Cephalon Q1 2007 Earnings Call Transcript

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Cephalon, Inc. (CEPH)
Q1 2007 Earnings Call
May 1, 2007 5:00 pm ET

Executives

Chip Merritt - Senior Director of IR
Frank Baldino - CEO
Bob Roche - EVP of Worldwide Pharmaceutical Operations
Kevin Buchi - CFO
Lesley Russell - EVP of Worldwide Medical & Regulatory Operations
John Osborn - General Counsel

Analysts

Eric Schmidt - Cowen & Co.
Ronnie Gal - Sanford Bernstein
Jim Dawson - Buckingham Research Group
Annabel Samimy - UBS
Brett Holley - CIBC World Markets
Dave Windley - Jeffries & Co.
Michael Rockefeller - Morgan Stanley
Jim Birchenough - Lehman Brothers
Adam Greene - J.P. Morgan
Corey Davis - Natexis

Presentation

Operator

Good day, everyone and welcome to the Cephalon First Quarter 2007 Earnings Announcement. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Chip Merritt, Senior Director of Investor Relations for Cephalon. Please go ahead, sir.

Chip Merritt

Thank you. Today we will review Cephalon's financial performance for the first quarter of 2007. Before we begin let me remind you that certain statements on this call maybe forward-looking and are subject to risks and uncertainties associated with the Company's business.

These statements may concern among other things guidance as to future revenues and earnings, operations, transactions, prospects, intellectual property, litigation, development of pharmaceutical products, clinical trials, and potential approval of our product candidates.

The Company also may discuss certain non-GAAP financial measures within the meaning of Regulation G during today's call. The information required by Regulation G is available in the newsroom section of our website at www.cephalon.com.

Additional information and risk factors affecting the Company's business and financial prospects and factors that would cause Cephalon's actual performance to vary from our current expectations is available in the Company's current Form 10K on file with the SEC. During the call, we will update full year 2007 guidance and provide second quarter guidance.

Please note that guidance remains in effect unless the Company provides subsequent modifications or updates. Our earnings press release is available on the Internet at www.cephalon.com. Investors with further questions should contact me at 610-738-6376. This conference call is being webcast via the Cephalon homepage and will be archived for one week after the call.

Speaking on today's call will be Dr. Frank Baldino, Chief Executive Officer, Bob Roche, Worldwide Pharmaceutical Operations, and Kevin Buchi, Chief Financial Officer. Also joining us on the call today are Dr. Lesley Russell, Worldwide Medical and Regulatory Operations, and John Osborn, General Counsel. Following remarks by Frank, Bob, and Kevin we will be pleased to answer your questions. Now, Frank Baldino.

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Frank Baldino

Thanks, Chip. Good afternoon, everyone. As we celebrate our 20th anniversary, we're entering a new phase in our history that will be marked by two key milestones. First, with the approval of FENTORA and the pending approval of NUVIGIL, we're transitioning to second-generation products in our two main therapeutic franchises pain and wakefulness.

Second, we are on the cusp of making a significant impact in the field of oncology with two promising compounds of late stage development, TREANDA and CEP 701. These compounds are identified in the March publication of R&D directions as two of the 100 great investigational drugs of 2007.

Let me start by reviewing the outstanding financial results for the first quarter. We're off to a truly great start to the New Year. Sales increased 23% and basic adjusted income per share increased approximately 86% over the first quarter of 2006. Our remarkable achievement.

Some of the other highlights of the quarter included PROVIGIL began its ninth year in the United States market with double-digit growth due to continued end roads as a primary care market. We received an approvable letter with favorable draft labeling from the FDA for NUVIGIL and we are thrilled with the tremendous launch of our next generation pain product, FENTORA.

Let's look at the business in more detail. PROVIGIL prescription growth remained strong during the quarter with IMS data reporting a 15% increase over the first quarter of 2006. With the addition of 250 first position Takeda sales reps in early 2007, we expect continued strong PROVIGIL sales as we reach out to more and more primary care physicians to the remainder of the year.

With NUVIGIL, we are pleased to announce that the FDA has completed its review of the NUVIGIL NDA application. We work closely with the agency to provide safety data that was integral to the finalization of draft labeling.

The outcome of this work was the avoidance of a black box and we agreed to labeling and warning labels that appropriately reflects the efficacy and safety profile of these two drugs. We submitted a class one complete response for the approvable NUVIGIL letter and anticipate final action by June 16th.

Recall last November that we secured a composition of matter patent on the polymorphic Form I of armodafinil, which is the most stable crystalline form contained in NUVIGIL. This patent should protect our wakefulness franchise through 2023. Following issuance of this patent, we embarked on a comprehensive clinical program to unlock the full utility of NUVIGIL.

The focus of the program will be to study potential benefits that NUVIGIL may offer patients with the excessive sleepiness, fatigue and cognition associated with a variety of diseases including Parkinson's disease, schizophrenia, cancer and bipolar depression.

With more clinical data, we believe we can demonstrate the additional utility that NUVIGIL can offer patients suffering from a broad range of disorders and not only retain but also expand the valuable wakefulness franchise. We currently are planning to launch NUVIGIL once we have unmasked the additional clinical data.

And now, Bob Roche will discuss the launch of FENTORA.

Bob Roche

Thank you, Frank. What I would like to do today is to describe not only the steps that we took to successfully launch FENTORA but also to make sure you understand our thinking about the immense opportunity that we still have before us. We launched FENTORA on October 1st, 2006, and we got off to a fast start for several reasons.

First, our 100 plus pain care sales reps were already fully trained and experienced in their respective territories. Second, our pre-launch programs had effectively primed the market and the Marketing materials for launch were ready to distribute within weeks of October 1st.

Third, also within weeks of launch, numerous key opinion leaders in pain management were trained on the benefits and risks of FENTORA and prepared to educate other healthcare professionals in their communities. But the biggest reason for the successful launch of the product is FENTORA itself. FENTORA is a major advance and offers a significant upgrade in the treatment of breakthrough cancer pain.

Many important members of our physician target audience quickly bought into this concept when they saw firsthand the benefits FENTORA offers their patients versus traditional therapies. Our FDA approved label positions FENTORA very positively, not just against oral transmucosal therapies but against all therapies for breakthrough pain.

Prior to the launch of FENTORA, our pain care sales force had been detailing ACTIQ pretty broadly to about 17,000 physicians, however a relatively small fraction of these physicians, about 2,000, were responsible for 80% of ACTIQ Prescriptions. It was these physicians who formed our primary target audience during the initial phase of launch.

It is important to recognize that we did not embark upon a patient switch strategy. Our goal was to change prescribing habits of these high prescribing opioid physicians by educating them about the real benefits of FENTORA. In a crowded market, with numerous short and long acting opioid it was critical for us to get the docs attention and create sufficient awareness for our new product.

Our pre-marketing efforts began in mid 2006 and by the end of March of 2007, we had detailed over two thirds of those 2,000 core physicians five times or more. This is a resulted in an unaided awareness for FENTORA among this group of over 50% and aided awareness of nearly 100%.

During the first quarter of 2007, we continue to focus on these core physicians and also began reaching out to the next tier of about 5,000 doctors who are high prescribers of opioids but who have not historically prescribed ACTIQ, and now as we enter May we are reaching out to all of those 17,000 targeted physicians and building our business across-the-board.

Two major opportunities are before us. One, is to continue growing FENTORA by educating physicians on the concept of breakthrough cancer pain and its treatment with rapid onset opioids. We've been at this now for almost seven years but still it remains a relatively poorly defined field.

The other opportunity of course is the prospect for FENTORA outside of cancer pain, in indications such as breakthrough lower back pain and breakthrough neuropathic pain. Let me first talk about breakthrough pain and rapid onset opioids.

While most investors to who follow Cephalon are pretty familiar with the concept of breakthrough pain, it's ironic to think that you maybe better informed than much of the physician community here in America. The truth is that breakthrough pain is a condition generally recognized only by top tier opioid prescribes and pain specialists that we typically call on.

The concept of breakthrough pain is relatively new. The term was first introduced into publication in a 1990 survey by Dr. Russell Portnoy.

In addition, of course patients are generally not familiar with the term. As for the term rapid onset opioids, it is equally misunderstood by most physicians who perceive all short acting opioids as having rapid onset, which in most cases is simply incorrect.

The truly unfortunate result of all of this confusion is that physicians will usually just increase the dose or the frequency of a patient's short acting or long acting product when trying to treat the breakthrough cancer pain episodes.

This approach, as we know, can cause serious problems with side effects and overmedication, but now with the availability of FENTORA, there's a much better way to treat these pain sufferers. FENTORA provides them the right amount of pain relief when and where they need it. We believe that a huge opportunity still exists as physicians and patients recognize FENTORA as their first choice rapid onset opioid medication.

As we advance our clinical work in non-cancer pain, we have a tremendous opportunity with FENTORA. When it comes to these non-cancer pain patients, the prevalence and characteristics of their breakthrough pain is very similar to that experienced by patients with cancer.

Estimates show that between 64% and 89% of patients with cancer pain experience breakthrough episodes, and about 74% of non-cancer pain patients experience these same breakthrough pain episodes. The groups are obviously very similar. In addition, time to peak intensity and the duration of the pain episode is similar for the two groups.

Opioids are widely used in the treatment of these non-cancer patients. Of all the patients taking chronic opioids, 32% of them take that medication to treat back pain, and 30% of them are taking their opioids to treat neuropathic pain. In contrast only 12% are taking them to treat cancer pain, 12%.

We know from our own studies that breakthrough pain episodes experienced by these non-cancer sufferers respond very well to FENTORA. And for all these reasons, we are tremendously excited about the significant impact FENTORA can have on patient health and well being and the exciting growth potential that it has for Cephalon.

In summary, we have had a strong launch of FENTORA and continue to grow the product aggressively. Today, that growth is coming from the physicians and patient types that we have identified through our efforts in the field over the last seven years. In the future, with new and broader indications and a much bigger field force presence, the opportunity that FENTORA represents is enormous.

Thanks very much. Frank, back to you.

Frank Baldino

Thank you, Bob. For the beginning of our collaboration with Alkermes, we appreciated the challenges of the addition market and we continue to explore a number of initiatives to effectively introduce VIVITROL to the addition community.

In late December, we began distributing patient starter kits to physicians and to date we have distributed several thousand kits. The kits have been well received by the patient community and this provides physicians an easy way to introduce the product to new patients. In January, we were assigned the unique J-code by CMS for VIVITROL that has facilitated the reimbursement process for physicians.

In addition, we just launched a disease awareness campaign called LIVE outside the bottle, to help raise awareness that alcoholism is one of our country's most misunderstood and destructive medical conditions and that medical treatment is available.

The website,www.liveoutsidethebottle.com includes a physician locate or tool to help patients start the road to recovery. A number of government agencies also are acknowledging the importance of VIVITROL. A few months ago, the national institute on alcohol abuse and alcoholism included VIVITROL in their treatment guidelines and more recently, the Center for substance abuse treatment released their advisory brochure on VIVITROL.

We continue to believe that VIVITROL is an important and innovative treatment option for patients suffering from alcohol addiction. While the initial outtake of this product has been slower than anticipated, we remain encouraged by the efficacy stories that we are hearing from patients and their physicians. These anecdotes indicate that there is a long term market potential for VIVITROL.

While we don't specifically talk much about our European or other international operations, they continue to perform quite well and we're taking steps to drive further performance. In fact, in the first quarter, our European business delivered a 21% increase in sales over the first quarter of 2006.

With the infrastructure required over the last few years, we now have established presence in each of the key European countries that enables us to further develop our existing products, acquire additional products, and drive greater profitability from these operations.

Turning to oncology, the National Cancer Institute conducted a five year study of 582 newly diagnosed patients with acute Acute Promyelocytic Leukemia or APL, using TRISENOX in combination with standard chemotherapy as part of first line therapy.

The study concluded that 77% of patients in the treatment arm that included TRISENOX remain alive and in remission for three years after diagnosis, compared to 59% on a standard treatment arm. These results are truly remarkable, and clearly indicate that TRISENOX has great potential to help the 1,500 newly diagnosed APL patients, which occur in the U.S. Each year.

We believe the treatment guidelines will likely change to incorporate TRISENOX and front line therapy of APL. We look forward to full scientific study results being presented at the Annual Meeting of the American Society of Clinical Oncology in Chicago this June.

Our plans for TREANDA and the treatment of non-Hodgkin's lymphoma or NHL remain on track for submission in the fourth quarter of this year. Indolent NHL affects some 25,000 to 30,000 new individuals every year in the United States. Although these patients have a median survival as long as ten years this remains an incurable disease.

A continuous rate of relapse is usually seen in advanced stages in patients often are treated with various combination therapies. And Phase II studies TREANDA has shown a 94% response rate, and relapsed NHL patients and combination therapy with Rituxan and when used as myelotherapy a 76% response rate in NHL patients refractory to Rituxan and other chemotherapies.

We have completed enrollment in our Phase III study and pending positive results anticipate completing the study and submitting the data to the FDA in the fourth quarter of this year.

We expect submission of CEP-701 or lestaurtinib for the treatment of acute myeloid leukemia by the first half of 08. CEP-701 is a potent inhibitor of select tyrosine kinase including flip three. Annually in the United States there are 13,000 newly diagnosed AML patients. 25% to30% have the flip three mutation.

CEP-701 is shown to be cytotoxic to AML blasts with this specific mutation and Phase II work we had shown that if a patient was sensitive to the drug and had the flip three inhibition, there was 100% response rate. With the high level of confidence and the ability to predict which patients will respond to the drug, we effectively enter the realm of personalized medicine.

Over the last few years, we took a series of strategic steps to create a fully integrated oncology franchise. We believe these investments will begin to pay off for Cephalon in 2008. Today we continue to be encouraged by our progress on the clinical regulatory front as we prepare to commercialize these near term opportunities.

In summary, we believe that NUVIGIL, our CMS franchise has a clear opportunity for many years of growth. Our pain franchise continues a smooth transition with FENTORA consistently growing both market share and overall units sold. FENTORA's 2019 patent should provide strong protection for pain franchise going forward. And our oncology franchise is on track and poised to further diversify and accelerate our growth in the years ahead.

Now, Kevin will discuss our financial performance during the quarter.

Kevin Buchi

Thank you, Frank. Today, we reported our first quarter 2007 financial results. What was expected to be a transitional year for the company. We reported sales of $423.9 million, which is an increase of 23% over the first quarter of 2006 and basic adjusted income per common share of $1.45, an increase of 86% over the same period last year. First quarter sales and adjusted income per share exceeded the high end of our original guidance by $14,000,000.45 respectively.

CNS franchise sales increased 35% to $217.5 million. Pain franchise sales were $131.4 million, an increase of 12% over the first quarter of 2006, FENTORA sales for the quarter came in at a robust $31.7 million. Other sales were $74.9 million, a 12% increase over the same period last year.

Each quarter, there are normal fluctuations in wholesale inventory levels. As you would expect, during the quarter we saw a decrease in inventory dollar levels for branded ACTIQ. However amounts for our other U.S. Products remain largely unchanged.

Our goal is to maintain inventory levels of between 2 to 3 weeks of each of our key products. At the end of the first quarter we were at the low end of this range. Combined adjusted R&D and SG&A expenses in the first quarter of 2007 were largely unchanged from a year ago.

This results in a dramatic increase in operating margins as all of the increased sales flowed through to adjusted net income. When compared to first quarter 2006, adjusted R&D expenses decreased approximately $6 million to $74 million and adjusted SG&A increased approximately $7 million to $152.5 million. Our adjusted tax rate for the quarter was 36.5%, which was slightly higher than our guidance. During the quarter, there were several adjustments that were made to arrive at adjusted net income.

The most significant of these were: We excluded $10 million in success based milestone payments for work on CEP-701 formulations. We excluded $21 million associated with the ongoing amortization of acquired intangible assets, and we excluded $11 million to reflect the tax effect of these pre-tax adjustments. Based on our current outlook, we expect first quarter results will flow through to our full 2007 financial results and have raised our guidance accordingly.

Notwithstanding our challenges throughout the remainder of the year, including the continued erosion of ACTIQ, increased R&D spending associate the with NUVIGIL clinical programs and the elimination of reinvestments from Alkermes as we exhaust the funds available for reimbursement we are increasing our 2007 guidance.

As stated last week in our pre-announcement press release, our 2007 total sales guidance remains at $1.675 billion to $1.725 billion. Our guidance for adjusted net income was increased by $33 million to between $292 million to $298 million and our guidance of basic adjusted income per common share was increased by $.50 to between $4.40 to $4.50, assuming 66.3 million shares outstanding.

Guidance for the CNS franchise is reduced by $25 million to between $925 million and $950 million. Same franchises increased by $50 million to between $425 million and $450 million, and our guidance for other product sales is reduced by $25 million, to between $300 million and $325 million. R&D and SG&A expenditures have targeted to be between $315 million and $335 million and $685million and $715 million respectively. Our assumed tax rate for the year is approximately 36%.

The company is introducing second quarter 2007 sales guidance of between $415 million and $425 million. Adjusted net income of between $69 million and $76 million and basic adjusted net income per common share of between $1.05 and $1.15 based upon 66 million shares outstanding.

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

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Eric Schmidt with Cowen & Company.

Eric Schmidt - Cowen & Co.

Good afternoon. Congratulations on a great quarter. Just looking for some more details around PROVIGIL. I notice you didn't break out the sales in Q1. Could you provide that detail as well as the reason for the decrease in CNS sales guidance for the year?

Frank Baldino

Well thanks for the comments, Eric. I think I'll turn it over to Kevin to give you some color on that. We didn't, I don't think we shared the first quarter breakout. So we're not going to do that but maybe Kevin has a comment about the year performance.

Kevin Buchi

I think the performance of the pain franchise has been stronger than expected, Eric, as you saw, we increased the performance in that area and we just kind of leveled it out. We always viewed our products as being a portfolio product as you know.

We think the overall outlook looks generally the same for the year or within the same general range as we had before. We just tweaked it a little bit to reflect the reality that the pain franchise is doing a little better than expected and weakness maybe in VIVITROL, and that's really it.

Frank Baldino

I think the 15% growth we saw quarter, this quarter over first quarter 2006 is pretty good relative to product that's been on the market for nine years, we're pretty excited about the growth of PROVIGIL. Bob do you want to comment further on that?

Bob Roche

Yeah. I am happy to, Frank. As you mentioned, strong continued growth quarter-on-quarter versus last year and as we've seen in recent years, including in 2006, the really strong seasons for PROVIGIL may be even still to come as we go through the rest of the calendar year.

Having said that, we've got to keep in mind that we have an asset that we've been working effectively with for over nine years now, and it's provided tremendous return over that period of time and we expect it will continue to do so.

Eric Schmidt - Cowen & Co.

So just to be clear, even though this is still your biggest and hopefully one of your most rapidly growing franchises, you're not going to be breaking it out in further quarters either? You'll be combining with capital?

Frank Baldino

I think we stopped giving PROVIGIL detail back in 2006, Eric. I don’t think that’s…

Eric Schmidt - Cowen & Co.

You were giving guidance as a combined franchise, but breaking out the PROVIGIL numbers on a quarterly basis for us.

Frank Baldino

I just went through two earnings scripts and didn't see that we did that.

Kevin Buchi

That's really not what we've been doing, Eric.

Bob Roche

We haven't changed our form of doing this for over a year now.

Eric Schmidt - Cowen & Co.

Okay. I will give you guys…

Frank Baldino

First of all, we appreciate your comments and I think we answered your question. I think PROVIGIL is showing continued strong growth. As Bob said, we're getting through the first quarter always has a little bit of a hang around effect of the slow growth holiday season. Usually in March, we see a breakout of that as we saw this year, and continue to see that for the rest of the year.

We still see PROVIGIL as a major growth driver for the company's top line not only in '07 but also ‘08 and ‘09 and even though we're putting most of our investment dollars behind NUVIGIL as you know, that's going to really move the franchise forward and we expect to have maybe a major player in the pain care. I'm sorry, in the sleep/wake franchise for several decades to come.

So we think this will continue to be a major growth driver in the future.

Eric Schmidt - Cowen & Co.

Thanks. Appreciate the comments. I'll circle back off line.

Frank Baldino

Thanks.

Kevin Buchi

Thanks, Eric.

Operator

Thank you. We'll go next to Ronnie Gal with Sanford Bernstein.

Ronnie Gal - Sanford Bernstein

Good afternoon, gentlemen and congratulations on a good quarter.

Frank Baldino

Thanks.

Ronnie Gal - Sanford Bernstein

A couple of things. First, I noticed that you moved some of your cost components around and gave us a comparable number for the first Q1 of ‘06 but I was wondering if you could give us for the last four quarters the COGS, R&D, SG&A based on how you are now reporting depreciation amortization?

Kevin Buchi

I think the revised guidance that we provided includes those numbers. We typically haven't provided cost of goods guidance. We typically do kind of top line revenue and we give you detail on operating expenses between R&D and SG&A and then we give you bottom line, and the guidance that we provided includes kind of the reallocation of cost of goods, reallocation of depreciation. It really was not a material change.

Ronnie Gal - Sanford Bernstein

Okay. So just kind of looking at the quarterly numbers, it looks like the big number that came down from at least the first quarter of 06 and first quarter of '07 was R&D expenses. Just thinking about how those numbers will move in the future, obviously this is a big change from your previous guidance on the cost side and I was wondering how does it look for the next three quarters? I know that in previous conversations you've mentioned that you expect to ramp up R&D for the cancer R&D budget.

Kevin Buchi

Yeah. I think actually, the larger change, the remainder of this year will be increased R&D expenditures with the NUVIGIL clinical studies, really start to enroll patients and really start going. They were initiated in the first quarter, but we didn't have huge numbers of patients enrolled and so the expenditures for NUVIGIL clinical programs will increase fairly substantially as the year goes on. I think that's going to be the biggest driver going forward on the R&D side.

Ronnie Gal - Sanford Bernstein

And it's largely balanced between the quarters or we seeing a gradual increase throughout the year?

Kevin Buchi

I think you'll see a gradual increase throughout the year.

Ronnie Gal - Sanford Bernstein

Okay. And last…

Kevin Buchi

And the other thing as long as we're on this subject, the other thing that’s worth mentioning in terms of the quarters going forward for the rest of the year is this is the last full quarter for which we would receive reimbursement for VIVITROL costs from Alkermes. So you should expect additional flow through of expenses if you will associated with the Alkermes collaboration on VIVITROL for the rest of the year.

Ronnie Gal - Sanford Bernstein

And that will I assume go into the SG&A line?

Kevin Buchi

That is correct.

Frank Baldino

That's reflected in the guidance that Kevin gave earlier.

Ronnie Gal - Sanford Bernstein

Okay, thanks. I'll get back into the queue.

Operator

Thank you. We'll go next to David Buck with Buckingham Research Group.

Jim Dawson - Buckingham Research Group

Yeah, hi. It's Jim Dawson for David Buck. When will we see the benefit or TRX growth from Takeda reps and primary care? We haven’t seen that up to this…

Frank Baldino

Well I think Bob will answer some of those questions but I'll preview that by saying first of all it's a good question. We've heard this before, but it's a good time to address it a little more detail. Our biggest market today is primary care and our biggest growth market is primary care, and that's a pretty big change over a year or two ago, and a lot of credit has to go to Takeda reps for positioning us in their market and driving that market.

Bob will give you a little more color on that.

Bob Roche

Yes, I think that we are beginning to see some real substantive contribution and impact from the very significant effort that's being put forward by our partners at Takeda and primary care. In 2006, you'll remember, there were about 500 sales reps who were co-promoting or pardon me, promoting PROVIGIL in a second position after REZEREM, and I think it's fair to say that although contacts were made and seeds were planted, there was not a great deal of return that was generated during that period of time.

In 2007, what happened differently is that an additional 250 or so fully dedicated Takeda salespeople have come on board and begun to promote PROVIGIL, and as you know, after following us for awhile, and understanding the business, as you do, that it takes a little bit of time for the efforts that these guys are expanding to really begin to come into division.

But having said that, if I look at the data on new prescribers, these are doctors who have never written PROVIGIL before or haven't written it for the foreseeable past, we got 15,000, approximately 15,000 new prescribers in the primary care arena during the first two months of 2007.

So there's a lot of growth in the actual number of folks who are writing and what we anticipate to see is that as they become more and more familiar with the product, their productivity will increase and that the numbers of prescriptions that they write will begin to grow very substantively.

So I think we're going to see some real continued growth here in primary care. It will continue to be predominant and the most rapidly growing element of our business and a lot of that has to be attributed to the impact of our partners at Takeda.

Jim Dawson - Buckingham Research Group

Okay, thanks. And for the pain market, talk about the opportunity for FENTORA with modafinil and armodafinil potentially both being on the market by 2009?

Frank Baldino

Yes, this is Frank. I think the opportunity we have with FENTORA is an excellent one as Bob pointed out earlier for two points. One is we've been in this space for a long time and second is we've got a superb product in this space relative to the competition and third is for a several years ahead of all of these new products in that we'll be broadening the label of FENTORA beginning with the conclusion of the studies this year, filing of FENTORA this year and then the label in 2008.

So I've also said publicly and I think this is important that we have built this breakthrough pain market patient-by-patient, doctor-by-doctor, all by ourselves for about a decade now, and it would sure be nice to have some other voice in the space teaching physicians in the medical community at large about what breakthrough pain really is and making a larger awareness in efforts with patients to teach them about the utility of product to treat and the rapid onset opioid market.

So we welcome the competition. We think it's going to expand the market as much as we see with Asesorias and other products and we'll be major beneficiaries of that effort and expansion because we have what we consider to be a superior product on the market. Maybe Bob wants to add a little bit of color to that. He is the guy who has got to deliver on all those promises.

Bob Roche

Yes, I think the most important and most exciting opportunity that we have in this arena is clearly the broadened label for FENTORA that we anticipate some time late in 2008. And if we anticipate new competition coming on who will have breakthrough cancer pain labels in 2009 as you mentioned, Rapinyl and the BEMA compound, that this can only serve to I think improve the overall market and enhance patient interest.

So we're looking forward to it and certainly looking forward to FENTORA with the broadened label.

Jim Dawson - Buckingham Research Group

Okay, thanks. And lastly, would you just comment on how many months of inventory are out there for ACTIQ and like price per prescription should we be using for that product? Thanks.

Kevin Buchi

The question was, inventory for ACTIQ and price per unit for ACTIQ? Price per prescription for ACTIQ? Is that the question? Hello? Are you still there?

Jim Dawson - Buckingham Research Group

That's correct. Those were the questions.

Kevin Buchi

I think I can take the inventory one and I'll punt the other one to Bob if that's okay.

Jim Dawson - Buckingham Research Group

Yes, that’s fine.

Kevin Buchi

ACTIQ inventory is a little difficult as you can imagine to calculate a month's supply because the months are decreasing , as the product becomes generically eroded. Having said that it's kind of within the normal range, as you know, maybe it three weeks out there. It's not a lot and ACTIQ inventory at wholesale did come down this quarter. Bob?

Bob Roche

Yeah, on the price per prescription, I don't have the most recent data on that, but we have been running at somewhere between $2,500 and $2,700 per ACTIQ prescription. What I would ask is that you get in touch with Chip and that number can be validated for you.

Frank Baldino

And then just needless to say, we're really thrilled with the transition that ACTIQ to the generic space has had and where FENTORA is going in the future.

Operator

Thank you. We'll go next to Annabel Samimy with UBS.

Annabel Samimy - UBS

Hi. Thanks for taking my call. Great quarter. Really quick question on FENTORA. Now that you're trying to move into the non-cancer breakthrough pain, are there any different risk management procedures that you would have to undertake based on FDA guidelines or is the FDA requesting greater risk management procedures?

Frank Baldino

Well that's a good question, Annabel. We have Dr. Lesley Russell with us today. And I am sure she will be happy to answer your question.

Lesley Russell

We have a fairly comprehensive risk management plan already in place that's been approved the agency. Obviously as we file the new indication for a broader indication, they will review that risk management plan but it is fairly comprehensive and actually we believe that it covers pretty much what we would need to cover even with a broader indication, but clearly that would be part of the review process for a broader indication.

Annabel Samimy - UBS

Okay. Great. And just again, housekeeping issue, that I just want to make sure I understood, the D&A, the depreciation and amortization that you used to report in previous quarters, is that now folded into R&D and SG&A?

Kevin Buchi

Yeah, that's exactly correct. We actually got a comment letter from the SEC requesting us to do that so we took it out of the line and we folded it back up into the various other lines in the income statement.

Annabel Samimy - UBS

Okay. And then on the ongoing studies for NUVIGIL, have the various studies been initiated? Are you initiating further studies or just enrolling right now?

Lesley Russell

The programs are being initiated. We have an open IND for bipolar depression, and the other programs are coming on board over the next couple of quarters.

Annabel Samimy - UBS

Okay, great. Thank you.

Kevin Buchi

One other housekeeping issue, Annabel. I apologize for taking up your time but Eric Schmidt asked earlier about PROVIGIL sales in the CNS franchise and I said erroneously that we had not previously disclosed that and we had been so I apologize for that. We just made a change that kind of slipped through. PROVIGIL sales in the first quarter, sales in the United States were $188, 727,000, sales in Europe were 12,762,000, so total PROVIGIL net sales in that CNS line were 201,289,000 so I apologize to Eric and hope that helps.

Annabel Samimy - UBS

Helps me too. Thanks.

Operator

We'll move next to Brett Holley with CIBC World Markets.

Brett Holley - CIBC World Markets

Yes, thanks for taking the question. I guess the question I have is what are the factors that arriving the seasonality that we've seen kind of year-over-year with PROVIGIL and do some of the same factors kind of apply to FENTORA here?

Frank Baldino

I think the seasonality has been with us with PROVIGIL since the day of launch, and we provided some information or Chip has that the same is true on the pain care side. In fact the overlap year after year with ACTIQ has been quite remarkable. The exact dates of the seasonality may shift a bit, but not very much. Bob, do you want to talk about that?

Bob Roche

Yes. We did a lot of analysis on the pain care market and specifically, looking at ACTIQ prescription patterns over the seven years that we've been commercializing the product, and there was a remarkable and very consistent trend towards a pretty significant flattening of the product from around the middle of October through the end of February or even into early March.

And that's very consistent with what we've seen this year with FENTORA. FENTORA prescriptions in March as you've been following the numbers have grown pretty dramatically versus February or January, and I guess this is a trend that we're going to continue to see with this compound as well.

Brett Holley - CIBC World Markets

Okay. One other question, actually on TREANDA. What kind of response rate in your discussions with the FDA, what kind of response rate would be adequate in the Phase III for them to be comfortable. Do they give you any kind of guidelines or thoughts on that order?

Lesley Russell

Yes. When we met with the FDA at the end of Phase II meeting, they were really looking for us to largely replicate the data we saw in the Phase II, so if we see a response rate in the mid 70% and remission duration of at least six months, that's the ballpark that they're looking for and I am pretty confident we would achieve that.

Brett Holley - CIBC World Markets

Okay, thank you very much.

Operator

Thank you. We'll go next to Dave Windley with Jeffries & Company.

Dave Windley - Jeffries & Co.

Hi. Kevin thanks for the detail on PROVIGIL. That was going to be one of my follow-ups so I wonders, on your guidance and sales assumptions for Q2, are you assuming constant inventories in the channel or are there any assumptions about movement in the inventory levels?

Kevin Buchi

No. We're not assuming any movement in the inventory levels. The inventories seem to be at a pretty low level and that seems to be sustainable at this point in time.

Dave Windley - Jeffries & Co.

Just keep that constant?

Kevin Buchi

That's correct.

Dave Windley - Jeffries & Co.

And Bob, on the PROVIGIL scripts, I was interested in your comments about the co-promote Takeda reps for the second half of 06 and not generating a lot of return. You obviously saw on an overall basis very strong year-over-year growth in scripts during that period of time for PROVIGIL. What would have been the contributor to that if not Takeda?

Bob Roche

Well, I think, if so fact I think our own activities we continued focus that we were putting on to the product through an enhanced field force presence in 2006 and just the continuing enthusiasm about the product. You'll remember that in 2005, we were projecting loss of PROVIGIL exclusivity and a pretty quick switch over from PROVIGIL to NUVIGIL and that didn't occur in 2006 and then we were able to refocus activities and really kick start what had been a pretty significant slowing in the growth trend of the product.

So 2006 might have looked a little bit higher than it ordinarily would, but the product continues to grow very nicely and we're very pleased with that performance.

Dave Windley - Jeffries & Co.

Thanks for the color on that and then some of the data that you gave around new prescribers is interesting. Can you give us a context as to say what percentage increase over your existing prescriber base that 15,000 would represent?

Bob Roche

You know, Dave?

Kevin Buchi

We could do the math.

Bob Roche

I wish I had that number for total PROVIGIL prescribers in that period of time and I don't have that with me.

Dave Windley - Jeffries & Co.

That's okay. Let me ask a different version. As you see these new prescribers coming in, can you describe maybe qualitatively how is their prescribing pattern evolve? Is there an experimentation period or does it gradually ramp or how should we anticipate that they may contribute to the prescribing base?

Bob Roche

That's an issue that I can certainly put a little color to. When a new prescriber comes on board to PROVIGIL and gives it a go, he's probably got a sample and he tries that, likes the effect and writes a prescription for the product. The pattern of behavior that we seen is that doctor probably writes only about one prescription in the first month that he is or she is a member of the PROVIGIL prescribing community.

That number then ramps up and we saw with the psychiatry element of our market base that it ramped up very quickly. In primary care, we're seeing a slower process of ramping but one that is pretty defined and distinct nonetheless, and we're also seeing an increase in the productivity of those new prescribers when they first come on board.

Right now, we're up to almost two prescriptions per month for a typical new prescriber when they come on. After six months that prescriber might be writing seven or eight prescriptions a month. After 12 months we're looking for them to write 15 to 20 prescriptions a month. That would be the kind of progression that we would hope to see now with these new docs coming on board with the Takeda co-promote.

Dave Windley - Jeffries & Co.

Super and last question and I'll jump out and that is, as you fold this into the base, is it your goal for these added new prescribers and I'm assuming continued additions of new prescribers to maintain a PROVIGIL prescription growth in the mid teens or is it your expectation that it can actually ramp back up toward those numbers that we saw in the late ‘06 timeframe?

Bob Roche

I would not anticipate seeing any increase in the growth rate, rather if we're able to maintain this more or less where we are then we will achieve the numbers which have been offered to you in guidance.

Dave Windley - Jeffries & Co.

Okay. Great. Thanks for the answers.

Operator

We'll go next to Michael Rockefeller with Morgan Stanley.

Michael Rockefeller - Morgan Stanley

Good evening, guys. So as this opportunity for FENTORA grows and especially if you got additional indications, do you think that the hundred or so reps that are selling the drug now will be enough to address these larger Markets? Could you possibly leverage your primary care sales reps or would you have to hire some other ones?

Frank Baldino

I think, Mike, that's a really important question and it's one of these wonderful situations to be in. You got a drug that's doing really well in the specialty market that we've been dominating and created the market for and we're about to enter in 2008 an opportunity to grow this into a brand new marketplace that we really haven't developed much effort in the pain care side.

And we'll have a lot of choices to make at the time, whether we go with the co-promote or go ourselves into that space, how many reps do we immediate to address that space. I think today, we don't have an answer for you and we'll be more forthcoming over time. I think let us get the data in, let us file the NDA.

We have a full ten months of review from the FDA on that NDA and during that time frame in early ‘08 we'll be laying out for you and everyone else how we are going to address the primary care element, Mike because you are right, that's going to be the big driver element for the new indications. How we are going to do it and that will of course be any guidance that we put forward in 2008 and beyond.

Michael Rockefeller - Morgan Stanley

Okay. Thanks.

Operator

Thank you. We'll go next to Jim Birchenough with Lehman Brothers.

Jim Birchenough - Lehman Brothers

Hi, guys and congratulations on the quarter. Two follow-up questions. Just on the sequential decline in PROVIGIL sales from Q4 to Q1, other than seasonality and perhaps some change in inventory, anything else that might be contributing to that and specifically I'm wondering whether any Cephalon reps have been reallocated to promoting ACTIQ or if there's been any changes with the Cephalon sales force?

Bob Roche

Yeah, hi, Jim. Bob Roche. As in past years, we've actually seen quarter one look a little bit anemic versus quarter four of the previous year, and in some years we've had a reduction in actual prescriptions written during that sequence of quarters.

So, this is nothing new. It's exactly the same pattern that we've experienced over years past. Certainly from the demand creation side and one that we're anticipating to see probably in years ahead, but right now we're looking forward, to prescription growth and quarter-on-quarter increases and as I've said a couple of times now we're really excited about the continued great opportunities that PROVIGIL represents.

Frank Baldino

And Jim, if you do the analysis, I am sure you have it in front of you of the seasonality year-over-year, it all occurs about the same time, roughly the Christmas season through I guess its President's, Martin Luther holiday, February, etcetera, and that's the time frame where we get the weakest sales of PROVIGIL historically since the beginning of time and historically, the fourth quarter has been strong and the first quarter has been weak, and that hasn't changed.

I wish we had better answers for you on why that happens and I'd like to have a solution to that, but we're pretty happy with the pattern that we've seen and remember, PROVIGIL is up 15% in the first quarter of 2007 versus first quarter of 2006, so even though first quarter has been anemic, this has to be a good one or else it's the last year.

Jim Birchenough - Lehman Brothers

And just on to better understand the opportunity for FENTORA, could you maybe speak to reimbursement in terms of where payers are reimbursing FENTORA relative to ACTIQ and any progress you've made there?

Frank Baldino

Bob, do you want to talk about that?

Bob Roche

Yeah. Certainly, reimbursement is an issue for ACTIQ outside of breakthrough cancer pain. Reimbursement authorities are looking for ways to minimize their expenditures on products of high value and then FENTORA is really no exception to that either.

So we are continuing to fight those battles. We are winning many of them, losing some, when we get the new label for FENTORA it's going to be a whole new ballgame.

Frank Baldino

And I think, Jim, one of the things with reimbursement these days, it's always been a struggle and it's getting to be more of a struggle, and when we get paid to do is collect the money. That's what our job is.

We make arguments, we fight the good fight, and we are seeing even though the hurdles are getting higher and higher overtime, we are still getting paid for the scripts that are being written and we haven't seen much pushback beyond what we normally see. So we are pretty happy with our performance there.

Jim Birchenough - Lehman Brothers

So just to be clear, within label and breakthrough cancer pain, FENTORA is not at any disadvantage in terms of reimbursement?

Frank Baldino

We haven't seen any differentiation between in label or outside of label reimbursement for that product.

Jim Birchenough - Lehman Brothers

Just one further pipeline question. I'll jump back in the queue. What are the timeliness for the NUVIGIL data?

Frank Baldino

I'll let Lesley answer that question for you.

Lesley Russell

Specifically which NUVIGIL data?

Jim Birchenough - Lehman Brothers

Well, some of the expansion opportunities you're pursuing for an expanded label, maybe if you could layout the timeline of when you might expect data in bipolar depression that sort of thing?

Lesley Russell

We really just started the program, so, I mean, the timeliness are a little bit difficult to give you right now, but we would anticipate certainly nothing before this time next year at any rate.

Jim Birchenough - Lehman Brothers

Great. Thanks for taking the question.

Operator

Thank you. We'll move next to Adam Greene with J.P. Morgan.

Adam Greene - J.P. Morgan

Thanks. Quick question for Kevin. Can you give us the update on the status on your plans for the debt pay down this year? And then also actually on NUVIGIL, I know you're not officially planning on launching that this year, but is it going to be available to doctors if they want to write a script, are you shipping to trade or just not going to ship at all this year?

Frank Baldino

I will answer the first one for you and I will punt the second one to my friend Dr. Roche.

Adam Greene - J.P. Morgan

Okay.

Frank Baldino

And the first one was on…

Adam Greene - J.P. Morgan

Debt pay down.

Frank Baldino

You know, I think we'll be opportunistic. I think we still got $1.2 billion of convertible debt on the balance sheet. We would like to reduce that overtime. And I think if events were appropriate, if the stock price were at a reasonable level, if we had an open period, then we might consider doing something like that.

It's really not, I wouldn't say it's a critical concern for us as the earliest maturity is in 2008 and it's only a couple 100 million dollars, and given the cash flow being generated by the business that's not a particularly daunting amount, but certainly overtime I think we would like to reduce it.

Bob Roche

And in respective of the NUVIGIL approval process, we have no plans to launch the product in 2007.

Adam Greene - J.P. Morgan

Okay, thanks.

Operator

Thank you. And ladies and gentlemen, we have time for one further question. Our last question will come from Corey Davis with Natexis.

Corey Davis - Natexis

Hi, thanks. Just same question, you answered on FENTORA on PROVIGIL are you seeing any pushback from managed care in terms of rebating?

Bob Roche

Corey, hi. It's Bob. I think I understood your question any additional pushback from managed care on PROVIGIL and it's nothing more than what we have been enduring over the last several years. Hello?

Frank Baldino

Okay. I think we lost Corey.

Bob Roche

I think he's on a cell phone.

Frank Baldino

Yeah, that concludes our call. So thank you all for participating.

Bob Roche

Thank you.

Operator

Thank you. And once again ladies and gentlemen that will conclude today’s call we thank you for your participation and you may disconnect at this time.

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