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Cephalon (NASDAQ:CEPH)

Q4 2010 Earnings Call

February 10, 2011 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

Lesley Russell - Chief Medical Officer and Executive Vice President

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

Robert Merritt - Vice President of Investor Relations

J. Buchi - Chief Executive Officer and Director

Analysts

David Buck - Buckingham Research

Nick Bishop

Ronny Gal - Bernstein Research

Manoj Garg - Soleil Securities Group, Inc.

Gregory Gilbert - BofA Merrill Lynch

Raghuram Selvaraju - Rodman & Renshaw

Christopher Schott - JP Morgan Chase & Co

Randall Stanicky - Goldman Sachs Group Inc.

Marc Goodman - UBS Investment Bank

David Amsellem - Piper Jaffray Companies

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

Gary Nachman - Susquehanna Financial Group, LLLP

Operator

Good afternoon, everyone, and welcome to the Cephalon Fourth Quarter and Full Year 2010 Earnings Conference Call. At this time, for opening remarks and introductions, I'd 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 fourth quarter and full year of 2010. Before we begin, let me remind you that certain statements on this call may be forward-looking and are subject to risks and uncertainties associated with the company 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 our 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 cause Cephalon's actual performance to vary from our current expectations is available in the company's current quarterly filing on file with the SEC. During this call, we will introduce first quarter 2011 guidance and update 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 Cephalon's homepage and will be archived for one week after the call.

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

Now, Kevin Buchi.

J. Buchi

Thanks, Chip, good afternoon, everyone. Division and strategy that we created under Frank Baldino's leadership remains an integral part of our company. It was a privilege to have worked with Frank and I'm honored to lead this great company into the future. We will continue to focus on new therapeutic areas that offer unique patient benefits. While there is risk inherent in the development of these new compounds, we have mitigated this by creating a portfolio of opportunities.

Creating significant shareholder value requires bringing products to market that offer unique benefits to patients and physicians that managed care can embrace, and enjoy Intellectual Properties that provides investors confidence. As pleased as I am with the strong financial performance we reported today, I am as enthusiastic about the company we are building for tomorrow.

Business development remain at the forefront in 2010. We completed the acquisition of biotech company's Ception Therapeutics with their lead compound CINQUIL for the treatment of eosinophilic asthma and initiated a Phase III program.

We completed the acquisition of BioAssets Development Corporation and their intellectual properties surrounding the use of anti-TNF antibodies injected epidurally for the treatment of psiatica[ph]. We have initiated a Phase I/II study with our proprietary anti-TNF molecule.

We entered into an agreement with ChemGenex Pharmaceuticals Ltd. ChemGenex's product candidate Omapro, shows promise to the treatment of Chronic Myelogenous Leukemia patients who have failed or are intolerant to Gleevec and one other tyrosine kinase inhibitor. Together with ChemGenex, we are analyzing the Phase III data of a possible submission to the FDA later this year.

We formed a strategic alliance with Mesoblast Limited, which allows us to participate in the entirely new field for us, Regenerative Medicine. Mesoblast Mesenchymal Precursor Cells or MPCs produce slight declines and/or growth factors that induce endogenous tissue repair or salt proliferation. This new technology has enormous potential. Our agreement provides us with global rights in three treatment areas. Cardiovascular, core blood expansion, and central nervous system. Mesoblast recently announced encouraging data from their Phase II program in congestive heart failure.

This control study demonstrates patients with congestive heart failure who were injected with Revascor, Mesoblast's allogeneic MPCs have reduced rates of major adverse cardiac events, cardiac-related hospitalizations and mortality. This is the largest opportunity in our pipeline.

In a separate study, core blood stem cells cocultured with the MPCs showed a 44-fold volume expansion. Subsequently utilized in hematopoietic stem cell transplants, patients demonstrated shorter time to neutrafil [ph] and place engraftment when compared to historical controls obtained from the Center for International Blood and Marrow Transplant Research Registry.

During 2011, we plan to begin a Phase II study in patients who have suffered a mild myocardial infraction. Revasco will be tested in patients immediately after they undergo a standard angioplasty stent procedure to open a blocked coronary artery. The proof of concept of this procedure was validated in a large animal study. The study demonstrated that Revasco can be injected safely into the coronary artery after a myocardial infarction, with improvement seen versus controls and injection fraction and myocardial perfusion.

During 2011, we will work with Mesoblast to finalize all CMC requirements. After completion we plan to initiate Phase III programs for both congestive heart failure and bone marrow transplants early in 2012. From a patient, scientific, medical and business perspective, we are very excited about the use of [indiscernible]. Mesenchymal Precursor Cells have the potential to change the face of medicine and transform Cephalon.

The nearest term opportunity in our pipeline is our tamper-deterrent extended release hydrocodone product for chronic pain. We expect to see Phase III results from this program by the end of this year with an FDA submission planned for early 2012. Our goal is to be first to market with the twice-daily acetaminophen-free [ph] tamper-deterrent product.

The label expansion for program for NUVIGIL and bipolar depression is advancing according to plan. Two of the three Phase III studies are on track to be completed by the end of this year. The third is scheduled for completion in the second quarter of 2012. If the first two studies are positive, and the subsequent submission is approved by the FDA, we will be prepared to launch in 2013. This would mark the first indication outside of the weight category for this franchise, and represents a large opportunity to help millions of patients suffering from bipolar depression.

Enrollment in our Phase III program with CINQUIL for

Eosinophilic asthma is under way. The Phase II data demonstrates the consistently positive signal in CINQUIL numerous endpoints including the Asthma-Control-Questionnaire FEV1, FEC and clinical asthma exacerbations. These data suggest that CINQUIL has the potential to treat severe asthmatics with elevated eosinophilic counts. We expect to complete the Phase III program in 2013 and are targeting 2014 as the potential launch year for CINQUIL.

Our product candidate, LUPUZOR, the Systemic Lupus Erythematosus is currently in a Phase IIb program. This summer we will review the interim results of this study. If these data are positive, we will begin the Phase III program for the second half of this year.

We also continue to make progress with our Phase III study of TREANDA for frontline treatment of indolent non-Hodgkin's lymphoma. We have now enrolled 80% of the required patients for this study and we expect response data by the end of 2011. In addition, we have an extensive Phase II pipeline, which includes our anti-TNF antibody for sciatica, TREANDA combined with Rituxan for mantle cell lymphoma, our proteasome inhibitor for multiple myeloma, and our part inhibitor for tumors with DNA repair mismatch on non-small cell lung cancer.

Yesterday we announced our option deal with Alba Therapeutics Corp., a privately held biopharmaceutical company. Under the agreement we have an option to purchase all of Alba's assets relating to their product candidate, larazotide acetate for the treatment of celiac disease.

In an earlier Phase II study, a signal of efficacy was seen. But the endpoint chosen for that study may not have been sufficiently specific to that disease. Utilizing our more disease specific primary endpoint, Alba will be initiating a new Phase IIb study in 2011. Should that study be successful, we will exercise our option and move forward to Phase III studies. There is currently no approved treatment to celiac disease, which affects more than 2 million people in the U.S. alone.

With five Phase III programs planned for 2011, and three additional Phase III programs planned for 2012, we have one of the most promising late stage pipelines in the industry today.

We continued our geographic diversification in 2010 with the acquisition of Mepha AG. Mepha roughly doubled our x U.S. business on an annualized basis with the diversified product base in Europe Africa and the Middle East. With our expanded global capabilities, we are launching selected branded product in over a dozen new countries and more than 50 branded generic products during the 2011, 2012 timeframe.

As we turn to our existing business today, we reported that during 2010, we again delivered strong financial results. Sales and adjusted net income both exceeded the high end of our guidance range and set new records for the company. This strong performance was led by TREANDA. Yearly sales of TREANDA grew 77%. We remain on track in our efforts to expand the label with our program to secure a frontline indication for TREANDA and indolent non-Hodgkin's lymphoma. Following the completion of extensive data monitoring, we plan to file the StiL Group study with the FDA around the middle of this year.

Furthermore, as mentioned earlier, our own frontline study continues to progress. We remain confident that TREANDA will continue to grow within its current indications, and also has the potential for expanded utility based upon the outcome of ongoing clinical trials.

The NUVIGIL launch continues to track ahead of other recent second-generation product launches in the industry. We will utilize the positive results from our recently completed Phase IV clinical trial in shift work disorder patients to continue to gain market share. I previously mentioned, our efforts to expand the label to NUVIGIL to include an indication of adjunctive therapy for bipolar disorder. If the bipolar program is successful, we expect NUVIGIL to have the opportunity to become a more widely prescribed medication than PROVIGIL was at its peak.

The pain franchise remains a stable contributor to our top and bottom line. Sales growth of FENTORA in the U.S., EFFENTORA in Europe and the addition of pain products from Mepha resulted in total franchise growth of 6%.

In summary, we are using the cash flow generator from our existing product portfolio to build a world-class late stage clinical pipeline. We expect to continue to add additional product candidates from both our internal discovery and business development assets.

Now Wilco will discuss our financial performance

Wilco Groenhuysen

Thank you, Kevin. Today we reported our 2010 financial results. We again generated record sales and earnings for the year. Sales increased 28% over 2009 and $2.76 billion. And basic adjusted net income per common share for the year increased 35% to $8.74 based on an average 75.2 million shares outstanding.

Adjusted net income for the year was $657 million, an increase of 40% over 2009. CNS franchise sales increased 18% above 2009 to $1.39 billion. Pain franchise sales increased 6% to $526 million. Oncology franchise sales increased 53% to $514 million due primarily to strong TREANDA sales of $393 million. Other sales were $327 million compared to $142 million for the same period last year, due primarily to the acquisition of Mepha AG, which contributed $183 million to this category.

Since the acquisition of Mepha on April 9, 2010, total sales by Mepha over all franchises amounted to $259 million. As expected, our business continues to generate strong positive cash flow. In 2010, we delivered net cash provided by operating activities of $782 million. We ended the year with cash and cash equivalents of more than $1.16 billion.

Our goal is to maintain wholesale inventory levels of between two to three weeks for our key products. During the quarter, total days on hand remained within this range. In January of 2011, we discontinued our 100-count bottles of PROVIGIL and a 60-count bottles of NUVIGIL and replaced them with the new 30-count bottles. This change should reduce retail inventory levels and consequently should reduce our exposure to returns.

When compared to 2009, R&D, expense as adjusted for certain pro forma items, increased $17.9 million due primarily to the increased spend associated with clinical trials and the inclusion of Arana and Mepha costs. Adjusted SG&A increased $138 million for the year versus 2009, mainly due to the inclusion of Mepha and increased spending on the promotion of amongst others, NUVIGIL.

Our effective adjusted tax rate for the year was 33.4%. During the quarter, there were several adjustments that were made to arrive for the adjusted net income. The most significant of these were, we excluded $100 million associated with the acquisition of worldwide licensed rights to Mesoblast proprietary technology platform.

We excluded $30.5 million from cost of sales associated with the ongoing amortization of acquired intangible assets and accelerated depreciation related to restructuring. We excluded $15.4 million associated with non-cash interest expense associated with our convertible debt. And we excluded the tax effect of these items and other charges.

Based on our current outlook, we have raised 2011 guidance. Total net sales guidance is now between $3.015 and $3.095 billion, and guidance for the CNS franchise between $1.45 billion and $1.49 billion. The pain franchise is between $540 million and $570 million; the oncology franchise is between $570 million and $600 million, and our guidance for other products sales is between $420 million and $450 million.

Adjusted R&D and SG&A expenditures are targeted to be between $520 million and $540 million and $970 million and $1 billion respectively. Guidance for adjusted net income is between $665 million and $688 million, which equates to a basic adjusted income per common share of between $8.70 and $9, assuming 76.4 million shares outstanding. Our assumed tax rate for the year is approximately 33%.

We are also introducing first quarter 2011 guidance. Our sales guidance for the first quarter is between $725 million to $755 million. Consistent with previous years, our sales guidance does not include other revenues. Adjusted net income guidance is between $144 million and $159 million, which equates to a basic adjusted income per common share of between $1.90 and $2.10, based upon 75.8 million shares outstanding and a tax rate of approximately 33%.

In summary, 2010 marks another record year for the company. Looking forward, I'm confident that we have positioned Cephalon with a rich pipeline. Our goal is to deliver new therapeutics to under-served populations and sustainable value creation that will reward shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Manoj Garg with Soleil Securities.

Manoj Garg - Soleil Securities Group, Inc.

PROVIGIL came in a little bit more than we would have expected. Can you just comment on inventory there?

J. Buchi

I think its safe to say that we didn't see anything that can change the inventory levels, but I will -- Wilco, you can fill on that.

Wilco Groenhuysen

PROVIGIL sales came in slightly higher than expected because we had somewhat higher scripts than expected. Inventory levels remains relatively sluggish with no significant development. And as I mentioned earlier on, in the first quarter with a reduction of the bottle 30, we did see a little bit of sales impact in the first few weeks of January. Towards the end of the year, we see no increase in wholesale inventory levels.

Manoj Garg - Soleil Securities Group, Inc.

On the updated 2011 CNS guidance, I'm assuming that this is largely driven by PROVIGIL. So can you just comment or give us an updated conversion expectations for 2011?

J. Buchi

Bob, you want to handle that?

Robert Repella

When you look at NUVIGIL, our focus going forward is really on expansion, we're focused on shift work disorder, and we're no longer concentrating on conversion of appropriate medafinil patients. Actually when you look at NUVIGIL, what we've seen recently is approximately 80% of the business is coming from our expansion efforts in shift work disorder and treated LSA. And about 20% really is now coming from conversion of medafinil patients. So we move in the direction of expansion and that's where we expect to realize our sustained growth in 2011.

Manoj Garg - Soleil Securities Group, Inc.

So I think you had commented last quarter that by the end of '11 you would've expect 50% to 60% conversion. Is that still true? Is that what we should model or...

J. Buchi

So from an overall perspective, our target remains to have NUVIGIL become the preferred product in the weight category before or by April 2012. And as you know, our market share right now is around 40%, that's how we ended the year in 2010. We expect to continue to grow that throughout 2011 through our focus on expansion in shift work disorder. When you look at shift work disorder, there's about 12 million individuals in the U.S. that are working shifts that struggle with excessive sleepiness. And we think that's our greatest opportunity for growth over the next 12 to 15 months. And that will allow us to continue to gain share. So those are our target to be the preferred product in the category, and we do have a Phase IV study now, the results that we just released, that will give us the momentum behind the brands that we're looking for. Because it looks at not only wakefulness late in the shift, but also looks at wakefulness during the commute home and also has a functionality measure based on the gas scale included in that study. And clearly the NUVIGIL cohort was statistically significant in terms of superiority of outcomes in that study across those endpoints. So we think we're poised to really drive growth in the shift work disorder segment this year.

Operator

And we'll take our next question from Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs Group Inc.

I wasn't clear, are we still thinking about 50% to 60% in terms of the conversion rate for NUVIGIL?

J. Buchi

That's our target. Our target remains to be the preferred brand by the time it's provisionary. So, yes.

Randall Stanicky - Goldman Sachs Group Inc.

In terms of -- you guys have been active on the business development front. You have a lot of cash, over $1 billion generating a lot of cash. How should we think about two things, one, share buybacks versus potentially bigger deals going forward here, and then some of the areas that you talked about historically in terms of geography, any change in your thinking on that front?

J. Buchi

In terms of future deals, I think we believe, at this point in time, that it's kind of a target-rich environment out there. We're seeing some transactions that are potentially interesting. And so we intend, we fully intend to continue the momentum we have in business development. Having said that, business development has the uncertain signs. So there's no guarantees but we're certainly still out there looking. In terms of your question on larger deals, you know what, it's interesting we look at larger deals on a pretty regular basis. The challenge we tend to have is the larger opportunities tend to be public companies with pretty substantial market caps, pretty well vented and pretty well understood by the market. And we see much less opportunities to create significant value in those types of opportunities because they are so well vetted. And so, not withstanding the fact that we all look at the large transactions, we tend to just find more opportunity in the smaller, single product companies. In terms of share buybacks, As I say, I think we'd rather focus on expanding the business and to the extent we think that we can still create a lot of shareholder value by entering into new transactions. I think we'd rather do that.

Operator

And we'll take our next question from Chris Schott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co

First question was just on R&D and what's kind of behind the increased guidance for R&D in 2011. I'm assuming that's the recent Mesoblast deal or is that something else? And when we think about 2012 start of Phase III programs for Revascor, can you just give us a flavor of what size, scope, and duration of studies we should anticipate?

J. Buchi

I'll answer the first part. The increase in R&D guidance is principally related to large transactions supporting that product. And I'll turn it over to Lesley in terms of clinical programs.

Lesley Russell

I think the size of the clinical programs -- I think we'll need reasonable safety numbers. This is a new procedure. So I think around sort of 1,500 patients mark for patient exposure. The size of the actual efficacy study will really be dependent on the effect size that we expect to see. And based on the 50-patient study it was pretty significant. That said though, we're always more conservative as we go into Phase III. So look around the sort of 400 to 500 patient mark for efficacy, with around 1,500 total exposure.

Christopher Schott - JP Morgan Chase & Co

And just on duration of those studies, what should think about?

Lesley Russell

We should think about the primary efficacy outcome measure being events [ph] at one year.

Christopher Schott - JP Morgan Chase & Co

I know you haven't given 2012 guidance at this point, but just from a high-level, how should we be thinking about the SG&A spend at Cephalon as you approach the provisional path in expiration. It seems like you've got a number of important late stage programs running on the R&D side, but would you consider a meaningfully smaller SG&A footprint or do you intend to keep spend kind of somewhat close to current levels as you consider things like the individual opportunity in by bipolar and your tamper-resistant opioid [ph] launch et cetera?

J. Buchi

You're asking about SG&A, or R&D, or both?

Christopher Schott - JP Morgan Chase & Co

SG&A.

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As you know there is no one currently promoting PROVIGIL in the organization. So the SG&A organization that we have is sized for this quarter and commercial opportunities are currently being promoted. We always review size of the organization, is it appropriate? Those types of things, but certainly trying to operate as efficiently as we can and to limit fixed cost with the extent that we can. But having said that, when PROVIGIL goes away I would expect the amount to decrease in SG&A unless something else happens in the organization which we're not currently planning for. Looking at it around in terms of R&D, the R&D spend is going to be heavily dependent upon the progress of the Phase III clinical trials. The current expectation is that we'll be spending a very substantial amount of money in 2011, and the significant piece of that will continue into 2012. So we're very conscious about cost structure. We're also very conscious in continuing to investing for our future.

Operator

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

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

You clearly have all been making a very rapid expansion in some of these biotech pipelines. How can you help us make these opportunities more tangible for us rather than just feeling like pie-in-the-sky biotech high-risk opportunities? And what can we expect to come to market first out of all these that you've sort of laid out for us?

J. Buchi

I think the first to market is most likely to be the [indiscernible] product. It's hard for me to classify hydrocodone as a biotech type of product.

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

No, I guess I'm talking about more of the investments that you personally made.

J. Buchi

I think in terms of the other investments, if you look at the characteristics of those investments, I say the riskiness of that varies across the portfolio. I'd make an argument that the [indiscernible] asthma is probably on the lower risk scale for the opportunities that we have in the clinic. So the Phase IIB data, the placebo-controlled study. We understand the mechanism there. [indiscernible] So I wouldn't view that one as being anti-risk maybe of some others. And I would point out that all the high-tech investments that we're making, including risky areas like [indiscernible] we're making those investments on the basis of placebo-controlled, human clinical data. So that is risky but that solid genome data is supporting the efficacy behind this at this point in time. The rest will come out in Phase III, and hopefully those Phase III studies will start rolling out in 2011, 2012, and try to provide for more companies.

Operator

And we'll go next to Gary Nachman with Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group, LLLP

First question is on Mepha, the sales rebounded nicely from the third quarter. Is that a good run rate that we should use for 2011? Are you guys seeing any incremental pricing pressure in Switzerland? And did you mention the product launches that you're expecting in that business? If you did, I may have missed that. If you could repeat it.

Wilco Groenhuysen

I think the fourth quarter run rate is indeed a better reflection of what we expect going forward explained in the third quarter. One of the reasons why the sales are slightly low was production in pipeline for the $89 million that we reported in this quarter and we expect to see substantially some volume growth. There is price erosion undoubtedly in Europe not just focused on Switzerland, but in other countries as well. Historically, you see 2% to 3% price erosion in business. We've always been able to offset that with the volume increases and mix of improvements that we would expect that as well.

J. Buchi

In terms of new product launches, they kind of fall into two categories. The launches of our currently branded products into new territory. For example in places like Poland, Netherlands, Baltics, Czech Republic, those type of opportunities. There's then the continuing introduction of new brand of generics by Mepha, and that's a very long list of around 40 or 50 different compounds based on developing [indiscernible].

Gary Nachman - Susquehanna Financial Group, LLLP

Anything else you could do with AMRIX to try and turn the product around. They've been trying for a few quarters now, and it seems to be struggling still. And have you made any changes to the pain cells for us or do you want to keep that intact in preparation for the tamper-deterrent hydrocodone product?

Robert Repella

We do expect to realize modest growth with AMRIX in 2011. We have made some adjustments to the sales force, and we've implemented a plan of differential resourcing. And in essence, what we've done is we've deployed the sales force, not in a continuous fashion but we kind of put them into places where we have the best opportunity for growth. So we have a high density of high decile Doctors, they have good access into those offices. And importantly, there is solid reimbursement for the brand in those MSAs and geographies. So we've got our people positioned where the growth opportunity exists, and we continue to be aggressive in our support of patients in terms of helping them with our out-of-pocket costs, with our co-pay card program and we piloted a new program last year. We like the results that we saw in the four states we piloted it. So we rolled it out on a national basis this year. And we think those combined efforts will give us again an opportunity for modest growth, combined with additional efficiency will help contribute also to a stronger bottom line.

Gary Nachman - Susquehanna Financial Group, LLLP

Will you make any changes to the infrastructure for the tamper-deterrent product?

Robert Repella

We've got a whole series of contingency plans that look at our pain franchise and certainly, we're looking at the right balance for FENTORA and AMRIX and TD hydrocodone when it gets here. But we'll make the adjustments as we get a little bit closer and better understand what the portfolio looks like.

Operator

We'll take our next questions from Ronny Gal with Bernstein.

Ronny Gal - Bernstein Research

First, Europe is down as an area where there's a lot of seasonality in generics and we don't always have a great visibility from the outside, how the seasons progressed for the Mepha business. Can you just give us an idea in percentages how should we think about this in terms of percentage of revenue coming in every quarter due to seasonality, and obviously there is some growth superimposed on top of that. And second, if you guys give us a little bit of insight into how PBMs would think about hydrocodone? One concern I've been hearing is that given your history as a company that prices its products well, managed care might be somewhat resistant to adopting new product early. Have you guys modeled what managed care might do here, and how to think about it?

J. Buchi

I'll answer the first question, then I'll hand it over to Bob to talk about the strategy around hydrocodone. There really is very little seasonal fluctuation that we would expect in the Mepha business over the year. I think that maybe more seasonality in the U.S. but the European business is pretty stable across the year. So you can almost literally just divide it by four and that's pretty close to the right number.

Robert Repella

We think we have a unique opportunity to be first in class with our tamper-deterrent hydrocodone product, and that it will be tamper-deterrent A; B, it will be long-acting; and C, APAP-free [acetaminophen-free] which is important to the marketplace in terms of managing potential toxicities with APAP products. So, from a managed-care perspective, we believe that they'll see the value of that product in terms of its differentiation, and we don't anticipate that it'll be problematic in terms of gaining reimbursement for that product at launch.

J. Buchi

We would expect the price and volume [indiscernible] to be there. I wouldn't characterize it as a company's overall, aggressively priced products [indiscernible].

Operator

And we'll take our next question from Raghuram Selvaraju with Noble Financial Group.

Raghuram Selvaraju - Rodman & Renshaw

First of all, regarding TREANDA, I just sort of wanted to get positional color on what you see as the expectation for the product growth capacity without formal FDA approval and front-line at HL or mantle cell, and how much growth do you think the product still has left in it? Without factoring in the impact of the FDA taking into account the StiL study and the current you're running with Rituxan?

Robert Repella

So TREANDA had very strong growth in 2010. As Kevin commented earlier over 70% growth, 2010 versus 2009. That's a growth curve that would be difficult to continue to replicate year-on-year. But when we look at the opportunity for TREANDA going forward, clearly, there is still many patients in the U.S. who suffer with CLL and NHL that could be candidates for the product. When you look at the prevalence data in the U.S. we're talking about just over 50,000 CLL patients and just over 100,000 NHL patients. So there's a lot of opportunity for growth within the labeled indications and utilization patterns, and then of course in the marketplace, there continues to be independent third-party data that is generated. And certainly, healthcare professionals look at that and evaluate that data. That's certainly separate and apart from anything that we do commercially or promotionally and we don't quantify that impact specifically, but it does play into the growth potential for the brand. But we think again, just based on the demographics that TREANDA has opportunity for sustained continued growth in 2011 and beyond.

J. Buchi

I think it's fair to say as well that the combination of the StiL data and the phase III program that we're running in frontline we do very much hope that we'll be able to get the [indiscernible].

Raghuram Selvaraju - Rodman & Renshaw

Can you say anything more about the efforts ongoing to identify a successor molecule to TREANDA at this point in time?

J. Buchi

No not at this point in time. We're still looking at some alternatives. I would say though that the success of molecules that we're looking at the TREANDA our new NDAs I wouldn't use them as line presenters. There are not products that would be bioequivalent from [indiscernible]. What we're interested in looking at with TREANDA is whether or not we can develop a product that has the same efficacy, if you will, it has an extended DK profile suitable for use for mostly bookings. So this will be a new NDA and not just a traditional line extension.

Raghuram Selvaraju - Rodman & Renshaw

With respect to the recent Alba deal, could you comment on how large the celiac disease and market opportunity is as you see it? And what perspective there might be for pricing of a drug like larazotide acetate into syndication?

Robert Repella

We believe this is a large market opportunity, potentially over 2 million patients in the U.S. That provides an excellent revenue opportunity for us and meeting an unmet need in the marketplace. It's too early to comment on pricing at this point. We'll do our sensitivity analysis as we conduct our market research assessment as we move forward but we remain excited about the possibility of meeting the needs of these patients who to date really don't have any solutions for the challenge that they face.

Operator

We'll go next to Greg Gilbert with Bank of America Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

How would you characterize the pace of the NUVIGIL cases versus the generics? And what are some relevant milestones you can point to over the next 12 months or so on that front?

Gerald Pappert

The pace discovery is proceeding with respect to the cases against each of the defendant. There is no trial date that has yet been set by the District Court in Delaware. So there is not a specific trial date I can point you to. The only other relevant probably timeline for your interest would be the expiration of the respective 30-month stays as to each defendant which begins in third week in April roughly and then continue into May and June.

Gregory Gilbert - BofA Merrill Lynch

A bigger picture question for Kevin, I think some folks have already touched on this, but Cephalon's clearly done a good job in finding and launching drugs in the past but I sense that there's a lot of skepticism among investors as to whether Cephalon is the right company to find and develop these more novel, more biotechie products. So short of fast forwarding to the clinical data readouts for all these novel programs, how do you try to make investors comfortable that you'll pursue a balanced approach between the novel development investments versus -- and I know the risk varies across those, but you know what I mean in broad terms, and bouncing those with sort of less risky capital deployment strategies.

J. Buchi

I think if you look back at history of Cephalon, our largest product, PROVIGIL, was certainly in the category of a risky investment by the time we made it. Phase I and new therapeutic area has no currently available therapy and our history as an organization has been to balance those types of opportunities with the affects which was already approved when we acquired it. I think the strategy is largely unchanged. I think we've got a balanced approach, we continued to do transactions like the Mepha transaction, which was a transaction of raw products into our portfolio for the European market, we'd be very suitable for that market. And against that, we balance things like [indiscernible], which obviously has a technology which is more risky. I think the way we get comfortable with the risk, and I don't know if this helps investors at all is that if you put aside the nature of the technology and look at the nature of the clinical data that supports these acquisitions, all of these product candidates forget how they work. They all have human Phase II clinical data with placebo-controlled studies that is officially and internally consistent if you would feel compelled to say these products are doing something in these patients. That's how we get comfortable with it internally. Hopefully as we tell that story to investors, obviously they're going to be some people more skeptical than others. As we tell that story, hopefully people start to believe and hopefully as the data starts to roll in for the Phase III studies, as I said, that will cement that belief.

Operator

And we'll go next to David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray Companies

Just wanted to touch on the hydrocodone product. Right now you'd be the second hydrocodone product without APAP to get to market after the Zogenix product. So I guess the question here is can you comment on how you think you are differentiated on that product?

J. Buchi

I'll make a couple of comments. First of all I'm not sure that we'll be second to market behind Zogenix. I would imagine being in a race with them, but I think we're enrolling rapidly and I think we have a real good shot at being to market ahead of them. Having said that, their product is my understanding, does indeed lack APAP but I don't believe it has any kind of deterrent properties and I don't believe it's an extended-release or I could be wrong there. So I think we'll be right there with them, but I think we'll have a much better product when it comes to market. IS that fair, Bob?

Gerald Pappert

The big differentiation point would be the tamper-deterrent. So APAP-free and long acting will probably be the points of similarity and but the TD is really important to the marketplace, and we think we'll be at the point at which we kind of diverge.

David Amsellem - Piper Jaffray Companies

And then the second question, back to business development, I guess the Mepha acquisition was unique in the sense that it was the departure from a lot of the pipeline-oriented transactions that you're doing. So I guess the question here is what's your appetite for doing more deals along the lines of brand generics or even vanilla generics going forward whether it's oversees or domestic?

J. Buchi

I don't think you'll see us do a generic deal in the United States. I think we do transactions that we believe are appropriate for the local market. And I think in many parts of Europe and the developing world, a brand of generic strategy can make a lot of sense. I don't just say it's not unique. We did a transaction, as you probably recall, several years before which was also the fact of the European market for the oncology space. My view of the U.S. generic marketplace is that the U.S. market doesn't pay for quality in generics, it just pays for the cheapest possible generic. That is in stark contrast to many other parts of the world where the quality of the product and the quality of the brand counts. So I think additional brands of generics types of deals in other parts of the world where that makes sense potentially we'll certainly look at those. But I wouldn't count on us doing a generic deal in the U.S.

Operator

And we'll go next to Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank

First of all can you talk about the SG&A level in the quarter and what you spent on and whether you strategically were going to spend that at the beginning of the quarter or did you spend more as you saw that the top line was going to be better as the quarter progressed?

Wilco Groenhuysen

No we can't let our spending be determined by the trends that we see in our top line, yearly observations. Increase in SG&A has been slightly variable in nature. Largely driven by marketing initiatives such as the European launch of some of this is related to product launches and are largely variable, more focused on managing fixed cost and increasing operating leverage in 2012.

Marc Goodman - UBS Investment Bank

Just so I understand the delta from maybe an average of second and third quarter to the fourth quarter. You were saying there was launches in Europe that cost extra spending and then what else?

Wilco Groenhuysen

We have continued spent in NUVIGIL in the past we've spoken about our WebMD campaign. We spent some money on that as you know we did a couple of transactions in the latter part in most of the increase in the third quarter of 2010 in our prepared remarks.

Marc Goodman - UBS Investment Bank

Can you talk about the WebMD campaign and what you're seen so far?

J. Buchi

Maybe Bob can say a few things about how that's progressing?

Lesley Russell

It's a core platform for us in terms of our Internet efforts to communicate with potential patients. We've seen significant interest in terms of the number of visitors to the site that is educational in nature around shift work disorder and treated OSA and the number of patients that have followed on to gain information about NUVIGIL and potentially have a discussion with their healthcare provider about NUVIGIL and whether it's appropriate for them in terms of managing the excessive sleepiness associated with their shift work disorder or their treated OSA. So we're seeing good responsiveness and now we're at a point where we can start to evaluate how that responsiveness translates into discussions with the healthcare provider and then eventually a NUVIGIL prescription for appropriate patients. So I think as we get later into this quarter and into the second quarter, we'll have a much better view of the impact to that program. But again, it's part of our overall effort to leave no stone unturned in terms of consumers, patients, healthcare professionals, payers, managed care to ensure that we do everything to drive appropriate growth of NUVIGIL.

Marc Goodman - UBS Investment Bank

Can you talk about when the strategy changed from not switching patients from PROVIGIL to NUVIGIL to just focusing on the new patients?

Robert Repella

So we started the transition, I would say late summer in the third quarter. And have fully executed that change in the fourth quarter of last year and we talked a little bit about it on the last call, in terms of that transition being driven by the fact that in terms of PROVIGIL patients that are in our reach, we think we've gotten the majority of those in terms of transition of patients that are on appropriate indications. Those that are on doses that we can move from PROVIGIL to NUVIGIL. And so with the opportunity that exists for expansion and where we were with the original conversion effort we thought that the time is right to make the transition. So late third quarter into the fourth quarter and now our focus in 2011 is growth through expansion. So we've had nice results so far, we crossed over in the fourth quarter the 1 million prescription line in total since the launch of NUVIGIL. So that was a nice milestone for the brand and again, we think with the new data that we have from our Phase IV study, positions us well for sustained growth.

Marc Goodman - UBS Investment Bank

When I look at PROVIGIL plus NUVIGIL together as one franchise it still looks to me like it's declining. August, September, October, November, December. Why is that?

Robert Repella

If you look at the category in the latter part of 2010, we saw some stabilization compared to what we had seen previously and we talked a little bit about PROVIGIL's demonstrating a bit more strength that we had anticipated and the impact that, that had on our overall company performance. So while the category was declining consistently through the middle of 2010, again in the back half, we saw that decline slow down a bit and for the market as, we look at it, 2011, we expect it to be stable to slightly down, but not on the order of magnitude that we've seen in previous years when you're looking at '09 versus '08, for example.

Marc Goodman - UBS Investment Bank

So by the end of the year you switched over a little bit more than 50% like you said, and then you're assuming that NUVIGIL will grow in 2012.

J. Buchi

The only thing to remember about 2010 is that there was really no new data for any of these products. We do have the advantage that we have some good data now [indiscernible] talked about. And hopefully, that new data will allow us to improve the penetration of NUVIGIL and continue to grow the brand.

Marc Goodman - UBS Investment Bank

What are your thoughts on the emerging markets and maybe doing some deals there? Obviously all the pharma industry is moving there. What are your thoughts? I know you have a small operation there so far.

J. Buchi

Yes, we do. My hope is that studies with a number of our branded products in that region, in China specifically. As we talked historically, we would very much like to do a focus transaction to get commercial presence in China. Assets in China tend to go at pretty fancy prices right now and as you know, we've always been kind of value buyers. I think if we cannot find something which looks attractive commercially to us, then we will build our own infrastructure slowly over time and commercialize our products as we go forward starting with PROVIGIL at the end of this year.

Operator

And we'll go next to Nick Bishop shop with Cowen and Co.

Nick Bishop

We discussed a lot about your acquisition strategy. I guess you haven't specifically commented on whether you'd be looking to buy somebody -- buy a company with some revenues or earnings ahead of the PROVIGIL expiration.

J. Buchi

In a vacuum, would we like to buy a company that has a good revenue for a fair price, sure. We don't see a lot of assets to kind of fit that category. Assets that are suitable for specialty marketing efforts that has some reasonable potential for growth that had long ideas with a fair price. But we'll always open to look for those kinds of things. It's a pretty scared landscape for those types of assets.

Nick Bishop

I was wondering do you have any updates on what might be happening -- the litigation with Watson around Fentora. Can we expect to see something on that soon?

Gerald Pappert

This is Gerry Pappert. As you may know, the court entered an order the other day, asking the parties for their thoughts on the practical implications of the court's ruling at least initially on some but not all of the patents that issue in this case. And recall there are three patents, and two of them are listed in the Orange book, one of them is not. The court's order indicated that the judge may be prepared to rule on the patents listed in the Orange book but not yet prepared to rule on the non-orange book. They've asked the parties to provide the court with our views on the practical implications of approaching it in that fashion if you will. So we will be doing that and supplying the court with our two-page letter briefs by Tuesday the 15th which is the deadline in the order. And I don't think it's unreasonable to expect the ruling on the Orange book patents in fairly due course after their submission.

Operator

And we have time for one more questioner. We'll go next to David Buck with Buckingham Research Group.

David Buck - Buckingham Research

First, can you just review the price increase activity that we saw in the fourth quarter or any activity first quarter? Secondly, if you look at the R&D number that went up this year for the Mesoblast partnership, can you talk a little bit about what the Delta might be in 2012 from 2011? And just in regard to the Revascor study, how expensive would you expect that to be? And then another one for Kevin, you heard actually the comment about the riskiness of R&D strategy and the riskiness of the profile. One commercial question related to SG&A is when you see provision go in April in 2011 -- April in 2012, why wouldn't the recent flexing of spending on SG&A if NUVIGIL sort of peeks, and you have NUVIGIL no longer growing.

J. Buchi

That maybe some level of questioning. Depending upon the outlook depending upon the result of the bipolar studies. Depending upon the kind of a lot of things. I don't want to kid anyone that we don't think seriously the fact that we're losing a product that today is $70 billion. So we're not going to go to the certain the important for the branded sales, authorized generic Europe and so on. You should expect a significant decrease in revenue in 2012 beginning at 2013. We would expect to start cutting back after that as some of these new opportunities start to get launched and start to get some traction. There maybe some room to flex SG&A somewhat but my earlier point as you're well aware there is no one out there currently detailing PROVIGIL today. On the R&D side, it's difficult to predict what the R&D line is going to look like because we have multiple phase three trials going on now, which will be continuing into 2012. Some will be concluding this year, but many will be concluding in 2012 and a number starting up in 2012. So the R&D spend really depends on the success rate that we have. I have a much better feel for that as we go through this year. Your other question, I think I was going to turn over it over to Bob and I forgot what it was anyway.

David Buck - Buckingham Research

Price increase activity and maybe just a thought on formulary for NUVIGIL in 2012

J. Buchi

I'll take the crash question and then Bob can take your question on formulary. A total of 2010 price by 10% and lower price also by 10% and mid-January by about 5% and PROVIGIL prices by about 10%.

Robert Repella

Dave, what was your formulary question? We lost that one.

David Buck - Buckingham Research

As you look towards April 2012, can you give some sense of what you think the formulary position for NUVIGIL would be?

Robert Repella

We have long-term agreements in place with the majority of our customers in terms of access reimbursement and formulary position. We think that combined with the possibility of new indications like bipolar will have our customers look to the value, the increasing value that NUVIGIL can provide going forward. We also, when we look at the market, we recognize that and we talk to customers that therapeutic interventions, they're costly, they're time consuming they take a lot of energy. And we don't expect with the agreements we have in place that customers are going to want to move in that direction. So we expect a prescription written for NUVIGIL in 2012 and beyond will get filled with NUVIGIL, again because the agreements we have in place and the value the product provides. And when you look at the category, relatively speaking, it is not that large with these customers so again, we don't expect them to be that interested in taking specific action. They'll realize their windfall, their economic gain when medafinil goes generic. But we think we'll have a long-term relationship with them as it relates to NUVIGIL.

Robert Merritt

Okay it's 6:00, so we need to conclude the call and we thank you all for your participation.

Operator

This does conclude today's conference. Thank you for your participation.

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