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Eurand N.V. (NASDAQ:EURX)

Q3 2009 Earnings Call

November 5, 2009 08:30 a.m. ET

Executives

Bill Newbould - VP, IR

Gearóid Faherty - Chairman and CEO

Mario Crovetto - CFO

Analysts

Annabel Samimy - Thomas Weisel

John Newman - Oppenheimer

Frank Pinkerton - SunTrust

Scott Henry - Roth Capital

Rich Silver - Barclays Capital

Scott Hirsch - Credit Suisse

Greg Gilbert - Bank of America Merrill Lynch

David Steinberg - Deutsche Bank

Presentation

Operator

Greetings ladies and gentlemen and welcome to the Eurand third quarter 2009 financial results conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Bill Newbould, Vice President, Investor Relations at Eurand. Thank you Mr. Newbould, you may now begin.

Bill Newbould

Thank you operator and good morning everyone. Joining us on the call today are Gearóid Faherty, Chairman and Chief Executive Officer and Mario Crovetto, Chief Financial Officer. Before we begin I’d like to remind everybody that this conference call today may contain forward-looking statements within the meaning of the Federal Securities Laws

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements.

Factors that could cause our actual results and outcomes to differ materially from those expressed in or implied by such forward-looking statements are discussed in greater detail in our annual report on Form 20-F filed with the SEC in March 2009, as well as in subsequent filings.

Given that forward-looking statements are subject to risks and uncertainties, you should not place undue reliance on them. Forward-looking statements are based on various assumptions and represent our estimates and assumptions only as of the date they are made. We assume no obligation to update forward-looking statements.

I’d like to now turn the call over to Gearóid.

Gearóid Faherty

Thanks Bill and good morning everyone. As noted in today's press release Eurand had another outstanding quarter with many key achievements across all areas of our business. We received FDA approval for our lead product ZENPEP, continued the strong revenue growth we saw through the first half of the year, increased our share of the US pancreatic enzyme market with Pancrelipase, added substantially to our cash reserves in October and advance our pipeline. As you will have seen in our press release this morning, revenue is at EUR 30.6 million or $44.8 million were up 25% compared with the third quarter of 2008.

The quarterly growth in revenues once again was led by sales of our Pancrelipase and Axcan ULTRASE® along with royalties from sales of AMRIX® and higher development fees. Pancrelipase are unbranded Pancreatic Enzyme Product or PEP, held a 21.2% share of the US coated PEP markets for the week ended October 23. And remain the second most spent PEP in the United States according to IMS data.

Among our partnered product, Cephalon reported AMRIX® sales of $26.7 million for the third quarter of 2009, an increase of 30% from a year ago as Cephalon noted in its quarterly conference call last week. Sales of AMRIX® which is a detail sensitive product slowed somewhat in the third quarter of 2009 due to a realignment of their sales force and support of the launch of NUVIGIL. With the realignment now completed, Cephalon's focus has once again turned to AMRIX® and they expect AMRIX® sales to continue to grow and they are remaining bullish about the products future.

Another partner product that we expect will become an important revenue contributor in 2010 is the EUR-1045 marketed by our partner GlaxoSmithKline as Lamictal ODT. Approved in May for the treatment of Bipolar 1 disorder and seizures, GSK launched Lamictal ODT in late June and we have seen a favorable trend in prescription growth to date. With script now at a run rate in excess of 1000 per week. The script data are expected to become more meaningful in the coming month as GSK begins to see the result of the sampling and titration program they instituted at launch.

As announced on October, 28 we completed a public offering of $9,775,000 ordinary shares at the offering price of $11.25 per share. This included the underwriters exercise of the over allotment option of $1,275,000 shares. Of the total shares offered $7,775,000 were sold by Warburg, Pincus our largest share holder and $2 million were newly issued and sold by Eurand. We intend to use the net proceeds of approximately $20.6 million from the sale of these 2 million ordinary shares to fund potential product acquisitions and/or potential acquisitions of complementary businesses and research and development of additional product candidates as well as to fund working capital and other general corporate purposes. These proceeds will increase our cash reserves substantially from the $45.8 million we reported at September 30, 2009. I would like now to take a few minutes to focus on our newest product ZENPEP.

As we announced in late august, the FDA approved ZENPEP for the treatment of Exocrine Pancreatic Insufficiency or EPI, in patients with cystic fibrosis or other condition. The approval of ZENPEP is a major milestone for Eurand and complete our transformation to a fully integrated specialty pharma company.

In preparing for the launch of ZENPEP, we have built a sales force of sufficient size and scope to address the distinct segments that define the EPI market. Those are cystic fibrosis and the broader non-CF markets where patients are treated for EPI due to chronic pancreatitis, gastrointestinal surgery and pancreatic cancer. We expect to launch ZENPEP later this month and we'll provide more detail around our sales and marketing activity at that time.

With ZENPEP, we are entering an estimated $400 million US market that presents the potentially very favorable competitive dynamic. At the moment there is only one other approved product. In addition, we believe the 21% market share that we've achieved with our non-branded PEP Pancrelipase positions us well for the ZENPEP launch.

We believe ZENPEP has several competitive advantages. ZENPEP is the only FDA approved PEP clinically tested in patients as young as one. A message that we believe will resonate particularly well with healthcare practitioners treating young CF patients and parents of patients with CF.

ZENPEP is also the only FDA approved PEP available and four dosage strength to facilitate dose titration. In addition the ZENPEP label allows the contents of the ZENPEP capsules to be opened and sprinkled on a wide variety of commercially available soft foods. This is particularly important for young children who may have difficulty in swallowing capsules.

At the recent North American Cystic Fibrosis Conference in Minneapolis the largest annual gathering of CF specialists, interest in ZENPEP was extremely high. Traffic at our booth was very heavy throughout the conference with many enquiries about the clinical benefits of ZENPEP, our patient support programs and the pending launch. Based on the level of activity and enthusiasm we saw in Minneapolis, it would appear that the CF market is looking forward to the launch of ZENPEP. To ensure that we executed successful launch our U.S. commercial team has been active on all fronts immediately following FDA approval at the end of August.

We began hiring the sales people that we have previously identified to the recruiting process initiated several months before hand all of these sales representatives have now been hired and trained. Territories have been assigned and following our launch meeting last week detailing has begun in order to further heighten physician awareness and anticipation ahead of commercial availability.

On the reimbursement front, our team of national account managers continued to meet with the major national and regional managed care organizations to gain formulary access to ZENPEP. We have also taken the necessary measures to secure Medicare and Medicaid reimbursement to address any shortfall in patient’s access to ZENPEP and accelerated options. We will also have a sampling in patient support program for a period of time following the launch. As previously disclosed, we do not expect a meaningful contribution from ZENPEP to our fourth quarter 2009 revenue. As we were recognized essentially, no revenue from wholesalers stocking in excess of prescriptions. In terms of our out licensing efforts for ZENPEP, we continue to be engaged in discussions with potential partners in Europe and in Asia.

Now, I'd like to take some time to bring you up to date in some recent clinical development activities. We've completed a Phase III trial of ZENPEP in patients with chronic pancreatitis and we are currently evaluating the data. We anticipate that the data from this trial will provide additional information about the clinical benefits in this condition and in these patients. And be supportive of our [modeling] efforts to the GI community.

As previously disclosed, we completed two pivotal pharmacokinetic study of EUR-1025 our once-a-day oral modified-released formulation of ondansetron. Based on these results, the company expects the 1025 has a similar efficacy in safety profile as 8 milligrams of Zofran® dosed three times a day. And we have recently initiated discussions with the FDA regarding the future development of that product.

In summary, we had another excellent quarter with strong revenue growth in all segments of our business, the approval of our lead product and significant progress in our clinical program.

Now I will ask Mario to review our financial results with you and then I'll take a few brief minutes before we close the call and answer your question.

Mario Crovetto

Thank you, Gearóid. As you'd have noted from our press release and as Gearóid mentioned, the third quarter of 2009 was another quarter of very significant revenue growth for Eurand compared to third quarter of 2008. Revenues totaled EUR 30.6 million compared with EUR 24.6 million a year ago. This represents an increase of 25% or 19% in constant currency.

In dollars, revenues were approximately $45 million at the convenient rate of $1.46. The main reasons for this increase were sales of our Pancrelipase product, higher sales of ULTRASE to Axcan and increased sales of AMRIX® by Cephalon and therefore higher royalties to us.

Gross margin on products sales was 38%, an improvement from 30% in first quarter 2008. This reflects the increased proportion of higher margin product in our total product sales mix. Research and development expenses were up 33% in constant currency compared to second quarter 2008. Mainly because of increased clinical and product development activity compared to a year ago. Selling, General and Administrative expenses during the quarter were 3% higher in constant currency compared to a year ago. Net loss in this quarter was EUR 0.4 million $0.6 million which is $0.01 per share in dollars.

At the end of the third quarter, cash, including cash equivalent and marketable securities was EUR 31.3 million or $45.8 million. This represented an increase from the end of the second quarter due to receipt of the scheduled $5 million payment from UCB and other favorable working capital items. It is important to note that this cash balance of $45.8 million does not include the $20.6 million of proceed from our recent offering.

I will now turn to our financial performance in the first nine months of 2009 compared to the same period in 2008. Year-to-date 2009 revenues totaled EUR 90.3 million or $132.1 million. This represents an increase of 24% over the same period a year ago, in constant currency revenue growth was 15%. So that phase grew 21% or 12% in constant currency mainly driven by our Pancrelipase product and by our sales of ULTRASE® through Axcan. Royalties rose 36% in constant currency primarily due to sales of AMRIX® by Cephalon, and development fees increased by 23% in constant currency.

Gross marginal on product sales improve to 38% from 35% in the first nine months of 2008. Research and development expenses were up 30% in constant currency mainly because of increased clinical and product development activity. Spending general and administrative expenses in constant currency were inline with 2008. Net loss in the first nine months of 2009 was EUR 2 million or $2.9 million. This is $0.06 per share in dollars.

As Gearóid mentioned, we expect to launch ZENPEP later in November. And we will recognize revenues based on prescription levels not on our shipments into the distribution channel. Therefore we do not expect meaningful revenues from this product in the fourth quarter. As far as SG&A expenses are concerned the selling and marketing components which step up very significantly in the fourth quarter compared to third quarter due to the launch of ZENPEP in the United States.

As Gearóid mentioned the main reasons for the increase are the significant expansion of our phasing their marketing programs, product sampling and patient support programs that we will introduce to support the launch. As a result, we currently estimate that our total SG&A expenses in the fourth quarter will be at least $5 million higher than in the third quarter. Obviously, the size of this increase will be append on the uptake of the product and the patient support programs.

I will turn the call back to Gearóid.

Gearóid Faherty

Thank you Mario. Before we take your questions I would like to make a few closing comments. As you can imagine these are very exciting times for Eurand and we enter the final two months of the year on a high note. We will soon launch ZENPEP signifying the completion of our transformation to a fully integrated specialty Pharma Company. We intend to leverage the market position we have established with Pancrelipase to compete in the large and attractive PEP market with ZENPEP. We look forward to further growth in sales by GSK of Lamictal ODT and continuing growth of our other partner products such as AMRIX® and ULTRASE®. We are on track to achieve strong revenue growth for the full year, we look forward to further developments with our late-stage pipeline products 1025 and 1073 and finally our strong balance sheet with ample cash and no debt leaves us well positioned to pursue acquisitions of products and/or complimentary businesses that would expand our product portfolio and commercial capabilities.

This concludes our opening remarks. Now we will open the call to your questions. Operator?

Question-And-Answer Session

Operator

Thank you, sir. Ladies and gentlemen at this time we will be conducting a question-and-answer session. (Operator Instructions). One moment please while we pull for questions.

Ladies and gentlemen our first question comes from the line of Annabel Samimy with Thomas Weisel. Please proceed with your question.

Annabel Samimy - Thomas Weisel

Hi, thanks for taking my question. I want to talk a little bit about the logistics of how you are going to switch from the Pancrelipase product to the ZENPEP is it going to be a switch strategy? Are you are pulling Pancrelipase, can you just give us a little bit more color around that?

Gearóid Faherty

Sure Annabel, this is Gearóid. Annabel, obviously we are about to enter very competitive market place with a well entrenched lead player in Solvay. It's not in our interest before we bring the product into the market to tell people what it is we are going to do. But obviously if you could imagine we have defined our programs for Pancrelipase. How long it will stay in the products? When it will be replaced with ZENPEP? And other issues that we want to address by now. But we don’t plan to announce that until such time as we launch. But, yes, there is obviously a switch strategy that we have worked out.

Annabel Samimy - Thomas Weisel

Okay can you may be tell us how you mentioned that you had higher interest sales force, can you tell us how your sales force compares to the size of your competitors sales force now?

Gearóid Faherty

As I said in the prepared remarks Annabel, when we launch we will provide details as to the size of the sales force and to the marketing programs that we have but I can tell you that we view the size of our sales force to be competitive to other people such as Solvay.

Annabel Samimy - Thomas Weisel

Okay let me try the competitive positioning then. I noticed that at the recent conference there is some data out on your competitors specifically CREON has some data around chronic pancreatic in there is some more pediatric data how do you feel that you compare now to some of the data that has been coming out on the competitor product.

Gearóid Faherty

On the data that we have seen so far we understand that Solvay have now produced data in patients down to the age of seven but have not published any data in the patient population from seven to age one, and obviously we have. We have also seen recently head line data from a poster session on their chronic pancreatitis data. And as I said in the call that we issued are the call prepared remarks today, we have also completed our study and we would expect to announce our data very, very soon. We don’t see ourselves being at any competitive disadvantage to them and CP.

Annabel Samimy - Thomas Weisel

Any news on ULTRASE® or Axcan product coming out?

Gearóid Faherty

Nothing that I can say.

Annabel Samimy - Thomas Weisel

I will get back in the queue, thanks.

Gearóid Faherty

Okay.

Operator

Thank you ladies and gentlemen. Our next question comes from the line of John Newman with Oppenheimer. Please proceed with your question.

John Newman - Oppenheimer

Could you talk just little bit about the sales breakout for Pancrelipase between CF and chronic pancreatitis. Could you just give us a general sense as to what your total spend is going to look like next year for both R&D and SG&A? Thanks.

Gearóid Faherty

Okay. With regard to the Pancrelipase, it's our belief that the majority of our sales in Pancrelipase come from GI side of the business rather than the CF side of the business. With regards to the SG&A and R&D spend for next year, we are not prepared to give guidance at this time.

Operator

Our next question comes from the line of Frank Pinkerton with SunTrust. Please proceed with your question.

Frank Pinkerton - SunTrust

Hi, Gearóid. Thanks for taking the question. First one is, I guess you don’t always believe data you see but the data we have that breaks up Pancrelipase currently through the channels of prescribing in the United States. It has the highest percentage of prescriptions for the product going through what is the general practitioner channel somewhere a little over 30% versus the other products that are down around 15.

Is that volume that's expected to cap turnover or is that merely volume that’s been switching at the pharmacies and so you'll need to go back out and get that volume with ZENPEP once it's launched?

Gearóid Faherty

Well, as I said Frank in the answer to the previous question. Because it's coming through the general practitioner channel, we believe its coming primarily in the GI space. We think its largely driven by managed care and as you know for our Pancrelipase product to date we have not being out detailing as we haven't had reps in the market, we've not been detailing the product, we've working strictly through our contracts with managed care. So we think it's to date its principally managed care driven.

Frank Pinkerton - SunTrust

Okay and our conversations with pharmacists over the last month about the switch. It's quite funny that when we call in it seems that Pancrelipase is all of a sudden have been put in a very favorable position. It’s a product that basically can be delivered the next day if the pharmacy doesn’t have a PEP on the shelf already and very willing to switch over to that product. So my question is I still think the pharmacist side of this channel use the entire PEP market really as a generic market, is there going to need to be education on the pharmacist side once we launch those through to make sure that these products are differentiated at that point.

Gearóid Faherty

I think there will be but I think it also comes as a result of the FDA guidance Frank, where the FDA have in approving Eurand and approving Solvay advice people these are not interchangeable products. Obviously, the FDAs deadline hasn’t expired it's yet at April of next year. So obviously if there is a pool of these products from the market that are not approved at that time, products are defined as not interchangeable that obviously drives the education program. But as you can imagine we will be out there educating people as well. I think you also make a very good point. I think we have worked very hard with the distribution as we are with managed care to facilitate access to this product, get it to people quickly and that has obviously been a contributor to why we have taken so much market share so quickly.

Frank Pinkerton - SunTrust

Okay great and then just a final question after the raise or capital raise here. Can you just quickly remind us, what’s the focus on the business development front? And then if it is product and licensing can you just kind rank the product? And for example versus CLIPPER do you expect to have products coming in before them would they be earlier stage assets or may be fall behind CLIPPER? And what would be the focus overall for business development? Thank you.

Gearóid Faherty

I think that’s a great question Frank. Obviously, it's great for us to sit with so much cash in our balance sheet which we haven’t had in the past and definitely it gives us the ammunition we need to grow us and do some business development deal. Our primary focus in terms of therapeutic focus would be in cystic fibrosis or GI. We would be active to in license products in late-stage development or even marketed products in the United States that we could prevent to the existing sales force. So, definitely in terms of focus CF and GI, obviously we've preferred our products that are as advanced as possible.

The types of deal we would be keen to do would be something like we did with CLIPPER where we got the product that was with a European partner, they were selling us in Europe, they didn’t have an interest in taking it into the United States. They had significant Phase III clinical data behind us and safety data which means the risk to our investment was less. So, that’s a typical example of what we would like to do, but we would also be interested in acquiring marketed products in the GI or CF space if were able to find such products.

Frank Pinkerton - SunTrust

Thank you for taking the questions.

Operator

Thank you. Our next question comes from the line of Scott Henry with Roth Capital. Please proceed with your question.

Scott Henry - Roth Capital

Starting on the income statement; you kind of set the bar at around 13 million for SG&A in Q4. Is that kind of a good go forward number or would you say there is certain amounts of [bogus] spending that go along with the drug launch?

Gearóid Faherty

I think, I'll pass this question on (Inaudible) to Mario. But my initial comment would be, obviously if we are having a big sampling program, if we are having patient support programs, that we are waiting for Medicare and Medicaid reimbursements come through in the first quarter of next year it would certainly be some programs that we would not see continue throughout the year. I don’t know, Mario do you have anything else to add or is that pretty much it?

Mario Crovetto

No that is really Gearóid you answered.

Scott Henry - Roth Capital

Okay fair enough and then with the guidance you had out there for 30% to 40% higher R&D revenue in '09 is that still good?

Mario Crovetto

It's probably on the high side now.

Scott Henry - Roth Capital

Okay and then just rounding out the P&L taxes.

Gearóid Faherty

Can we interrupt you a second? You said revenue?

Scott Henry - Roth Capital

I meant R&D. Okay my mistake.

Mario Crovetto

Related to R&D expenses.

Scott Henry - Roth Capital

Yes exactly, the tax line that bounces around a lot it makes a significant difference with these low numbers any way we should think about that?

Mario Crovetto

The tax line is negatively impacted by the fact that we have subsidiaries in different jurisdictions and they have different tax positions. And as you know we pay taxes in difference countries. So there can be. Actually there are, subsidiaries which pay taxes because they make money. And subsidiaries which use their NOL but fully reserve the tax credit. And this is at the moment what's happening to us, essentially, some subsidiaries recognize taxes and some other subsidiaries are unable to recognize the tax credit. So, overall, a consolidated level, we incur or at least we book more taxes than what one would expect and this situation will continue for the next few quarters. Long-term, it will correct itself.

Scott Henry - Roth Capital

Okay. Fair enough. Shifting over to the business, if I look at product sales and I strip out what I guess would be Pancrelipase. It seems like the base business is kind of flat sequentially possibly even down slightly which it doesn't really make sense giving AMRIX® and Lamictal ODT. How could you talk about that base business trend?

Gearóid Faherty

I think it probably depends on what you define as base business. Obviously there is the legacy products that we have from the days when we were part of (Inaudible). And I would agree that that part of the business is flat or slightly growing some quarter slight decline, some quarter slight growth. And I think that’s the way that will stay, that’s the old part of the business. But then if you talk about AMRIX®, you talk about Lamictal which obviously eventually become part of that core well, then that’s not the case as we have seen AMRIX® is significantly up and Lamictal has just launched.

So, I think it's very important how you define the base business. Likewise obviously the royalties come from these products, they are coming to the market and you have seen with AMRIX®, you start to see with Lamictal, you start to see with ULTRASE®, that we have had significant royalty growth in the last all throughout this year.

So, I think the old legacy product that date more than 10 years from the (Inaudible) business. Yes, I would agree, those are flat or slightly declining with some quarters every now and again. But then you have to look at the business that has developed since that time, the new product approvals like AMRIX®, like Lamictal or the growing franchises like ULTRASE® and then obviously that’s completely different.

Scott Henry - Roth Capital

Okay. So, its just a little volatility there, it sounds like. Final question with regard to ZENPEP in Europe, I thought we might hear some clarity on this call. Have you yet met with the authorities over there? And if so, do you have any idea what would be necessary for approval.

Gearóid Faherty

No we don’t is the answer. We expect to have hear from the agency before the end of the year.

Scott Henry - Roth Capital

Okay thank you for that clarity and thank you for taking the questions.

Gearóid Faherty

No problem.

Operator

Thank you our next question comes from the line of Rich Silver with Barclays Capital.

Rich Silver - Barclays Capital

Just on first of all on Lamictal can you tell us what the real price per script is?

Gearóid Faherty

I can't yet because of GSK but we should be able to give you that later Rich.

Rich Silver - Barclays Capital

Okay and given the emphasis in your discussions in terms of the importance of this product to you even though you are obviously not marking in it can you give us some sense of as you look forward and your planning, your reinvesting in your business and just future growth how important this is say relative to the cash flow generation that you would be expecting on ZENPEP?

Gearóid Faherty

I think we obviously expect ZENPEP to be a much more important product to us than we would with Lamictal for the obvious reason that all the revenues come to us that distinct from a royalty take and a gross margin on sales with Lamictal. That being said as you know Rich, it’s a very decent franchise for GSK they have done very well in protecting that franchise from generic competition they have invested a lot of money in developing this formulation with its two indications of bipolar and seizure, they have also developed a sustained release formulation that has a more limited indication. So that all tells me that these guys are very committed and are keen to sustain its franchise. So, I'd expect it to be a decent product for us. But certainly going to your question, I'd expect ZENPEP to be significantly more important to us.

Rich Silver - Barclays Capital

And how does GSK communicate with you in terms of their needs ordering what sort of lead time or what is sort of the duration of the budget if you will, so you have some sense of their expectations in the coming period?

Gearóid Faherty

What we do with all our clients is we have a situation whereby they provide us with 12 months rolling forecast. Obviously, in a situation like this where we are in a launch situation, we have to see how the product evolved, we have to be more flexible. And in anticipation we would provide a direct amount to the stock to deal with eventualities in the launch. It takes more like six months after launch, nine months after launch before we start to see a real trend and before the 12 month forecast become more important to us. But, from a business point of view, all our partners like the people of Cephalon, like the people of Axcan and now like the people of GSK, they are all obliged to provide us with 12 months rolling forecast.

Rich Silver - Barclays Capital

And can you remind us how you'd count for the revenues both on the manufacturing side and also in the royalty side?

Mario Crovetto

That’s quite simple. With our passage we invariably have exclusive supply arrangement. We ship product to them and these are product sales to us. So, this revenue stream is booked as product sales.

Royalties are computed on the net sales of our conference and are a percentage of those net sales and these are classified as royalties in our revenues.

Rich Silver - Barclays Capital

So it’s the net, it's based on the net sellable partners its not based on some sort of script formulation like ZENPEP would be?

Mario Crovetto

No, whatever our conference report to us as their net sales.

Rich Silver - Barclays Capital

Okay and then just switching to the chronic pancreatitis study what is you plan to file this with the FDA in order to actually get formal label expansion or will you just be using the data to support the marketing of the product with a current indication.

Gearóid Faherty

As you know Rich we already have a full label. We already have a label that allows us to treat cystic fibrosis and EPI associated with other conditions that we already have a full label. We will certainly be using this data to support the marketing efforts and if we believe that the time that the particular benefits to be gained by filing it with the FDA and asking for some form of expansion well then that’s obviously something we will look at.

Rich Silver - Barclays Capital

Okay and then just lastly as far as ZENPEP in Europe status of partner discussions and ditto in Japan?

Gearóid Faherty

As you know we have one deal already signed in Japan or in Asia and South Korea we are talking to other companies there. We are likewise talking to European partners obviously the European partners they are waiting to hear what the EMEA has to say about these products in general and about our products specifically and that will obviously go to the licensing terms in time of launch. So we think we need to see some clarity with the EMEA before we would sign a deal.

Rich Silver - Barclays Capital

And then I know either sensitivity around the launch of ZENPEP you already said that a few times for competitive reasons. But you are having discussions as you said with manage care organization, anything you can share with us with regard to pricing and pricing relative to not just CREON but also your own Pancrelipase?

Gearóid Faherty

I'm not prepared to give details as to price thing. Obviously the product will be more expensive than the existing Pancrelipase product that is a low cost on branded products. ZENPEP is not low cost and will not be unbranded. So, it is a very different strategy there, we'll be launching the product very soon and obviously at that time. Those type of details will be available to everyone.

Rich Silver - Barclays Capital

At what point would you expect ZENPEP to be breakeven on an operating profit basis?

Gearóid Faherty

Obviously there is a couple of factors that we are going to come up against in the next four to five months. The first one is we are obviously going to sample aggressively as we put the product into the market and that will have a negative impact on scripts. In addition, you are not allowed to apply for Medicare and Medicaid reimbursement although such time as you get approval. And then it takes about four to six months post approval before you get reimbursement.

So, obviously that’s not going to happen for us until about February of next year. So, that obviously has a cost for us because if we want to ensure that we don’t loose any of these scripts, we'll need to have a patient support program and plan to assist patient so that we don’t loose any script that they have been written, we want to know that they are filled. And then the third thing I think that impacts us. Obviously, there are two now approved product ourselves and Solvay the deadline for approval is April of next year. If there are no other people approved or if there is somebody else approved that goes to the competitive dynamic that we have to face and obviously that goes to the potential for this product for us.

So I think it's too early, Rich, to say. I think its more likely going to be a second quarter event before we have all the elements in our control. We will have the sampling completed, we will have full reimbursement, we will know what the competitive environment is, we will have been out and detailing the product. So I think second quarter is the time we get to really judge how we are doing with this product.

Rich Silver - Barclays Capital

Okay thanks Gearóid, thanks Mario.

Operator

(Operator Instructions). Our next question comes from the line of Scott Hirsch with Credit Suisse please proceed with your question.

Scott Hirsch - Credit Suisse

Gearóid, what's your sense of current generic inventory in the channel and how fast will the FDA act in April as you mentioned to pull those who are unapproved off the market.

Gearóid Faherty

I think in terms of the channel, Scott, the big issues for people for distribution in general managing these type of products is the poor stability and the overfill associated with the low cost products that are in the market today. How are the unapproved products that are in the market? So I think that puts the cap on how much there can be in the market at any time most of all of these products have a two-year shelf life, it usually takes about three months from producing this product before you get it into distribution. So that takes you down to about 21 months when you supply it to the market.

Distribution in North America usually doesn’t want to take any product with less than 13 month shelf life. So that takes you from 13 to 21 as the max you should see in the space. It's unlikely you would have all of that in the market at any given time because logistically it would be very, very difficult to do so.

Also I can imagine with the deadline coming, distribution would be vary about taking large stocks in or people will be vary at supplying it because they will have to give it back. So, this is my estimate, it will about two or three months of stock could potentially be in the market maybe even less. As to what the FDA will do, we don't know. But it's happened in the past, what we saw a last year as various deadlines came and went, we sold people voluntarily pulled from the market. The FDA were not obliged to move on impact global, they were not obliged to move on Breckenridge or KV, all of these people were through from the market. So, I don’t know what the FDA will do, we all to have to see what the suppliers will do themselves.

Scott Hirsch - Credit Suisse

Do you have enough capacity to supply the whole market if they do pull all these other products off?

Gearóid Faherty

Well, obviously at the moment we are already supplying ULTRASE® and that represents about 20% to the market and as you have heard in our call today, we are already supplying 21% of the market with our own Pancrelipase product. So, we have considerable capacity and as you know from our infrastructure Scott when I met you, we have very significant facilities around the World, we've plants in the United States that can manufacture a product in date in Ohio and are doing it so with Pancrelipase right now. We have the product that I'm speaking to you from today at Milan where we supply the Axcan product in ZENPEP. So, yes, I believe we have sufficient capacity to meet the market.

Scott Hirsch - Credit Suisse

And then just with the share. The overall market share has changed a lot since last year. This year we have seen a lot of the brands pickup and J&J is still taking share. Is there any insight into what's going on with their version of pancrease?

Gearóid Faherty

No, they haven’t provided any guidance. We've never seen any clinical data from them as to whether they completed their clinical studies or not and what the results of those studies were, we know they started some studies we haven’t seen anything from them since. Likewise I know a number of people have been asking about how they follow us we're at the end of the review process. We have no visibility as to that. We noted last week when we were at the cystic fibrosis annual meeting that once again [McNeil] did not have a presence, did not have a boost at the meeting. And that has been the case for them for the last three years in a row now which seems strange considering the opportunity. And the other thing obviously we noted as J&J's announcement two days ago that they are going to rationalize their sales force and refocus some of their business that we don’t know that’s on play to this franchise or not.

Scott Hirsch - Credit Suisse

And then just lastly, the gross margin clearly was higher than expected you noted that was product mix is that mix sustainable?

Gearóid Faherty

Well I think it goes to the question I was asked earlier about the base business. Obviously as we bring more of the newer products like Lamictal like AMRIX® to the market and ZENPEP, our margins greatly improved. We have guided the street in the past on these calls and in one-on-one meetings. But the gross margin we have on things like GSK or AMRIX® are greater than 50%. Obviously, the base business didn’t have that type of gross margin. So the more of these partner products that come to the markets, the more successful they are, the greater improvement we see in gross margin the same will take place obviously with ZENPEP where we will have a very significant margin difference to what we did have with Pancrelipase.

Scott Hirsch - Credit Suisse

Great and then just very lastly the EUR-1025, any timeline on when you are meeting with the FDA and what our timeline could look like?

Gearóid Faherty

As I said in the call today, we actually had the meeting yesterday. And we will soon advice people as to how the meeting went and what our plan to take it forward. We discussed a number of different options with the FDA were internally evaluating these options now and as a future call we'll advice people as to what we've decided to do.

Operator

Our next question comes from the line of Greg Gilbert of Bank of America, Merrill Lynch. Please proceed with your question.

Greg Gilbert - Bank of America Merrill Lynch

Gearóid are you willing to talk about when you'll stop shipping Pancrelipase versus when you'll stop booking sales for it?

Gearóid Faherty

No, Greg, I'd prefer not to do it. We'd like to keep that to ourselves for now.

Greg Gilbert - Bank of America Merrill Lynch

Okay. And then moving on, can you talk about post-approval studies the FDA required during (Inaudible)?

Gearóid Faherty

They are actually very similar to the post-approval studies that they are asking Solvay to do and that we'll expect them to opt most people to do. And the FDA are asking people to monitor for viruses post-approval and also to monitor or for the risk of colonic strictures.

Greg Gilbert - Bank of America Merrill Lynch

Okay. And then it looks like non-porcine PEP product could hit the market in 2011. Do you have any observations on that data or that companies or the compounds presence at the recent meeting and what do you think may happen in 2011 if the product does come to market?

Gearóid Faherty

I think the important thing to realize Frank is it's not a new product. This is the old Altus product that had very questionable clinical data and limited efficacy in CFA versus placebo. I think if I recall and don't hold me to this, so I think CFA has something like 67% in a placebo control trial versus our product which had 88% to the massive CFA difference. We'd also expect that product to be very expensive in relation to our product. We also know that product, at the time when Altus was managing it and actually gave it back to the Cystic Fibrosis Foundation because there were some very unusual data on the product that came out of Europe where efficacy was not shown at all and which at the time the company said related to stability problem.

So I think it's very important to understand that is not new, that is a recycled. The old product that had come from the CF Foundation went to Altus, stayed in Altus for a number of years, did clinical work, failed to convince people and was given back to the CF Foundation. And now I understand, I think, its one of the old Chief Medical Officers or so of Altus that has now gone back to the CF Foundation and taken the product out again. So based on the data I have seen on the product so far I don’t see it as a threat to the existing product and I think it is a long way to go yet before it would be approved but obviously these are my personal opinions.

Greg Gilbert - Bank of America Merrill Lynch

So any of those comments about data relative to the recent data they presented?

Gearóid Faherty

No but I think the recent data was an open label study. So we don’t have the access to the data to see or I don’t know I haven’t seen it as yet I am going off the placebo studies which would compare to what we have done and obviously there was a massive difference in CFA.

Greg Gilbert - Bank of America Merrill Lynch

And last question for either of you, do you expect, I know you cant talk about your collaborations that haven’t been announced yet but do you expect any new material revenue streams to emerge over the next 12 months for the company that we don’t know about but that you know about?

Gearóid Faherty

Obviously over the last three years we have signed six deals with partners every year. So we have done something like 18 deals over the last three years. So, obviously, we are hopeful that some of these products will soon start coming to the markets, many of them would be in different phases of clinical development. It's hard to say when. And if they will come, it really depends on their success in the clinic or their success on the approval process. And really nothing I can talk about right now.

Operator

Thank you, ladies and gentlemen. Our next question comes from the line of Frank Pinkerton with SunTrust. Please proceed with your question.

Frank Pinkerton - SunTrust

Hey, Gearóid. Just two follow ups quickly. I know we talked about this all times but is there any plans to give guidance in the future once maybe ZENPEP gets launched and there is a little more certainty from your perspective on what top-line and bottom-line can be?

Gearóid Faherty

I think its likely Frank. We've already started to do it. In the last call we guided people to research and development expense. And on the call today we have guided to SG&A. And I think, once we see what the competitive landscape for the product is next year once the sampling reimbursement and withdrawal issues arise other way. I think we'll be in a better position then to decide what we might want to do.

Frank Pinkerton - SunTrust

Okay, great. And I was kind of hoping someone else would ask this, but I'll go ahead and throw it out because it is getting to me quite a lot and that is. If the original Solvay sales force is somewhat disbanded due to the Abbott acquisition. Even if the product gets picked up by maybe a larger Abbott sales force. Do you think that offers you a window of opportunity to capture some market share? And what's the company willing to spend from a sampling, marketing other perspective maybe over three to four month period to do that? Thanks.

Gearóid Faherty

I think it’s a good question Frank. We were at the cystic fibrosis meeting as we said in Minneapolis last week and there was a tremendous rumor in the market that the Solvay sales force for this particular product who is going to be dispended at the acquisition by Abbott closed. We heard it from many different people that these people would be made redundant either later this year at the start of next year.

Obviously, I have seen no announcements from Abbott, I have seen no announcements from Solvay. I presume in the same way you've heard the rumors I've heard the rumors, we can’t confirm or deny these rumors. And it's not our position to do so, where that to be the case and where this sales force to be disbanded, obviously, I would believe that to be an advantage for us. Any distraction that Solvay would have at this moment in time with their conversion of their old to their new product and as a time when we were about to launch I would see that as nothing but beneficial to us.

Frank Pinkerton - SunTrust

And from a spending perspective, what are you willing to sample or other type of things you are willing to do to try to capture that share?

Gearóid Faherty

I think as we have said in Mario's guidance, we are going to spend heavily in the next quarter. All the cost that Mario talked about the $5 million potential increase in SG&A. Obviously only a percentage of that relates to the actual fixed sales force cost, the rest would go to sampling patient assistant programs.

We are very committed to a successful launch for this and would certainly be committed to spend for this for the next quarter and a half at least to ensure that once that we don’t miss out on any opportunity as the results of Solvay distraction that we don’t miss out while we are waiting for reimbursement to happen that we have an opportunity for patients to try the product and convince themselves that it works as we know it does and so that there is no issue about them coming off one product and going to another. So, yes, an answer to your question, we would be prepared and are prepared to spend for the next quarter and a half to make sure we launch that well.

Operator

Our next question comes from the line of David Steinberg with Deutsche Bank, please proceed with your question.

David Steinberg - Deutsche Bank

Thanks I was wondering could you comment a little about pricing for the pancreatic enzymes. I know that in the last several years units have only grown modestly with the patient population that pricing per script has gone up as some of the generic players have exited and the market leader has put in some significant price increases. So, going forward, assuming that the FDA does mandate all the non-approved products be removed from the market. Gearóid, what sort of pricing flexibility do you think participants have? How does it compete with existing CF products could have been a significant price increase across the board once there are only approved products in the market. Could you comment on where the pricing might go?

Gearóid Faherty

Sure. I think it’s a very important point David. We've seen the major players, today over the last three to five years, have taken significant price increases in this market. And I think what we have seen at the market as a whole, there is a large segment of this market that has not been price sensitive. I would argue most of that is in cystic fibrosis and people like Solvay, people like Axcan have taken the very significant prices frequently over the last number of years. Obviously now there will be facilitation in the future after low cost, products leave the market. And as we know three of them already have and a lot of that has already converted to the branded pricing. And you've seen already a very significant jump in the value of this market.

I think the remaining low cost product which is namely our product leaves the market and the fact that the pricing dynamics have not changed in anyway. Yet I think there is significant opportunity for price depreciation. I think also the fact that these are much more complex products then they were, the FDA have pushed for very significant characterization of these products. They are committing partners to do certain studies post-approval. So I think we will see considerable price depreciation as we go forward. And as I think you mentioned on launch we believe that Solvay increased price by approximately 15%.

Operator

Thank you ladies and gentlemen. Our next question comes from the line of Scott Henry with Roth Capital please proceed with your question.

Scott Henry - Roth Capital

Thank you for taking the follow up, I was just hoping to drill down in broad terms little more on the reimbursement cycle here could you estimate what percent of the pancreatic enzyme market would be public payer versus private payer?

Gearóid Faherty

Yeah we think reimbursements with the various government programs would be between 30% and 40% of the total market.

Scott Henry - Roth Capital

And I assume that’s mostly Medicaid?

Gearóid Faherty

Yes indeed.

Scott Henry - Roth Capital

And I think you clarified that you would expect approval in that category around February 2010?

Gearóid Faherty

The obligation is you can't apply for it, got under such time as you approved. And then the bureaucratic process of getting the approval through and getting your reimbursement typically takes between 4 and 6 months.

Scott Henry - Roth Capital

And then on the private side it would be the traditional P&T committees kind of, my experience has been that’s either a very quick process or it can be a six months process. Just any kind of color you could give on the private payer side.

Gearóid Faherty

I think it's exactly like you said I think some of them are extremely quick. I think also on a very important point to add in this case is, this is a very small patient population especially in cystic fibrosis the cost of the annual use for patients is relatively small so it tends to be below the threshold of pain for many of the players. So it tends to move through more quickly. But I think you are right I think there is a spread between some people being very quick and on board straight away and then there is some others because of their systems take longer.

Scott Henry - Roth Capital

Okay thank you for the clarification that’s helpful.

Operator

Thank you ladies and gentlemen at this time I would like to turn the floor back to management.

Gearóid Faherty

Okay. Thank you very much for your attention this morning everyone. It was a pleasure to talk to you and to answer your questions, we look forward to updating you on the business on our next conference call. Thank you.

Operator

Thank you ladies and gentlemen. This concludes today’s teleconference. And you may disconnect your lines at this time. Once again, thank you for your participation.

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Source: Eurand N.V. Q3 2009 Earnings Conference Call
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