Sepracor Q3 2007 Earnings Call Transcript

Sepracor, Inc. (SEPR)

Q3 2007 Earnings Call

October 30, 2007 8:30 am ET

Executives

Adrian Adams - President and CEO

David Southwell - EVP and CFO

Bob Scumaci - EVP of Corporate Finance, Administration and Technical Operations

Mark Corrigan - EVP of R&D

Mark Iwicki - EVP and Chief Commercial Officer

Jonae Barnes - SVP of IR and Corporate Communication

Analysts

Greg Gilbert - Merrill Lynch

James Kelly - Goldman Sachs

Matt Duffy - BDR Research

Biren Amin - Stanford Group

Larry Neibor - Robert W. Baird

Frank Pinkerton - Banc of America

Andrews Swanson - Citigroup

Ian Sanderson - Cowen

David Woodburn - ThinkEquity

Hudson Boyer - Wachovia

Presentation

Operator

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

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

Adrian Adams

Thank you operator, and good morning, everyone. Thank you for joining us for our third quarter 2007 financial results webcast.

With me this morning are David Southwell, Chief Financial Officer; Mark Corrigan, Executive Vice President of Research and Development; Bob Scumaci, Executive Vice President of Corporate Finance, Administration and Technical Operations; Jonae Barnes, Senior Vice President of Investor Relations and Corporate Communications; and our newest member of the executive management team, Mark Iwicki, Executive Vice President and Chief Commercial Officer, who joined us early this month after a very successful period with Novartis.

Before I proceed, I would ask Jonae to read our forward-looking statements. Jonae?

Jonae Barnes

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

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

Thank you, Adrian.

Adrian Adams

Thank you, Jonae, and thank you again, everyone, for joining us this morning. As you know, we released our third quarter results this morning in addition to announcing further steps towards our goal of delivering sustained peak financial performance for Sepracor on a going-forward basis.

During the last quarter and in early October, we made additional significant strides in expanding our LUNESTA franchise outside the United States through a development and commercialization partnership with GlaxoSmithKline in all international markets outside of North America and Japan.

This, together with the already announced partnership with Eisai in Japan, should help us to ensure that many more patients with insomnia can experience the benefit of this well-differentiated product.

We also recently announced the appointment of several experienced commercial managers, with proven track records, to key strategic posts in the organization. Each of these events is crucial. So execution of overall corporate strategy was to deepen and broaden our management team's strengths and capabilities, and reinforce our objective to deliver enhanced performance and productivity across all our commercial organization, while fully leveraging our product franchise. Further important objectives include growing our research and development pipeline and aggressively pursuing corporate development and licensing opportunities.

Please now refer to slide number 2, as I briefly recap the financial results for the quarter. I will then provide further commentary on each of our commercialized products and our commercial re-organization efforts later in the webcast.

For the third quarter 2007, we delivered solid results in the phase of XOPENEX Inhalation Solution revenues, following the CMS decision to lower the reimbursement price for XOPENEX in the Medicare Part B. This CMS decision went into effect on July 1st

For the quarter, we recorded total revenues of $283.9 million, which was a slight decrease of 1.9% from revenue recorded during the same period last year.

LUNESTA performed well during the quarter with revenues of $160.9 million, which was an increase of 13.6% of LUNESTA revenues for the third quarter of 2006.

XOPENEX HFA also posted an increase of 32.3% in revenues over the same period last year, with the third quarter total 2007 revenues up $17.3 million.

As mentioned, we saw a decline in XOPENEX Inhalation Solution revenues of around 25% for the third quarter 2007 versus the same period in 2006, attributable mainly to the change in XOPENEX Inhalation Solution reimbursement on the Medicare Part B.

BROVANA, which was launched in April of this year, had revenues of $2.4 million for the quarter. For the nine months ended September 30th, total revenues reached $893.5 million, which was an increase of 6.4% over the same period in 2006.

The EPS for this period decreased by 18% to $0.61 compared to the same period last year. Included in the 2007 nine-month period EPS was an after-tax charge of $0.28 that we recorded in the first quarter, resulting from the settlement of litigation related to tecastemizole.

Our cash, and short and long-term investments remained strong at $932 million as of the end of the third quarter 2007, an increase of $71 million from the second quarter 2007. This is an excellent position in which to be, in order to allow us to pursue potential corporate developments on licensing initiatives.

Please now refer to slide number 3, a slide that refers to LUNESTA's performance. As you can see from the chart on the left-hand side of the slide, although LUNESTA's market share has remained relatively flat, year-over-year, we have seen a 13.3% increase in total prescriptions and a 7.4% in new prescriptions on an annualized basis versus the same data point from last year.

We're pleased that we have been able to hold onto market share following the generalization of Ambien in April of this year, and we believe that this market will continue to grow significantly next year. Importantly, we saw continued strength in managed care access for LUNESTA, with unrestricted access now being available for approximately 85% of all managed care lives. This contrasts with Ambien CR, which has 77% access as of the end of September. One of our tactical focal points right now is towards pulling through this excellent managed care access position in the prima care area, which is focusing on growing overall total and new prescriptions.

Turning now to slide number 4. As part of our strategy to accelerate LUNESTA's goal, we've organized a new consumer marketing and promotional campaign in September. Our extensive market research has just shown that most doctors and patients, when choosing the treatment for insomnia, look for an agent that gets the patients to sleep fast, keep them asleep, can be used in the majority of patients, and has a minimal impact on them the next day. These attributes are seen with LUNESTA, and are supported by data from a large well-controlled clinical trial database of LUNESTA.

As you can see, our new campaign has an important focus on the premise that a great night's sleep leads to great next day. By fully capitalizing on LUNESTA’s strong product profile, we hope to make LUNESTA the number one patient-requested sleep aid and to accelerate growth into the future as the market continues to grow.

Moving now to slide number 5. I would like to comment on the performance of XOPENEX, with a particular focus on XOPENEX inhalation solution. Encouragingly, we can see from this slide that CMS’s implementation of the lower reimbursement rate of XOPENEX inhalation solution has, to date apparently, had a little impact on the retail market for the product. In fact, as of the week ended in October 12th, market share of total prescriptions in the short-acting beta-agonist inhalation solution market remained at or around 24%.

Further, we anticipate continued retail demand for XOPENEX Inhalation Solution, since a significant percentage unit sold for the retail channels are for pediatric patients through announcements.

Despite a mild allergy in flue season, which impacts the incidences of asthma flare-ups, hospital demand for XOPENEX Inhalation Solution has remained solid, and we share the hospital market of 32.9% for September. We’ve actively contracted with a number of Home Healthcare companies in the wake of the CMS decision to reduce the reimbursement rate for XOPENEX Inhalation Solution.

We believe this contracting effort has been successful in helping to maintain availability of XOPENEX Inhalation Solution or Medicare Part B beneficiaries, and we have seen a relatively steady unit demand from this channel since the July 1st implementation date.

Please now refer to slide number six, which illustrates the continued growth and performance of XOPENEX HFA. The XOPENEX HFA performed well during the quarter with total prescriptions-market-share at 8.3% of the short-acting beta-agonist MDI market in September, a new prescription share coming at a 9.5%. As you may recall, this is a highly competitive market, but it's undergoing a marked transition as CFC-containing albuterol MDIs must be phased out before the end of 2008.

Currently, approximately one-half of the market has transitioned from CF based MDIs to HFA MDIs, which means that we believe there remains a significant opportunity for XOPENEX HFA to gain greater share in the market over the next 12 months. Access through managed care also remained strong with Tier 1 and Tier 2 coverage at 59% of managed care lives.

Turning now to BROVANA, slide number seven. As you can see from this graph, which encompasses both retail and non-retail channels, we're now beginning to see increased amounts for BROVANA. We believe that this growth, particularly as seen in September, can be attributed to the issuance of a temporary J-Code for the products from the Medicare Part B, which went into effect at the end of the second quarter of this year.

As we mentioned in our last webcast, the application for a permanent J-Code for BROVANA is under review by the Centers for Medicare and Medicaid services, and we expect to hear from CMS soon regarding its position on our application. If we're awarded a unique permanent J-Code, we would expect it to be implemented as of January 1st, 2008. We believe that implementation of a permanent J-Code would help to further simplify the billing process for the product under Medicare Part B and could therefore have a demonstrable impact on prescription demand.

That completes my commentary on the products, and I would now like to turn to another important announcement we made this morning, concerning a planned reduction in the size of the Sepracor sales force. Please refer to slide number eight.

On our last webcast, I referred to a strong desire, and indeed our objective, of building a stronger, more productive, and best practice commercial organization. This is important to not only more fully leverage our current differentiated assets, but also to be in a position to maximize the potential opportunities that we anticipate will come from our R&D pipeline, and hopefully through corporate development and licensing.

In a broad sense, the two areas where we've been focused are firstly the recruitment, and retention and development of talent in the sales and marketing area. And secondly, striving to ensure that we have the right sales-force structure inside and in place, given the opportunities and competitive environment in which we operate. And the last point, we would be working with an external consultancy that specializes in the area of sales-force productivity. Much of this work is now being completed, and I would like to summarize where we are.

As you may have seen, we recently announced the hiring of Mark Iwicki, our new Executive Vice President, and Chief Commercial Officer; and Mr. Jay Smith, our new Senior Vice President of Sales. Both of these professionals have joined us from Novartis, where they had great success in building major brands, of implementing creative market strategies and of course, in developing best practice sales-force productivity, as evidenced in the number one rankings within the industry.

These hires, together with a new Vice President of Marketing and a new Vice President in New Product Planning and some very talented people for Sepracor, should significantly enhance our capabilities and commercial effectiveness, moving forward. We are looking forward to their immediate contributions.

With respect to the sale-force, we've announced a reduction of approximately 300 positions. Within this initiative, we are examining our sales organization, in-depth, to identify areas for improvement that will drive Sepracor's success in 2008 and beyond. We believe we have an opportunity to significantly raise the performance level of our sales organization and can do so quickly, so that we can see a positive impact in 2008.

We also believe that this restructuring will give us the necessary selling effort to support LUNESTA, BROVANA, and XOPENEX. Although we are decreasing our total items, we will be increasing our efforts against what we believe are the most valuable positions for all products. This focus will allow us to continue to have high expectations for our product sales in 2008.

From a sales force perspective, we will be holding all levels accountable to sales goals next year. We are plying to increase the leverage in our incentive plans and to establish more closely tied pairs to performance. We're also developing a new sales training program to help our representatives and managers develop the skills they need to achieve their aspirations and goals and our high expectations.

We plan to move very quickly to implement these changes to the sales organization and plan to have the new sales structure in place in January 2008. We estimate that this reduction in sales force size, combined with other anticipated cost-adjustments, will lead to a reduction of approximately $90 million to $100 million for 2008. Clearly, reductions in personnel are never easy, and we will ensure that any Sepracor staff affected will be treated with the respect and dignity that they deserve.

At this point, I would like to hand you over to Mark Corrigan who will provide an update on some excellent progress in the research and development area. Mark?

Mark Corrigan

Thank you, Adrian. Let me take the opportunity to review our pipeline progress.

For LUNESTA, we are working with our partners Eisai in Japan and GSK in Europe to advance towards regulatory approval. We anticipate hearing preliminary feedback from EMEA on our submissions later this quarter. In the U.S., we anticipate pediatric studies to commence next year. With XOPENEX and BROVANA, we'll continue to execute to honor our commitment to executing the FDA request and studies.

The next slide. On our earlier stage portfolio, we are excited about the start of Phase II for SEP-289, our triple reuptake inhibitor for depression. We believe we are among the scientific leaders in this field, and anticipate filing two INDs later this fall [two future triple] with different monoamine ratios.

We are completing SEP-441 Phase I work ex-U.S. and hope to file an IND in the U.S., and commence Phase II in the U.S. for GAD. Similarly, SEP-162 is poised to enter Phase II early next year for major depressive disorders. We are very excited about an upcoming Translational Medicine study results, including this quarter, to nail our acceleration of these programs. We hope to expand our position at these exciting programs at the [MAAX] webcast.

Our confirmatory Pan-European LUNESTA study in combination with [donotoxin] with the augmentation of [interdepartmental] response is ongoing, and we should have the data from that study available at the time of the launch of the product, if approved in Europe.

Next slide, in order to seize the evolving opportunities in discovery research, and take advantage of the cost-control management resources, we have reenergized our commitment globally. This slide depicts our current scope of activity. We have partnered research in biology in Santiago and Melbourne, Australia, experimental medicine efforts in Europe and U.S., and most recently a ramp-up of our process chemistry in India and medicinal chemistry in Japan. We believe these investments truly de-leverage our capability and would lead to enhanced productivity in discovery research.

I would like now to turn the call over to David who will update some financial results and guidance. David?

David Southwell

Thank you, Mark, and good morning. Total revenues for the third quarter, as Adrian said, declined slightly to approximately $283.9 million, which reflected a 1.9% decrease from the third quarter 2006 revenues of $289.3 million.

As you can see from the chart on the left, this was due, in large part, to a reduction in XOPENEX Inhalation Solution revenue that resulted from the coding change by CMS that went into effect on July 1st. This resulted in significantly lower Medicare reimbursement to XOPENEX Inhalation Solution.

Total revenues for the nine months ended September 30, 2007 were $893.5 million, which was a 6.4% increase over the same period in 2006 for which total revenues were $839.4 million.

Moving to slide number 13, the next slide. Net income for the quarter was approximately $42.9 million, or $0.37 per diluted share, compared to $64.4 million or $0.56 per diluted share for the third quarter of 2006. This decline, again, was primarily the result of the lower XOPENEX Inhalation Solution revenues as a result of the CMS coding change.

Net income for the nine months ended September 30, 2007 was approximately $71.6 million, or $0.61 per diluted share versus $85.5 million, or $0.74 per diluted share for the nine months ended September 30, 2006.

Importantly, however, included in the nine months 2007 results of $0.61 per diluted share is a $0.28 after-tax charge of $32.9 million that was applied during the first quarter of 2007 relating to the settlement of two class action lawsuits related to tecastemizole.

Moving to the next slide, 14. As you can see from this slide, we are reasserting our revenue guidance for 2007 of $1.23 billion to $1.3 billion and we are narrowing our EPS guidance as we approach the end of the year. We are now guiding to finishing the year with more than $950 million in cash, and in long and short-term investments.

We've narrowed our fully diluted earnings per share range to $1.05 to $1.15, from the $1 to $1.30 for the year, so it's going from $1 to $1.30, to $1.05 to $1.15 based on weighted average shares outstanding of 118 million shares. Importantly, this range includes not only the after-tax charge relating to the settlement of the tecastemizole litigation of $0.28 per diluted share, but it also includes the restructuring charges that we'll incur with the commercial reorganization and reduction in our sales force that we discussed previously.

Turning now to slide 15. While we're not providing overall guidance for 2008 at this time, we currently anticipate at fully diluted EPS range of approximately $2.35 to $2.45 per share. Adrian?

Adrian Adams

Thank you, David. Please now return to our final slide for today, slide number 16. Our near-term objective for the company includes the continuation of our developments of a best practice, from peak performance sales and marketing organization. And clearly, we would focus on talent management, and of course, on the reorganization and restructuring of the sales force. The absolute focus will be on accountability, peak performance and excellence in execution.

Building from this, our efforts more fully leverage our exciting product franchises, and this includes accelerating LUNESTA volumes and share growth, growing the XOPENEX franchise, includes inhalation solution and HFA, MDI and successfully growing BROVANA.

Another component of our overall near-term corporate strategy is to broaden and deepen our research and development pipeline with continued advancements in our clinical pipeline, initiation of three Phase II proof-of-concept studies, and the final filing of three INDs. Focused on going investment in research and development is fundamental in creating the products on organic sales growth for the future.

On the corporate development front, we continue to aggressively pursue synergistic corporate development from licensing opportunities. Beyond this, we are very interested in identifying early and late-stage products that could help or enhance our development pipeline, and of course we’ll continue to assess merger and acquisition opportunities as appropriate.

In summary, the actions we have taken and the operational and strategic plans in place gives us confidence that Sepracor can move into its next exciting phase of growth, with good earnings momentum in 2008, a strong and more productive commercial organization, excellent R&D prospects going forward, and with a talented group of professionals that is Sepracor. At this point, I would like to open up the call for your questions and answers.

Operator, can you please give the instructions.

Question-and-Answer Session

Operator

Certainly. The floor is now open for questions. (Operator Instructions). Our first question is coming from Greg Gilbert of Merrill Lynch. Please go ahead.

Greg Gilbert - Merrill Lynch

Thanks, good morning. I have a couple, first can you share what tax rate assumptions you are using for the preliminary '08 EPS goal?

Adrian Adams

Yes. Greg it's just keeping it consistent just for a comparison purposes, we've not assumed the full evaluation in that number of our NOL.

Greg Gilbert with Merrill Lynch

Okay. On LUNESTA, can you comment on the inventory levels as well as, net price during the quarter as compared to the June quarter sales? Were they a little ahead of what we were at cost, given script growth?

Mark Corrigan

Sure. We don’t comment on the net price, but we obviously can share the inventory levels. The LUNESTA inventory levels stayed relatively constant at six and half weeks. UDV XOPENEX was up a little bit; it was up from about five to five-and-half weeks, and the net change from a dollar perspective on that is about $3.5 million.

Greg Gilbert with Merrill Lynch

Was there anything temporary or of one-time nature that helped LUNESTA net sales in the quarter?

Mark Corrigan

No. I mean, that was just -- it was sort of the ongoing sales. And then the MDI, just to finish your first question was about five weeks. It stayed about the same and BROVANA was about four and a half weeks, which changed, I mean it came way down but it's a relatively small product, and so it’s not the inventory that moves around, the loss on that one still.

Greg Gilbert with Merrill Lynch

Okay. One more and I'll get back in line. Adrian, can you update us on the XOPENEX [CDB] legal situation and any contingency plans you may have in place, if there is an average generic launch next year?

Adrian Adams

It’s clear, as you know from my past, I never comment on our strategy in relation to litigation. Obviously, we are well aware of the time lines, and we feel good about our intellectual property positions. So, clearly I think the litigation is going through the normal routes. And when I am at a position to comment on any progress, I will do that. But again, I will re-emphasize that we feel good about our intellectual property position.

Greg Gilbert with Merrill Lynch

Thank you.

Adrian Adams

Thank you, Greg.

Operator

Thank you. Our next question is coming from James Kelly of Goldman Sachs. Please go ahead.

James Kelly - Goldman Sachs

Good Morning. My question has to do with the milestone payments from Esai and from GSK. Were any received in this quarter, where are there in the P&L, and how do they play into your guidance, both for this year and next year? Thank you.

Adrian Adams

Bob.

Bob Scumaci

I'll take that. We did receive both payments. They are captured on the deferred revenue line in the balance sheet, and we will take those equally over the life of the contracts.

David Southwell

And they haven’t figured in the guidance. The guidance is product guidance although they are in the EPS number.

Mark Corrigan

Right.

James Kelly - Goldman Sachs

Thank you.

Operator

Thank you. Our next question is coming from Matt Duffy of BDR Research. Please go ahead.

Matt Duffy - BDR Research

Good morning. Thanks for taking my questions. A couple of things, so you're looking to 300 rep reduction in your sales force, which looks in round numbers at around 17% reduction in your field force. Can you talk a little bit about what that will do to share of voice purpose with the doctors, and then if you're going to take another 5% out of sales in marketing, will it affect DTC in your share of voice there?

Adrian Adams

Well, I think it's a very good question. Not obviously, within this exercise, there are an awful lot of different parameters that drive sales force productivity. Clearly when one looks at sales force productivity, one looks at the very one that directs our efforts. And in particular, we use the classic methodology of addressing our efforts to this high decile physicians, so that is one of the reasons why we commented in this webcast, but we believe that we can enhance productivity and deliver more productivity by redirecting our sales efforts into those high prescribing physicians that relate to the decile doctors. So we believe that this is an example where we will be able to do more with reps.

In relation to share of voice, I think clearly if one looks holistically at all the pharmaceutical representatives that are operating within the LUNESTA space, then obviously we are shouted by Sanofi-Aventis. But where we operate from is, we've targeted and focused on sales and marketing and that relates by most of the all of the different elements within our promotional mix.

So we prefer to look at share of voice within our targeted high decile physician, and that is what's driving the model that we are putting in place and the confidence that we have in driving enhanced productivity next year, even with a reduced sales-force and delivering more with less.

Matt Duffy - BDR Research

So, as you look at that -- when you look at your decile prescribers and presumably you will be dropping some of the lower decile prescribers, are you hoping to maintain voice or improve voice relative to Sanofi? I know that’s probably getting into some competitive things, but if you can give us some broad strokes there about the overall corporate goals within those target audiences, that'll be helpful?

Adrian Adams

I think clearly when you have effort that has potentially been in the low decile doctors, when you move those target and efforts and decile doctors, you are by definition increasing your share of voice in that population. When it comes down to focus on the competition, clearly in the assumptions that we make next year, we look to what effort we project they would be delivering. We have no control over that. What we do have control over, is making sure we target our efforts to those doctors that have the highest prescribing potential. Then, when we deliver a message consistently and effectively, matched up with the quality sales efforts to drive enhance productivity, so we focus on things that we are in control of. We are in control of the Sepracor share in voice in those high prescribing physician populations and we believe that this is leveraged, a conclusion that we can deliver more with less.

Matt Duffy - BDR Research

Very good, thanks. One thing on the CMS front with XOPENEX, could you just talk about where you see, just in worst case scenarios due to CMS action or inaction on the XOPENEX over the next several months how in broad strokes that might affect the top or bottom line guidance you have given to this point?

Adrian Adams

Well clearly, we have given guidance for this year within our target range of $1.05 to $1.15. And key within that assumption is that the business that was related to the Medicare Part D area is business that has gone.

As of July the 1st, obviously, when our new blended reimbursement rate came into place, we made an assumption that most of our business will go between now and the end of the year. Having said that, as I mentioned in the call, we have been very pleased with the fact that the retail segments of this market and indeed our hospital share have performed extremely well.

As you know, around about 70% of the overall XOPENEX inhalation solution business is relating to the retail sector, and in particular is focused on the pediatric population. So we are very encouraged that today we have seen little impact on the CMS decision on our retail prescriptions of inhalation solution.

David Southwell

And Matt, from a guidance perspective, we are assuming that the CMS decision is not reversed. So we're assuming that it's status quo for the balance of the guidance for this year, as Adrian said, but also for the guidance. The EPS sort of indication that we gave for next year, we're not assuming that the CMS business comes back. So really, any news from that front is good news from the perspective of it coming back.

Adrian Adams

As you know, Matt, I think there is some draft legislation that is currently in play, and clearly, that's got some pass to move forward on. But in the event that that was to happen, then obviously we would access everything from that opportunity.

Matt Duffy - BDR Research

All right. Very good. Thanks.

Adrian Adams

Thank you for the question.

Operator

Thank you. Our next question is coming from Biren Amin with the Stanford Group. Please go ahead.

Biren Amin - Stanford Group

Yeah, hi. Thanks for taking my question. It seems that with your 2007 XOPENEX HFA guidance and the 50 million today that you reported, that you are hoping for a big Q4. Can you just share with us why you're so confident for such a big Q4 for HFA?

Adrian Adams

Well, I mean, clearly, there were two aspects. Aspect number one, obviously, is the seasonality within this marketplace. As you know, every year I think the seasonal trends point to a stronger quarter four. Secondly, the problem is that the point is overlaid on the fact that obviously the transition from CFC to HFA is now starting to pick up pace again. That is the reason why we believe that quarter four will be a solid quarter for XOPENEX HFA and beyond.

Biren Amin - Stanford Group

Okay. And for this quarter, can you just tell us what the level of commercial and government rebates were?

Adrian Adams

We don't comment on this.

Biren Amin - Stanford Group

Okay. Thanks.

Adrian Adams

Okay.

Operator

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

Larry Neibor - Robert W. Baird

Thank you. Good morning.

Adrian Adams

Good morning, Larry.

Larry Neibor - Robert W. Baird

Do the earnings per share guidance you have given for '08 assume any rebound in LUNESTA's market share?

David Southwell

Larry, the '08 number sort of came after our budget. It came after what we were expecting. And it obviously has embedded in it a number of revenue numbers and a number of cost assumptions. And I promised Adrian, I would not go into any greater level of granularity on that.

So I'm afraid we're going to leave that out there without going into all of the assumptions, because obviously as we go into the budgeting process at the end of the year, the assumptions change. And so, we'll be providing a lot more detail on our '08 guidance in January as we always do at that time.

Larry Neibor - Robert W. Baird

And secondly, despite having a superior managed care position versus Ambien CR as your slide point, you continue to under-perform in that product in terms of market share. What specifically are your programs to reverse that, and does your managed care position do that? Is that really very important?

Jonae Barnes

Well, I mean, on the last points, of course, the managed care position is very important, and in particular, our positioning versus Ambien CR. Clearly, I think we had a sustained strategy to roll our share particularly in the tier 2 and tier 3 position levels. But, your point is well made. I think that is an important kind of trend, but the more important trend is to pull through that activity into the primary care position population.

Clearly, one of the dynamics that's been in place over the last number of months following the Ambien genericization is a settling down in the kind of market share trends. If one looks actually at the data, the market share loss with the Ambien CR, post Ambien generalization, is actually been significantly more than with LUNESTA. So, right now we see a situation where our new campaign is resonating nicely.

I think we do believe that our debtors are in support of the fresh start of the debt. As that starts to catch hold, we will look to more fully leverage the pull-through for the managed care. So we feel pretty good that we've weathered the storm in Ambien genericization.

The market share dynamics have moved around a little bit. That said, I think if I look over 12 months, look at in total prescriptions for LUNESTA versus the same period last year, it's actually growing at double-digit growth, and we are very pleased with that. Our new prescriptions are growing around 7.4% and we are looking to drive that up further as we move into 2008. And that will form the basis for discussions during the budget process, which will then form the basis for the guidance that we'll give at the end of January.

Larry Neibor - Robert W. Baird & Co.

All right. Thank you.

Jonae Barnes

Thank you.

Operator

Thank you. Our next question is coming from Frank Pinkerton of Banc of America. Please go ahead.

Frank Pinkerton - Banc of America

Hi. Thanks for taking the question. Can you outline for us the metrics used to determine the sales force and marketing and spending cuts as appropriate, and what levels of return by these two pulls, is the spend with either costs for additional cuts or more capital to be deployed?

Jonae Barnes

I mean, clearly, I think one is looking at overall sales force productivity, there are an awful lot of metrics for one use, and I don't want to use a lot of time in this call to go through this, although, I would be happy to discuss it with you further. But, when one looks at sales force productivity, one looks at the amount of effort that you have, one looks at the market opportunity, one looks at the shift in different number of full-time equivalents that you put in different detailing positions with your sales force, and then you do the classic kind of return on investment kind of analysis.

We've done all of that. We've done it across the portfolio. We have looked at aspects of more sales people, and we look at aspects of less sales people. And we've taken this stance pretty well, and we believe where we have reached at this point in time and the structure that we have been putting in place is the structure that will leverage the full franchise, and make sure that we can drive high levels shared voice in all our target physician population. And so, obviously, we believe that the metrics we have used and the assumptions we're making in relation to accountability next year on our incentive scheme, we will drive the productivity, as I mentioned, earlier we will do more with less.

Frank Pinkerton - Banc of America

Okay. Great. And just a follow-up, by the end of the year, you know, by my calculation you should have just short of a billion in cash on the balance sheet, what are the goals for improving maybe the NeuroCom pipeline as we look at it over the next four to five years? Can you give us a hint; do you have a preference for a transaction side therapeutic category or anything else for use of that capital in the pipeline? Thank you.

Adrian Adams

I’ll comment first and then I'll ask David to comment as well, I mean, you're right, I think we are very pleased with our growing cash balance, particularly related to potential opportunities in the corporate developments and licensing areas. Clearly if one looks at our strategy, moving forward, in addition to growing productivity in the commercial organization, clearly we want to broaden and deepen our research and development pipeline. We recognize that obviously we have a gap at this point in time as we move towards the first projected new products entry in the 2011 timeframe.

Clearly as we manage the business, we're going to be looking for all available opportunities to not just to achieve but hopefully to exceed some of our milestones in research and development, and looking to cost-effective research and development around the globe.

Clearly from a corporate development and licensing perspective, with that cash balance, we are anxious to look and identify other opportunities, but also to enhance that pipeline and give us additional organic sales growth into the future, and David you want to comment on that?

David Southwell

Sure. Frank, I'd say if you look at what products we can use as it was, obviously we would like to build the number of marketed products that we sell and we are certainly looking for those. Inevitably, those are always competitive with other companies that are trying to do the same thing. So we're mindful not only of getting the right product to fit in with our sales force and our company, but also to do so at a valuation that is attractive to shareholders.

On page 3, I mean, clearly we would like to fill that port in our pipeline. So, actively looking at the Phase III product, we feel what we can add to a Phase III product, firstly the ability to get things through the FDA. (inaudible) last two MDIs were most likely for approvals. So, we feel that we are very good at getting things through the FDA. We also have a very significant sales force, and well-motivated sales force, even pro forma, obviously pro forma, the change that Adrian announced today. So we also think on our existing products and we certainly look at those. Plenty of drug delivery companies are anxious to work on our products, and we are always interested in talking to them.

And then, we are always interested in discovery, and that’s really an area where we excel ourselves, and so we have to find something pretty attractive to do a major transaction from a discovery perspective.

And we haven’t done any M&A deals over the 15 years that I have been at this company, and certainly any significant M&A deals. But that doesn’t mean that we don’t look at them, and we certainly look at things that come along, and if we find something that's attractive, we will certainly take a good look at it. Is that comprehensive Adrian or do you want to add to that?

Adrian Adams

Certainly, I don't think anything further needs to be added there.

Thank you, next question

Operator

Thank you. Our next question is coming from Andrews Swanson with Citigroup. Please go ahead

Andrews Swanson – Citigroup

Thanks, very much. You talked a little bit about your ability to maintain volumes on XOPENEX CDB in the private states? Can you talk about your ability to maintain price in that setting? Any initial comments on negotiation you had with large customers in that setting as you think about new contracts year-to-date. And then also, I think this was sort of broadly addressed in the last question, but just to the extent to which the opportunities for late staging you might think weigh on your decision to make sales force reduction at this time? Thanks.

Adrian Adams

Yeah, I mean, obviously when it comes down to pricing and discount in relation to XOPENEX we never comment on, I think I have said clearly, and we have a excellent managed care organization that continues to develop a strong managed care position, and we are very keen to maintain all market share and we had a very good track record of that in the retail segment and we will continue to hold on to that market share unless there are any other competitive or environmental issues within that. So that said, I won't comment on the aspects of discounts given and license.

And when it comes to in-licensing late Phase III assets, I think clearly with the goals that we've set down for aggressive corporate, development and licensing, we want to make sure that in the way we structure and size our sales-force, that we retain a very strong focus in both the primary and specialty care audience, and that we retain an ability to be able to take a product and leverage that fully through creative and targeted sales and marketing with sales-force productivity in the high decile prescribing physicians.

We believe that the structure and size that we have in place will not only support the aspects of RUNESTA, BROVANA and XOPENEX, but also provides significant opportunity for a primary care and specialty products that we may be able to in-license. Clearly, a lot of structure and sizing that one may do relates very much to the opportunity that you have. In the event, but we identify a Phase III opportunity, a late stage opportunity that we believe with good productivity and with extra sales efforts will lead to a good result, we are satisfied by about in time, but we still believe that the structure and size that we have in place offers a very attractive partnership opportunity with other parties

There are many, many things that drive the dynamics of the deal, and clearly I think within the pharmaceutical sector, it is not necessarily with the cash, but lot of the confidence in the biotech specialty pharma area always want to partner which -- they follow. They are looking for nimbleness, looking for success, looking for targeting and looking for help in actually driving market share as quickly as possible. So believe we have structure, and capability, and a competency in place and proven track record to delivery that. And that's what we would be offering in home grown corporate development and licensing.

Andrews Swanson – Citigroup

Thanks very much.

Adrian Adams

Thanks.

Operator

Thank you. Our next question is coming from Ian Sanderson of Cowen. Please go ahead.

Ian Sanderson - Cowen

Hi, good morning. Thanks for taking the question. On the XOPENEX HFA, what's the strategy for gaining share in the HFA of federal market? Is it all about pricing here or can you successfully differentiate this?

Secondly on the XOPENEX net deals, what percent of the current prescriptions outside of the Medicare Part B market are for pediatric patients versus adult patients?

Adrian Adams

On the first one obviously with XOPENEX HFA and I think is not all about price, and I mean clearly one of the dynamics in the market place is to make sure that we have a very strong managed care position and we commented in the web cast that obviously that position is being strengthened over the period of time. So, clearly price plays an issue, place a part in the market, but we differentiate XOPENEX HFA, MDI there is somebody out there attributes that we have. And so we see the opportunities that allows the seasonality kick in as the conversion from CSC to HFA, really starts to accelerate. But we're in a good position to enhance market share as we move into next year. And that is the absolute focus of our sales force going forward.

On your second point, can you just repeat that point?

Ian Sanderson - Cowen

Yeah. What percent of the current XOPENEX UDV scripts, and again outside of Medicare Part B, are for pediatric patients versus adult patients?

Adrian Adams

Well, I think if all looks at that particular market, we've mentioned that 70% of our overall business pre-CMS decision was within the retail segments, and the vast majority of those patients are actually in the pediatric population. And again, that leads us to the confidence on why we're very pleased that we're holding on to the market share. That market share has been steady for a significant period of time. And the early data shows that we are holding on to that market share with the predominant in the pediatric population.

Ian Sanderson - Cowen

And could I ask one follow-up on BROVANA, how are you differentiating that from Perforomist and if you care to comment on what the differential pricing might be?

Adrian Adams

Well, I mean, obviously, if you look at the pricing that Perforomist have come out with, they've come out with a slight price premium over BROVANA. It comes down to the strategy. Obviously, you are not to discuss with them. We believe in this marketplace there is going to be a number of things that drives market share evolution.

Firstly, it's the education of the physician population that there is a new approach to treating COPD in these relatively infirm patients. Secondly, obviously what BROVANA offers as does Perforomist is the opportunity with a simple dose twice daily to allow the patient to take a dose in the morning and one in the evening to allow greater mobility during the course of the day. And in the end the dynamics are going to drive the market share, penetration and competitive market share penetration are no different in this market or now before. And we believe our key differentiating feature, given relatively similar product profile is going to be down to sales force execution, and to find out from looks of share abortion the capacity that we have, we believe that can bring that to birth to make sure that we retain a dominant share how this market starts to develop hopefully with a (inaudible) orders beginning of next year.

Ian Sanderson - Cowen

Thank you.

Operator

Thank you. Our next question is coming from David Woodburn of ThinkEquity. Please go ahead.

David Woodburn - ThinkEquity

Good morning. Thanks for the opportunity. From an R&D expense standpoint over the next couple of years you have got three compounds that could potentially be in Phase II next year. Are you planning on carrying those all the way through Phase III assuming they are successful on your own, or would you be looking to bring in some help to help offset some of the R&D expense? And then secondly when are the 300 reps being notified, and does that 300 number include some that have already left voluntarily? Thank you.

Adrian Adams

On the first one, clearly, I think what has been developed within Sepracor over the last number of years is a very productive discovery organization, and a clinical development group and regulatory group that has proven track record in bringing successful NDA’s submission to market. And clearly a key part of our growth in the future is, related to organic sales growth from those new products.

We also anticipate, obviously, that as we invest further in those products, our goal is to get those products to market as quickly, effective as possible with a target product profile that will allow us to compete effectively in what are very nice opportunities, particularly in relation to depression and anxiety.

When it comes down to the aspects of costs and how we allocate those costs. Obviously, we see a significant opportunity to share the cost with potential partners then obviously we'll retain that cost. Clearly, we have no presence outside the United States at this point in time and therefore there may well be some solutions that we can consider within the course of that. At the moment, though, we are focused predominantly on making sure that we don't just meet or hopefully exceed our targets in relation to R&D.

Secondly, when it comes down to sales force execution, I think we've announced the reduction in sales force size or around about 300. That includes, obviously, about 100 to 110 positions that are vacant at this point in time, and we will look to actually complete that function by the end of this year, so that we can move into 2008 with a highly motivated and well incentivized, more productive, and substantial, commercial and sales force organization in keeping with the opportunities that we have.

And in relation to our notification, I think we only sent out the announcement this morning in relation to the reduction, and over the course of the next one to two weeks we will obviously be looking to make sure that the gap between this announcement and Sepracor employees affected being notified as short as possible. As I mentioned on the call the respect and dignity that we want to move forward on this with affected employees is of paramount importance to us.

David Woodburn - ThinkEquity

Great. Thank you.

Jonae Barnes

One more question?

Operator

Thank you. Our next question is coming from Hudson Boyer of Wachovia. Please go ahead.

Hudson Boyer - Wachovia

Hi. I just had one question. How big do you expect the restructuring charge associated with the sales-force remuneration in the fourth quarter to be?

Adrian Adams

Bob, your comments on that?

Bob Scumaci

We are estimating at this point in time to be approximately $10 million.

Hudson Boyer - Wachovia

$10 million? Okay. Is any of that running into first quarter of 2008?

Bob Scumaci

No.

Hudson Boyer - Wachovia

Okay. Thanks a lot.

Adrian Adams

No, I think, again on that point. One of the points we emphasize, in the tighter range of EPS that we're guiding to between $1.05 and $1.15, we are achieving that, while absorbing the cost in relationship to restructuring. And, obviously, reasserting guidance on the top-line revenue between $1.23 billion or $1.3 billion.

Hudson Boyer - Wachovia

Okay. Thanks.

Adrian Adams

So, that concludes the call for this morning. We appreciate everybody's interest and indeed the questions. We remain confident in our ability to drive this business forward, as I mentioned to the 2008 to renewed earnings momentum, strong commercial productivity, excellence in the research and development area and striving towards delivering peak financial sustained performance.

So, with that I look forward to talking to you on our next webcast which will be scheduled in January of next year. Thank and have a wonderful day.

Operator

Thank you. This does conclude today's teleconference. An audio replay of today's call will be available for one week starting today at 10:30 Eastern. The dial-in number is 973-341-3080 and the PIN number is 9192732. Please disconnect your lines at this time and have a wonderful day.

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