Sepracor Q1 2007 Earnings Call Transcript

posted on: April 24, 2007 | about stocks: SEPR

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Sepracor Inc. (SEPR)
F1Q 2007 Earnings Call
April 24, 2007 8:30 am ET

Executives

Timothy Barberich - Chairman and CEO
Adrian Adams - President and COO
Mark Corrigan - EVP, R&D
David Southwell - EVP and CFO
Jonae Barnes - VP, IR and Corporate Communications
William O'Shea - COO

Analysts

Greg Gilbert - Merrill Lynch
Matt Duffy - BDR Research
Larry Neibor - Robert W. Baird
Bert Hazlett - BMO Capital Markets
Marc Goodman - Credit Suisse
Rick Silver - Lehman Brothers
Biren Amin - Stanford Financial Group

Presentation

Operator

Welcome to Sepracor's First Quarter 2007 Earnings Call. Hosting the call today from Sepracor is Mr. Timothy Barberich, Chairman and Chief Executive Officer. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions, following the presentation. (Operator Instructions).

It is now my pleasure to turn the floor over to our host, Mr. Timothy Barberich. Sir, you may begin.

Timothy Barberich

Thank you. Good morning and thank you for joining us today for the first quarter 2007 earnings webcast. With us this morning are Adrian Adams, President and Chief Operating Officer; Dr. Mark Corrigan, Executive VP, Research and Development; David Southwell, EVP and Chief Financial Officer; Bob Scumaci, EVP, Finance and Administration; and Jonae Barnes, Vice President, Investor Relations and Corporate Communications.

Before we begin, I would ask Jonae to read the Safe Harbor statement.

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Jonae Barnes

Good morning everybody. Various remarks that we make about our future expectations, plans, and prospects constitute forward-looking statements for purposes of the SEC Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors which are discussed in our most recent annual reports on Form 10-K, which is on file with the SEC and other reports that we file with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so. Any forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to today. Thank you.

Timothy Barberich

Thank you, Jonae. This was a quarter of significant progress for the company on several fronts. Earnings continued to advance in the quarter year-over-year as growth in revenues continues to exceed growth in expenses. Recently we announced the launch of BROVANA, the first long-acting bronchodilator, available in nebulized solution formulation, an important new treatment paradigm for COPD. In-line products continue to grow year-over-year, particularly XOPENEX and XOPENEX HFA.

Today, we announced a preliminary settlement subject to the execution of definitive agreements and subject to court approval of two securities class action lawsuits brought by shareholders against Sepracor and certain executives of the company.

Regarding the failure of tecastemizole to be approved by the FDA during 2002; included in the first quarter 2007 results, is an after-tax charge of $32.9 million or $0.28 per diluted share, related to the expected settlement of these two lawsuits. We believe there was no wrongdoing on the part of Sepracor and we are pleased to have this litigation concluded.

And finally during this quarter, we initiated a transition in the management team of the company and this transition has been occurring smoothly and we expect, will have a positive impact on the overall health of the corporation.

As you know Adrian Adams joined us in March as President and Chief Operating Officer, and it's the intention of the Board of Directors to complete this transition of Adrian to CEO in the near future. My plan is to continue as Chairman.

Today, David Southwell will review the financial results of the quarter. Adrian will review the operations of the company. Dr. Mark Corrigan will review the status of our R&D programs. And then David will comment on guidance for the year. Afterwards, we will open the session for questions and answers. David.

David Southwell

Thank you, Tim, good morning. For the three months ended the March 31, 2007, Sepracor's consolidated revenues were approximately $331.4 million, of which revenues from pharmaceutical product sales were approximately $321.3 million. Of that, XOPENEX Inhalation Solution revenues were $152.5 million, XOPENEX HFA revenues were $20.5 million, and LUNESTA revenues were $148.3 million.

Net income for the first quarter of 2007, was approximately $22.5 million, or $0.19 per diluted share. Included in the first quarter 2007 results is an after-tax charge of $32.9 million or $0.28 per diluted share, related to the preliminary settlement of two class action lawsuits.

These consolidated results compared with consolidated revenues for the first quarter of 2006, was approximately $285.7 million, of which revenues from pharmaceutical product sales were approximately $277.5 million. Of that, XOPENEX Inhalation Solution revenues were $134.1 million, XOPENEX HFA revenues were $5.3 million, and LUNESTA revenues were $138.1 million.

Net income for the first quarter of 2006 was approximately $10 million or $0.09 per diluted share. Sepracor repaid all of its outstanding 5% convertible subordinated debentures, which was approximately $451 million, including $11 million in interest, when they came due on February 15, 2007. As of March 31, 2007, Sepracor had approximately $830.3 million in cash and long and short-term investments, Adrian?

Adrian Adams

Thank you, David, and good morning to each and everyone one of you. As some of you know, this is now my seventh week with Sepracor and I am delighted today to participate and present my first webcast with the company.

As Tim and David have already indicated, the first quarter of 2007 has been another successful quarter, with strong earnings momentum. And in my brief remarks today, I’ll comment on the performance of each of our product franchises, in addition to focusing on our near term commercial clarities.

Firstly, I would like to comment on our overall revenue growth within the quarter as indicated on our next slide.

As you can see the first quarter of 2007 saw robust revenue growth with overall revenues for the first quarter reaching $331.4 million, a 16% increase over the same period in 2006.

The principal drivers of growth were LUNESTA and XOPENEX Inhalation Solution, while XOPENEX HFA has also begun to make a meaningful contribution to the business. The XOPENEX franchise now accounts for around about 52% of overall sales and LUNESTA around about 45% of total revenues.

Over the rest of this year and beyond, we are looking forward to a successful launch with BROVANA, our recently launched new product for COPD to further broaden and strengthen our product portfolio and revenue growth.

Our next slide shows our strong earnings momentum. Within the first quarter, we grew earnings per share by 111% to around $0.19 compared with an EPS of $0.09 per share in the first quarter of 2006.

As indicated on this slide, included in our first quarter results is an after-tax charge of $32.9 million or $0.28 per share, related to the preliminary settlement of two class action lawsuits. This earnings momentum has reflected a strong sales growth, continued measured investments, and cost controls on all aspects of our business, and is also a reflection of the robust operating leverage within our unique business model. A model that allows us to take assets all the way from discovery through to commercialization with a strong capability in the primary care and specialty areas.

I would now like to focus on each of our product franchises beginning on the next slide with LUNESTA. In the first quarter, we continue to see solid revenue growth for LUNESTA. LUNESTA revenues for the first quarter '07 reached $148.3 million, an increase of 7.4% over the same period in 2006.

If you look at the 12 months ending quarter one '07, as compared to the 12 months ending the first quarter '06, there was a 23.5% increase in revenue, to around $577 million. We remain confident about the best in class and differentiated profile of LUNESTA within the insomnia market as illustrated on our next slide.

In 2006, almost 50 million prescriptions were written in the insomnia market and the total sedative-hypnotic market is now currently growing at approximately 14% of the 12 months ended March 2007.

Our objectives for LUNESTA are simple and focused, and we have to solidify the products as first-line therapy for all patients diagnosed with insomnia and to accelerate the growth of LUNESTA prescriptions through clear, clinically proven product differentiation.

Since launch, we have remained focused on the key product features of fast sleep onset, effective sleep maintenance, and efficacy in the majority of patients, including utility in patients with insomnia and coexisting depression, anxiety and those with menopausal symptoms.

This unique profile has been a key driver of the strengthened managed care coverage we are seeing in United States market, a key focus of our ongoing commercialization efforts.

Currently, we are detailing on communicating to our target high prescribing potential doctors with [new messaging], maximizing our extensive Phase-IV clinical data and supported by a quality sales force effort, and continued creative direct-to-consumer advertising.

With this in mind, we have recently reinitiated the previously successful LUNESTA challenge program, which allows patients to redeem vouchers for several tablets of LUNESTA free of charge. All of this with the absolute strategic objective of making LUNESTA the number one requested sleep aid.

Turning now to the insomnia market and product growth, we are pleased with despite the softening of the sedative hypnotic market over the past 12 months LUNESTA continues to outpace the market in terms of overall prescription growth.

During the first quarter of 2007, LUNESTA prescriptions grew 14.6% compared to the first quarter of 2006. This compares favorably to a market growth of 10.8% in the same period. In other words, LUNESTA grew 35% faster than the market in this time period.

Our next slide shows [AUDIO GAP] and total prescription trends with LUNESTA.

As can be seen here in terms of prescription on a quarterly basis, we see stable volume of market share. Our objectives, as outlined, are to focus our efforts across the organization to execute with excellence, and to accelerate the prescription growth on a going forward basis.

Also for reference, LUNESTA wholesale on retail pharmacy inventory units are flat from quarter four '06 to quarter one '07. One of our keys to our commercial objectives with LUNESTA, as mentioned a few moments ago, has been to strengthen our managed-care positions and we have been delighted with our progress over the past year or so as shown on the next slide.

As this slide shows compared with last year, LUNESTA's unrestricted formulary positions have increased in the commercial managed-care segment. Unrestricted formulary positions are considered Tier 1, Tier 2 and Tier 3 positions. As of today, we have unrestricted coverage in 87% of managed-care lives and pleasingly 85% of this coverage is in Tier 2, or 3 positions, compared with 79% for AMBIEN CR, a great footprint position for growth of LUNESTA in the future.

Over the last several months, the contracting strategy for LUNESTA has been focused on identifying high control opportunities to maximize contract pull-through and preserve net margin. We believe that this approach should be successful as AMBIEN goes generic and as managed-care plan seek to identify the new branded formulary leader.

To this end, we are delighted with the fact that will point a leading managed-care provider of recently provided coverage of LUNESTA that pushes us past AMBIEN CR with regard to our unrestricted formulary access footprint. This recent win removes what was a significant prescription barrier to over 20 million lives in this quality commercial managed-care health plan.

Also, not shown on this graph, we are delighted to report that LUNESTA access to Medicare Part B plans is also ahead of AMBIEN CR with 46% Tier 2 coverage versus only 18% for AMBIEN CR. Of note here is the fact that Medicare Part B constitutes approximately 13% of the sedative hypnotic class in the retail sector.

Now, moving along to the XOPENEX franchise, this next slide provides an update on the revenue growth for XOPENEX Inhalation Solution. XOPENEX had another strong sales quarter, with quarter one '07 sales coming in at $152.5 million, an increase of 13.7% compared with the same period in 2006. When looking at the 12 months ending quarter one '07, the XOPENEX Inhalation Solution saw a strong revenue increase of 25.8% to around $573.5 million.

XOPENEX Inhalation Solution sales have been supported by retail sales and significant growth in the non-retail sector, particularly the sales to Medicare and hospitals.

The next slide shows the prescription performance of the product from both a new and total prescription point of view. In terms of scripts for XOPENEX Inhalation Solution, we saw growth involved in throughout the first quarter of this year and we finished the quarter with a new prescription share of 24.6% and a total prescription market share of 25.5%. We are particularly pleased with these shares, given the matured phase the product is in its lifecycle.

Also for reference, XOPENEX Inhalation Solution wholesale and retail pharmacy inventory units are flat from quarter four '06 to quarter one '07. XOPENEX sales have also been supported by significant growth in the non-retail sector, particularly sales to Medicare and hospitals.

Our next slide shows the market share evolution of XOPENEX Inhalation Solution in the hospital setting. In the hospital segment, again we continue to see good growth in the quarter with a market share of 34.6%. This represents a 1.5% market share point gain when compared to quarter one '06; an impressive performance.

Obviously, with the continued switch of MDI business from CFC based to HFA based products, we have been focusing more sales force on accelerating the sales in prescription growth of our XOPENEX HFA MDI products and we are increasingly pleased with the products. Please refer to our next slide.

This slide shows XOPENEX HFA had another strong sales quarter, with quarter one '07 revenues of $20.5 million. This was an increase of 280% compared with the first quarter of last year. For the 12 months ended quarter one '07, we have reached $56.1 million and this product offer obviously represents growth potential for Sepracor over the next few years.

Again from a tactical point of view, our sales representatives are focused on driving prescription growth particularly in the retail sector.

On our next slide, you can see that we continue to see encouraging growth in market share and volume for XOPENEX HFA and we ended that quarter with a 6.5% market share in new prescriptions. This represents an increase of 44% from quarter four '06. Also, during the quarter we saw further evidence of increasing CFC to HFA conversion in the market, which we believe supports our strategy of focusing on strong formulary position and access, and leveraging our unique product profile. We believe this strategy should gain additional momentum throughout this year and into 2008 with a further conversion of the market to HFA products.

It should be noted that as of March 2007, the HFA market now represents a greater than 50% share of the short acting beta-agonists MDI market. This underscores that rapid conversion to HFA products is taking place.

With this in mind, I would like to outline on a much more competitive position in the managed-care area compared with the ProAir HFA as seen in the next slide. This slide clearly shows, that compared with last year XOPENEX HFA formulary positions have continued to increase in the commercial managed-care segment. Over the 12 months XOPENEX HFA competitive positions in Tier 1 and Tier 2, have improved by 15%.

Conversely, managed-care is taking steps to manage ProAir. At ProAir's launch, many managed-care plans [erroneously] classified ProAir as a generic, because it was initially marketed under the name Albuterol HFA. But overtime, plans have reclassified ProAir ahead of generic Tier 1 position.

This may help to level the playing field against ProAir, where ProAir's Tier 1 positioning has fallen from a 46% to a 6% coverage position. This again should bode well for the remainder of the year.

In my next slide, I would to like to share the excitement we feel for the recent launch of BROVANA, a highly differentiated product for the chronic obstructed pulmonary disease market. The launch of BROVANA in early April, adds to our respiratory portfolio of products and is the third product Sepracor has launched in three years.

We believe that with BROVANA, we have a significant opportunity in a market that is of considerable size. An estimated 24 million patients have COPD. Like other chronic disease market, there is under-diagnosis with only half of these potential patients being treated. This represents another potential growth opportunity for Sepracor.

In this market, we believe there is a need for a long acting bronchodilator in a unique nebu-formulation, with both fast onsets and a 12 hour duration. BROVANA is the only long acting bronchodilator available in a nebulized form.

Sepracor's experienced and knowledgeable sales force is now promoting BROVANA in hospitals and to primary care physicians and pulmonologists, who treat patients with COPD.

It is early days, but all the signs and feedback from doctors, patients and our representatives have been very positive. We have early wins occurring in both the inpatient and outpatient settings. Several hospitals across the Untied States have already added BROVANA to their formulary in the first two weeks of launch. In addition, we have BROVANA demand coming in from all major channels, retail, home healthcare companies and hospitals.

Interestingly, managed-care organizations are indicating that COPD is not a tightly managed disease state with respect to access to medications, due to the serious nature of the disease. And therefore, we are seeing mostly open access for BROVANA for patients enrolled in managed-care plans. And lastly, initial feedback from physicians regarding BROVANA's profile is very strong and many physicians are indicating that BROVANA addresses a current unmet need in the treatment of chronic obstructed pulmonary disease.

We look forward to reviewing sales and prescription progress, as data becomes available. The addition of BROVANA to our respiratory franchise puts us in a position to offer products to many patient populations in respiratory needs. BROVANA and XOPENEX are beautifully positioned in quite distinct groups of patients as indicated on this slide.

The majority of XOPENEX Inhalation Solution users are the young pediatric asthmatic patients, who need a short-acting bronchodilator for the mild, moderate or severe exacerbation.

At the other end of the age spectrum BROVANA will be primarily utilized by elderly COPD patients with moderate, severe or very severe symptoms, who need a long acting beta-agonist for maintenance therapy. Therefore both product franchises are positioned clearly for the patient and offer opportunities for growth well into the future.

Also important, that the use of our entire respiratory portfolio is supported by national and international guidelines for treatment of asthma and COPD symptoms.

And finally, I would like to summarize our key commercial objectives for the remainder of 2007 and beyond. These are shown on my final slide. We are driving the sales force to accelerate LUNESTA volume and growth to increase productivity and targeting, new enhanced messaging, incorporating our co-morbidity data, continued direct-to-consumer advertising campaigns and strengthening of our managed-care coverage.

With XOPENEX, we are focusing on increasing the adoption of our HFA MDI through the conversion of CFC's to HFA inhalers, which we have seen accelerating in 2007 due to the limited supply of CFC's currently in the marketplace.

For BROVANA, we just recently launched the product and look forward to the opportunity to leverage its unique profile and build from the synergies of our XOPENEX franchise. We intend to make BROVANA another Sepracor success.

I would now like to handover to Mark Corrigan, who will briefly review the progress in research and development market.

Mark Corrigan

Thank you, Adrian. This morning I would like to briefly update you on R&D progress of Sepracor. I will review our pipeline.

Turning first to LUNESTA, while we've continued to roll out our Phase IV data in the United States, and recently have had our landmark second six-month study accepted for publication in the Journal of Sleep. We've also been busy at advancing our overseas efforts of registration. We have a goal to submit a marketing application in the third quarter of 2007 in the EU for the possibility of an approval in the second half of '08.

We've received our [RAPTURE] assignment, countries Ireland and Portugal and we will be meeting with them in advent of our filing. We had held three meetings with them and they are supportive of our draft claims to incorporate our clinical data and psychiatric diseases now labeled, which differentiate LUNESTA from other sleep hypnotics in that market.

R&D is providing support as we continue our business development efforts to identify a Japanese partner. We are executing the PK study in the elderly population as directed by the Japanese Health Authority, and planning for the two clinical studies to complete the JMDA. This includes the establishment of the clinical sites network in Japan for sleep studies.

For BROVANA, we are supporting the commercial activities for the launch of this exciting new product. We are executing on the regulatory FDA mandated requirements of the pediatric program in asthma, as well as a large simple safety trial.

Our Phase IV program, includes investigating combinations with Tiotropium, a steroid combination once daily used as well as an active publication program. Just this year, we anticipate abstracts at ATS, ERS, CHEST and pharmacy meetings, are at least 10 to 15 of our scientific studies.

For 289 which is our triple re-uptake inhibitor for depression. We have initiated a PET baboon study that is a Positron Emission Tomography scientific study in animals, and we have completed the Phase I single dose and multi dose studies with one more Phase I study to do, the Food Effect study, and before initiating the proof-of-concepts in depression in the fourth quarter of ’07.

SEP-162 or SNRI for major depressive disorders continues to advance, we have completed the single dose and we are initiating the multiple dose PK studies. Our carcinogenicity studies are targeted to initiate in the third quarter of '07, with imaging studies and proof-of-concept study anticipated for late this year or early next year.

SEP-441 is a GABA-a agonist, it's Phase I ready targeting a rapidly acting treatment for generalized anxiety disorder and panic disorder. We have a stretched goal of initiating proof-of-concept for this compound in late '07 or early '08.

Finally, our preclinical discovery effort has continued to progress as we concentrate on our four major areas of interest. Follow-up triple reuptake inhibitor programs, DAAO inhibitors, further work in the Alpha-2,3 GABA-a Agonist program and finally our collaboration with ACADIA on M1 agonists. Over to you, David.

David Southwell

Thank you, Mark. Let's start with the revenues. We are changing our guidance in point estimate to reflect the external variables that affect each of our individual products. While the mix of revenues has changed, the midpoint of our total revenue guidance remains unchanged from our previous point estimate of $1.46 billion for 2007.

Our cost guidance will remain point estimates, since costs are more predictable and controllable. At the midpoint of our revenue guidance, fully diluted earnings per share guidance for the year 2007 is now $2.11, which includes the after-tax charge of $32.9 million or $0.28 per diluted share, for the Soltera litigation. Other than this charge, the principle changes are an increase in operating income and a reduction in our share count assumptions from a 121 million shares to about a 118 million shares.

LUNESTA's revenue guidance is now approximately $640 million to $660 million for 2007, of which the majority is still likely to be in the second half of 2007, in response to our promotional activities during the first half of the year. XOPENEX franchise revenue guidance is now approximately $705 million to $725 million reflecting increased guidance for both the inhalation solution and Metered-Dose Inhaler dosage forms.

Specifically the Metered-Dose Inhaler is approximately $105 million to $115 million. Guidance for the inhalation solution is about $600 million to $610 million. BROVANA revenues are expected to be approximately $45 million to $60 million for 2007 following the launch in the second quarter. Royalty revenues remain unchanged at about $40 million. Total revenue guidance for the year therefore is approximately a $1.43 billion to $1.49 billion.

On the expense side, we're reducing our research and development expense guidance from approximately $230 million to about $220 million. But we are increasing our selling, general and administrative expense guidance from about $830 million to about $835 million. In addition the 2007 after-tax charge is $32.9 million associated with the settlement of the lawsuits related to the Soltera litigation.

Based on these revenue and earnings levels and a tax rate of approximately 5%, we are guiding to primary earnings per share at the midpoint of our revenue range of approximately $2.32 per share, based on weighted average shares outstanding for the year of 107 million shares.

On a fully diluted share count of 118 million shares, this equates to EPS of approximately $2.11. Importantly, and to repeat, these numbers include an after-tax charge for the settlement of the Soltera litigation of $0.31 per primary share and $0.28 per diluted share.

On the balance sheet side, we still expect to end the year with approximately $1 billion in cash and short-term investments. Tim?

Timothy Barberich

Thank you, David. To summarize, we have experienced a three year compounded annual revenue growth rate of more than 66%. At the midpoint of our '07 guidance of $1.46 billion, we are anticipating a 22% growth in revenues for the full year of 2007 as compared to the full year of 2006. We are also beginning to experience significant operating leverage as growth in revenues outpaces growth in expenses.

As you can see, we are anticipating a 32% increase in earnings per share for 2007, as compared to 2006, including the after-tax charge of $0.28 per diluted share for the Soltera settlement.

The first quarter for 2007 was a successful quarter and we anticipate another exciting year of progress. Our short-term priorities are to grow LUNESTA and the XOPENEX franchises. We believe we are on track with the successful launch of BROVANA. We are making progress with our ex-US strategy for LUNESTA and are on target to submit our MAA in Europe during the third quarter of this year. In addition, we are moving forward on our clinical programs for LUNESTA in Japan.

Our pipeline of clinical candidates continues to advance and we are targeting to have three proof-of-concept studies well underway in the early part of 2007. On the corporate development front, we are continuing to aggressively pursue opportunities and by the respiratory and CNS specialty areas as well as other primary care opportunities.

We will now open the session for Q&A.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions). Our first question comes from Greg Gilbert of Merrill Lynch.

Greg Gilbert - Merrill Lynch

Thanks, good morning. I have a couple. The first on LUNESTA, how did the average selling price change from 4Q to 1Q if at all and how should that trend going forward?

Timothy Barberich

Well Greg, as we said, we really don't comment on the ASP. We have obviously used some ASP to achieve better position in the managed-care environment and that has been very successful for us.

Adrian Adams

And as I indicated on the slide Greg, you have seen that the excellent progress we have made in the managed-care area. And it’s not a position that we see now that we believe positions us well for the remainder of this year. And that that strong footprint of managed-care coverage will allow us to grow the business into the future.

Greg Gilbert - Merrill Lynch

And then for Mark, can you discuss the 441 compound? Can you talk about what molecule it's based on or related to and how would you characterize its risk profile in time-to-market may be relative to the other early stage compound?

Mark Corrigan

Yeah, we've had an active GABA research program and so that it's mechanistically targeting that. I'm not going to comment on its actual molecular structure at this point in time. Relative to its risk profile though, we are looking forward to, basically its looking very clean so far and I think in this area in [angiolitic] in general, is not exactly an easy gambit. So that there is certainly some risk pertaining to developing drugs for these indications. However, we are going to take our best shot at it and as I said the early data are really very preclinical level, are extremely exciting and so we are quite hopeful that we can move forward impressively with it.

Greg Gilbert - Merrill Lynch

And lastly, I guess for all of you, what are the most burning priorities from a business development standpoint? I recognize you are looking at a lot of things, but what do you really need to achieve sooner or rather later in your view? Thanks.

Adrian Adams

Well Greg, that's a good question, and [coping] with a lot of financial companies. This is a strong goal for us. As indicated on the call I think we are looking forward to leverage in LUNESTA by seeking approval in Japan and in Europe and obviously seeking partnerships to maximize our assets in the area.

As we have discussed internally here, we are very keen on the question of focus and obviously on therapeutic strategies in the respiratory and CNS area. So, we are aggressively pursuing opportunities, whether it be a potential company acquisition, whether it be product or technology to help us to build the pipeline and near term assets into the future.

Clearly, I think our goals are quite simple. We leverage our current portfolio. We think we have got good opportunity. Pull through the excellent productivity we’re seeing in research and development and complement that with aggressive and timely corporate demands and licensing activities and that's exactly what we're doing.

Operator

Thank you. Our next question comes from Matt Duffy of BDR Research.

Matt Duffy - BDR Research

Good evening and thanks for taking my call. Couple of things. Adrian, I wonder if you and the team might comment on your experience in promoting in a market with important generic brands with a branded agent. Obviously, the generic AMBIEN weighing heavily on people's thoughts here and just what your experience and thoughts are in this marketplace at this point

Adrian Adams

Yeah, it's a very good question particularly with the genericization of AMBIEN. Obviously, as you would expect within a quality organization, we are going to [fall] for this. If one looks at the analogs that we've looked up in this market, the majority of those analogs point to the fact that the generic products tend to impact within the family of those products and that the products go on from strength to strength.

From our point of view, our focus is on making sure that we build on a very strong managed-care evolution we are seeing at this point in time. And the fact that LUNESTA is a highly differentiated product from AMBIEN. One of the reasons, we believe why over the last 12 to 15 months, we have moved from a 10% coverage in the Tier 2 position into a 37% coverage, I think is that the product you’ve seen has been very differentiated. Products in the end live or die based on the clinical profile, and we believe that LUNESTA has best in class and differentiated profile. And that’s going to work for us, in what would be growing marketplace.

David Southwell

Matt, in terms of the experience, I would also point you to the fact that we launched XOPENEX in 1999 into a fully genericized market and it really build that market ourselves. So, I think everyone around the table has a lot of experience of marketing against generic market.

Matt Duffy - BDR Research

Very good, thanks. And one other thing, one your strategic goals in terms of the field force, particularly with regards to LUNESTA. They are improving targeting and productivity there. Could you give us some additional color on how you might be able to do that and how we might be able to read some of the effects of that?

Adrian Adams

I think, within the pharmaceutical industry, particularly in a market like the United States, where there is a lot of data available. Obviously, the focus remains quite simple and that is to make sure that we identify, the high prescribing top decile doctors. And that we focus our efforts to call on those doctors with high levels of frequency. And that’s exactly what we are doing.

And (inaudible) we recently had the time with our sales force to refocus their efforts around new messaging, and excited messaging in relation to co-morbid data. We emphasize the need to continue to call on those high prescription potential doctors and make sure that we call with good levels of frequency. It's as simple as that, it’s about execution with excellence and that’s what we'll be delivering between now and the end of the year.

Matt Duffy - BDR Research

Thanks very much and good luck.

Operator

Thank you. Our next question is coming from Larry Neibor of Baird.

Larry Neibor - Robert W. Baird

Thank you. Good morning.

Adrian Adams

Good morning, Larry.

Larry Neibor - Robert W. Baird

Given that you have been on the market for a couple years now with LUNESTA and have been surpassed in market share by a competing product. Do you see the need to increase the size of your sales force in order to enhance the power of your message?

Adrian Adams

Well, in terms of thought processes for sales force size, we believe that the size of the sales force we have at this point in time is adequate for our needs. We actually believe that there is going to be some interesting changes in dynamics within the marketplace over the course of this year.

In particular, I think we will love to see what happens with Sanofi-Aventis, with a possible approval of the [current plan]. That could significantly change the share of those dynamics within this marketplace.

We are very focused on making sure that we control our destiny in the areas where we can control. And we believe that our sales force capacity and the strength of our sales force, particularly in the primary care physician areas, is efficient with focus in the right area, with quality messaging, we believe is adequate to actually continue to build prescription volume. And particularly very much the trends that we see happening in the marketplace. And we think that the share of (inaudible) dynamics in the fourth quarter of this year, in particular are going to change very nicely towards LUNESTA. So, the focus is on executing with excellence. I want to emphasize that.

Larry Neibor - Robert W. Baird

Second question please. Will the change in reimbursement status in the XOPENEX HFA market be enough for you to gain market share more rapidly there or do you need to focus more detail attention there?

Adrian Adams

I think the detail attention that we have we think is adequate. We have a significant size sales force that we think, more than meets the needs of our target doctors. So, from that point of view again with the HFA product as we’ve mentioned we have seen some very good market share evolution. We have been particularly pleased with a very good position in the managed-care segment and we think that our product will grow best on its merits.

Larry Neibor - Robert W. Baird

Thank you.

Operator
Thank you. Our next question is coming from Bert Hazlett of BMO Capital Markets.

Bert Hazlett - BMO Capital Markets

Thanks good morning. Thanks for taking the question. I have two, but first on XOPENEX MDI. We did see a considerable pickup in prescriptions in particular in February and March. I am of surprised to see the flat revenue from 4Q to 1Q. Can you just comment on inventory levels for that product, given the pickup in scripts, do you think you have worked through any inventory stocking that might be out there? Thanks.

David Southwell

Yeah, we’ve reduced our inventory quite a bit. We are down to about four weeks of inventory at the wholesale and retail at the same level.

Bert Hazlett - BMO Capital Markets

Okay.

David Southwell

For about 10 weeks.

Bert Hazlett - BMO Capital Markets

And that’s for MDI specifically?

David Southwell

MDI specifically.

Bert Hazlett - BMO Capital Markets

Okay. So we should expect to see then an increase quarter to quarter then for that product given the scripts?

David Southwell

Yeah, I don’t think inventory level is going to go down any further. It might stabilize back at about five weeks with further demand level. That’s where we want to be.

Adrian Adams

And Bert this is Adrian here, good to speak with you again. I think as David mentioned within our overall guidance, we have indicated our confidence in the XOPENEX HFA and MDI level and we are very pleased with prescription trends, as you have noted as well.

Bert Hazlett - BMO Capital Markets

Thank you very much Adrian. A second question on LUNESTA, could you just describe for us the opportunity you see in the EU for that product. In particular a differentiation of the product, how you intend to position that there. And maybe a reminder of the IP situation for LUNESTA there? Thanks.

Adrian Adams

Yeah maybe I'll ask Mark to talk about some of the good discussions we've been having Europe, and then I'll come back to talk about the opportunity.

Mark Corrigan

Thanks Adrian, yes. One of the things is Europe has lagged behind United States as you recall, we were the first hypnotic to basically, on the strength of our data, have removed the short-term restriction on prescription. In fact, the vast majority of prescriptions written for chronic insomnia are written for much more than the two weeks. So, the labels had been a bit out of kilter with the actual medical usages of the products. In Europe, that is certainly the case where there is actually a fairly high level of psychotropic use and in fact where their policy has continued to have that short-term restriction.

That's when we were introducing our data package to potential RAPTURE. Many of the European RAPTURE countries were quite excited, as this data package gave them the opportunity frankly to redress the policy issue on strength of the data. So, we are hopeful of that, and having given I think some preliminary information that our draft SMPC which is the draft label in Europe, will contain both the long-term data as well as the clinical section will include our trials in depression and anxiety, which is 80% of the chronic insomnia’s effect present in co-morbid disorders. That we think will give us a very important differentiation when we get to the approaching negotiations from the generic sleep hypnotics that are available in the market. Adrian?

Adrian Adams

Yeah, thanks Mark. And I think as Mark indicated there, and as you well know, I think the European market is much more fully developed I think and less sophisticated in terms of overall Houston than the United States. So, we believe that these labeling discussions that we've been having in the target profile, we think represents a nice opportunity for the products in the European sector. And obviously one of our goals in addition to getting the product approved is obviously to secure a part that has the capability and experience to move this product into the primary care area, and we have some discussions onboard in that regard.

Mark Corrigan

Finally, data exclusivity, which is a 10-year period, will be based on a successful accomplishment of acceptance in the year.

Bert Hazlett - BMO Capital Markets

Thanks very much.

David Southwell

Thanks Bert.

Operator

Thank you. Our next question comes from Marc Goodman of Credit Suisse.

Marc Goodman - Credit Suisse

Yes, two questions. First, on the XOPENEX CMS reimbursement. Obviously you didn't have a lot of discussions with CMS. Can you just give us your latest thoughts on that and your expectations as we get closer to this announcement?

And then second of all, just back on the XOPENEX HFA, you showed us how deterring had changed quite a bit for ProAir and for your product for the past year. Can you just give us a flavor for, in the past, three months, four months, just something a little more closer up, how much is expected to change? Obviously your product is taking off nicely; we are seeing the HFA come over from the CFC. We are seeing all of that. The one thing that's surprising to me is that ProAir continues to do so well, just given the dynamic that you are showing with deterring. So may be you can just help us understand that a little better?

Adrian Adams

On the first point on the position with CMS on XOPENEX, I think we have been clearly updating everyone. And every opportunity in relation to the timeframes associated with that determination. We have been very pleased over the recent months but obviously that determination is going to be based on clinical data rather than on pricing. So the timings remain the same, we have ongoing discussions with the CMS and the timings are late to end June position. And then obviously a final determination in September of this year. So, we've been working very hard in the backend and as Jonae has mentioned in the past in a number of investor conferences, I think the CMS has actually had an unbelievable amount of requests on points that have been fed in from the customer group, indicating the strong support for XOPENEX.

On HFA, I think if I look over the last three to four months, we have seen some continued progress in the managed-care segment. You are right; we showed data that indicated its progress over the course of last 12 months or so.

Obviously, we have been pleased with the prescription and market share evolution of the HFA over the course of the last 12 months or so. And obviously getting back from a situation where ProAir obviously got a dominant position right out of the gear, based on the fact that they were promoting a product Albuterol HFA. So, we are working very hard to pull through and obviously to further strengthen our position in that area, based on the clinical data and based on the attributes of HFA and beyond.

Marc Goodman - Credit Suisse

When did the changes occur to ProAir and the theory, was it in the past month or two or was it much further?

Timothy Barberich

Year, this is Tim, that's a relatively recent development, within the last quarter.

Marc Goodman - Credit Suisse

Okay. And then just back on XOPENEX nebule. Can you just tell us what your expectation is coming out of CMS with respect to the guidance that you've provided? And then you know maybe what the different scenarios are around that and how the numbers would change? Thank you.

David Southwell

Well, it's hard; Marc this is David, it's hard to really talk about what is with it. Our guidance assumes no material change in the utilization of XOPENEX. So, it's pretty much a status-quo guidance.

Marc Goodman - Credit Suisse

Okay.

Operator

Thank you. Our next question is coming from Rick Silver of Lehman Brothers.