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Executives

Will Roberts – VP, Corporate Communications

Vin Milano – President and CEO

Dan Soland – VP and COO

Charlie Rowland – VP and CFO

Colin Broom – VP, Chief Scientific Officer

Bob Pietrusko – VP, Global Regulatory Affairs and Quality

Analysts

Joel Sendek – Lazard Capital Markets

John Newman – Oppenheimer

Stephen Willey – Thomas Weisel Partners

Liisa Bayko – JMP Securities

Phil Nadeau – Cowen & Company

Robyn Karnauskas – Deutsche Bank

Steve Brozak – WBB Securities

Yale Jen – Maxim Group

Brian Skorney – ThinkEquity, LLC

ViroPharma Incorporated (VPHM) Q3 2009 Earnings Call Transcript October 28, 2009 9:00 AM ET

Operator

Thank you for holding, ladies and gentlemen. Welcome to the ViroPharma teleconference call. At this time, all lines are in a listen-only mode. There will be an opportunity to ask questions at the end of today’s call, and instructions will be given at that time. Today’s conference is being recorded. Thank you for your attention. I will now turn the call over to your host, Mr. Will Roberts.

Will Roberts

Thank you. Good morning and welcome to ViroPharma’s conference call and webcast to discuss ViroPharma’s third quarter and nine-month 2009 financial results and other business matters. This call is scheduled for approximately one hour.

With me on the call this morning are ViroPharma’s management team, Vin Milano, Colin Broom, Tom Doyle, Bob Pietrusko, Charlie Rowland, and Dan Soland; Bob Doody of Corporate Communications; and Rich Morris, our Chief Accounting Officer.

Certain statements regarding future demand for Cinryze and Vancocin, the timing of any FDA actions related to the potential approval of generic versions of Vancocin, the timing of manufacturing scale of procedures, clinical studies, and all elements of our 2009 guidance and gross margins made during this conference call are forward-looking statements.

As you know, forward-looking statements involve substantial risks and uncertainties and actual results may differ materially from those projected in such forward-looking statements. The development, marketing, and sale of pharmaceutical products are subject to risks and uncertainties. As a result, our actual results could differ materially from those results expressed in, or implied by, this conference call.

Please refer to the press release issued this morning and to our filings with the SEC for more information regarding the risks and uncertainties that could cause future results to differ materially from those expectations expressed in this conference call. On this call, we will discuss some non-GAAP measures when talking about our company's performance. And you can find the reconciliation of those measures to GAAP measures in our press release issued this morning.

With that, I’ll turn the call over to Vincent Milano, ViroPharma’s President and Chief Executive Officer. Vin?

Vin Milano

Thanks Will. Good morning to everyone listening to ViroPharma’s conference call. We are in the midst of one of the most successful product launches for an ultra-orphan disease, whether measured by the impact that this drug is having on the lives of HAE patients or product sales. Successfully launching a biological product is both exciting and challenging. I’m proud of our team’s launch performance, delivering Cinryze to HAE patients and improving their quality of their lives by providing a prophylactic therapy for this debilitating illness.

Many of the questions that have been asked about this launched have been answered. How much demand can we generate in the first year of launch? When we acquired Cinryze, we had strong convictions that there was a real patient demand and need for a product that could prevent attacks of HAE. Our convictions have been proven true. We expect to have at least 380 patients on commercial drug by year-end, and we have hundreds more HAE patients going through the Cinryze solutions process today in order to obtain commercial access to the drug.

Will the doses per week be different in the real world than it was in the clinical study? So far, the answer is no. The average doses per week, though a highly variable number across patients, has not dropped, and on average, continues to mirror what we saw in open-label studies. Although we continue to believe it may come down, it has not yet.

How will the process of securing reimbursement for these patients go? So far, reimbursement has been very strong, thanks to our team of corporate account directors and payers who recognize the needs of this patient population with limited therapeutic option. As of now, we have 196 plans reimbursing at least one patient.

What’s next? We view Cinryze and C1 inhibitor as pillars for long-term growth by focusing on new territories, new indications, alternative routes of administration, and two C1 product developments. On the first topic, we are currently working with our partner Sanguin on additional ex-US territories. In parallel, we decided to take three steps at risk, which we view is critical to this process.

These include securing orphan drug designation for Cinryze in the EU and receiving agreement on our pediatric investigation plan or PIP from the EMEA’s Pediatric Committee. The PIP is an essential milestone towards completing our third at-risk step, the MAA submission, which we hope to complete early next year. Second, label expansion. We are completing our assessments of other non-HAE diseases associated with accepted consumption of C1 inhibitor and where Cinryze may be of therapeutic benefit.

Finally, we are assessing the feasibility in a clinical setting of subcutaneous administration as an alternative route of delivery for prophylaxis. In addition, we are exploring development of a recombinant C1 inhibitor product.

We are close to finalizing our plans for this platform for growth. We intend to conduct an event early next year, in which we would provide detail on our plans for the Cinryze franchise. I’m very proud of the strong launch execution throughout our global organization.

We also appreciate the efforts of the Hereditary Angioedema Association that has been an incredible advocate for more than ten years for patients suffering from HAE. I would like to applaud Tony Castaldo and the entire HAEA team on our annual patient meeting, which occurred last week. The meeting was very successfully. And based on the record attendance of this year’s meeting, it is evident that there are more patients today interested in learning about available therapeutics than ever before.

Finally, on the topic of HAE, we’d like to note the recent approval of CSL Behring’s Berinet for the treatment of acute facial and GI attacks of HAE after they occur. This will be an important drug for HAE patients who want to treat their attacks rather than to prevent them.

With that I will now turn over the call to Dan to provide you with more details on the Cinryze launch to date. Dan?

Dan Soland

Thanks, Vin. And good morning to everyone. I’d like to now provide an update on the first ten months of our Cinryze launch, including some of the initiatives we have underway to support the long-term growth of the product. We are with Cinryze ten months into an incredibly successful launch of this important ultra-orphan drug. And like them, I want to applaud our Cinryze team, both here in the US and in Europe, as well as our partner Sanguin.

Patient demand for the drug has been very strong, enabling us to achieve over $29 million in net sales for Cinryze during the third quarter and over $61 million in sales for the first nine months of the year. The number of patients in Cinryze solution continues to grow. As Vin mentioned, we continue to have great success obtaining reimbursement for patients with over 196 plans reimbursing at least one patient as of now.

And as you may recall, on the second quarter call, we mentioned that we had two patients who had received the final denial of coverage. I’m happy to say there had been no additional final denials of coverage to date. And further, we were successful in overturning one of the two final denials. The sales force also continues to make great progress in the field with well over 1,000 identified physicians with at least one HAE patient.

Regarding manufacturing and scale-up, our partner Sanguin began work prior to our acquisition of Lev on expanding manufacturing capacity. Since the acquisition, we have been working to improve yields and to accelerate capacity increases. This year alone, we, with Sanguin, have increased production by 20% over our original plan. We could not ask for a better partner. And this has allowed more patients to benefit from prophylaxis with Cinryze. These efforts will continue in 2010 and 2011.

To meet the extraordinary demand for Cinryze, we are executing a two-tiered approach to scale up our manufacturing output, which has been underway for well over a year. The first step is a parallel chromatography process, or PCP, a process we expect to increase volumes. We expect PCP to be implemented in the first quarter of 2010; this additional product entering the market in the second quarter of 2010.

Meanwhile, we are temporarily managing the rate at which additional patients are started on drug to ensure that those already receiving drug and those new patients who start their routine prophylaxis will continue with a reliable and uninterrupted supply of Cinryze. At the time of the additional product when PCP enters the market, we will then return to adding new patients at a normal rate.

Given such near-term timing, our sales force will continue to actively promote the drug and to drive new prescriptions, and Cinryze solutions will continue to work with these patients to secure reimbursement. This will go a long way to ensuring that as additional product from our PCP is in the channel, we can move these new patients on to commercial drugs as quickly as possible.

In terms of moving patients through Cinryze solutions, we have seen an average of 90 to 120 days through the first ten months of the drug’s availability. That being said, this average will likely increase for some patients currently in Cinryze solutions until the additional product from PCP expansion becomes available.

The second phase of our scale-up effort will be moving to industrial scale manufacturing, which we anticipate will come online by year-end 2010. This phase of manufacturing scale-up will ensure that we will have enough product supply to meet the demand two to three times as implied by our peak year US HAE prophylaxis sales guidance of $250 million to $350 million. While these processes take time to implement, we are pleased with the progress we’ve made in moving the timelines forward to implement them as quickly and as efficiently as possible.

With that, I will turn the call over to Charlie to review our third quarter and nine-month 2009 financial results and guidance. Charlie?

Charlie Rowland

Thanks, Dan. And good morning to everyone on the call. The third quarter represented another strong quarter for us, driven by 22% revenue growth and positive cash flows. Our topline for the third quarter and nine months of 2009 was very strong. Net product sales for the quarter and nine months were $81 million and $223 million respectively compared to $66 million and $182 million for the same periods of 2008. This represents growth of 22% for both the quarter and nine months. This impressive growth is driven by the launch of Cinryze.

Cinryze contributed $29.1 million in net sales in the third quarter. And for the nine months period, Cinryze contributed $61.3 million in net sales. During the third quarter, we shipped approximately 8,000 doses to SP/SD’s. Vancocin contributed just over $51 million in net sales during the third quarter, down from nearly $66 million in the third quarter of 2008. This reduction in net sales was due to lower sales volumes driven by lower rates of severe disease compared to last year at this time and a suspected increase in compounding seen both in the hospital and long-term care marketplace. This was partially offset by net realized price growth.

Importantly, inventory levels at the top three wholesalers remained well within normal levels. For the nine months period, Vancocin contributed approximately $161 million in net sales compared to $182 million for the nine-month period in 2008, a decline of approximately 12%. This decline is a result of the same factors impacting the quarter.

Our combined cost of sales for the third quarter and nine months was approximately $10 million and $28 million respectively compared to nearly $3 million and $7 million for the same period in 2008. The change period-over-period is due to product mix, as we did not have Cinryze in the first three quarters of 2008. In addition, our margins were negatively impacted by the Cinryze inventory step-up associated with our acquisition of Lev Pharmaceuticals by approximately $700,000 and $6.9 million for the quarter and nine months respectively.

There will be no further impact of the step-up in inventory in any future quarter. We expect Cinryze gross product margins, excluding amortization, to continue to be at least 70%. Our third quarter selling, general and administrative expenses were approximately $20 million in 2009 compared to $14 million in the same quarter of 2008. For the nine-month period, our SG&A expense grew to approximately $68 million from $44 million in 2008. For both periods, this growth in SG&A was driven by the commercial launch of Cinryze, including costs associated with Cinryze field force, our medical affairs activities, and our launch programs.

Regarding our R&D expenses, during the third quarter of 2009, our investments into our clinical pipeline were $11 million compared to nearly $15 million in the third quarter of 2008. For the nine-month period, our R&D expense decreased slightly for the same period in 2008. And for the quarter, our R&D expenses are primarily attributable to the increasing cost associated with enrollment in our NTCD clinical program and Cinryze investments.

For the nine-month period, in addition to those I just listed, our R&D expenses are primarily attributable to our NTCD program, maribavir Phase 3 wrap-up and cost related to Cinryze open-label studies. So, just as we did last quarter, we have arrived at our adjusted net income from GAAP net income by adjusting for non-recurring and non-cash items. For detail, describing the differences between adjusted net income and GAAP net income, please refer to the table found in our financial release from this morning entitled Selected Financial Information - Reconciliation of GAAP Net Income to Adjusted Net Income.

We had GAAP income of approximately $20 million for the quarter and a GAAP loss of $23 million for the nine months, which was primarily associated with the first quarter $65 million write-off of goodwill. Our adjusted net income numbers were approximately $32 million for the third quarter of 2009 compared to $33 million in the third quarter of 2008, and nearly $76 million for the nine-month period compared to $84 million for the first nine months of 2008.

The decrease in adjusted net income for both the three and nine-month period is primarily due to lower Vancocin net sales, also impacting the change period-over-period with net contributions due to the Cinryze launch, an increase of tax expense due to lower available tax credit, lower interest income due to market fluctuation, and lower research and development expenses.

Next, our balance sheet, which again strengthened further over the second quarter of this year. We ended the third quarter in a strong financial position with $358 million in working capital compared to $328 million at the end of the second quarter. This includes $289 million in cash and cash equivalents, up from $267 million last quarter. And we achieved net cash inflows from operations of $42 million for the nine months of 2009.

Now I’d like to review our updated guidance for 2009, which was issued in our press release this morning. As a reminder, last quarter was the first time we provided Cinryze net sales guidance. Today we are in a position to further tighten the range we provided and expect Cinryze net sales to be between $90 million and $95 million for the full-year 2009. This revenue guidance reflects all the variables discussed previously on the call by Dan and Vin.

Regarding forward expense guidance, our combined research and development, and selling, general and administrative expenses are expected to be between $140 million and $145 million. This includes stock-based compensation. We expect that the impact for stock-based compensation expenses included in the expense guidance I just described to be between $11 million and $13 million.

So, a very strong quarter financial performance. Net product sales of $81 million, Cinryze sales increasing the 36% of total revenue, $26 million in cash flows from operations, and an ending working capital balance of $358 million, of which $289 million is in cash and cash equivalents.

With that, I will turn the call back over to Vin for some concluding comments. Vin?

Vin Milano

Thanks, Charlie. This quarter has been a continuation of what has become one of the most successful ultra-orphan drug launches ever. Our goal is to not only deliver a phenomenal first year sales, but to also drive our success throughout the coming years with this drug, measured both by lives restored through prevention of attacks of HAE with Cinryze and by revenue growth. Each of our patients is extremely important to us. And in everything we do, we work to help to restore their lives to them.

Very briefly on the topic of Vancocin, as many of you are aware, we did have an opportunity in the third quarter to present our case to the FDA’s Advisory Committee for pharmaceutical science. While the outcome of the panel did not support our position regarding the bioequivalence requirements for generic Vancocin, we are hopeful that the agency will be thorough in their review of ANDA filings to ensure that the products under review do meet the requirements that were endorsed by the panel members. Nonetheless, we are prepared to launch and authorize generic version of Vancocin upon approval of a third-party generic product.

Finally, I would like to thank all of our employees for their dedication and hard work during the quarter and conclude with reiterating my pride in our team’s execution on every facet of the Cinryze launch. We are extremely honored to be contributing to the positive impact that Cinryze is having on the lives of HAE patients who had been suffering without a solution too long. So, a great quarter and nine-month period, with much more to look forward to this year and beyond.

With that, let’s open the line now for some Q&A. Operator, are there some questions for our team?

Question-and-Answer Session

Operator

Yes. (Operator instructions) The first question we have is from Joel Sendek.

Joel Sendek – Lazard Capital Markets

Hi, thanks.

Vin Milano

Good morning, Joel.

Joel Sendek – Lazard Capital Markets

Good morning. Couple of questions. First of all, just some more details on the production of Cinryze. Is it -- are you anticipating that you will be capacity constrained or are you just kind of laying out your plan with how you are going to source products in the future? And how will that impact the gross margin going forward?

Dan Soland

So, Joel, this is Dan. First off, the most important thing that we want to accomplish is to maintain a reliable and an uninterrupted supply of product to our existing patients and any new patients that we add. So that’s our primary objective here. PCP, as we mentioned, begins in the first quarter of next year. And product from that effort comes into the channel in the second quarter of next year. PCP has an annual capacity of about 40,000 to 45,000 doses. And as we also mentioned in the call, at the end of the year, we will bring on the industrial scale. And this is an additional or additive of another 120,000 doses of annual capacity. So our objective is that we were sure that we don’t interrupt the supply to our existing patients and new patients that we do add. So we do need to manage this temporarily.

Charlie Rowland

And Joel, as to your margin question, really our guidance in the call today was greater than 70%. And whether we’re at PCP or industrial scale, we will still be above that number.

Joel Sendek – Lazard Capital Markets

Okay. So I guess -- I just want to -- obviously you mentioned that number of patients by year-end and we can kind of calculate the growth rate. So, should we have that maybe moderate for a quarter and then have a return to the previous rates? Is that kind of what you’re telling us or --?

Vin Milano

We are not giving any guidance today, Joel, on 2010. We are saying that we’re going to be managing the rate of new patient adds as we bring the PCP on. But again, as we know, the variables are great. So the number of new patients that we add is dependent upon how all the other variables play out.

Joel Sendek – Lazard Capital Markets

Got it. Okay. And then just maybe one final way to get at this in a backward looking way, can you tell us how many patients were on drug at the end of the third quarter?

Vin Milano

The reason we’ve provided the number today is for two reasons. One, to put in context on a go-forward basis to help you understand, if we are going to provide drugs for every patient who is on drug, it gives you a sense of what the beginning of 2010 looks like. And so it’s one year into the ownership and the launch of the product. We thought it would be good to provide some more details. But we are not going to get into intra-quarter discussions.

Joel Sendek – Lazard Capital Markets

Okay. Thank you.

Operator

The next question we have is from John Newman.

John Newman – Oppenheimer

Hi, guys. I just had some -- hello? Can you hear me?

Vin Milano

Yes.

John Newman – Oppenheimer

I just had a question -- two bookkeeping questions actually. What should we think about in terms of your tax rate going forward? And then on the accounts for Cinryze I saw in your press release that the inventory that you purchased from Lev has now been used. How much of an effect should we expect on a positive basis than in terms of lower COGS? Thanks.

Vin Milano

So, in the quarter, we mentioned that there were $700,000 worth of step-up in inventory that came through in the quarter and $6.9 million on a year-to-date basis. So if you back that out, you will see that our COGS margins are above 70%. We anticipate them to stay there as we go forward. Your other question was around the tax rate. I think we guided on our last call or call before our rate will be somewhere between 34% to 36%. I don’t see anything going on at the moment that would impact that. Our rate did creep up in this Q, but it was anticipated and it’s a result of the fact that as we wind down spend on maribavir [ph] but we are getting a lower orphan drug tax credits. And so that’s all factored into our guidance.

John Newman – Oppenheimer

Great. And then one quick follow-up. On CSL’s product, do you have any sense -- I know you don’t promote Cinryze off-label for acute use, but do you have any sense as to how much use you are getting there or how much consideration that you’re getting there from the current physicians that are using the drug prophylactically?

Dan Soland

This is Dan. And interestingly, we don’t have a real hard fix on exactly how many acute patients that we might have. But I would like to add that this is a large market and that there appears to be plenty of opportunity for CSL and any other competitors who would come into the market to promote their products in the acute market segment.

Vin Milano

And John, the vast majority of the patients that are on Cinryze are using the product prophylactically.

Charlie Rowland

And John, you can sort of back into that from the standpoint on the call, Dan mentioned that our average doses are staying pretty even with what we had in the clinical studies. So just by default, there really can’t be very many acute patients in there.

John Newman – Oppenheimer

Great. Thanks, guys.

Operator

The next question is from Stephen Willey.

Stephen Willey – Thomas Weisel Partners

Yes. Thanks for taking my questions.

Vin Milano

Good morning.

Stephen Willey – Thomas Weisel Partners

I was wondering if you could comment on the percentage of clinical trial patient conversions and previous CTOR [ph] taking patients that you expect to occur by year-end.

Dan Soland

Steve, this is Dan. And I guess the vast majority of the CTORs in clinical trial patients were converted over by the end of the second quarter. There may be one or two left, but beyond the second quarter that we might yet convert, but the vast majority have already been converted and were converted by the end of the second quarter.

Stephen Willey – Thomas Weisel Partners

Okay. And then maybe if you could just comment if there was much patient -- if there was much management in the ramp of new patient starts within the third quarter that occurred or is this more of a forward-looking fourth quarter, first quarter event?

Dan Soland

Our sales force continues to be very active to try to get prescriptions into Cinryze solutions. Their efforts are going to continue with healthcare professionals to do that. We hope that that does not slow down in any way. So to get prescriptions into Cinryze solutions, we want to continue to push our sales force to add more patients and prescriptions into Cinryze solutions, no slowdown there.

Vin Milano

And Steve, I would say that it’s more of a forward-looking statement than a third quarter statement.

Stephen Willey – Thomas Weisel Partners

Okay. And just a quick housekeeping question. Is there much CMV expenses still left in the OpEx space or are those essentially have been stripped out?

Charlie Rowland

They are immaterial at this point going forward.

Stephen Willey – Thomas Weisel Partners

Okay, great. Thanks a lot.

Vin Milano

Thanks, Steve.

Operator

The next question is from Liisa Bayko.

Liisa Bayko – JMP Securities

Hi, guys.

Vin Milano

Hello.

Liisa Bayko – JMP Securities

I have a couple questions that sort of controlled -- I guess roll out, is that how to phrase it, that you are doing, or it’s a controlled way in which new patients are being put on therapy? Is that creating like a buildup of patients who are waiting for drugs?

Dan Soland

Liisa, this is Dan. And one of the things that we’ve been very careful in doing with healthcare professionals than with patients is to set the right expectations. And so once the prescription enters Cinryze solutions, the average time to get a patient on drug is, for the first ten months of the launch, has been 90 to 120 days. We are going to have to -- we are communicating to healthcare professionals and with patients that, you know, please be patient. And there are some of these patients who are going to have to wait longer than the 90 to 120 days to get our drug. That being said, we don’t want to slow down the addition of patients who get new prescription into Cinryze solutions. And we don’t want to slow down the efforts to achieve satisfactory reimbursement. We are hoping that we can continue to move forward in an aggressive way with that. And as product becomes -- more product becomes available in the second quarter, hopefully we can take advantage of that.

Liisa Bayko – JMP Securities

So how much of a -- what kind of a slowdown are you talking about in terms of time from the 12-week period to what amount of time?

Dan Soland

It would be pretty hard to speculate. There are a whole host of moving parts. So I don’t have an answer, unless somebody else --

Vin Milano

I mean, the only thing I think Dan said in the script on the call is that the PCP process will deliver commercial product into the trade in the second quarter. We will return to more normal levels of adding patients at that time who may or may not be (inaudible) at the time that you start that. But to speculate exactly how many patients we can add between now and then is very, very tough because there is too many variables.

Liisa Bayko – JMP Securities

Okay. So I guess my question is -- I mean, do you now have adequate supply to -- supply drug to all the patients if the prescriptions go through --?

Vin Milano

Absolutely.

Liisa Bayko – JMP Securities

Okay.

Vin Milano

Absolutely. So that is the core tenet of our plan, is to make sure that any patient on drug now, any patient that gets added to the drug in the future has an uninterrupted supply of Cinryze; number one priority.

Liisa Bayko – JMP Securities

Okay. And then do you have any sense yet for the pricing of Berinet? Have they commented on that? And have you heard anything about the launch?

Vin Milano

We have not, Liisa. Can we turn that around and ask you if you heard anything?

Liisa Bayko – JMP Securities

Not at this point, really no. And then just turning to Vancocin, can we expect a price increase in 2010 if there are no generics on board yet?

Vin Milano

We don’t comment on our future price increases.

Liisa Bayko – JMP Securities

Okay. And then just final question on Vancocin, I mean, what are your thoughts with regards to swine flu and potential increases in the rates of maybe more severe disease?

Colin Broom

Liisa, this is Colin. At this point, it’s a speculation as to what will happen with swine flu (inaudible), quite an increase, which seems to be affecting the younger patient population, who as you know clearly the best susceptible getting CDI. So it’s possible that could fall into the older patients. So we’ll watch that and observe what happens, but so much speculative if there could be any upside.

Liisa Bayko – JMP Securities

Okay. And then --

Vin Milano

We (inaudible) the patients, Liisa.

Liisa Bayko – JMP Securities

Okay. And then just financial question. When you talk about the rates of severe disease declining C.diff, can you be more specific on what sort of decline? And is this consistent with the sort of trends you’ve been talking about over the last 12 months or so?

Colin Broom

Well, we have known at least over the last 12 months there has been a decline perhaps also in the incidence of C.difficile infection. As you know, the official figures and CDC figures lag 18 months, two years behind. What we have observed in the past is that the use of Vancocin has been maybe a pretty good (inaudible) what’s happening out there in the community.

Vin Milano

So Liisa, our five-person sales team in Northeast provides us some anecdotal information that doesn’t necessarily give you a quantitative answer to your question. But I think qualitatively, it seems to support some of the results that we see in the sales numbers. And they are two-fold. One, as Charlie mentioned in the prepared comments, that there is a strong suspicion that there is more and more compounding going on at both the hospitals and the long-term care facility. So that’s had an impact in terms of Vancocin capsule use. And also importantly, as it relates to the rate of infection is they see very common at the hospitals more work being done on infection control. And anecdotally they believe that’s had a positive impact on managing the epidemic or potential epidemic of C.difficile infection. Anecdotal information, but from the field, that’s what we hear.

Liisa Bayko – JMP Securities

Okay, great. Thank you very much.

Vin Milano

Thank you, Liisa.

Operator

The next question is from Phil Nadeau.

Vin Milano

Good morning, Phil.

Phil Nadeau – Cowen & Company

Good morning. Thanks for taking my question. On the capacity increases that you mentioned, the PCP coming on line in Q1 on the industrial scale at the end of next year, are there any regulatory requirements for bringing that additional capacity on line? Do you have to sign off in any way?

Bob Pietrusko

For the PCP, that’s an annual reportable event. And for the large scale industrial process, that will require prior approval of supplementation review by FDA, and we expect to meet with FDA regarding the industrial scale to discuss with them the requirements and the review process for that.

Vin Milano

To make sure it’s clear, the annual reportable is not an FDA process to go through. So all the steps and pieces of the puzzle for PCP are in place, and we will begin in earnest in the first quarter producing product under that. And then as Bob alluded to, he stated clearly, the industrial scale is a more traditional regulatory process.

Phil Nadeau – Cowen & Company

Okay. And on the industrial scale, do you have any sense of how difficult the tolerances are that the FDA typically requires for a transition like this? Is it something that you think should be relatively easy to satisfy, or do you see any risk that the FDA could make the bar pretty high?

Bob Pietrusko

Regarding that question, I can say our current experience is that we have implemented changes to the manufacturing process this past year. And we’ve discussed this with the agency, the requirement specifications. So, knowing those requirements for our initial increase in capacity and moving forward, we will have a better idea of that, but we do have this knowledge and we do have those criteria that we will utilize to characterize the process that controls the specifications and what is necessary to have this review go as smoothly as possible.

Phil Nadeau – Cowen & Company

Okay. And when you say industrial scale will be online at the end of 2010, is that therefore when you predict the regulatory approval of the new process and therefore that’s when you can begin production, or is that when you actually think you could have material from the industrial process being shipped into the channel?

Dan Soland

Great question, Phil. That’s when we expect approval of the process. And obviously, we will be producing a risk in the industrial scale prior to the licensure or the supplement being accepting by the FDA. So you could expect product being available the day that is licensed.

Bob Pietrusko

Yes. And preparing for this, there is something called performance watch [ph] that are being produced right now that will placed on stability specifications. And so that when there was an approval, it’s anticipated that these particular performance watch can be put into commercial supply immediately.

Phil Nadeau – Cowen & Company

Okay, great. And on the PCP scale, I think you said 40,000 to 45,000 doses on an annualized basis. Just you’re really going to start producing using PCP in the first quarter. Is it therefore safe to assume that you should have 40,000 to 45,000 doses of Cinryze to ship next year?

Dan Soland

So Phil, it is on an annualized basis, but we carry -- there is other factors here. There is safety stock that we carry over. I think on a -- from a minimal level, you can expect 40,000 to 45,000 doses next year.

Phil Nadeau – Cowen & Company

Okay. Just one question on the approval of Berinet and the opportunity that could be left for you. The label of Berinet doesn’t specifically mention laryngeal attacks. So, is there any window for you to develop Cinryze or an indication of laryngeal attacks? Or do you believe that the orphan status for CSL would preclude you even from developing Cinryze for that indication?

Vin Milano

I think -- at this point it’s a speculation. In the past, it’s been the model and the claim, and then the questions around that are how closely or thinly can you slice that claim. And so it’s speculation. But for the most part, the orphan designation that they have applied for that’s public is for the treatment of acute indication and for the molecule.

Phil Nadeau – Cowen & Company

Okay. Do you expect to explore this with the FDA in the future or is your interest in getting an acute indication for Cinryze pretty low?

Vin Milano

The latter.

Phil Nadeau – Cowen & Company

Okay, great. That answers all of my questions. Thanks so much.

Vin Milano

Thanks, Phil.

Operator

Next question is from Robyn Karnauskas.

Robyn Karnauskas – Deutsche Bank

Hi, guys. Thanks for taking my question.

Vin Milano

Good morning, Robyn.

Robyn Karnauskas – Deutsche Bank

I guess the first thing I wanted to know was, you typically have given the number of doses bought by patients or sold into pharmacies. Can you give that for the third quarter?

Charlie Rowland

The amount that we shipped to SP/SD’s in the third quarter were approximately 8,000 doses, which I said in the call. I guess, Robyn, is that the number you’re asking for?

Robyn Karnauskas – Deutsche Bank

And then the number that was actually bought by the patients versus shipped to the pharmacies.

Charlie Rowland

I think the way we can answer that, we don’t have that second answer or second detail down to the -- in our fingertips here. There was about $1 million of the sales in the third quarter that was additional value in the channel. So maybe that’s the other way to get to your question.

Robyn Karnauskas – Deutsche Bank

Okay, that’s helpful. And then as far as the free drug you talked last quarter about, how your assumptions for giving free drug were and there was less free drug being given out than what you had assumed, or less people on Medicaid. Can you give some color on that for the third quarter?

Charlie Rowland

It’s -- the third quarter behaved a lot like the second quarter. The undiscounted payers, if you will, remained high at around 87%, which I think was the same as it was in the second quarter.

Dan Soland

It really speaks to the success of our corporate account managers and their efforts with the payers, Robyn. They have been very successful in convincing the payers to reverse for the product.

Robyn Karnauskas – Deutsche Bank

And you mentioned also last time (inaudible) concerned that that could impact sales. Have you see people negotiating around that? Is that still a concern or is that less of a concern going forward?

Dan Soland

I guess there are other companies who had been through this, and we’ve learned a lot from what -- how they managed the process. And I think the word is manage and it is a process and that we just have to be vigilant and keep an eye on this and to play out our options as they become necessary when certain patients start to get these maximums. That’s what we are doing. That’s what we plan to continue to do.

Robyn Karnauskas – Deutsche Bank

Great. I guess then the last question is again around the supply issue again. You have inventory in the channel. Are you assuming a certain amount of drawdown of that inventory?

Charlie Rowland

As we suggested on the call and there has been other questions, our objective is to be sure that for those patients who are currently on Cinryze and any new patients that we add, that we have a reliable and uninterrupted supply. There could be some draw-downs in the channel that again if there is and it’s likely that we won’t be adding as many new patients. So there’s a lot of variables here that affect us, and we are going to keep a very careful eye on all those variables and we will add patients as it make sense.

Dan Soland

And Robyn, I guess what we’ve been seeing in the channel is the weeks on hand had stayed constant. And so -- when Vin talked talk about the $1 million, that’s the increase in value in the trade because the product is growing. So, at a minimum, if you are doing your models, I would factor that in versus any real change in inventory in the trade.

Robyn Karnauskas – Deutsche Bank

Great. One last question if I may. The steroid prophylactic patient market, are you seeing more use of Cinryze into that patient population or is it still newly identified patients?

Dan Soland

I think it’s -- it's a great question, Robyn. I think it’s some of both. We know that there are still patients who are using steroids prophylactically and there are physicians out there who are relatively well satisfied with that use. We are going to continue to work on those physicians to try to convert as many of those patients over as we can in the future. We know we have not completed that work yet. And also we continue to identify new patients that we did not know about.

Robyn Karnauskas – Deutsche Bank

Great. Thanks, guys.

Vin Milano

Thanks, Robyn.

Charlie Rowland

Thanks, Robyn.

Operator

Next question is from Steve Brozak.

Steve Brozak – WBB Securities

Hey, congratulations on Cinryze. But I want to go back to Vancocin. A lot of what we’ve been modeling are on co-morbidity problems with H1N1, and we haven’t even seen the seasonal flu come in. You mentioned C.difficile basically coming down, but you are also in line with (inaudible) for Staph infections in some cases. Hypothetically speaking, you never want to answer a hypothetical question, but assuming, let’s say, you were to see a bump-up in terms of physicians going out there and prescribing whatever they are going to prophylactically because of the co-morbidity problems, would you have enough inventory and enough distribution capacity to meet any significant rise like that? Would you be able to accommodate that in case all of the sudden you were to see these -- the hospital systems overwhelmed and you were to see the distribution of drugs in some cases by a more rudimentary process, would that be an acceptable statement?

Dan Soland

Steve, it’s a great question and it’s something that we do think about because we want to be sure that we have enough products for the situation -- or circumstances that you are describing. And I think, as Charlie mentioned in his discussion, that there has been no drawdown in the channel so that the distributors themselves have plenty of products. We have substantial reserves of product, and we have substantial amounts of API. So we cannot foresee a situation where we would not be able supply the circumstance that you described.

Steve Brozak – WBB Securities

Okay, cool. Because it’s just one of those things where you don’t want to be in a situation where you get that spike in demand and it’s very lumpy, and then you wouldn’t be able to do it. So there wouldn’t be any limiting step on that.

Vin Milano

Not on Vancocin.

Steve Brozak – WBB Securities

Got it. Great. Thanks. I’ll jump back in the queue.

Operator

The next question is from Yale Jen.

Yale Jen – Maxim Group

Good morning, gentlemen.

Vin Milano

Good morning, Yale.

Yale Jen – Maxim Group

Just for you small questions. The first one, as you mentioned, there is 8,000 doses shipped in the third quarter. Could you remind us how many doses were shipped in the second quarter? Have you mentioned that earlier?

Vin Milano

Yale, there were approximately 2,500 shipped in the first quarter; 6,300 doses shipped in the second quarter; and 8,000 doses in the third quarter.

Yale Jen – Maxim Group

Okay, great. Thanks. You mentioned at the beginning of the call that you anticipate 380 patients by year-end. How much you have so far, at least for the third quarter?

Charlie Rowland

We’re not commenting on the quarterly numbers. Again, the context here was to give our view on how we are seeing the first year go. We are not going to give the intra-quarter stuff.

Yale Jen – Maxim Group

Sure. And in the third quarter, among the patients’ scripts, is there a more newer one -- a new script of the third quarter compared to the last one, or do you have any sort of granularity you can provide on that front?

Vin Milano

Yale, you’re asking have we seen a change in the number of patients getting prescriptions --

Yale Jen – Maxim Group

New patients, newly prescribed patients in the third quarter in comparison -- I mean, in the third quarter that’s there.

Vin Milano

So the run rate of new prescriptions for new patients has come down, which you would expect, but it’s still above what we originally had anticipated at this point of the launch.

Yale Jen – Maxim Group

But you are not offering a number on that?

Vin Milano

No, we will not.

Yale Jen – Maxim Group

Okay. And lastly that you just mentioned that you’re going to start the European exploring [ph]. And could you give us some sort of a high-level look at what the market looks like from your vantage point?

Vin Milano

Dan?

Dan Soland

Great question, Yale. So we -- there are some obvious things. The obvious things are that they have had more options in Europe to treat HAE than we’ve had in the US for sometime. They have had steroids obviously. They have had at least two sources of C1, but again for acute use only. And they also have the product from Shire now available. But all of those really were more for acute use. When we are out talking to thought leaders in Europe, they are thinking as, believe it or not, very similar to the physicians in the US. There are a rather sizable number of patients that they would like to have on prophylaxis. And the way it works in Europe is if you’re approved for acute use, it’s been difficult to get the payer, the government then to reimburse for a prophylaxis. So the key physicians who we spoke to are looking forward to having a prophylactic option for Europe.

Yale Jen – Maxim Group

So you mean that prophylaxis will use prior to acute, so you’d be able to establish a reasonable reimbursement in Europe?

Dan Soland

We believe that there is a sizable opportunity for prophylactic use of Cinryze in Europe.

Yale Jen – Maxim Group

And do you anticipate or do you think there will be a discount in terms of pricing for the product in Europe?

Dan Soland

Obviously we haven’t progressed that far, but we have thought about it. And you know, in Europe, it’s a bit different. And because there are other products on the market and countries like to reference those other products, it’s going to be difficult to get up to US pricing. We’re going to try, but the reality of it is we are not going to get there.

Yale Jen – Maxim Group

Okay, great. Thanks a lot.

Vin Milano

Thanks, Yale.

Operator

The final question we have is from Brian Skorney.

Brian Skorney – ThinkEquity, LLC

Hey, guys, good morning. Thanks for taking my question. Just kind of a couple of questions on long-term strategy here. First of all, you talked about exploring an option for a recombinant C1 inhibitor. And I’m just wondering -- have you looked into what the feasibility of running another HAE trial would be now that Cinryze is on the market, Berinet is on the market, in all likelihood we will see DX-88 on the market? Do you think -- I know that these trials were somewhat difficult to enroll when there was nothing out there. Would you anticipate that being a rate-limiting factor?

Colin Broom

This is Colin. We are evaluating a number of opportunities in terms of lifecycle management. Recombinant program is somewhat further on. There is work to be done, and we are looking at the feasibility. More immediate perhaps is the potential for subcutaneous development. So the feasibility of clinical trials is pertinent for not just recombinant, but yes, we are looking into feasibility, and yes, we believe studies -- clinical trials still are feasible in this area.

Vin Milano

And Brian, it doesn’t just have to be within HAE. I mean, there are other indications. So we haven’t really disclosed what exactly we are going to be developing recombinant for.

Brian Skorney – ThinkEquity, LLC

Got you. And then so we’ve talked kind of about next steps for Cinryze and other indications and ex-US territories. I’m just wondering what about -- have you guys explored at all what to do with the plasma you guys have? I think right now you are just reselling it. But I’m wondering if there are additional products that you get out of the plasma to purify and market. Has that been explored?

Dan Soland

Brian, as you mentioned, the part of the plasma that we are not using for C1, we sell that off to another company. And they use that residual product to make their plasma-derived products. And we have looked at other potential products that may -- that we could look to develop out of the plasma, but I would say it’s early days and it would be probably not a good idea to speculate beyond what we just stated.

Vin Milano

So Brian, 100% of our plasma we do sell to third parties, the byproducts after we’ve taken the Q1 [ph] out, and that is reflected in our cost of goods as a reduction of our raw material price.

Brian Skorney – ThinkEquity, LLC

Got you. And then last question is just when we are looking at -- you guys probably have a better hold on the C.diff market than anyone else. It seems like we’ve hit some level of maturity for Vancocin at least in this year as far as seeing severe C.diff cases going to previous ICAACs and IDSAs. There is always the talk about C.diff being kind of the sleeping giant ready to awake And I’m wondering -- I mean, what -- do you think that still holds water or are you really seeing a maturity and severity of C.diff? And what implication does that wind up having for the non-toxic C.diff strain? And if generic Vancocin does come on the market, how commercially viable do you think development programs will be for C.diff?

Vin Milano

So Colin, do you want to comment on the evolution of drugs in general and how early for C.diff?

Colin Broom

We know that the instance of C.diff, as we said, has certainly plateaued, maybe has gone down, but it’s not gone down to zero. This is not like epidemics of the flu or H1N1. There is a background incidence, not background instances -- has increased over the last two, three decades. It‘s not going to go down to zero. It may plateau off for a few years, but history tells us that it will come again. And that will come along as new features (inaudible) strength. So this is something that’s going to be a continuing public health issue. Recurrence, we know, is still a problem. And really that’s where non-NTCD has its roll reducing recurrence. If we look at the longer term, it’s still going to be high. As the population ages, new bugs potentially develop. Continued broad use of antibiotics. They are all risk factors for C.diff. So it’s not going to go away, and the opportunity for non-toxic potentially preventing factor for C.diff as well is also very attractive.

Brian Skorney – ThinkEquity, LLC

Great. Thanks so much.

Vin Milano

Thanks, Brian. Ladies and gentlemen, thank you for your time this morning. This is a very exciting time here for ViroPharma in the launch of Cinryze. We look forward to continuing this remarkable momentum that we have enjoyed for the first nine months, for the balance of this year, and into 2010. And we look forward to our next conversations with you. Thanks, and have a great day.

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Source: ViroPharma Incorporated Q3 2009 Earnings Call Transcript
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