Forest Laboratories, Inc. F4Q10 (Qtr End 3/31/10) Earnings Call Transcript

Forest Laboratories, Inc. (FRX) F4Q10 (Qtr End 3/31/10) Earnings Call Transcript April 20, 2010 10:00 AM ET

Executives

Frank Murdolo – VP, IR
Larry Olanoff – President and COO
Frank Perier – SVP, Finance and CFO

Analysts

Chris Schott – JPMorgan
Ian Sanderson – Cowen
Gregg Gilbert – Bank of America/Merrill Lynch
David Buck – Buckingham Research
David Risinger – Morgan Stanley
Marc Goodman – UBS
Annabel Samimy – Thomas Weisel
Ronny Gal – Bernstein
Elliot Wilbur – Needham & Company
Louise Chen – Collins Stewart
Rich Silver – Barclays Capital

Operator

Good morning. My name is Michael and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Laboratories fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to turn the conference over to Mr. Frank Murdolo. Sir, you may begin your conference.

Frank Murdolo

Thank you, Michael. And good morning, everyone. Thank you for joining us today for this fourth quarter fourth quarter fiscal 2010 conference call. Joining me today is Larry Olanoff, our President and Chief Operating Officer; and Frank Perier, our Senior Vice President of Finance and Chief Financial Officer.

By now, each of you should have seen this earnings release that we put out around 8 o’clock. The release is also available at our website www.frx.com. By way of Safe Harbor statement, let me add that various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and actual results may be different.

Let me now turn the call over to Larry, who will comment on the business during the quarter.

Larry Olanoff

Good morning, everyone. I will start today’s call by reviewing key company events for the quarter, then turn the call over to Frank Perier, who will review the financial details of the quarter and the fiscal year. Our underlying business continued to perform very well during the quarter for our key marketed products.

Lexapro sales remained very close to target despite the expected modest decrease in market share. And we saw continued solid prescription growth for Namenda, Bystolic, and our newest product, Savella. Excluding the $229 million one-time charge taken in the just completed quarter in connection with the previously announced agreement with AstraZeneca to acquire additional rights to NXL104 and ceftazidime/104, as described in the earnings release, earnings totaled $0.83 per share.

We had an extremely busy few months, including an FDA advisory committee meeting to review Daxas just two weeks ago. While we are disappointed that the panel did not vote in favor to support the overall approval of Daxas, we are encouraged by the two positive votes on the individual components of safety and efficacy. We are working closely with the FDA to address the committee’s concerns as well as those of the FDA.

It has been just about a year since we launched Savella, and sales in the current quarter were $17.4 million, and $52.7 million for fiscal 2010. Our broad-based early experience sampling program and general promotional activities appeared to have succeeded in driving patient and physician experience with Savella. And we continue to be encouraged by the solid uptake and the positive response to Savella’s profile in performance with both specialists and general practitioners.

There have been approximately 45,000 cumulative prescribers since launch, and new prescribers are currently being added at a rate of approximately 850 per week. Repeat prescribers account for approximately 89% of Savella weekly prescribers. The majority of Savella’s business, about 71%, is coming from continuing patients, while add-on therapy accounts for another 22%.

There has been a steady growth in total weekly prescriptions for Savella since the launch. Following a slower trend during the summer months, the latest total – weekly total prescriptions for Savella’s 50th week on the market are up 90% versus the week ended July 3. The latest weekly total prescriptions volume is now running at approximately 12,500 scripts.

Savella rapidly gained share in the fibromyalgia market, driven by early adopter physicians both specialist and primary care. Since launch, 39% of prescriptions have been written by primary care physicians, 16% by rheumatologists, 11% by pain specialists, and 8% by neurologists. Assuring further growth in the primary care segment is our long-term strategy.

As the rate prefers [ph], Savella moved from Tier 3 to a Tier 2 unrestricted formulary position with all WellPoint, Anthem, UniCare Part D formularies. Savella has been available on Aetna Medicare Part D formulary in Tier 2 and was moved to the lowest co-pay status for preferred brands earlier this month. This will provide an additional 600,000 Medicare members access to Savella without formulary restrictions. We have now exceeded our regional managed care goals, having achieved unrestricted formulary position, either Tier 2 or Tier 3 status, in commercial plans covering over 80% of targeted prescriptions.

Regarding our in-line products, Lexapro sales in the quarter totaled $556.3 million, an increase of 1.4% year-over-year. The additional depression indication in adolescence along with continued general market growth is helping to maintain Lexapro revenues in the current market, as we reduced the anticipated increase in share for the adolescent patient population while achieving increased coverage in state Medicaid plans.

Overall, Lexapro finished in the fiscal year in line with our total prescription market share expectations of about 14.5%, with full year sales of $2.3 billion for fiscal 2010. Namenda sales were $297.9 million during the quarter, growth of 22.2% year-over-year. Full year sales for Namenda for fiscal 2010 reached $1.1 billion, breaking through the $1 billion mark for the first time.

Bystolic had sales in the quarter of $53.1 million. This compares to sales of $29.7 million in the year-ago period. Full year sales were $178.9 million. Bystolic sales continue to perform strongly, and we continue to see an encouraging mix of patients, including significant proportions of those switching from generic beta-blockers and those new to beta-blocker therapy.

Our approach to physicians has been to emphasize the use of Bystolic as the first add-on agent to standard first line agents, and this appears to be resonating well in the marketplace. Bystolic has a growing base of over 140,000 prescribers, with approximately 85% of these being repeat writers. Both primary care physicians and cardiologists are prescribing the product and share amongst cardiologists continues to exceed that as a national share for Bystolic. Since the launch, approximately 750,000 individual patients have filled a Bystolic prescription.

Overall, on the managed care front, our access without any step added or prior authorization restrictions covers over 85% of total beta-blocker lives. And with several recent Tier 2 additions, Bystolic now has unrestricted Tier 2 coverage on 18 major national health plans and is the preferred brand at many of the major national plans, including Aetna Part D, Humana Part D, United Part D, Cigna, Medco, and WellPoint. Overall, we are pleased with the strong sales and earnings performance of our inline products.

I’ll now turn the call over to Frank Perier, who will provide more details on the financial results.

Frank Perier

Thank you, Larry. And good morning, everyone. Our fiscal fourth quarter revenues were comprised of $995.6 million of product sales versus $896.7 million last year, representing growth of 11%. $54 million of contract revenue primarily from the Benicar agreement, down 2.2% versus last year as well as $6.6 million of interest income. Total revenues for the quarter, which are inclusive of product sales, pretax earnings from Benicar, interest and other income, totaled $1.1 billion, an increase of 9.4% from last fiscal year.

For the full fiscal year, total revenues increased 6.9% to $4.2 billion, while product sales increased 7.4% to $3.9 billion. During the quarter, Lexapro and Namenda inventories at wholesalers decreased by about 1.4 days each from last quarter, or approximately $8.5 million for Lexapro – $8.5 million in sales for Lexapro and $4.6 million in sales for Namenda.

Wholesale inventories for Bystolic and Savella were essentially flat compared to December 2009 quarter. Gross margins in the quarter came in at 76% compared to 76.8% in last year’s fiscal fourth quarter. As described in our press release this morning, we reported a one-time charge of $229 million or $0.76 per share related to the previously announced agreement with AstraZeneca to acquire additional rights to NXL104 and the ceftazidime-NXL104 combinations.

SG&A spending during the quarter of $320.6 million was 37.8% lower than last year’s fourth quarter. SG&A expense in the fourth quarter of fiscal 2009 included a charge of $170 million related to the US Attorney’s Office for the District of Massachusetts investigation into marketing promotional practices. Excluding the US Attorney’s Office investigation charge, SG&A expense decreased 7.1% versus the prior year quarter. In addition to our ongoing spending levels in support of inline products, this quarter included significant investment spending to support Savella, which was launched in late April 2009 and Daxas prelaunch investment.

For the full year, SG&A spending of $1.3 billion decreased by 14.2% and included a one-time charge of $20 million for the settlement with Caraco related to the legal proceedings for Lexapro. This compares to last fiscal year spending of $1.5 billion, including a charge of $44.1 million related to the termination of the Azor co-promotion agreement and the $170 million related to the US Attorney’s Office investigation. Excluding the impact of the one-time charges in both years, SG&A expense decreased 1.3%.

Research and development spending for the quarter of $409.7 million includes $229 million charge related to acquiring additional commercialization rights to NXL104 and its combinations. R&D spending reported in the fourth quarter for the prior fiscal year totaled $123.8 million.

Excluding the Novexel charge, R&D spending increased 46.1% in the current fiscal quarter, primarily as a consequence of an expanded late stage development program spread over multiple pipeline of products. The current quarter also included product development milestone payments of $3 million compared to $16.9 million of milestone in the prior year’s quarter.

For the full fiscal year, R&D spending of $1.054 billion included total licensing and acquisition charges of $403.9 million related to the Nycomed, Almirall, and AstraZeneca Novexel collaboration agreement and milestone expenses of $60.9 million. This compares to last fiscal year’s spending of $661.3 million, including license charges totaling $150 million related to collaboration agreements with Phenomix and Pierre Fabre, and milestone expenses of $59.4 million. Excluding the impact of the license agreement payments in both years, R&D expense increased 27.1%.

As we have completed full year income tax allocation based upon final financial results, the company’s reported effective tax rate for the fiscal year was 28.2%, resulting in a recorded effective tax rate of 74% for the fiscal fourth quarter. Excluding the effect of the one-time charge related to acquiring additional commercialization rights of NXL104, the effective tax rate for the quarter was 20.4%. The annual effective tax rate, excluding all one-time items was 20.84%.

Actual shares outstanding as of March 31 were approximately 302,389,000 shares, an increase of 774,000 shares from last year. We did not repurchase any stock in fiscal 2010 and have remaining authorization to repurchase up to 5.7 million shares. Our cash and marketable securities balance at March 31 was approximately $4 billion, an increase of $182 million from last quarter. Of this, approximately $1.1 billion or 26% of our cash and marketable securities are domiciled domestically, with the remainder maintained by our international subsidiary.

I’ll now turn the call back to Larry for a pipeline update and fiscal year 2011 guidance review.

Larry Olanoff

Thank you, Frank. As we move into fiscal 2011, our focus will remain on moving our significant product development pipeline forward, making this another very busy period for us. You will see more clinical data during the year from many products in our product development pipeline. Next month alone, we will have abstracts on old presentations for Bystolic, linaclotide, Daxas, aclidinium, and LAS100977 at three major conferences.

Reviewing our late stage product pipeline, as we said in our press release this morning, we have terminated our collaboration with Phenomix for the development and commercialization of dutogliptin for business reasons. As you know, the PDUFA date for Daxas this next month, we will work closely with the FDA and we remain optimistic that through proper labeling of Daxas as a treatment to reduce exacerbations of COPD and an appropriate post-approval risk monitoring and management plan that Daxas, subject to approval, will ultimately be made available for use by COPD patients.

In December, we were very pleased to announce an additional product to our existing collaboration with Almirall to develop, market and distribute LAS100977 in the United States. This product is a highly potent inhaled once-daily, administered long-acting beta2 agonist. We along with Almirall plan to develop it in combination with an undisclosed corticosteroid for the dual indications of both asthma and COPD. Additional Phase II studies are planned to start in the second half of 2010.

In January, we and our partner Almirall announced positive top-line results from a double-blind, placebo controlled, parallel group design three-month Phase III trial in patients with COPD. This is the aclidinium and chronic obstructive pulmonary disease or the ACCORD COPD I Study, and it’s the first of three Phase III studies, two of which are ongoing. All are investigating the twice-daily administration of aclidinium. We anticipate reporting top-line results for these studies in the second half of 2010 and the first quarter of 2011.

I would remind you that we review – that we view aclidinium as a broad franchise opportunity. The new BID program will facilitate our strategy to in parallel develop a twice-daily aclidinium-formoterol combination. We anticipate in reporting top-line results for the Phase II studies for that combination product in the second half of 2010.

We have access to a neat dry powder inhaler delivery device for aclidinium that will be convenient to use and easy to incorporate higher or more frequent dosages as well as combination agents. The ease of use and functionality of the inhaler device is an important factor in delivering the correct dose to the lungs to ensure effective COPD treatment.

With a dose counter and a unique control window that tells the patient that the dose has been inhaled correctly, we believe that aclidinium in its DPI will add to the competitiveness of the franchise. As we have previously communicated, we anticipate a filing date for aclidinium by late 2011. In December, we’ve submitted the NDA for ceftaroline, our novel cephalosporin for the treatment of patients suffering from complicated skin structure and skin infections and community acquired bacterial pneumonia.

We also announced the addition of two new products for our existing co-development ceftaroline collaboration with AstraZeneca for effects of these products, including a new acquisition to our own pipeline, ceftazidime combined with NXL104. You may recall, in January 2008, Forest licensed from Novexel North American rights to Novexel 104 in combination with ceftaroline and obtained a right at first negotiation in North America to a ceftazidime 104 combination.

Through a transaction with AstraZeneca executed immediately following AstraZeneca’s announced acquisition of Novexel, we acquired additional rights to Novexel 104, which amends the terms of our 2008 agreement with Novexel covering the combination of Novexel 104 with ceftaroline and adds additional US rights to the combination of ceftazidime and Novexel 104 as well as other future possible combinations.

Novexel inhibits several classes of bacterial enzymes called beta-lactamases that break down beta-lactam antibiotics, including cephalosporins. It is perhaps the broadest active such agent now in clinical trials and can potentially be combined with several different beta-lactam antibiotics to enhance their spectrum of activity and counteract gram-negative bacterial resistance. This transaction broadens our antibiotic product portfolio, which now includes drugs principally active against both gram-negative and gram-positive pathogens as ceftaroline and ceftaroline/104, and gram-negative pathogens that is ceftazidime 104 to address virtually the entire spectrum to clinical important bacterial pathogens.

In November, we and our partner Ironwood Pharmaceuticals announced positive top-line clinical trial results for two Phase III studies of the investigational drug linaclotide in patients with chronic constipation. These two trials are part of a larger Phase III program investigating the effects of linaclotide treatment in patients with either chronic constipation or with irritable bowel syndrome with constipation.

The Phase III chronic constipation results were very consistent with results we and Ironwood described in our earlier disclosure of the Phase IIb results both in chronic constipation and in IBS-C, both bowel movement measures as well as symptom measures. We expect to report top line data from the IBS-C Phase III trials in the second half of this year.

Turning to cariprazine, in October, we and our partner Gedeon Richter announced positive top-line results from a Phase IIb clinical trial of this dopamine system stabilizing antipsychotic agent cariprazine for the treatment of acute schizophrenia. This latest schizophrenia data and the previously announced Phase II results in patients suffering from acute mania associated with bipolar I disorder confirm our long health belief in this compound and led us to initiate Phase III trials in parallel for both indications early this year.

Cariprazine is currently undergoing also Phase II clinical trials in Bipolar Depressive Disorder as well as adjunctive therapy in major depressive disorder. We anticipate reporting top-line results for the Phase II study in the second half of 2010.

Our collaboration with Pierre Fabre for F2695 or legromenalsphran [ph], a once-daily administered selective norepinephrine and serotonin reuptake inhibitor for the treatment of depression is also on track. And as planned, we initiated Phase III clinical trials during the past summer, which are actively enrolling. The impressive results of the previous Phase II depression study, which ultimately led to our decision to license this product, represented at the ACNP meeting this past December. We anticipate reporting top-line results for the first Phase III study in the second half of 2010.

As I believe, we demonstrated our R&D day meeting in January. We currently have two inline products, seven pipeline products, six of which are in Phase III or later that we believe could collectively represent several billion dollars of potential product sales in the long term, sufficient overtime to replace the revenues last due to patent expiration for Lexapro in 2012 and Namenda in 2015.

However, we must operate with the assumption that not all of our late stage programs will ultimately result in approved products or products that achieve our peak sales projections. Accordingly, one of our strategic goals has been to double the commercial value of our late stage product pipeline by 2012 through the addition of new development opportunities, both licensed and acquired, and the advancement of our earlier stage pre-approval concept programs.

Since late 2008, we have added four major installments towards this 2012 pipeline expansion goal; Daxas, F2965, LAS100977, and ceftazidime 104. And we have partnered with AstraZeneca for the co-development and commercialization of ceftaroline and ceftaroline 104 outside of the US, Canada and Japan.

In parallel, we continued to advance our development pipeline. Our business development team continues to see interesting and commercially attractive products in the market, and we have clearly demonstrated the ability to compete effectively to secure such important new products, either through product licenses or direct acquisitions. We remain confident our ability to achieve our 2012 product acquisition goal in parallel to advancing our established pipeline.

Moving to our financial guidance for fiscal 2011, this will be another significant investment year on the R&D line as well as on the SG&A line, as we continue to support our portfolio of late stage pipeline products as well as our currently marketed products. We are projecting fiscal year 2011 R&D spending of $680 million, which includes approximately $25 million in potential milestones for existing products, an increase of approximately 4.5%, excluding upfront licensing payments made last year.

We are projecting an SG&A expense of approximately $1.3 million, which includes continued significant support for Bystolic and Savella. In addition, projected SG&A expense also includes launch costs for Daxas and ceftaroline subject to their approval. We are projecting top-line product sales growth of approximately 7% and growth of approximately 5% for total revenues, which also includes income from Benicar agreement, interest and other income.

Lexapro sales are projected to be just under $2.3 billion, unchanged from fiscal 2010. This is based upon a price increase already realized, including a 1.7-share point decline in market share and total prescription volume growth for the category of approximately 2.5% in 2011. Namenda sales are projected to grow approximately 9%, and Bystolic sales are projected to grow approximately 60%. Sales for Savella are projected to be approximately $100 million this year after being launched in late April 2009, having completed 11 months on the market this last fiscal year.

As I said earlier, we remain optimistic regarding the progress of Daxas and are working towards an approval and launch this year. Subject to approval, we are currently projecting sales of approximately 25 million for fiscal year 2011. We have also assumed approval and launch for ceftaroline for the treatment of complicated skin and skin structure infections and community acquired pneumonia and are projecting sales for this product of approximately $6 million for fiscal year 2011.

Our projected tax rate will be approximately 22.5% for the coming fiscal year, which recognizes the expiration of the research credit, and we are projecting average diluted shares outstanding at approximately 305 million. Rolling this out leads to an earnings per share projection of between $3.50 and $3.60 per diluted share, including the impact of healthcare reform.

We view the increased R&D and SG&A spending levels as necessary strategic investments, as we continue to manage the business with the long-term goal of ultimately developing and marketing a portfolio of new products that will collectively more than replace the earnings from Lexapro and Namenda after the marketing exclusivity for these products expires in 2012 and 2015 respectively.

Our first priority remains to provide for the future growth of the company’s revenues beyond this period. In addition to advancing our current pipeline and supporting our existing and future inline products, we are also actively pursuing new product licenses and assessing potential acquisitions to add to our development pipeline on our inline products.

These additions have the potential to feed our existing therapeutic areas as well as allow entry for Forest into new therapeutic areas consistent with our opportunistic business model approach. This combined effort will continue to drive our decision making and allocation of resources, as we look forward into the next decade.

Frank Perier

Thank you, Larry. I will now review some of the fourth quarter sales figures for our smaller products. Sales of Aerobid, $2.8 million; Campral, $6.0 million; Celexa, $3.4 million; Cervidil, $13.4 million; Esgic, $0.7 million; Europe, $16.4 million; generic, $2.7 million; Lorcet, $1.4 million; Monurol, $0.3 million; Tessalon, $0.1 million; Thyroid, $10.5 million; Tiazac, $1.8 million; and for the Benicar third-party sales, that would be $241.5 million.

With that, I think we can start our Q&A session, operator.

Question-and-Answer Session

Operator

(Operator instructions)

Frank Perier

Thank you, operator. We can begin now.

Operator

Your first question comes from the line of Chris Schott with JPMorgan.

Chris Schott – JPMorgan

Great, thanks. Just a quick question and start with on healthcare reform, can you just quantify a little bit the anticipated top-line impact in your fiscal 2011 forecasts from reform? And then maybe just think ahead to fiscal year 2012, how much incremental impact would you expect there from the donut hole and industry fee kind of etc. And I’ve got a couple follow-ups from there.

Frank Perier

Yes, Chris. I think for fiscal 2011 we’ve included approximately a $30 million impact, again, because we have basically the Medicare rebate adjustment for the full fiscal year and then we pick up all the other industry fee etc. and the donut hole for one quarter next year. So overall, it’s about $30 million impact to us, as we have about less than 5% of our total sales in Medicare. And looking forward, I mean, we’re not really giving guidance beyond the current fiscal year, but the number is significantly bigger than the $30 million that we’re going to have in this current fiscal year.

Chris Schott – JPMorgan

Okay, great. And then your guidance assumes two launches as well as that $25 million of Daxas revenue. Can you just elaborate a little bit more on how much Daxas-related SG&A is reflected in the guidance and what’s the flexibility around some of that spend in the event Daxas approval is actually pushed out beyond fiscal year 2011?

Frank Perier

Chris, we don’t normally speak to the SG&A support behind individual products. Suffice it to say that we’ve got some significant level of investment behind Daxas. It’s going to be a very important product, with a pending approval from the FDA. It will give us certain amount of flexibility if they get pushed out a little bit further. But we, I think, are fairly optimistic that we will be able to hopefully get the product approved in this current fiscal year.

Chris Schott – JPMorgan

Great. And then one final question, if you could just elaborate a little bit more on what led to the decision to walk away from dutogliptin? Was this driven all by (inaudible) uptake was something that’s on the data set or just was that something else that drove that decision? Thanks.

Larry Olanoff

This is Larry Olanoff, Chris. Thank you for the question. I think at this point, it would be best for us not to expand on the comment that it was still related to business considerations.

Chris Schott – JPMorgan

Thank you.

Operator

Your next question comes from the line of Ian Sanderson with Cowen.

Ian Sanderson – Cowen

Good morning. Thanks for taking the question. First, on ceftaroline, could you comment on the FDA’s draft guidance for non-inferiority trials and how some of those propose changes, whether they might impact the ceftaroline NDA filing, and how that impacts your view of the approvability here? Secondly, on Daxas, have you scheduled a meeting with the FDA or that waits for the PDUFA date? And exactly what are you basing your sales projection there on in terms of feedback post the advisory committee meeting?

Larry Olanoff

I’ll try to address the Daxas question first. You can assume at this point that we’ve been already in dialog with the agency regarding the post advisory committee actions. And we will continue that dialog as long as that window remains open up to and after necessary the action date. Regarding the assumptions in terms of the sales projections and such, we have built in some optimism relative to getting the product approved, as Frank said, in this fiscal year, which would allow us a less complete year of sales for the product, but a line of sales with some potential regulatory outcomes that we see are possible based on the advisory committee and some preliminary discussions we’ve had.

Ian Sanderson – Cowen

Okay.

Larry Olanoff

Regarding ceftaroline, I won’t comment specifically on the guidance other than to say that we also have been in dialog with that product since the NDA has been submitted. We operated under the – what we thought were fairly and continue to think fairly solid approaches in terms of the analyses we performed, both for skin and skin structure infection as well as community acquired bacterial pneumonia. In terms of the numbers that we generated relative to non-inferiority assessments, those are really right on top of vancomycin and aztreonam combination as it relates to the skin results.

And for the community acquired pneumonia results, we’ve at least numerically if not statistically out-distanced ceftriaxone. So we’re fairly comfortable we will be able to manage the future discussions up through and including the advisory committee along those issues. We’ve also performed the additional subgroup analyses taking into account some of the comments into guidance as well as the prior discussions along other products that were recently reviewed for this indication. And again, we feel fairly comfortable we can carry today in terms of inclusion or exclusion of specific cases or categories of patients with infections. Hope that answers your question.

Ian Sanderson – Cowen

Yes, it does. And if I could ask one quick – Frank, one quick financial question, the Namenda numbers in the quarter despite the inventory work-down did seem to run a bit ahead of the prescription demand, which – I don’t believe there is a price change in the quarter. Is there an explanation for that?

Frank Perier

It’s probably laid in the script numbers, Ian. I mean, I know what our factory sales are and I know what the inventory is and the wholesalers are holding.

Ian Sanderson – Cowen

Okay. And what was the – can you repeat what the adjustment was for the inventory?

Frank Perier

For Namenda, it was about $4.5 million.

Ian Sanderson – Cowen

Okay, thank you.

Operator

Your next question comes from the line of Gregg Gilbert with Bank of America/Merrill Lynch.

Gregg Gilbert – Bank of America/Merrill Lynch

Thanks. Just a follow-up first on dutogliptin, what’s the status of those other trials that you started last year and your funding of them or were they just being planned?

Larry Olanoff

There are a number of ongoing studies both by ourselves and Phenomix.

Gregg Gilbert – Bank of America/Merrill Lynch

And what’s the status of the funding obligations from Forest?

Larry Olanoff

I’m not going to comment on that at this time.

Gregg Gilbert – Bank of America/Merrill Lynch

Okay. My other question is about your cash position, given that that position is growing and is disproportionately growing in Europe, it seems unlikely that licensing deals can make a big dent in that cash position. What’s your latest thinking on the deployment of that cash?

Larry Olanoff

I think, Gregg, our latest thinking is consistent with what we have said consistently. We are focused on using our liquid resources to expand the product pipeline of the company, both through licensing and acquisition. We sort of (inaudible) in that cash in the fourth quarter with the AstraZeneca Novexel deal. And we will continue to look for opportunities to both license, acquire products, and potentially acquire companies. And we, I think, said pretty consistently as our stated strategy for business development and use of resources.

Gregg Gilbert – Bank of America/Merrill Lynch

Lastly, Larry, did I miss an update on roflumilast [ph]? Did you cover that?

Larry Olanoff

No, I hadn’t commented on roflumilast. As you may well know that the last – and as we provided roflumilast last year was that we had completed a Phase II proof-of-concept study in COPD, and we were unable to demonstrate any statistically significant or clinically relevant change in the primary outcome, FEV1 versus placebo.

Gregg Gilbert – Bank of America/Merrill Lynch

Okay. Thank you, guys.

Operator

Your next question comes from the line of David Buck with Buckingham Research.

David Buck – Buckingham Research

Yes. Thanks for taking the question. A couple of quick ones. For Daxas, can you remind us whether or not you submitted the REMS program as part of the initial NDA? And if you’ve submitted since, that could be considered a major amendment in your view? Secondly, for ceftaroline, are you expecting an advisory committee for that before the PDUFA date? And then finally, $4 billion in cash and securities was up despite the AstraZeneca deal, I guess just in rough numbers, I mean, what is the target do you think you need or see as appropriate for your current acquisition and business development plans? And if it’s less than that, is there some type of plan for return of cash to shareholders? Thanks.

Larry Olanoff

I get all the pieces. Regarding the ceftaroline, an easy answer, yes, we do anticipate an advisory committee prior to the PDUFA date. Regarding the REMS plan, I think we can – what I would say at this point is you can assume the FDA has the REMS plan in front of them. I won’t comment in terms of when it was submitted. And as far as the cash both held by us here in the US and by our subsidiaries, there is no magic number per se. We have a fairly ambitious and have had a fairly ambitious licensing program underway, and the cash does allow us even greater flexibility regarding potential acquisitions, either in the US or more importantly in Europe where those acquisitions exist and where we can use the cash even potentially to expand not only our US pipeline but potentially access into Europe with products that we may have ultimately worldwide rights too.

David Buck – Buckingham Research

And just a follow-up on the last part, Larry, I mean, given that you are retaining the significant amount right now, should we be looking at more potential transformative type acquisitions or is it just same strategy as has been in the last year-and-a-half?

Larry Olanoff

I think it’s principally the same strategy as has been in the last couple of years, and I – I think having the cash available to us gives us a lot more flexibility, especially at this point given the price of our stock, which really is not useful for us in acquisition The cash gives us that much more leverage as we go in and look in specifically for tuck-in type acquisitions like we did with Novexel.

David Buck – Buckingham Research

Okay. Thank you.

Operator

Your next question comes from the line of David Risinger with Morgan Stanley.

David Risinger – Morgan Stanley

Yes. Thanks very much. A number of questions. I guess first, just a follow-up on that one, Larry, you mentioned that you’re thinking about transaction strategies similar to the past year-and-a-half, but given the rate that the cash is building, you would be getting close to $6 million in cash in late 2011. So it seems that the company would have to consider larger, more transformative transactions in order to utilize cash rather than let it build and earn a very, very low return for shareholders. So I was wondering if you could comment on that. And then, Frank, if you could discuss the Medicare and Medicaid mix? If you could split those out, what percentage of sales come from Medicare and what percentage of sales come from Medicaid? And then one final question, I guess, for Larry is, do you think you will have clarity from the FDA on Daxas on the PDUFA around May 20? And in addition, if Daxas is delayed by fiscal ’11, will it be accretive because you will spend far less than you would have generated in terms of revenue? Thank you.

Larry Olanoff

I’ll comment on the Daxas issue and then I’ll let Frank comment on the other questions that you’ve raised. We hope, in fact, to have some additional clarity, as you suggest, on the action date. But at this point, I think it’s too early to project what that actions will be? So I won’t comment any further. Regarding the actual impact on the P&L, it’s roughly a push in the sense that the spending that we would recover versus the potential sales in the fiscal year, there might be a modest accretion there, but it’s not of material difference. I’ll let Frank comment on your other question.

Frank Perier

Yes, sure, Dave. With regard to acquisition strategy, again, we’ve never ruled out a larger business development opportunity. I think we’ve said – we don’t see the need for a transformative transaction. I think we believe in the health of our late state pipeline and its continued advancement. With regard to cash, as we’ve said, we have about $4 billion today. I totally expect somewhere maybe just south of $1 billion of free cash, which would kind of bring us to about $5 billion by the end of this year – this next fiscal year. Again, a significant amount of resources, but we continue to believe we have the ability to deploy those resources for our shareholders’ benefit. And with regard to Medicaid and Medicare, I’m not going to give a whole lot of additional guidance, as I indicated, our Medicare and Medicaid business is less than 5% of our total sales.

Operator

Your next question will come from the line of Marc Goodman with UBS.

Marc Goodman – UBS

Yes. On R&D, I haven’t seen you guys actually spend a lot more than you had planned in quite a few years. I was just wondering what was the upside (inaudible) and then – and I’m just kind of thinking about this coming fiscal year, I would have thought that R&D would have been higher. So I was curious what’s the delta, the big change in this year to next year, and why is it not higher? Is there any update on the Namenda once-daily? Is there any new strategy with that? I just think it was asked every quarter. And then the IBS guidelines that were put out (inaudible), just curious if those change your mind about linaclotide at all or your thoughts there. Thanks.

Larry Olanoff

Okay. Thanks, Marc. It’s Larry Olanoff responding to your questions. Regarding the R&D spend this year, we did spend a bit more than we originally projected, but the additional spending once you carve out the licensing deals and the Novexel acquisition, which allows you relate it to the acceleration of a number of programs, all of which are in Phase III. So we look – the BID program when aclidinium was a new endeavor we took on after the once-daily results were made available to us, and we decided to move that NDA along as fast as possible.

There are other examples. Cariprazine is another example, a very good example where, for us, in terms of leveraging our R&D spend and discounting what programs may or may not go forward, we’ve put a certain percentage probability on the Cariprazine program and which reversed itself clearly once we have to face two results with schizophrenia this past fall, which allowed us now to fully resource a combined Phase III program in bipolar pneumonia and schizophrenia as well as carried in parallel of Phase II proof of concept program in bipolar depression as well as in treatment resistant depression. So we’ve expanded wherever we’ve had the opportunity – legitimate opportunity to expand money into R&D program. We’ve pushed very hard to make that spending. For this coming year – this fiscal year, you will see a further modest increase on top of that spend, but it was the big increase occurred last year. We just can continue to keep those resources very heavy in terms of moving forward our pipeline. The SG&A expense changes are very – as we said before, very consistently with, again, with the plan to launch two new products in its fiscal year.

Regarding the IBS-C guidelines, we reviewed those. If anything, it potentially gives us the option to pursue a slightly more liberal definition of our primary endpoint in terms of the change in bowel movements, which might even increase our responder rate. So it’s a consideration that we will continue to mull over prior to on being on blinded studies. So we’re very comfortable with the current endpoint and the study design based on the hope of Phase II results in IBS-C and chronic constipation, as well as the Phase III results to stay really back – in chronic constipation (inaudible).

Marc Goodman – UBS

Just a follow-up on the R&D, I mean, if we annualize what you’ve just spent this quarter, obviously you’re not going to spend that much this coming year. Dutogliptin, we’re losing. Should we assume that that’s the delta?

Larry Olanoff

I think we’ve provided you with a specific projection for R&D spending for the year, and we will leave it at that.

Frank Perier

Yes. I mean, Marc, we gave you guidance last year. We thought we would spend about $630 million on R&D. And if you exclude the one-time items that we have in R&D this year for Nycomed, the Almirall deals, which two are $175 million and then $228 million for AstraZeneca, we’ve spent $650 million. So we actually over-spent our guidance. And we are growing that number. So I think we managed the P&L pretty effectively. And we see – continue to see the ability to spend to the level that we’ve got to you too for R&D next year.

Operator

Your next question will come from the line of Annabel Samimy with Thomas Weisel.

Annabel Samimy – Thomas Weisel

Hi, thanks for taking my question. Just bank on Daxas and the REMS program, is there any chance we can get a little bit more detail as opposed to REMS that you have projected that would provide us with some comfort that you could potentially get an approval kind of May 20.

Larry Olanoff

Yes. Again, I think it would be – thank you for your question, Annabel. But it would be premature for us to discuss content of the REMS. You can assume that some of the components are the kinds of thing you would continually see in a REMS program. I’m not going to try to spend discussion at this point at something for now between the company and the FDA further discussion.

Annabel Samimy – Thomas Weisel

Okay. I guess one other comment that you made earlier, you mentioned that you didn’t feel that you need any kind of transformative acquisition. And I guess what makes you comfortable with that, given that in a couple of years time you’re actually going to have a free transformative event. So I guess (inaudible). Why not have something little bit more transformative?

Larry Olanoff

Well, as Frank said, we’re not disregarding if such an opportunity came along, we’re not disregarding that opportunity if it was of a larger acquisition nature. But I think realistically those opportunities are few and far between. And once that makes sense, and one has to be very careful house. We expand that money.

Frank Perier

And that’s why, Annabel, we have said very consistently for the last three years that we are not banking on a silver bullet to address on to 2012. We have been steadily building a pipeline of a late stage development pipeline of products. The first two products have been delivered to the market already, and Bystolic and Savella are the next generation of products for the company. And we’ve got two sitting with the FDA right now, and we hope to have filed a couple more before 2012. So we’re pursuing our state of strategy very consistently, and we plan to supplement that strategy with opportunistic acquisitions along the way. We don’t see the need to do some kind of big transformative (inaudible). We don’t feel that are plastered [ph] in the wall. We’ve got to go out and do something great.

Annabel Samimy – Thomas Weisel

Thank you.

Operator

Your next question comes from the line of Ronny Gal with Bernstein.

Ronny Gal – Bernstein

Good afternoon. Good morning. And thank you for taking my question. I guess three of those, looking at 2011, I’m seeing a submission obviously for linaclotide. I would like to see a milnacipran submission as well. It sounds like your timeline suggests that somewhere in late 2010 or early 2011 you might submit that. Second, just to help us the fact and on to the risk reward you are talking when you license products, and to the extent that you can, can you give us an idea about the total investment to date in dutogliptin and Daxas, just so we understand what kind of risk you’re taking per molecule? And last, and I know you guys have been trying to avoid that, but at some point, we probably need some clarity around this. What sort of SG&A investment that will currently tried to Lexapro, obviously products laid into a pipeline, you spend less money, you spend less money on? And the question is, is there really a step-down in the SG&A cost when Lexapro comes off that?

Frank Perier

I think when Lexapro comes off patent, the SG&A cost goes zero effectively. So –

Larry Olanoff

But there is no real step-down. There will be very little step-down, Ronny, because we’ve been managing both direct marketing support spend behind Lexapro as well as the sales force coming behind Lexapro for several years now. And by the time we get to much of 2012, there will be minimal investment behind that product.

Frank Perier

And $1.2 billion, $1.3 billion is roughly where we should think about it. We should not expect a step-down in SG&A in fiscal –

Larry Olanoff

Yes. Don’t expect a step-down in SG&A in fiscal ’13.

Frank Perier

Yes. It’s the same thing we’ve been managing, not only the direct marketing spend, but the sales allocation behind it. So –

Larry Olanoff

I mean, you can’t support a pipeline of four, five, or six young products with a step-down in SG&A spend.

Ronny Gal – Bernstein

Okay. So what are you trying to expect on three that we’re talking about so far to have come into the market like fiscal 2013?

Frank Perier

Ronny, we’re really not giving guidance on fiscal ’13. We are talking about fiscal ’11.

Ronny Gal – Bernstein

I’m talking about the product coming to market, not investment level.

Larry Olanoff

We hope we’d be in a position to have filed both linaclotide, aclidinium before that timeframe.

Ronny Gal – Bernstein

And milnacipran?

Larry Olanoff

That’s potentially.

Ronny Gal – Bernstein

Okay. And last, just to assess the risk reward around the investment of individual product, any guidance you can give us around how much money was spent to date and dutogliptin and Daxas?

Larry Olanoff

Well, on – I think it’s fair to say that we don’t – as we do with SG&A, we don’t give out individual product numbers in terms of how we spend into R&D. We can tell you which ones have been heavy in terms of the R&D spending. And dutogliptin in the past was the major support provided by us. But on Daxas, it’s pretty straightforward, and there would be – most of the expenditures on Daxas to date related to the licensing arrangement that comes behind that. And the biggest piece of the upfront payment that we had with the license was a deal back in August of last year.

Ronny Gal – Bernstein

Okay, thank you.

Operator

Your next question comes from the line of Elliot Wilbur with Needham & Company.

Elliot Wilbur – Needham & Company

Thanks. Just for Frank, if you could, if you could probably give some color on gross margin expectations for fiscal 2011?

Frank Perier

I think gross margin should be relatively comparable to the gross margin that we just delivered in the current fiscal year.

Elliot Wilbur – Needham & Company

Okay. And then can you just remind us where we are – or what’s lapsed under the current share repurchase authorization? I’m forgetting that’s even still open. And then what would be sort of the next opportunity (inaudible) revisit that and maybe just given again sort of the commentary around what seems to be desire for accelerated deal flow from the investment community and continued significant buildup of cash, sort of how the company is thinking about that vis-à-vis other investment opportunities?

Frank Perier

I think we’ve already responded to a number of questions with regard to cash, our acquisition, business development strategy and perspective. So – and I think we’ve covered that. With regard to the number of shares outstanding under the authorization from the Board, it’s 5.7 million shares, and it’s a discretionary authorization with no expiry related to it. And to the extent that we exhaust – when and if we exhaust that authorization, we would probably go back to the Board and get a similar type of authorization.

Operator

Your next question will come from the line of Louise Chen with Collins Stewart.

Louise Chen – Collins Stewart

Hi, just a few questions for you. First, can you provide more color on how to F2695 is going to be differentiated from the competition?

Larry Olanoff

I think what would be perfect to say at this stage is the compound still in Phase III is that we looked at this compound based on the Phase II results, which I have remarked earlier, had been released at the recent ACNP meeting. And we saw a product that had what we thought was a very attractive risk benefit ratio relative to good tolerability, once-a-daily administered product. And when (inaudible) a pretty good response rate results.

And so we are focusing on looking at this product in major depression and looking at – on efficacy with tolerability profile followed behind it, but also we are looking at some other opportunities in terms of some sub-scores within the depression score that would speak to specific symptoms. And as we mature that kind of constant, we will be in more communication as to where that’s going to go. But we think this is going to be a good anti-depressant. We are not looking to see this product perform like Lexapro did. I don’t know that any anti-depressant would perform that realm, but it will flow well within our sweet sport in terms of what kind of sales we think we can realize it. And we’ll look to Hispanic profiles. We go through the Phase III programs and beyond.

Louise Chen – Collins Stewart

Okay. And second question is with respect to linaclotide, if the drug is approved, what percentage of use do you expect to be chronic and what percent do you expect to be intermittent use?

Larry Olanoff

It’s a good question. I don’t know that we’ve made specific projections in that regard. I think the – we’ve done studies. What I can say is we’ve done studies, including six-month studies that we will submit along with the NDA that will support chronic use. And we don’t anticipate at this point based on the concept of the Phase III program that the drug recommendation would be for intermittent use or sub-chronic use. So what I can say at this point is that the program itself has been designed to enable both chronic and intermittent use for those patients and believe intermittent use is best suited to their own conditions.

Louise Chen – Collins Stewart

Okay. And last question I had was just modeling the fiscal 2011 based on your guidance. Is there anything that we should be thinking about in particular on SG&A, R&D or tax quarterly progression of those?

Frank Perier

I think the way to think about it is that there is a little bit more investment in the first half of the year slightly versus the back half of the year. But the year is pretty well split 50/50, front half/back half, maybe 47/53.

Louise Chen – Collins Stewart

Thank you.

Frank Murdolo

Operator, we will take one more question, please.

Operator

And your final question will come from the line of Rich Silver with Barclays Capital.

Rich Silver – Barclays Capital

Yes, hi. Most of my questions have been answered. Just on Daxas and on ceftaroline, those revenue assumptions that you provided, can you give us a sense of the timing that’s assumed for those revenue numbers on the launch?

Larry Olanoff

I think with Daxas, again we would be looking at the second half of the fiscal year, but ceftaroline would be in the last quarter of the fiscal year primarily.

Rich Silver – Barclays Capital

Okay. And then just one last one on the R&D and SG&A spend, that was 47/53 for both in terms of how we should think about it?

Frank Perier

Yes, as far as going all the way down to earnings.

Rich Silver – Barclays Capital

Oh, that’s earnings?

Frank Perier

Yes, taken all the way down to earnings, and that’s kind of the split of the year.

Rich Silver – Barclays Capital

Okay. Okay, thank you.

Frank Murdolo

Thank you, operator. And thank you, everyone, for joining us this morning. That will end our conference call. And certainly please feel free to give a call in if you have any additional questions.

Operator

And thank you, ladies and gentlemen. That will conclude today’s conference call. You may now disconnect.