Forest Laboratories, Inc. (NYSE:FRX)
F4Q 2014 Earnings Conference Call
April 28, 2014 5:00 p.m. ET
Brenton L. Saunders – President & Chief Executive Officer
Francis I. Perier – Executive Vice President of Finance & Chief Financial Officer
William Meury - Executive Vice President of Sales and Marketing
Marco Taglietti - Executive Vice President of Drug Development and Research & Chief Medical Officer
Frank J. Murdolo – Vice President, Investor Relations
David Amsellem – Piper Jaffray & Co.
Jay Olson – Goldman Sachs
Marc Goodman – UBS
Ronny Gal - Sanford C. Bernstein
Elliot Wilbur - Needham & Company
Liav Abraham – Citigroup
Andrew Finkelstein – Susquehanna Financial Group
Chris Schott – JPMorgan Chase & Co.
Chris Schott – JPMorgan Chase & Co.
Patti Bank – Discern Securities
Tim Chiang – CRT Capital Group
David Maris – BMO Capital Markets
Doug LaSalle – Barclays Capital
Welcome to the Forest Laboratories Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions).
I would now like to turn the call over to Mr. Frank Murdolo, Vice President of Investor Relations.
Thank you, Leo, and good morning, everyone. Thank you for joining us today for this fourth quarter fiscal 2014 conference call. Joining me this morning is Brent Saunders, our Chief Executive Officer and President; Bill Meury, our Executive Vice President, Sales and Marketing; Frank Perier, our Executive Vice President of Finance and Chief Financial Officer; and Marco Taglietti, our Executive Vice President of Drug Development and Research and Chief Medical officer. By now, each of you should have seen the earnings release that we issued this morning. 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 vary. These remarks involve a number of risks and uncertainties, including but not limited to the difficulty of predicting FDA approvals, the acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the timely development and launch of new products and the risk factors listed from time to time in Forest Laboratories' annual report and quarterly reports.
Let me now turn the call over to Brent.
Thank you, Frank, and good morning, everyone. Thank you for joining our call to discuss our fourth quarter results and the progress we’re making in rejuvenating Forest. The teams at Forest produced an exceptionally strong quarter, with sales up 34% and non-GAAP EPS more than tripled. And all this was accomplished in the midst of tremendous change inside our company. I’m so proud of the efforts and focus of our people.
At the outset of my time as CEO of Forest, we laid out four key priorities that we will drive to increase shareholder value. And in a short period of time, we have established a track record of delivering value. We have delivered value through a strong focus on execution by our commercial teams by growing sales and launching new products. We’ve delivered value through our drug development pipeline. We’re delivering value by aggressively reducing our cost base and we have leveraged our balance sheet to deliver value through business development actions. So as you can see, our team is dedicated, working hard and focused on delivering on our priorities.
Let me give you a few examples of our accomplishments, starting with the sales and launch performance. In the quarter, we grew sales by nearly 34% over the prior year. The biggest drivers were products from the Next Nine that grew by approximately 70%, adding $431 million to our sales and full year sales increased 20% to $3.6 billion. We launched two new drugs, Fetzima and Namenda XR, while continuing launch activities for Linzess and Tudorza and we also re-launched Saphris in February. We secured formulary access for Namenda XR on nine of the top ten Medicare formularies as the market continues to transition from twice a day Namenda to once a day XR based on a strong value proposition for patients, caregivers and payers. And we developed the first ever direct to consumer TV campaign at Forest to educate silent suffering IBS constipation and chronic constipation patients about Linzess.
Turning to drug development, we continued our robust record of clinical and regulatory accomplishments. We achieved FDA approval to market Fetzima for patients with major depressive disorder, a first pass approval. We responded to the pediatric written request with the expectation of securing an additional six months of pediatric exclusivity for Namenda. We filed two new fixed dose combinations for approval, Namenda XR plus Donepezil and Bystolic plus Valsartan. We received approval in Canada to market Tudorza and Constella, the local brand name for Linzess. We gained FDA support for our plans to file the Ceftazidime/Avibactam combination for serious infections.
What makes these accomplishments even more impressive is that our team achieved many of them even as we kicked off the implementation of Project Rejuvenate, our three-prong cost reduction program. Our teams kept their heads down and focused on their objectives, while the most significant changes in our company’s history were taking place around them. For example, we’ve already completed all aspects of our flattening and broadening work stream. In so doing, we removed bureaucracy and brought our management team closer to our front lining customers by eliminating two layers and we reduced our total head count by more than 600 positions without touching the customer facing sales force.
Between the headcount reductions and the work streams to enhancing efficiency, we’re on track to meet or exceed our targeted savings of $500 million by the end of our Fiscal 2016 with 75% to 80% of the savings expected to be achieved in fiscal year ’15. These cost reductions, along with topline growth, contribute to our strong EPS performance this quarter.
Finally, let me comment on how we’ve utilized our balance sheet to create value. First we used ex-US cash to acquire Saphris, an established product with sales of about $150 million for less than two times sales. Bill will talk about how we’re rejuvenating that brand in a moment. Second, we issued $1.1 billion in a maiden bond offering at an attractive rate. Third, we acquired Aptalis, the biggest acquisition in Forest’s history for $2.9 billion in cash and we funded it with a $1.8 billion bond offering at an even better rate. We closed the Aptalis deal in just 3 weeks. And in just 99 days after announcing the deal, we have identified more than $125 million in synergies, integrated the U.S, Canada and UK operations and combined our U.S sales force. This meant selecting, training and launching a combined GI specialty sales force covering a five product line call. Now, that is a prime example of the kind of relevance and efficiency that I’ve been talking about during our previous calls.
Fourth, yesterday, we announced the acquisition of Furiex for $1.1 billion in cash. The acquisitions builds on Forest’s growing position in gastroenterology and helps create a leading GI company within Forest. Eluxatelene will be very complementary to our anchor GI product, Linzess, and additive to our broader GI portfolio, making us even more relevant to gastroenterologists and primary care physicians. One thing to keep in mind, neither Saphris nor Aptalis nor Furiex would have been so accretive if we had followed the conventional wisdom because conventional wisdom would have meant starting our cost reduction efforts with our sales force, the part of our business which generates revenue. We have shown over time that we can act nimbly to fight conventional thinking and in the process create more value for our patients, customers and shareholders alike.
The proposed combination of Actavis and Forest is another exceptional illustration of this type of thinking. By combining a leading global generic company with a growing specialty pharma product offering and a fast growing predominantly U.S special pharma company, we are working to create a new breed of specialty pharma company, one focused on growth, lower risk R&D efforts and cash flow generation. We seek to maintain the strength of each company while capturing all the topline and cost reduction synergies that will come from this unique combination. And in doing so, we believe we will be at the front edge of our fast changing industry.
Let me pass the call over to Bill Meury to speak about the commercial performance during the quarter.
Thanks, Brian. Good morning everyone.
As an overview, the fourth quarter was strong on several fronts. Forest sale levels were again above expectations and product growth rates were strong across our five key product lines, CNS, GI, Respiratory, Cardiovascular and Anti-infective. Second, we launched Saphris on schedule and as planned in mid-February. Third, the Namenda XR new prescription conversion rate doubled to over 30%. Fourth, the nationwide DTC campaign for Linzess was launched in early April as planned. And finally, we completed the Aptalis commercial integration and relaunched the product line the first week of April. Those are some of the highlights of the quarter. Now I’ll touch on the key products.
Sales in the fourth quarter for Namenda XR were about $73 million and for Namenda IR $379 million, representing a franchise total of $452 million. The new prescription conversion rate doubled during the fourth quarter, increasing from approximately 15% to 30% as I just mentioned. We expect the conversion rate will continue to increase over the next several months as physicians, health plans, pharmacists and caregivers recognize the benefits of this innovative new product. This trend is consistent with positive physician and health plan and feedback we believe confirms the preference for once a day high dose formulation of Memantine.
We also filed an NDA for the fixed dose combination of Namenda XR and Donepezil. 70% of Namenda patients today are also taking Donepezil. If approved, the fixed dose combination will simplify therapy even more for patients and caregivers. Forest’s product innovations will allow these patients and caregivers to move from three pills twice a day with Namenda IR and Donepezil to two pills once a day with Namenda XR and Donepezil to ultimately one pill once a day with the fixed dose combination, which should be commercially available in early 2015.
Turning to Viibryd, sales for the fourth quarter were about $53 million, representing an 18% increase over the same quarter last year. Importantly, demand for Viibryd has been relatively strong during the launch of our SNRI, Fetzima. In other words market share Fetzima is coming primarily from other SNRIs as opposed to Viibryd. We have effectively segmented the markets so both products can coexist and thrive and that’s why we expect to reach higher sales levels with two products on the market than we could with just one.
Fetzima, which was approved in September 2013 and launched just this past December, is off to a solid start with sales of $4 million in the quarter. Approximately 6,800 physicians have tried Fetzima since its introduction and adoption by psychiatrists and primary care physicians is in line with expectations. Also consistent with our segmentation strategy, Fetzima is being used primarily for moderate to severe new patients or patients who don’t respond to SNRIs such as Cymbalta. Viibryd and Fetzima will continue to be promoted alongside each other because it yields important strategic and economic advantages.
Sales for Saphris in the fourth quarter, which consisted mainly of February and March, were $28 million. We re-launched Saphris to psychiatrists and select primary care physicians and quickly stabilized demand for the product. In fact, prescriptions were up approximately 5% versus baseline or the pre-launched period, though still lower than historic levels. Our aim over the next several quarters is to restore growth by expanding the Saphris user base and by retaining high physician detailing levels. As a remainder, almost 80% of the Saphris audience overlaps with Fetzima and Viibryd, which means we can take full advantage of our access and relationships in psychiatry. Here again the benefits of the line call strategy we are employing are being realized in a concrete way. Saphris is a strong fit.
Turning to our gastrointestinal product line, Linzess recorded sales of $61 million for the quarter, which represents a 19% increase over the prior quarter. Market share with gastroenterologists climbed to over 22%. And by the end of 2015 we expect to have close to 100,000 physicians using Linzess. To sustain a high growth rate in fiscal year 2015, as you know we just launched a direct-to-consumer advertising campaign. The campaign consists of nationwide print, digital and television advertising. The print and digital components stated the week of March 31 and the television component on April the 9th. We believe this is the right product end market for DTC and we expect the campaign to significantly increase awareness and sales for Linzess. Typically it takes three to six months for the full effect of DTC advertising to be achieved. I would also point out that we’ll continue to maintain high physician detailing levels during the DTC campaign. We believe there’s an important interplay between physician and consumer promotion and that a two part approach will have the most meaning full effect on sales levels.
We completed the acquisition of Aptalis on February 3 and officially began detailing the product line just a couple of weeks ago. Total sales for February and March were approximately $108 million, led by Canasa at $24 million, Carafate at $21 million and Zenpep at $20 million. The product line is highly concentrated, which means we can use one specialty sales force for promotion and entirely complementary, which means 80% of prescribers also use Linzess, resulting in both cost and potentially sale synergies. Aptalis created a solid business and we believe a bigger promotional effort that includes more sales representatives, more account managers and more CF centers, among other things can extract even more value from this product line.
With a suite of five promoted GI products anchored by Linzess, we are going to be even more -- a more complete resource to GI specialists. We have upper GI covered with Carafate and Pylera and lower GI covered with Canasa and Rectiv. Also, there is a cystic fibrosis business in the United States. It’s a great opportunity and is expected to be an important source of growth in the future. And with the Furiex deal, we look forward to adding Eluxatelene to the product line.
Turning to Tudorza, sales were $25 million for the quarter, which represents a 24% increase over the third quarter. Now as you know, the focus here has been on improving formulary coverage and while there’s more work to do, we’ve made very good progress. As previously mentioned, as of January 1, Tudorza is now on formulary unrestricted at seven of the top 10 part D plans in the United States and available without restrictions to 70% of patients, including both part D and commercial. Our promotional levels remain at or near the top of the market, even when accounting for GSK’s launch activity. And so we expect that volume and market share will continue to increase at a steady rate during fiscal year of ’15.
Sales in the quarter for Bystolic were $143 million, representing growth of 8% year-over-year. We’re starting to lay the groundwork for the launch of the fixed-dose combination product of Bystolic and Valsartan, which we expect will expand the pool of eligible patients for Bystolic and generate even more first and second line use. So we had another very strong quarter and we’re looking forward to continued solid performance across each of the product franchises.
Now, let me turn the call over to Frank for an update on the financial results.
Thanks, Bill and good morning everyone.
Reported GAAP earnings per share were $0.20 per share in the fourth quarter of fiscal 2014 compared to $0.17 in the fourth quarter of fiscal 2013. Non-GAAP EPS in the quarter totaled $0.87 as compared with $0.25 in the fourth quarter of fiscal 2013, excluding acquisition-related amortization and specified items in both periods, including charges taken for Project Rejuvenate and Aptalis acquisition and integration costs.
Project Rejuvenate was initiated in December 2013 and includes a series of significant strategic actions to streamline operations and reduce costs, and is expected to yield savings of approximately $500 million by the end of fiscal year 2016. Project Rejuvenate charges totaled $109 million this quarter, and we expect the total cost of the project to be in the range of $150 million to $200 million over the course of the project.
As a result of the February 18 announced acquisition of the company by Actavis, we will not be providing earnings or sales guidance for the next fiscal year.
Turning back to the fiscal fourth quarter, total revenues were $1.1 billion, versus $814 million in the prior year. Product sales were $1 billion versus $783 million last year. Excluding the impact of the Saphris purchase and the Aptalis acquisition, net sales totaled $912 million, an increase of 16.4%. Contract and other revenue was about $44 million, including $28 million from the Benicar agreement with Daichi Sankyo. As a reminder, the residual Benicar royalty ended on March 31 2014.
With the exception of Namenda XR and Linzess, wholesale inventories decreased by about half a week this quarter compared to last quarter from just under three weeks to about 2.5 weeks. Namenda XR increased to 4.5 weeks to cover the switch from Namenda IR. Linzess inventories increased to approximately five weeks in anticipation of higher demand from our DTC campaign. There was no overall impact to net sales.
Gross margin in the current quarter was 76.2% versus 77.3% in the comparable period last year. Excluding the Aptalis inventory step-up charge of $28 million, the gross margin in the current quarter was 78.9%. And the increase was due to a change in product mix and more favorable margins on certain products.
SG&A spending during the quarter was $679 million, up 82.1% from the $373 million last year. During the quarter, we recorded $110 million of restructuring expenses related to Project Rejuvenate and SG&A, primarily relating to employee termination benefits and the write-down of certain facilities to fair value. In addition to Project Rejuvenate, SG&A expenses included $98 million attributable to Aptalis, including $23 million of the Aptalis acquisition cost and $14 million of employee termination benefits associated with the Aptalis integration, and a $34 million increase related to the Ironwood collaboration, as the product has now turned profitable and other one-time items. Excluding these items, SG&A spending is effectively flat when compared to last year’s fiscal fourth quarter. The current level of spending reflects the resources and activities that we believe are required to support our currently marketed products, particularly our newest products, Saphris and the Aptalis product portfolio, Fetzima and Namenda XR, as well as our recent launches of Tudorza, Linzess, Viibryd, Daliresp and Teflaro.
Research and Development spending for the quarter was about $192 million compared to $240 million reported in the fourth quarter of last year. R&D spending is primarily in support of our late stage development program spread out over multiple pipeline projects as well as post- approval commitments on marketed products. The current quarter includes development milestone expense payments of $8 million compared to $17 million of milestone payments in the prior year and about $32 million in expenses related to the Saphris and Aptalis acquisitions. There were no upfront license payments in either the current quarter or last year’s quarter. Excluding the impact of milestone payments in both years and the expenses related to the acquisitions, R&D expenses decreased 32% year over year.
Interest and other income net was an expense of $43 million in the current quarter as compared to income of $8 million reported in the fourth quarter of last year. As a result of $3 billion in bond offerings, interest expense totaled $49 million. Interest income was $6 million as compared with $5 million in the prior year quarter. The increase in interest income was primarily attributable to a higher average cash balance on hand during the quarter.
As we completed the full year allocations based upon final financial results, the company’s reported effective tax benefit for the fiscal year was 102.7% and for the quarter was 176.6%. Excluding the impact of Project Rejuvenate, Aptalis acquisition costs, the Nebreva loan write-off and non-operating discrete tax adjustments, the full year effective operating tax rate was 4% and was positively impacted by the change in the mix of earnings and the tax benefit of net interest expense.
Actual shares outstanding as of March 31, 2014, were approximately 272,330,000, an increase of approximately 5.8 million shares from last year’s fourth quarter.
Our cash and marketable securities balance on March 31 was approximately $3.3 billion, a decrease of $1.2 billion from the quarter ended December 31, primarily due to the completed acquisition of Aptalis. Of the total $3.3 billion, approximately $1.3 billion or 39% of our cash and marketable securities balance is domiciled domestically with the remainder maintained by our international subsidiaries.
Let me now turn the call over to Marco for a pipeline update.
Thank you, Frank. Good morning, everyone.
I just have a brief update this morning. But first let me start out by saying how very proud I am of all the accomplishments by our colleagues in the R&D organization during the past year. In fiscal year 2014, we made three submissions in the U.S and seven internationally. This was another exciting and productive year for us.
The key activities that took place during the quarter include the three submissions to FDA and the positive topline results on the Phase IIB clinical trials for Cariprazine, our investigational atypical antipsychotic. First in January, we submitted the complete packet to FDA’s pediatric written request for Memantine. If FDA finds that this packet meets the requirements of the written request, we will be entitled to a six month extension of marketing exclusivity for Memantine after the expiration of the patent. We expect to receive feedback from the FDA in July.
Second, in February we announced the submission of our NDA for the once daily fixed dose combination of Bystolic and Valsartan for the treatment of hypertension. And finally in March, we and our partner, Adamas Pharmaceuticals announced that we submitted an NDA for the once daily fixed combination of Namenda XR and Donepezil for the treatment of moderate to severe dementia in the Alzheimer’s type.
Let me also remind you about Cariprazine. In March we and our partner, Gedeon Ritchter, reported topline results for two recently completed Phase IIb clinical trials evaluating the efficacy and safety of Cariprazine. The first clinical trial evaluated Cariprazine in patients with major depressive disorder who have demonstrated an inadequate response to antidepressant therapy. In the second clinical trial Cariprazine was evaluated in patients with bipolar depression. Cariprazine demonstrated statistical significant improvement in both studies. So we have now successfully completed Phase 2 for both programs and we are planning to present data to the FDA as soon as possible at the end of these two meetings in order to finalize and agree upon the Phase 3 program.
You will also recall that we received a complete response letter in November for Cariprazine for the treatment of schizophrenia and for the acute treatment of manic or mixed episodes associated with bipolar one disorders in adults. In the complete response letter, the FDA acknowledged that Cariprazine clearly demonstrated effectiveness in both indications. However, the agency indicated more information, including additional clinical trial data, would be needed to better define the optimal dosing regimen to maintain the demonstrated efficacy while minimizing the potential for the development of adverse events generally associated with this class of drugs. We recently met with the agency to share additional recent clinical data, but in our opinion address the concerns raised by the FDA in the complete response letter. And I’m pleased to report that we had a very positive, constructive meeting with FDA. And following FDA’s feedback we are planning to file a resubmission for Cariprazine by the end of this calendar year.
With regards to Anti-infectives, our joint collaboration with Astra Zeneca for the development of Ceftazidime/Avibactam is ongoing. We expect the results from the Phase 3 clinical studies in complicated intra-abdominal infections later this summer and for the complicated urinary tract infections early in calendar 2015. As previously reported, we met with the FDA to discuss the Ceftazidime/Avibactam program and we are pleased that the agency has advised that they will accept an NDA filing for both indications using the Phase 2 data that we currently have in hand under 505 (b)(2) process. We are on track to file the NDA this summer and thanks to its QIDP, Qualified Infectious Disease Product Designation, the review should be about eight months. The phase 3 studies will be added to the NDA later in the year when they are available, but should not delay the 505 (b) (2) review or approval. Assuming we receive an approval with the Phase 2 data, this will be a full approval for both indications.
And to finish very briefly on two upcoming regulatory events. Regarding our fixed dose combination of Aclidinium/Formoterol, we have completed our analysis of the existing information in our databases and have been responding to and clarifying questions with FDA as part of the pre-filing process. We recently received the written responses from the FDA to our clarifying questions and we are now planning to meet with the agency to agree on the additional clinical work required to address their concerns. And we have requested a meeting likely to be held during third quarter of this year. We would be able to provide a timetable for this program after we have reached an agreement with the FDA.
On a separate note, in February we and our partner Almirall filed a submission in Canada for the fixed dose combination of Aclidinium/Formoterol and we expect feedback from the Canadian Regulatory Authority by the first quarter of calendar year 2015.
Finally, later this quarter we will be reporting topline Phase 3 result for a general anxiety disorder indication for Viibryd. So you can see that we are very active with our drug development programs and there will be additional significant milestones coming later this year.
I’m now turning the call over to you, Brent.
Thank you, Marco. As you can see from the results we delivered this quarter and over the course of the entire year, Forest is in a very strong position thanks to our colleagues’ focus on our four key priorities. We have delivered on our growth objectives, delivered on our pipeline, reduced our cost base and have been very nimble and adept in deploying our capital and doing strategic deals. Ultimately, we are proud of the value we have created for each of our stakeholders, including our shareholders and we look forward to creating more in the future.
I’ll now turn over the call to Frank before we open it up for Q&A.
Thank you, Brent. So now I’ll just read the fourth quarter sales figures for some of our smaller products. Campril $0.3 million, Celexa, $3.3 million, Cervidil, $13.8 million, Esgic, $0.3 million, Europe, $35.6 million, Generics, $5.4 million, Lexapro, $21.8 million, Monurol, $1.8 million, Thyroids, $11.3 million, and Tiazac $0.4 million. And just lastly, the Benicar third-party sales for the quarter were $192.9 million.
I think we can just move on to the Q&A. Operator, we’re ready to start if you’d open up the lines please.
(Operator Instructions). Our first question is coming from David Amsellem of Piper Jaffray.
David Amsellem – Piper Jaffray & Co.
Thanks. Just a couple. Wanted to follow-up on Eluxatelene. So first, on the pancreatitis data, or the pancreatitis events, what are your thoughts about potential for a restrictive REMS? And then secondly, in terms of the DEA scheduling, I'm just wondering out loud why it would be scheduled at all, given that this is a product that has limited systemic absorption? Thanks.
Yeah. So David, I appreciate the questions on the schedule. We hope you’re right, but we obviously have to go through that process with the FDA and DEA ultimately. But let me turn over to Marco to answer both one and two in maybe a bit more detail.
First of all David, I’d like to start with pancreatitis. We of course we looked very carefully before closing the deal in the database, which is over 2,000 patients actually treated with Eluxatelene. Let me just say these pancreatitis, we don’t see these as an approvability issue. The events are uncommon. We have very few actually cases of pancreatitis. Second, they are mild and thirdly are fully reversible. This is the type of adverse event that will be easily managed in the labeling with medical educations. At this point we don’t expect any kind of restrictive REMS and therefore we don’t see this at all as a stopper. With regards to the problems in terms of probability, with regards to scheduling as Brent was saying, I think that you’re pretty right. The drug is not absorbed. The drug doesn’t show in our clinical trial in any form of being potentially abused, but this is part of a discussion we will have to do with the agency.
I think it’s imperative that, David we intend to model a bit conservatively and then if it does better and we get better outcomes with the FDA, then the return and everything else gets stronger. Thank you.
Our next question comes from Jami Rubin of Goldman Sachs
Jay Olson – Goldman Sachs
It's Jay Olson for Jami Rubin. I had three questions. First off, on Tudorza/Formoterol combination, can you comment on what potential additional studies, if any, might be required? And second of all, on Cariprazine, can you just remind us how that product will be positioned along with Saphris, in terms of differentiating those two in schizophrenia? And then third of all, it looks like the conversion to Namenda XR is going really well. Can you remind us what your target is for percent of scripts to Namenda XR by your August hard switch date? And also, what will be your strategy for the Namenda/Aricept combo? And is that an incremental opportunity, or will that be another conversion from Namenda XR to Namenda/Aricept? Thank you.
Great. So quite a few questions. Why don’t Marco if you could take the combination question about additional clinical studies.
This is actually very brief. Right now it’s very difficult to predict what actually the FDA may require. We expect that they may want some additional clinical data, but these would be part of the discussion that we expect to have over the summer with them when we will meet them.
Great. And then in terms of co-positioning Cariprazine and Saphris, we believe they can be very nicely co-positioned. But Bill, you want to add some color on that?
Yeah. I would say first, Jay, as you know Cariprazine is pharmacologically different than Sapris. Saphris is a D2 5-HT1A antagonist whereas Cariprazine is a D3/D2 partial agonist. And as you know, there is a great deal of churn and switching in this category. Response to antipsychotic therapy is very idiosyncratic and so more options are needed, not fewer. The other point I would keep in mind is that when we think about Cariprazine, the starting point is schizophrenia and bipolar mania, but what we are really interested in and what we are aiming for are indications in either MDD or bipolar depression. And so when the dust settles here we’d like to see a product that has a strong following in the Schizophrenia, bipolar mania side of the market, and then another one that not only has a following there, but also is very useful for mood disorders.
Yeah. Then with respect to Namenda, I think what we find so positive is that we are seeing the conversion in the market place by patients and doctors and caregivers voluntarily moving to XR is very promising. I think they recognize the innovation of XR. The dosing convenience of XR is a compelling preposition for them and that is moving at a pace that exceeds our expectations. So we are on track to do I think better than we thought on that conversion through the summer. With respect positioning of the fixed dose combination, maybe I’ll turn it back to Bill to talk about that versus XR.
Jay, I think there are two objectives here. First, 70% of patients that are taking IR or XR today are also taking Donepezil. And so this would be a very logical product for them. I think physicians will feel the same way too. And the other objective is to expand the use of combination therapy. Only 25% to 30% of patients with moderate to severe Alzheimer’s disease are taking two medications. The clinical data are fairly convincing. The neurology community believes in combination therapy. And so we think a fixed dose combinations could expand the use of combination therapy. And if we could achieve both objectives it will be a worthwhile pursuit.
Jay Olson – Goldman Sachs
Great. Thank you and congrats on the quarter.
Our next question comes from Marc Goodman of UBS.
Marc Goodman – UBS
A couple of things, first on Linzess, I think I heard you say that the inventories moved up to five weeks in anticipation. Can you tell us where were they? I didn’t hear what that was. Second, Marco, you talked about a couple of the pipeline projects. What else is going on? This I guess could be the last call where we get a flavor for what else is being spent in the pipeline? Are there any other paying products that you all are still working on? I’m just curious if you could list some of the other projects that you are being worked on so we have an idea of what’s going on there. And then third, Frank, I know you don’t want to give guidance, but can you just give us a sense of what the tax rate would be for this fiscal year if Forest was standalone? Thanks.
Marc, why don’t I take questions one and three and then Marco can talk about the pipeline. As we said, we’ve seen the Linzess inventory in the channel increase to -- from the normal run rate where we’ve been in right around three weeks up to about five weeks. So about a two week increase and again that was due as the channel was expecting the launch of the DCT program in the first week of April. So we expect those inventories to quickly normalize. And then with regards to tax, it’s very hard to talk about a standalone situation when as of the end of -- by mid-summer there will ultimately no longer be a standalone Forest. But I would expect if we were a standalone, that we’d be backed down around that 20% or maybe even just a little bit better rate. And then Marco you want to come in?
Yes, absolutely. Actually we are still pretty busy with several development activities. First of all as I mentioned with Viibryd, the general anxiety disorder, we expect to have all the results this quarter and (inaudible) will be another submission that we will plan by end of the year or early next year. We have our pain drug, the Phase II program is ongoing in osteoarthritis and low back pain with our partner Grunenthal and we expect reading of these results sometime during the summer which is from the two studies. With Ceftazidime/Avibactam, we are finishing the Phase III, but we’re filing based on the Phase II. Another big area actually that we are doing a significant amount of work is actually some of the -- following the acquisition of the Aptalis in cystic fibrosis.
As you may know, actually we at Forest, we had already a product in Europe, Colobreathe, but now we are adding a new product that we’re developing. There’s [inaudible] which is an inhaled version of [inaudible], to treat potential colonization of infections. We have an MAA so a submission in Europe ongoing. We just filed actually in January following the acquisition in Canada and we’re looking what could be the potential requirement here for the US. We have Zenpep, which actually we just showed the positive result when we made the press release and we are planning to file in Europe. We have also collaborations like with Trevina with the drug for the potential use in congestive heart failure. And of course we have a significant amount of activities to continue to expand the role of our drugs in pediatrics. Many of our post-approval requirements are in pediatrics and several other programs to expand the labeling like the safety and is a submission trial for Tudorza.
Our next question comes from Ronny Gal from Sanford Bernstein.
Ronny Gal - Sanford C. Bernstein
Good morning and thank you for taking my questions. I've got two, one around Tudorza and one around pricing. Around pricing, when I just calculate my effective price that is scripts revenue divided by script, I'm seeing like almost a 10% increase this quarter versus the December quarter in terms of Namenda and Bystolic. Have you been actually more effective in terms of holding the line on pricing this quarter versus the payers? Should we -- is this a new strategy for some of the products that have lower growth to them? Second question on Tudorza, can you talk a little bit about the number, how you're dealing with this issue of co-pays within the Part D programs? Obviously, you cannot give those to people back. How many -- what percentage of the market do you actually have where you are in tier two? And similarly, we've seeing GSK launching Breo, very weak, and we're wondering if you guys have any insight on that issue. How strong do you expect Anora to be if we think about the launch of Anora versus Tudorza? Is this a good benchmark for us? Are you expecting this product to take significant share and slow your growth, or not? If you can just discuss that matchup.
Yeah. Ronny, this is Bill. As it relates to your first question in terms of price, I think we’ve done a good job of managing our overall discount rate across the entire product line and payers know that we’re very sensible when it comes to price increases. As it relates to the third, fourth quarter equation, keep in mind that the third quarter is our highest quarter in terms of rebates and that steps down in the fourth quarter because unlike the third quarter, the fourth quarter doesn’t have any discount rate related to the coverage gap. As it relates to Tudorza and our coverage, it’s 70% unrestricted and that split about 50% Tier two and about 50% Tier three. If you want to take it a step further and think about the commercial in Part D customer segments, it’s roughly, let’s say 65/35. In the commercial segment we provide co-pay assistance. And so a good bit of our Tier 3 coverage we’re able to assist patients with their co-pay so that people are paying generally $30 to E40 a month as opposed to something north to that. And we found that program to be very valuable. Physicians and patients appreciate that we can provide the assistance, but as you point out on the part D side of the equation, co-pay assistance isn’t permitted.
As it relates to Breo, I think that GSK is off to a slow start in part because of formulary coverage obstacles that it appears from our perspective they’ve encountered. They did launch in the middle of the CMS calendar year. I know they’re also testing out a new sales force model and the transition to that model may be having an impact. But to be fair it is early, and GSK is a very capable marketer. The last several weeks I’ve noticed that prescription levels have improved. I think it’s too early to render our verdict on Breo.
It does sound like GSK is focused on the strategy on converting patients from Advair to Breo and the same appears to be true for Anora. It looks like they’re using a two part approach to managing -- at least that’s what it appears from our perspective, the Advair transition. I think at the end of the day that when you look at the COPD market, there’s going to be a mono-therapy market for LAMAs, which consists of first line use or add-on to an ICS/LABA and then there’s going to be a combination piece. I would expect that the overall market will expand, not at a dramatic rate but it will expand over time as more therapies are introduced.
Ronny Gal – Sanford C. Bernstein
Let’s see if I can sneak one in. When I think about a Tier three in the Part D program, should I think about this as equivalent to like restricted population, just because the co-pays are so high? Or can you actually get a pretty decent penetration in that tier three, although they have to pay a much higher patient co-pay?
Yeah. I think that – I would not think about it as a restricted population. Co-pays can vary from plan to plan. They can trade in that $50 range, maybe a little bit higher. But from our perspective even in tier three, although it’s a little bit more expensive, your market share and volume generally trades closer to the average as opposed to when there’s a prior authorization in place you can see a pretty big swing in volume or share.
Our next question comes from Elliot Wilbur from Needham & Company. Your line is open.
Elliot Wilbur - Needham & Company
Thanks. Good morning. Just a couple of quick questions around the MDX 8704 franchise. Reasonable to expect that at some point in time next year there will be generic versions of Namenda on the market. And obviously, there's not an AB-rated substitutable drug that's going to be available. But how do you guys think about leakage when you build your longer-term models? Certainly, would assume it would be relatively small, but is 5% to 15% a reasonable assumption? And then with generic entry, at least on the immediate release, how are you thinking about pricing power of the overall franchise? In the last couple of years, I think at least according to on a WAC basis, pricing has gone up about 17%, 18% versus a low double-digit rate historically. And I'm wondering if you think that the entrance of generics, even if for the immediate release, would have any impact on that trend? And then just lastly, real quickly, any reason that you wouldn't immediately launch 8704 upon approval? And just thinking about the trade-off between potentially putting the product out there for generics to go after versus, obviously, trying to expand the overall market. Thanks.
I’ll turn it over to Bill in a second. I think in terms of generic IR, we do get the pediatric extension as we expect. The generic should enter the market around July of 2015 is the date of the settlement date. So it’s pretty much set in stone. I think you want to talk a little bit about the conversion and leakage rate?
Yeah. If you look at the XR formulations that face generic alternatives, there’s a fairly wide range of erosion. It can be as low as you point out in the 5% to 10% range. It could climb higher to 30% or more. And what I would keep in mind with Namenda XR is that it is a relatively fragile population of patients. We think that the dosing schedule here is particularly relevant and that we should preserve a good portion of our Namenda cells. Now I don’t think we’ll be at the lower end of the range necessarily, but I don’t think that we’ll exceed the high end of the range either.
I think the other point I would make is the patients and the caregivers are voting voluntarily here with converting to XR now and they are exceeding our projections for conversion and we expect that trend to continue. So we believe the patients and caregivers like the once a day dosing and they like the XR product better than the IR. We’ve seen that in our survey data and feedback from patients and caregivers.
That’s exactly right. And then if it relates to the question about pricing power, you know what kind of price increases we’ve taken historically and payers of course are an important part of any pricing strategy. I don’t think that our pricing practices in the future are going to look very different than what they are in the past even given a generic event with IR.
Our next question comes from Liav Abraham. Your line is open.
Liav Abraham – Citigroup
Good morning. Just one question for me. Just a follow-up question on the LABA/LAMA Aclidinium/Formoterol, just wondering on your commitment to this asset if the FDA requires extensive additional clinical data, such as perhaps a new trial. Under the scenario, would you continue investing in the development of the product, given its delay in coming to market and the fact that under the scenario, it would be the third or the fourth agent in the class to come to market and therefore, have a much more limited commercial opportunity? Thanks.
That’s a great question. If we had a situation where the FDA did in fact require us to do extensive clinical work and the competitive landscape appeared such that we’ll be fourth or fifth to market as a result of that, and these are all big ifs, we don’t know the answers to any of this yet, I think based on our view of spending our money like it’s our own, we would take a very hard look at whether or not we’d move forward. I think it’s something we have to discuss with our partner Almirall. And in fairness we’d really want to understand the competitive set because as you know we are not the only ones who face challenges with this division at the FDA. None of these products ever quite come through as expected. So it’s not a unique Forest LABA/LAMA combination situation, but again if all those things were to happen as you outlined, you would imagine we would have a very serious review and thinking about what to do next.
Our next question comes from Andrew Finkelstein of Susquehanna Financial Group.
Andrew Finkelstein – Susquehanna Financial Group
Thanks very much for taking the question. In view of the fact that you're not giving an outlook for this year, are there any particular products where we should think about a change in the trend as we're tracking the prescriptions, in particular with Linzess and the DTC and how you're prioritizing accelerating your fastest-growing products versus keeping the foot on the gas with all of them? And then in particular with your marketing efforts, the early results you're seeing with Linzess DTC and marketing generally, where you find the best return? And with products at the lifecycle they are for you, where is the money best spent and what changes have you made over the last year, as you optimize the return on your investments? Thanks.
With respect to guidance, as we’ve said we’re not going to provide numerical guidance because of the Actavis merger acquisition and their rules under the Irish takeover panel. But what we can say is we expect that on a standalone basis, we expect the business to continue performing well and revenues to grow year-over-year due to really a growth in the Next 9 product and portfolios as well as contribution from the new products like Saphris and the Aptalis product line. And so we expect the business to continue to perform as you would expect it to. Bill, you want to talk a bit about the Linzess and DTC and IR?
Yeah. I said earlier as it relates to Linzess, we literary only have week of data. It’s very positive. Other performance indicators are moving in the right direction too, but it’s early. If it was negative I wouldn’t be drawing conclusions from that either. But that is a real focus of the company right now. You can look at the effect that DTC has on other products or over 50 or 60 examples. When it works it can have a fairly significant impact. We’re investing in DTC because we believe it’s going to change the trajectory. We’re focused of course on Namenda XR and that conversion as Brent said. Physicians and patients have really voted there and we want to continue to assist them with the transition.
Bystolic is another big product that’s important to us in preserving our user base and our volumes. The next way to think about it is we have several important line extensions in fiscal year ’15 that we’re going to launch including the fixed dose of Bystolic and Namenda, as well as the combination of Ceftazidime/Avibactam. And I think all the products are important. We have the capacity to manage all of them. We just need to set our priorities and those are just a few of the key priorities. I think the growth rate as we head into fiscal year ’15 are when you look at it on a quarter over quarter basis are all -- most of them are in the double digit range for our key products at least. As it relates to how we’re thinking about investments, the biggest one we make is the sales force.
I think what’s changed over time is that we look very carefully at regional differences and customize our deployment more than ever before. Certain parts of the country, there’s greater physician and formulary access than other parts of the country. And so we manage that extremely carefully. We also of course have incorporated a consumer promotional component to our marketing, at least several of our marketing programs. Linzess of course is getting the most attention, but we have significant consumer outreach for Namenda XR as well as Tudorza. And I think that will continue as long as we see a return on that investment. And then of course we’re spending a good bit of money on co-pay assistance because that’s important and we’ll continue to do that appropriately in the future.
Andrew Finkelstein – Susquehanna Financial Group
And are there any areas in marketing where you've cut back across the portfolio?
Generally non-customer facing activities, we look very carefully at. And so we try to preserve everything that is customer facing. We have deployed our speaker program in a much more surgical way and that provided some economies.
Our next question comes from Chris Schott of JPMorgan
Chris Schott – JPMorgan Chase & Co.
Great. Thanks very much. Just two quick ones here. I know you're not providing 2015 guidance, but I wanted to ask on Aptalis specifically. At this point can you give us a little more color on that $700 million guidance number? Is that something you're still comfortable with? Are you more comfortable now that you've had some time to diligence those assets? Just trying to get a sense of how that portfolio, in particular, is shaping up. The second one was just on M&A opportunities. We're getting an increasing number of data points from major pharma around the narrowing of focus within those companies' portfolios. From a product acquisition standpoint, is there meaningful further opportunity for Forest and I guess Actavis here? And how do you look at these opportunities and returns, when we think about mature products and acquisition of mature products relative to the type of deal we saw announced yesterday? Thanks very much.
Yes. So I think on Aptalis, we do remain comfortable with our initial view of the forecast around those products. Keep in mind the current Aptalis run rate does include the Pharma Tech business and we’re still evaluating who would be the best donor of Pharma Tech, keeping it or divesting it. And so that could have impact; it’s about $100 million of topline sales in Pharma Tech. I think with respect to M&A opportunities, I know I hear a lot of people say that good opportunities are disappearing, but I suspect Furiex wasn’t on most people’s radar screen either. And so we have a long list of opportunities. We have multiple discussions going on with multiple different parties about everything from Saphris type deals of buying products from other companies to buying companies like Furiex to doing things like Aptalis. So we have more opportunities, then our business development team is working incredibly hard. And so we don’t see a shortage of good strategic, smart opportunities. It’s just the action ability of those opportunities and when you can do it and stay disciplined on pricing and meet your internal hurdle rates for the deployment of that capital that really decides the timing around that, Chris. I think you had a third part to your question. Do you mind just repeating it? We’ve had a lot of multiple questions today.
Mr. Schott actually left the queue. (Operator Instructions). Mr. Scott, your line is open.
Chris Schott – JPMorgan Chase & Co.
Okay, great. Thanks. The follow-up to that was more just around the returns, when we think about taking a product that -- and going through a launch cycle with a product relative to, let's say, a deal like Saphris where you've got an asset that's already established that has it seems like very high returns or margins very quickly. How do you weigh the returns on those type of transactions, I guess the new product opportunity versus buying portfolios of mature products? Thanks.
I think you look at the strategic fit first, look at how to best deploy capital, how to -- obviously internal rates of return around those deals. We have a very disciplined high expectation around those measures. So when you look at a deal like Saphris let’s say versus Eluxatelene, you think about them in many ways similarly in terms around financial return, but very different life cycles because a drug like Saphris you have to re-launch it. It has a reputation in the market and we believe we can alter that curve, but not dramatically where a drug like Eluxatelene perfect complements Linzess. We get it for arguably 13, 14 plus years. We get global rights and we really can do a lot of like cycle management and other work around Eluxatelene to potentially create a franchise in the future versus just a product.
And so I think we try to stay very disciplined and we try to stay on our strategic path. And I believe as I said during my opening remarks, for a company like Forest and even a company like Actavis plus Forest, we don’t need necessarily fewer sales reps. We need more products. We believe when we have a five product line call in GI or we have a 3 or 4 product line call in CNS, all the products do better because the reps have more access and they’re more relevant to the doctors. And we can talk not just about one product over and over again, but we can talk about disease states and multiple treatment options. And that just puts us in a stronger position all around and really it rises tides for all the products. I think we think about them carefully, but we’re going to continue to execute against our plan to create more relevancy in these blockbuster line calls as we’ve called them.
Our next question comes from Patti Bank of Discern Securities
Patti Bank – Discern Securities
Good morning. Just a couple Linzess questions. If the patient awareness on the IBS side was running in the 8% to 9% range, can you maybe give an idea of what a realistic improvement in that would be from the DTC? Would it be like a three times improvement? Would that be considered successful? And then also, just on – yeah, can you hear me?
Yes, that’s right. I think the most important measure is going to be our sales levels, but I would expect that yeah tripling or more. We see the internet traffic in the past couple of weeks has more than tripled. And so I think the awareness number you have is the right one.
Patti Bank – Discern Securities
Okay. And then just on the JV, I know that's been profitable. Do you expect that to stay profitable at this point, or is that still going to fluctuate on a quarter to quarter basis based on the DTC spend?
I think overall the commercial side of the JV is now profitable. if you look at the overall JV, don’t forget there’s an R&D side of it well. There’s still some spend associated with the overall program. I think that even with DTC we do expect it to in fiscal 2015 be largely a profitable JV.
Our next question comes from Tim Chiang, CRT Capital.
Tim Chiang – CRT Capital Group
I just had one follow-up question on the Eluxatelene product. You guys had mentioned schedule three as the conservative best case scenario. In your due diligence with that product, what are the differences in terms of what you can say on the marketing side, scheduled drugs versus non-schedule drugs? Certainly, if you look at Linzess, you have a very sizable marketing DTC campaign going on with that product. I guess with this product, if it's scheduled, you wouldn't be able to do that, right?
Not necessarily, depending on what schedule it is. So take schedule five I believe Lyrica for example is schedule five and they run DTC campaigns quite a bit. I think Ambien was schedule four and Ambien at the time ran quite a few DTC, a lot of television and consumer campaigns as well. I think the real difference for us has been schedule three and schedule four is really paperwork and sampling. It’s got nothing to do with refills or how we communicate the message. Obviously fewer restrictions creates a better story and profile around the drug. So we are going to work very hard with FDA and DEA to make a strong convincing case that it should be scheduled altogether. But I think realistically it’s going to be somewhere between three and five and we obviously model conservatively and still hit all of our internal numbers and thresholds and everything else from there is upside.
Our next question comes from David Maris of BMO Capital Markets.
David Maris – BMO Capital Markets
Good morning. I have 17 questions with Forest.
I can’t do it, David. I can’t keep track of them anymore.
David Maris – BMO Capital Markets
Actually, I have just a question for Marco and you, Brent, on R&D. Maybe if you could just summarize the programs that have been stopped as part of the cost cutting program. And then separately, now that the deal is close to closing, what do you think was -- that got you to the point where there was so much of an opportunity to shut things down in R&D? Was it just the natural progression of launching the products, or was it lack of oversight on staffing? Or maybe if you could address those two
So look, in terms of stopping programs, we really didn’t stop any programs that were underway. We ended programs that were running to their natural conclusion. I think the one thing that we probably did change is we’ve increased our internal hurdle rates for proceeding with studies. So as we look at some of the phase two programs other things that Marco mentioned in his long list of things that we are working on, in order to advance those into stage three for example, we have a higher internal hurdle rate if you will to spend that money and move it along. And so I think as you think about the reductions in R&D, it really was about tighter expense management. It was about tighter contractor management. It was resizing the organization to fit the current workload as we expect it on a more steady forward walking basis. And getting the organization or the R&D organization organizationally fit is probably the best way to say it. But it wasn’t about drastic cuts in programs or change in philosophy of doing low risk, highly productive R&D development and regulatory work.
Just to make it very clear, it was not that we were wasting money either. As Brent was saying, it is we built in the last four or five years an organization that could manage all the NDAs that we have been managed successfully. And now with a natural evolution of the programs, we start to be was also in the territory where you have studies that are not more for the commercial organization and we could step back and really look how to be more effective in doing that. Some of the activities being for example the Celexa organization incorporating into [inaudible] has been also a significant saving. So clearly as Brenton was saying, becoming a PT organization, nimbler, really looking at the more than the programs actually individual studies if they were really worth the potential expansions.
Our final question comes from Doug LaSalle of Barclays.
Doug LaSalle – Barclays Capital
Good morning. Bringing up the rear again. Thanks for taking the questions. Just in terms of Namenda XR and the conversion, I was just curious on your perspectives on the physician level of awareness in terms of the hard switch in August, in terms of why aren't we seeing potentially even a higher conversion rate right now to the XR product? And just in terms of where you expect that to be as we progress over the next few months, I know you're not providing a full-year guidance, but just a road map for us, and then ultimately what happens when you stop shifting the -- or when the immediate release product is no longer available? And then just a quick follow-up on Saphris. I know one of the opportunities that you saw was that a lot of doctors hadn't tried the product. And so that was the key in terms of relaunching it. Just your perspectives now, I know it's still very early, but have you had any traction in terms of getting, widening that, the prescribing base for that product? Thank you very much.
On Namenda XR, look I think where we’re at, exceeding 30% conversion in the market by patients and caregivers and physicians without pulling or withdrawing IR, is really a very, very strong start and it shows that customers really appreciate the innovation and dosing convenience of XR and are making that switch on their own. And so we’re well ahead of our internal plan. We expect that trend to continue because of the strong support by taking the caregivers and doctors for that once a day product. And so I know you may say you’re surprised, but patients only go to get refills from time to time. So it’s not like it happens immediately. And so I think that the conversion in the market place above 30% is exceptional and we’re not even close to where we need to make any hard decisions. So the market is really speaking on its own and voting for the innovation of XR. Bill, you want to tackle that --?
Yeah. I would expect on XR that over the next several quarters that you’re going to see a rate that’s at least as high as the one you observed over the last quarter, when we went from 15% to 30%. I think as more patients visit physicians for checkups or refills, then there will be a natural transition to the newer, more convenient product. And I believe all the physicians that need to be aware of Namenda XR are fully aware of it. As it relates to Saphris, two comments. I was pleasantly surprised at how quickly we were able to stabilize demand. There was a product that was relatively neglected over two years and in two months we were able to stabilize our volume. The next step of course and it’s an important one is to restore at least some rate of growth. Our focus is on the user base. To answer your question directly, we’re adding about 200 to 300 new users each week and I think that we’ve made nice progress over the past couple of months, but there’s clearly more work to do. Relaunching products takes a great deal of work and we knew that when we got into this. So far though, we’re fairly pleased with what we’ve seen since we re-launched it in mid-February.
Just in conclusion, I wanted to thank everyone for taking the time to join us on this call and if you have any additional questions, please feel free to reach out to Frank and we’ll be happy to try to accommodate you. Thank you again for joining us and we look forward to talking to you soon.
Thank you. This does conclude today’s conference call. Please disconnect your lines at this time and have a wonderful day.
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