Forest Laboratories Inc (FRX) F2Q11 (Qtr End 9/30/10) Earnings Call October 19, 2010 10:00 AM ET
Executives
Frank Murdolo - Investor Relations
Larry Olanoff - President & COO
Frank Perier - SVP, Finance & CFO
Analysts
John Boris - Citi Investment Research
Ian Sanderson - Cowen and Company
David Amsellem - Piper Jaffray
Louise Chen - Collins Stewart
Corey Davis - Jefferies
John Stevenson - KBC Securities
Marc Goodman - UBS
Gregg Gilbert - Bank of America/Merrill Lynch
Mario Corso - Caris and Company
Gary Nachman - Leerink Swann
Frank Pinkerton - SunTrust Robinson Humphrey
Irina Rivkind - Duncan Williams
Operator
Good morning my name is Bobby Joe and I will be your conference operator today. At this time I would like to welcome everyone to the Forest Laboratories Second Quarter Fiscal 2011 Earnings Conference Call. (Operator Instructions).
Now I will turn the call over to your host today Mr. Murdolo with Investor Relations. Sir, you may begin.
Frank Murdolo
Thank you Bobby Joe and good morning everyone, this is Frank Murdolo. Thank you for joining us today for this second quarter of fiscal 2011 conference call. Joining me today is Larry Olanoff our President and COO and Frank Perier our Senior Vice President of Finance and Chief Financial Officer.
By now, each of you should have seen the earnings release that we issued around 8 A.M this morning. The release is also available at our website, www.frx.com.
By way of Safe Harbor Statement, let me add that the various remarks that we may make about future expectations, plans, prospects for the company that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and actual results may vary.
Let me now turn the call over to Larry, who will comment on the business during the quarter.
Larry Olanoff
Good morning everyone. I will start today's call by reviewing key company events for the quarter and turn the call over to Frank Perier who will review the financial details of the quarter. Our underlying business continues to perform very well during the quarter for our key marketed products. Lexapro sales were essentially unchanged from last year despite the expected modest decease in market share and we saw a continued solid prescription growth for Namenda, Bystolic and for our newest products Savella.
We had a very busy quarter including a positive recommendation for the approval of Ceftaroline from the FDA Anti-Infective Drugs Advisory Committee. We look forward to hearing from the FDA on the action date for Ceftaroline at the end of this month.
As planned during the quarter we responded to the FDA's complete response letter for taxes which was issued by the agency in May. We expect the response from the agency in the first quarter of calendar year 2011. During the quarter, we and our partner Ironwood Pharmaceuticals reported positive top line results from the first of two ongoing phase III clinical trials assessing the efficacy and safety of linaclotide for irritable bowel syndrome with constipation or IBS-C. Later this quarter we expect to receive the results from the second Phase III clinical trial for linaclotide and IBS-D.
Regarding our inline products, Lexapro sales in the quarter totaled $569.3 million, essentially unchanged from the year ago period. The continued general market growth is helping to maintain Lexapro revenues in the current market. Sales of Namenda were $310.1 million; growth of 12.7% year-over-year, a combination used with acetylcholinesterase inhibitor remains the most widely applied dosage regimen and accounts for about 60% of total Namenda use.
Bystolic had sales in the quarter of $63.7 million, compared to sales of $40.7 million in the year ago period. Bystolic sales continue to perform strongly and we continue to see an encouraging mix of patients including significant proportions of those switching from generic beta-blockers and those new to beta-blocker therapy. Our approach to physicians has been to emphasize the use of Bystolic as the first add on agent to standardize first line agents and this message appears to be increasingly well received and represents a significant change in the beta-blocker treatment regimen for many hypertensive patients.
Bystolic has a growing base of approximately 164,000 prescribers with approximately 90% of these being repeat writers. Both primary care physicians and cardiologists are prescribing the product. While share amongst cardiologists continues to exceed that of the national share for Bystolic, recent monthly prescription trends show that primary care providers are now generating higher prescription volume than cardiologists.
Since the launch in 2008 approximately 986,000 patients have filed or filled a Bystolic prescription. Younger patients comprised a higher percentage of Bystolic patients than for other beta-blockers and other antihypertensive agents in general. 54% of Bystolic patients are in fact younger than age 65, compared to 43% for other beta-blockers and 46% for the general antihypertensive market.
Overall in the managed care front, our access without any step at it or prior authorization restrictions covers over 85% of total beta-blocker lives. Bystolic has unrestricted tier 2 coverage on major national health plans and is the preferred brand at many of the major national plants.
Within the past two months Bystolic has become available unrestricted as tier 2 preferred brand co-pay product on the Medco National Preferred Prescriptions commercial formulary and the Express Scripts National Preferred commercial formulary.
We launched Savella in April 2009 and sales in the current quarter were $21.4 million, as compared to sales of $10.2 million in the year ago period. Our broad based early experience sampling program and general promotional activities have succeeded in driving patient and physician experience with Savella and we continue to be encouraged by the solid uptake and the positive response to Savella's profile and performance with both specialists and general practitioners.
During September Savella achieved a 5.7% total RX share of the fibromyalgia market growing 207 basis points versus last September and is the only branded drug in this category that has grown total prescription share in the past 12 months.
There have been approximately 62,000 cumulative prescribers since launch and repeat prescribers continue to account for over 90% of Savella's weekly prescriptions. Over 80% of Savella's business is coming from continuing patients while the remainder is primarily coming from new starts as add-on therapy. We are also seeing switches to Savella from multiple other therapeutic categories including opioids, non-steroidals and SSRIs. This is a strategic achievement as nearly 74% of fibromyalgia's total prescriptions written are for these older off label categories.
In total about 85% of Savella treated patients are on polytherapy for their fibromyalgia which is similar to the current experience for both Cymbalta and Lyrica. We continue to see a steady growth in total weekly prescriptions Savella with the latest weekly total prescriptions volume running at over 15,000 strips.
Savella rapidly gain share in the fibromyalgia market driven by early adopter physicians both specialists and in primary care. Recent weekly total prescription data indicates that primary care physician's account for nearly 60% of the new prescribers. Assuring further growth in the primary care segment is our long term strategy.
We have exceeded our original managed care launch goals for Savella and have achieved unrestricted formulary position either Tier 2 or Tier 3 in commercial plans covering 80% of targeted prescriptions.
Just earlier this month Savella moved from non-formulary restricted status into the Tier 2 unrestricted coverage on all member health, CCRX formularies and on all Medco, Medicare Part D formularies.
Overall, we are pleased with the strong sales and earnings performance of our inline products and their positioning with national managed care plans. I will now turn the call over to Frank Perier who will provide more details on the financial results.
Frank Perier
Thank you Larry and good morning everyone. Fiscal second quarter revenues were comprised of just over $1 billion of product sales versus $962.7 million last year representing growth of 7.7%, 42.4 million of contract revenue primarily from the Benicar agreement down 14.5% versus last year as well as 8.5 million of interest income. Total revenues for the quarter which are inclusive of product sales, pre-tax earnings from Benicar, interest and other income totaled $1.009 billion an increase of 2.3% from last fiscal year.
Other income in last year's second quarter included a $40 million of payment from AstraZeneca as a result of granting them the rights of ceftaroline in Europe.
Wholesaler inventories were essentially flat at just under 2.5 weeks as compared to last quarter with little impact on the current quarter sales. Gross margin in the quarter came in at 76.3% compared to 77% in last year's second fiscal quarter. SG&A spending during the quarter was $316.4 million, down 2.6% from last year's second quarter. SG&A spending in the second fiscal quarter of 2010 of $324.9 million included a charge of $20 million as part of a settlement with Caraco Laboratories related to legal proceedings for Lexapro. Excluding the charge, SG&A spending the current quarter increased 3.8% versus the prior year. The current level of spending reflects the resources and activities required to support our currently marketed products, particularly Bystolic and Savella.
Research and development spending in the current quarter was $154.5 million, compared to $263.1 million reported in the second quarter last year. R&D spending in the prior year quarter included a charge of $100 million for an upfront license payment in for the product collaboration agreement for Daxas. Excluding the payment R&D spending reported in the current quarter decreased 5.3% versus the prior year. Research and development spending is primarily in support of the expanded late stage development program spread over multiple pipeline projects with four products currently in Phase III trials.
The current quarter also included product development milestone payments of $3 million, compared to $29.9 million of milestones in the prior year's quarter. Our effective tax rate for the quarter was 22.9%. We expect the full year reported effective tax rate to be approximately 22.8%. However after excluding one time items, the full year adjusted tax rate is expected to be approximately 21.5%.
In May the board of directors approved a new share repurchase program for up to 50 million shares of the Company's common stock and in June the company entered into an agreement with Morgan Stanley to repurchase $500 million of its common shares, utilizing accelerated share repurchase transaction. There were no shares repurchased during the current quarter. We have authorization to repurchase an additional 38. 8 million shares. Actual shares outstanding as of September 30th were approximately 287.612 million, a decrease of 16.2 million shares from last year.
Our cash and marketable securities balance on September 30th was approximately $4.1 billion, an increase of $242.8 million from last quarter. Regarding the Department of Justice settlement of $318 million, the reserve was $225 million at September 30th, reflecting payments made to date. Of the $4.1 billion total cash, approximately $1.3 billion or 32% of cash and marketable securities are domicile domestically with the remainder maintained by our international subsidiaries.
Moving to our financial guidance for fiscal 2011, we now expect that diluted earnings per share for the fiscal year ended March 31st will be in the range of $3.80 to $3.90 per share including the impact of the ASR transaction and excluding the charges the in the June quarter of $0.56 per share for the settlement with the United States Department of Justice and the upfront license payment to TransTech Pharmaceuticals.
I'll now turn the call back to Larry for a pipeline update.
Larry Olanoff
Thank you Frank. As we move further into fiscal 2011, our focus continues to remain on moving our significant product development pipeline forward, making this another very busy period for us. As we have previously guided you will see important Phase II and Phase III clinical data in the coming months for aclidinium, levomilnacipran and Linaclotide as well as FDA action on our NDA filings for ceftaroline and Daxas.
Regarding our late stage product development pipeline on September 7th, the Anti-Infective Drugs Advisory Committee recommended ceftaroline for approval for both the submitted indications of acquired bacterial skin and skin-structure infections and community acquired pneumonia.
We expect to hear from the FDA on the ceftaroline submission by the action date which will occur around the end of this month. If approved we plan to launch ceftaroline during the early part of the calendar year 2011. Last December we expanded our relationships with AstraZeneca for infectious disease products in a transaction that broadens our partnership beyond just ceftaroline to include Ceftaroline 104 and Ceftazidime 104.
You may recall in January, 2008, Forest licensed from Novexel North America rights to Novexel 104, a beta-lactamase inhibitor for use in combination with Ceftaroline and obtained a right of first negotiation in North America to Ceftazidime 104 as a combination.
To a transaction with AstraZeneca executed immediately following AstraZeneca's announced acquisition in Novexel. We acquired additional rights in Novexel 104 which amends the terms of our 2008 move in Novexel carving the combination of Novexel 2014 with Ceftaroline and as traditional U.S. rights the combination of Ceftazidime and 104 as well as other future possible combination with other antibiotics.
Novexel 104 inhibits several classes of bacterial enzymes called beta-lactamases, that break down beta-lactin antibiotics such as Cephalosporin, Penicillin and Carbapenem. This is perhaps the broadest act of such agent now in clinical trials and can potentially be combined with various beta-lactamase antibiotics to enhance their spectrum of activity and counter act gram-negative bacterial resistance.
Our antibiotic product portfolio now includes drugs principally active against gram- positive pathogens, just as Ceftaroline and Ceftaroline 104, and gram-negative pathogens, specifically Ceftazidime 104 to address virtually the entire spectrum of clinically-important bacterial pathogens.
Later this quarter we expect to report top-line results from two ongoing Phase II clinical trials for Ceftazidime 104 in patients with complicated intra-abdominal infections and complicated urinary tract infections.
Last month we and our partner Ironwood Pharmaceuticals announced positive top-line clinical trial results from the first of two Phase III IBS-C clinical trial. Analysis of the data indicate clinically meaningful and statistically significant symptom improvement was achieved for an Linaclotide treated patients compared to placebo treated patients for all four or primary efficacy end points which includes two composite responder end-points encompassing abdominal pain and complete spontaneous bowl movements as well as individual responder end points for the individual components.
Significant improvement was also achieved for an Linaclotide treated patients compared to placebo treated patients for all pre-specified secondary endpoints which are measures of abdominal pain, abdominal discomfort, bloating and bowl symptoms.
The safety results were consistent with those observed the previous with Linaclotide trials with diarrhea being the most common adverse event in Linaclotide treated patients. We expect to report top-line results from the second Phase III clinical trial for IBS-C during the current calendar quarter.
The IBS-C clinical trials are part of a broader based reprogram investigating the effect of linaclotide treatment on patients with IBS-C or chronic constipation. Previously Forest and Ironwood reported positive results of two Phase III trials in patients with chronic constipation. Assuming positive results from the second Phase III IBS-C trial, we anticipate submitting the NDA for both indications in mid-2011.
As you will recall, in May we received a complete response letter from the FDA for our NDA free taxes for the treatment COPD. When we receive the complete response letter which requested certain additional information and analysis of existing data, we announced that we anticipated being able to respond to the FDA during the third calendar quarter and as announced last month, we have filed in a response addressing topics raised in that complete response letter.
The FDA has acknowledged receipt of the resubmissions, considers it complete, as a class 2 response to their complete response letter. I would remind you that no additional patient trials were requested. We expect the next action from the FDA in the first quarter of 2011.
In January, we and our partner Almirall announced positive top line results from a double blind placebo controlled parallel group design, three month Phase III trial with aclidinium in patients with COPD. This is the aclidinium in chronic obstructive pulmonary disease trial or the ACCORD COPD I study and is the first of three Phase III clinical trials, two of which are ongoing, investigating the twice daily administration of aclidinium.
We anticipate reporting top line results for the second U.S. study later in this quarter and the third European study during the first calendar quarter of 2011. Assuming positive results we anticipate submitting the NDA for aclidinium BID around mid 2011.
We view aclidinium as a broad franchise opportunity. The new BID Monotherapy program will facilitate our strategy to develop a twice daily aclidinium formoterol combination. We anticipate reporting top line results for the Phase II studies for that fixed dose combination formulation also during the current calendar quarter.
We are pleased to have access to a unique dry powder inhaler device for aclidinium that will be convenient to use and easy to incorporate higher or more frequent dosages as well as combination agents. The ease of use and functionality of the inhaler device is an important factor in delivering the correct dose to the lungs, thus ensuring optimal COPD treatment and improving patient compliance and satisfaction with their dosing regimen. With the built in dose indicator and a unique control inhaler tells the patient that the dose has been inhaled correctly. We believe the aclidinium DPI will only add to the competitiveness of the franchise.
Last December we were pleased to announce an addition to our existing collaboration with Almirall to develop market and distribute LAS 100977 in the United States. This compound is highly posed inhaled, once daily administered long acting beta two agonist. We along with Almirall plan to develop a combination with an undisclosed quarter of a steroid with the dual indications of both asthma and COPD. Additional Phase II studies are planned to start later this quarter.
Our development collaboration with Pierre Fabre for F2695 or legromenalsphran a once-daily administered selective norepinephrine and serotonin reuptake inhibitor for the treatment of depression is also on track. We initiated Phase III clinical trials last summer for this agent and anticipate reporting top-line results for the first Phase III clinical study in the first quarter of calendar 2011 with additional Phase III clinical studies completing during the remainder of 2011.
The impressive results of the Phase II depression study that led to our decision of licenses product were presented last December at the ACMP meeting. Turning to Cariprazine, in August, we and our partner Gedeon Richter announced preliminary top-line results from a eight week Phase II Clinical Trial for the treatment of bipolar depression. In that trial a total 233 patients were randomized in either one of two actives and that was a low dose or a high dose treatment groups or placebo.
The primary end point was the Montgomery-Asberg Depression Rating Scale or MADRS and the study was designed to be exploratory in nature. Although the overall difference observe between the drug treated and placebo treated groups were not statistically significant. Over the course of the trial there was evidence of a clinically relevant symptom improvement in the high dose cariprazine arm of the study by comparison of placebo.
In addition to tolerability results for cariprazine support further investigation in this patient population. We are currently considering conducting an additional Phase II dose response study in bipolar depression patients examining a wider range of doses. Cariprazine is also under going Phase II clinical trials or a Phase II clinical trial in patients as adjuctive therapy to SSRIs in major depressive disorder. We anticipate reporting top-line results from that study they are in the first calendar quarter of 2011.
In addition, cariprazine is undergoing Phase III clinical trials or separate indications of schizophrenia and bipolar mania. We expect to report top-line results from both programs during the second half of calendar 2011.
We currently two recently launched inline products by Bystolic and Savella. One additional through product in the NXR and six Phase III correlated pipeline products. Though the six pipeline products two are under FDA review that's Daxas and ceftaroline. Two are planned to be filed during 2011 exactly Aclidinium and Linaclotide and we expect to pipeline two more NDA during 2012 for Cariprazine, Levomilnacipran.
We believe these products could collectively present several 1 billion dollars of potential product sales in the long term. Sufficient overtime to replace the revenues lost due to patent expiries for Lexapro in 2012 and Namenda in 2015.
Since late 2008 we have added six major active installments toward the 2012 pipeline expansion goal including Daxas, Levomilnacipran, LAS100977 and Ceftazidime 104 and we have advanced Linaclotide and Cariprazine through proof of concept the full Phase III develop.
In addition, we recently added the glucokinase activator program from TransTech, an earlier-stage program. And we partnered with AstraZeneca for the co-development and commercialization of Ceftaroline and Ceftaroline 104, outside of the U.S, Canada and Japan.
In parallel, we continue to advance our full development pipeline. Our business development team continues to see interesting and commercially attractive products in the market, and we have clearly demonstrated the ability to compete effectively to secure such important new products, either through product licenses or direct acquisition.
We remain confident in our ability to launch additional new products prior to and post the 2012 time period in parallel to advancing our established pipeline.
Frank Murdolo
Thank you Larry. I will now read some second quarter sales figures for some of our smaller products. Campral, $5.1 million; Celexa, $3.5 million; Cervidil $14.3 million; Esgic, $0.6 million; Europe sales $19.2 million; Generic, $17.8 million; Lorcet, $1.3 million; Monurol, $0.5 million; Thyroid $8.4 million; Tiazac, $1.7 million and the Benicar third party sales for the quarter were $237.8 million.
So operator, just give us a minute. We'll start the Q&A session just shortly. Okay, operator, thank you. If you could start the questioning please.
Question-and-Answer Session
Operator
And your first question will come from the line of John Boris.
John Boris - Citi Investment Research
Thanks for taking the questions. I have two questions. The first one is for Larry. With the pending potential PDUFA date and launches of ceftaroline, can you just talk about some of the product concept testing that you've been doing within the hospital. What are some of the risks, some of the opportunities and how are physicians within the hospital setting viewing the profile of ceftaroline and what do you its going to best replace? Do you think its going to be restricted etcetera and then for Frank, can you just remind us on the Bystolic royalty Cymbalta, what actually happened there in the fourth quarter and what potentially beneficial effect might that have on your gross margins going forward. Thanks.
Larry Olanoff
Thank you John for that questions. As regards to ceftaroline, we've talked about this and we continue to move forward with this theme which is that we see the product as an impaired first line use agent. We purposely pursue the two largest use indications in the hospital for in the line of biotics as it relates to Community Acquired Bacterial Pneumonia had completed skin infections with the purpose of allowing physicians to see this as a random or commonly used drug and ceftaroline is being a surplus offers the kind of cefts safety profile which again was discussed at the time of the advisory committee which will also provide a level of familiarity to physicians who are well versed in the use of both (inaudible). So we think our message has been well received. Our discussions with various members of the hospital community as it relates to pulling drugs onto formulary have been positive thus far and centered in on the all the various parts that you would expect in terms of getting the labs ready to test for the product, kind of use of the product, the pricing and all the other aspects. So I think we're fairly well prepared and we're now in the process of, as we've announced earlier expanding our hospital sales force, training up the people and getting ready for what will be very full launch in the first quarter of next year. And I'll allow Frank to talk about the Bystolic question you had.
Frank Perier
Yeah, sure John. Thanks for the question. Effectively January 1 we stopped paying the royalty directly to myelin but then we do commence the amortization of the buyout amount that will amortize over remaining life of the product on a projected sales basis. So you'll see a modest improvement in cost of goods as the amortization rate will be slightly below what the cash royalty rate has been.
John Boris - Citi Investment Research
Thanks.
Operator
Your next question comes from the line of Ian Sanderson.
Ian Sanderson - Cowen and Company
Good morning and thanks for taking the question. First on Ceftaroline, any update on the discussions with the FDA regarding the labeling specifically your proposal to raise the microbiological deceptibility break point and maybe if you can give a little color on how important you feel that might be and then secondly for Frank. I notice is what I think is a significant quarter-over-quarter increase in the U.S. dominical cash balance and wondering what the dynamics where there and related to that do you anticipate any change in U.S. government policy regarding repetition over the next year.
Larry Olanoff
Thank you Ian for your questions, regarding ceftaroline as we said we anticipate an action by the agency around the end of the month. You can expect that over the course of the time since the advisory committee we have been and the instructions with the agency on a variety of things as would normally ensue prior to such an action date beyond that I can't really give detail. What I would relate to you is the presentation we made at the time of the advisory committee and we felt very helpful mutual comments made by the members of the advisory committee as to the need to put in practical numbers as it relates to break points. In the end this is a laboratory based need, it really should not impact in a major way the use of the product but it is a practical need for the laboratories in terms of doing their susceptibility testing and there are number ways of supporting that going forward.
Ian Sanderson - Cowen and Company
And if I could ask on the sort of the pre-launch activities, have you put the hospital sales force in place i.e. just that SG&A spending number in Q3 largely reflect what we should see going forward or is that incremental from here?
Larry Olanoff
In a moment I will let Frank answer your other question regarding macro-financial cash distribution but he can also comment on this as well. Well right now we are already operating with little more than half anticipated hospital sales force. So that cost is already recurring cost for us for some time. We have had some additional costs into that third quarter but there will be some additional cost coming in as we hire additional reps from other people and backfill into our field sales as well.
Ian Sanderson - Cowen and Company
Okay thanks about that.
Frank Perier
And with regard to domestic cash, actually we're running right on plan relative to our expectations as far as U.S. versus non-U.S. cash generation during the year and I think we expected to have slightly higher U.S. cash generation this year versus the prior year. With regard to repatriation I think it's something that's on top of every one certainly in our industry and multiple, any multi-national U.S. based companies certainly in the top of the list but I think it's given the current constraints with the administration and congress that's still on the wish list. I don't really see much activity.
Ian Sanderson - Cowen and Company
Okay. Thank you very much.
Frank Perier
Sure.
Operator
Your next question comes from the line of David Amsellem.
David Amsellem - Piper Jaffray
Hey, thanks for taking the questions. Just quickly on Savella, you mentioned that over 80% of prescriptions are coming from continuing patients. It seems like you're not seeing strong growth from patients who are new to the drug. So I guess, what do you think you can do to drive new patient growth and particularly drive patients off of the generics used off label.
Larry Olanoff
I think in any category at this stage of the game your expectations are the fact a vast majority of your scripts are going to come from recurring patients. That's a good sign in the sense that patients are maintained on the product and they tolerate it well and see a benefit. In the market two things I think need to be -- you need to be aware of. One is that it's still a growing market in terms of the market size. We're still seeing healthy double digits increases in the market as we go forward. That means new patients are being brought into any form of therapy where we're tracking scripts.
The second part of it is the polytherapy market. So its not so much switching patients off of other drugs that make occasionally occur making them more of an anti depressant and putting them on either some Cymbalta or Milnacipran, Savella in our case. But in the end it's really these patients are treated with mutli-product categories, many of which are generic products which are not even approved for the use and that's just a reality of the marketplace.
David Amsellem - Piper Jaffray
Okay and then one other question if I may on Levomilnacipran, can you talk about how you think the product is differentiated from the reuptake inhibitors and I know that you haven't, you're going to get top line data next year but maybe give us a sense of how you think this product could be positioned versus what's out there in terms of the SNRIs?
Larry Olanoff
Without getting into specifics, with the data from the Phase II study which is really kind of what sold us on the utility of the product, we were impressed with the response rates. We think it's a right potent well tolerated product based on other anti depressants in the SRI class. The Phase III programs are designed to help us further profile the product and we see this product as comfortably fitting within our sweet spot for these types of acquisitions.
David Amsellem - Piper Jaffray
Okay. Thanks.
Operator
Your next question comes from the line of Louise Chen.
Louise Chen - Collins Stewart
Hi, a few questions. First question I had was with respect to your remainder of fiscal 2011. How should we think about the quarterly progression of your SG&A, R&D spending and maybe your tax rate as well?
Frank Perier
Sure Louise. Again we've got, from an R&D expense standpoint we're going to have some increase in the second half versus the first half of the year and again from an SG&A standpoint with hopefully some -- assuming we get some positive news from the FDA you'll see some additional SG&A expense relative to the ceftaroline launch in Q4 but no real big movements from quarter-to quarter.
Louise Chen - Collins Stewart
And then with respect to the increase in your EPS guidance, aside from the tax rate, is there anything else that you're changing?
Frank Perier
It's really a good question Louise. It's really across the board. We're looking at some modest improvement in sales and revenue expectations, some savings potentially from an SG&A, very modest and then some incremental spend in R&D. So it really kind of goes down almost every line of the P&L but we added all up there is nothing individual the call out when you add it all up, we are looking at stronger earnings than we had originally forecasted.
Louise Chen - Collins Stewart
And then the last question I had was just on your cash balance outside the U.S. How do you expect to leverage that to build your U.S. pipeline, we just get a lot of questions on that so just curious if you could clarify your strategy.
Larry Olanoff
Again we try and direct all of our business development activities be it a licensing arrangement with up fronts or be it outright acquisition of a product or the potential acquisition of a company through our international subsidiaries to really leverage up that opportunity that we have offshore.
And we continue to - we have done that in the past and we continue to do that in the future and we continue to be very active in looking at the bull gamut of business development activities from licensing all the way up to our acquisitions. We have been very active and we continue to be very active.
Louise Chen - Collins Stewart
Thank you.
Larry Olanoff
Sure.
Operator
Your next question comes from the line of Corey Davis.
Corey Davis - Jefferies
Thanks very much. First of all a follow-up Levomilnacipran and I heard what you said to the response to the previous question but are you only pursuing an MDD indication, just curious why you wouldn't also go after all the other indications like SAD, GAD, OCD or some of the pain indications like Cymbalta is just resource constraints right now or there is particular attributes of the product that don't make it amenable to going after additional indications.
Larry Olanoff
Corey, thank you for your questions. I think two reasons that we pursue NDD one it's easily 80% of the market in terms of the psychiatric use. We see as I said earlier we see the product performing right within our sweet spot in terms of revenue generation from this type of an acquisition and you also have to be aware of the IP Coverage for these products and stay within the appropriate space in that regard. I think there are attributes of this product that go beyond depression that we may seek to profile as we go forward. Obviously though depression will be our primary promotional message as we go forward.
Corey Davis - Jefferies
Okay and secondly I think it was Ian that asked about the break points of ceftaroline. So first is just help us put it in perspective, how important is that in a label and then asking the question in a different way of, if the break points end up in the label are not as good as you might like. Is there an opportunity further down the road to maybe improve those through studies or something else or is it a one shot deal given that it is laboratory measure.
Larry Olanoff
It's a good question, I think as I said earlier it's a practical issue for us. The laboratory who want specifications as to how to read out their samples, having said that there are a good number of patients that cut in obviously in the hospital who have no laboratory data to proceed the use of the product that is just the way of the world. They may get that feedback, they may not get that feedback in some hospitals that information is not routinely generated. So I think it's a very useful piece of information, at some proof it give people practical information in terms of how they are using their drug, a lot of that decision on the future use of drug even when the data comes back from the laboratory is driven by the patient response.
Beyond that whatever you find it actions are within first year or so of the use of the product you will start having some discussion going on with an independent agency that looks at these great points and they will make their access based on the data and then the data really involves not only the clinical data that he generated in your Phase III trial but in the surveillance data that continue to be generated as we go into the marketplace and beyond. So yes and your point is well taken. There is a lot of data in the marketplace that helps set this bright points beyond what might appear in fact it should serve. But I think the conversation that occurred at the advisory committee was very well centered on how these things need to be considered and at this point I wouldn't forecast the terms of what exactly the package in certain degree.
Corey Davis - Jefferies
And last question on Cariprazine. What are the chances you have to do some long term, like one year studies? I think if I recall there is still a debate going on where lots of these group at the FDA wants one year studies but they held a panel meeting and the panel said no, you don't have to do those. So what's your current thinking on Phase III? Can you get away with just the six or eight week studies, whatever they are or might you have to do longer term studies to get that thing approved in schizophrenia?
Larry Olanoff
You know, our program is I would say very simply -- our program is designed across the classical duration of studies as you mentioned six to eight weeks, in that framework. I think there are a number of studies that the company could consider beyond the initial indication that relate to product performance over the long term which are separate indications for withdrawal type designs and such and separate indications for persistence and they're probably more important in the European marketplace and those are -- they're clearly under our consideration but we've not received any feedback from the agency in our discussion of the necessity to do longer term studies for efficacy and we, as you would expect we're doing the kinds of open label long term studies to confirm safety profiles as well.
Corey Davis - Jefferies
Great, thanks and nice quarter.
Larry Olanoff
Thank you.
Operator
The next question comes from the line of John Stevenson.
John Stevenson - KBC Securities
Thanks for taking the question. This was on LAS 100977, I noticed at the most recent ERS meeting that there was a crossover study which yielded pretty impressive results on the [F51] program. You mentioned you're moving into additional Phase II work. So I was wondering if you might be able to comment on what dosage levels you're looking at. Are they pretty much in the same ball park or are you adjusting the doses that you're looking for.
Larry Olanoff
I don't think we've made any comments to date in terms of specific doses that we plan to study. We will use the data from the previous Phase II studies to inform us in that regard. And as you are aware Almirall is working -- it is their project and they're working very closely with us so the two companies will come to a decision in terms of the -- we're looking for a dose which is clearly clinically efficacious. We wanted to avoid any issues of tolerance development over time which is classic for these group of agents and as potent as it is, we need to work with a practical dose that we can deliver from what we think is an ideal device.
John Stevenson - KBC Securities
And then how quickly might you be able to have some of the Phase II results from the next set of studies? Is that something that would happen 2011 or 2012?
Larry Olanoff
I don't think we forecast the date yet.
John Stevenson - KBC Securities
Okay, and then just last thing on aclidinium formoterol. When might the earliest time you could move -- might be the earliest time you can move that into Phase III?
Larry Olanoff
We would hope to be able to initiate Phase III program with that combination in 2011.
John Stevenson - KBC Securities
Great, thanks.
Operator
Your next question comes from the line of Marc Goodman.
Marc Goodman - UBS
Good morning. Two questions. First Larry, can you talk about your desire to potentially move into Europe or is it lets just focus on the U.S. and continue the licensing strategy there? And then the second question is just thinking through SG&A over the next year, just trying to understand the incremental spend that you're planning. You have two launches earlier. I think Frank had mentioned you have to increase the hospital sales force a little bit more; part of it's already in the number. So I am just trying to gauge how much more there and then what kind of spend incremental should we be expecting for Daxas?
It seems like you are trying to keep SG&A pretty tight, so just trying to get a flavor for that.
Larry Olanoff
You made some very good comment. Regarding the next year’s SG&A we will tell you in April which is all right. Frank is putting a muzzle over me right now.
Marc Goodman - UBS
Will there be an increase in sales force for Daxas?
Frank Perier
From a primary care standpoint we don't anticipate any expansion of the primary care field force to support Daxas. The only field force expansion, and it’s modest, is that we are looking for is in the hospital based field force for the support of ceftaroline.
Marc Goodman - UBS
And can you just tell us what number you have today in hospital reps and what your plan is?
Larry Olanoff
We have about 110 hospital reps today. Our plan is to possibly double that number. We have already start putting in the senior management team to allow that to occur, so that's progressing very well in advance of the training we plan towards the end of this year and the launch next year. In regard to the expense some of that expense will flow into this fiscal year. There will be some additional fiscal and that's already been budgeted to our projections for this fiscal year, some additional expense will flow into fiscal year 2012.
Frank Perier
I guess suffice it to say that we are going to be as conservative with our SG&A spend as we can but at the same time we are not going to compromise the launches of any of these products.
Larry Olanoff
And can you remind me of your second question?
Marc Goodman - UBS
Yeah, I was just curious about your thoughts with Europe?
Larry Olanoff
Just to remind you we are already in Europe. We have had a hospital sales force for decades now in the UK and Ireland and we market a number of products there especially products as well as some over the counter products and done that quite successfully. We have overall long time ambitions to explore other possibilities in Europe. At this point what we have been doing to go forward with those ambitions is to seek licenses and opportunities on products, especially specialty products that we can gain at the time we sign our license with North America to also gain rights into Europe and potentially even other territories.
We are not looking at any major acquisitions immediately on our play bill in terms of expanding in Europe but we will seek where opportunities arise to grow organically and pursue specialty items.
Marc Goodman - UBS
Thanks.
Operator
And the next question comes from the line of Gregg Gilbert.
Gregg Gilbert - Bank of America/Merrill Lynch
Hi, guys I have a couple. First of all on the wording of your additional development agreement to talk about during this and subsequent year. Should I read into that or is that just the typical you always have things in the air and they can close at any time?
Larry Olanoff
Yeah there is nothing, there is no subtle message in there Greg. It's just we have always have a lot of blob in the air and with our general run rate has been that two to three of them land in any given year.
Gregg Gilbert - Bank of America/Merrill Lynch
Can I ask you about your appetite for share buyback currently since you didn't purchase any in the quarter?
Frank Perier
Well since we are under an ASR program right now that will run through the earliest at the end of the calendar year and potentially into the first calendar quarter of next year, we are really restricted from doing any additional discretionary share repurchase until that transaction unwinds itself.
Gregg Gilbert - Bank of America/Merrill Lynch
Okay and then I have two for Larry, the first one is maybe a bit tricky but how predictive was the last data set on Linaclotide of the next data set you expect to see in the next couple of months?
Larry Olanoff
Well, this is a great question. As we look at the two studies, they're near identical in design and many features in terms of endpoint and patient inclusion and exclusion criteria. So that plus the Phase IIb data in IBS-C plus the data -- the Phase III data in chronic constipation gives us a reasonable level of confidence that the results we saw in the first IBS-C Phase III trials should replicate themselves in the second and we will anxiously await that outcome.
Gregg Gilbert - Bank of America/Merrill Lynch
And then lastly, a high level questions. You obviously have goals in terms of revenue generation to replace what's going away but how would you characterize how the company thinks about the types of revenue that you would hope to have in the post cliff [ph] era for the company?
Larry Olanoff
Well I think as we look out to -- over the longer term, one of the benefits that we will have is we'll have a much more diverse portfolio of products so that we don't find ourselves kind of the victim of our own success as we are today with such heavy concentration really in just two products. So we really envision a much more diverse portfolio of products, a portfolio that we believe we can still very profitably market and sell but we're not so highly concentrated in any one therapeutic category. I'd also comment that amongst the products in our current portfolio, the vast majority of them already carry kind of their life cycle management plans with them, whether that's a near follow on product or additional indications. I think that's also a change for us relative to our past where we had products with limited exclusivity periods and limited indications. So we make I think very conscious choices as the opportunities to expand franchises. Aclidinium is a very good opportunity there where we're looking at a follow-on which is a combination product. And the device itself, the DPI there allows us a number of opportunities. A similar franchise opportunity is what we've constructed around 104. So we're very comfortable with the kinds of plans and business models we've created. And as Frank said, we look forward to a time when no one product will be defining in terms of our revenue generation but the revenues will be spread amongst numerous products with different exclusivity periods.
Gregg Gilbert - Bank of America/Merrill Lynch
Thank you gentlemen.
Operator
Your next question comes from the line of (inaudible).
Mario Corso - Caris and Company
Yes, good morning. A couple of quick questions. In terms of the updated guidance, what's assumed in there in terms of Namenda XR and is there anything you can say on expectations for patent issuance at this point and then would commercialization immediately follow? And the second question, in terms of gross margin, it looks like there was about 100 basis point or so difference between the first quarter and the second quarter. For the full year should we be looking as one of those as more representative of what we should see or perhaps somewhere in between? Thank you.
Larry Olanoff
On the gross margin, we were a little bit heavier on cost of goods this quarter. That should not repeat in the second half of the year. So that was really just some one time items that came through relative into the quarter. With regard to the Namenda XR strategy, we're still not in a position where we're prepared to announce what exactly is our commercialization strategy for the extended release formulation of Namenda or on the -- what the status of the separate patent is.
Operator
Your next question comes from the line of Gary Nachman.
Gary Nachman - Leerink Swann
Good morning. First is the follow-up on ceftaroline. Can you just elaborate a little bit Larry, what do you think about pricing at this point in terms of range of daily cost of therapy after your discussions with formularies and would you look to add other hospital products with the new sales force or just wait for the rest of the anti-biotic portfolio to materialize.
Larry Olanoff
Good question Gary. I think at this point it's pre-mature for us to say anything about pricing. We are sensitive the range of prices that are out there and the sense that hospitals and GPOs apply to what they regard as both premium prices versus generic pricing and then there is a range there. So I don't know that we made our firm decision as to what the price will be yet anyway. So I won't comment further on that. The second part of your question was related...
Gary Nachman - Leerink Swann
You had other possible products in your new sales force.
Larry Olanoff
We continue to look for products both in primary care, specialty and hospital space we could come up with another product that we can introduce. We will be quite interested in pursuing it. Having said that though we look forward both Ceftazidime 104 and Ceftaroline 104 and they are not that distant future being added to the franchise as well but our focus right now and clearly for the first year will be getting ceftaroline well established in the marketplace and we have another opportunity that we right now in our portfolio that could be sold into the hospital but we don't want them to get in the way of building the ceftaroline successfully in our first year launch.
Gary Nachman - Leerink Swann
Okay and then one of Daxas. Since you submitted your response, have you had any other meaningful discussions with the FDA or is it still too soon before the PDUFA data for the first quarter and do you see another panel potentially at some points maybe even before approvals since the first one was I think if one would agree very confusing regarding the outcome in terms of risk benefits of the drugs.
Larry Olanoff
To answer your question we don't see the eventuality of another panel PDUFA we have not made any comments that affect and the kind of discussions we have had have been minimal and routine. So we are still looking forward to the first next year hearing a more definitive response.
The kinds of things that we had to do within a response letter, we are also very routine. So, we don't at this point we can't identify any particular controversial issues. It's a pretty open book it's time of the advisory committee. You can see what our packets had served was at that point in time and kind of where you were shaping the indication, the agency in many ways to encourage us to pursue this and as I said we have no reason to believe that the forward path runners is going to be anymore, any different that what we would routinely predict.
Gary Nachman - Leerink Swann
Have you started any pre-launch activities for Daxas yet?
Larry Olanoff
Nothing in particular.
Gary Nachman - Leerink Swann
All right. Thank you.
Larry Olanoff
After this next question, we will take one more question please.
Operator
And your next question comes from the line of Frank Pinkerton.
Frank Pinkerton - SunTrust Robinson Humphrey
Great. Thanks for taking the question. Just to can you walk me through anything that maybe going on in the channel inventory with distributors on Lexapro. Our price changes are rebating practice changes that it appears that it's moving up and cost per script.
Larry Olanoff
Frank there is really nothing unusual going on with regard to the channel. As far as cost per script, I can't really help you. The scripts are estimate; I know what my sales and basically know what's sitting in the channel or inventory.
Frank Pinkerton - SunTrust Robinson Humphrey
Okay great and this is a follow up. Just remind us on your guidance what's included for the R&D tax credit and why potentially I think you don't have that in there. Why are you assuming that that won't be passed when Congress comes back? Thanks.
Larry Olanoff
We have not -- we never assume once the R&D credit expires that it's going to be renewed until Congress actually does renew it and this maybe one of those years where it may actually slip even further than it normally would. I don't think its any guarantee that Congress is going to renew the R&D tax credit. It comes back and finish it. So that's -- if they do renew it there is a potential benefit to our tax rate but its not baked in there at the moment.
Frank Pinkerton - SunTrust Robinson Humphrey
Thank you.
Larry Olanoff
Sure.
Operator
Your final question comes from the line of Irina Rivkind from Duncan Williams.
Irina Rivkind - Duncan Williams
Thanks for taking the call. Just two questions. One, what was the operational cash flow and two, I heard you saying earlier on the call that you were thinking about additional dose ranging studies on Cariprazine and I was wondering if those doses are currently being studied in the Phase III trials and if not, how that would change the outcome of those programs.
Larry Olanoff
On the dosing range with Cariprazine -- in the Bipolar Depression Studies we purposely started at the lower end of the dose range just to confirm that we have good tolerability and that we could profile the product similar to what we've seen in schizophrenia and Bipolar, and Bipolar mania thus far. But the doses that we would consider studying into future studies are very much within the range of what we studied before with mania probably being at the higher end of the range of doses that we would consider. This experience we've had with Bipolar depressions is hauntingly similar to where we were with schizophrenia, starting out carefully with a lower and kind of a more flexible dose range and now considering a more definitive Phase IIb study. So we're still very encouraged with the data we received. We got that away with the first Phase II study of schizophrenia we hope that going forward Bipolar expression we can replicate the results we had in our later Phase II study of schizophrenia.
Frank Perier
And Irina, again as we said during the call that the total cash flow increase was $242 million in the quarter, we haven't quite gotten the breakdown between operating and capital investment but it is essentially all operating.
Irina Rivkind - Duncan Williams
Thank you.
Larry Olanoff
Well thank you everyone for joining us this morning, for taking the time to join in on the conference call and of course we'll be here for the rest of the day to take any additional questions that you may have. Operator, that concludes the call. Thank you.
Operator
Thank you. This does conclude today's conference call. You may now disconnect.
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