Forest Laboratories F1Q08 (Qtr End 6/30/07) Earnings Call Transcript

Jul.17.07 | About: Forest Laboratories, (FRX)
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Forest Laboratories (NYSE:FRX)

F1Q08 Earnings Call

July 17, 2007 10:00 am ET

Executives

Charles Triano - VP, IR.

Larry Olanoff - President and COO

Frank Perier - SVP of Finance and CFO

Analysts

James Kelly - Goldman Sachs

Donald Ellis - Thomas Weisel Partners

David Windley - Jefferies & Company

Mark Goodman - Credit Suisse

Annabel Samimy - UBS

Gregg Gilbert - Merrill Lynch

Gary Nachman - Leerink Swann

Michael Rockefeller - Morgan Stanley

Richard Silver - Lehman Brothers

Ian Sanderson - Cowen & Company

Guss Roseville - Piper Jaffray

Andrew Swanson - Citigroup

Angela Larson - SIG

Joe Tooley - A.G. Edwards & Sons

Presentation

Operator

Good morning, my name is Marcus and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Laboratories', First Quarter Fiscal 2008 Earnings Call. (Operator instructions) Thank you.

I will now turn the call over to Mr. Charles Triano, Vice President of Investor Relations of Forest Laboratories. Sir, you may begin your conference.

Charles Triano

Thank you, operator, and good morning, everyone. This is Chuck Triano. Thanks for joining us this morning for this first quarter fiscal 2008 conference call. Joining me today is Larry Olanoff, our President and Chief Operating Officer; and Frank Perier, our Senior Vice President of Finance and Chief Financial Officer. By now, each of you should have seen the earnings release that we put on the wires just after 8’ O clock this morning and the release is also available at our website, frx.com.

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

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

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Larry Olanoff

Thank you, Chuck. Good morning, everyone. I will start today's call by reviewing key company events for the quarter, and then we will turn the call over to Frank, who will review the financial details of the quarter.

Our underlying business continued to perform well during the quarter, as we saw an increase in prescription volume for all of our key marketed products Lexapro, Namenda, and Benicar, as well as strong top line and bottom line performance for the company.

Reported earnings in the just completed quarter totaled $0.83 per share, growth of 34% compared to a year ago period.

Looking first at Lexapro, sales in the quarter were $552 million, an increase of 9% year-over-year and an increase of $22 million correspondingly. It appears that wholesalers held slightly less inventory of the product at the end of this quarter as compared to the end of the March quarter. The SSRI/SNRI market had a total prescription volume rate during the quarter of approximately 7% and we continued to be pleased with the continued strength in the market's overall performance.

Lexapro's total prescription share was flat during the fiscal first quarter but we continue to project very modest market share gains for the balance of this fiscal year. Related to managed care formularies, we have not seen any substantial changes in Lexapro's positioning within the national accounts.

Moving to Namenda, the brands performance has remained strong, largely driven by a continued trend towards a more aggressive treatment strategy for Alzheimer's disease. This is reflected in the expansion and the overall use of Namenda, in combination with cholinesterase inhibitors and earlier use of Namenda, in combination in moderate patients. The brand has also seen a benefit due to improved patient access to the product. As Namenda continues to be the only NMDA receptor antagonist available on the market with no therapeutic substitute, it continues to have very broad access in both the commercial and the Part D formularies. For the quarter, sales were $192 million, an increase of 27% from the year ago quarter.

Regarding Benicar, it continues to make market share gains in a very crowded market; physician experience with the product continues to support a continuation of these market share gains. Preliminary reports of unusual sales, which are recorded by our partner, were approximately $186 million with our partnership pre-tax earnings for the quarter, totaling $53 million.

While supporting our key brands in the market place continues as a clear focus for the company, we are also allocating significant resources behind our large current development pipeline, about which I will go into more detail shortly, as well as into our business development efforts to further expand this development pipeline. I will now turn the call over to Frank, who will provide more details on the quarterly financial results.

Frank Perier

Thank you, Larry. Fiscal first quarter total revenues which are inclusive of sales, pre-tax earnings from the Benicar co-promotion, interests and other income totaled $928.3 million, an increase of 14% from the year ago period. Revenues were comprised of $842.6 million of sales, which increased 11% compared to last year; $52.5 million of contract revenue from the Benicar co-promotion agreement, an increase of 26%, as well as $26.7 million of interest income. Other income in the quarter was $6.4 million, which included a $5 million milestone payment received by our Forest’s Europe subsidiary, related to their development program for an inhaled Cystic Fibrosis product they are developing in Europe.

Regarding wholesale inventory at the end of the quarter, we see a slight decline to the level of Lexapro, of approximately one day, and a slight increase in Namenda, also approximately one day, compared to the levels at the end of March.

Gross margin in the quarter came in at 77.9%; this level compares to 76.8% in our fiscal fourth quarter last year and 76.9% in last year's fiscal first quarter. The sequential rise in the quarter was attributable, in a large measure, to some manufacturing efficiencies experienced.

SG&A spending during the quarter was $261.3 million, up 7% from last year. As we look forward to the remainder of the year, we now anticipate additional SG&A spending related to milnacipran, as a result of the sooner than expected NDA submission, which was based on the strong results from the recently announced Phase III study. And we continue to plan for pre-launch through large expenses for nebivolol.

Research and Development spending was $136.9 million in the quarter, a decrease of 2% in the year-ago period. For comparison purposes, I would highlight that the year-ago period included a $60 million license payment made to Almirall for the development rights to aclidinium. During the just completed quarter we incurred approximately $28 million in milestone development expenses across three partner companies. This level of milestone expenses in the quarter, was higher than initially planned largely due to achieving product a packet on the goal earlier than expected. Thus, milestone experience related to the successful results of the Phase III study of milnacipran, was completed in the quarter.

Our effective tax rate in the quarter was 22%, due to the revenue and expense mix between our two key tax jurisdictions, the U.S. and Ireland. We now anticipate that the 22% rate will carry through the fiscal year.

During the quarter we repurchased 1.8 million shares and we continue to have an additional 12.9 million shares available under the existing program.

Our cash and marketable securities balance at June 30 was approximately $2.3 billion, an increase of $278 million from last quarter.

I'll now turn the call back to Larry for a pipeline update and guidance review.

Larry Olanoff

Regarding pipeline compounds, we expect to commit to a period of submissions and actions, as well as Phase II and Phase III clinical trial results from late calendar 2007 well into calendar 2008.

Regarding nebivolol and the hypertension filing, we have submitted the response to the FDA's issued approvable letter and we will receive a six-month review of that response, with an action date scheduled for late 2007.

Regarding the application for nebivolol for congested heart failure, the data collection from the Eastern European sites and subsequent analysis has now been completed and the partnership will continue to assess the appropriate strategy and timing for the CHF submission, but we will likely wait until FDA action on the hypertension indication.

Based on the positive study outcome for the Phase III milnacipran study in fibromyalgia announced in May, we are now planning an NDA submission around the end of this calendar year, based upon data from the two completed Phase III studies for Desmoteplase. We recently reported that the DIAS-2 study did not achieve its predefined endpoint. We continue to review the full database, and we’ll make a decision regarding the status of Forest involvement in this program in the coming months.

As we move later in the calendar year, we expect to receive top line results from a Phase II proof of concept study for schizophrenia, with our novel investigational antipsychotic RGH-188. This study is now fully enrolled. We have also commenced enrollment for a second Phase II proof of concept study for RGH-188 in bipolar mania, with results expected sometime in 2008. We also anticipate results from an ongoing Phase III Lexapro study in adolescent patients with major depression, by the end of 2007. This study is also fully enrolled at this time.

A once daily formulation of Namenda is being evaluated in a Phase III moderate to severe Alzheimer study, which is also fully enrolled and should report out in early calendar 2008.

Regarding aclidinium, our long acting muscarinic antagonist being developed for chronic obstructive pulmonary disease with our partner Almirall; enrollment of two large Phase III international studies has been completed and we expect top line results for these studies in the second half of calendar 2008.

Two Phase III studies for ceftaroline, a fifth generation injectable cephalosporin, continue to enroll patients with complicated skin structure infections; and we will soon begin enrollment in two studies for community acquired pneumonia. We anticipate the skin and skin structure results in the second half of 2008, and the community acquired pneumonia results in 2009. These data from the two indications, if supported, will serve as our plan submission package to the FDA for initial marketing approval. We also are working towards generating proof of concept data for neramexane for Alzheimer’s disease. We plan to conduct this study primarily outside the U.S and are still securing study centers, anticipating starting the study later in calendar 2007. We continue development of the Oglemilast,, the PDE4 program partner with Glenmark, and we have now completed additional free clinical work, requested by the FDA, which we will soon submit for their review. We must receive an FDA concurrence before we can move into a larger Phase II proof of concept study.

In addition to these later stage programs, we also have several ongoing early projects and I will continue to emphasize that we clearly recognize the need to bring additional products to market there, in the next few years, as Lexapro and Namenda loose protection in the general 2012 time frame.

Our most important focus today, and over the next several years, is to license, co-promote or acquire individual products, or acquire companies with useful products, that collectively will serve to ultimately more than replace the earnings from our current inline products.

Further as Frank has reported, we continue to spend heavily on our R&D budget, specifically as it relates to clinical trials and supportive activities to provide for the opportunity to have products such as Nebivolol, Milnacipran, Ceftaroline, Aclidinium, and RGH 188, enter and become established within the marketplace up through this 2012 time frame.

Moving to our financial guidance for fiscal 2008, we continue to believe that earnings per share in the current fiscal year are likely to be between $3.05 and $3.15. This level of earning per share includes stock option expense, as well as anticipated higher SG&A spending for milnacipran, due to the acceleration of our NDA submission, a slightly higher tax-rate, and a modest reduction in plan milestone payments, as the DS 2 trial for desmoteplase did not meet its predefined end points.

I will now turn the call back to Chuck to start the Q&A session.

Charles Triano

Thanks, Larry and before we get into Q&A, I'll provide quarterly sales for some of our smaller products that I know; some of you are model and I'll list these in alphabetical order.

Aerobid, $5.1 million, Aerochamber, $7.6 million, Campral, $7.5 million, Cervidil, $14.9 million, Combunox, $700,000, Esgic, $1 million, Europe $16.5 million, Generics, $3.1 million, Infasurf, $3.2 million, Lorcet, $2.6 million, Monurol, $300,000, Tessalon, $4.6 million, thyroid products $15.4 million, Tiazac branded $3.4 million, Tiazac generic $5 million.

And with that operator, if we could please poll for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Kelly with Goldman Sachs.

James Kelly - Goldman Sachs

Good morning, I had two questions, if I may. Could you update us on what the planned milestone payments will be for the year – if you made the slight change given the prior guidance of $85 million. And I am also just interested, as you mentioned how R&D spending is a very important component as you prepare for the area around, the time frame around 2012. Can you help us think a little bit about the trajectory of R&D, whether it's on a percentage of sales basis or a growth rate basis? Thank you.

Frank Perier

Yeah Jim, with regard to the milestone payments, rather than the $85 million, we are probably looking at something in $75 million range, with the remainder of the payments kind of split pretty much evenly over the back half of the year.

Larry Olanoff

Regarding the R&D costs and expenses; we are not projecting out beyond this year. We've given guidance for that as of our last quarterly call. But I think what you'll see this year, you saw last year. We are going to continue to spend very aggressively on R&D and look for new opportunities, as well as opportunities within our current pipeline, to improve on the potential of our products as we bring them into the marketplace.

Operator

Your question comes from Donald Ellis with Thomas Weisel Partners.

Donald Ellis - Thomas Weisel Partners

Hi, this is Don Ellis, a couple of questions, finance questions. The first quarter historically, is one of the weakest quarters for you. Your first fiscal quarter, can we expect that trend to continue in fiscal '08, in another words is the June quarter the weakest quarter of the year, on top line?

Larry Olanoff

On top line Jim, I think the sales results and the sales as well as the performance of the other products in the marketplace. I would just remind everyone that we do have significant investments that we are making, not behind one launch product, but behind two launch products now, for both the Nebivolol and Milnacipran.

Donald Ellis - Thomas Weisel Partners

Okay, next question. In the March of '07 earnings conference call, you guys got about 8% year-over-year earnings growth and then in this quarter it was about 14%. Was there something unique about this quarter or should we still look for 8% or a little higher than 8% for year-over-year revenue growth?

Larry Olanoff

Again, I think the key, Don, is that, in getting ready to launch not one but now two products, you are going to see investments spending picking up in the back half of the year. Though, again I think our overall guidance should remain intact.

Donald Ellis - Thomas Weisel Partners

Okay, thank you.

Operator

Your next question comes from David Windley with Jefferies & Company.

David Windley - Jefferies & Company

Hi, good morning. Thanks for taking the questions. First one on Milnacipran, given the more stringent phase III trial design compared to the competitors, do you expect to receive a differentiated label?

Frank Perier

At this point in time we think that we will be able to request a claim for Fibromyalgia Syndrome. But it’s not clear where the labeling is going relative to our competitors. We don’t know enough about Cymbalta's results to make any extrapolation of what their claim may be. And we have now at least an early label for Lyrica, which doesn’t appear to differentiate in terms of a specific subset of claims. It seems that they've gotten treatment of fibromyalgia, very straight forward indication statements.

David Windley - Jefferies & Company

Okay.

Frank Perier

We can just review our own data and look for opportunities within that data to exploit differences between the projects.

David Windley - Jefferies & Company

Okay. And sticking to Milnacipran, have you talked about or when might you talk about, additional indications to add to the label?

Larry Olanoff

No, we haven't commented on any additional indications, right now our focus is on fibromyalgia. We obviously are aware of other potential opportunities and continue to explore those, but we haven't made any public comment about any direction we might take in that regard.

David Windley - Jefferies & Company

Okay. And then finally on review here, is there any chance that you might get priority review for formalin and aspirin?

Frank Perier

It's a possibility, but we don't know at this point in time what the FDA additive is going to be.

David Windley - Jefferies & Company

Okay. And then the last question is: on the stronger gross margin in the first quarter, is that sustainable or is that a number that you expect to move back down toward the lower 77% range, I think it was in the guidance?

Frank Perier

I would expect the number too to drip down somewhat for the rest of year.

David Windley - Jefferies & Company

Okay. Thank you for taking the questions.

Larry Olanoff

Sure Dave.

Operator

Your next question comes from Mark Goodman with Credit Suisse.

Mark Goodman - Credit Suisse

Yeah, hi, first question is, can you talk about the schizophrenia drug, and how you believe it could be differentiated in the marketplace? And then second of all, in the press release, it mentions that Forest could be in a position to, I guess was very solidified in some of these opportunities, with respect to in-licensing as the year progresses. Are you in a position today where you have many later stage in-licensing opportunities that you have looked that relative to your 6, 12 months schedule, just give us the flavor for how you view the licensing activity, on a relative basis?

Frank Perier

Thank you, Mark, for the questions regarding the schizophrenia compound, RGH-188, which we have licensed from Gideon Richter. The compound has a unique blend of activities related to both the dopamine and serotonin receptor we believe differentiates it from many of the other existing eight typicals. What we've noted to date and especially in the preclinical studies, which we've more detail on at this time: a relative lack of any EPS type activities, any motion dystonia type disorders, and it looks fairly efficacious again in the preclinical models. We hope to see these kind of profiles as well as, again the annual data would point just to a lack of other problematic attributes that we have seen in a typical class.

Larry Olanoff

Without weight gain?

Frank Perier

Weight - we have not seen any evidence for weight gain and we don't believe we have that kind of receptor profile, based again on our preclinical results. The clinical results thus far, are really just limited to Phase I tolerability studies in patients, aside from saying that the drug is reasonably tolerable in those patients. It is too early to extrapolate from beyond the animal results. But again, we have some reasonably consistent and I think favorable animal results, and so our optimism remains strong relative to what we might see in the early clinical trials.

As far as your question in terms of the current status in-licensing, we never comment on anything that's close or far off in that regard. I can just tell you that we have a number of projects that we are in discussions with various partners, and a good number of them are projects which are in advance clinical trials.

Larry Olanoff

Over all the deal volume remains actually quite strong.

Larry Olanoff

With those projects coming in.

Frank Perier

And those projects as always existed with both new partners and established partners.

Mark Goodman - Credit Suisse

Thanks Frank.

Operator

Your next question comes from Annabel Samimy with UBS.

Annabel Samimy - UBS

Hi. It's Annabel Samimy. Thanks for taking my call. Just a couple of quick questions. First on Namenda, I think in the last quarter your assumption was that Namenda would be growing 14% to 15%, and we saw the result 27% this quarter and do you have any reason to believe that that could be concerned or estimate or do you think necessary something by that assumption? And the second question I had is for SG&A, I think you said, that was expected to grow by that 9% and so even that’s the plan being push forward, exactly what kind of impact does that do that 9% assumption and why is that being unclassified within SG&A rather than R&D?

Larry Olanoff

Okay. With regard to SG&A, I think the key is we are not going to give line item adjustment on our guidance. We're giving an overall guidance number that says that were within in range that we gave initially. Marked the activity that we hadn’t planed for with known after plan is really marketing, pre-marketing activities, so that's why would fall into the SG&A line.

Frank Perier

And regarding your question on the Namenda, at this point we staying without projection that we in the guidance that we announced the beginning of this fiscal year.

Larry Olanoff

As I did indicate we did have a little bit wholesale activity on Namenda with their inventory taken off by that of date

Annabel Samimy - UBS

Okay. Thank you.

Operator

Your next question comes from Gregg Gilbert with Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Thanks I have a couple. First one share repurchase, certainly recognizing that business development licensing is a high priority. Larry, curious on your thoughts on share repurchases at the current time at the current price, and also what's in your guidance in that regard?

Larry Olanoff

Regarding -- my kind of philosophy with share repurchases is that we have a recent amount of cash, but that cash, the primary purpose of that cash really applies to furthering our development pipeline, whether acquiring individual products through license, or acquisition, or even acquiring a company. So we clearly believe that’s our priority; I don't think anyone in the company questions it. We have taken the opportunity to exercise our ability under the grant approved through our Board to do share repurchases, as we did a modest amount in the last quarter and we will continue to look for those opportunities as we go along. At this stage we clearly recognize the priority that cash is there to further development and advancement of our pipeline.

Gregg Gilbert - Merrill Lynch

And, Frank, in your guidance, is the actual number of shares at the end of the quarter what you are using for the rest of the year?

Frank Perier

We still anticipate shares to increase slightly progressively until the year, based upon option exercises, etcetera.

Gregg Gilbert - Merrill Lynch

Okay. And then, Larry, a follow-up on RGH-188. Obviously, at the end of the proof of concept base, you will know whether the program is going forward or not. But do you except to learn anything more specific about some of those attributes you called out earlier, that you observed in pre-clinical models? Could you help with those expectations for what we will know and what we won't know, probably in this next data plan?

Larry Olanoff

That's a good question, Gregg. I think we will get a first look, at obviously, the efficacies of the most important factors where we will see it. It's a good size study. But in addition, we should also get a reasonable first look at least at any short-term weight gain for which some of these compounds are clearly a problem, as well as any other general intolerability. As you mention, the extra pyramidal symptoms are something that are clearly differentiating factors for the class as a whole, and we have a number of other measures that we'll follow for exploratory purposes.

But I think about the weight gain issue, the EPS issues. These standard things that one worries about in this class balanced against the efficacy we should have first read out and it gives plenty of trial, later this year.

Gregg Gilbert - Merrill Lynch

Thanks and last the quick one. Would you mind sharing the actual PDUFA date for nebivolol?

Larry Olanoff

No, we don't comment on PDUFA dates.

Gregg Gilbert - Merrill Lynch

Okay, thanks.

Operator

Your next question comes from Gary Nachman with Leerink Swann.

Gary Nachman - Leerink Swann

Good morning. First question: when are we going to see the results of the other drug, milnacipran that is ongoing and how are all these being incorporated into the overall NDA package for the product?

Larry Olanoff

We expect to have results on the ongoing efficacy trial in the U.S., sometime in 2008. However, we don’t believe that study will be part of the initial filing, which we hope to make by the end of this calendar year, aside from any safety data that we accrue. We believe that the studies, the two completed studies, will serve as a basis for proof of efficacy; we have quite a bit of data both from the ongoing program, as well as safety experience in depression oversees, during the marketing period and the pre-marketing period, that I think will form a adequate safety assessment for the purposes of submitting the NDA. Should we need that data in the future and should fall within, we anticipate within the timeframe of our discussions with the FDA over their initial submission.

Gary Nachman - Leerink Swann

Okay. And what about the European study that’s ongoing, will we see data on that?

Larry Olanoff

I don’t believe we have commented on that and the study that's going, on to the sole authority of PFR. We are allowed to study, but we haven’t factored into any calendar in terms of data availability, as yet.

Gary Nachman - Leerink Swann

Okay. On nebivolol, what type of preparations are you guys doing and have to do for the launch of that product, and after approval, could you potentially launch it?

Frank Perier

We are doing a number of pre-marketing activities, getting sales marketing materials ready for the launch of the product. But we anticipate getting a response from the FDA, probably late in the fourth quarter of the calendar year; we anticipate big time positive results from the FDA on launching the product in the first calendar quarter of next year.

Gary Nachman - Leerink Swann

Okay, and could you review for us, how many sales rep do you plan to initially have for that product and where are they going to come off from?

Larry Olanoff

We will have multiple sales forces behind the product. We haven't made any public statements exactly how many sales reps we are still looking; details will be provide as we go forward, but they will come from ours. We don't at this point plan to expand the existing sales force, so it will be coming from our existing primary care sales force and our specialty sales force.

Frank Perier

Look, Gary, the Benicar, co-promotion period of our agreement terminates in March of next year. We will have some details available to us on the current plans from the Benicar program as well.

Gary Nachman - Leerink Swann

Okay, and there is no update with Benicar, as far as potentially extending that agreement, co-promotion for Benicar?

Frank Perier

The existing co-promotion agreement for Benicar, no there is no discussion with Sankyo regarding that. And again the Benicar agreement runs for 2014, our commitment to co-promote Benicar and Benicar HCT concludes in March.

Gary Nachman - Leerink Swann

Okay and then just quickly one last question. When do you guys expect to get the judges' ruling on the tab appeal for Lexapro? And if you could just comment broadly on how confident you are in your argument that you presented?

Larry Olanoff

First of all we are very confident in the case as a whole, both through the original federal court cases as well as in the appeal and we've not seen anything by report or documentation to suggest that we have any question marks in the quality of the case that we pursued. Regarding the date in terms of their decision, we really don’t know. Judge Laurie, who is a very respected jurist and is leading the elite panel here, has made decisions anywhere from 10 days to nine months after the deal was heard. So we wait as everyone does, if not more anxiously, for the result but we can’t, at this point we can’t forecast when that’s going to occur.

Gary Nachman - Leerink Swann

Okay. Thanks Larry.

Operator

Your next question comes from Michael Rockefeller with Morgan Stanley.

Michael Rockefeller - Morgan Stanley

Good morning. Larry, two questions on Aclidinium. First, can you talk about some of the potential benefits of this product versus the other anti-muscular and economy markets (inaudible)? And then second, do you plan to release the Phase II data for Aclidinium at the European Respiratory Society meeting in September? Thanks.

Larry Olanoff

Just to answer the second question first, regarding release of data, we are hoping that data will be released sometime in 2008 at a professional meeting. We don’t know exactly what meeting as yet. But we anticipate there will be further release of that data. More importantly, in terms of the attributes of Aclidinium based on what we have seen in the day thus far, what’s being talked about, is that clearly the compound has a different metabolic profile which means it’s cleared from the blood stream very rapidly, after it enters the blood stream. So it is active in the lungs but not particularly active systemically. That leaves with the potential for reduced side effects which are known within this class, such as bladder problems and dry mouth, which we think are important tolerability side effects. We also believe that the multiple-dose device that we offer with this product is quite unique and is going to be very well received by patients. And we feel we may have the opportunity to show a faster onset of the facts. I think if we get even two out of those three, we are going to have a substantially competitive product in the market place.

Michael Rockefeller - Morgan Stanley

Thank you

Operator

Your next question comes from Richard Silver with Lehman Brothers

Richard Silver - Lehman Brothers

Good morning. The Nemanda and Lexapro inventory changes versus last quarter, can you give us some sense of your expectation going forward, whether they’d be increasing or decreasing?

Frank Perier

I think our operating assumption is that the wholesales group has satisfied the normal levels, but they do move around there every quarter and there is several million dollars worth of sales on your product.

Richard Silver - Lehman Brothers

Okay, and then on your guidance that was provided in greater detail in last quarter's call, you mentioned, you expected on Lexapro for the share gain to be 10 basis points over the course of the year and today you said that you expected that to gradually increase. Can you tell us whether it is still expected to be 10 basis points?

Frank Perier

We are going to continue to stand by the number we gave in our guidance at this time.

Richard Silver - Lehman Brothers

Okay, and then also the Benicar co-promo. Can you give us some sense on the magnitude of the step-down in the economics after March of ‘08?

Frank Perier

Yeah Rich, probably we've been working on an operating assumption here that today we are getting a bit less than half of the profitability with our Reps participating in the co-promotion. Once we move into the residual period, which is for six years starting in April of 2008, we will get an equal and gradual step-down each year through 2014. By the time we are in 2014 we will be getting somewhere around a quarter of the profitability as compared to a bit less than half today. And it's an even step each year to get there. That's the best way to think about it, and obviously we don't incur any sales force cost for all reps that we would have to chart back against that during the residual periods.

Richard Silver - Lehman Brothers

Okay. And then on the sequential improvement that we saw in the gross margin, that you attribute to manufacturing efficiencies and that you expect to drift down over the course of the year. Can you give us a little bit more detail on what caused that and why it should drift back down?

Frank Perier

I really know just a couple of one-time benefits that we experienced in the first quarter across a range of products getting a slight benefit from the closure of our Inwood facility, on some of the smaller products. But again it's kind of overall, and we expect it to drift down into the guidance range.

Richard Silver - Lehman Brothers

Okay. Thanks.

Frank Perier

Thanks, Rich.

Operator

Your next question comes from Ian Sanderson with Cowen & Company.

Ian Sanderson - Cowen & Company

Hi, good morning. Thanks for taking the question. First, Larry, on the Nebivolol CHF data, might we see any new data on the CHF indication prior to our filing? Secondly, on another Gedeon Richter collaboration, any update on RGH-896 for neuropathic pain?

And also Frank mentioned the milestone, the $5 million milestone received in the quarter, is there a program there so that we might see additional milestones in successive quarters?

Larry Olanoff

Let me comment on the first two questions, I'll ask Frank to comment on the milestone question you raised. Regarding the CHF indication, we don't have any current plans that I am aware of to talk about the data, as we have indicated in the call. We have completed our analysis of that data. No surprises and we continue to look at it from a strategic standpoint and timing standpoint in terms of any further actions we pursue with the FDA and a filing of that information. Regarding the other Gedeon Richter's compound RGH-896, we're continuing to complete the preclinical package on that, getting that ready for Phase II start, and we'll give you further guidance when we bring that to completion.

Ian Sanderson - Cowen & Company

Thank you.

Larry Olanoff

I am sorry there was a question regarding the milestone. I’ll let Frank comment on it.

Frank Perier

Yeah. With regard to the milestones on the development program Cystic Fibrosis product in Europe, there is the potential for a milestone payment, a little bit larger than what we just recorded late in the fourth quarter or first quarter of the next calendar year.

Ian Sanderson - Cowen & Company

Okay. And a quick follow up on Nebivolol, do you care to elaborate on any of the other differentiating trials that are ongoing, and when might we see some data out of those? This would be in hypertension.

Larry Olanoff.

We've always said this in the past, which we will continue to comment on, that we do have plans as well as ongoing activities to differentiate the product against the existing agents in the hypertension area. We believe we have the potential to show some clinically relevant differentiating characteristics, the studies are designed for that purpose. That data will begin to flow out at or around the time of the approval on launch, and will be available to us at least through I would say a year, year and half—through that launch period in terms of current activities under way.

Ian Sanderson - Cowen & Company

Thank you

Operator

Our next question comes from Guss Roseville with Piper Jaffray

Guss Roseville - Piper Jaffray

Good morning. I have two questions, first I wanted to echo one of my colleague’s earlier questions on revenue guidance. At the end of the last quarter, you gave I think 8% of the $3.44 billion and today's revenues are now $128 million times, that's about the same amount. Do you expect an increase in revenue quarter-to-quarter or are you sticking by that guidance? And the second question is, what are your thoughts on the beta blocker overall market in hypertension? Is that a growing market or a slowing market?

Frank Perier

This is with regard to sales. We are just not, we don't give quarterly guidance and we've basically reaffirmed already where our annual guidance is for the year. So there is nothing that I have to add to that.

Larry Olanoff

Regarding the beta blocker market, as it currently exists. I mean basically there is one non-generic entry now I believe in the market. But in terms of the use of beta blockers on the dollar basis, there clearly is growth potential and it’s growing now and I think it will grow further. I think there is clear recognition of the value of beta blocker, especially in a certain class of patients who have got additional cardiovascular risk and they are widely utilized, more second- and third-line agents but there is clear a niche there. And we believe, we are entering within that we see our recognition, we believe that we have the differentiating properties of the Nebivolol. We believe in the commercial potential of this product and will push it very hard, when we launch.

Guss Roseville - Piper Jaffray

Thank you.

Operator

Your next question comes from Andrew Swanson with Citigroup.

Andrew Swanson - Citigroup

Thanks, I just had a longer term strategic question. Over the years, you’ve sort of been able to move earlier and earlier in the process in terms of licensing Phase II and even Phase I compounds. If you think about the company five years out, do you anticipate having even further internal research capabilities and actually becoming ultimately less reliant on this thing and if so are you already making investments in that regard? Thanks.

Larry Olanoff

We haven't discussed our thinking in terms of our year strategy for any kind of internal discovery effort. We haven’t taken that apart in terms of deciding that that’s not a place we would want to go. I think our strategy has been more focused on opening up all various opportunities for licensing or acquisitioning, as you mentioned, including earlier phase projects. And we have expanded our scope in terms of the various therapeutic areas and where we have pursued these early discovery projects, and that's included, expanding some of our total capacity at a laboratory level to support that, to see that formulation development for additional chemistry, or even what I would call desk-based pharmacology evaluation and persuasive additional study. So, we can do a lot of things and most things that large companies can do without actually initiating a more classical drug discovery effort. But, having said that and as excited as we are about that potential, it hasn’t taken our focus off of late-phase projects and even company acquisition opportunities to get products into the market place within this timeframe up to and including 2012. So we always like to emphasize that because that's an exciting part of what we do in the licensing and virtual discovery stage, but it will never substitute for our short term needs, but it will help feed our longer term potential.

Andrew Swanson - Citigroup

Thanks very much.

Operator

The next question comes from Angela Larson with SIG

Angela Larson - SIG

Good morning and staying in the strategic long-term thought process, could you give us an idea the company has in-licensed a lot of products and have been active in development, when you look out to that 2012 goal, what percent of that goal do you think can be mapped by the products you have today versus licensing and acquisition activity?

Frank Perier

We haven't given any kind of direction or forecast in that regard. We fully realize that we have a challenge in 2012 and we've not made any statements about 2013 being a banner year. Our real objective is to minimize the drop off from 2012 acutely, but more importantly to show the growth potential beyond the 2012, 2013 time frame. What I can say is that even we have a very appreciable Phase III pipe line. We have some products that we think will add substantially even in that time-frame in terms of our financial bottom line. But we also appreciate that we have risks going forward, so we are expanding the pipeline to have more shops on go. We've not hesitated to expand the scope of our pipeline in terms of therapeutic carriers or in terms of the stage in which we license the compounds.

So we're looking across all different opportunities, all different sizes of opportunities and some of these deals may even involve multiple projects. So we've not stopped and tried to do a calculation of what numbers we need to fill in a particular time frame. We think all of these opportunities are valid and we'll give them all the development resources they need to bring them in, in a timely manner.

Angela Larson - SIG

Thank you

Charles Triano

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

Operator

Okay sir, your final question comes from Joe Tooley with A.G. Edwards.

Joe Tooley - A.G. Edwards & Sons

Hi, thanks. With the end of the Benicar co-promotion period approaching, is there any possibility that Forest might be able to participate in the potential Benicar and morphine fixed-dose combo? Or is that something that you are no longer interested in, and it’s something that although you are slow with Nebivolol for hypertention.

Larry Olanoff

We've had a very good relationship with Sankyo. We continue in discussions with them for all potential opportunities and we've not come any further in terms of what those opportunities might be.

Joe Tooley - A.G. Edwards & Sons

Okay. Thanks.

Charles Triano

Thank you everybody.

Operator

This concludes today's Forest Laboratories, first quarter fiscal 2008 earnings conference call. You may now disconnect.

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