Momenta Pharmaceuticals CEO Discusses Q2 2011 Results - Earnings Call Transcript

Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA)

Q2 2011 Earnings Call

August 4, 2011 10:00 AM ET

Executives

Beverly Holley – Director, IR

Craig Wheeler – President and CEO

Richard Shea – SVP and CFO

Analysts

Eric Schmidt – Cowen & Co.

Ritu Baral – Canaccord Genuity, Inc.

Bret Holley – Oppenheimer Securities

Ami Fadia – UBS Securities LLC

Joseph Schwartz – Leerink Swann LLC

Sumant Kulkarni – Bank of America Merrill Lynch

Duane Nash – Wedbush Securities, Inc.

Avik Roy – Monness, Crespi, Hardt & Co., Inc.

Ronny Gal – Sanford C. Bernstein & Co., Inc.

Ricky Moore – Brooks Moore

Operator

Good day, ladies and gentlemen, and welcome to the Momenta Pharmaceuticals Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Ms. Beverly Holley, Director of Investor Relations. You may begin.

Beverly Holley

Thank you and good morning. I want to welcome all of you to Momenta’s conference call to discuss financial results for the second quarter of 2011 and provide a corporate update. With me on the call today with prepared remarks are Craig Wheeler, President and Chief Executive Officer, and Rick Shea, Chief Financial Officer. Following our remarks, we’ll open the call to questions.

Before we begin, I’d like to mention that our call today will contain forward-looking statements. Various remarks that Momenta Pharmaceuticals may make about management’s future expectations, beliefs, intentions, goals, strategies, plans and prospects; the company’s revenue, expenses and other results of operations, including the quarter ended June 30, 2011; our enoxaparin sodium injection commercial prospects and our generic competitors’ prospects for approval and commercialization; our generic Copaxone development and ANDA review expectations; and our other product development plans and expectations, including our future development, partnering and commercialization potential for our development programs, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “hope,” “target,” “project,” “goals,” “potential,” “predict,” “might,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “tentative,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors referred to in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2011, filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by Momenta from time to time with the Securities and Exchange Commission.

As a result of such risks, uncertainties and factors, the company’s actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein.

Momenta is providing the information on this conference call as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our logo, trademarks and service marks are the property of Momenta Pharmaceuticals, Inc. All other trade names, trademarks or service marks are property of their respective owners.

And with that, I will now turn this call over to Craig Wheeler, Momenta’s President and Chief Executive Officer.

Craig Wheeler

Thank you, Beverly. Good morning, everyone, and thank you for joining us. This morning, I’ll discuss our company’s progress in the second quarter of 2011 and provide an update on recent corporate developments at Momenta. After that, Rick will give an overview of our financials.

Momenta had another very strong quarter. Net income for the quarter exceeded $64 million. Earnings per fully diluted share were $1.26 and at the quarter’s end, we had a cash balance of $246 million and $85 million in accounts receivable. On July 23, we marked the one-year anniversary of the FDA approval of generic Lovenox, giving us and Sandoz over a full year as a sole provider of generic Lovenox.

For the second quarter of 2011, Novartis-Sandoz reported enoxaparin net sales of $284 million, which translates to a Momenta profit share of $84 million. Currently, enoxaparin has captured roughly half the market. Rick will discuss the enoxaparin sales and profit share in more detail in his remarks. But I’d like to give you some additional perspective regarding the enoxaparin launch and sales performance.

Enoxaparin is the number one injectable generic in U.S. sales. The launch of enoxaparin has been the biggest launch in Sandoz history. Sandoz has sold over 30 million pre-filled syringes and has generated over $1 billion in sale since the launch. We estimate that over 2 million patients have been treated with enoxaparin. And finally, we estimate that since the introduction of enoxaparin the U.S. healthcare system had saved over $0.5 billion.

By any measure this is an important drug and we are very pleased with over one year as sole provider of generic Lovenox. The fact that no other generic Lovenox has been approved in this timeframe indicates that the FDA has set high scientific and technical standards for approval and we are very pleased to have met those standards.

The one year anniversary of the approval had several contractual consequences for us. In recognition of completing a full year of sales without an additional generic entering the marketplace as of July 23 we earned a $10 million milestone payment from Sandoz. This revenue is partly offset by an obligation we incurred to pay a $6.7 million milestone payment to Parivid LLC which Rick will discuss.

This one year milestone also triggered an increase in the royalty rate we will receive from Sandoz if and when a third-party competitor enters the market. Previously we had disclosed that royalty rates would range from high single to low double digits. Now should another competitor enter the market we would receive royalty from the low double digits, representing a 20% to 25% relative increase in royalties.

I’ll also now comment on the two court cases concerning enoxaparin. We filed a suit against Teva in December 2010 for infringement of two Momenta patents. In April of 2011, we served Teva with a claim-by-claim allegation of infringement and discovery is now underway. A Markman hearing has been scheduled for December 2011 and a preliminary trial date for this case has been set for February 2013. Should any other generic versions of enoxaparin advance in the regulatory process, we also plan to enforce our proprietary technology.

Regarding the suit sanofi-aventis filed against the FDA following our enoxaparin approval, we have no new information. As a reminder, in August 2010, the court denied Sanofi’s request for a preliminary injunction on the sale of Enoxaparin. In April of 2011 the parties each completed briefing of their motions for summary judgment and those motions are pending. We believe that Sanofi’s claims are without merit and continue to believe that the court will ultimately agree.

In conclusion, we’re proud to have achieved the one year milestone on enoxaparin, but we recognize that the threat of competition weighs on our stock. This historic approval has changed the game for approval of complex drugs. It has also provided a solid financial foundation on which to build our company and it serves as a guide post for our Copaxone and FOB strategies.

I’ll now discuss M356, our generic version of Teva’s Copaxone, which we’re developing in collaboration with Sandoz. The paragraph IV litigation with Teva is in high gear. The litigation involves seven orange book patents expiring in 2014 and two non-orange book patents one expiring in 2014 and one in 2015. As you may know, the court chose to advance start of the trial to July by splitting the trial into two phases.

The first phase took place in mid-July and dealt only with the issue of inequitable conduct. The second phase on the remaining issues are set to start September 7. There was a great deal of attention paid to the first portion of the trial because a finding of (inaudible) conduct on the part of Teva would render the patents unenforceable. Following completion of this phase of the trial, we remain confident that we have a strong position and are looking forward to September’s testimony.

As of today, we have not heard a final ruling on this phase of the trial and it’s important to note that the court may not issue a ruling on the first phase before the second phase of the trial begins in September.

Our Copaxone ANDA is under active review and we’re doing all we can to support and expedite the FDAs review efforts. The FDA is engaged and the nature of their review signals that they have a deep understanding of our approach.

As I have previously discussed, we and all generic companies are facing significantly longer review times as the FDAs resources have not increased to keep pace with their increased workload. This makes it very difficult to predict the duration of the review period and the timing of a possible approval. We continue to believe that the information provided in our ANDA establishes equivalence between our product and Teva’s and that the application is approvable as a 505(j).

I’ll now address the area of follow-on biologics. We’re continuing to advance our programs while we engage with potential partners. I want to emphasize that the most important aspect to any FOB collaborative partnership is alignment on strategy because we believe we have the potential to create an industry leading FOB business.

The FDA is going through a process of meeting with companies and industry associations to begin to define their implementation of the 351(k) pathway. Specifics of discussions with the agency are confidential at the FDA’s request. However, based on what is publicly available, I can say that those discussions are focused on biosimilar user fees, review metrics and the structure of the pathway.

The FDA has proposed an application process with a series of steps, including a review of analytic and bio characterization data before determining the appropriate scope of any clinical studies. We believe this process will also help establish the potential for product substitutability. Importantly, we believe, reviews will be done on a case-by-case basis, enabling companies to differentiate their applications based on the thoroughness of their characterization. In fact, the FDA specifically cited that generic Lovenox approval as an example of the relevance of characterization to their review process.

We believe this approach fits very well with our goal of using our characterization technology and process knowledge to reduce clinical requirements and enable the approval of an interchangeable FOB product.

I’ll now touch just briefly on the novel drug programs. M402, our preclinical oncology candidate, is advancing, and we hope to initial clinical trial studies later this year. We’re also investing in novel drug discovery focusing on two areas, heparin-based or HSPGs and novel biologics, which were initially focused on biobetters. Both of these areas leverage the tools and know-how that we have created in the development of our complex generics and follow-on biologics. And both discovery areas have the potential to generate multiple product candidates in the future.

I’ll now turn the call over to Rick for a financial update.

Richard Shea

Thanks, Craig. Revenue for the second quarter totaled $87 million and included just under $84 in profit share revenues from the sales of enoxaparin and $3.6 million of collaborative revenues. Sandoz reported enoxaparin net sales of $284 million and as the sole generic we continue to earn 45% of the product’s contractual profit.

The profit share in the second quarter was reduced by a $3.7 million annual adjustment to our share of preapproval development cost. So you can calculate that the contractual profit – product profit for the quarter was approximately $195 million or 69% of net sales comparable to last quarter’s percentage in net sales of 68%.

On the Novartis earnings call, Sandoz indicated that we are working to maintain the product supply chain capacity at 45% to 50% of the market. Sandoz did not provide any further guidance on future enoxaparin sales so I’ll just comment that Enoxaparin sales will fluctuate from quarter-to-quarter. As a reminder, due to the current status as a sole approved generic we are earnings a 45% contractual profit share under our Sandoz collaboration agreement.

Should an additional generic Lovenox enter the market, our economic arrangement would shift from a profit share to a royalty on net sales which would significantly reduce our enoxaparin revenues. Also remind you that we are currently operating at or near the maximum capacity of our supply chain, so we and Sandoz have limited opportunity to grow from our current market share in the near term.

With respect to operating expenses I had indicated that for 2011 we expect that operating expenses excluding noncash stock compensation expense, and net of collaborative revenues would run between $15 million to $18 million per quarter. For the second quarter 2011 total operating expenses excluding stock comp and net of collaborative revenues totaled $16.6 million compared with $17.1 million in Q1 of 2011. Research and development expenses for the second quarter of 2011 were $14.2 million, compared with $11.8 million for the same period last year. Excluding stock comp, the 18% increase in R&D is due primarily to an increase in M356 manufacturing expenses and an increase in head count related expenses.

G&A expenses for Q2, 2011 were $9.2 million, compared with $6 million for the prior year second quarter. Excluding the enox-related royalty payable to MIT of $1.7 million, the increase in G&A was primarily due to increased litigation expenses, due to the enox litigation and increased stock compensation expenses. The net income for the second quarter of 2011 was $64.3 million or $1.29 per share basic EPS and $1.26 fully diluted.

For Q2, 2010, we recorded a net loss of $15 million or a loss of $0.34 per share. As of December 31, 2010, at the end of the prior year the company had available net operating loss carryforwards in excess of $200 million which can be applied to Federal and State taxable income for this year.

As Craig mentioned in July, we earned a $10 million milestone from Sandoz on the one year anniversary of a sole generic status. And also based on the one year anniversary we made a $6.7 million milestone payment to Parivid, the mathematical data integration firm whose assets we acquired in 2006. Those transactions will both be reflected in our Q3 results.

We ended the second quarter with $246 million in cash and marketable securities, compared with $153 million at the end of 2010. The receivable at quarter-end from Sandoz is approximately $85 million. We do expect that near term, during the period of sole generic enoxaparin, we are likely to continue to be profitable and cash positive.

This concludes my financial review. I’ll now turn it over to Craig for a concluding comment.

Craig Wheeler

I think we’re doing all right, sorry, about that guy. I missed by cue here. In summary, it’s a great quarter for us. We’re very focused to continue to build shareholder value by moving generic Copaxone towards approval on launch by developing different age follow-on biologic products and by discovering and developing innovative and novel drugs.

And now we’ll open the call for questions. Thanks.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Eric Schmidt of Cowen and Company. Your line is open.

Eric Schmidt – Cowen & Co.

Thanks for taking my questions. I guess I have a few just knits first on the financials for Rick. In terms of the $10 million milestone to be received from or that was received in the third quarter from Sandoz and a $6.7 million payment. Where on the balance sheet, sorry, where on the income statement will we see those?

Richard Shea

The $10 million milestone from Sandoz would be part of our collaborative revenues. And the $6.7 million payment to Parivid will be capitalized and amortized over the life of the asset. So that was part of the purchase accounting for the acquisition of the Parivid assets.

Eric Schmidt – Cowen & Co.

It’ll be in R&D eventually?

Richard Shea

And that will be recorded in the third quarter.

Eric Schmidt – Cowen & Co.

Okay. Not amortized.

Richard Shea

What’s that again?

Eric Schmidt – Cowen & Co.

It won’t be amortized. It will be recorded in the third quarter.

Richard Shea

It will be recorded in the third quarter. There actually will be a piece of the amortization that we’ll immediately record it. And then the balance of it will be amortized over the remaining life of the asset.

Eric Schmidt – Cowen & Co.

And that will in R&D?

Richard Shea

The amortization will go through R&D.

Eric Schmidt – Cowen & Co.

Okay. And I apologize but I think I got a little bit lost when you were going through the profitability of enox in second quarter. I think you said $95 million of joint venture profits of which you received $45 million is that correct?

Richard Shea

I said that the joint venture profit was $195 million. So that was about 69% of the net sales. And our 45% share of that was reduced by $3.7 million of that annual adjustment that I had talked about. So, on an annual basis we adjust the percentage – our percentage share of the pre-launch development cost.

So the bulk of those pre-launch development cost, our share of that was recorded back following the launch in the third quarter of 2010. And then each – at the end of each launch year which is defined as four quarters into the launch which we just reached in the second quarter. At the end of that we have an annual adjustment to that percentage share.

Eric Schmidt – Cowen & Co.

Okay. And then what causes the royalty to go to double-digits in the event of another entrant into the market, is that contractual after one year?

Richard Shea

Yes, that’s correct. It’s a one-time change in the royalty rates.

Eric Schmidt – Cowen & Co.

Okay. And then, last question, the SG&A side, in terms of litigation it seems to be heating up on several fronts. Should we expect that to increase in the second half of the year?

Richard Shea

The litigation expenses relating to the Copaxone litigation are covered by Sandoz. So the litigation expenses you’re seeing in our G&A is our share of the enox related litigation. So there is not that much going on there. There is a Markman hearing scheduled for December. I don’t think that’s going to be particularly material, but it could increase slightly.

Eric Schmidt – Cowen & Co.

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Ritu Baral of Canaccord Genuity. Your line is open.

Ritu Baral – Canaccord Genuity, Inc.

Hi, guys. Thanks for taking the question, and congratulations on the quarter. Actually is what my first question is on. Last call, you had mentioned that you guys were essentially running at capacity. And yet, quarter-over-quarter, we saw some really meaningful growth there. Could you go over the efficiencies that you saw between last quarter and this quarter? And I mean, are they really efficiencies that you really wouldn’t see translated again?

Craig Wheeler

Ritu, it’s Craig. Thanks for the question. Yeah, there are certainly some efficiencies coming out of it, but part of what you’re seeing is the variability that comes from marketing a generic the way we’re marketing it.

Where people are buying in bulk, there’s different mix issues that come into it. So there is a lot of things that contribute to it. But I think it’s fair to say that our production capacity has not changed dramatically. There certainly are few efficiencies as you run a plant over time as you gain, but it does not change dramatically.

Ritu Baral – Canaccord Genuity, Inc.

Got it. And could you review for us the infringement claims that you are arguing in your lawsuit against Teva on enoxaparin?

Craig Wheeler

Well we can’t give you the details of the claims because its proprietary in the court, but it is basically we’re exercising the patents which you’ve seen out there in the public domain that are patents on analyzing and manufacturing the products. So that’s basically what we’re going after them but we can’t give you any more details on that.

Ritu Baral – Canaccord Genuity, Inc.

Got it. And last question before I hop back in the queue, during the inequitable conduct trail that was just argued in July in New York there was significant discussion of the pre-clinical EAE assay in MS. And while MS doesn’t have a perfect preclinical efficacy model how do you guys see the EAE assay as a reflection of efficacy for any sort of copolymer 1 or glatiramer compound, and how important was it, in your opinion in the development of Copaxone originally?

Craig Wheeler

Well, I can comment just at a high level on the EAE assay. It’s an assay that was developed long time ago by Teva and what they had used for some of the original work. Our belief continues to be that there are multiple ways, including multiple ways that you can look at the activity of this compound. And we think it’s a broader bio characterization story. So I can’t comment specifically on that assay which was built a long time ago, but I can say that we have a much more comprehensive view about how you think about bio characterization of a molecule like this.

Ritu Baral – Canaccord Genuity, Inc.

Got it. And the RBL assay for safety and toxicity that was discussed in the trial as well, what are your sort of general views on that?

Craig Wheeler

Well, again, not commenting on the specific technology behind the assay but there were lots of things that were discussed at that trial about when that assay was developed and the accuracy of the assay etcetera that continued to indicate you need to have a broader perspective on the biologic characterization these molecules. There’s not a single assay that is we believe conclusive here.

Ritu Baral – Canaccord Genuity, Inc.

Great. Thanks. I’ll hop back in the queue.

Craig Wheeler

Sure, thanks.

Operator

Thank you. Our next question comes from Bret Holley of Oppenheimer. Your line is open.

Bret Holley – Oppenheimer Securities

Yeah. Thanks very much for taking the question. I’m wondering about your views on The New England Journal of Medicine, there was an article from the FDA and I guess it seems like the interchangeability criterion that they’re kind of applying or thinking about although fairly amorphous seems obviously to be singled out as being pretty high. And I’m wondering does it give us any more visibility on where the FDA is headed on particularly the issue of interchangeability?

Craig Wheeler

Well actually we were very pleased to see the comments made by the FDA in that article in terms of how they’re thinking about the process and how they’re thinking about it. We have been from the start advocating a very high bar for substitutability with programs and we think the FDA is doing the same thing here. So that’s in line with our strategy.

What was very encouraging in that article is if you read about it, they talked about the totality evidence. They actually talk about the kind of analytic packages that we have put together historically which we feel fits very, very nicely with the strategy that we’ve proposed as well as the competitive advantage that we feel we have in being able to do those types of characterization on the biologic molecules both on the analytic side as well as on the biologic characterization.

So when we read that article, we read it as a very positive statement and we expect a high bar to be there and I think the high bar is what we are looking for to make sure that we have the opportunity to be competitively advantaged in that space.

Bret Holley – Oppenheimer Securities

Yeah. And so I guess it leads to my second question, it does seem like may be that you’re kind of playing into proprietary resistance that you have that makes it extraordinarily difficult for others to at least go for the interchangeability?

Craig Wheeler

Well, that’s very hard to say because we don’t know what others have but I think it’s fair to say that the flexibility that the FDA is showing is exactly what we’ve been talking about since we even started lobbying in Congress in terms of what needed to be in this pathway. The acknowledgement by the FDA that they’re looking for a pathway that actually will allow innovative technologies to be introduced to the FDA is really the opening that we need and we hope for.

And I think if you look at some of the precedents that they’re looking at, clearly they’re looking back towards enoxaparin and other things and saying, hey, there was a lot that taught us as FDA as well as the applicants in terms of what’s necessary here. So we couldn’t be more pleased with the way they are setting up the framework for how they’re evaluating these applications.

Bret Holley – Oppenheimer Securities

And I guess the last question is does that give you any visibility or does it change your view on how you might approach going for biosimilars versus interchangeable molecules? I know you’ve said in the past that your ultimate goal with this program is to go for interchangeable molecules, but does this give you more encouragement down that path?

Craig Wheeler

Well, I think we’re already pretty directly down that path. It certainly gives us more confidence. Remember what we’ve said in the past is our goal is to drive towards identical substitutable molecules. But the value of all of that work you do along the way now has the ability to actually potentially reduce clinical trials, potentially give you the time advantages, potentially help to set the standard for what’s necessary to approve these molecule.

So we look at it in the totality of – both encouraging us to go for our original goal which is generically substitutable molecules but also the ability to use our technology much as we have in many different ways through trying to create competitive advantage in enoxaparin and Copaxone.

Bret Holley – Oppenheimer Securities

Nice. Thanks a lot.

Craig Wheeler

Sure.

Operator

Thank you. Our next question comes from Ami Fadia of UBS. Your line is open.

Ami Fadia – UBS Securities LLC

Thanks. Hi, good morning. Some of my questions have already been answered, but I had another one. Given that you have been building your cash balance and given sort of the progress that’s being made at the FDA with respect to thinking about possibly for biologics, how are you guys pushing forward on some of the earlier stage pipeline that you might be working on and what can you tell us about what is sort of next to come?

Craig Wheeler

Sure. Well, that’s a pretty broad question so let me try to give some color around that. I think the cash balances that are building with the enoxaparin revenues have certainly given us more strategic freedom to consider what kind of investments we would want to make and where we can support it.

Our thinking continues to be that as we build our follow-on biologics business, we’d like to find some partners to bring both some capabilities into that as well as some capital into that. However, the nature of the kind of deals, I would say, both on the follow-on biologics side is potentially the new drug side as well, have changed now that we have cash balance. In other words, we have the ability to take programs along further if we feel that we actually are going to get a higher partnership value for those by bringing them further along in the pipeline.

We also have the ability to potentially co-invest which actually leaves us the potential to actually get a higher share of the revenues of those products and ultimate success. So, we think we need to use it judiciously but we still think we need partnerships. We think that actually really significantly increases our ability to invest and therefore capture upside profits in the future. So we’re looking at it as actually enhancing the trajectory of the company though we’re not really adjusting too much in terms of our goal for partnership. It does give us much more freedom to invest.

Ami Fadia – UBS Securities LLC

Thank you.

Craig Wheeler

Sure. Thank you.

Operator

Thank you. Our next question comes from Joseph Schwartz of Leerink. Your line is open.

Joseph Schwartz – Leerink Swann LLC

Hi. Thanks. I was wondering, since you said we may not get an inequitable conduct ruling before the start of the case on September 7. What about Markman rulings, would it be possible to advance without having key definitions and such?

Craig Wheeler

Yeah. That’s a good question, because obviously everybody has been looking for the Markman decision ever since those hearing. We’ve asked for the same questions and the feedback – sorry, we’ve asked for the same questions and the feedback that we’ve gotten is that it is possible to start the trial. It also is very possible that the judge at the start of the trial will actually put forward their views on the Markman hearing. So we don’t know when we’ll see it. And it is possible to start the trial but we suspect we might see something as we put that forward.

Joseph Schwartz – Leerink Swann LLC

Okay. And how are you and Sandoz thinking about manufacturing capacity for M-Enoxaparin? I mean, it would seem line the – like, you can pretty much sell whatever you can make and so I’m wondering what is your planning here based on what you think other competitors timelines might be?

Craig Wheeler

Yeah. It’s a good question. And I think a way to think about it is we’ve done what we can in terms of increasing capacity within the current configuration of the supply chain. So for us, in other words, to increase supply, it really is tanks, steel and investment like that. It’s not yield increases around the edge.

So given the timelines it would take to do that and given the potential for competition and given we’re very-very satisfied with the market share we have at this point in time I don’t think there is a significant intention to do major new investments in the playing field, which would take some quite some long timeline. However, we are continuing to look at potential yield increases in our plants to see if there is more we can squeeze out of the existing plants.

Joseph Schwartz – Leerink Swann LLC

Okay. Thank you.

Craig Wheeler

Sure.

Operator

Thank you. Our next question comes from Sumant Kulkarni of Bank of America. Your line is open.

Sumant Kulkarni – Bank of America Merrill Lynch

Good morning. Thanks for taking my question. The first one is a clarification. Did I hear it right that you said that the increase in the royalty from the low double-digit rate is going to be a one-time change and that cannot change at any point in the future?

Craig Wheeler

Yeah. That’s correct. There’s a one-time change that was in – that was contractually agreed to. If we had been a single generic for a year – in other words, we have been able to enjoy no competition for a year. The tiered royalty rates that we have which are tiered, so we originally said they go from high single digits to low double digits based upon sales (inaudible) that whole package moves up about 20% to 25%, which puts all of the royalties in the future into low double digits.

Sumant Kulkarni – Bank of America Merrill Lynch

Great. And I heard in your prepared remarks that you could potentially also sue other – potentially generics on Lovenox. We know of other public filers on Lovenox who are working towards getting their products approved as well. So what triggers your actual lawsuit, because you’ve sued only Teva so far?

Craig Wheeler

Well, we can’t really tell you the strategy on the lawsuits, because I don’t think that would be very helpful for us competitively. Suffice it to say that we are well aware of what our patent positions are, and we’ll continue to enforce that. But we really don’t want to go any deeper than that in terms of how we think about going after that.

Sumant Kulkarni – Bank of America Merrill Lynch

And my last one is a bigger picture question for you, Craig. Now that you have a nicely positive cash balance, what type of technologies do you think you do not have internally which could help you develop your FOB program further?

Craig Wheeler

Yeah, it’s a good question. I think we’re kind of at a road where we’re looking at what are we brining from a partnership versus what are we investing ourselves. Obviously, the biggest thing that we have not done is this company is invest heavily in scale-up capabilities in the company.

We don’t have large-scale pilot plants in biologic production. As most companies do, we have access to cell lines. We can bring them in. We have cell line expertise and those types of things. But as you get to larger scale clinical production, we’re forced to actually do that all through a series of outsourcers. And having a partner that had greater capability would certainly help us there.

We now have the financial flexibility that we decided the right way to go forward. We may end up beginning to actually bring our scale up a bit into the pilot scale, at least, and we’re going to put some more resources there. But those are the biggest gaps we have on the biologic production capacity.

Sumant Kulkarni – Bank of America Merrill Lynch

At some point, do you see yourself as a manufacturer as well?

Craig Wheeler

It’s a good question. And I really don’t think I see us as going into large-scale manufacturing. Because I think there is adequate capacity that’s coming online around the world. And there are so many new technologies that may actually enable lower cost manufacturing.

I don’t see us going into building large steel 20,000-liter fermenters because I’m not sure that’s a worthwhile capital investment for us. I do see, though, that it may make sense for us to bring it further, such that we actually have the ability to very much we have, because we have with enox and Copaxone begin to embed our process control technologies in that plants.

And so, what we’ve done with the contract manufacturers on those earlier programs is we’ve actually taken our scientists and engineers and had them develop the processes with our vendors in their plants. And so, I think that’s much more likely at the large-scale what you’ll see us doing in the biologic side.

Sumant Kulkarni – Bank of America Merrill Lynch

And my final question is on potential partnerships, so when a partner approach you or vice versa, do you use a portfolio of approach or is it a molecule by molecule type partnership?

Craig Wheeler

Yeah, another good question. I think there are multiple different flavors of partnerships that are out there. There are certainly some approaches and discussions we’ve had which have been kind of platform partnerships where we’re doing the whole platform together almost like a joint business. And there are others which are more product-focused where you more pilot something with a product and potentially give us more flexibility on our own around that.

So we’re looking at both kinds of things and what really the most important thing for us is how we think about aligning strategically with those partners because as you’ve seen with enoxaparin it’s not just a science, it’s the regulatory approach, it’s the IP approach. It’s all of those things that are necessary to kind of bring the strategy together. And so we need alignment on that and that’s really what we’re looking most for and then behind that we’ll figure out what the most effective deal from a financial and structural perspective is but we need that strategic alignment.

Sumant Kulkarni – Bank of America Merrill Lynch

Thank you.

Craig Wheeler

Sure.

Operator

Thank you. Our next question comes from Duane Nash of Wedbush Securities. Your line is open.

Duane Nash – Wedbush Securities, Inc.

Good morning, and thanks for taking the questions. This morning’s article by the FDA in The New England Journal places a high value on what they call a fingerprint like characterization of follow-on biologics. I realize enoxaparin and M356 are drugs and not follow-on biologics, but is there any way you can compare the degree of characterization of the two? For example, would you believe that 356’s characterization is equivalent to enoxaparin or is it different because we’re talking sugars versus proteins or any comments there?

Craig Wheeler

Sure. I’ll give you a couple of comments on that. First as we look at the article in New England Journal of Medicine, the fingerprint is exactly what we do. We actually take the level of analytics, whether it’d be a sugar, whether it’d be a peptide, whether it’d a glycoprotein down to a level where we really try to understand (inaudible) what’s in these volumes and therefore can meaningfully reverse engineer those programs and processes.

And the second part of the question was, how do you compare Copaxone versus enox? Well, I mean, they are in some senses directly compatible because the kind of tool and techniques and the algorithms that used to be able to resolve them are very similar to kind of the – our paradigm for going after them.

In some senses, they are different, but the difference is really in the nature of the molecules and how they’re produced. And in enoxaparin, the kinds of things you need to do from a process dimension to be able to control the molecule really is screening and filtering your raw materials and controlling because they’re naturally produced molecule and ultimately from pig’s intestines.

When you’re looking at a molecule like Copaxone, it’s a chemically synthesized, so you don’t have to worry about the supply chain issues, but you have to worry much more about the reaction conditions. So in some sense you have a higher degree of inherent complexity in a molecule Copaxone because it’s not made with a biologic template but you have a simpler set of variables that you need to control because a batch reaction has basically five or six time temperature pressure, concentration, catalysts et cetera, a simpler set of variables that you need to control for us. So they are different is some senses and they are same in the others. I hope that gives you at least some sense of it.

Duane Nash – Wedbush Securities, Inc.

Yeah, that’s very helpful. But my understanding is when you produce a batch of each of these, you then wind up doing quality control tests to examine the variability or the parameters, which a particular batch falls within. And is there any way of quantifying how close you – the variances are for 356 versus how closely are for Enoxaparin?

Craig Wheeler

Well, I guess what I’d say in response to that is our variances in all cases for both of those products are controlled with a finer degree of control (inaudible) control their own characterization. In other words, we take our analytics several levels deeper and it’s not just looking at the product that we had.

We actually build those analytics into in process controls, into intermediate controls such that and we design those processes based on those analytics to have a variability that is within the bounds of variation of innovators.

We take a series of batches whether it be enoxaparin or Copaxone and look at what we see coming from the innovators. And we design our process to be within their band of variations all the time and actually control it therefore we have to control it within a tighter band. So we are for both products within the degree of variation that we see in the innovator product using a higher resolution lens than we’re aware that the innovator is using on their own products.

Duane Nash – Wedbush Securities, Inc.

Great. Well, thanks very much.

Craig Wheeler

Sure.

Operator

Thank you. Our next question comes from Avik Roy of Monness, Crespi. Your line is open.

Avik Roy – Monness, Crespi, Hardt & Co., Inc.

Hi, guys. Congratulations on the one year anniversary of launching enoxaparin. That one month of exclusivity has turned out to be quite a long period of time. I have a question about the sanofi-aventis side of things. So Sanofi reported a 25% sequential quarterly drop in their U.S. Lovenox revenues and given what you’ve said about how from a volume standpoint you’re steady at about 40% to – 45% to 50% market share, what do you think is going on, on their side? Is it purely things like inventory and mix in bulk purchasing, or are they being more aggressive about discounting and what’s your sense out there in the market as to what’s driving that gap down for them?

Craig Wheeler

Yeah. I don’t have full transparency into that so I really can’t answer it specifically. But as you can imagine when you’re seeing your sales ramp up on our side and you’re seeing sales down – there is a set of inventories that need to be worked off and so they’re probably just settling into steady state as people have worked off inventories and then are starting – they will start to probably level out at a share which we think is roughly 50% of the market.

But I think – certainly in the first six months of sales and (inaudible) tailing off, because remember we’ve been bringing our share up to this to our full production capacity. There are numerous places where there’s inventory working off and therefore no forward buys and those of things that they’re wrestling with.

Avik Roy – Monness, Crespi, Hardt & Co., Inc.

Got it. Okay. That’s helpful. Thanks a lot.

Craig Wheeler

Sure.

Operator

Thank you. Our next question comes from Ronny Gal of Bernstein. Your line is open.

Ronny Gal – Sanford C. Bernstein & Co., Inc.

Good morning. And congratulations again on the one year anniversary of Lovenox, sole generic position. A couple of questions, the first is about the comment you guys made about the expectation that the decision on the inequitable conduct in the Copaxone trial will not take place before the beginning of the trial. Is there like any hints from the courtroom you’re getting suggestion this is the case? My understanding is that judge essentially says she does not need summaries before she makes a decision which would suggest to me a fairly near term decision or is there a change in that? Or any other reason to think this decision will take a while?

Craig Wheeler

So thanks. I mean good question. So we didn’t say it won’t, we think it may not happen until the beginning of next trial. We’re not getting any specific signals. You are correct, the judge did decide that she didn’t want any post trial briefings business. But there is no indication that it’s going to come sooner or later.

But when we say it may not because when you look at the typical time it takes a judge to actually come out with a judgment, that’s a very quick time for it, number one. And number two, I think a lot of discussions that happened in this phase of the trial certainly actually provide background for the next stage of the trial, so there is a very good chance that the judge would want to hear the rest of the story before they make any kind of ruling.

Ronny Gal – Sanford C. Bernstein & Co., Inc.

Oh okay, got it. And second query is about biosimilars. In line with some of the things were mentioned before, let me just sharpen the questions little bit. In 2014 we’re going to see entry into the European markets with biosimilars. And obviously even if you just focus on the U.S. market, having a patient population already used your drug in Europe, will make it a lot easier to get adoption in the U.S. market. So in your mind, is there a little bit of a due date by which you have to begin clinical development for the European market, otherwise you might find yourself a little disadvantaged. Is this a situation where you’re looking at need to find partner is a near term issue?

Craig Wheeler

Well, I guess, I would say a couple of answers to that. We haven’t declared our strategy in Europe one way or the other with our products but our primary strategy is the U.S. market. We believe the pathway in the U.S. is much more tuned to the kind of technology that we’re bringing to bear. It allows us to kind of bring it forward first. It doesn’t mean that there may not be instances where we go to Europe first, but we also feel that by putting a greater degree of resolution around this, we certainly will create a series of questions that will likely be asked, people that are bringing in products that aren’t quite similar and they understand what the differences are and they read the differences.

So, we are thinking about Europe, we’re thinking about actually quite hard, but we have not made any kind of declaration in terms of what we’re going to do with Europe. But our primary focus is to try and take advantage of the U.S. pathway and then potentially use that U.S. pathway in the long run to be able to leverage towards substitutability in other markets around the world.

Ronny Gal – Sanford C. Bernstein & Co., Inc.

Got you. One follow-up to this, if you talk to Roche and you look at the Cabilly patent, they last till December 2018. And they withstood several challenges so far. I guess the question, do you actually see entry of monoclonal antibodies in United States before that date or are you thinking more of other molecules able to – other non-antibody molecules in the U.S. market before 2018.

Craig Wheeler

So I think you have certainly the potential to see antibody molecules in the U.S. before the 2018 dates. Cabilly is only one of the number of patents that are out there, that people have to consider when they’re launching these programs. Obviously Cabilly’s been around and been blocking for a lot of people. But there are – but there is the possibility, I think, to think about how you’re going to play your strategy there.

I also do expect to see other products that aren’t antibodies into this market, because I think many of those are products that people try to push in market in Europe, and will be attempting to bring into the market here as soon as they can.

Ronny Gal – Sanford C. Bernstein & Co., Inc.

Great. Thank you very much.

Craig Wheeler

Sure. Thanks.

Operator

Thank you. We have a follow-up question from Ritu Baral of Canaccord. Your line is open.

Ritu Baral – Canaccord Genuity, Inc.

Hi. Thanks for taking the follow-up. Rounding back to Europe for a second, now that we have a significant body of safety data from the U.S. use of M-Enox, what is the status of re-approaching EMA on approval of (inaudible) of M-Enox in Europe?

Craig Wheeler

Sure. Well, so on the first level our understanding is that the EU is adapting their path for enoxaparin based upon what they’re seeing with the U.S. approval of enoxaparin. So, we do think things are changing there.

And so we’re still trying to really set out what our strategy is there, because we think it would be good to have our products in the market in Europe. The counter weight is the price of Lovenox in Europe, which is extremely low. And so, it’s a market where you’ve really got to look carefully to figure out how you’re going to enter that marketplace because it’s going to be very difficult to make any kind of meaningful profit in the European market because of the way Lovenox has been priced in Europe, which is way, way below the U.S. market.

So we’re really working through those issues. We haven’t definitely written it off yet, but it’s a place where strategically we think it would be helpful to have a product there. But from an economic basis, it doesn’t really add a lot to our bottom line to go to that market.

Ritu Baral – Canaccord Genuity, Inc.

Got it. And based on your comments on your interactions with the FDA on the biosimilars path, as well as some of the notes in the New England Journal article, would you foresee biosimilars U.S. path as being almost like a two-step path, where the characterization technology would be needed, kind of an IND step before the design of the clinical trials? What are sort of the macro things that you could talk about in your interactions with the FDA?

Craig Wheeler

Well, I’ll give you some impressions. And I’m going to try to be careful to talk about what kind of has been laid out here in the public domain. I think what you’ve seen from the FDA in the New England Journal of Medicine and other places that they’ve been talked, that there is indeed a desire to have a two-step process where they could really see the characterization and bio-characterization data companies produce to help them pass judgment in terms of what clinical trials would be necessary is one piece. And then second piece, to think about what would be required for substitutability for those programs.

But what I do think will emerge, because I think people will be coming in with different strategies as you might get that pathway as optional, because you may have some people that want to come in and say, look, we just want to handle this like a biosimilar where we’re going to do the clinical trials. So we’re planning on doing that. We just want to do a classic IND meeting. We’re not looking for substitutability. And so, I think you will see the FDA probably be flexible based upon what companies – what paths the companies want to go and what kind of advice that companies want to get from the agency.

I think the important thing from the industry perspective is a two-step process put in place which of course you can tell by our comments, we strongly endorse. It’s got to be accompanied by appropriate metrics and so review it on an expedited basis so you don’t end up in long, long reviews and then getting into a clinical discussion. We have to try to get the clinical programs on as well.

Ritu Baral – Canaccord Genuity, Inc.

Got it. And just following up on a previous question. It does sound like you are considering at least setting up your own pilot capacity, production capacity capability given the new technologies and sort of disposable biologics manufacture that have come out recently. What sort of I guess area of investment dollar wise do you think we could be talking about something like $50 million, would it be $100 million plus, any thoughts on that?

Craig Wheeler

Yeah. We haven’t really put the numbers against yet but I think I can say with confidence it will be significantly less than those numbers for a pilot facility. We have access to pilot, how we would start it. We’re looking at though, how we would take advantage of some of those flexible technologies.

Do we want to – can we build a pilot scale, would have the flexibility to go to those new technologies or to classic steel tanks. We’re thinking about all of those issues, but the main reason that we think about going to higher scale either here or continuing to do as we current do with our vendors is that, as you get to those initial scales so much interplay has to come between the process analytics and process controls that we’re developing here and what’s happening in those vessels, how you think about media, how you think about configuring the vessels, how you think about measuring what you’re doing. That’s either we’re going to have to do it through external relationships and bring that (inaudible) to give us more – I think, more ability to do it rapidly to get them to a larger scale. And so that’s what we’re thinking through right now. But we haven’t made any final decision, but I do think it’s not going to be the $50 million to $100 million kind of investments, at least not initially we’re thinking about.

Ritu Baral – Canaccord Genuity, Inc.

Great. Thanks for taking the question, guys.

Craig Wheeler

Sure. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Ricky Moore of Brooks Moore. Your line is open.

Ricky Moore – Brooks Moore

Yes. Could you all talk little bit about M118 and what’s going on there? Haven’t heard about that in a while.

Craig Wheeler

Sure. I’d be happy to talk about that. M118 is really, if you remember is a drug that we finished our Phase II on a couple of years ago, and we’ve been looking towards partnerships. And what we have said is that we really would need a partnership to be able to bring that program forward. It has actually had, in the first round of partnerships we did – actually, pretty rough set of discussions. We’ve actually been unsuccessful in bringing a partner on board.

There were a lot of reasons. People saw the program is quite exciting and had real potential. But the risk of expense for the trials and the kind of market it might see if it didn’t actually meet those endpoints. And the situation that many companies were in at that point that were likely licensors really didn’t bring the kind of deal forward that we thought was going to be appropriate for bringing the molecule forward.

We are seeing some renewed interest in it so we are currently in some discussions. That renewed interest is coming from companies starting to get their molecules, for example, the oral space and thinking that a hospital product might come in, some notable failures that have happened in some of the cardiovascular drugs that have been happening meaning that there is more opening to actually bring a molecule like this in.

So we are still looking for partnerships. But for us here, we are looking at that as an upside, if we can get that partnership signed. And we do think it’s still possible. We’re still working on it. But based on our last experience, we’re not putting it as a very high probability we’ll get that partnership, but we’re pushing hard to try to get it.

Ricky Moore – Brooks Moore

And fundamentally I mean, that drug three or four years ago was highly touted and had a lot of great benefit. Has anything changed with that?

Craig Wheeler

Nothing has changed with it. I think it is the challenge that people have with. It’s not the drug itself, but it’s the nature of the clinical trials that are necessary for the very large trials in a very I would say, what’s the right word, a messy, a dirty population. Meaning, the population is going to be seeing. This is going to have a lot of co-commitment issues and therefore even with a very large trial has been showed by some of the other large trials that have been under cardiovascular, you may not show the inherent capabilities of the molecule.

And so if you do because we’ve seen it in Phase II, we’ve seen in all the animal data that it looks really good. You’ll have a superior molecule and there is a strong confidence that there is a broad market out there, particularly in the hospital environment. But because of the nature of those trials and the size of them and the uncertainty of them just because of the nature of the clinical trial what people are doing is if you end up with equivalents, you’re going to enter a market, which is essentially a triple generic because you have heparin, you have Lovenox as a generic, and you’d have probably by that time

Angiomax as a generic. So it really is one of risk tolerance because the trials in this indication are just not clean trials. And so that’s where people are wrestling when we talk of the partnerships. Promise is there but huge investment and if you miss it you’re in a triple generic market and so that’s what they’re wrestling away.

Ricky Moore – Brooks Moore

And you guys did a secondary I guess, last December and I never really grasped why you guys did that after approval of M-Enox and had $65 million or $70 million in cash. Why did you all do that?

Richard Shea

Let me take that one. At the time as you remember Teva was speaking very confidently and positively about getting their generic Lovenox approved by the end of the year. At the same time, we looked at our cash levels and we looked at taking a conservative perspective on the next drug in our pipeline which was generic Copaxone, if we made an assumption that we wouldn’t be able to invalidate all of the patents then we would be looking at 2014.

So essentially I was looking to bridge four years of R&D spend and we thought that was just an opportune time to ensure that we would be able to cover that gap. Now as it turns out Teva didn’t get approved. As it turns out we have been generating that kind of revenue from the enox sales but certainly at the time in the, say, November 2010 timeframe when we were planning this offering, it certainly wasn’t very clear that we would have the sole generic for this length of time.

Ricky Moore – Brooks Moore

Great. Okay. Thank you.

Craig Wheeler

Sure. Thanks.

Operator

Thank you. I am showing no further questions in the queue at this time.

Craig Wheeler

Okay. Well, thank you very much everybody. We really appreciate you being on our call and look forward to talking to you again next quarter.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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