Forest Laboratories F2Q08 (Qtr End 09/30/07) Earnings Call Transcript

Forest Laboratories Inc. (FRX)

F2Q08 (Qtr End 09/30/07) Earnings Call

October 16, 2007 10:00 am ET

Executives

Charles Triano - VP, IR.

Larry Olanoff - President and COO

Frank Perier - SVP of Finance and CFO

Analysts

Guss Roseville - Piper Jaffray

Gary Nachman - Leerink Swann

James Kelly - Goldman Sachs

Greg Gilbert - Merrill Lynch

Annabel Samimy - UBS

Michael Rockefeller - Morgan Stanley

Mark Goodman - Credit Suisse

David Buck - Buckingham Research Group

Don Ellis - Thomas Weisel Partners

Dave Windley - Jefferies & Company

Frank Pinkerton - Banc of America Securities

Bert Hazlett - BMO Capital Market

Presentation

Operator

Good morning, my name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Laboratories Incorporated Second 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, Tracy, and good morning, everyone. This is Chuck Triano. Thanks for joining us this morning for the second 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 around 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.

Larry Olanoff

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

Our underlying business continued to perform very well during the quarter, as we saw an increase in prescription volume for all of our key marketed products Lexapro, Namenda, and Benicar. Reported earnings in the just completed quarter totaled $0.71 per share, which included a $70 million, that's a $0.15 per share licensing charge for our collaboration with Microbia announced during the quarter. Earnings per share growth excluding that charge represented growth of 15% compared to the year-ago period.

Looking first at Lexapro, sales in the quarter were $559 million, an increase of 7% year-over-year. It appears that wholesalers collectively had inventory levels approximately one and half days lower than at the end of the June quarter. This would account for an approximate reduction of $9 million in Lexapro sales for that quarter.

The SSRI/SNRI total prescription growth rate has been just over 5% so far this fiscal year, somewhat ahead of our fiscal year growth projection of 3%. Lexapro's total prescription share was down slightly during the fiscal second quarter, but we continue to focus on overall prescription volume for the brand, which continues to run on plan.

Moving to Namenda, the brand performance has remained strong with 24% growth in sales year-over-year. We continue to see a pattern of more aggressive treatment strategy for Alzheimer's disease in the form of combination use with cholinesterase inhibitors and earlier use of Namenda in moderate Alzheimer's patients.

It appears that wholesalers also do down some inventory for the brand, at the end of September quarter, after increasing their levels for the brand in the first quarter, and that collectively accounted for approximately four days less inventory, at the end of September, as compared to end of June, which equates to approximately $9 million in sales.

As a note, the fourth year of Namenda's five year new chemical entity Hatch-Waxman exclusivity period occurred today, which would be the first point the FDA would accept paragraph four challenges. We expect that given the success of Namenda, there will be of course paragraph four challengers, challenging the orange book listed pattern which expires in April 2010, but is expected to be extended until mid 2013.

We will be advised at such time when the FDA has deemed those applications complete and we will take appropriate steps in defense of the pattern.

As a reminder, a legal challenge by far would institute an additional 30 months of exclusivity beyond the current October 16, 2008 its expiration of the five year NCE exclusivity, thereby extending the Hatch-Waxman period until April 2011.

Regarding Benicar, it continues to grow in line with our planning. Preliminary reported end user sales which are recorded by our partners Daiichi Sankyo were approximately $182 million with our partnership pre-tax earnings for the quarter totaling $50 million.

The sequential decline in our Benicar contribution is due to higher marketing expenses during the just completed quarter compared to the prior quarter.

Looking at the managed-care situation for Lexapro and Namenda, we have largely completed calendar year 2008 contracting and do not see any meaningful difference in repaid levels or formulary positions for the coming year.

Regarding spending levels, we continue to channel significant resources behind our large current development pipeline, about which I will go into more detail shortly, as well as, into pre-launch activities for both nebivolol and milnacipran, while providing the appropriate support behind our branded products, Lexapro and Namenda.

Our most near term launch happening this week will be Azor, our recently announced co-promotion partnership with our long-time partner Daiichi Sankyo.

Azor is a fixed dose combination of Benicar and amlodipine indicated for the treatment of hypertension. We will support all portion of the details, during the three year co-promotion period, with a sub-proof of the approximately 1,100 Forest sales people who are currently detailing Benicar with the marketing and promotion expense for Azor borne entirely by Daiichi Sannkyo. We will be paid royalty based on sales, which scales according to pre-specified annual sales levels.

I would remind you that our obligation on the existing Benicar agreement calls for the Forest sale force to support that brand until the March 2008 end of that quarter, after which point, we will continue to receive a share of the product profits until April 2014, with an annual reduction in a level of those profits and current levels.

The other portion of the Benicar sales forces will be allocated to nebivolol for its plan launch early next year. Azor and nebivolol will not be sold by the same sales reps. We do not plan to expand the sales force for the Azor or nebivolol launches as the capacity returning from the Benicar effort along with some reallocation from Lexapro to nebivolol will provide an appropriate level of detailing activities for all of our brands.

I will now turn the call over to Frank, who'll provide more details on the quarterly financial results.

Frank Perier

Thank you Larry and good morning everyone. Fiscal second quarter total revenues which are inclusive of sales, pre-tax earnings from the Benicar co-promotion, interest and other income totaled $919 million, an increase of 8.5% from the year ago period. Revenues were comprised of $842.3 million of sales, which increased 8.2% compared to last year; $49.6 million of contract revenue from the Benicar co-promotion agreement, an increase of 2.6%, as well as, $24.9 million of interest income. Other income in the quarter was $1.4million.

Gross margin in the quarter came in at 77.4%; this level compares to 77.9% in our fiscal first quarter and 76.2% in last year's fiscal second quarter.

SG&A spending during the quarter was $280 million, up 8% from last year and remains on plan, which includes investment spending to support nebivolol and milnacipran.

Research and development spending was $170.7 million in the quarter, inclusive of the 70 million licensing charge in connection with the Microbia agreement, an increase of 82% in the year ago period.

For comparison purposes, I would highlight that the year ago period did not include any licensing or milestone payments and stripping out the Microbia charge, as there were no other milestone payments during the quarter, year-over-year growth for this line was 7.5%.

Our effective tax rate in the quarter was 19% due to the tax effect of the Microbia charge, which is treated as a discreet item under FIN48, which we adopted in the first quarter.

We anticipate that the 22% rate we've previously projected will carry through the second half of the year, and then our blended annual rate will be just over 21%.

During the quarter, we repurchased 4.95 million shares and continue to have an additional 17.9 million shares available under our existing program which was expanded in 35 million shares.

We will continue to be optimistic regarding our share repurchase program. Since, fiscal year 2005 the company has repurchased 71.6 million shares or 19% of the average shares outstanding. Actual shares outstanding as of September 30th were 313,467,710.

Our cash and marketable securities balances on September 30th was approximately $2.4 billion, an increase of 68 million from last quarter. Of this, 736 million or 31% of our cash and marketable securities are domicile domestically, with the remainder maintained by international subsidiaries.

In addition to share repurchase, we regularly evaluate uses of cash with the primary emphasis upon business development activities that can help establish a new product base to replace earnings which lose patent protection in the first part of the next decade.

I'll now turn the call back to Larry for our pipeline updates, and guidance review.

Larry Olanoff

Thanks, Frank. Regarding pipeline compounds, we are coming into a very busy period, where we will be receiving clinical trial results for an array of later stage compounds, as well as an FDA action on nebivolol and a planned NDA submission of milnacipran for fibromyalgia.

We just reported the results of our Phase II proof of concept study for RGH-188 for schizophrenia. In that six week trial performed in all US sites, RGH-188 had a daily dose of up to 4.5 milligrams per day demonstrated a statistically significant therapeutic effect when this group was tested separately for proof of concept purposes against the placebo treatment group on the primary end-point, the pan scale. The high dose group up to 12 milligrams per day demonstrated a numerical advantage on the pan scale compared to placebo, but this did not achieve statistical significance when implying the same statistical test against placebo. Of interest, these overall treatment effects were of similar absolute magnitude in both treatment arms, and were observed despite a large placebo effect.

Further, the drug was generally well tolerated with comparable overall drop-out rates across the active and placebo dose groups. As stated in yesterday's release of these studied top-line results, we are still analyzing the data further as we plan for the continued development of RGH-188 in schizophrenia.

We also have an ongoing proof of concept study for RGH-188 in bipolar mania, with results expected in 2008. Regarding nebivolol and the hypertension NDA filing, we have submitted the response to the FDA to issue the approvable letter and will receive six months review of that response, with an action date scheduled later this quarter. We are planning a January launch subject to final FDA approval after this review. We will then review our strategy of pursuing an additional indication for congestive heart failure for nebivolol.

We are in the process of compiling the NDA submission for milnacipran and plan to file around the end of calendar year. The NDA is based upon data from the two completed Phase III trials and data from these studies will be presented next month in more detail in Boston at the American College of Rheumatology Annual Conference.

We expect results from the Phase III Lexapro study in adolescent patients with major depression by the end of this calendar year. If those results are supportive, we would plan to submit the data to the FDA for possible labeling expansion resulting in what could be a distinct benefit for Lexapro relative to the other promoted products in this antidepressant category.

In addition, a once daily formulation of Namenda is being evaluated in a Phase III moderate-to-severe Alzheimer's study which is now fully enrolled and we will report out early in calendar 2008. Regarding aclidinium, our long-acting muscarinic antagonist is being developed for chronic obstructive pulmonary disease with our partner Almirall. Enrollment of two large Phase III international trials has completed and we expect top-line results for these studies in the second half of calendar 2008.

Phase III studies of ceftaroline a fifth generation injectable cephalosporin have progressed well. The first study in complicated skin and skin structure infections has now completed enrollment and the second study will complete enrollment later this year. We have also begun enrollment in the first of two studies in a community acquired pneumonia setting.

We anticipate the skin and skin structure results by the end of calendar 2008 and the cap or community acquired pneumonia results in 2009. These data from the two indications if supported would serve as our planned NDA submission package for initial marketing approval here in the U.S.

For our most recent licensing opportunity, linaclotide for chronic constipation and constipation predominant irritable bowel syndrome, one Phase IIb study is in progress for each of these indications. We expect to see data from these trials during the first half of 2008.

This is a very interesting compound with a novel mechanism of action, which acts locally in the gut with extremely low systemic exposure, which may be a very important safety benefit in this category. This mechanism is in contract with serotonin based compounds, which act systemically and given the withdrawal of Zelnorm earlier this year, this market remains a very large and very underserved opportunity.

We also are working towards generating proof of concept data for neramexane in Alzheimer's disease and we plan to conduct this study primarily outside the U.S. and are still securing study centers anticipating starting the study later this year or early next.

Regarding Oglemilast, the Phase II PDE4 program partner with Glenmark, the FDA has reviewed the additional data we submitted and has given us a partial response which allows us the option to move forward with a larger proof of concept study in COPD with some limitations. We will await further communication from the FDA while we assess our options with Glenmark to determine the optimal path forward for this program.

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

Moving to our financial guidance for fiscal 2008, we now estimate that earnings per share in the current fiscal year are likely to be between $3.10 and $3.20. If we add back the $0.15 per charge, net of tax for the Microbia licensing fee which was not included in the original guidance range of $3.05 to $3.15.

This new earnings per share estimate continues to include stock-option expense, as well as, SG&A spending for pre-launch activities for milnacipran as well as planned launch expenses for nebivolol along with some initial wholesaler stocking of the product. We also will update our original R&D spending guidance which was approximately $550 million inclusive of $85 million in plan milestone payments. We now project approximately $530 million of spending, which includes plan product milestone payments of $70 million, but excludes the $70 million Microbia licensing payment.

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

Charles Triano

Thanks, Larry and before we get to the Q&A session, I'll offer some sales figures that we've been giving here for the last few quarters on some of the smaller products and I'll do this in alphabetical order.

For Aerobid sales approximately 4.9 million, Aerochamber $6.1million, Campral $7.7 million, Celexa branded Celexa $5.9 million, we no longer sell generic citalopram. Cervidil $14.6 million, Combunox $500,000, Esgic $900,000, Europe $17.6 million, other generics, $2.3 million, Infasurf $3.3 million, Lorcet $2.3 million, Monurol $300,000, Tessalon $2.5 million, thyroid $14.3 million, branded Tiazac $2.7 million and generic Tiazac $4.2 million.

And with that Tracy, if you could please poll for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Guss Roseville with Piper Jaffray

Guss Roseville - Piper Jaffray

Good morning. I had a couple of questions today. Thank you for taking them. The first is, on your assumption of guidance for EPS for the year, what is the underlying assumption on share repurchases?

Larry Olanoff

Coming over the guidance number, we have assumed some moderate activity for share repurchase, similar to the type of activity we've experienced in the fiscal year to-date.

Guss Roseville - Piper Jaffray

Okay. Thank you. And then on the RGH-188 trial, have you disclosed the powering for the trial and what the baseline pan score was?

Larry Olanoff

No. We haven't disclosed those results as yet.

Guss Roseville - Piper Jaffray

And would you be willing to do so today?

Larry Olanoff

No. I think, we'll take the opportunity to disclose those results when we disclose the outcomes for the study in more detail, and that I think that will probably be at time of Scientific Meeting.

Guss Roseville - Piper Jaffray

Okay. Thank you.

Operator

Your next question comes from Gary Nachman with Leerink Swann.

Gary Nachman - Leerink Swann

Hi, good morning. First on the R&D expense, it's coming in a little bit lower than we've thought. Could you be a little specific as to what is getting pushed out, I guess into next year?

Larry Olanoff

No, I don't think anything is getting pushed out until next year. These are just adjustments based on program. Our status, one of the things that takes us down a bit is the desmoteplase program which was discontinued earlier this year.

Gary Nachman - Leerink Swann

Okay. And then following up on the RGH-188, and I know it's still early but, can you just sort of comment a little bit on why you didn't see a dose response? And do you think it's a possibility that you'll need to do some more Phase II work to get comfortable with what dose you should be using moving into Phase III?

Larry Olanoff

No, I think it's still a little early to determine whether we have a dose response or not. As I indicated on the phone, the magnitude of the absolute change in the pan score for the two groups were not substantially different and if you look at on any number of products that are in the market today, you will note trail-by-trial that it's unusual to see a dramatic dose response. In many cases you'll see, middle or higher doses that perhaps don't perform as well as some of the lower doses, maybe some unique characteristics about this compound that would tell us that the dose-response characteristics maybe a little different than predicted but I think at this time, we just don't know and it's something that we will test further. We haven't made a decision whether we will test that characteristic further in another Phase II trial or go right into Phase III, and that's something we'll be discussing both with our partner and with the experts that we employ to help us in the review of the data.

Gary Nachman - Leerink Swann

Okay. And when are going to have the data fully analyzed?

Larry Olanoff

I think it will take us another month and half before we have all the data in hand to make a learning decision about what options we want to take going forward.

Gary Nachman - Leerink Swann

Okay. And I guess at this point, could you comment maybe, just generally, on the discontinuation rate and I know the actives were similar to placebo, but you know, they did seem pretty high and does that have to do with the protocol the Phase II and is there a way to better control for that into Phase III?

Larry Olanoff

We haven’t announced anything about discontinuation rates whether they were high or low, but I can tell you that the rates were no different than what's been seen in US trials and at least in the past few years. So, they were clearly within the range that, so we could still make, I think, a very educated decision as to what the outcome of the study was. And clearly there was no propensity of the active treatment arms to show a difference in drop-outs due to adverse events, by example.

Gary Nachman - Leerink Swann

Okay. And then lastly Larry, when will we have the data for the third milnacipran Phase III study? And how do you expect that data to be amended to the NDA filing? Thanks.

Larry Olanoff

We should have the data available for that study in the second half of '08 and we would anticipate that would come in at a time when the NDA was under review and, if necessary, we could supplement as part of a response to the NDA with that data. But it will come in, in a timely manner in terms of, if we needed for purposes of establishing efficacy at this point in time, we are not anticipating that need.

Gary Nachman - Leerink Swann

Okay. But you don’t think the FDA will at least want to take a look at it, when it comes in?

Larry Olanoff

I think the FDA will want to look at the safety data, I think if we've been able to establish the efficacy, I think they will be satisfied.

Gary Nachman - Leerink Swann

Okay. All right, thanks.

Operator

Your next question comes from James Kelly with Goldman Sachs.

James Kelly - Goldman Sachs

Thank you and good morning. I was wondering if you could comment a little bit on the trends that we have been seeing more recently inside the depression market, and also for Lexapro, where numbers have, you know, looking at total prescription growth of around 1% on a weekly basis. And I’m interested, this is also a period of tough comps, do we see this as a period where it’s just tough comps and it gets better or is there something important going on with the market dynamic?

Larry Olanoff

I think if we look at the overall market growth for the year, we are actually seeing a growth rate which is little higher than what's predicted in our plan, which is encouraging. But I think clearly there has been a drop-off since the past few years where there was a major rebound. I think after the FDA deliberations on pediatric suicidality may have also been influenced in small part by Medicare Part D, although that’s not a huge market relative to the overall depression market.

There is also, I think, some of the drugs that declare share within this market are being used for other purposes as well, so there may be a little bit of confusion in that regard. But I think the growth rate you are seeing right now is probably more in line with the kind of go-forward growth rate that we would anticipate. I don’t --barring any other events, I don’t anticipate any major differences and you will see some variation in growth just seasonal impact as well. But I think the kind of numbers that we were looking at and say the 3% per annum growth is probably what we would anticipate going forward into the future.

James Kelly - Goldman Sachs

And as we take a look, and thanks a lot for the comments about the sales force mix and structure, as you take a look at Azor and nebivolol, as we take a look a little bit beyond that to milnacipran and aclidinium, can you help us understand a little bit about what sort of potential or additional sales force needs could we be looking at or how you think about it strategically versus the use of sales force today?

Larry Olanoff

That's good question. I think in assuming that we continue to establish our sales force across the current brands and the entry of nebivolol and continuing to support the Azor co-promote, in at least at some point within that time period, we would anticipate that we would go back and look very carefully at what our needs were. But I don’t think it would be at all inappropriate, at this stage, to consider that we could probably expand the sales force to accommodate both milnacipran and aclidinium launch and I think there would be a matter of looking at both the primary and specialty segments and determining how that would be blended in terms of any growth in the sales force.

James Kelly - Goldman Sachs

Great, thank you. And just two quick pipeline updates, to make sure I have done. For the Glenmark compound, the PDE4 said that, you were waiting for some further information and discussions with the FDA. Do you have a sense of timeline on when we are going to hear next on steps followed with this product?

Larry Olanoff

I think that we've got a number of questions that we put into the FDA, some of which they responded I think, was enough to let us know that we could in fact start a larger scale three-month study in COPD which was our initial intent. We have a few other questions outstanding that help us to find the long-term development program and then we would hope to hear back from them within the next two to three months.

James Kelly - Goldman Sachs

So, will you start the larger scale short-term study until before you hear back from them or…?

Larry Olanoff

We will be in discussions with our partner in terms of what is our next best step to take.

James Kelly - Goldman Sachs

Okay, great. And then lastly, given what we know at this point about RGH-188 and the data that came out last night. If we do see into that, if there were final results and this has been with speculations are that the low dose did have statistical result, the high dose did not. How do we think about what steps are needed to get this product to full approval? Do we see a few Phase III products? How is this data usable in getting to an approval?

Larry Olanoff

I think the data is very useful to tell us that we are getting an effect up to receptors we want to get that effect. And clearly based on the overall characteristics of the drug, both the efficacy and the kind of parameters we measure in general in this patient population, we are very comfortable that we are seeing what looks to be a therapeutic effect mediated that, dopamine receptors for this product. We think that the characteristics of this product which are unique relative to the modulation of different dopamine receptors, as well as, certain serotonergic receptors may also be realizable in this data although it's early days. And we are actually looking forward with great expectation to the bipolar mania study as well, because that is becoming a bigger and bigger market driver for this whole category. So, I think we have to look at this data in consort with that data to ultimately get a better sense of where this drug will profile. But in the meantime, we will be looking at great depth within the schizophrenia data to better direct us on how what next steps are optimal to move the product forward within that indication. And we are not adverse to moving the two indications forward in somewhat divergent pathways if necessary to get to the market rapidly with the greatest impact.

James Kelly - Goldman Sachs

Thank you very much.

Operator

Your next question comes from Greg Gilbert with Merrill Lynch.

Greg Gilbert - Merrill Lynch

Thanks. I have a couple. On nebivolol, can you give us sense of how much spend there will be in the guidance relative to that, the amount of pipeline, so you alluded to?

Larry Olanoff

For Nebivolol, we're looking at just under 80 million spend, in the current fiscal year excluding sales force.

Greg Gilbert - Merrill Lynch

And I would assume a much smaller amount for just the pipeline fill in the March quarter?

Larry Olanoff

Yes.

Greg Gilbert - Merrill Lynch

Okay. What are your thoughts on managed care access out of the box on the product?

Larry Olanoff

So far, we've been meeting with various managed care groups and advisory panels and so far, the comments back to us have been fairly encouraging. Data blockers as a rule have been well carried or well positioned within the managed care plans, they are not a huge part of their spend and they've been -- as I said, they've been well received in the past with good positioning and reasonable rebates. A lot of that I think is also historically driven by the price of these products despite the availability of generics but also their ability to differentiate against those generics by general profile as well as indication. So, thus far, I guess the short answer is, we don't anticipate any major problems establishing ourselves on formulary, it may take a few months after the launch, but we think we know what messages we have to prepare for and I think the formularies won't be putting up any major walls or resistance within this categories as a whole.

Greg Gilbert - Merrill Lynch

And Larry, on the review of the NDA itself, is there anything you can offer to make us confident that your confidence in the January launches is, I guess well founded relative to information you have that we don't? Or you're simply assuming because you already have an approvable letter and you believe your answers were sufficient that you ought to assume a final approval?

Larry Olanoff

That's where we are, you stated it very well.

Greg Gilbert - Merrill Lynch

And then --

Larry Olanoff

We just went back and forth but not so far, nothing that is a signal to us of any problems with an action date as we planned.

Greg Gilbert - Merrill Lynch

And lastly Larry, how would you characterize the number and quality of business development opportunities that you see out there at this point?

Larry Olanoff

We see quite a few. I mean, we are not waiting for them to come to us. We are out there actively beating the bushes as well, and overall the quality has been surprisingly good and it's very diverse. And I think as long as we remain opportunistic and willing to consider all opportunities including co-promotes that makes sense for us and not limit ourselves, therapeutically or in concept, I think there will be plenty of opportunity for us to consider and work towards deal structure. So, we keep pretty busy and I would say, at any given time, we have any number of potential deals there that are reaching a stage and maturity which look serious to us.

Frank Perier

Deal structures, just to supplement that, certainly include our traditional licensing as well as opportunities to make outright acquisitions of companies and products.

Greg Gilbert - Merrill Lynch

Thank you.

Operator

Your next question comes from Annabel Samimy with UBS.

Annabel Samimy - UBS

Hi, and thanks for taking my call. I had a couple of quick questions, one of them was, is there, do you have any potential quotes you can give us on RGH-188 in terms of the tolerance, are you seeing some different side effect profile and some of the others given its unique mechanism?

Larry Olanoff

The date, it is very early in the sense, that’s we really are waiting for additional breakouts of the data and a lot of the safety information. But we haven’t seen anything on quite yet. But in terms of the adverse event profile, it’s looking to fall in where we pretty much predicted. It would be clearly at the more beneficial end of the atypicals and nothing there that looks like any single, either unanticipated, or one that would be of concern to us in terms of launching this product competitively into the marketplace. That's about all I can say at this point.

Annabel Samimy - UBS

Okay. What might you expect from some of the earlier phase that you have done in terms of improve side effect that profiles or what you are hoping for?

Larry Olanoff

Well, we are looking at the classical categories that is somewhat limited certain members of typical class whether that be metabolic, cardiovascular or traditional EPS numbers, and such taking into account that other than whether there is a QT increase or clear over diabetes when getting into things like EPS it’s a bit of an apples and oranges comparison as well and we are looking forward and also to seeing the bipolar mania date in this regard.

But thus far as I said, the date is very early. We only have very top-line data but we are not seeing any signals to put this in a place where we think we have either a problem with this compound and specifically whether there is any issues that perhaps would put us in a negative light in terms of a safety profile.

Annabel Samimy - UBS

Okay. Then on nebivolol, you'd mentioned that you are going to make decision on CHF after you get approval. Do you feel that you are going to have to conduct any further trials on, for the CHF indication or is this single study enough at this point?

Larry Olanoff

Good question. We are anticipating going to the FDA talking to them about the senior data is giving them a proposal while we think that would be adequate, but we would also have backup decisions if necessary.

Annabel Samimy - UBS

Have you started any of the trials or backup positions in terms of having to start new trial?

Larry Olanoff

No, we haven’t started anything as yet.

Annabel Samimy - UBS

Okay. And then just one last question if I may, on -- given that [customers] are seeing 2007 or year before their market exclusivity, has gone we are obviously going to expect in paragraph four or five, can you just go through your patent strategy, again you get a 30 month stay, you are looking for patent restoration, how are you trying to get the patent restoration, again of the patent that we see is related to the treatment and preventions through both scheme. Can you sort of go through the strength of that patent for us?

Charles Triano

Annabel, this is Chuck. Yeah, as we referenced in the prepared remarks, we expect there will be paragraph four challenges today being that this is the first day the FDA would accept those challenges, and we likely get notification anywhere from two to six weeks once the FDA deems the application is complete. So, what that does under Hatch-Waxman it will trigger a 30 month stay. That stay is added to the end of the fifth year, so that fifth year is October 16th of '08 plus 30 month is April 16, 2011. That becomes the Hatch-Waxman stay before any potential pediatric extension that could go beyond that.

And presumably we will be defending our patent. As referenced earlier the patent today listed in the orange book, 703 Patent expires in 2010 and under Patent Term Restoration which we applied for last December, which passed back approval time plus a portion of our Phase III time, we expect adding that back to the patent will bring us approximately September of 2013 for ultimate patent expiration day if the patent is upheld to the legal process.

Annabel Samimy - UBS

Okay. In terms of what type of patent it is, are you comfortable on the strength of the patent or?

Charles Triano

Issued patents have presumption of validity; it is a used patent covering Alzheimer's disease.

Annabel Samimy - UBS

Okay. Thank you.

Charles Triano

Sure.

Operator

Your next question comes from Michael Rockefeller with Morgan Stanley.

Michael Rockefeller - Morgan Stanley

Good morning. Question on linaclotide, I was wondering if you could just remind us, what the design of the Phase IIb study is and whether we are going to see data in chronic constipation before the data in IBS given that Microbia had said that-that study will be done before hand?

Larry Olanoff

Yeah. We haven't given specific terming, Mike, other than to say that there are two studies of 300 patient and a 400 patient study. And we've been loosed with the timing at this point just referring to the first half of 2008, and these are both proof of concept studies or larger studies here that we certainly will look forward to the results. But at this point we haven't been more specific on the timing of those top-line data.

Michael Rockefeller - Morgan Stanley

Can you just talk about sort of maybe the risks going from Phase IIa to Phase IIb with this? And then also just, reiterate the opportunity here with this market?

Larry Olanoff

I think at this point the studies that are designed that are out there assuming we get a clear answer for both indications it should be sufficient to allow us to design the Phase III program.

For the chronic constipation, I think the end point is fairly straight forward and that at least the legacy of drugs in that particular category has not been a problem safety wise, so we would assume that its relatively clear pathway. In the constipation predominant IBS side, clearly there has been a legacy of products with problems or at least in IBS in general and Zelnorm being the most recent case for the constipation predominant category. And I think the unique characteristics of this product in terms of its apparent local action and it's almost negligible or zero systemic absorption puts us in a very good place, after demonstrating efficacy in terms of why this would be a great product for this category in view of the regulatory needs.

Michael Rockefeller - Morgan Stanley

Okay. Thanks a lot.

Operator

Your next question comes from Mark Goodman with Credit Suisse.

Mark Goodman - Credit Suisse

Yeah, couple of questions I guess. I'm not sure if you mentioned this, but on $18 million of the wholesalers stocking, can you break that out between Namenda and Lexapro?

Second question is, the 530 million of R&D, so that's 70 million of milestone, so does that include 28 from the first quarter and then nothing in this quarter. And then, coming up in the third quarter, the 20 million for Azor?

And then the third question is, can you talk about life cycle extension strategies for Lexapro?

Frank Perier

Okay Mark, just to deal with the first two questions. As we've referenced earlier, that the 18 million of wholesaler stocking impact, basically it's evenly split between Lexapro and Namenda, the days are very different but the value per day is also very different, and ends up being almost evenly split.

Mark Goodman - Credit Suisse

Okay.

Frank Perier

99. And, just as a refresher, Azor is an approved product. That payment will be then amortized over the life of the deal. So, it's not going to be a one-time charge to P&L, so therefore it's not in the R&D milestone payments.

Mark Goodman - Credit Suisse

Okay. Life cycle?

Larry Olanoff

On the life cycle management on Lexapro, as we said in the past, we continue to look at a number of different options, identified either by ourselves our partner Lundback in, but we have not made any statements public relative to what we maybe doing at this time or planning to do in the future, but clearly it's an area that we continue to explore.

Mark Goodman - Credit Suisse

Have you -- I mean would you even mention if you started clinical trials on anything?

Larry Olanoff

No, we decided for competitive reasons, we'll hold our results close until we actually have them in hand and then we will prepare to talk with people.

Mark Goodman - Credit Suisse

Okay.

Operator

Your next question comes from David Buck with Buckingham Research Group.

David Buck - Buckingham Research Group

Yes, thanks for taking the question. First Larry, your comments on the antidepressant category indicator that you saw some market growth was above what you'd expect going forward. Can you talk about whether you are confident in Lexapro and continuing to grow its CRX going forward?

And on RGH-188 can you tell us what differences there are in terms of patient numbers of enrollment and bipolar mania indication and is there any ability to, can you give us a sense of what the commitment is for both indications to the agency in terms of number of trials, remind us whether its two Phase III studies for both indications, thanks?

Larry Olanoff

I guess I will go backwards, for each indication the intent would be to submit, for acute mania and for schizophrenia there would be the requirement for two Phase III trials in each indication. Without going into detail, the study in bipolar mania is of a similar size to what we did in schizophrenia with similar intent to terms of trying to determine results from the proof of concept standpoint as our primary goal. As far as the Lexapro growth rate, we would see at this point Lexapro growing in terms of total volume of Lexapro scripts growing probably at close to the market growth itself. We continue to look for opportunities to have a small increase in share growth or maintain share growth as necessary, but so far we're tracking pretty along the lines of market growth rates and of course we have the opportunity for revenue based on any price increases we might take.

David Buck - Buckingham Research Group

Okay. So the bottom line you are looking for some type of rebound then in, in the growth of deal over volume?

Larry Olanoff

I think it’s too early to argue whether a particular set of weeks or even a few months trend in a growth rate it's going to dictate the annual growth for the year as a whole, while we say that’s balanced by higher growth rates earlier this year or whether that actually is a strong projector for subsequent years, again we would as I said earlier, right now our estimates is annual growth in the foreseeable future should be above 3% on average.

David Buck - Buckingham Research Group

Okay. Thank you.

Operator

Your next question comes from Don Ellis with Thomas Weisel Partners.

Don Ellis - Thomas Weisel Partners

Thank you. Most of my questions have been asked and answered. I just have one question regarding RGH-188. You’ve mentioned that this compound acts on dopamine and serotonergic receptors. Can you tell us what you know now whether RGH-188 is an antagonist or agonist for these two receptors and if there are any other receptors that you believe are may be acting on? Thanks.

Frank Perier

Yes, Don we’ve talked just loosely about an effect on D2 and D3 and that’s more and more a unique characteristics of this compound is that it is acting both on D2 and D3, although we haven’t gone into a tremendous amount of detail relative to that.

Don Ellis - Thomas Weisel Partners

Being whether agonist or antagonist to those?

Frank Perier

It’s a partial agonist of D2 and a D3 antagonist I believe. No sorry.

Larry Olanoff

It’s an antagonist it had -- I am sorry, we have to go back and confirm that. It basically, it’s exerting D2 properties that would be effectible, in effect of an antagonistic purpose that’s a category you need for all these drugs effectively but whether it’s a partial agonist or partial antagonist maybe subject to interpretation.

Don Ellis - Thomas Weisel Partners

Okay, great. So, what about D3? Do you know what that how it acts there?

Larry Olanoff

Again, we will say at this point it's active on D3, I mean we can clarify that in the future time.

Don Ellis - Thomas Weisel Partners

Okay, great, thanks, and then with respect to serotonergic receptors?

Larry Olanoff

It operates on a number of serotonergic receptors but once that we would describe more in terms of potential efficacy rather than any potential side effect driven events.

Don Ellis - Thomas Weisel Partners

Terrific, thank you very much.

Operator

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

Dave Windley - Jefferies & Company

Hi, thanks for taking my questions. First, can you tell me if you specify the exact nebivolol action date?

Larry Olanoff

No. We haven't Dave, later this year with the launch projected for January of next year, but we have not given the specific date.

Dave Windley - Jefferies & Company

Okay, and then clarifying on the comments on Azor in the sale force, is it the portion in the sale force that has been detailing Benicar that will be detailing Azor or a portion of that force, portion of the portion in other words?

Larry Olanoff

No, right now we have roughly 1,100 sales reps who are detailing Benicar and will do so until the end of March. We are taking about half of that group and giving them Azor as well, so they will have Azor along with Benicar and then we will drop Benicar at the end of March and continue with Azor.

Dave Windley - Jefferies & Company

And at the point that Benicar is dropped, will Azor then be detailed by the full 1,100?

Larry Olanoff

No. the other potion will be detailing nebivolol. So, our contractual obligation for the co-promotion will be covered by that half of the Benicar sales force.

Dave Windley - Jefferies & Company

Okay, all right. Moving to milnacipran, have there been any changes subsequent to the release of the second study data have there been any changes to the third study?

Larry Olanoff

We've increased the size of the third study recently, about the trials in patients but other than that we have not detailed anything else Dave.

Dave Windley - Jefferies & Company

Okay. And I am sorry, and that was increased to 1000 patients?

Larry Olanoff

I believe so, yes.

Dave Windley - Jefferies & Company

Okay. I think that's all I have thank you.

Larry Olanoff

Okay.

Operator

Your next question comes from Frank Pinkerton with Banc of America Securities.

Frank Pinkerton - Banc of America Securities

Hi. Thank you for taking the question. Can you please, just walk me through the trial design for Ceftaroline? And given comments from the FDA, I believe it was last week; are there any planned changes to those trials?

Larry Olanoff

For the skin and skin structure trial these are standard designs in terms of against comparator agents, so one dose group and now there is nothing in context there. I think all the parameters in terms of the design, the statistical design, non-inferiority margins that hasn't changed.

On the community acquired pneumonia trials. The first trial is ongoing. As I said, it's recruiting well. We've not made any significant changes to that trial, either in the basis of any FDA comments directly in terms of what they put out public guidance and we plan to initiate the fourth trial, which is the second CAP trial very shortly. But nothing dramatic in terms of any impact by in terms of FDA recent statements, and as far as the design, again it will be standard comparator agents. I am not sure we've disclosed that in the past.

Frank Pinkerton - Banc of America Securities

Thank you.

Larry Olanoff

I would take an opportunity just to clarify the question earlier about the D3 and D2 receptor effects for our RGH-188. It is in fact a antagonist at the D3 receptor and it's a partial agonists at the D2 receptor, so what I said earlier was correct, as the partial agonist effectively serves as an antagonist properties at the D2 receptor as well.

Charles Triano

And operator, I think we have time for one more question please.

Operator

And your last question comes from Bert Hazlett with BMO Capital Market.

Bert Hazlett - BMO Capital Market

Thanks, I appreciate the question. I actually, have two. First on milnacipran and fibromyalgia. Could you just discuss the potential positioning for that? I know there is a large opportunity there but competitors with similar indications and data seem to be having a penetration rate on the market, that's fairly robust. Can you give us a sense of how -- as this is evolving, how you see, has your enthusiasm picked up or has it decreased for that compound? And then I have another question.

Larry Olanoff

We continue to be very enthusiastic about the opportunity. And during the market, it's as anything the -- our competitors are doing a very good job, educating that market and making a much greater awareness of the disease and how to evaluate and treat the disease. So it's very much preparing to feel for us as we come in. We're quite prepared to come in a little bit later in the scheme, we've done this many times before. We have an established mechanism which in part reflects at least one of the compounds we anticipate will be in the market at or around the time we enter. And, we're going to be running at very similar parameters that they've put out there in terms of what is important in the treatment of the disease which includes control of pain. But also very importantly, impact on patient's quality of life and global response and then a lot of other sub-categories that relate to all those parameters. So I think, we'll share our common messages and we think we can share them competitively.

Frank Perier

And I would add Bert, we also expect that there will be a significant percentage of patients who are on multiple therapies. So, we think there will be a lot of combination, you'll see given that Lyrica is a very distinct, more analgesic effect, versus milnacipran or duloxetine. So, we do think combination therapy will be prevalent. This is a very heterogeneous patient population and as Larry pointed out, I think the efforts at least one big competitor at this point who is in the market, is only serving to broaden the opportunity for everybody here.

Larry Olanoff

And there is also -- and this is also opportunity for switches in any pain market today, patients who are not fully satisfied on their current regimen is even look towards combination therapy or looking to replace products and go on and off various regiments. So, we will there both for primary use and for switch opportunities.

Bert Hazlett - BMO Capital Market

Thanks, and just taking a step back for a second. How should we consider, how you think about the balance between EPS growth and EPS performance and the urgency with which you are operating in terms of licensing and business development? How should we and the investment community be thinking about you and your management team balancing those two?

Larry Olanoff

We believe as we stated earlier this year and we believe that any opportunity to improve on EPS performance is important and we obviously work very hard with our in line products to achieve that, but we've also stated many times that we would, if we had to sacrifice EPS for the purposes of bringing in significant new licensing opportunities. Our ultimate vision is directed towards the 2012 timeframe where -- we've said this many times and we believe in a healthy way, we're obsessed with delivering on that timeframe in terms of bringing new products and to replace products that will loose exclusivity and to do that, we believe its important that we look carefully at any licensing opportunity that across the desk and any ones that clearly are to our benefit that we devote the necessary resource to acquire them and develop them. And that includes acquisition of products as well as acquisition of companies that fit that need.

Bert Hazlett - BMO Capital Market

Thank you. I appreciate it.

Charles Triano

Thank you everybody.

Operator

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

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