and Company

Then would you be willing to comment to Greg's earlier question on the couponing. What that couponing percentage would be right now?

Kevin Buchi

I think frankly if you look at the product Luke PROVIGIL, and look at the gross to net on PROVIGIL I think once NUVIGIL becomes a mature product in several years you can expect it to translate into something more in line with what we are doing with PROVIGIL. The gross to net for PROVIGIL is more on the single-digit delta. We are going to, though, I would suggest, do more managed care contracting with NUVIGIL, what we have historically done with PROVIGIL. So you could expect somewhat larger reduction for that in the future once you get study state.

Frank Baldino

We also expect more volume from doing that, as well. So that should offset that. Look, I think it's just too early. Everybody is asking me that question. I know it's a really important question for everyone. It's just too early to talk about this. The gross to net of this product is changing weekly as we progress through the launch, and you just hate to put numbers on things that will not be substantiated a week later. Have to bear with us in this process. We're pretty excited about the launch. We expect a good product to grow for a long time with a gross to net that Kevin said a moment ago approaches that of PROVIGIL.

Operator

We'll go next to David Amsellem with Piper Jaffrey.

David Amsellem - Piper Jaffrey

Quick question on NUVIGIL, just in terms of the reimbursement landscape, are you looking to have the drug placed in a Tier 2 on selected formularies or do you envision it mainly a Tier 3 like PROVIGUL?

Frank Baldino

The goal of this contracting is to improve status of the drug. We've had great success with PROVIGIL, largely as a Tier 3, largely as a prior product. We expect to have great success with NUVIGIL, whatever tier it ends up on. We will continue to work with payers to try to improve the status of NUVIGIL, even though we've had great success with PROVIGIL. In some cases we'll be able to do that. We've seen some movement in that area with a number of plans. The tradeoff will be, as you said, you trade off price for volume. You get more volume by improving or allowing the drug to have greater access to patients. So we are on track with all of our new plans with NUVIGIL and we just don't have a lot of specifics to discuss at this early stage.

David Amsellem - Piper Jaffrey

I know it's early, but what is the extent to which you think PROVIGIL naïve patients are on NUVIGIL and with the Co-Pay Assistance Program in place, do you have a sense that you can grow the overall wakefulness market into 2010?

Frank Baldino

We actually have some numbers for you. So, Bob, you want to answer that?

Bob Roche

As you can imagine, David, we're slicing and dicing these data in many, many different ways. Right now, we are running at about 6,000 prescriptions a week for NUVIGIL and growing very nicely. Of that number of 6,000 or so prescriptions a week, over half is actually for patients who are naive to category therapy, right? So, they haven't been on PROVIGIL in last 12 month or ever. That's how we have to define that. So there are lots of new patients coming on here. There are however a lot of switch patients as well. About half of the patients that we are seeing on NUVIGIL are switchovers, so we believe that there is some room for growth here.

As you're aware, this category has been declining over the last couple of years. We are hoping that we can either slow or potentially stop that decline. It's really, as we mentioned during the call, going to be the advent of new uses, new indications, new focus on even approved indications, such as shift work sleep disorder that we believe hold a good opportunity for the product over the next really 18 to 36 months.

David Amsellem - Piper Jaffrey

Okay. And then just one last question on the Co-Pays Assistance, is there a cap in terms of the number of scripts that a patient can use for the co-pay subsidy?

Bob Roche

No. There is not.

Operator

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

Louise Chen - Collins Stewart

Couple of more questions on NUVIGIL. I am just wondering, now that you've had some experience with the PROVIGIL to NUVIGIL switch, do you have any thoughts on the ultimate switch rate for the products?

Bob Roche

The ultimate switch rate, you're asking what do we anticipate as being our kind of maximal penetration with NUVIGIL?

Louise Chen - Collins Stewart

Yes.

Bob Roche

Well, I didn't answer it last quarter, and I'm not going to answer this one. We believe clearly that NUVIGIL can be the dominant brand here. It's in our interest and in patients' interests to move business from PROVIGIL to NUVIGIL. I think we're off to a terrific start doing that. There's lots of models floating around out there that look at both short term and longer term conversion rates, and I think you can have a look at those and try to develop some level of comfort for yourself.

Louise Chen - Collins Stewart

Then the other question is just on your patent for NUVIGIL; can you talk about your patent landscape and then why you're confident in the strength of your intellectual property for NUVIGIL?

Frank Baldino

We will hand this over to our General Counsel.

Jerry Pappert

Well, I think we’ll use a couple of things; number one, companies like ours don't develop products and base future plans on products with weak intellectual property estates and that's certainly not what we have done in this case. We believe very strongly in the strengths and the enforceability of our intellectual property surrounding our NUVIGIL product. Beyond that I don't think it would be in the interest of the company to get into details about why we feel so confident about the strength of our IP, because as you may assume, I think it’s reasonable for all of us to conclude that at some point we may see an Anti-filing for NUVIGIL and end up litigating the matter. So I'm not going to go any further than that.

Operator

We'll go next to Corey Davis with Natixis.

Corey Davis - Natixis

Back to the coupon thing. It's a subtle, but I think important point. The concern is not so much the gross-to-net discount right now because I'm assuming you get a free pass for this quarter and the next couple of quarters, but what's your confidence that to say that whatever the number is now, 40% of scripts that are on coupons will translate into actual revenue-generating scripts and do you have any data on the conversion rate from coupons to paying scripts?

Bob Roche

The answer to the second question, Cory, is no. We do not have that data. However, the way that we've modeled the use of these coupons is clearly not to be giving away business for the foreseeable future, but rather to use these as a means by which to get new patients on to product and then to convert them into regular prescription receiving patients and to convert existing provisional business to NUVIGIL.

Now, it may not appear logical to think so, but it's really the latter of those which is the more difficult right because these are physicians and patients who in many cases have been taking the product for extended periods of time. It's definitely going to take some level of incentive to get them to move, to change their reimbursement plan, to go through the prior authorization process again if that is an issue and clearly, the use of these vouchers moving forward is going to be really important for that element of conversion.

But getting back to the modeling, we reckon that, between three and four additional prescriptions come through for each and every coupon that we give away. So we're hoping that these patients will be able to convert and will become good users of the product for many years to come.

Frank Baldino

They are converting, Bob. I mean the point is that we do have some that they are converting rapidly. That's why the launch has gone so well. Just for the record, there is nothing new here. I mean, I think we're pretty good at what we do on a sales and marketing side. However, the strategy of providing samples and coupons at time of product launch isn't really rocket science. It's something we're doing different than most people have done over the years.

We're just surprised as almost as you are at the level of success that we've achieved in such a short time with this product. There's a question earlier about penetration rate that Bob didn't answer. I'm glad he didn't answer it and I'm not going to answer it either, but I would like to comment that, suffice to say, that at the run rate we're seeing so far, the NUVIGIL launch, that we believe the business that we're going to able to garner from PROVIGIL for the foreseeable future will allow us to continue to grow our business for many years to come.

Corey Davis - Natixis

NUVIGIL?

Frank Baldino

Right, with NUVIGIL, what I said PROVIGIL?

Corey Davis - Natixis

Yes.

Frank Baldino

NUVIGIL. The fact that this launch has been so successful, you know we're confident that we'll garner sufficient quantity of the sales to continue to grow our business uninterrupted for many years to come. That's the plan and we're happy to be on that track.

Corey Davis - Natixis

So the numbers you cited of half of the patients being naive to therapy is encouraging, but so far it doesn't look like the total franchise volume has shown growth. So, a, do you agree with that? And, b, is it just too soon to say? And c, I guess, would we be the underestimating the actual basal decline in the PROVIGIL volume had NUVIGIL never launched?

Bob Roche

I think you maybe underestimating that. Because if you look back over time, Corey, you are seeing the PROVIGIL itself declining at anywhere from a 3 % or 5% rate depending on your period, right? If we can stop that decline and keep a steady prescription number of somewhere between 50 and 51,000 on a weekly basis, then I think we're doing pretty well.

I agree with you. I think that that those naive patients coming onboard to NUVIGIL is really good news. I think the overall number of prescriptions for the product is just a little too low as yet to be making too much in the way of determination or projections on.

Corey Davis - Natixis

Last question, I don't know if Lesley is on the call, but what dose did you end up picking for the bipolar studies?

Lesley Russell

The dose in the Phase II studies was 150 milligrams, so we'll certainly be using that again.

Corey Davis - Natixis

Are using any higher dose in Phase III?

Lesley Russell

I don't have all the details on the Phase III, but we'll consider whether that might be a good thing to do.

Operator

And we'll go next to Gary Nachman with Leerink Swann.

Gary Nachman - Leerink Swann

A couple more on NUVIGIL. What are you hearing anecdotally about the longer during a profile of the product? Those products right now are about half that of PROVIGIL. Do you expect that to increase at some point?

Frank Baldino

Would you repeat the second part of your question, please, Gary?

Gary Nachman - Leerink Swann

Sure. Pills per RX right now are about half that of PROVIGIL. Number of pills per prescription, do you expect that to increase at some point?

Bob Roche

Yeah, so the answer to that question is yes. I mean that is being somewhat affected by the fact that we do have seven-day vouchers out there. Remember that when a voucher is given, there is a prescription written for the number of tablets that the voucher entails and so that wouldn't tend to see prescriptions for seven days worth of PROVIGIL. At least I don't think so until we get to jetlag, but in the case of the earlier part of your question...

Gary Nachman - Leerink Swann

Which was, what are you hearing anecdotally about the longer duration profile?

Bob Roche

Listen, anecdotally the feedback we're getting here is very, very positive. I've been out in the field on three or four occasions since we launched the product, working with our sales, talking with physicians, both opinion leaders and regular average docs. There's a lot of enthusiasm about the product. It does appear to be delivering on the promise that the clinical trial program appeared to provide, and certainly the late day efficacy that we're able to promote is something that means a great deal to physicians and especially to their patients. As I say, so far the drug is delivering.

Gary Nachman - Leerink Swann

Okay. Just back to the pills per RX, so once these seven-day vouchers are through, do you think it's going to get back up close to the level of PROVIGIL?

Bob Roche

I see no reason to believe that this would be prescribed in any kind of a different fashion than PROVIGIL.

Kevin Buchi

Gary, if you look back at history, you'll see with the AMRIX launch we started off at around 19 pills per script and took about six or nine months to get to 29 pills per script. If you go back and look at the FENTORA launch, same thing happened. You start off with less pills scripts per day, and it takes about nine months to kind of reach the full steady state.

Bob Roche

One final point is that this really is a truly once-a-day product, so there are some prescriptions that could conceivably be written for a smaller number of tablets for a patient who had been receiving 60 tablets of PROVIGIL a month, you would expect that individual to get a 30-tablet NUVIGIL prescription.

Gary Nachman - Leerink Swann

Okay. Are any formularies actually limiting the number of pills in a prescription, giving a maximum on it?

Frank Baldino

This is the advantage of NUVIGIL, don't forget, because with PROVIGIL there were significant limitations on that. 30-tablet scripts were allowed by most. About 25% or so permitted scripts larger than that. That was one of the questions we were always confounded with, why should only 25% of the patients need double the dosing. The answer was, they all really did; it was just that the payers didn't pay for it. So with NUVIGIL offering a true once-a-day dosing, we think that satisfies the problem out there and there's no need to limit scripts.

Gary Nachman - Leerink Swann

I know you tried a co-promote in the past for PROVIGIL. I mean, is that something that you're considering at all for NUVIGIL, especially when you think about growing the whole franchise? Is that even in the cards?

Bob Roche

It's not in the cards right now.

Frank Baldino

Don't forget when we did the co-promote with Takeda, if you are referring to PROVIGIL, we didn't have a primary care sales force of consequence at the time. It was our initial foray into that space. We wanted to determine whether or not there was a market in primary care for PROVIGIL, and it turns out that there is, and it turns out that it became our biggest growth market with Takeda. We're happy with the performance they provided there and we've taken over that primary care space. Now we detail in that space ourselves, and we bring AMRIX to that space, we bring NUVIGIL to that space. So we think we're fairly well represented in the primary care space at this moment.

Gary Nachman - Leerink Swann

One last one just on M&A. I know you're aggressive out there looking at deals. Is the sweet spot for you still in the $100 million to $200 million range, or now that you have a bigger war chest would you potentially look for bigger deals than that?

Kevin Buchi

Sure, I think honest answer is we always look at bigger deals. The bigger the deal, the higher the level of risk and so the more comfortable we need to get with that deal. I think if you assume that our history is (inaudible) sub-$500 million deals, I think it is unlikely that we will do deals that are out of that space, but if a more compelling opportunity arises there's always possibility.

Operator

And we'll go next to Annabel Samimy with Thomas Weisel.

Annabel Samimy - Thomas Weisel

Just on the wakefulness franchise again, you had stopped promotion of the wakefulness franchise for some time, essentially restarted with NUVIGIL launch. Are you seeing increased interest in the wakefulness category in general, and have you been able to move back into the psych audience or into the broader audience with comorbid depression indication?

Bob Roche

Well, we don't have a comorbid depression indication.

Annabel Samimy - Thomas Weisel

The OSA indication for comorbid depression?

Bob Roche

We are calling on selected psychiatrists with a message of comorbid disease and patients who suffer from obstructive sleep apnea. We're getting I think a good reception with that message. We're talking about excessive sleepiness in a sleep-related condition. That just happens to be well represented in physician waiting rooms right across the country and psychiatrists are no exception to that and, as a matter of fact, they've got a ton of these patients. They are recognizing the disorder. They are shuffling these patients to sleep centers, they are getting the disease properly identified and treated. So that's been a real positive.

Annabel Samimy - Thomas Weisel

In terms of promoting wakefulness in general, have people or physicians essentially falling asleep when you stopped promoting it and they're waking up to it again, or do you feel that they've been onboard all along and now there's just little bit more energy with the new product?

Bob Roche

That's a wonderful analogy, Annabel.

Annabel Samimy - Thomas Weisel

Didn't mean the analogy, sorry.

Bob Roche

That’s fine, I like it. I might use it with your permission. It's actually probably not the case or at least I don't believe it is. We didn't stop promoting PROVIGIL or wake promotion for any really long period of time. It was really during the first quarter of 2009 that we basically shut off the promotional messaging around PROVIGIL and we really began to ramp it up again in second quarter with wait promotion in general and coming soon kinds of messaging around new products. So there wasn't that long a hiatus of promotion. What there was, was an absolute absence of PROVIGIL materials, samples and everything, which we have been able to replenish very effectively with new materials and documentation and whatnot regarding NUVIGIL.

Annabel Samimy - Thomas Weisel

Also on TREANDA, have you seen any new patterns in the types of physicians prescribing, and is it more a community based docs, or is it still thought leader-driven at this point? Are you seeing any shift there? Also in terms of NHL outside of publication, anything else that you are doing to get into that NHL population?

Bob Roche

I think we are definitely seeing some growth in the community-based setting for both indications, and we really have I think a tremendous opportunity with NHL moving forward. We are very, very lightly used in even second-line therapy, more heavily used in third-line therapy.

Clearly, the objective and the opportunity here is to move the product forward in the treatment paradigm, and we think as data become available, we think with additional promotion and clarity around the promotional messaging that we're going to be able to do that pretty effectively. So I'll tell you, I've got a lot of confidence in our ability to move this product and I believe that we're going to do so very effectively as we go through the end of 2009.

Annabel Samimy - Thomas Weisel

Then just one question on Reslizumab. You seem to have completed enrollment of the study, which is going to be about four months, so that puts completion at the end of September, are we likely to see data by the end of the year? Also, can you speak to GSK's action on Reslizumab in Europe?

Frank Baldino

The first part of the question I'll answer, and let Lesley answer the GSK question. We expect data by year end on Reslizumab. That was the plan originally and like you said they have completed enrollment and they should be on that plan. Second part of your question, Lesley?

Lesley Russell

GSK had submitted Mepolizumab for HES, so that’s eosinophilic syndromes. We believe that the reason why they withdrew the file was that although they had pretty compelling data on reduction in the eosinophil counts, and one of their endpoints of being steroids tapering and the clinical benefit sort of equation of what did that all mean wasn't really sort of thought through. I believe that's the reason why a, they never filed to the FDA and b, why they withdrew the file from the EMEA. Neither of those reasons or none of those reasons pertain to the study that was done on Reslizumab for EE, which has both an eosinophil reduction endpoint and a clinical benefit endpoint as primary. So, we believe the reasons for GSK withdrawing the files are irrelevant to what the studies with Reslizumab was trying to show.

Operator

We'll go next to Tom Russo with Baird.

Tom Russo - Baird

Just a couple of quick questions on guidance. The PROVIGIL-NUVIGIL guidance is maintained with NUVIGIL running ahead of expectations at a lower revenue per patient. Can you just comment on what in your assumptions is offsetting that? Is it a price increase, is it franchise growth or was the original guidance just conservative?

Kevin Buchi

I think the original guidance as you know contains the guidance range. I don't think it's a question of, needing to change the range; it's just a question as to where in the range you think you might show up. As you'll notice we raised the guidance range for the oncology franchise, but didn't raise the overall guidance range for sales for the year. I think frankly, you’ve hit on part of the reason for that.

Tom Russo - Baird

I would think with the lower gross margin of NUVIGIL, that's kind of offset by the lower R&D spending to get to your net income guidance. Can you comment on what's not getting done and if that's kind of a strategy going forward where you can lever R&D, or is there some other, something else going on there?

Kevin Buchi

I wouldn't say anything's not getting done. I would say that we're doing a good job of controlling cost, trying to find savings, trying to operate efficiently. There are a lot of moving parts. I think to our credit, we're able to offset the increased interest expense associated with the convertible debt. We're able to offset the much lower than expected interest rates that we're suffering from with our investments and we're still able to raise guidance for the year. So I just think it's a sign of a company that's being operated efficiently.

Operator

The question will be from Chris Schott with JPMorgan.

Chris Schott - JPMorgan

Can you first elaborate a little bit on the usage of the Co-Pay Assistance Program? At this point, what percent of scripts are using that program?

Bob Roche

The percentage that are using the program currently is between, on a weekly basis between 15% and maybe 22%. The average co-pay buy down is somewhere just a little bit north of $30. And the great news is that we're able to manage that number. If for some reason we think that it's too high or too low, then there's flexibility there in our ability to manage it.

Frank Baldino

And remember, Chris, that people who qualify for this, the government plan people don't qualify Medicare, Medicaid. Mail order doesn't qualify for this. The majority of people who have $10 co-pays or less don't qualify for this. So there's a subset of people who'd actually meet the qualifications for the co-pay. Those are people who have co-pays above $10 per script. So it's a smaller universe, but the Co-Pay Assistance Program has been very successful within that narrow universe.

Chris Schott - JPMorgan

When we think about that going forward, can you just comment, if there are any hurdles for, when I think about the 15% to 22%, how should we think about that, let's say, over the coming quarters, when we think about all the population who don't qualify? What percent do you kind of envision using this program overtime?

Kevin Buchi

I'm comfortable with a range in and around the 20% range. That's certainly the internal projection number that my team and I are using for 2009. Depending on how things go in 2010 we may want to change that upwards or downwards.

Frank Baldino

It's really hard for you guys now to figure out the whole gross to net thing on NUVIGIL, there are so many moving parts. You've got the coupons, the vouchers. You've got the co-pay assistance. You've got the contracting that's increasing in this activity, retail stocking, lots of things going on. It's almost impossible for us to nail down numbers specifically going forward. It must be impossible for you guys to do that. All we can say is that the launch is going ahead of expectations. We are very pleased with the percentage of the business we're garnering shifting over to NUVIGIL.

We're exceedingly pleased, as Bob said, with the percentage of new or naive patients getting NUVIGIL scripts and the feedback we're getting from the field. So if we had to write a script for how this thing would turn out, this is a better outcome at this point in time than we would have predicted several month ago. So it's very difficult to provide the clarity you need, but I think Kevin in about four month or so or six months, we should be able to be in the position of giving more accuracy on what they need to do to build their models.

Kevin Buchi

Absolutely. As time goes by, we'll reach a steady state, and it will be much easier to come up with the types of information that will be helpful to you.

Chris Schott - JPMorgan

Sure. Actually there's a follow-up question there too. Given how strong the uptick has been for NUVIGIL to date, does that change any of your thoughts or plans as it relates to building out even maybe a more preferred formulary position relative to PROVIGIL? And one thing you hear is, you become less willing to offer incremental rebates to managed care or tweak that Co-Pay Assistance Program given how successful the launch has been today?

Frank Baldino

Look, I think the strategy on contracting is really simple. It's what do you get for the sacrifices you make on price? If you can get more volume, more access to patients, which means through higher tiering or lower tiering, Tier 2 maybe or something and perhaps a loss of prior authorization. Removal of prior authorization, you would certainly make that trade and you got to do the math. It's all about math, right? You're not going to give up something just to give it up. You're not going to give up something just to say you have a contract with somebody.

There's got to be a net gain for the shareholders, and where you see the possibility of gathering that you're going to do that? So, I don't think it has anything to do with the co-pay program, nor do I think it has anything to do at least in my mind with how well the uptick is. If we can get a successful transition of the product without doing a lot of contracting, we'll do that. If we can do contracting to improve that, we'll do that. If we can do contracting to improve patient access overall, dry volumes, we'll certainly do that. We'll just have to see what the future brings.

Chip Merritt

We've concluded our hour, so thank you for joining today's conference call.

Operator

That does conclude today's conference call. We thank you for your participation.

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Source: Cephalon, Inc. Q2 2009 Earnings Call Transcript
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