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Eurand N.V. (NASDAQ:EURX)

Q4 2009 Earnings Call

March 4, 2010 8:30 am ET

Executives

Bill Newbould – VP, IR

Gearóid Faherty – Chairman and CEO

Mario Crovetto – CFO

Analysts

Ian Sanderson – Cowen & Company

Annabel Samimy – Thomas Weisel Partners

John Newman – Oppenheimer & Company

David Steinberg – Deutsche Bank

Frank Pinkerton – SunTrust Robinson Humphrey

Scott Henry – Roth Capital Partners

James Molloy – Caris & Company

Gregg Gilbert – Bank of America-Merrill Lynch

Operator

Greetings, ladies and gentlemen, and welcome to the Eurand fourth quarter and full year 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, Claudia, 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 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 now like to turn the call over to Gearóid.

Gearóid Faherty

Thank you, Bill, and good morning, everyone, and thanks for joining in. Today I would like to begin with a brief summary of our 2009 fourth quarter and full year achievements, discuss the ZENPEP launch, and provide an update on our development pipeline. Then I will turn the call over to Mario, who will review our financial results. I'll conclude with a summary of upcoming milestones, and then we'll open the call to your questions.

So turning to the fourth quarter, I'm pleased to report another strong quarterly performance. As noted in today's press release, we grew revenues by 28% to EUR30.3 million or $43.4 million. The key development of the quarter was the launch of ZENPEP, but we also expanded our commercial organization, strengthened our cash position with the proceeds from a second reoffering, and continued to advance our late stage pipeline.

Our fourth quarter revenue growth was led by sales of pancrelipase, our low-cost pancreatic enzyme product; and, by sales of ULTRASE by Axcan. Also contributing to our quarterly revenues, were sales from partner products AMRIX by Cephalon and Lamictal ODT, which our partner GSK launched in summer 2009. We expect that these products will continue to be an important part of our revenue stream going forward.

Focusing for a moment on AMRIX, Cephalon grew sales by 17% in the fourth quarter to $30.6 million and by 55% for the full year in 2009 to $114.4 million. Although substantial, the rate of growth was slowed somewhat last year by a realignment of Cephalon sales force as part of the new VIGIL launch. As Cephalon noted on its fourth quarter call, with the sales force focused on the right customers, they expect AMRIX growth to reaccelerate in 2010, and look for this product to drive growth in their paying franchise in the years ahead.

In terms of our partnering efforts for this product outside the United States where we hold the right to the product as cyclobenzaprine extended release, we recently entered into an exclusive license and supply agreement with Technopharma [ph] that includes 17 countries in South and Central America. This brings the total number of countries where cyclobenzaprine is partnered to 21, including South Korea, Israel, Turkey, and South Africa.

The fourth quarter capped off another outstanding year for year-end, with record revenues of EUR120.6 million or $172.8 million, a substantial 18% increase for the 12 months in 2009 versus 2008.

We had a number of other key accomplishments in 2009, most notably around our lead proprietary product ZENPEP. As you know, the FDA-approved ZENPEP, a pancreatic enzyme product indicated for the treatment of EPI and cystic fibrosis or other conditions in late August, and we began shipments in November. We view the launch of ZENPEP as a transforming event that completes our evolution from a drug formulation company to a full-scale commercial organization. To support the ZENPEP launch, we expanded our commercial team to include an internal cystic fibrosis sales force of 16 representatives and a contract sales organization of 49 reps charging the GI market, and other several key management positions in sales and marketing.

In 2009, our low-cost pancrelipase product became the second most prescribed coated PEP in the US, with a peak market share of 21% according to IMS data. This gave us the presence in the PEP market ahead of the approval and launch of ZENPEP. In accordance with our agreement with the FDA, we stopped shipping pancrelipase with the launch of ZENPEP.

In late December, as part of our strategy to convert our market share of pancrelipase to ZENPEP, we introduced pancrelipase 5000, an authorized generic to the 5,000 unit low-dose of ZENPEP.

Other highlights of 2009 would be the FDA approval of Lamictal ODT, a fast-dissolve, taste-mask formulation that we co-developed with GSK for the treatment of bipolar 1 disorder and seizures. As I noticed, GSK launched this product in June, and scripts are now approaching 2,000 per week and growing.

We also strengthened our management team in 2009 with the appointment of the chief research officer. And now, there's a number of key positions in our regulate [ph] reserve, medical affairs, and legal groups.

Now I'd like to take a few minutes to update you on the launch of ZENPEP. For the weekend this February 19, 2010, ZENPEP and its AG or authorized generic held a 3.8% share of total prescriptions in the coated PEP markets. When combined with script for our pancrelipase product, we had a total market share of 16.1%. We believe a number of factors have affected prescription growth through the early stages of the launch.

First, we put a high volume of samples into the market, a business decision consistent with the launch of chronic drugs and with the product profile that has the potential to become an important player in the US PEP market. The goal of this program was two-fold, to overcome any payment issued early in the launch and to precipitate trial with the product category where provisions require samples for start for switches. In the first three months of the launch, we distributed more than 22,000 bottles. Sampling in the CF segment uses bottles of 100 capsules. In the GI segment, we began sampling with bottles of 100 capsules, and are now sampling with lower count bottles. We also have early experience program in both segments to generate first trial and to create a feedback loop between physician and patient so that they can share their results with ZENPEP. These programs provide free product for the first 30 days. And we expect to see the results from these two programs and our sampling efforts over the coming weeks and months.

Second, we continue to ship pancrelipase into the market until the day we ship ZENPEP to retail pharmacies. The goal was to provide access to a low-cost product while we secured reimbursement for ZENPEP and the AG. We estimate that there are still several weeks of inventory at the wholesale and retail levels. We expect to see prescriptions for this product continue, but decrease as the supply is used up.

Third, the continued presence of unapproved PEPs has had a significant impact on the early uptake of ZENPEP. We believe that these manufacturers have been and will continue to aggressively contract with significant discounts as a means to move their inventory into the channel ahead of the FDA's April 28 deadline for NDA approval. Obviously, this process could backfire for these suppliers should the FDA mandate a recall or CMS discontinues Medicare Part D or Medicaid payment for unapproved PEPs.

Lastly, the time required to gain reimbursements have effected prescribing. In CF, half the patients received Medicaid assistance and half are covered by private insurance. While federal Medicaid now covers ZENPEP, at least 13 states require additional review and contract for ZENPEP to be placed on the preferred drug list. In non-CF, Medicare party represents 25% to 35% of lives, with the balance covered by private insurance. However, there is a significantly higher use of PEPs by patients covered under Medicare Part D than patients with private coverage. This underscores the importance of having reimbursement in place in the GI markets.

The application process for reimbursements can only begin once FDA approval is received. Securing contracts for payment on commercial plans, and through Medicaid and Medicare Part D can take four to six months or longer. We're on track to complete this process and expect to have most lives covered by the end of the first quarter. But we have also put in place a third party vendor to assist with insurance coverage, reimbursement, and claims processing should patients and providers wish to use ZENPEP today.

We're encouraged by the anecdotal information we've received about ZENPEP's clinical utility. We saw on the clinical trial studies, ZENPEP is able to bring patient symptoms under control at half the maximum recommended dose by the Cystic Fibrosis Foundation guidelines, and this message is resonating well in the marketplace. We had numerous reports of patients achieving very positive results. And we're seeing signs that indicate that acceptance in usage are growing.

As we move into the second quarter, we expect to see additional weekly growth as the impact of our staff and programs begins to take hold and translate into script, pancrelipase inventory runs off, and we have reimbursement fully in place. Further, we expect a greater clarity on the competitive situation following the April 28 deadline when the three remaining unapproved PEPs must have an approved NDA or risk regulatory reaction.

Now, moving away from the ZENPEP launch, I'd like to bring you up-to-date in some recent activities with our pipeline. Late in the fourth quarter, the European Medicines Evaluation Agency or EMEA finalized its draft guidelines on the clinical development of products for treating cystic fibrosis. We recently received feedback from the EMEA on the clinical and reg path forward for ZENPEP in light of the guidelines. Based on their recommendations, we expect to initiate a Phase III study in Europe in the second half of this year, 2010. We don't intend to provide study details at this time for competitive reasons.

As previously disclosed, we conducted two pivotal PK studies on EUR-1025, a proprietary once-a-day formulation of ondansetron that we anticipate would have a similar efficacy and safety profile as the existing formulation, which is dosed two to three times a day. We recently shared this data with the FDA. And we're currently working on a protocol for a single Phase III study in post-operative nausea and vomiting that we expect to submit in the first half of the year.

In regard to EUR-1073, Chiesi has completed a Phase IIIb clinical trial in Europe. The data showed that CLIPPER met the primary efficacy endpoint of non-inferiority to prednisone, the current standard of care in ulcerative colitis. We're evaluating the result, and we'll soon decide whether or not to take this product forward in development.

I'd also like to mention that following a strategic review of our technology portfolio, we've decided to seek all the internal investment in the drug conjugation technology and close our small Trieste research facility. We may speak to out-license this technology and its intellectual property to interested parties.

To summarize, we had a very strong and productive fourth quarter and year in 2009. In addition to record annual revenues, we gained FDA approval for two products and launched our first self-marketed product. We strengthened our balance sheet and continued to advance our pipeline. We believe these achievements set the stage for continued growth in 2010, and provide the foundation for long term success as a fully integrated specialty pharma company.

With that, I'll ask Mario to review our financial performance. Mario?

Mario Crovetto

Thank you, Gearóid. As Gearóid mentioned, the fourth quarter of 2009 was another quarter of very significant revenue growth for Eurand, compared to the fourth quarter of 2009. Revenues total EUR30.3 million, compared with EUR25.7 million a year ago. This represents an increase of 18% or 28% in constant current. In dollars, revenues were EUR43.4 million at the convenience rate of 143. There were three main reasons for this increase, face on our pancrelipase product; higher sales of ULTRASE to Axcan; and, increased sales of AMRIX by Cephalon, and therefore, higher royalties to us.

I'd like to remind you that as we said during our third quarter earnings call, we base sales of ZENPEP in the fourth quarter on the reported IMS prescriptions and recognized no revenue from full sales of stocking of the product. In first quarter 2010, we will continue to book revenues of ZENPEP and its authorized generic on a prescription basis.

Gross margin and product sales were 38.5% in the fourth quarter of 2009, much higher that 26.4% recorded in fourth quarter 2008. This reflects the increased proportion of higher margin products in our total product sales mix.

Research and development expenses were lower than in fourth quarter 2008, essentially because the timing and progress of clinical activity can vary significantly from quarter-to-quarter.

As anticipated during our last call, in the fourth quarter of 2009, selling, general, and administrative expenses were much higher than in previous quarters. This is because their selling component steps up due to the launch of ZENPEP in the US. The main reasons for the increase are the expansion of our sales team, product sampling, and marketing programs. Net loss in this quarter was EUR3.9 million, which is EUR0.08 per share or $0.12 in dollars.

At the end of the fourth quarter, cash including marketable securities was EUR39.9 million or $57.2 million. This included $20.1 million of net proceeds from our October public offering. Compared to December 2008, the increase was EUR17.2 million or approximately $25 million.

I will now turn to our financial performance in full year 2009, compared to full year 2008. In 2009, revenues ended up at EUR120.6 million, which was approximately $173 million, at a convenience rate of $1.43. The increase over 2008 was 22%. In constant currency, revenue growth was 18%. Product sales grew 24% or 20% in constant currency, driven by our pancrelipase product and by our sales of ULTRASE to Axcan. Royalties rose 32% or 25% in constant currency, primarily due to sales of AMRIX by Cephalon. Development fees were essentially unchanged.

Gross margin on product sales improved to 38.2% from 32.7% in 2008 due to an increased proportion of higher margin products in our product mix. Research and Development expenses were up 16% or 12% in constant currency. And selling, general, and administrative expenses were up 23% due to the significant increase of the selling and marketing component in the fourth quarter of 2009, which I mentioned earlier.

Net loss in full year 2009 was EUR5.9 million, which is EUR0.13 per share of $0.18 in dollars. I will turn the call back to Gearóid.

Gearóid Faherty

Thanks, Mario. Before I open the call for questions, I'd like to make a few closing comments. We're excited about the ZENPEP launch and are confident we have the people, plans, and resources in place to make the product a long term commercial success. We look to the coming April 28 FDA deadline for NDA approval of pancreatic enzyme products for greater clarity on the competitive landscape that ZENPEP will face. We expect to begin a Phase III program for ZENPEP in Europe later this year. And we're in active discussions for potential 0ut- licensing opportunities there and in Asia. We look forward to continuing growth from key partner products such as AMRIX, Lamictal ODT, and ULTRASE. And lastly, we continue to advance our pipeline, and we have the resources to pursue additional opportunities for growth. Toward that end, we're activity seeking late-stage development and marketed products to leverage our commercial efforts.

This concludes our formal remarks. Now I'll ask the operator to open the call for your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Our first question is coming from Ian Sanderson with Cowen & Company.

Ian Sanderson – Cowen & Company

Good morning. Thanks very much for taking the question. First on ZENPEP reimbursement, maybe – if you could maybe breakdown the percent of prescription – PEP prescriptions in the cystic fibrosis and the GI markets, respectively, that are covered by either Medicare or Medicaid. And also, could you give us an update on where ZENPEP stands in terms of commercial plan reimbursement? And then the second question related to that, do you believe that the FDA or do you have some evidence that the FDA actually will force a recall of the non-approved PEPs in late April or will they just leave the inventory out there?

Gearóid Faherty

Okay. Ian, this is Gearóid answering your questions. I think during the call this morning, I probably covered some of it, so I'll make a repeat of some of the information. In CF, about half the patients received Medicaid assistance and half were covered by private insurance. With regard to federal Medicaid, we are now fully covered for ZENPEP, but there are about 13 states that require additional review before we get full coverage, but we're looking for their results if we can get on the preferred drug list. And we're in discussions with those 13 states right now. That's the slowest part of the process because we're going through individuals, obviously, getting the full federal coverage was just one negotiation. And we then turned it–

Ian Sanderson – Cowen & Company

So you expect those 13 states to come to closure by the end of this quarter.

Gearóid Faherty

I think we'll have most of them. One or two might slip into the next quarter. It's hard to say. It's not a process that has a defined timeline. It's a third – it's the question of negotiating contracting and so on, depends on the availability of people when they can get to the issue. But we're open in discussions with all of them right now. The discussions are quite advanced. We had our meetings. So we should be able to push it through quite quickly. But that's for 13 states. Remember, the federal coverage for everything else is already in place.

In non-CF, somewhat different, it's a bit more complex probably. Medicare proxy [ph] party represents about 25% to 35% of the lives in that particular segment. The balance is covered by private insurance. However, there's a bit of a difference here or further complication. We've seen significantly higher use of PEPs by patients covered under the Part D than patients covered by private coverage.

So this has obviously been a problem while we've been waiting for that to come through. The biggest challenge I think everybody has when launching a product into this phase is you can't start this process until you have your FDA approval. And the process takes four to six months. We're almost finished. I think that the possibility of having it by the end of the month having full coverage, some of it again might slip into the next quarter. But as I said on the call, we put in a third party vendor assist program to help with insurance coverage reimbursement and claims. So we're trying to ensure that we don't lose so many scripts to reimbursements problems.

You also asked me about the FDA and what they're likely to do. Obviously, we're getting very close to the deadline now. It's essentially six weeks away. Three of the products have still not been approved. And we have no guidance from the FDA to say that they're likely to change the guidance in any way. The last time they change the guidance, they give one year of notice that they were about to change. This time, we're six weeks away and there is no guidance, no new guidance, so we've no reason to believe any change is coming.

By the same token, we don't know what they're going to do with regard to when the deadline happens. Will they pull existing stocks from the market? I think if they do, it will be a very significant challenge for many companies who we believe have discounted heavily and pushed stocks into the market. It's also possible that it could happen because when Solvay were approved, they were given 30 days before they were obliged to take back stock from the wholesalers. And when we were obliged to – when we were approved, we were obliged to stop shipments immediately. So certainly, it would seem very strange if the agency obliges Solvay who was approved to pull its stock back, but wouldn't oblige a non-approved product to be pulled back.

Ian Sanderson – Cowen & Company

Okay. But to be clear, you did not have to recall your existing stock of–

Gearóid Faherty

No. Our agreement was as soon as we started shipping to the pharmacy, we were allowed to leave the rest of the products in the market. And probably, the difference between us was our product – one of the difference would have been our product was called pancrelipase and our new product was called ZENPEP. So there was no possibility for confusion in the patient population and the physicians. On the other hand, CREON and some of the more established products that are named – obviously, they view CREON and an old product CREON in the market, there is the greater risk if the brand name is the same. So obviously, there're two different approaches there. You correctly point; we don't know which approach they're going to take on the 28th of April.

Ian Sanderson – Cowen & Company

Okay. Thank you.

Operator

Our next question is coming from Annabel Samimy with Thomas Weisel Partners. Please state your question

Annabel Samimy – Thomas Weisel Partners

Hi. Thanks for taking my call. Just going back to the prior question on the private player side, can you give us a little bit of color there and whether there's any complication from getting reimbursement from that side?

Gearóid Faherty

No, we haven't, Annabel. We're working through it. We have quite a lot of them on board. And one of the challenges we face that we intimated or hinted about in the call, is obviously a few people out there offering very large discounts. And to these organizations to take products that might not be approved that becomes challenging for us in our pricing negotiations. But no, they're going along according to plan. We have many contracts already signed. We've still some more to negotiate. And the only issue we've seen to date is discounting by unapproved products.

Annabel Samimy – Thomas Weisel Partners

Okay. And separately on the patient assistance program, how do you expect that to continue after you start getting reimbursement on the Medicare and Medicaid side? They use (inaudible) providing it?

Gearóid Faherty

No. We don't think we need to. If we had patients coming forward that really wanted it and we're having some delays with their programs that were administrative that we're likely to be short term, then we would be keen to support people. If on the other hand, obviously, reimbursement is in place, we would see no reason why we should be doing it also.

Annabel Samimy – Thomas Weisel Partners

And so, in terms of SG&A, do you think that – does that have a big impact on some the SG&A numbers early on in the first quarter or second quarter?

Gearóid Faherty

I think it'll have an impact. But I don't think it's very significant, no.

Annabel Samimy – Thomas Weisel Partners

Okay. And can you remind us, pancrelipase 5000, that's strictly for the non-CF market. There're very few people in the CF market use that dose?

Gearóid Faherty

That's correct. The only people that would typically use that low-dose in CF would be very young children, typically, children that have just been born, neonates. Most other patients in CF would quickly switch to high doses.

Annabel Samimy – Thomas Weisel Partners

Okay. If I may ask one more question separately on the business development side. I know you talked about out-licensing. But are you doing – are there any activities that you're conducting to build out the pipeline more extensively?

Gearóid Faherty

Yes, we are. We're actively looking at in-licensing development stage products and we're also looking to in-license the market stage product, if we can, in the United States. We have a dedicated group in our Yardley office working on this program. We have a number of negotiations in course, but it's too early to say anything more about them right now.

Annabel Samimy – Thomas Weisel Partners

When you talk about in-licensing development stage, is this a similar set-up to the Amrex flammatology T [ph] type of deals or is actually in-licensing product to sell yourself?

Gearóid Faherty

It would be product that we want to sell ourselves, both for the development side and obviously the marketed product.

Annabel Samimy – Thomas Weisel Partners

Okay. Thank you very much.

Gearóid Faherty

No problem.

Operator

Our next question is coming from John Newman with Oppenheimer & Company

John Newman – Oppenheimer & Company

Hi, guys. Thanks for taking the question. Actually, I have a couple. First, could you tell us what your current share is in the CF market? And also, in terms of your patient assistance program, should we assume that prescriptions that are submitted to Medicaid, but not covered, are currently picked up by you guys right now? And then, I just wonder if you could talk a little bit about your spending expectations for 2010? You said you're going to be starting a Phase III trial on your – for ZENPEP. I'm just wondered how you think about that. Thanks.

Gearóid Faherty

First question, John, about where do we think scripts are to date as we have. In ZENPEP and its AG, we have about 3.8% of the market. They're combined with about 16.1%. We think the vast majority of that is in GI. We think we're still in sampling and our patient trial programs in CF, so we would think the vast majority of scripts you're seeing from us today are in GI. And a lot of the sampling and the trial of the product are still going on in CF, and we're not seeing revenues from that.

With regard to people, do we – if we have patients of mid-size on a federal program and don't get reimbursed, do we pick up on those? We certainly have a lot of programs. We have a third party vendor. We have our own programs in-house to make that happen. But we have anecdotal information or some feedback from the market that we're not picking all of that up. We still think we're losing some of scripts to people or having challenges getting reimbursed. Some people just don't want to go through the bother of making it happen. And it be at the physician, the nurse, the caregiver, or whoever, we feel we're certainly losing some scripts to that right now. Obviously, that's something we're working extremely had on to make sure that that doesn't become significant. And as I said in the call this morning, we're almost at the end of the reimbursement process. We have a lot of it in place. It will soon be over. Obviously, our sampling programs and free programs cover some of that right now.

The last thing you asked me about was the clinical programs in Europe and what it will cost us going forward. The trial, we should expect to start this in the second half of the year. I would imagine this would run for at least one year, at least one year. The expenses would obviously spread out over the second half of this year and into next year. I don't think it'll be a hugely expensive trial. It'll probably be in the same range as the trials we've done in the past in this area, which have been in the sort of $2 million to $4 million range, and that would over a two-year timeframe.

John Newman – Oppenheimer & Company

One quick follow-up, could you – would you be able to give us any sense as to the revenue breakout between pancrelipase, ZENPEP, and then I guess what you guys get from manufacturing?

Gearóid Faherty

Run that by me again, John.

John Newman – Oppenheimer & Company

Could you give us a revenue breakout from pancrelipase, ZENPEP, and then the manufacturing piece, just trying to sort things out from the total number?

Gearóid Faherty

We're kind of reluctant to do as we don't want to be breaking out too much. What we think we've done is we've given a decent level of guidance. We're saying total market share at the moment is 16.1%, of that 3.8% is coming from ZENPEP and then the AG. And a further breakout from that would be ZENPEP on the last week would have been 2.3%, whereas the pancrelipase AG would have been 1.5%. So if you're looking for a percentage breakout from scripts based on last week, it would be pancrelipase 12.3%, and ZENPEP 2.3%, and pancrelipase 1.5% of the total end market as it is in the US.

So obviously, pancrelipase, as you know, was a low-cost product and it was put in to compete in the genericized market space, and it was at a significant discount. And we've talked about this in the past as at least 50% to the branded pricing. ZENPEP on the other hand, I think from the last call, we advised people that we priced this in comparison with Solvay at the price that they launched there. And obviously, our pancrelipase 5000 AG is at a significant discount to the ZENPEP 5000.

John Newman – Oppenheimer & Company

Great. And then, you mentioned that you're seeing some of the products that are not approved engage in some aggressive price discounting. Are you also seeing wholesale levels increasing or are they going down? And what is the shelf life for these types of products? So if the other players did try to stop the channel at the April 28th date, how long will those products actually be viable?

Gearóid Faherty

Okay. We've seen some wholesaler buy-in, obviously, for the product. These people are discounting very aggressively. Somebody is taking and placing a bet and hoping that there isn't a recall. I don't think the wholesalers care very much about this because for them, if they don't sell it, they give it back to the manufacturers. So it's the manufacturers that are taking the risk. And if the FDA decides to, as they did with Solvay, and give people 30 days to pull products from the wholesalers, well then it will be the manufacturers who bear the burden, not the wholesalers themselves.

With regard to stability and how long these products can be in the market, the typical product, the unapproved products, have a shelf life of about 24 months. They typically take about three to four months from when they're made to get into distribution. So by the time it hits distribution, it's usually down to about 19 or 20 months. Most wholesalers do not want to stock products that have less than 13 months of shelf life. So theoretically, an estimate would be maximum of six to seven months of inventory, and that you would see in the system.

If you compare that to us and our pancrelipase, we stopped shipping in November. And with that four months later, we still have some products in the market, but we're seeing it obviously drop back and wholesaler inventories are getting down to the few week ranges rather than any longer than that. But the big question for anybody who's playing this game right now would be, if the FDA moved as they did with Solvay, that's very dramatic for anybody who's been shoving a lot of products into the market.

John Newman – Oppenheimer & Company

Great. Thanks for answering all the questions.

Gearóid Faherty

No problem.

Operator

Our next question is coming from David Steinberg with Deutsche Bank.

David Steinberg – Deutsche Bank

Hi, thanks. Gearóid, you mentioned that you'd pursue the aggressive sampling campaign against 22,000 bottles in the first three months. Do you have any data that you can share about what conversion you're getting from some of the patients who started sampling right up front and who are now – has discontinued that?

Gearóid Faherty

It's been very good conversion, David, in GI. It's been a quicker conversion. We're seeing a slower pickup in CF, and patients are more reluctant to change. We're finding that you have to do a repeat visit. You see some patients ask for another week. I think that isn't too surprising because the CF patients are typically sicker patients. They are more challenged patients. They need more convincing.

We also had free programs there for these people to try it out. These patients take the sample, go home, come back to the center one or two months later, and that's when the decision is being made to make a change. So I think in GI, we've already started to see it. And I think the 3.8% of script that we picked up now with the combined product are largely in GI. I think the CF pickup would be something we'd expect to see more in the second quarter.

David Steinberg -Deutsche Bank

And then, when you initiated the launch, you thought there's a visible chance that you could pickup all, or most, or at least a billion – large percentage of pancrelipase converting to ZENPEP. Obviously, most of the pancrelipase have gone to other competitors at this point. Do you still think that you would be able to capture a large percent of pancrelipase either via the ZENPEP or the AG?

Gearóid Faherty

Well, David, I wouldn't agree that most of it has gone to anybody. I'd say, we started – we had a peak last year of 21%. And as of last week, we were at 16.1% with the combined pancrelipase, ZENPEP, and the AG, and that's last week with an increase versus the week before. So obviously, I'm hoping we put in the floor the week before and we're now starting to build.

I think we certainly had challenges and certain organizations at the time of the flip getting into the VA and getting on their list, which is a very important player by $25 million worth of business in the low-cost area. We weren't on their programs because of their approval closes on to the middle of February. So we haven't obviously seen the benefits of that because that's only one week of scripts that we're seeing in the results we're presenting this morning.

So I'm reasonably happy at the moment. I'd like it to be higher than it is. And obviously, we're always pushing better and better. But at 16.1% market share and at three-point days, obviously for ZENPEP, then that's essentially two months into the launch and a lot of sampling going on. I think this isn't bad performance.

David Steinberg – Deutsche Bank

Okay, fair enough. And then final question, do you think after three months that your sales force is now right-sized for the opportunity or do you think you need to add some more reps?

Gearóid Faherty

I think what we're seeing at the moment, it is the right size. We're looking at the CF markets to see if there're some additional programs and systems we need. It's a slower convert. It needs more hand-holding. It needs more frequent visits. I think we've sized properly. We're watching it carefully, and we'll make a decision in the next couple of months as we see the sampling end.

David Steinberg – Deutsche Bank

Okay. Thanks.

Operator

Our next question is coming from Frank Pinkerton with SunTrust Robinson Humphrey.

Frank Pinkerton – SunTrust Robinson Humphrey

Great. Thanks for taking the question. Gearóid, can you just go repeat what you said about the facility closure? I missed that.

Gearóid Faherty

Okay. Frank, we have a small facility in Trieste. They were working on free clinical development of drug conjugates. And the facility employed nine people. We didn't own the facility. We rented it. With the clinical programs that we have going forward this year in the later stage with ZENPEP, with ondansetron, with any other pipeline work that we might be in the process of trying to bring in right now, we think that that program is too far out. It's too early staged. We think it's better to take a small amount of resources that were there and devote it to the later stage pipeline. So it's a very small event for us.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. Can you just reinforce, I want to make sure I understand what's going on. From a standpoint of there is a pancrelipase 5000, there is no ZENPEP 5000 unit product, correct?

Gearóid Faherty

No, Frank. That's not correct. The ZENPEP dosage strengths that we have are 5,000, 10,000, 15,000, and 20,000 units of lipase. And what we did is, we put an AG in just for the 5,000 unit product. So we've only one AG, and it's only for the 5,000. And the reason we did that, the pancrelipase market share that we had last year, 50% of it was low-dose 5,000. And we believe that a low-grade GI market, not a chronic disease, more about bowel pain and bowel disturbances, diarrhea, and constipation, it's less chronic. It's used less frequently. And we believe it's extremely price-sensitive and has no real interest in brands.

We believe this is the market that KV picked up from Impact Global two years ago. We believe it's the market we picked up from KV when they shut down their operations last year or whenever it was. And so we think this will always switch to the lowest cost product that's in the market. And given that, given that the low-cost – the unapproved products had not been pulled; we felt it was important to put the AG in to hold that market segment until such time as all the low-cost, unapproved products had been pulled from the market. Because if we hadn't done that, we believe that would have just switched to the next low-cost product, which happens to be Pancrease MT from McNeil.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. Great. And then a follow-up question with two products that even the ones filed as an AG and ones a brand, they're technically similar. Is there a concern that Medicaid may purchase the branded product with the price differential and you end up, longer term, with some type of litigation? What's the stop in place that Medicaid always gets the best price on that product?

Gearóid Faherty

Yes. Well obviously, what we have is we have both products in the market at the moment, and we're seeing script growth on both. And actually the ZENPEP 5000 is doing very well. Obviously, we control the contracting we do with people on the AG. And obviously, we're in a position to change whack on that product and decide how we want to contract with these agencies going forward. You can imagine for competitive reasons and for people who might be listening in on this call, I don't intend to tell people as to the contract terms we drop this or how we might move. But obviously, the controlling price in this market today has been Pancrease MT, which is the lowest cost product in the market today aside from our GAG [ph]. And to give you an example of the difference, the closest Solvay dose to that would be almost twice the Pancrease MT price, almost. Don't hold me to those exact figures.

So it's very important for us to keep that in the space, be careful how we play with this, until such time as we know who's going to be in the market. But we also think it's a good product to be used in the low-grade GI market. It's not a product that typically plays into CF. A number of people got confused about this and asked me, "Well, are you not worried that people who are taking higher doses would just take more doses of the 5,000?" To put that in perspective for people, if CF patients are taking as much as two to three 20,000 units capsules five times per day, for them to move that to a 5,000 unit, they'd end up taking 35 to 40 capsules a day, very, very unlikely to happen, and obviously, haven't happened in the past when these low-cost products were available to these people.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. Great. A couple more if you'll bear with me, can you explain the rationale by doing more of an outsource versus in-source sales force? And as you add via business development, hopefully, and have more products in the GI space over the next couple of years, who do you have rights to in-source that sales force?

Gearóid Faherty

Very good question. What we've done, Frank, is obviously, we didn't want to bring on the full cost of the sales force while we were waiting for the FDA approval to come through. It would have been a very significant cost. And as you saw, we had a delay at the FDA for two months for no reason, as far as we are concerned, and so we would have been stuck with the cost of that for quite a period of time. Given that concern, what we did is we went out to win it back then we said, "We want you to work with us on this and give us a system that will provide us with people four weeks after approval." We wanted the ability to manage that sales force. And we also want the ability to select the people that would come into that sales force, and we did all of that.

In addition, our contract allows us to hire any of these people that we like, and it also allows us to get rid of any people that don't perform. So we're looking at weekly scripts per representative. And we can decide, "Hey, these people are not working for us. You need to take them into wherever, back to innovate them to do whatever you need to do." Whereas obviously, if these were our own employees, we wouldn't have that flexibility.

So what we're hoping is, assuming – and obviously, we're expecting a successful launch as the year goes forward, we can decide to take some of these people in and make them part of our sales force. We also note that most of these people, they would be very motivated for that to happen. Actually that's one of their performance drivers. They're hoping that at the end of the year, we will be offering them permanent positions.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. Great. Can you just talk a little bit about where the sampling cost for ZENPEP fell? Was that all on the fourth quarter or will we see some of that move into the first quarter?

Gearóid Faherty

Mario's going to take that, Frank.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. Great. Thank you.

Mario Crovetto

Mainly in the fourth quarter of last year.

Frank Pinkerton – SunTrust Robinson Humphrey

Okay. And then finally, I think – this one may be a touchy one. I know you don't want to talk about the Axcan products and your supply. But as you walked us through what possibly can happen with products in the channel, under the scenario where Axcan may not get approval and have to pull products out of the channel, as the manufacturer there, what are your contract terms such that you would not have any write offs if a scenario like that occurred?

Gearóid Faherty

Okay, Frank. I believe Axcan sometime ago filed our contract with them at the (inaudible), so it's public record. But what people should know is, not just with Axcan, but we work in a principle that all our customers, once the product leaves the gates of our facilities, it's theirs. They own it. That's not Axcan, that's everyone. We take products back from no one unless there is a manufacturing defect.

Frank Pinkerton – SunTrust Robinson Humphrey

Great. Thank you for answering the questions.

Operator

Our next question is coming from Scott Henry with Roth Capital Partners.

Scott Henry – Roth Capital Partners

Thank you, and good morning. For starters, given that we're in the beginning of 2010, did you want to put any guidance out there in terms of spending or revenue targets, or just any parameters, and how we should think of 2010?

Gearóid Faherty

I think, Scott, it's a little bit early for it yet. We've given you some guidance, obviously, as to the clinical trials we expect to be conducting. We're going to go a ZENPEP trial in the second half of the year. With regard to revenues, it's a bit early to call, because obviously, whatever happens on the 28th of April can have a very significant effect on what our revenues are likely to be. Likewise, as I've said in my introduction this morning, we're looking very aggressively to find additional products to bring in, both in development stage and marketed products.

Obviously, if we were to do a deal that brought in a product that would require further clinical development that would go to expenses. So I'm hoping we'll be in a better position to give people some idea of what's going on by the end of the second quarter. Because at that stage, well obviously, we'll know. "Have we brought in anything?" At that stage, we'll know what the competitive landscape is and what the FDA did or didn't do on the 28th of April. But for now, we'd prefer to say no more.

Scott Henry – Roth Capital Partners

Okay. Fair enough. And then another question, obviously with ZENPEP in Europe, it appears there was a short and a long way to get approval. It looks like it's going to be closer to the long way. So when we think about a partnership, is that still a 2010 possibility? Or the fact that now you're going into clinical trials, should we think about that as more 2011?

Gearóid Faherty

I think it's still, Scott, a 2010 event. I think actually, the fact that finally the EMEA came out with guidance the 30th of November that actually helped us in the process. Because up until then, the challenges we faced with the partners were, the EMEA has a draft guidance out there. The draft guidance has been in circulation for a year-and-a-half. Are they confirming this? Are they not? Will you be doing studies? Will you not? Will you be doing one study, two studies, three studies, or what are you going to be doing? And unfortunately, we were not in a position to answer.

So I think the fact that the guidance is issued, the fact that we are only doing one study has totally clarified that position. And it makes it must easier for our business development people to talk to people and say, "This is what we have to do." So in any type of transaction, the more clarity you have, the easier it is to bring a deal to closure.

Scott Henry – Roth Capital Partners

Okay. Then the final question is bit more of a big picture question. When you think about ZENPEP and pancrelipase 5000, have your long term expectations changed at all from, say, a year ago versus today? And along with that, when you look at this market in the early prescription trends, do you think we're in a disequilibrium because perhaps people are flooding the market with product because they don't want to be stuck with it post April 28? I'm just trying to get your read on – do you consider the first few months of the launch, hopefully, looking like noise? Or do you think it was harder than expected?

Gearóid Faherty

A couple of comments, and you said, looking back a year ago, what we think versus now. I think most people who have been writing enough, and talking about us, and talking to us have been working on the assumption that three or four, or five products would have been approved by now. We're now six weeks away from the April 28 deadline, and there are still only two approved products. So I think that's better than most people thought. And if I look back to what we thought a year ago, it's better than what we thought as well. We thought there could have been more approved by now because many of these unapproved products were filed before we were filed. So I think from a competitive landscape, obviously, the deadline hasn't happened yet, but certainly, it hasn't got any worst. If anything, it is better.

With regard to the noise of the first quarter, I think there's been a lot of noise in the first months of the launch. I think the sampling is noise. I think six months waiting for reimbursement is a very significant amount of noise. I think the fact that other manufacturers who obviously have a better insight as to whether they're going to be approved or not, pushing products into the market, is without question, noise.

So I think we – I'm very pleased that we're sitting today. I believe we're two months into the launch. Because I mean, what happens in December, it's a holiday season. We have January and February. And we're already at 3.8% market share for a new market with five players supplying it and aggressive pricing going on. I think that's decent penetration for this early stage. So no, I haven't changed my outlook. And obviously, I'll be very pleased if the number of approved products stays as it is today. And then, I sincerely hope that the FDA do decide to pull unapproved products from the market come the April deadline.

Scott Henry – Roth Capital Partners

Okay. Thank you. That's helpful.

Operator

Our next question is coming from James Molloy with Caris & Company

James Molloy – Caris & Company

Hi. Thanks for taking my question. Would you have mind commenting, I know you spoke a little bit about the other entrants, your current thoughts on other entrants coming into the market, anything you can share on when you think these people may come in? Are you still expecting–?

Gearóid Faherty

Obviously, James, the problem is we just don't know. And to our understanding, three people have filed at the FDA that has not been approved. And some of those, there is very little clarity as to what they're doing. Some people have said they've submitted rolling submissions. Some people are unprepared to talk about what they've done at all. And some people have published some clinical data, some people have not. But in the general public markets, we're getting no guidance from anybody. So unfortunately, we don't know what's going to happen. But obviously, we're getting very, very close to the deadline.

James Molloy – Caris & Company

Okay. And with the caveat, you obviously can't tell what's going to happen in the future, where would you be satisfied? At what percent would you be satisfied to get to? I got to believe, coming from 21% to 16% with the launch of the new product isn't the direction you're looking to go, where do you think you can get to and that depends on the generics getting all pulled by the FDA, or left in, or new entrants? Can you talk to where would you be satisfied with this launch getting to?

Gearóid Faherty

Where I'd be – where I wasn't aware and prefer the launch to get is where I prefer the product to get. Obviously, it's a function of how many players are in the market. We have five players in the market right now. Two of them approved; three of them unapproved. The three that are unapproved – and there are people definitely who are pushing cheap and heavily, heavily, heavily discounted products into the market right now, and that's obviously disrupting the process.

And then obviously, as we switch from our old product to our new, we had a lag of six months to get reimbursement in place. So that's unquestionably hitched. So to be at this stage of the launch and at 16.1%, I don't think that's bad. In the event there are two players in the market, our expectations are one thing. If it's three, four, or five, our expectations change. Most people have estimated that this market is worth $400 million, $450 million, I've even seen as high as $500 million as a total market value for this.

We know Solvay pushed price very heavily on approval, and have actually taken price since. So certainly, this market is worth over the $400 million mark. Obviously, for Eurand, even if Eurand just took a 25% or a 20% stake at that market, it's a transformational event for us. So I think we have to wait. Our expectations have to be certainly conditioned by how many players we're going up against. The fewer they are, the higher our expectations are. But for this to be transformational, if we were back to where we were at 21% with the pancrelipase at a fully branded pricing that would be huge for us. If we have only no other players, but ourselves and Solvay, we'd obviously hope to do better.

James Molloy – Caris & Company

Absolutely. And I couldn't agree more. I think the offer as generic launch is a good idea to try to hold share. It's hard to say it's worked at this point. There's been a lot of noise, obviously, six-month delay in reimbursement, the flood of the generics coming in–

Gearóid Faherty

Id' give it a couple of weeks. Don't call it yet.

James Molloy – Caris & Company

When do you expect to see – when do you – at what point do you want to be of that market share, and when would you consider it excess?

Gearóid Faherty

Obviously, we want to get as high and as fast as we can by the 28th day. We want to be – we want our sampling. We wanted everybody that we wanted to sample have a sample. We want as many people as possible to have tried the product by that date. We want total market awareness for us. So that if there is a major event that takes place in the 28th of April, people know about us. The product is being reimbursed. The private insurance companies are covering it. The states' Medicaid and Medicare have us on their preferred list so that we're in a position to take this if the FDA moved. Even without that move and even in the face of this competition, we're already at 16%.

James Molloy – Caris & Company

All right. Thanks for taking the question.

Operator

We have time for one more question. Our last question is coming from Gregg Gilbert with Bank of America-Merrill Lynch.

Gregg Gilbert – Bank of America-Merrill Lynch

Thanks. I have a few for Gearóid. First for Mario, can you comment on the SG&A level in the fourth quarter and whether that's a good run rate for future quarters? I understand there's some sampling in there, but maybe not a full quarter of your new sales force infrastructure. So can you comment on that 4Q level going forward?

Mario Crovetto

Gregg, our Q4 level is a good base for moving forward. The cost for the sales force was practically for the entire quarter because the sales force had to be trained prior to the launch. And as far as sampling is concerned, that's not. Although very important from a strategy point, that is not a very, very significant cost because it is at our cost. So looking forward, Q4 2009 is a good base for our SG&A.

Gregg Gilbert – Bank of America-Merrill Lynch

Thanks. That's helpful. And Gearóid, going back to the AG strategy, should we assume that the 5,000 AG market share that you attained comes at about half the price of ZENPEP scripts?

Gearóid Faherty

I think that's a reasonable estimate.

Gregg Gilbert – Bank of America-Merrill Lynch

And why wouldn't you expect ZENPEP 5000 scripts to be converted to the AG almost every time once the system figures that out? I understand you have some control. But why is that not likely to be the case?

Gearóid Faherty

It's because we've had the 5,000, and the other people have had this low-dose products in the market for the last five, six years when it with hardly a generic size. And yet still, people liked Solvay, had a solid branded franchise at low-dose, as did Axcan, as did McNeil. McNeil is visibly lower priced to the other two. But Solvay is at a price at least twice or more than twice this level has been for the last number of years and still does a reasonable franchise in low-dose.

Gregg Gilbert – Bank of America-Merrill Lynch

But isn't this the first time there is a carbon copy of a brand product available from the same company? Is this different from the past?

Gearóid Faherty

That's a good point.

Gregg Gilbert – Bank of America-Merrill Lynch

Okay. One other question about what may happen in April. Has the FDA, Gearóid, been asking you all about your ability to supply larger parts of the market as they consider how to treat the unapproved products? Has there been any body language or questions at all that make you confident. I know you don't want to predict the outcome. But any tone from the agency that makes you hopeful?

Gearóid Faherty

Nothing I want to comment about. But we would believe they're looking at this issue carefully.

Gregg Gilbert – Bank of America-Merrill Lynch

Great. Thanks, appreciate it.

Operator

We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Gearóid Faherty

No additional comments from management at this time. I'd like to thank everybody for joining the call this morning and for the interesting questions we received. We look forward to updating you on the first quarter soon. Thank you, everyone.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.

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Source: Eurand N.V. Q4 2009 Earnings Call Transcript
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