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Cephalon (NASDAQ:CEPH)

Q3 2010 Earnings Call

October 28, 2010 5:00 pm ET

Executives

Wilco Groenhuysen - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Gerald Pappert - Executive Vice President, Secretary and General Counsel

Robert Merritt - VP of IR

Lesley Russell - Chief Medical Officer and Executive Vice President

Robert Repella - Senior Vice President of U.S Pharmaceutical Operations

Kevin Buchi - Chief Operating Officer

Analysts

Corey Davis - Jefferies & Company, Inc.

Manoj Garg - Soleil Securities Group, Inc.

Raghuram Selvaraju - Rodman & Renshaw

Christopher Schott - JP Morgan Chase & Co

Randall Stanicky - Goldman Sachs Group Inc.

Eric Schmidt - Cowen and Company, LLC

Marc Goodman - UBS Investment Bank

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Jon Stephenson - Summer Street Research Partners

Gary Nachman - Susquehanna Financial Group, LLLP

Operator

Good day, everyone, and welcome to the Cephalon Third Quarter 2010 Earnings Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Chip Merritt, Vice President of Investor Relations. Please go ahead, sir.

Robert Merritt

Thank you. Today, we will review Cephalon's financial performance for the third quarter 2010. Before we begin, let me remind you that certain statements on this call maybe forward-looking and are subject to risks and uncertainties associated with the company's business. These statements may concern among other things guidance as to future sales and earnings, operations, transactions, prospects, intellectual property, litigation, development of pharmaceutical products, clinical trials and potential approval of a product candidates.

The company also may discuss certain non-GAAP financial measures within the meaning of Regulation G during today's call. The information required by Regulation G is available in either the earnings press release or the Investors section of our website at www.cephalon.com. Additional information and risk factors affecting the company's business and financial prospects and factors that would cost Cephalon's actual performance to vary from our current expectations is available in the company's current quarterly filings on file with the SEC.

During this call, we will update full year 2010 guidance and introduce full year 2011 guidance. Please note that guidance will remain in effect unless the company provides subsequent modifications or updates. Our earnings press release is available on the Internet at www.cephalon.com. Investors with further questions should contact me at (610) 738-6376. This conference call is being webcast via the Cephalon homepage and will be archived for one week after the call.

Speaking on today's call will be Kevin Buchi, Chief Operator Officer, and Wilco Groenhuysen, Chief Financial Officer. Also joining us today are Dr. Lesley Russell; Chief Medical Officer; Gerry Pappert, General Counsel; and Bob Repella, Senior Vice President and Head of our U.S. Pharmaceutical Business. Following remarks by Kevin and Wilco, we will be pleased to answer your questions. Now, Kevin Buchi.

Kevin Buchi

Thanks, Chip. Good afternoon, everyone. I believe this is the first earnings conference call that Frank Baldino has ever missed. As you all know, Frank remains on medical leave, I'm sure Frank is listening and we all wish him a rapid recovery and a speedy return.

Returning now to the third quarter. We continue to execute on our plan to deliver strong financial results while building a diversified global business. Third quarter sales of $707 million exceeded the high end of our guidance range by $7 million. Adjusted net income of just over $170 million set a new quarterly record for the company and exceeded the high-end of our guidance range by $27 million. Most gratifying, we generated cash from operations of $272 million bringing our cash on hand to more than $1.2 billion.

The factors that contributed to our record earnings included higher overall sales, the mix of those sales, both geographically and by product, and our continuing efforts to improve operating leverage. With a global portfolio of products and extensive R&D pipeline and an active business development effort, as evidenced by last week's announcement concerning BioAssets and Ingenix, Cephalon is very well positioned for the future.

Looking forward to 2011, we expect overall clinical spend to increase meaningfully as we continue to invest in promising late stage opportunities. Five Phase III programs that are included in next year's guidance include TREANDA for the treatment of frontline inland non-Hodgkin's lymphoma, our tamper deterrent twice-daily hydrocodone product candidate, [indiscernible] for the treatment of [indiscernible] asthma, NUVIGIL, for adjunctive therapy in bipolar depression and assuming success in the Phase II-B study, LUPUZOR for the treatment of systemic lupus erythematosus.

Last week's exercise is the option to acquire BioAssets Development Corporation, who provides us a strong intellectual property rights covering the use of anti-TNF sciatica pain. Our anti-TNF domain antibody will enter a dose finding Phase I/II clinical program by the end of this year. During our Investor Day on November 18, we will provide greater detail on these and other pipeline opportunities.

TREANDA remains one of our key products going forward, compared to the third quarter of 2009, sales nearly doubled as we reached more and more patients. As you are all aware the steel group studied TREANDA in front-line treatment of patients with advanced follicular and lymphomas. Last year they presented their findings the TREANDA plus Rituxan is superior with respect to progression free survival and complete response rate when compared to the standard of care therapy, CHOP plus Rituxan. We decided to move forward with submitting the study for potential FDA approval in this frontline setting. The plan submission is for the first half of 2011.

While we're hopeful that the steel group study will be accepted for filing, we continue to enroll patients in our study with TREANDA in combination with Rituxan in the front-line setting. This dual approach provides the best chance for a front-line indication in Enderlin non-Hodgkin's lymphoma. We remain confident that TREANDA will contribute meaningful growth for many years to come.

NUVIGIL continued its growth trend during the third quarter with total prescriptions exceeding 200,000 for the three-month period. This is a 13% increase over the second quarter of 2010. Based on aggregate prescriptions throughout the quarter, market share during the quarter to NUVIGIL was 35% up from 30% throughout the second quarter and 26% throughout first quarter of 2010. We're satisfied with the consistent growth of NUVIGIL since launch. Stronger provincial performance resulted in greater sales and profitability at the third quarter than expected. We continue to expect that NUVIGIL will be the preferred product in the weight market by April 2012.

During the interim, PROVIGIL continues to generate substantial amounts of cash, fueling additional business development and pipeline possibilities.

Clinical and regulatory efforts continue towards adding additional indications to the NUVIGIL label. As previously reported, our jetlag SNDA has been filed with the FDA, results from our clinical programs demonstrated that we met the requirements of a Special Protocol Assessment by reaching statistical significance on both primary end points. These results were discussed with the agency in May and we have the PDUFA date of December 30 for this indication.

Our study in sleepiness associated with TBI program, is being discontinued due to slower than anticipated enrollment of patients which has pushed the expected timeline beyond what is acceptable. We've also made changes to our NUVIGIL bipolar clinical program. In Studies of psychiatric disorders where placebo effects can be pronounced, it is not uncommon for companies will multiple clinical trials to achieve the two positive results needed for approval. As a result, while we have not seen any of the results from our two ongoing blended studies, we decided to add a third trial to maximize the likelihood of clinical success to this large market opportunity. We believe that the current update of NUVIGIL the potential for additional indications and strong intellectual property will allow NUVIGIL to be a very successful product for many years to come.

We recently completed the trial of our AMRIX patent infringement case in federal court in Delaware. The trial went very well and we anticipate a decision from the court during the second quarter of 2011. In addition, our patent stays around AMRIX continues to become stronger. Earlier this week, a fourth patent issued and was listed in the orange book. Another patent is scheduled to issue later this year.

The launch of FENTORA in Europe delivered 362% growth in year-over-year sales. The success in Europe contributed to a 16% increase in overall FENTORA global sales. In the United States, it's our understanding that the FDA is now pursuing a classwide REMS covering all transmucosal immediate release fentanyl products and has convened an industry working group to handle the matter. We continue to work on our REMS and look forward to its implementation.

We've delivered on our goal of building a profitable, growing and diversified business. Our pipeline of new medicines continues to advance and we expect to augment it with additional compounds from our own research as well as from our business development efforts in the future.

Now Wilco will discuss our financial performance during the quarter.

Wilco Groenhuysen

Thank you, Kevin. Today, we released our third quarter 2010 financial results. We reported net sales of $707.1 million, which is 32% increase over the third quarter of 2009 and exceeded the high end of our guidance by $7 million. This year-over-year net sales increase resulted from, amongst other things, strong sales growth of TREANDA and NUVIGIL and the addition of Mepha. Our acquisition of Mepha earlier this year contributed $80.5 million of sales growth when compared to the third quarter of 2009. Adjusted net income for the quarter was $170.7 million, an increase of 35% over the third quarter of 2009, strong sales and as Kevin mentioned, the favorable product mix and the focus on operating leverage enabled us to deliver these results.

Basic adjusted net income per common share was $2.27, based on average 75.2 million shares outstanding. Compared to the third quarter of 2009, CNS franchise sales increased by 19% to $354.3 million due to strong sales in our wakefulness franchise. Pain franchise sales increase by 10% to $131.2 million primarily due to the addition of Mepha and growth in worldwide FENTORA sales, both of which more than offset to the continued generic erosion of our generic OTFC products.

Oncology franchise sales were $132.9 million, an increase of 60% largely due to a 91% increase in sales of TREANDA, which reached $103.9 million. Other sales, which include a portfolio of over 100 products were $88.8 million, up 153% due primarily to the acquisition of Mepha. Overall sales throughout our European organization grew by 78%. Adjusted for the effects of the acquisition of Mepha of 82%, and a negative currency effect of 9%, sales in local currencies grew by 5%.

From the end of the third quarter, total inventory levels for our U.S. brand of products remain relatively unchanged at our goal of between two to three weeks. Excluding VIE expenses, adjusted R&D in the third quarter of 2010 increased from $91.5 million to $108.7 million as compared to the third quarter of 2009, primarily due to increases in expenditures on clinical trials and the acquisition of Mepha.

We expect that R&D expense will increase in the fourth quarter as enrollment in our LUPUZOR, CINQUIL, anti-TNF domain antibody, tamper-deterrent hydrocodone TREANDA and NUVIGIL clinical programs increased. Again, excluding VIE expenses, adjusted SG&A increased from $192.6 million to $228.5 million largely due to the acquisition of Mepha.

We continue to generate strong cash flow from operations. During the quarter, cash flow from operations was $272.4 million and for the first nine months of 2010, was $650.5 million. We ended the quarter with over $1.2 billion in cash and cash equivalents.

Our adjusted tax rate for the quarter was 33.9% which is slightly above our guidance of 33%. During the quarter, there were several adjustments that were made to adjusted net income. The most significant of these were, we excluded $41.1 million associated with the ongoing amortization of acquired intangible assets, accelerated depreciation related to restructuring and amortization of inventory revaluation related to the acquisition of Mepha. We exclude $15.1 million associated with impeded interest expense of convertible debt. We excluded $5.2 million associated with the change in fair value of deception contingent consideration. Then we expanded the tax effect of these items and other charges.

Through the first quarter of 2010, we guided the healthcare reform impact to between $7 million and $11 million for 2010. After a thorough review of the we have revised the expected impact to between $16 million to $18 million for 2010, which is included in today's guidance. The full year 2011 expected impact of these items which includes the increase of the Medicare rebate to 23.1%, and the extension of rebates through Medicaid managed care organization and PHS price discounts is between $22 million and $26 million. The expected impact for 2011 of the Medicare Part B coverage provision and the annual pharmaceutical fee is unchanged at an additional $19 million to $24 million. Based on our current outlook, our 2010 total sales guidance range is increased to between $2.69 billion and $2.73 billion. Our guidance for adjusted net income for the full year is increased to between $617 million and $632 million and our guidance for basic adjusted income for common share has increased to between $8.20 and $8.40, reflecting a basic share count assumption of 75.2 million shares outstanding.

In our press release financials, we have allocated sales by Mepha which were reported under other with a respective franchise where applicable. Related to this, our 2010 guidance includes $40 million in our CNS franchise and $65 million in our pain franchise that would've been included in other prior to this change.

Total franchise sales guidance for 2010 is as follows: Guidance for the CNS franchise is increased to between $1.34 billion and $1.37 billion; the pain franchise is expected to deliver between $510 million and $530 million. Oncology is increased to between $500 million and $520 million and our guidance for other products else is lower to between $325 million to $345 million. R&D expenditures are lower to between $430 million and $450 million. SG&A expenditures remain unchanged at between $910 million $930 million. Our assumed tax rate for the year is approximately 33%.

We are also introducing full year 2011 guidance based upon the following key assumptions. NUVIGIL continues to gain market share and has no generic competition to average through the year. Based upon these assumptions our 2011 sales guidance is between $2.96 billion and $3.04 billion an increase of approximately 11% over our 2010 sales guidance. CNS sales guidance is between $1.39 billion and $1.43 billion. Pain franchise sales guidance is between $540 million and $570 million and oncology sales guidance for 2011 is between $570 million and $600 million. Our guidance for other sales is between $420 million and $450 million. Consistent with previous periods, our sales guidance does not include other revenues

Our SG&A guidance is between $970 million and $1 billion and R&D guidance is between $505 million and $525 million. The full year 2011 adjusted net income attributable to Cephalon is between $652 million and $668 million, which equates to a basic adjusted income per common share attributable to Cephalon all between $8.45 and $8.65 based upon the 77.2 million shares outstanding at a tax rate of approximately 33%.

That concludes our opening remarks. We will now open this call to you and your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Gary Nachman with Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group, LLLP

Wilco, first question for you, how is CNS guidance so high for next year? I know you have some Mepha in there now, but are you factoring any price increases next year for PROVIGIL or NUVIGIL? And maybe you can talk about the type of conversion rates that you're assuming for PROVIGIL to NUVIGIL? And do you have any assumptions for jet lag in there?

Wilco Groenhuysen

As we've discussed in an earlier conference call, we tend not to guide towards assumptions with respect to the price increases. As you know, we managed PROVIGIL prior to it going generic in April 2012 of cash generation enabling us to explore business development opportunities, talk about NUVIGIL share, I think that was your second question in this list, maybe Bob can give some comments to that. We expect the run rate at the end of the year of between 50% and 60%. So the majority of the scripts will be NUVIGIL scripts in our anticipation. And remind me what was the third question?

Gary Nachman - Susquehanna Financial Group, LLLP

Do you have any assumptions for jet lag in there? Would that all be incremental if you get the approval?

Wilco Groenhuysen

There's very limited sales of jet lag included in that guidance.

Robert Repella

Maybe just on the on the 50% to 60%, that would be end of 2011. But look, we're very pleased with the progress we're making with NUVIGIL in terms of growth. Between our expectations, as Kevin mentioned, we hit over 200,000 prescriptions in the third quarter, up 13%. In terms of PROVIGIL, PROVIGIL held up a little bit stronger than we had anticipated, so that's good for revenue. But to put a little bit of a damper on NUVIGIL share, but our expectation is that we will go out of 2010 with a NUVIGIL share in the low-40 range.

Gary Nachman - Susquehanna Financial Group, LLLP

And then for 2011, top and bottom-line guidance, if I did my math right, it looks like you're projecting sales should be up about 11% adjusted net income only about 6%. So I guess why wouldn't we see better operating leverage next year? You talked about the increase in R&D or the clinical studies the five Phase III programs but maybe you can elaborate also on SG&A trends. It looks like that, that's going to be meaningfully as well.

Wilco Groenhuysen

It will go up to some extent partially driven by Mepha. Remember that Mepha only covers three quarters in 2010 we expect of course four quarters in 2011. Clinical studies will increase significantly, Kevin, and I mentioned that in my opening remarks this is an impact in the Pinnacle studies operating leverage are pursuing continue to pursue in G&A expense. As you can imagine with the ambitions we have with NUVIGIL continue although from continued to going to marketing dollars behind that as well. So we're focusing on preparing ourselves for developing the pipeline as well as having NUVIGIL meaningful market share generic or managing operating leverage in fixed cost.

Kevin Buchi

Gary, our real focus in 2011, the most critical thing we can do in 2011 is to advance the portfolio products that we have in Phase III clinical trials. We all know that PROVIGIL's been a tremendously successful product for us, it has generated huge amounts of revenues all over the 14 years that it would've been on the market. So cutting out of 2011 going into 2012, our objective would be able to come back to you and point to all the Phase III successes which we have had in the Phase III programs which is ongoing. So that ends the political trial budget. Lesley's external budget is going up something like 70% from 2010 to 2011. But it's a very, very substantial increase and hopefully we'll pay off very much in the long-term.

Gary Nachman - Susquehanna Financial Group, LLLP

And then just lastly, this is probably for Lesley, just on the planning to file TREANDA now for front line use with the steel study, did you have any discussions with the FDA or is it just based on your due diligence on how they handle that study that you feel like the FDA will probably accept it?

Lesley Russell

It's suppose to be honest. I mean we've had a pre-NDA meeting with FDA about the field data. But withstanding their usual comments, which we would absolutely anticipate being this another study that we conducted. But we are, instead we'll be looking at that which is very reasonable on that part but we have started to look at the sights and monitor the data and we believe certainly that we have enough to submit and we hope the FDA will accept the file. But we plan to do that in the first half of next year.

Operator

And we'll go next to Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs Group Inc.

To hit on Mepha, did you say the Mepha number for the quarter was $80.5 million was that correct?

Wilco Groenhuysen

That was correct.

Randall Stanicky - Goldman Sachs Group Inc.

Can you just maybe drill down into some of the drivers of that and how that compares to the $90 million last quarter what's going on with that number and how should we think about the run rate for the Mepha revenue from here going forward?

Wilco Groenhuysen

We expect the run rate of about to the $90 million level that's also included in our fourth quarter guidance. The few reasons why third quarter sales was slightly below our earlier expectations, first of all, we came to the conclusion that the pipeline inventory and the wholesale chain was slightly too and so we managed to reuse it to a more acceptable levels. Of course it affects sales in the quarter but normal occurring event in at least every margin we spoke about the impact of FX which was approximately 9% for the entire sales which had significant impact as well. So the combination of a number of factors, which the two I just mentioned the most meaningful, that the slightly lower than anticipated sales and we fully anticipate it to pick up again in the fourth quarter.

Randall Stanicky - Goldman Sachs Group Inc.

So we go back to $90 million, what are you assuming into 2011 guidance in terms of growth off of that. I'm imagining you're seeing some of the pricing pressures across Europe that others and some of your competitors are also talking about. Are you expecting to grow year-over-year?

Wilco Groenhuysen

Yes we expect to grow top line year-over-year we experienced similar pricing pressures as a competitors obviously but again, we spoke about that in the passes year pricing pressure in the European market is not something new. That's been going around for quite a while and traditionally we've been able to offset pricing erosion with volume increases. We've been doing that again this year and we expect to do it next year. And our current anticipation is that Mepha sales should probably be around the $400 mark in 2011.

Randall Stanicky - Goldman Sachs Group Inc.

And I know you won't give us the margin for that business but how do we think about the synergies realized and how the profitability adds to the overall business in 2011?

Wilco Groenhuysen

I should make sure I use the correction that Kevin applied, it's duly noted. I said $400 but of course I meant $400 million. Again, Mepha when we acquired it was accretive to earnings and demonstrated in the two quarters that we've now have them in our group. We developed a very detailed plan of synergies realizing realization of synergies we expect that to kick and more meaningful in 2011 with the full effect kicking in 2012.

Randall Stanicky - Goldman Sachs Group Inc.

On the R&D number that kicks up into 2011. I assume that was your link to some sizable projects. So how do we think about the distribution of some of that spend on a quarterly basis relative to the year?

Kevin Buchi

We'll be providing quarterly guidance to you on the next Earnings Conference Call. I think it's a sufficient to say at this time that given the number of clinical programs given the earlier comments, the R&D, the increase in the R&D budget is being driven by those and you would expect the trends to kind of pick up as you go through the year as you get more and more patients accrued into these studies.

Operator

We'll go next so Corey Davis with Jefferies.

Corey Davis - Jefferies & Company, Inc.

Kevin, can you say that your previous statement anticipating Dr. Baldino's return by the end of the year still holds?

Kevin Buchi

I'm not going to comment in any great detail on Frank's health obviously, Corey. But we're very much looking forward to getting him back in here. I certainly hope he comes back sooner rather than later.

Corey Davis - Jefferies & Company, Inc.

For Lesley, anything you can say about that design of that third NUVIGIL bipolar study and how it's different than the other two and are the other two studies already fully enrolled?

Lesley Russell

The first study is not going to be substantially different. I think we're just being prudent here in adding a third study in bipolar. Most companies really do three or four to get back that two. And so I think this make sense for us to do that. In terms of enrollment, the first two studies we will have completed by the end of '11.

Corey Davis - Jefferies & Company, Inc.

The high placebo affect in CNS studies was now in the time you started those two, so you must've seen something about a high overall FX size in those two to make the decision to start the third one, no?

Lesley Russell

No, we honestly haven't. I think actually many of you asked me when you were in here. And I think really this is just a very pragmatic decision. We know that the data business come in, we've discontinued TBI we want to really ensure the highest possibilities in bipolar and I think that's just makes sense from that perspective.

Corey Davis - Jefferies & Company, Inc.

So what's the earliest you could file on NDA on bipolar if say the first two studies come in positive?

Lesley Russell

The first two come in positive then we our original timelines hold which is the filing in the beginning of '12. So the first two come in, everything's great were just the backup plan if, for any reason, only one of those two comes in. Because of the fewer response rate. So we're very much hoping that this doesn't change the plan at all.

Corey Davis - Jefferies & Company, Inc.

With gross margin and tax rate?

Wilco Groenhuysen

Sorry, Corey, what's the question.

Corey Davis - Jefferies & Company, Inc.

Help with gross margin and tax rate for '11?

Wilco Groenhuysen

Gross margin is we expect gross margin to be between 83% and 84%. Tax rate, I think, was included in our opening remarks. That's 33% anticipated for 2011, Corey.

Operator

We'll go next to Chris Schott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co

On the NUVIGIL conversion trends it seems like they have been little bit stagnant of late. I guess given all the incentives to move to the product from PROVIGIL, can you help us just understand a little bit what's happening there and what you can do to further accelerate this move to NUVIGIL?

Wilco Groenhuysen

As I mentioned, we're pleased with the growth of NUVIGIL in terms of the TRX volume. Right now we're focused on two efforts in the marketplace, one is expanding use primarily in the shift work disorder area and clearly there are millions of patients available out there who work either night or day in rotational shifts. So we're spending time and effort with our customers and through our web-based programs to educate the patients about shift work disorder and to have that appropriate dialogue with their physicians. And then we continue to convert appropriate Modafinil patients. Those that are within our reach, in terms of utilization and working of course with our managed care customers to pull through NUVIGIL and grow share within those accounts as well.

Christopher Schott - JP Morgan Chase & Co

And then just building off some of your earlier questions, as we get closer to 2012, I know you haven't given formal guidance out that far but just from a high-level can you help us get a better feel about how you're thinking about absolute spend on SG&A and R&D in that time frame? I guess will there be an opportunity or will you look to meaningfully reduce spend as we get to that timeframe phase for PROVIGIL or should we think about a temporary dip in earnings and margins as you're investing in the pipeline and prepping for the next wave of product launches?

Kevin Buchi

It's certainly fair to say that you can tell from the guidance that you have an idea that PROVIGIL is still a very, very substantial product in 2011. When you lose the product to that scale, it's not realistic to think that you're going to be able to maintain earnings. So you should expect an earnings dip in 2012. As I said, I think the wisest thing we can do at this juncture in our history, as we're coming out of 2012, going into 2013, '14, have the most robust pipeline possible so that we can generate the most growth coming out of there. And that's going to be our focus over the next year or so. I know it doesn't directly answer your question on 2012 expenses but frankly, I'd rather wait and give you a more detailed explanation about a year from now what we know the level of success we've had with the Phase III programs we have currently ongoing.

Christopher Schott - JP Morgan Chase & Co

You've obviously got a rapidly growing cash balance year. Can you just give us a latest flavor of how you're considering business development? Should we think of I know you're historically just opportunistic is your focus now on the method type that bring in market product, immediate revenue, or are you still pretty heavily looking at developing stage deals as well and give it seems like you got a pretty robust late stage pipeline that's now built out.

Kevin Buchi

I think both. I think in this industry it's very, very difficult to say that you have a pipeline that it's too deep or too robust. So we'll absolutely continue to invest in pipeline opportunities. You probably saw we did a small transaction just last week with an Australian company called Congenix which has an interesting product for the treatment of CML. That was fit very, very nicely in with our existing core universe. It's obviously not a huge project, not a billion dollar product, it's a very nice addition to the portfolio and hopefully will be successful for us. We are interested in continuing to expand in the areas where we have a commercial presence today, Congenix. We're interested in looking into other specialty therapeutics areas where they make sense for us. We're interested in additional geographic expansion. If you look at our European business, we're certainly a little light in the big five it will be nice to have a greater presence in some of those territories. We'd love to get a presence in China as we've been talking to you about the probably a year or so now and hopefully we can get something small done in that area to get things moving there. I am pleased to say that we're in the process of launching TREANDA in Hong Kong now, so we're getting closer to China. But I think the answer to your question, we've always been very opportunistic. We're going to continue to be very opportunistic and we're going to continue to try to diversify the business.

Operator

We'll go next to the Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank

First of all, can you talk about the sales reps and where the focus is for the fourth quarter and into 2011 and what might change with focuses. And the spending levels. Number two, could you just repeat what you said about NUVIGIL and your expectations or your goals for where you wanted to be on conversion by the end of this year and by the end of '11. And then could you repeat also what you said about the movement of the sales from one line to on the other line items on Mepha?

Kevin Buchi

Maybe to handle the last one first, we did take the Mepha sales that we're on CMS products and we classify them into CMS line and so on throughout the sales details I'll let Wilco kind of give you the exact numbers and then we can turn it over to Bob so more detail on salesforce and individual share customers.

Wilco Groenhuysen

It's exactly the way Kevin explained, in the second quarter when we reported our sales we included all Mepha sales under other. What we did in the third quarter is analyze their product portfolio and reclassify Mepha sales to the respective franchisees where they were applicable. So Mepha CMS sales are now reflected in the CNS franchise of Mepha, pain sales are reflected in our pain franchise. The effect, as we explained earlier on, was about $40 million that are now on a full year basis in our CNS franchise for 2010 earlier have been reported under the other as part of the Mepha sales and $65 million in our pain franchise. Again, that's 2010 impact.

Robert Repella

And from a salesforce perspective, relative to our current portfolio, we believe we're pretty much right sized going into 2011 in terms of the team that we have representing TREANDA in the Oncology segments. As well as the CNS team, which is primarily focused on NUVIGIL. On the pain side, again, we think generally speaking, we've got the right deployment. We might make some minor adjustments put a little bit more emphasis on Ventura. We think there's still significant opportunity for growth with that product. And with AMRIX, we want to make sure that we have the resources dedicated in the right locations, especially where we have the best reimbursement and access for that product. But I think generally, we're where we want to be on the sales force side. On the NUVIGIL conversion question, if you go back a year at this point in time, the bulk of our patients were coming from appropriate conversion of Modafinil patients but today, more of our patients are coming from our expansion efforts in shift work disorder and OSA and to a lesser degree, from conversion of Modafinil patients. Some of them are just out of reach and as I mentioned, our managed-care agreements are pretty much higher up the label. Some of them are on higher doses and may not be appropriate for conversion. So the balance has shifted a bit but again we see an opportunity for continued steady growth in NUVIGIL going forward.

Marc Goodman - UBS Investment Bank

I thought you said you were going to be in the low 40% range by the end of '10 was that what you were saying.

Wilco Groenhuysen

Right. For TRx share.

Marc Goodman - UBS Investment Bank

And then by the end of '11 you were thinking?

Wilco Groenhuysen

50% to 60%, same as we've been saying.

Marc Goodman - UBS Investment Bank

Back on the expenses, just thinking about the Delta, 2010 to 2011, what is the Delta outside of any 2%, 3% increases just for inflation or whatever and plus the Mepha. Is there any other increases that we should be thinking about?

Wilco Groenhuysen

The huge one is clinical research. As I mentioned earlier Lesley's budget for clinical trials is up over 70% 2011 versus 2010. So again a very strong commitment to building the pipeline and making sure that we can be successful going forward.

Marc Goodman - UBS Investment Bank

So on SG&A we've got four quarters versus the three quarters of Mepha, that's really and then just minor change for inflation that's really the only changes?

Kevin Buchi

That is correct.

Operator

We'll go next to Annabel Samimy with Stifel, Nicolaus.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

I just want to clarify on the Mepha reclassification, was their reclassification this quarter as well or was it just a straight $80 million?

Wilco Groenhuysen

The $80 million was on a full year. The $80 million was in the third quarter. So in pain, it was $17 million, CNS $6 million in the third quarter, and then in other $57 million. So the $80 million breaks down again $17 million in pain, $6 million in CNS and $57 million in others.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

And then if you could give us a bit of an update on the pipeline, just wanted to know a little bit more about the tamper resistant hydrocodone, looks like you were going to file at the end of 2012. We haven't really seen much come out of that so can you just give us an idea of what the clinical program is about and maybe to find a little bit more specifically how you see this as a very large market opportunity. Is it coming primarily from the current Hydrocodone market or more from the ER population?

Lesley Russell

Why I don't start with the clinical program. I'm really pleased to say that this program has greatly accelerated. We've actually completed the pre-requisite Phase I work we needed to do and we have commenced the Phase III program which is in agreement with what we discussed in the Phase II meeting with the agency earlier this year and enrollment in the Phase III program both to get our exposure is going really, really well and the double blind study kicks off next month. So actually, we believe that rather than filing, assuming success, rather than filing at the end of '12, we actually believe we'll be able to file in the first quarter of '12, hopefully allowing us if we do it early enough in '12 theoretically have an action date within 2012 so that's our plan. It's going really, really well and as for market size, I'll hand that over to Bob.

Robert Repella

Clearly the hydrocodone market is a large segment of the pain business and depending on the product profile that we end up with potentially we could be the first aid that's long acting and also tamper deterrent. We think that will give us a unique differentiation point in the marketplace again it's all predicated on the label and how we're approved by the FDA. But that being the case, we think this has a significant revenue opportunity for the company in the pain franchise and fits in nicely with where we are today with Ventura and AMRIX.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

On one other pipeline program, that CNS program, I think could you provide us a little more color around what you saw in the interim analysis that triggered the full acquisition to BioAssets and if you can just share some data there at all?

Kevin Buchi

We're not going to be sharing a lot of the date from BioAssets because it was done with a product which is not the CMF that we are taking into clinical trials. But I think the data that they've generated is consistent with much of the data that's in the literature. That show that these drivers have an effect in patients with the [indiscernible]. I don't know if you have any more color that you'd like to add to that Lesley, but...

Lesley Russell

I think it is what we were hoping we would see. Obviously we have a different TNF antibody. We are gearing up our TNF antibody administered up and running this calendar year and we're on track to do that. So with the U.S. R&D being filed almost as we speak and using and hoping to get some enrollment started in Australia so we're on track to start with essentially is a dose finding Phase II study by the end of this year.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

And one more question regarding AMRIX we didn't really see much growth there quarter-over-quarter so can you tell us what's going on there, or should we just not assume growth for this product anymore?

Robert Repella

Let me just say that we certainly haven't -- on the commercial organization, given up on the opportunity to go AMRIX we recognize that TRx has been flat through most of the year. One of the challenges we faced, this is a highly generic marketplace, 97% to 98% of the prescriptions in the SMR segments are generic. We had a couple of plans that put generics in place this year and I'm pleased that we were able to hold our volumes in the face of some of those challenges. We do have 70% of commercial lives who have reimbursement for the product albeit primarily at third tier. So one of the things that we've been focusing on is making sure that there is a clear understanding of our excellent co-pay support program not only among doctors but also patients and pharmacists. So we think we're working through some of the issues and challenges this year and we're positioning ourselves for an opportunity to get back on a growth track in 2011.

Operator

We'll go next to Jon Stephenson with Summer Street Research.

Jon Stephenson - Summer Street Research Partners

A couple of questions on NUVIGIL, I was wondering with the generics on PRVIGIL coming in early 2012, have you seen any evidence in your formulary discussions heading into 2011 of any attempts to reposition NUVIGIL?

Robert Repella

No, we have not. We have agreements in place with most of the major plans in the U.S. which we're pleased with, and we're working with them in terms of pull through programs to drive shares. So it's a partnership at this point in time we expect that will continue through 2011 and beyond. And our expectation is to potentially adding new indications to NUVIGIL. It will be a product we can partner on for a long time into the future.

Jon Stephenson - Summer Street Research Partners

And then a follow up on that franchise, you mentioned your goal of 50% to 60% share by the end of next year, what is your assumption in that model as it pertains to market growth? Because obviously the market has been declining somewhat lately.

Robert Repella

Our expectation for 2011 is the market will be generally flat so we have seen it decreasing at about 2% year-on-year for the last couple of years but we've seen a little bit of stabilization and provisional as I mentioned earlier and we think flat is a reasonable projection for 2011 partly due to the fact that we're focused on expansion, shift work disorder, OSA and while that certainly benefits NUVIGIL from a growth standpoint, in some instances it also provides some support to PROVIGIL as well.

Jon Stephenson - Summer Street Research Partners

On TREANDA, obviously that's been a great launch for you guys. The last quarter was the slowest sequential growth that you've seen at this point. Obviously it was a summer month in the quarter but what's going on there? Is this a sign of things to come or do you expect some invigorated growth going forward to carry it through until you get the approval on the other indications?

Robert Repella

I mean the time is not that different than what we've seen in previous years and with that a little bit about it in our last call that third quarter historically you see it flattening patients delay starting their therapy due to vacations physicians are out of the office for the same reason. Fourth quarter we've seen that as well in the past because of the holidays, especially as we get into November and December. The real growth quarters are the first and the second quarter of each year and our expectations are that TREANDA will be on a strong growth curve as we get into 2011 and we'll perform very well next year.

Operator

We'll go next to Ram Selvaraju with Noble Financial Group.

Raghuram Selvaraju - Rodman & Renshaw

Just wanted to get a little bit more color on how the oncology revenues are being projected going forward and where those are coming from? Particularly with respect to the 2011 guidance. How much of that is attributable to TREANDA and how much of that is attributable to other oncology products?

Kevin Buchi

We're not expecting any changes in mix in revenue. We're not expecting any new oncology products to be launched in 2011. So it's kind of the same mix generally speaking that you're seeing in 2010.

Wilco Groenhuysen

The most significant contributor to the projected sales growth in 2011 obviously is TREANDA. We also have an oncology portfolio and specific quarter for Europe we expect some growth as well.

Raghuram Selvaraju - Rodman & Renshaw

But effectively there shouldn't be any significant change in the mix from 2010 versus 2011 if we look at that revenue item?

Kevin Buchi

There's not a huge change. The biggest growth driver is going to be TREANDA in the oncology franchise.

Raghuram Selvaraju - Rodman & Renshaw

With respect to the TREANDA franchise, could you tell us a little bit about your plans for a potential successor molecule to TREANDA and where that is in development and if we should expect any progress on that front in the coming six to 12 months.

Kevin Buchi

Well we're looking at a number of opportunities for life-cycle extension around TREANDA. I mean those opportunities of course include protecting the existing product. We have not been guiding you to include TREANDA revenues beyond 2015 in new models, I wouldn't change that. We're certainly working to provide additional intellectual property around TREANDA. We're also looking at potential follow-on molecules specifically molecules that might have kind of a longer plasma half-life to be more appropriate to treat solid tumors. but again, those are early stage. They're currently pre-clinical. I think we have some interesting leads. But again, I view those as being too early to include in your model at this point in time. We'll provide you additional insight as we move into the quarter.

Raghuram Selvaraju - Rodman & Renshaw

Lesley, regarding the Biologics pipeline, could you refresh my memory again as to when we should expect to see Phase IIb data from LUPUZOR and when we would expect the single Phase III program to kick off.

Lesley Russell

Single Phase III, we are gearing up to start. We are going at the end of this year, we're running a pretty extensive program it's a big indication. We'll be doing a couple of studies looking at exacerbation and then a long function study and then open label data to get the prerequisite exposures and that program is nicely on track going at the end of this year. We've had a Phase II meeting with the agency. We've had ENE sign purchase advisors. The program is locked and loaded and getting ready to go. In terms of the other Biologics, obviously, we talked a little bit earlier about the inhibitor, which goes into the program at the end of the year and then LUPUZOR, it's in Phase IIb right now I would hope that we have positive data from an interim analysis with a study we're doing in the first half of next year, which would then kick off the Phase II program towards the end of next year. So it's a busy time for that franchise.

Raghuram Selvaraju - Rodman & Renshaw

Finally with respect to CINQUIL, has there been any indication from the agency or from key opinion leaders that they would want to see benchmarked clinical efficacy data for that program versus so there? Or how are you thinking about positioning the product versus in the asthma market?

Lesley Russell

It has a different mechanism. So basically, there's no requirement to go against [indiscernible]. It's different population we see this being subject with high count with the IDE with the body. So in terms of the program, it is really adding I think two standard of care so the Phase III studies irrespective of the end point is standard of care plus or minus the manner.

Raghuram Selvaraju - Rodman & Renshaw

So effectively, you would not see patients taking Solar being rolled into this clinical study or do you have excluded criteria in patients who have ever been exposed to?

Lesley Russell

Act I can actually remember the exact data on delay or I think in the face to Solar was excluded so my guess is that we would population that their eligible for Zolak. So they're not necessarily overlapping.

Operator

We'll go next to the Manoj Garg with Soleil Securities.

Manoj Garg - Soleil Securities Group, Inc.

First, on Fentora, as we're all awaiting a decision here. I saw that the judge just issued a memorandum enjoining Watson from launching at risk so does your timeline expectation on the decision change there?

Gerald Pappert

Manoj, this is Jerry. All I can tell you is we are expecting a decision from the court really anytime now. And as you know, with a 30-month stay lapsed at the end of last week and certainly we welcome the court's order today, which I guess relieves all of us of the possibility of Watson launching until a decision is reached. But as you'll recall though also, Watson would first need final approval of their ANDA and our citizens petition is currently pending before the agency we believe give us a very strong argument that they do not have an approvable product. But today's order does not give us any further indication as to whether the court would rule though we are expecting a ruling sooner rather than later.

Manoj Garg - Soleil Securities Group, Inc.

So the second part of that question was going to be given that they already have a tentative, you're not concerned about their tentative approval you think the agency would still need to answer your CPs?

Gerald Pappert

We believe that the agency shirt rule on our citizens petitions prior to making a decision on final approval of the ANDA for a number of reasons, including the fact that as the court expressed some concern, you may recall there was a recent lifting of the protective order to allow us to present to the agency evidence of a second salt in the Watson ANDA for public health and safety reasons. So we believe that this is the one example of where the agency really should take a very close look at the arguments raised in our citizen petition before granting final approval.

Manoj Garg - Soleil Securities Group, Inc.

Lesley, with this new implemented REMS program on NUVIGIL, can you first detail how it's different than the previous risk map? And then also, was this something that was necessitated by the agency potentially to get jet lag through?

Lesley Russell

The REMS is actually pretty similar to the old risk map. It's a medication guide and communication so it's pretty much what we had in the risk map before but obviously, although a risk anyone with a risk map was then given the letter to convert it to a REM. So that's essentially what the NUVIGIL and PROVIGIL REMS is they really are unchanged. And this was independent of jet lag. Though one could speculate that perhaps now there is REMs approval that's helpful but is no more than speculation.

Manoj Garg - Soleil Securities Group, Inc.

And then lastly can just help me with timing on the [indiscernible] asthma studies. Where are we in recruiting I don't think it's kicked off yet, but when will that be and how long do you expect the recruitment period to last?

Lesley Russell

The program's kick off is later this year. The exacerbation studies are one year studies. So I think we have got gathered 2013 submissions timeline it's around that. So about a year to 18 months enrollment in a year for the long-term.

Operator

And we have time for one more question. We'll go next to Eric Schmidt with Cowen and Company.

Eric Schmidt - Cowen and Company, LLC

Just one kind of general big picture question maybe best for Kevin. You're generating run rate basis over 1 billion in cash per year that's a very large sum into your market cap. Do you think about buying back stock and if you could just talk about in general use of cash, further acquisitions versus maybe to returning to shareholders some of his stash.

Kevin Buchi

I was actually reading through the script and looking at the performance of the company and I think it's pretty remarkable that over 20 years that Frank took to build this thing. That he was able to build it in an organization which is generating the level of revenue and level of cash flow which is now generating. We've got I think a pretty remarkable little company here. Actually it's not so little anymore. In terms of stock buybacks I think honestly I see relatively few examples that where stock buyback have actually created any value to shareholders. And I do believe that if you look at our history I think we've been, I would argue at least that we've been very successful in finding attractive assets acquiring attractive assets in building the business via that mechanism. Those types of transactions are a whole lot easier to do if you can do them with cash, that's available to you, you don't have to have financing out contingencies and the deals. And so given the levels of cash we have, I would like to maintain that cash on the balance sheet in anticipation of our being able to do additional business development deals. Now look If we get couple of years down the pipe and we've got $4 billion, $5 billion of cash on the balance sheet we still can't spend it then we will have a different conversation. But right now, I think there's a lot of interesting opportunities out there. Business development is very uncertain science but I'd like to think that we can spend it in a way that will generate a lot more value to shareholders than just the stock buyback would.

Eric Schmidt - Cowen and Company, LLC

Kevin do you think there'll be any change in the type of business development you do going forward as you start looking under rocks and buying smaller under-load assets, will we see more of the same or can we see something bigger?

Kevin Buchi

You could always see something bigger, Eric. I think it's always conceivable. I think as I've always said, the challenge of the bigger deal is that as you move into the billion dollar market cap types of companies, those are almost always public, they're always pretty well vested, people have pretty strong opinions on them and the market tend not to be you don't find I don't believe the level of opportunity but you can find -- as you say the things that are hiding under rocks. And so I kind of like being under rocks in the general sense. I think our history has been looking at deals in the $200 million to $600 million range. I think Mepha was kind of a great example of those kinds of deal that was an opportunity which we took advantage of and I think we've got a very, very good buy on Mepha. I like things like the [indiscernible] acquisition which was the same range. LUPUZOR was in the same range. Many of the things we're entering into Phase III now was a result of that type of activity. And I think we continued that type of activity and then continue to build the business successfully.

Robert Merritt

Well it's 6:00 o'clock. That concludes today's conference call we thank you for your participation.

Operator

Thanks, everyone. That does conclude today's conference. We thank you for your participation.

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