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Eurand N.V. (NASDAQ:EURX)

Q2 2010 Earnings Call

August 06, 2010 08:30 am ET

Executives

Gearóid Faherty - Chairman and CEO

Mario Crovetto - CFO

Bill Newbould - VP of IR

Analyst

Annabel Samimy - Stifel Nicolaus

Ian Sanderson - Cowen & Company

Frank Pinkerton - Suntrust Robinson Humphrey

David Steinberg - Deutsche Bank

Scott Henry - Roth Capital Partners

Sumant Kulkarni - Bank of America

Rich Silver - Barclays Capital

Operator

Greetings, ladies and gentlemen, and welcome to the Eurand Second Quarter 2010 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

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

Bill Newbould

Thank you, operator, and welcome everyone. Joining us on the call today are Gearóid Faherty, Chairman and Chief Executive Officer and Mario Crovetto, Chief Financial Officer. I would like to point out that the transcript for today's call will be posted on our website and also provided as a Form 6-K.

During the course of this conference call we will make projections or other forward-looking statements regarding future events or the future financial performance of the company.

The words believe, estimate, anticipate, intend, expect plan or similar instructions are intended to identify forward-looking statements. We wish to caution that such statements are subject risks and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business including factors that could cause actual results to differ from our forward-looking statements. Are described in our Form 20-F, Form 6-K's and other fillings with the SEC. The company assumes no obligations to update forward-looking statements to reflect actual results changed assumptions or other factors.

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

Gearóid Faherty

Thank you Bill and good morning, everyone and thanks for joining our call today. As you've seen from our press release this morning the second quarter was another strong course for our business and the highlight of the quarter was the strong growth of our ZENPEP franchise.

Product sales in the quarter were up 22% to EUR29.4 million or $36 million on the same quarter last year. Driving this growth was sales of ZENPEP which more than offset lower revenue from Axcan for ULTRASE and from Pancrelipase, the low cost Pancreatic Enzyme Product or PEP that we stopped shipping when we launched ZENPEP in November 2009.

We are extremely pleased by the progress we have made this quarter with ZENPEP and are optimistic about the products future. I’d like to take a few moments now to review ZENPEP’s recent performance and discuss some of the competitive dynamics that we’ve seen in the pancreatic enzyme market over the last few months.

Since April 23, the last full week before the FDA’s April 28 deadline to stop distribution of unapproved PEP's weekly reach our prescriptions for ZENPEP as reported by IMS have grown nearly four fold from 585 to 2,140 and we’ve more than tripled our market share for ZENPEP from 3% to 10%.

During that same time, we’ve nearly doubled the weekly retail scripts for our low dosed authorized generic Pancrelipase from 581 to 1,070. Taken together our ZENPEP franchise market share has grown from 6% to 15% and increased about 150%. Driving the robust growth in the ZENPEP franchise has been a combination of factors including increased product availability in the distribution channels, improved reimbursement in formulary status, higher brand awareness and physician acceptance due to strong promotional efforts and favorable competitive dynamics.

As I noted earlier, shipment of unapproved PEP's to wholesalers were discontinued at the end of April and government reimbursement was also hottest for most unapproved PEP's at the same time and at the end of May for J&J product. This situation created a window of opportunity for ZENPEP to capture a good part of the ground lost by the competition. We see this window of opportunity continue in the coming months as the new entrant works to fill supply channels and seek reimbursements for their products.

We have also worked hard to ensure that patient access to ZENPEP is not an issue. In an addition to an extensive sampling program initiated at launch we have worked to increase the product availability particularly in the large pharmacy chains.

I am also pleased to report that we have made excellent progress on the reimbursement front in the second quarter. The FDA's enforcement of the April 28, deadline heightened awareness among payers especially where only one approved PEP was listed on their formulary. In these instances payers were actually calling up to initiate contracting discussions.

We now have more then 90% of all covered life's in commercial managed-care and more then 90% of Medicare Part D life's of access to ZENPEP. We also have extensive Medicaid coverage with over but a hand full of states now in the fold.

As one of only two sales forces prior to the recent launch of J&J's product actively promoting their brands to physicians, our share of rights have increased considerably leading to broader market awareness and acceptance. This is especially the case in Cystic Fibrosis for greater awareness of the regulatory situation regarding PEP's makes physicians more willing to switch their patients to an approved PEP. In the larger GI segment the transition to approved PEP's is taking a little longer underscoring for us the opportunity to continue to grow ZENPEP share in the coming months. Our commitment to the Cystic Fibrosis community expand beyond our commercial efforts.

We are proud to sponsor the inaugural Eurand Cystic Fibrosis Cycle for life. As series of cycling events throughout the US aimed as raising funds for Cystic Fibrosis programs and research directed by the Cystic Fibrosis foundation. By lending our name and support to this effort we are also broadening awareness of Eurand and ZENPEP in the CF community. The first cycle for life event was held in San Francisco in late June and raised 65,000; a strong showing for the first year of an event of this kind.

Looking ahead, we are very encouraged about the prospects for ZENPEP and we expect to see continued growth of stocks of unapproved product leave the market and the full benefit of our initiatives to improve patient access and reimbursements are seen. In addition we believe that the substantial investments we’ve made today in our promotional initiatives are beginning to pay dividends.

Finally, we’ve recently made some key management additions to the US commercial team that we believe will help to sustain the growth of our branded and specialty pharma business this year and into the future.

In terms of the stages of the unapproved PEPs, the NDA through Axcan ULTRASE and VIOKASE and for Digestive Care’s Pancrecarb are still under review. On May 6, this year, Axcan announced that the FDA issued a complete response letter requiring that deficiencies in manufacturing and controlled processes asked the manufacturer of the active ingredient of ULTRASE, be addressed before they will grant approval.

It's important to note that Eurand licenses, manufacturers and supply ULTRASE capital to Axcan. But, we are not the manufacturer of the active ingredient. Axcan has publicly stated that they are confident that ULTRASE will be approved but they haven't given any guidance as to when.

Axcan also stated that they stop distribution of ULTRASE effective April 28 in compliance with the FDA's guidance. As a result of their distribution stop, sales and royalty revenues from Axcan were significantly lower in the second quarter but this reduction would more than offset by strong ZENPEP sales.

While Axcan continued to distribute the product in Canada and South America, we would not expect to see meaningful revenues from Axcan until such time as their NDA is approved and Axcan recommence shipments to wholesalers. That being said we expect any decrease in Axcan revenues in the second half compared return to the second half of 2009 to be more than offset by ZENPEP revenues.

Now I would like to bring you up to date on some recent activities with our pipelines. We continue to move ahead with our clinical development program in Europe for ZENPEP. As noted on our first quarter call, the European Medicines Agency late in 2009 finalized its guidelines for the development of Cystic Fibrosis products.

Based on the guidelines and the outcome of our discussions with EMEA or DEMEA regarding the clinical and regulatory pathway for approval in the EU, we finalized the trial protocol.

We are in the process of obtaining regulatory approval for the sites we enrolled and anticipate starting the trials soon. As we've discussed previously we are eligible to file the ZENPEP marketing authorization under the centralized procedure process meaning one application for the EU member states and the potential for 10 years of market exclusivity.

The European and Russian markets represent a very important opportunity for ZENPEP. With the combined market valued at $450 million in 2009 according to IMS health. In terms of our commercial strategy for ZENPEP in Europe and also in Asia, we continue to have discussions with potential distribution partners there.

Turning now to EUR-1025 our once a day formulation of the anti-emetic ondansetron we have just received FDA’s feedback on a protocol for Phase III trials that we submitted in March. The study is intended to evaluate 1025 and the prevention of nausea and vomiting.

We are incorporating the feedback into the protocol design and expect to make a decision about the study start later this year. As previously stated our current intention is to out license 1025. As noted in today's press release we've decided to discontinue development of EUR-1073, a Corticosteroid for the treatment of ulcerative colitis.

After a thorough analysis of the European study conducted by the licensor Chiesi's in mild to moderate ulcerative colitis comparing 1073 to the current standard of care we've concluded that this product does not have the product profile we would be prepared to take forward in the US markets.

Accordingly we will return to this product to Chiesi's at no cost to Eurand. In a few moments Mario will discuss our financial results for the second quarter and first-half in detail. But first I’d like to give you a brief summary of my remarks this morning.

We had another solid quarterly performance. I believe we are well on our way to another strong year. We are extremely pleased with the market progress we’ve made with ZENPEP and our significant market share gains. We look forward to continued growth in the second-half. And finally we look forward to initiating of Phase III programs for ZENPEP in Europe and 1025 in the US over the next few months.

I will now turn the call over to Mario.

Mario Crovetto

Thank you, Gearóid. In the second quarter of 2010 revenues totaled to EUR32.9 million compared to EUR30.5 million in the second quarter of 2009. This represents an increase of 8% or 3% in constant currency. In dollars, revenues were 40.5 million at the convenience rate of 1.23.

Product sales of EUR29.4 million or $36.2 million represented 89% of our total revenues and grew 22% or 17% at constant currency rate. Sales of ZENPEP and its authorized generic in this quarter amounted to approximately $10 million compared to a year ago these revenues more than offset lower sales of ULTRASE to Axcan and the absence of revenues from our low cost Pancrelipase.

As in the first quarter we record nice revenues of ZENPEP on the basis of shipments from wholesalers to retail in our retail channels. We believe this revenue recognition method is appropriate during the product launch phase and we may move to recognition based on our shipments to wholesalers at the future date.

The royalties of EUR1.8 million decreased compared to the second quarter of 2009 because of lower rises from ULTRASE of Axcan. Development fees were EUR1.6 million which is lower than in the second quarter of 2009 when fees included a significant milestone from GSK related to the launch of Lamictal ODT.

Gross margin and product sales was 46.9% in second quarter of 2010 compared to 35.4% in the second quarter of 2009 as a result of the ZENPEP sales. Research and development expenses were EUR5.6 million, 5% higher than in the second quarter of 2009. The 67% increase in SG&A compared to a year ago is primarily due to the big doubt of our sales force and commercial infrastructure in United States.

In connection with the launch of ZENPEP which took place in the second half of last year and to expenses of marketing, patient support and managed care programs focused on the ZENPEP franchise. We ended the quarter with a net loss of EUR3.4 million or $4.1 million which is EUR0.07 per share and $0.09. At the end of the quarter cash and marketable securities were EUR38.3 million or $47 million.

I'll now turn to a brief summary of first half 2010 financial performance. Most of the comments I just made in connection with quarterly result are also applicable to first half results compared to first half results compared to first half 2009.

Total revenues grew 7% and were EUR64 million or $78.7 million. The product sales component made up for 88% of our total revenues and increased 17% primary because of ZENPEP and its authorized generics.

Royalties were down 12% because of lower ULTRASE royalties. Development fees were lower than a year ago as I mentioned earlier fifth half 2009 fees included a significant milestone from GSK.

Gross margin and product sales was 49.6% in the first half of 2010 compared to a 38% a year ago. As a result of ZENPEP sales. Research and development expenses were 7% lower then a year ago when we recorded higher spending on clinical trails.

The increase in SG&A compared to a year ago is mainly due to the expansion of selling and marketing expenses following the launch of ZENPEP and its generic which took place at the end of 2009.

Net loss was EUR3 million which is $3.7 million or EUR0.06 per share in, and $0.08. Turning to the second half of 2010, the two key elements which will affect our financial performance are revenues from ZENPEP on one hand and from ULTRASE on the other. As we wrote in the press release and as Gearóid mentioned, compared with second half of 2009 the revenue decrease we expect due to ULTRASE should be more then offset by revenues of ZENPEP and its authorized generics.

I will turn the call back to Gearóid.

Gearóid Faherty

Thanks Mario. Before we open the call to your questions, I’d like to conclude with a review of some of the upcoming milestones in the second-half of 2010. We are excited about recent demand we’ve seen for ZENPEP and are optimistic about the product’s prospects. From our partnered products we look forward to continuing growth of Lamictal ODT and to seeing the impact of Cephalon’s renewed focus on AMRIX.

We will continue to advance our pipeline with the Phase III trial in Europe for ZENPEP which we hope to start soon and our work to finalize the failed Phase III protocol in the US for 1025, plus ongoing work in our many undisclosed co-development products.

Lastly, we have a very active in-licensing program for both marketers and development staged products and significant management efforts are being and will continue to be dedicated to this program in the coming months and quarters.

This concludes our formal remarks, now I will ask the operator to open the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from Annabel Samimy with Stifel Nicolaus, please state your question.

Annabel Samimy - Stifel Nicolaus

Hi. Thanks for taking my call. I have a few questions actually, Guys can you just clarify. You mentioned that the ZENPEP was 10 million. Is that ZENPEP specifically or ZENPEP’s franchise including or AG including the Pancrelipase?

Mario Crovetto

The ZENPEP franchise which is ZENPEP and its authorized generics. We had no revenues from the old low cost Pancrelipase in this quarter.

Annabel Samimy - Stifel Nicolaus

Okay, Could you help understand the pricing for the AG has the pricing improved since April 28, that went lower cost providers came off the market or has it stayed the same eventually?

Gearóid Faherty

Prices for the AG here and above that have essentially stayed the same.

Annabel Samimy - Stifel Nicolaus

Okay, and for the revenues you mentioned that ZENPEP sales had more than offset ULTRASE but sequentially your revenues are down from last quarter, as well as some of the quarters in 2009, so can you help us understand what else is going on over there?

Mario Crovetto

ZENPEP is significantly up compared to the previous quarter and not coming down and the question is?

Annabel Samimy - Stifel Nicolaus

Overall revenues are down sequentially from your first quarter as well as from other quarters to the end of the year.

Mario Crovetto

Well, in euro revenues are EUR32.9 million and last quarter where 31.1.

Annabel Samimy - Stifel Nicolaus

Okay so, it's an FX issue? Your revenues were around 40.5 million in the second quarter and last quarter they were 42 million. So potentially that's down.

Mario Crovetto

We reporting Euro as you know and for convenience we expressed revenues in dollar at the convenience rate which is always the rate at the end of the quarter.

Annabel Samimy - Stifel Nicolaus

Okay, I just want to make sure it's an FX issue rather than something that’s bigger going on. Okay, so just separately on a broader market issue, there is obviously what other pancreas has come out on the market, are you going to start any other new programs to offset some of the marketing that J&J maybe doing to sort of reenter the market and you mentioned also reimbursement how they maybe at a disadvantage are you suggesting that they lost a lot of their reimbursement when they pulled their older product off the market?

Gearóid Faherty

Well first of all we didn't know what they were going to do by way of marketing programs. We are not planning anything particular and different to what we've been doing for the last two quarters.

We believe that's worked extremely well. We see no reason why it will change. As a result of the new name they have, the new doses they have, the new NBC codes that they have for their product, they obviously have to go out and renegotiate for reimbursement just in the same way as we did and just in the same way that Creon did a year ago.

So yes we would expect them obviously to loose market share. We would expect it to happen as a result of them waiting to get reimbursement through unless obviously they have some form of program to compensate for that. Judging by the way scripts have gone for them for the last two or three weeks we've seen a decline for them in market share it would seem to be a factor that they have to consider.

Annabel Samimy - Stifel Nicolaus

And just going forward do you have any sense at this point when you can start seeing some positive cash flow from the launch and start leveraging your income statement and sort of get passive launch phase and sort of start generating some cash flow from the product?

Mario Crovetto

We don't make these types of statements and…

Gearóid Faherty

The only thing we would be prepared to say at this time are that obviously the factor for us is what happens with Axcan and we don't know when or if they are going to be approved and obviously that goes to our future projections.

So it's difficult for us to say right now, we think we will wait till we have some clarity on that and then maybe we will be able to talk about some form of guidance.

Operator

Our next question is coming from the line of Ian Sanderson with Cowen & Company.

Ian Sanderson - Cowen & Company

Good morning, thanks for taking the question. First, Gearóid could you tell us what the extent of the sampling program for ZENPEP is at this point and how long you plan to continue that program and related to that, do you plan to continue the authorized generic relatively permanent basis?

Gearóid Faherty

First one on sampling, sampling is cut back very, very significantly. But before we did in the first four months of the year we would think over 30,000 samples of 100 come sort of into the market when we launch the product.

So we had a very, very expensive sampling program. Since then we are still continuing to sample but much less aggressively and also we changed the size of the sample bottle we are working with. We are now working with a much smaller sample size.

So very extent of 30,000 at least put into the market in the first four months gradually backing off but now as people had an opportunity to try and use the product. Turning to the AG we are not prepared to say in the public and probably call what our strategy is for the product and we think it's been very useful so far.

We’ll see who the market entrants are as we go forward and adjust our strategy according to the competitive position we face for the product.

Ian Sanderson - Cowen & Company

And could you talk a little bit about sort of competitive threat as you see it from Lilly picking up the recombinant PEP product?

Gearóid Faherty

Sure, probably maybe two comments on that. The first one would be I have said it before on calls like this. Based on the efficacy, we have seen to date for that product and by efficacy I mean coefficient of that absorption the figures whereby you show how efficiently you digest that which is the most important product characteristic for these products.

The Efficacy show for that product is very, very much lower than we have shown with our product. In their clinical trial their CFA was in the 60's, the highest points for CFA with our product was over 94%. So, we think from an efficacy point of view, the product will have a very challenging future unless there is new date if that shows better CFA.

I think CFA is a very important consideration because firstly that’s what the FDA wants you lipase is the answer they want you to label on the basis of because they know it to be the most important end patient especially the chronic patients in Cystic Fibrosis and chronic pancreatitis need large amounts of lipase. So, with low efficacy it would make it very difficult for these chronic patients to be treated by that product.

Maybe there was a niche for the product in lower grade disease where CFA do not have to be as high, the problem I would see in that particular market segment as we know its very, very price sensitive and we have our AG there which makes it very difficult for them to compete economically with a recombinant product again an animal origin AG, so I find it hard to see a niche or role for the product in.

Ian Sanderson - Cowen & Company

Okay. That’s very helpful. And then finally you noted in the press release that 30% of the market is not yet converted to the FDA approved PEP's. How long do you expect that to take and actually what's holding that up?

Gearóid Faherty

I think it’s the case of you have still stocks of the old product in the market because when the FDA came out with its guidance on the 28 and CMS then on the 29, the guidance was stock distribution, you could no longer shift products to wholesalers.

There was not a recall you didn’t have a recall whereby resale had to shift back to wholesalers and then wholesalers back to the manufacturers. So the stock that within the market at the time was liable to stay there so we obviously have a large overhang of that products too in the market with presumably a retail chain and a wholesale chain that would like to see it used up commercially because they bought that product.

So I think we will see an overhang of that product or those products at least for the next quarter or two but gradually as we've seen from the script trends gradually decreasing. I think the decrease is also being accelerated by the fact that, one, some of the wholesalers are probably shipping products back to certain companies, I wouldn’t imagine that the retail is but then you have companies like us out there talking to physicians, talking to the care givers and advising them of the change.

So, that’s also contributing to pay for switching from unapproved to approved product. We think in the Cystic Fibrosis markets that change is well advanced we think it's less well advanced in GI because some of the docs there has been prescribing the older products for a very long time and have a much lower awareness of the FDA reg action.

And they're coming to hear about it as patients go look for reimbursement for the product find that they don’t have and then it has to come back to the physician. So that process seems to be taking longer.

Operator

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

Frank Pinkerton - Suntrust Robinson Humphrey

Hi, great. Thanks for taking the questions. Gearóid, can you just talk to business development front especially potential prime licensing proprietary products?

Gearóid Faherty

Sure, Frank. We obviously are not going to talk about specific projects but there are two things we are working on at the moment. We would be very anxious to bring in an existing marketed product that could be detailed by the existing full sales force without expanding it.

Needless to say to leverage the infrastructure that we have and without any particular need to expand it. We believe the infrastructure that we have presently could easily take one or two other products in the CF or GI space or possibly with an orphan drug indication.

So there is a defined focus on finding a market product in those types of segments. We are also keen to add to the development stage pipeline. Again we would be looking for products that are in the CF, GI or specialty markets particularly orphan drug. We would be very attracted to a product that’s had a drug delivery or drug formulation requirement to assisted and going through the agency and getting to market.

So we have a dedicated group of people reporting to the president of our pharma business in the United States looking for these opportunities.

Frank Pinkerton - Suntrust Robinson Humphrey

And then standpoint of urgency in BD now that Clipper I guess is no longer a go-forward. Does that leave a hole and something need to be put in there and filled and is there progress that’s being made on that front?

Gearóid Faherty

We are obviously looking at a number of products and we’ve been looking at a number of products and we've been looking at a product which talking about this now I think for two or three calls, so this is in the program that has started as a result of giving up on Clipper at the programs that’s been in place for quite some time. And the due diligence especially on development stage products like Clipper is very, very significant we don’t speak with doctors, we speak with consultants in the space and we are currently looking at the number of opportunities as to when they are likely to come in very much dependant on what we get to see, I would say no new heightened urgency it was as it has always been a very important issue for us when we set up this group and this group, this is all they do from they were established this is all they work on, they are not distracted by other business objectives.

Frank Pinkerton - Suntrust Robinson Humphrey

Okay, great, thanks for that and then just switching the focus to Europe, can you give us any detail on the trials that you are running, when are they going to start I'm assuming its very similar to trials run in the US but just confirm the end points and the timelines of enrolment there and then also number of patients and expected time to complete those?

Gearóid Faherty

I'll give you some answers, Frank I am rest into reluctant to give you a lot and the reason is we have been offered centralized review, it is the guidance came out from the EMA, the European Medicines Agency, they have changed their name relatively recently from EMEA to EMA and they have come out with some guidance back in November.

We have been working with them now for the best part of 9 to 12 moths to establish a protocol design for what's required to get a product of this type approved in the EU. We are expecting to be the first people to file under these new guidance that has been given by EMEA obviously the last thing I want to do is announce to competitors who would be thinking about it right now what the size needs to be what the end points need to be in order to get approved because I would short circuit for them the process that we've spent nine months going through.

What I can say is that we will start the trial very soon and the trial will involve many different countries around Europe. It will be not too different in terms of number of patients from the two trials we did in the state although in Europe this would be one and the type of trial will be slightly different but I am not prepared to say how right now.

Frank Pinkerton - Suntrust Robinson Humphrey

And can you speak about as this process goes forward is there any similarity in united states with the aspect of removing older product in the future from the market or whether this is just being added a product to what's already out there. Thank you.

Gearóid Faherty

There's a lot of talk and a lot of campaigning from the Cystic Fibrosis foundation across Europe to have a change because there are a lot of uncontrolled products in Europe right now very similar to what you have in the States.

Although the level of control is somewhat better and that these were approved many years ago. Europe started a process whereby old files are reviewed every five years as things stand so these products unlike the States come up for a natural review as a result of that process and but as to the defined guidance and a withdrawal date EMA have not given such guidance yet.

Operator

Our next question is comes from the line of David Steinberg with Deutsche Bank.

David Steinberg - Deutsche Bank

First with regard to Clipper on your key sales products I assume that you've marked a significant amount of spending to develop the product. Now that's gone, how should we think about adjusting our models, how much money were you going to spend on, how much do we lower R&D expense in the next couple of years based on that development?

Gearóid Faherty

Obviously David, we haven’t tied specific funds to this in terms of guidance that we have provided in the past. A trial for a product of this nature given that we had two Phase III or three Phase III trials behind it. We would have expected study sides from the FDA between 220 to 250 people and we would have expected a trial cost of quite a bit less than 5 million and that would have been spread as over a two year period of time.

David Steinberg - Deutsche Bank

Okay, great to know this. So I know you defer from giving guidance. But I am just thinking about long-term looking at your P&L. How should we think about how much the company will spend in R&D and SG&A as a percent of sales as we look out towards profits? Could you give us a metrics operating income, R&D spend, SG&A all as a percent of sales, since for a range help us think about your profitability in the future?

Gearóid Faherty

We would not see, David. Without a new end license product or some particular program of major significance a big increase in research spend from where we are now. Obviously the spend that we have today is just been able to sustain the two trials that we were obliged to do for ZENPEP. They have covered the trials we did on Dansetron to take it where it is today.

Obviously those are not trial expenses that have to be repeated. With going forward looking at the spend we are facing right now, the two items of clinical development of significance that are on very close to us right now would be ZENPEP in Europe and in answer to the last or the previous question I gave some guidance as to what the size of that might be and we’d obviously then want to be finalize the protocol with the FDA as we said in the call this morning, we literally just got their feedback and last week that we are working on that protocol, we have to go out now and re-price that, but then we wouldn’t expect it to be that significant.

So, I think certainly for the pipelines as we have it today we would not see a need to take the spend up very significantly. If we were to license it and additional development stage product that was ready to go into phase III, This will obviously very much depend on what the product is and at that time we probably be providing guidance as to what we think the cost will be to take it forward.

With regard to margins, obviously as we have described in the call today, we had made great progress with ZENPEP, the product has done very well but in the same period of time, we have seen a big decline in our revenues from Axcan and its very hard for us given that Axcan are not providing guidance right now as to understand when that revenue might be coming back.

So, as Mario said earlier we are reluctant and we are keen to wait and see what happens with that product before we formulize any further guidance.

Obviously our objective for the business is to run as efficiently, run as profitably, and we are very much focused on that, obviously the aim of in-licensing and looking to in-license the marketed product to leverage the infrastructure we have already established as I have said in my comments, we believe the infrastructure we have presently could easily handle one or two additional products and obviously that would have a major impact on margins where we to be successful there as well.

David Steinberg - Deutsche Bank

Okay, let me ask you another way. You indicated you would refrain from guidance because you didn’t know what was happening with Axcan and ULTRASE so I mean if you look at the trend on ULTRASE has gone from about 17% share down to 6% and assuming that you don't get approval any time soon looks like it will go to zero.

So let's just assume that you get no revenues from Axcan in the future, you've indicated that a unit of ZENPEP is a lot more valuable than the unit of ULTRASE so let's assume that Axcan generates zero revenues. Given the trajectory of your scripts help us with when you are going to turn profitable and how to think about the cash flows over the next couple of years?

Gearóid Faherty

We are not prepared to do that on the call David but as you said Axcan was a very big plant of ours and we reported over $40 million in revenues for them last year. We believe there will be an offset as we've guided on the call today.

We've told people in the past that we take about 30% to 35% of Axcan revenues would come to us in the combined fees and the plant manufacturing and royalty revenues we were there. So obviously the difference with ZENPEP would be we are not paying royalty to anybody so any of the revenues we get for that would come to us and they would be used to offset obviously the cost of promoting the product.

But I am not prepared to get into building up the actual model on the call this morning.

Operator

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

Scott Henry - Roth Capital Partners

There's a bit of a lead into this question so bear with me basically it stems down to the in the last six months ZENPEP has done very well and the stock doesn't really budge. It would seem to me the problem is somewhat a lack of visibility into the model and revenue drivers and then when you look at the street models and you look at the 10-K disclosure of revenues there's pretty wide discrepancies and I think there's a general lack of conviction by investors with regards to how market share gains equals earnings. So, I guess my question is can we get greater clarity on the drivers of revenues and why not?

Gearóid Faherty

Because we’ve had two very substantial events that we did not predict to take play or one rather in the last six months and that was Axcan. As we’ve been talking to people from our expectation was that Axcan would be approved.

Axcan as we’ve disclosed to people many occasions are our largest and were our most profitable product. And now we have no visibility as to when or if they are coming back to the market. It’s very challenging for us to predict what that would be.

Scott Henry - Roth Capital Partners

I think you completely misunderstood my question. I am talking about looking backwards, I am talking about estimates as how ULTRASE results in the numbers it does, the profitability of something like Lamictal ODT. From an investor’s perspective when we hear that ZENPEP is outweighing ULTRASE but then we also see earnings resulting in greater loss is just a lack of clarity which I think hurts the conviction of investors. It’s not an operational comment, it’s only presentational.

Gearóid Faherty

And obviously when we have a level of visibility that we feel secure about and our profitability to revive it and we have a better sense of what’s going to happen with Axcan. We are committed. We would like to provide more visibility; we are just not in a position to do it now.

Scott Henry - Roth Capital Partners

These are historical numbers I mean you have the numbers.

Gearóid Faherty

We’ve told you that, we take approximately 30% of what Axcan sell. We told you about the size of the Axcan business. We have told people that obviously any royalty revenues that we earn from these people and we have given ranges as to what the royalties it obviously straight to the bottom line. We have told people for products like Lamictal like Axcan, like AMRIX, we have gross margins of greater than 50%. So, I think we have given a lot of guidance on those issues.

Scott Henry - Roth Capital Partners

Okay, well then I guess reason to ask specific question, aside from that commentary, is the 10 million in sales for the quarter how does that breakup between Pancrelipase 5,000 and ZENPEP?

Mario Crovetto

Yes, it's approximately 9 million ZENPEP and 1 million reauthorized generic.

Scott Henry - Roth Capital Partners

Okay and if I could ask another question since this is very helpful Lamictal ODT what kind of profitability does that product have?

Gearóid Faherty

We have a royalty of greater than 5% in the product and we have growth margins of greater than 50% on the supply of product to them.

Scott Henry - Roth Capital Partners

Well, this is helpful, I just said as a comment I think it will be helpful to have greater clarity in the historical numbers I am not even talking about going forward. But I appreciate the feedback that you gave. Thank you.

Operator

Our next question is coming from the line of Sumant Kulkarni with Bank of America.

Sumant Kulkarni - Bank of America

Good morning this is Sumant thanks for taking my question. You just provided the AG versus the ZENPEP breakout of the 10 million is there any conceptual level you can provide for the high strength versus the low strength part of the 10 million?

Gearóid Faherty

I'm just looking at the data that comes out of the IMS that gives you a sense of what the percentages are on the last week that was reported according to IMS of our share 1.9% went to the ZENPEP side 2.7% of the market share, the total market share went to the 10, 1.7% went to the 15 and 3.6% went to the 20 to give you our total of ZENPEP total of 9.8%. So 3.6% to 20, the 15, 1.7%, the ZENPEP 10, 2.7% and the ZENPEP 5, 1.9% and that's as of the 23, July.

Sumant Kulkarni - Bank of America

What I meant is there a one to one correspondence between the script share and the sales share?

Gearóid Faherty

Sorry say that to me again.

Sumant Kulkarni - Bank of America

What would the sales share be? The script share we can get from IMS.

Gearóid Faherty

Yeah. In terms of product translate, well obviously we have then in case of the price of the various products and the price, the back price towards the loads product would be in the $0.70 range and our highest trend product would be over 260.

Sumant Kulkarni - Bank of America

And on SG&A I know you don't provide specific guidance but do you expect the second quarter of this year to be the highest in terms of SG&A spend?

Mario Crovetto

The SG&A in this quarter is sale indicative of the future it was a bit on the high side because of some special expenses we incurred in the quarter but this indicative of the future quarters.

Sumant Kulkarni - Bank of America

My final question is of the many undisclosed products that you have in development are there any that could come to fruition in the next few quarters that we may not be aware of?

Gearóid Faherty

We think there's a couple that are coming through to finding deadlines but again as far as by the partner but we think there's a possibility that one or two of them might be coming close to filing times.

Operator

Our last caller is coming from the line of Rich Silver with Barclays Capital. Please state your question.

Rich Silver - Barclays Capital

Yeah, just a couple of questions. First, on J&J now that they do have an approved product than on the market for almost a month; can you give us some sense of what you are seeing, hearing in the field. Now that they have the approved product and how aggressive they have been in terms of their promotion and marketing other products. And I have one more question.

Gearóid Faherty

We haven’t seen very much from them at all, yes Rich. There haven’t been a big presence in the Cystic Fibrosis area for a very long time and we haven’t seen any change in that as yet and the same would be said for GI where they did promote but not very aggressively. So up until the last new Zypad is about a week old now we haven’t seen any significant change.

Rich Silver - Barclays Capital

Okay. And then less important question but back in two years ago when you announced that ZENPEP was eligible for review under the centralized procedure in the EU. You also said that there was an 18 month time line for filing after that centralized review that’s been granted. So should we assume that that’s obviously not going to happen? So therefore when the time comes for it to be reviewed it will actually not be reviewing in a centralized way?

Gearóid Faherty

No. You shouldn’t assume that because that’s the time obviously when we were talking about that we were not aware and EMA we are not disclosing that they were developing guidance for the product.

And we provided a protocol to them while they were working through their guidance then their guidance came as in May and went thorough of last year or whatever it was and went through review process which finalized in I think was late November of last year. So, now we that is all has to be taken into consideration by then, so no we don’t expect what you just suggested.

Rich Silver - Barclays Capital

And then just last one which maybe you've answered this and I didn’t quite hear it but as we look at the quarter-to-quarter decline in the royalty line, can you give us any sense of how much of that was ULTRASE sources say AMRIX or anything else?

Mario Crovetto

It was entirely ULTRASE.

Rich Silver - Barclays Capital

Okay. So, for the others we can assume there was actually growth in royalty sequentially for everything else?

Gearóid Faherty

Obviously there are two other primary ones that will be driving, it would AMRIX and Lamictal. AMRIX was relatively flat and the Lamictal was growing.

Operator

There are no further questions at this time. I'd now like to turn the floor back over to management for any closing comments.

Gearóid Faherty

All we have to say is thank you for dialing in and thank you for your continued interest and support. That concludes our call this morning. Thank you.

Operator

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

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Source: Eurand N.V. Q2 2010 Earnings Call Transcript
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