Forest Laboratories F3Q07 (Qtr End 12/31/06) Earnings Call Transcript

| About: Forest Laboratories, (FRX)
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Forest Laboratories (NYSE:FRX)

F3Q07 Earnings Call

January 16, 2007 10:00am ET

Executives:

Lawrence Olanoff, President and Chief Operating Officer

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Charles Triano, Vice President, Investor Relations

Analysts:

Mark Goodman, Credit Suisse

Gregg Gilbert, Merrill Lynch

Elliot Wilbur, CIBC World Markets

Dave Windley, Jefferies & Co.

Ian Sanderson, Cowen and Company

Tim Anderson, Prudential Equity Group

Richard Silver, Lehman Brothers

Gary Nachman, Leerink Swann

Cory Davis, Natexis Bleichroeder

David Maris

Tim Chiang, FTN Midwest Securities

David Buck, Buckingham Research Group

Operator: Welcome to today's teleconference. I'm Kristin, your operator today. At this time, I would like to welcome everyone to the Forest Laboratories, Inc. third quarter fiscal 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press * and the number 1 on your telephone keypad. If you would like to withdraw your question, press * and the number 2. Thank you.

I will now turn the call over to Mr. Charles Triano, vice president of investor relations of Forest Laboratories. Sir, you may begin your conference.

Charles Triano, Vice President, Investor Relations

Thank you, Kristin, and good morning, everyone. This is Chuck Triano. Thanks for joining us today for this third quarter fiscal 2007 conference call. Joining me today is Larry Olanoff, our president and chief operating officer; and Frank Perier, our senior vice president of finance and chief financial officer. By now, each of you should have seen the earnings release that we put on the wires around 8:00 this morning. The release is also available at our website, frx.com.

By way of a safe harbor statement, let me add that various remarks we may make about future expectations, plans, and prospects for the company, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and actual results may be different.

That being said let me turn the call over to Larry, who will comment on the business during the quarter.

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Lawrence Olanoff, President and Chief Operating Officer

Thank you, Charles. Good morning, everyone. I'll start by stating that I am very excited to return to Forest in the role of president and chief operating officer. I view the company today as in a particularly strong position in terms of inline products, intellectual capital, financial strength, and both existing and potential pipeline opportunities. I will start today's call by reviewing key company events for the quarter, and then turn the call over to Frank, who will review the financial details of the quarter.

Reported earnings in the just completed quarter totaled 78 cents per share, which includes $10.2 million of stock option expense, pursuant to our adoption of FAS 123(r), and $20 million of R&D milestone expense. This represents growth of 37% over reported earnings per share of 57 cents in the year-ago quarter. Our underlying business continues to accelerate during the quarter, as we saw an increase in prescription volume for all of our key marketed products: Lexapro, Namenda, and Benicar.

Looking first at Lexapro, sales in the quarter were $546 million, an increase of 14% year-over-year. The SSRI/SSNI antidepressant market has continued to demonstrate improvement in total prescription volume bulk rates over the past several months, with the market growing approximately 8% in total prescription volume during the quarter based on monthly data through November, and weekly data for December. We continue to be pleased with the market's overall performance, and project that the underlying unit growth in the overall market should be in the 6% to 7% range for the full fiscal year ending in March.

Following the launch of generic versions of Zoloft during the September quarter, we have begun to see a renewed interest in Lexapro's market share, as detailing and sampling of Zoloft was discontinued; while we also added an important study, comparing Lexapro to Cymbalta, to our master visual aid, used by our sales force when detailing positions. We have also allocated greater detailing focus to high-prescribing Zoloft physicians.

Regarding managed care formularies, we have not seen any substantial change in Lexapro's positioning within our national accounts in response to the availability of the new generic SRI. Formulary position for Lexapro remains stable with interior mix on commercial plans, remaining at approximately two-thirds Tier II, and one-third Tier III.

In the current environment, managed care is generally observing formulary positioning in the context of both SSRI and SNRI products. I would note that the two SNRI are, on average, 33% to 48% more expensive than Lexapro, and importantly, as a competitive pharmco-economic advantage, Lexapro is the only SSRI to have favorable comparative clinical data, with two head-to-head studies against each of the two SNRIs, as well as comparative data against the other SSRI products, enabling our sales force to better communicate Lexapro's unique profile within this therapeutic category.

Moving on to Namenda, the brand has continued to generate increased prescription volume, largely driven by a growing prevalence of a more aggressive treatment strategy for Alzheimer's disease. This is reflected in the continued expansion and overall use of Namenda in combination with cholinesterase inhibitors, earlier use of the med in moderate patients, along with improved patient access to the product.

As the only NMDA receptor antagonist available on the market, with no therapeutic substitute, Namenda continues to have broad access in both the commercial and Part D formularies. For the quarter, sales were $174 million, an increase of 40% from the year ago quarter.

Regarding Benicar, it continues achieving meaningful growth, especially giving its later entry status in a very competitive category. The brand continues to gain share based on demonstrated attributes of the product and its broad physician acceptance. Benicar core promotion income totaled approximately $39 million of preliminary and user sales, as reported to us by our partner Daiichi Sankyo, of approximately $165 million.

The sequential decline in our pre-tax earnings contribution for the joint venture, despite a sequential increase in end user sales, was due to various expense allocation timing by Daiichi Sankyo which skewed our quarterly contribution from one quarter to the next.

Again, this quarter, all of our key marketed products generated very strong financial results, and while supporting our key brands remains a clear focus for the company, we are also allocating a significant resource both behind our current product pipeline, as well as efforts to further expand this pipeline.

As we reported last week, we completed our acquisition of Cerexa for a total of $494 million. This acquisition brought us four assets: a lead compound, which is Ceftaroline, which is a fifth generation injectable cephalosporin entering phase three trials this year for complicated skin and structure infections, and community-acquired pneumonia; an injectable carbapenem antibiotic close to an IND filing; a potential pre-clinical injectable antibiotic; and, very importantly, a talented group of people with significant expertise in the development of novel injectable antibiotics.

As we announced during the just completed quarter, the new drug application for the oral antibiotic Faropenem was deemed 'not approvable', largely based upon trial design changes enacted by the FDA after the NDA submission occurred, which will require superiority design studies for the two key indications of sinusitis and bronchitis; as opposed to the long-held, non-inferiority active trial control requirements.

We have had preliminary discussions with our partner, Replidyne, and the FDA, regarding new trial design requirements, but have not yet gathered enough information regarding trial design issues to fully determine incremental expenses and timing; or, to make an assessment of likelihood of successful study outcomes to determine a go/no-go decision regarding the program.

We anticipate obtaining enough information to make this decision in the coming months, and we'll keep you posted. I will now turn the call over to Frank Perier, to review the financials.

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Thank you, Larry. Good morning, everyone. For the fiscal third quarter, total revenue, which includes sales, pre-tax earnings from the Benicar co-promotion, interest and other income, totaled $893 million; an increase of 18% from the year-ago period. Revenues were comprised of $830 million of sales, which increased 16.2% compared to last year; $39 million of earnings' contributions from the Benicar co-promotion agreement, and increase of 37%; as well as $23 million of interest income. Tiazac sales during the quarter totaled $11.7 million, with $4.7 million in branded sales, and $7 million in generic sales.

Regarding wholesale inventory at the end of the quarter, they appear to increase by approximately 2 to 3 days, compared to levels at the end of September; likely due to wholesaler buying patterns around the holiday week.

Gross margins in the quarter came in at 76.45%. The total compares to 76.2% in our fiscal second quarter, and 76.8% in the year-ago period. SG&A spending was $269 million, up 7% from last year, and a sequential increase of approximately $10 million; while research and development spending was up $112 million in the quarter, which includes $20 million in milestone payments, referenced last quarter.

Our expected tax rate in the quarter was 21%, which was lower than the 22% in the first two quarters of the fiscal year, due to the recently passed renewal of the Research and Development tax credit. Overall, we expect this will lower our full fiscal year tax rate to 21.5%. Accordingly, we also plan to record a tax rate in our fiscal fourth quarter of 21%, to align the full year tax rate at 21.5%.

Fully diluted shares outstanding in the quarter were 320.4 million; a reduction of 2.2 million shares sequentially, and 20.3 million shares versus last year's third quarter, due to our share repurchase program. Actual shares outstanding on December 31 were 317 million. During the quarter, we repurchased approximately 1.290 million shares, under authorization of the third share repurchase program that was approved by our board of directors, following the completion of our second program. Under this new program, we have an additional 14.7 million shares available. We have cumulatively repurchased nearly 65 million shares at an average cost of $42 a share, which represents about 17% of fully diluted shares outstanding, prior to the start of our first program.

Our cash and marketable securities balance on December 31 was approximately $2.1 billion, an increase of $400 million from the last quarter.

As we indicated in this morning's earnings release, we have increased our projected earnings per share for fiscal 2007 to a range of $2.79 to $2.84 per share, up from the prior forecasts of $2.60 to $2.65 per share. This increase does not include the one-time charge for the Cerexa acquisition, which closed on January 10, and which will be incurred in our fiscal fourth quarter; but the projection does include an appropriate R&D allocation for development expenses related to Ceftaroline in our fiscal fourth quarter. The projected increase in EPS from our forecast labs quarter is based primarily upon better than initially projected performance from our promoted products, slightly reduced SG&A spending related to our initial forecast, and R&D spending that will be close to plan, despite changes in the make-up of the staff.

Lastly, we continue to benefit from the impact of our share repurchase program. I'll turn the call back to Larry, for a pipeline update and closing remarks.

Lawrence Olanoff, President and Chief Operating Officer

Regarding other pipeline compounds, the Nebivolol program for the treatment of hypertension and congestive heart failure, continues to progress.

Regarding hypertension, we have completed an additional pre-clinical study, and will soon complete the additional pharmco-kinetic study that we referenced last quarter; which, along with work from our partner, Mylan, has already completed, will serve as the basis for our response to the FDA's issued 'approvable' letter. The timing of the responses, unchanged from our guidance on last quarter's call, which indicated a submission to the FDA around the end of our fiscal year. We expect that the response will receive a six-month review by the agency.

Regarding the application for Nebivolol for congestive heart failure indications, the data collection analysis continues, albeit slowly, from the Eastern European sites. The partnership will continue to assess the appropriate timing for the CHF submission, but will likely wait until the completion of the package review for the hypertension indication.

We continue to make progress on the development programs, with two Phase III studies with milnacipran currently underway for fibromyalgia. The first of the two additional studies has completed enrollment, with top-line results expected by the middle of calendar year 2007; and the second study is expected to report out approximately six to eight months after those results are available.

Regarding Desmoteplase, enrollment of acute eskemic stroke patients in the DIAS-2 study, a Phase II-B3 study, has completed, and top-line results are expected not later than the first half of 2007.

A once-daily formulation of Namenda is in a Phase III Alzheimer's study, which should report out in early calendar 2008, and we are underway with our partner, Almirall, in the enrollment of two large Phase III international studies, in chronic obstructive pulmonary disease for LAS-34273, a long-acting muscarinic antagonist.

We're also working toward obtaining proof-of-concept data for Neramexane in Alzheimer's disease, but have not yet begun that study. Our Phase II anti-psychotic program, RGH-188, has now entered a proof-of-concept study for schizophrenia, and we expect to start a second proof-of-concept study in bipolar mania in the next few months.

The PDE-4 program, which ERC-3886, must successfully complete additional pre-clinical work before we can potentially move on to a larger Phase II study.

We currently have a significant number of development programs ongoing, and I would add that we clearly recognize the need to bring additional products to market during the next few years, as Lexapro loses patent protection in March of 2012, and Namenda also, around the same time. Our most important focus today, and over the next several years, is to license, co-promote, or acquire products or companies that collectively serve to ultimately more than replace the earnings from those products.

We continue to add support behind our business development group, and remain very optimistic regarding the identification and pursuit of attractive developmental drug candidates across a variety of therapeutic categories. Whether primary care physician-oriented, or specialty physician-focused, we believe that, as a company that specializes in partnerships, and also possesses strong scientific and marketing groups, we continue to be viewed as an attractive partner by many other companies.

Also, given our size, we can take advantage of opportunities that, while meaningful to us in terms of sales and profit levels, would not be as interesting to our larger competitors. Our size also gives us an advantage in terms of our ability to be more nimble in the negotiating process. We look forward to announcing additional development opportunities, which can diversify our risk profile as we move into the next decade.

I will now turn the call over to Chuck.

Charles Triano, Vice President, Investor Relations

Thanks, Larry. Before we get into q-and-a, I have a little added bonus here today. I'll give you quarterly sales for some of our smaller products I know many of you track on a regular basis. I'll do these in descending order.

For the quarter, Europe sales were $15.8 million; thyroid products $13.8 million; Cervidil, $13.6 million; Aerochamber, $11.1 million; Campral, $7.4 million; Aerobid, $6.4 million; other generics, $6.2 million; Tessalon, $5.3 million; Infasurf, $3.5 million; Lorcet, $2.9 million; Esgic, $1.9 million; Combunox, $900,000; Monurol, $300,000. With that, we can now ask Kristin to go ahead and hold for questions, please.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone, in order to ask a question, please press *, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q-and-A roster.

The first question comes from Mark Goodman from Credit Suisse.

Mark Goodman, Credit Suisse

Can you just talk about, philosophically, your views on licensing and M&A, and if it's any different from before you got back to Forest, and on M&A, if you could just talk about corporate acquisition, and how you view that; and also, biotech. There's a lot of small biotech companies out there, and are you willing to move in that line? Have you seen anything interesting?

Lawrence Olanoff, President and Chief Operating Officer

Maybe in reverse order, Mark, I'll say that we see a lot of interesting things, and we follow through in terms of due diligence with many of these opportunities as we go forward. As far as the philosophy, I don't think the philosophy of the company has changed dramatically since I've come back. Obviously, we've just completed a very large acquisition, the largest acquisition we've been involved with in probably 20 years, in relative terms. However, we've always kept acquisition as one of the tools to pursue, to acquire the necessary pipeline product we believe we will need in the future.

I will also say that our philosophy remains that product license opportunities as individual products are always a better option for us, as they reduce the risk going forward. But, under the right circumstances, and I think Cerexa was a great model for the right circumstances, we will also consider company acquisition when priced appropriately.

Mark Goodman, Credit Suisse

And, just on the inventory, you said "2 to 3 days." Was that across-the-board for all the products? Were you just talking about Lexapro and Namenda? What were you talking about?

Lawrence Olanoff, President and Chief Operating Officer

Across-the-board for all products, there's a 2 to 3 day increase, Martin. Obviously, Lexapro and Namenda probably have the biggest impact. We think it was probably about $22 million between Lexapro and Namenda, probably about $16 million for Lexapro, $6 million for Namenda.

Mark Goodman, Credit Suisse

Thanks.

Lawrence Olanoff, President and Chief Operating Officer

If you could keep him on; it doesn’t include Benicar, which Sankyo handles all the sales on that.

Operator

Your next question comes from Gregg Gilbert of Merrill Lynch.

Gregg Gilbert, Merrill Lynch

Thanks. I have a couple quick questions. Frank, is 21.5 the right rate to use going forward, or is there an opportunity to push that down some more over time, for taxes?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

It's the right rate to use for the rest of this fiscal year. I'm not ready to speak about what the tax rate will be in the following fiscal year.

Gregg Gilbert, Merrill Lynch

And then, I guess, for Larry, welcome, your first full call; have you had any conversations, formal or informal, with Daiichi Sankyo, to extend or expand your relationship with them?

Lawrence Olanoff, President and Chief Operating Officer

Well, we're aware of their combination product, and clearly, it’s one that we have an interest in, but we really don't disclose where we are, in terms of our discussions with a partner. I can say they've been a wonderful partner to work with, and we've very much enjoyed that relationship, both professionally and financially; and we would love to have the opportunity to continue to work with them.

Gregg Gilbert, Merrill Lynch

And one follow-up to the M&A question earlier, Larry? Would you say that the majority of your business development priorities are focused on prescription pharmaceuticals, or is the net wider at this point?

Lawrence Olanoff, President and Chief Operating Officer

I think that's a fair statement that the majority of our attention at this time is looking at ethical products with reasonable periods of exclusivity. I wouldn't negate the opportunity to consider other opportunities going forward, but that is essentially 100% of our attention at this time; and will probably always remain to be the majority of our attention.

Gregg Gilbert, Merrill Lynch

Thank you.

Operator

Our next question comes from Elliot Wilbur with CIBC World Markets.

Elliot Wilbur, CIBC World Markets

Hi, I wanted to ask a couple of market share questions around the Lexapro franchise. Sounds like the answer to this question's going to be "yes", but I'm going to ask it, nonetheless. At the beginning of the year, when you first issued fiscal '07 guidance, you talked about one of the components being, roughly, a 50 basis point gain in market share within the SSRI/SNRI category. Obviously, that hasn't happened yet, and one of the key catalysts for that was supposed to be the generitization of Zoloft. So, roughly, two months out, I'm wondering; sounds like you still think that opportunity is still on the table, and I'm just wondering what hasn't happened that you thought would happen, that would propel some additional market share leverage in the short term. And then, can you also give us a little bit more color on how you think the initial promotional activity with the new head-to-head data has been received, and what the real marketing power of that study is?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Elliot, it's Frank. Let me respond first to the first part of your question, and I think Larry will pick up the part about the recent head-to-head data; going back to what our expectations were at the beginning of the fiscal year, we initially indicated that we thought that our share would grow between 25 and 50 basis points; it was somewhere in that range. We were looking for a modest expansion of our share in the category. In fact, we did not experience that share growth; in fact, we lost a little bit of share in the category during the year. However, we also expected the category and the market itself to grow at around a 2% range. The market has actually grown at a much higher rate than we indicated; in the 7% to 8% range. So, we’ve benefited from an expanding market, and in essence, I think we've been able to, during the year, basically hold our position and with the ultimate generitization of Zoloft- Zoloft went generic, but there was a delay in the entry from Teva, I believe, so it happened a little bit later than we thought it was going to happen-- but if you look at the monthly and the weekly trends of late, we are starting to pick up the share that we thought we might be able to get, a little bit earlier in the year.

Lawrence Olanoff, President and Chief Operating Officer

Regarding the issue of head-to-head comparator data, I think in this particular market, there are a lot of different messages out there, although many of them have not been tested with any credible head-to-head data in terms of making, not necessarily claims, but offering opportunities. We've always taken the philosophy, is to demonstrate that data, and to try to demonstrate it consistently. It really involves a legacy of studies done earlier against other SSRI products, and now, in more recent past, SNRI products, and I think we've probably been the most aggressive, in terms of going out there, and really testing the hypothesis in terms of whether of not one product offers an advantage or not. What you've consistently seen across these studies is that escitalopram oxalate continues to perform at least equal to any antidepressant out there, and often with an improvement in overall tolerability, and that translates not just to an interesting study outcome, but often translates into a very beneficial pharmaco-economic outcome.

Elliot Wilbur, CIBC World Markets

I’d like to ask one follow-up question as well, with respect to formulary positioning, at least in terms of rebating. At the beginning of the fiscal year, we had talked about, with the addition of Medicare Part D, the average discount was going to be around 17%, I guess. Given some of the recent contract negotiations, which I assume occurred around calendar year-end, do you expect that rate to roughly hold, or we might see a little bit more or slightly higher rebate level going forward?

Lawrence Olanoff, President and Chief Operating Officer

Elliot, at the beginning of the fiscal year, we indicated that we thought the rebate might go up by about a point, and everything, to date, has basically held true to that very modest increase in our discount rate. We’ve really seen nothing that changes that.

Elliot Wilbur, CIBC World Markets

All right. Thank you.

Operator

Our next question comes from Dave Windley from Jefferies & Co.

Dave Windley, Jefferies & Co.

Hi. Thanks for taking the question. First question I wanted to ask was around Benicar, and acknowledging some of the earlier questions about how relationship might extend; if that relationship continues as it contractually stated today, what would be your plan for the sales force beyond March 31 of 2008?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Well, Dave, really, I think it's difficult at this point to speculate in terms of how the sales force would change until we understand better what that relationship would be extending out. We are committed to launch Nebivolol in that timeframe, and we've allocated sales force calls to that purpose. We would have to look at the relationship ultimately; we would have an ongoing basis with Daiichi Sankyo, and determine we would or not have to adjust that sales force.

Dave Windley, Jefferies & Co.

Okay, but to understand: if you don't extend with Sankyo, you would plan to move the current sales force detailing Benicar over to launch Nebivolol.

Lawrence Olanoff, President and Chief Operating Officer

That is correct.

Dave Windley, Jefferies & Co.

Okay. On two of your other pipeline products, the question is really the same. Those two are Milnacipran and Desmoteplase. There's been some suggestion that those products, or the NDAs for those products might be able to be filed with success in the next trial, for which data would be presented; so that the trials that will wrap that are currently ongoing; could you elaborate on whether you believe that could happen, and whether Forest would consider doing that on both Milnacipran and Desmoteplase?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

I think that you make a good point, but it really depends on the data, where the data directs us. If we have extraordinary results, we will take every option and look at earlier filings. Right now, our plans call for a conservative program which allows us multiple studies to ultimately convince the FDA of the safety and efficacy of both these products.

Dave Windley, Jefferies & Co.

Okay. Thank you.

Operator

Your next question comes from Ian Sanderson, from Cowen and Company.

Ian Sanderson, Cowen and Company

Good morning. Thanks for taking the call. First, on Ceftaroline, is the Phase III trial for complicated skin structure infection on track for starting this quarter; and the follow-up to that would be, is CAP trial be on track for second quarter; and an update on the Glenmark compound - was this the subject of the milestone payment in Q3, and could we see some of the Phase II-A data at the ATS meetings in Q2?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Thank you, Ian, for your question. Regarding the Ceftaroline program, yes to both questions, the skin and soft tissue structure program is scheduled to start in the first quarter, and still, to the best of our knowledge, on schedule to also pursue a start-up for the community-acquired pneumonia program in the second quarter of this year. Regarding the question on Glenmark, we don't make a practice at this point of disclosing all the details regarding our milestone payments. I can't really comment on this quarter's milestone payment. Regarding your question on when the data would be available, I don’t believe we have a specific timeframe yet set for the availability of the early Phase II trial.

Ian Sanderson, Cowen and Company

If I could follow up with another quick pointblank question on Namenda, the status - any update on the status of the once daily formulation, and what your assumption is for the exploration of the exclusivity on the current VID formulation?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

I'll let Chuck comment on that.

Charles Triano, Vice President, Investor Relations

The once-daily formulation of Namenda is currently in its stage three study, and I think we would expect to see the results of that study in the first half of

[technical difficulties]

Expires in October of 2008. Paragraph four [technical difficulties] can be made in October of 2007, which would add 30 months to the end of October '08, 30 months to the end of the fifth year. So that would make it April of 2011, if you presume a patent challenge. If you look in the orange book, we have two of the used patents listed, a 2010 and a 2014 used patent; so those are the patents right now in the orange book, and we have disclosed that we would expect a patent term restoration potentially in 2010 patent, out to the 2013 area. So that's how we see it between Hatch-Waxman, a patent challenge, and the patents themselves in the orange book; so, a couple of moving parts under the current twice-daily version, and then, hopefully, the once-daily version meets with success in its Phase III study.

Ian Sanderson, Cowen and Company

Excellent. Thank you.

Operator

Your next question comes from Tim Anderson, from Prudential Equity Group.

Tim Anderson, Prudential Equity Group

Thank you. A couple of questions. For the last two quarters, gross margins have been down year-on year, and I'm wondering if that's a gradual trend that's likely to continue, or is that just fluctuation around what is really a stable level, and if it is a downward trend, maybe you could rank-order the components of the slow deterioration? The second question is on your sensitivity to share price, on buying back shares. Is $50 a share still an approximate threshold about which you hold off?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Tim, it's Frank. Thanks for the question. There's a little bit of noise around our gross margin, but nothing significant, and there's no indication there of a longer term trend. Essentially, we're right on what we guided to for the year. With regard to share repurchase, yes, our break-even point is right around $50.

Tim Anderson, Prudential Equity Group

Thank you.

Operator

Our next question comes from Richard Silver, from Lehman Brothers.

Richard Silver, Lehman Brothers

Good morning. Just on the guidance, you mentioned the better than expected performance on promoted products and slightly lower SG&A; didn't mention anything about higher expected Lexapro and Namenda numbers in the fourth quarter; anything on that, that you can tell us, in terms of forward-looking numbers?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Really, nothing beyond what we've already disclosed. The inline products and the promoted products are performing well, and we continue them to have a good, solid fourth quarter to finish the year.

Richard Silver, Lehman Brothers

And secondly, on the inventory adjustment, would you expect any change in the next quarter, in maybe, perhaps, the other direction?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Yes, I would expect that the wholesale would, probably. Again, we think that they came pretty much right up to the 3 weeks in relation to making sure they had adequate supply over the holiday week, the way the days ran. We would expect them to contract that supply, going into our fiscal fourth quarter.

Richard Silver, Lehman Brothers

And then lastly, on share repurchases, are you still assuming no additional shares purchases in that disclosed '07 guidance?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Based upon where we are today, that's a safe assumption.

Richard Silver, Lehman Brothers

Okay. Thank you.

Operator

Your next question comes from Gary Nachman, of Leering Swann.

Gary Nachman, Leering Swann

Hi there. A couple questions. First, Larry, follow-up on Ceftaroline. What's the timeline we should expect for the Phase III, and can you talk a little bit about how you see that market opportunity? There's a lot of talk out there on issues.

Lawrence Olanoff, President and Chief Operating Officer

I'm sorry, Gary. I didn't hear the last part of your question.

Gary Nachman, Leerink Swann

Could you just elaborate on how you see that market opportunity? There's been a lot of talk on issues with MRSA. Just curious how you see the market opportunity for that product.

Lawrence Olanoff, President and Chief Operating Officer

I think the answer to your first question, Gary, is that we're currently projecting to complete the Phase III trials, file the NDA, and looking to enter the market in 2011, late 2010/2011 time period. We'll update that, obviously, as the trials get started, and we get a better understanding of the actual timelines.

In regards to your second question, in terms of the opportunity, obviously, we’re very excited about the opportunity. Your point about MRSA is very well taken in that it's become an increasingly difficult proposition for treatment in hospitals today, and it's added a huge amount of additional cost to the treatment of patients. A lot of patients coming in are coming in with resistant organisms, especially grandpas with resistant organisms; so this drug looks to be very useful in that regard. I would caution and say that we really are developing this drug as first line empiric therapy. The MRSA advantage, I think, is one that gives confidence that it is a wise choice for the admission -time treatment of the patient. But we’re not trying, nor do we have any intention to niche the product as a MRSA-specific drug, and I think that's based largely on the fact that we see it as highly active, from an efficacy standpoint where the cephalosporin profile.

Gary Nachman, Leerink Swann

Okay. And then, second question, on R&D expense, just to confirm, are there going to be any milestone payments in this coming quarter; and also, more broadly, I know it's still early, but can you comment on how next year should look? What are appropriate spending levels that you think are reasonable for the company? Do we look at this year as a gauge, or do you expect it to go higher next year?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

With regard to the fourth quarter, we have no further expected milestone payments that we expect to make this year. However, as I indicated earlier, we have incorporated the incremental spend for Cerexa for the Phase II development program that they are undertaking.

With regard to R&D spend, we indicated in the past that we're spending in the 15% of sales range this year. I wouldn't expect that to change.

Gary Nachman, Leerink Swann

Okay. Thank you.

Operator

Your next question comes from Cory Davis, from Natexis Bleichroeder.

Cory Davis, Natexis Bleichroeder

Thanks very much. Frank, actually, your last comment there was kind of my question. Longer term, 15% of sales for R&D; would that be including or excluding milestone payments?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

You know, I'm really not commenting on fiscal 2008. I'm just trying to set the expectation that we're no longer 9% or 10% R&D-spent company; that we're definitely in the higher range, if we develop out; acquire more products needed to develop a pipeline for the future of the company.

Cory Davis, Natexis Bleichroeder

Maybe I could ask the question a different way. Is there any kind of corporate long-term, say, 2 to 3-year target of where you want your R&D spend to be? Is it a percent of sales, or are you just going to let things go with what you end up licensing or acquire?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

I'll comment on guidance in the next conference call.

Cory Davis, Natexis Bleichroeder

Ok. Fair enough. That's all I have. Thanks.

Operator

Your next question comes from David Maris.

Good morning, a couple questions. On Faropanem, is it fair to say that you're planning how to do the follow-on studies on the four indications, or is it more accurate to say you're evaluating which, if any, of the indications you'll go forward with?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

David, in answer to your question, the indications we are most interested in, two of those indications are the ones we are looking at carefully in terms of what study design requirements are going to be necessary, and that's what we commented earlier. That is the bronchitis indication, as well as the acute bacterial sinusitis indication. For community-acquired pneumonia, I believe the format and the approach is not changed significantly, so we have some sense of where that will go. We've commented earlier in terms of what we believe we will need at launch, and the two indications I've mentioned that we've spent a lot of time thinking about, and will continue to think about, we believe, are key to that launch strategy.

David Maris

I guess the question is, you’re currently trying to figure out what design you need; it's not that you're weighing potentially not going forward with those two. Is that accurate?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

That's correct.

David Maris

And then, on the CHF filing, why wait on CHF and go forward with hypertension? Why not, when it's ready, just file it?

Lawrence Olanoff, President and Chief Operating Officer

Our approach here is that we always modeled this product, Nebivolol, in terms of its launch, on the basis of the hypertension plane only. For us, the CHF was icing on the cake, and we also believe that it would be given a tiny ear; it would be a clean regulatory pathway to have the agency review the hypertension data, while we clean up the CHF data to make sure it gets down on its own.

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

David, we also reserve the right to view this as it comes. We reserve the right to make a determination what we ultimately want to do; that's our line of thinking right now. On Faropanen, just to clarify what Larry said as we look at trial design; of course, trial design expense, timing, and likelihood of success would all have to come out in the right way in the equation for us to move forward. So, while we are assessing all those steps, they have to come out with the right answers for us to move forward; and once we get all the data, and can assess all of it, we can make that determination whether there is merit on moving forward with the program. But, as Larry said, we are taking the next steps to putting all of that together for that roadmap. Again, the map has to lead us in the right direction for us to go forward.

David Maris

So, a final determination of whether or not to go forward with two, or four, or none, or all, hasn’t been made; when do you expect to make that?

Lawrence Olanoff, President and Chief Operating Officer

We said in past communications, we expect to make that decision by the middle of this year

David Maris

Great. Thank you.

Operator

Your next question comes from Tim Chiang, with FTN Midwest Securities.

Tim Chiang, FTN Midwest Securities

Hi, thanks. Just one question. It looks like SG&A expenses as a percentage of total revenue has come in some. Do you expect the margin around 31%, 32% to stay this way going into the fiscal fourth quarter at all?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

We're really not trying to give guidance on specific line-items, but I think it's a relatively safe assumption.

Tim Chiang, FTN Midwest Securities

And just one last question: was there any price increase on the three major products, Lexapro, Namenda, and Benicar?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

In what time frame?

Tim Chiang, FTN Midwest Securities

Since the beginning of this year?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

No.

Tim Chiang, FTN Midwest Securities

Do you expect to raise the prices sometime this quarter, though, for any of those three products?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

We don’t make comments as to when we anticipate any, or taking price increases.

Tim Chiang, FTN Midwest Securities

Okay, great. Thanks.

Operator

Your next question comes from David Buck, from Buckingham Research Group.

David Buck, Buckingham Research Group

Thanks. Most of them have been answered, but a couple of quick ones. First, on Nebivolol and hypertension, can you give a sense of whether you set the marketing message as you expect the data to bear out, and give us some sense of that. Do you know enough now, given that you're on track to submit the response to the 'approvable' letter, around the end of this quarter, do you know enough to have pre-launch activity starting in the June quarter? And can you give us some order of magnitude on what that's spending there?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

David, we are on track to get the response in, as Larry mentioned earlier, around the end of the fiscal year, so read that as late March/early April at this point.

Lawrence Olanoff, President and Chief Operating Officer

I don't think we're really breaking out pre-launch expense or timing, I think in our guidance again, as Frank has referred to a few times here, on our call in April, when we go through the guidance, at that point, I think we will be looking more to talk to things like that. As far as our fiscal fourth quarter goes, we haven't made any specific comments within the SG&A spend, as far as line-items.

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

It's safe to assume for the year, and during the year, we have been making investments behind Nebivolol.

David Buck, from Buckingham Research Group

Okay. Thanks.

Charles Triano, Vice President, Investor Relations

Operator, I think we have time for one more question, please.

Operator

Okay, your next question comes from Gregg Gilbert with Merrill Lynch.

Gregg Gilbert, Merrill Lynch

Thanks for the follow-up. Frank, can you give us or estimate Benicar-related expenses in the quarter; and I think on the last call, you suggested that second-half expenses would be about $74 million. Does that still hold true?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

That probably still holds true for Benicar.

Gregg Gilbert, Merrill Lynch

Thoughts on the quarter; we were guessing in the low to mid-40s range?

Frank Perier, Senior Vice President of Finance and Chief Financial Officer

Your guess is good.

Gregg Gilbert, Merrill Lynch

Thank you.

Charles Triano, Vice President, Investor Relations

Thank you everybody for your time this morning.

Operator

This concludes today's Forest Laboratories, Inc. first quarter fiscal 2007 earnings conference call. You may now disconnect.

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