Sciele Pharma Q3 2007 Earnings Call Transcript

Sciele Pharma Inc., (SCRX)

Q3 2007 Earnings Call

October 31, 2007 4:30 am ET

Executives

Joe Schepers - Director, IR

Patrick Fourteau - President and CEO

Darrell Borne - CFO

Analysts

Adam Greene - JP Morgan

David Buck - Buckingham Research Group

Don Ellis - Thomas Weisel Partners

Angela Larson - SIG

Ken Trbovich - RBC Capital Markets

David Steinberg - Deutsche Bank

Gur Roshwalb - Piper Jaffray

Alex Rygiel - FBR

Natalie Gazal - Banc of America Securities

Presentation

Operator

Good day, everyone, and welcome to the Sciele Pharma Inc, Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Joe Schepers. Please go ahead sir.

Joe Schepers

Thank you. Good afternoon, and welcome to Sciele Pharma's third quarter 2007 Earnings Call. I am Joe Schepers, Sciele's Director of Investor Relations. Our speakers on the call today are Patrick Fourteau, President and Chief Executive Officer and Darrell Borne, our Chief Financial Officer.

Please note that this presentation contains forward-looking statements, which are subject to risks, uncertainties and other factors beyond the Company's control that may cause actual results, performance or achievements to differ materially from those anticipated in any forward-looking statements. These risks, uncertainties and other factors include, but are not limited to those described under Business Risk Factors of our annual report on Form 10-K for the year ended December 31, 2006 and our quarterly reports on Form 10-Q, as filed with the SEC. The Company does not undertake to update the forward-looking statements to reflect future events or circumstances. I will now turn over the call to Patrick Fourteau

Patrick Fourteau

Thank you, Joe. We are pleased to report strong financial results in the third quarter of 2007 compared with the third quarter of 2006. We achieved record sales of $99.4 million in the third quarter. This was a 33% increase in revenues compared with the same period of last year. We generated EPS growth of 12% in the third quarter of 2007 versus the third quarter of 2006. It is important to note that we increased our R&D investment to 9% of net revenue in the third quarter of 2007 or $9.3 million. In the first half of 2007, we invested approximately 8% of total sales in R&D. This increase was primarily related to $2.2 million of in process R&D charges for our recently licensed product, completion of a Phase III patient enrollments for both glycopyrrolate and the pravastatin/fenofibrate combination and the expansion of the company's clinical and regulatory group.

We believe our product pipeline will deliver new product launches, which are the key drivers of our future growth. Our primary focus is to effectively use our resources to develop new product, with an emphasis on speed to market. I will provide you with an update of our product development pipeline later on the call.

It is important to know that while we increased our investments in R&D, we continued tight control of our SG&A expenses. SG&A expenses in the third quarter of 2007 were approximately $1 million lower compared to SG&A expenses in the second quarter of 2007.

I will now cover the performance of our three division cardiovascular diabetes, women's health and pediatric products. Net revenue for the company cardiovascular product line which includes Sular, Triglide, Nitrolingual Pumpspray, Fortamet, and Altoprev increased 10% to $65.4 million in the third quarter of '07 compared with $59.6 million in the third quarter of 2006. There was a delay in Triglide product delivery resulting in product backlog that will be shift in the first quarter of 2007 instead of the third quarter of 2007. The other oil increased is that the last year was primarily due to the prescriptions growth of Sular, Nitrolingual Pumpspray, as well as, Triglide, as well as, price increases.

Cardiovascular diabetes product accounted for 66% in total sales in the third quarter of 2007. Total prescription of Sular increased 5% in the third quarter of 2007 compared with the third quarter of 2006 based on IMS National Audit Plus data. Nitrolingual Pump spray total prescription increased 1% and new prescription increased 8% in the third quarter of 2007 compared with the third quarter of 2006 according to IMS Prescription Audit Plus data.

Triglide total prescription increased 31% in the third quarter of 2007 compared with the third quarter of 2006 according to IMS Prescription Plus data. In August 2007 Sciele and LifeCycle Pharma announced the approval of LifeCycle's fenofibrate in 20 milligram and 40 milligram dosage grams. This will be the lowest dose fenofibrate on the market. We expect to launch this product in the first quarter and with this new introduction we expect to increase our sales of fenofibrate market.

On the Women's Health business side, our Prenate family of prenatal vitamin is one of the leading brand of prenatal vitamins in the US. Net revenue of the company's Women's Health products, which includes Prenate DHA, Prenate Elite, OptiNate, Zovirax, Ponstel and Ostiva increased 68% to $21.3 million in the third quarter of '07 compared with $12.7 million in the third quarter of 2006. Women's Health product represented 21% of the total sales in the third quarter of '07. At the end of June 2007 the company introduced Prenate DHA and we are very pleased with the initial success of this new product launch.

After approximately three months of promotion Prenate DHA had an approximate 14% market share of the new prescription DHA market according to IMS National Audit Plus data. The Prenate DHA market continues to be the fastest growing areas of mineral vitamin market.

Our pediatric product division net revenues of this division, which include Orapred ODT; Methylin Chewable Tablets, Furadantin, Rondec and Allegra Oral Suspension, increased to $12.7 million in the third quarter of '07 compared to $2.4 million in the third quarter of 2006. Pediatrics and other products represented 13% of the Company's total sales in the third quarter of '07.

This increase was primarily due to the Alliant Pharmaceutical acquisition. Keep in mind that there are some seasonal sales fluctuations with many of our Pediatric products with stronger sales in the first and fourth quarter of the year. We rapidly integrated Alliant Pediatric sales force of approximately 75 reps and brought the total to 100 reps in the third quarter of 2007.

I would move now to the product development which I think is one of the most exciting areas of the company at this point in time. We are indeed very pleased with the significant progress we’ve made in our pipeline this year. We believe that the investment that we are making in product development today will provide for the future growth of the company. Please note that we plan to launch three to four products per year beginning in 2008.

The company’s children’s product pipeline includes eight products. One product has been recently approved by the FDA. Two products are under review at the FDA; five products are currently in Phase III clinical trials. Let me remind you that a year ago we had only one product in our pipeline. Beginning with our pipeline of cardiovascular products, we’ve four products in development, all under review at the FDA. As most of you know, the FDA accepted the company’s Sular Supplemental New Drug Application with a PDUFA date of November 2, 2007.

This new Sular formulation utilizes SkyePharma’s patented Geomatrix drug delivery technology, which will enable us to offer lower dose of Sular for each of the current dose experience. Mylan recently filed a (inaudible) for only the 40 milligram dosage strength, and as a result we filed a lawsuit against Mylan in October 2007.

So, 40 milligram dosage strengthens only represents approximately 14% of the lawsuit. Upon FDA approval, our plan will be to launch a new Sular formulation in the first quarter 2008, which will give us several months to come to their patients to the new lower dosage of Sular before the current patent expires in June of '08.

Now let’s move on to our products in Phase III, and we are very pleased with the way we are progressing. I would like to spend particularly some time updating you on the products pravastatin/fenofibrate combination to treat mixed dyslipidemia. In October 2007, the company completed the enrollment of patients in its pivotal Phase III trial. There are 450 to 500 patients enrolling in this efficacy trial at 75% in the US.

This trial will compare the pravastatin and fenofibrate combination to pravastatin alone and fenofibrate alone. We expect to complete the Phase III study in mid '08 and plan to have clinical data to share with you in the second half of next year.

European clinical data, that includes approximately 500 patients, will be supportive to our 505(b)(2) filing. One of the primary reasons which was pravastatin, was due to its excellence at the profile. We are very excited with the new efficacy data that was just established on pravastatin. A study showing the long-term benefit of pravastatin was recently published in the New England Journal of Medicine.

It confirms both the safety and efficacy of pravastatin. In this analysis, five years of treatment with Pravastatin was associated with a significant reduction in coronary events or subsequent 10 years in line with eye cholesterol, who do not have a history of myocardial infarction. Pravastatin is the only statin that has been studied for difference of time interval. We believe therefore that this pravastatin/fenofibrate combination could be a very compelling therapy and as we are ahead of competitors who are working on fenofibrate with other combinations statin; we feel comfortable that we could be a big success with that product.

Let me remind you that according to IMS Health's data approximately 30% to 35% of patients generally taking a fenofibrate are also taking a statin, all that 5% of statin users are also being prescribed of fenofibrate.

In July 2007, the company licensed Clonicel from Addrenex for the treatment of hypertension. Clonicel is going in for pivotal trials for hypertension and 505(b)(2) NDA Filing with the FDA is expected in the first half of '08. Previously we had projected a FDA filing by the end of 2007. Clonicle is a 12-hour sustained release formulation of clonidine hydrochloride. This sustained release formulation is designed to reduce sedation and dry mouth associated with immediate-release clonidine, and a skin irritation associated with clonidine patches. There are approximately 10 million clonidine prescriptions for hypertension last year according to IMS as MPA data. Let's move on now to our pediatric product line where we have three products in development, all are under review by the FDA. While we have pushed back slightly the FDA Filing date for Clonicle for hypertension, we remain on track for the treatment of ADHD. We are announcing a press release today that Addrenex began a patient enrollment for the pivotal Phase III trials using clonicle for ADHD.

On August 15, 2007 the FDA accepted Summers Lab NDA with a PDUFA date of April 15, 2008 for its innovative treatment for head lice. Upon FDA approval, this product will be the first prescription medication that kills head lice by asphyxiation instead of utilizing a neurotoxic pesticide. This novel product is an excellent opportunity for Sciele. Head lice treatments, including pesticides, have been banned in California, and other states are also moving towards taking the same action.

The prescription is a novel will counter lice treatment market generated approximately $150 million in sales last year according to IMS. In September 2007 we completed our -- the enrollment of our Glycopyrrolate Phase III trials to treat chronic moderate-to-severe drooling in pediatric patients. This condition often results from cerebral palsy and other neurological disorder. The company has received all time designation for Glycopyrrolate. We expect to file an NDA with the FDA in mid 2008.

Finally, we have one product in development that will marketed concurrently by our Women's Health sales force and our primary care group. It is Plethora Solutions, PSD502, an innovative treatment for the treatment for premature ejaculations. You may have seen our press release this morning announcing the initiation of the patient enrollment for the Phase III clinical trial. PSD502 is a unique operatory rapidly absorbed formulation of two well established local anesthetics, lidocaine and prilocaine dispensed in a metered dose spray. Additionally, we've also planned to introduce new formulation to our Prenate family of product, and we are refining the trial's design for Rondec.

On the business development side, obviously as most of you know we have been very, very active, and we are already very active in product detail, and will look, and we continue to look at numerous opportunities to license and buy additional products.

Most of these opportunities are in cardiovascular, diabetes and Women's Health and Pediatric, and as we've mentioned before also the therapeutic area that are of interest to us.

To briefly summarize where we stand, we continue to deliver superior results while investing in products that are in late stage development, with the goal to bring and quickly to market. Once again with a successfully introduction Prenate DHA, we are continuing to demonstrate how effectively launch product.

Most important, moving forward, we are building a pipeline of products that is transforming Sciele into a more fully integrated pharmaceutical company that is focused on developing new products that address patient.

Now, I will turn the call over to Darrell to discuss the financial highlights in more detail.

Darrell Borne

Thank you, Patrick. As Patrick discussed, the third quarter of 2007 has been another strong quarter for Sciele Pharma. We had solid increases in third quarter 2007 revenues, and grew our EPS, while investing significantly more in R&D.

There was also an increase in depreciation and amortization to $7.6 million in the third quarter of 2007 compared with $6.8 million in the third quarter of 2006. In the third quarter of 2007, we had manufacturing delays on Fortamet, Orapred ODT and Triglide resulting in higher shipments in the second half of the quarter. This resulted in higher accounts receivable.

In addition the delay in Triglide product deliveries resulted in product back orders that will be shipped in the fourth quarter of 2007, instead of the third quarter of 2007. The manufacturing issues have now been resolved. For the three months ended September 30, 2007, net revenues increased 33% to 99.4 million from 74.8 million in the same period last year.

Net income for the third quarter of 2007 was $13.8 million compared with $12.3 million in the same period of 2006. Diluted earnings per share were $0.38 in the third quarter of 2007 compared with $0.34 in the third quarter of 2006.

Earnings before interest, taxes, depreciation, amortization and stock compensation expense, EBITDAS, a non-GAAP measure, was $31.7 million in the third quarter of 2007 compared with $26.2 million in the third quarter of 2006.

The Company believes that EBITDAS is a meaningful non-GAAP financial measure as an earnings-derived indicator that approximates cash flow. EBITDAS, as defined by the Company, may not be comparable to similar measures reported by other companies.

Cash flow per share, also a non-GAAP measure, was $1.63 per share for the first nine months of 2007 compared with $1.27 during the same period of 2006. We define cash flow per share as net income plus depreciation and amortization net of taxes, stock-based compensation expense net of taxes, and other non-cash expenses net of taxes.

The Company believes that cash flow per share is a meaningful non-GAAP measure of approximate cash flow on an EPS basis, which is utilized by the financial community to evaluate companies. Cash flow per share may not be comparable to similar measures reported by other companies.

Gross margins as a percentage of sales were 87% in the third quarter of 2007 compared with 86% in the third quarter of 2006. This increase in gross margins resulted from higher revenues and a change in the product sales mix.

Selling, general and administrative expenses or SG&A were $47 million in the third quarter of 2007 compared with $36 million in the third quarter of 2006. The increase in SG&A expense in the third quarter of 2007 compared with the prior-year period was primarily due to cost associated with the sales force expansion. Our new pediatric sales force created through our Alliant acquisition, the launch of Prenate DHA and higher royalties and commissions.

We continued to maintain tight controls of our SG&A expenses in the third quarter of 2007, which were below our SG&A expenses in the second quarter of 2007.

Research and development expenses were $9.3 million for the third quarter of 2007 compared with $4.5 million for the third quarter of 2006. This increase was primarily related to $2.2 million of in-process R&D charges for recently licensed products, completion of phase III patent enrollments for both -- patient enrollments for both Glycopyrrolate and Pravastatin/Fenofibrate combinations, and the expansion of the company's clinical and regulatory group.

Our R&D expenses in the third quarter of 2007 were approximately 9% of total sales.

As of September 30, 2007, the company had $204 million in cash, cash equivalents and marketable securities. During the third quarter of 2007, the company repurchased approximately $7 million or 305,214 shares of its common stock through a share repurchase program. As of September 30, 2007, approximately $33 million was available for share repurchase under the company's share repurchase program.

In addition to the repurchase, the company made additional investments in product development and made tax payments related to the retirement of its $150 million convertible debt, totaling a combined $22 million.

Turning our attention to guidance for 2007, Sciele Pharma re-affirms this full year 2007 revenue guidance within a range of $375 million to $385 million. The company also re-affirms its guidance on full year 2007 diluted earnings per share within a range of $1.53 to $1.58 per share after a non-cash expense of approximately $0.10 per share related to the company's redemption of its 1.75% convertible notes.

This guidance assumes an R&D expenditure rate of 7% to 8% of revenues, and reflects the anticipated range associated with Sular product sales based on the potential timing of the approval of the new Sular product. The 2007 EPS guidance does not include any additional shares from the net share settlement feature of the company's 2.625% convertible -- contingent convertible senior notes.

For 2008, Sciele expects to report revenues in the range of $430 million to $445 million. The company expects to report diluted earnings per share in the range $1.87 to $1.97 per share for 2008. This guidance assumes an R&D expenditure rate of 7% to 8% of revenues for 2008. This guidance does not include any unapproved products except the new Sular formulation or any potential one-time charges related to the new Sular conversion. The 2008 EPS guidance does not include any additional shares from the net shares settlement feature of the company's 2.625% contingent convertible senior notes. We are now ready to take your questions.

Questions-and-Answer-Session

Operator

(Operator Instructions). We'll go first to Adam Greene, JP Morgan.

Adam Greene - JP Morgan

Good evening, everyone.

Darrell Borne

Hi Adam, how are you?

Adam Greene - JP Morgan

Good. Few questions for you Darrell, on the guidance, you mentioned the excluding one time charges for the Sular conversion, what potential are one-time charges could we see, where exactly is that related? Second, what are your assumptions in terms of the Sular switch, the revenue guidance, what percentage of the franchise are you assuming gets converted by June? And then finally, what are you assuming in terms of for -- in the guidance for the new rules for becoming of the conversion in terms of adding in the interest expense?

Darrell Borne

Okay, let me try to take to them one at a time here. As far as the Sular charges: as far as one-time charges that we may incur, those would typically be inventory related, and again a lot of that's going to be dependent upon when the product is actually approved. If it's proved early, obviously we can convert earlier in the cycle. If we get an approvable letter obviously it will delay the launch of product slightly. So, it all depends on the timing of the approval of the product move, also depend on what if any inventory charges we did?.

Adam Greene - JP Morgan

Does this relate to if you had full inventory out of the channel or?

Darrell Borne

No, it's not inventory of the channel, it would be inventory in our warehouse.

Adam Greene - JP Morgan

Warehouse, okay.

Darrell Borne

The question was --

Adam Greene - JP Morgan

(inaudible) conversion rate in the revenue guidance?.

Darrell Borne

Yeah, as far as, the conversion goes we are targeting, as we have mentioned before, in the 80% to 85% conversion rate range for the full year. Now, again, that all depends on when you actually start launching the product.

Adam Greene - JP Morgan

Okay.

Darrell Borne

And then the final piece that you have is on the, the potential for the FASB change on the Coco? It does not have any impact of that as the FASB has not had a final ruling, as to how they are going to handle and treat that. So there is no impact on that at this point, because we don't know what that is going to look like.

Adam Greene - JP Morgan

Okay, thanks.

Darrell Borne

Okay.

Operator

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

David Buck - Buckingham Research Group

Oh, yes thanks. Just in terms of the R&D expenditures you mentioned in the commentary Darrell, just a $2.2 million charge, was that all -- it’s essentially a one-time write-off from a line, is that correct? And then I've got a follow-up.

Darrell Borne

That actually is impresses R&D charges with the recently acquired licensing products. So it’s one in the line, but it was the two additional products, Sular and I believe it was also Altoprev. And that equates to about $0.04 in it of itself.

David Buck - Buckingham Research Group

Okay, in terms of next year's guidance, can you give a sense of whether you have any type of new product approvals in there, and can you give some sense of what your assumptions are for growth in the Women's Health business and also for you talked about, a little bit about Sular’s growth, but can you give a sense of what you're expecting from the new form of Triglide. And maybe what some of the backorders did to revenues, what type of revenue impact they had in terms of the back orders for the third quarter? Thanks.

Darrell Borne

Sure, as far as the guidance, what we had said was the only unapproved product that we have in the guidance is the new Sular. So we don't have an anticipated any revenues associated with any of additional products, in particular Sular, which obviously has a PDUFA date of April of '08. We don't have any revenues associated with that in there. Clonicel, as you saw, was looks like we are going to have the filing in the first half of '08 now versus the end of '07. So it’s probably not likely that product would be available until '09. As a result of that if you look at the pieces of growth for us, we continue to see a nice growth as you saw in Prenate DHA and the whole family of products holding up very well as we launched that product. We would anticipate to continue to grow that revenue base, as well as, Zovirax that's a super product for us that we were able to license in from on a promotional basis from Biovail, and it will have a continuing impact on the Women's Health revenues as we continue to market that product.

As far as Triglide goes, obviously, we are anticipating launching before year end. The new fenofibrate product and so that along with the existing Triglide formulations should continue to grow the cardiovascular franchise as we convert Sular scripts from old Sular to new Sular. And don't forget Nitrolingual Pumpspray. Nitrolingual continues to grow and it had an 8% growth rate in Addrenex scripts this particular quarter on.

David Buck - Buckingham Research Group

And just a final, the backorder was immaterial in terms of dollars?

Darrell Borne

If you'll see the backorders, I think, in total they are about $5 million, and now it's a good time to change.

David Buck - Buckingham Research Group

Okay. Thanks.

Operator

Thank you. We go next to Don Ellis, Thomas Weisel Partners.

Don Ellis - Thomas Weisel Partners

Thanks. Good afternoon, guys.

Darrell Borne

Good afternoon, Ellis.

Don Ellis - Thomas Weisel Partners

Just a couple of questions, non-operating income shifted over to a negative number this quarter, can you tell us what caused that?

Darrell Borne

Yeah, if you look at the cash that we have on the balance sheet, we've finished the quarter at $204 million. We spent approximately $22 million on tax payments and product in-licensing cost, and we also repurchase, I think it was around $7 million worth our share repurchase. So, with that kind of cash flow coming out, we didn't have a significant balance like we have in other quarters, what you'll see is that we need to maintain close to about [$200] in a quarter in cash on average and about a 5% return to essentially cover the costs associated with the Line of Credit and new convert -- the $325 million convert.

David Buck - Buckingham Research Group

So should we continue to use the number like that for the December quarter of this year?

Darrell Borne

I would say we'll go down a little bit, but I would that it would be -- it will be slightly negative for the fourth quarter. Going into next year obviously as our cash balance continues to grow; it will wind up and be in break-even and slightly positive.

David Buck - Buckingham Research Group

Okay. Next question is on the tax rate is little higher than what we are looking for?

Darrell Borne

Yeah, as far as the taxes go, obviously, one of the things that we've said is as we continue to work on development projects and a number of these projects are actually international, Sular is an example of that. As those expenditures are off-shore, you do not pick up the tax benefits associated with that, so obviously there is that extra can give me a tick-up in your tax rate. Going into next year obviously, we anticipate to get the benefits for new Sular as well as for some of the other products. And so you should see a tax rate in the 35, 36 range.

David Buck - Buckingham Research Group

For -- that's what you're assuming for 2008?

Darrell Borne

That's correct.

David Buck - Buckingham Research Group

Sure. That’s all the questions I had. Thank you.

Darrell Borne

Thank you.

Operator

Thank you. We'll go next to Angela Larson, SIG.

Angela Larson - SIG

Thanks for taking the question. Could you give us a little color on the pediatric run rate? Do you feel like this quarter was fully reflective of the quarter in the volume -- the transitions to be, and it's greater than we lined as complete and the inventories are stable?

Darrell Borne

To answer your question on that, obviously one of the things that Patrick had mentioned on his portion of call is various seasonalities with some of the products. Obviously with Orapred ODT with the first quarters and fourth quarters being the allergy season and obviously it's an asthma product you typically see higher scripts in those two quarters. So, I guess, from a run rate standpoint you are going to have seasonality associated with that. We would expect to have some higher revenues associated with that. I would say from a sales perspective, they were fairly normal for Orapred ODT, as you saw, as I also mentioned we had some manufacturing issues with that we are not able to get the product until the towards the end of the quarter which obviously cost our DSOs to go up a little bit. But a long story short, it's fairly -- it was fairly normally for the PDS group.

Angela Larson - SIG

Great, and then on the SG&A cost savings, it's been great to see the sequential tightening there. Do you expect that to continue? And, I know, you don't want to give specifics for '08, but should we be looking for us to run in this general level, or because you have new launches, will there be some expenditures beyond the norm?

Darrell Borne

If you look at the potential for next year there is going to be quite a few product launches that we would anticipate. So, obviously, you are going to have launch costs associated with those products. As far as the sales rep cost we are not -- at this point unless we get additional products that would make sense to add reps we are not planning on adding any additional reps. So, you would have a similar run rate, as far as, that is concerned. The wildcard that everybody is taking into consideration is -- remember our royalties are in SG&A, and we have significant royalty rate on a couple of products in particular, Orapred ODT, which is in the 35% range. So, as sales continue to grow obviously the royalty portion of SG&A is going to continue to grow.

Angela Larson - SIG

Is there any chance you would start breaking that out?

Darrell Borne

Maybe a possibility, but right now we just work it into SG&A.

Angela Larson - SIG

Okay. Thank you.

Darrell Borne

Okay.

Operator

Thank you. We’ll go next to Ken Trbovich, RBC Capital Markets.

Ken Trbovich - RBC Capital Markets

Thanks for taking my questions.

Darrell Borne

Hey, Ken.

Ken Trbovich - RBC Capital Markets

How are you?

Darrell Borne

We are doing well, thank you.

Ken Trbovich - RBC Capital Markets

Yeah, its look it, I guess one of the question I was trying to understand with regard to the Women's Health business is Prenate DHA, how much stocking occurred during the quarter?

Patrick Fourteau

Not much, not much, as a matter of fact we have one product where we have moved faster than what we expected in term of updates, so we ended up the quarter with fairly low levels.

Ken Trbovich - RBC Capital Markets

Okay, and then with OptiNate coming down while Prenate DHA is growing, is there any risk to the OptiNate channel inventory or is that something you guys have already been in the process to many?

Patrick Fourteau

You know that we have IMA agreements in place, where the product was never “seller for us.” So, you know, the inventory is going down, naturally it doesn’t have any impact on our results.

Ken Trbovich - RBC Capital Markets

Okay, and then finally just with regard to the gains, I know, there was couple of questions about the new products and the fact that you guys, with the exception of the Sular line extension or new formulation, you don't have new products in there. Do you have launch cost associated with the new Sular formulation in there?

Darrell Borne

We do have launch cost in there in the first half of the year, yes.

Ken Trbovich - RBC Capital Markets

Okay, and then I know in response to Angela's question, you’ve said that you weren’t planning to expand the sales force. How are you going to sort of manage the new launches and perhaps try to reintegrate growth with Sular, without expanding the sales force, I know, obviously in the last few months we’ve seen Sular's scrips decline, and at least in terms of the rate of growth even slowing, I am just sort of curious given the number of new product launches, how you guys plan to manage that?

Patrick Fourteau

Well, in terms of the new, obviously to be consistent we have taken in our 2008 guidance, we have not taken any of the new products. Therefore, we have not taken any of the launch costs associated with it, and those launch costs could include some sales force expansion. You make a very good point, as far as Sular is concerned, because I think that here it’s a debate internally, but and I'll give you the sense of the debate. The debate is that we've always seen that we have been able to move Sular marketshare when we have increased the share of voice behind it. We are at discrete movement from 1 to 1.5 to 1.8 and those movements were always linked to increase in size of the Sciele’s voice, increasing the number of reps. With the new Sular formulation, what we would like to do is to find a deal that would allow us to increase the size of the sales force without having to pay for it. Remember the way we did it when we launched the DHA. We contracted [Vivax] buyback that allowed us to pay for an addition to a 100 to 200 reps, and that has allowed us to launch very successfully the product. We did the same, by the way, when with Addrenex products, and we are able to increase the size of our PCP sales force paying for its users --acquisition of those products, and that has allowed us to increase the market share of Sular at that point in time. Here we are, as I mentioned, and maybe we have not generally, it was maybe a ground in that, also commented that I had but, we are very actively looking at those opportunities and I, you know, you will see and I hope we will see very, very soon an opportunity that would allow us to move concurrently into the type of approach that we have taken with the Vivax.

Ken Trbovich - RBC Capital Markets

Okay. Then one final question, if you get a positive decision on the second should we expect that line extension this year or next?

Patrick Fourteau

It's going to be next year, anyway.

Darrell Borne

Okay. And then also, Ken, to that point if we do get approval soon, obviously we will be working on the conversion in early '08. So, obviously the revenues that are associated with old Sular and new Sular clearly will be impacted in the first half of the year. So I would anticipate lower revenues in the first half of the year, obviously higher revenues in the second half of the year. So as you are modeling out your revenues and EPS, take that into consideration.

Ken Trbovich - RBC Capital Markets

Okay, thank you.

Darrell Borne

Okay.

Operator

(Operator Instructions) We'll go next to David Steinberg, Deutsche Bank.

David Steinberg - Deutsche Bank

Thanks. I have a couple of…

Darrell Borne

Hello, David.

David Steinberg - Deutsche Bank

Hey, how are you?

Darrell Borne

Fine.

David Steinberg - Deutsche Bank

Good. Just a couple of Sular questions? First; Norvasc is now being generic for a couple of quarters, I am wondering if you've seen any changes at all in your formulary status since that's been genericised for sure?

Patrick Fourteau

Those have been certainly not -- no changes in formulary stages. We have had some losses on Medicaid side, okay. That has been really the main impact, I think there is just a weight of big Norvasc becoming generic, which is right now (inaudible) we were able to grow the scrips.

David Steinberg - Deutsche Bank

Right, okay. Okay. And then with regards to your Sular franchise, next year, obviously it would include some existing Sular likely some new Sular and potentially and hypothetically authorized generic in Sular. I know you indicated that to expect the new Sular in your revenues next year, but could you give us a sense of the level vis-à-vis 2007, do you think the franchise, the aggregate franchise will be higher in revenues, lower in revenues, about the same.

Patrick Fourteau

Yeah, let me first address two sides of your question. I think that you are, maybe, under wrong assumption when you think that there's going to be old Sular and new Sular co-existing. But we're going to be doing it when we launch a new Sular, we're going to take the old Sular out. Okay, so we're going to switch everything to the new Sular.

David Steinberg - Deutsche Bank

Okay.

Patrick Fourteau

So what you are going to find is that, to the point that was made by Darrel earlier and we are basically planning on adding an 80% to 85% conversion. So you are going to see on the TRX side most probably there will be an impetus, as you well know David when you launch a new product, the sales force might be excited but it's going to be a difficult market. So I think that on the TRX side you are going to see something which is going to be down may be 5% to 10%, I would say minimum. Okay, however, that's going to be made up, more than made up obviously by the impact of the price increases that we have put in place that will play fully in 2008 than in 2007 and more importantly on the gross margin side, do not forget that's a new Sular formulation will have a much better gross margin profile than the old Sular formulation.

David Steinberg - Deutsche Bank

Okay. So putting that all together than when you add up all the revenue pieces should we assume revenues up slightly, obviously more profits….

Patrick Fourteau

As to the revenue, David we are very conservative by nature okay. So I let you do that --assume that from our standpoint the way we have planned that is to be extremely conservative.

David Steinberg - Deutsche Bank

Okay. Thanks a lot.

Operator

Thank you. We'll go next to Gur Roshwalb, Piper Jaffray.

Gur Roshwalb - Piper Jaffray

Good evening. Thank you for taking the question.

Patrick Fourteau

Hu Gur, how are you?

Gur Roshwalb - Piper Jaffray

Good, thank you. So several actually, but i first is about Sular. How do you plan to position reimbursement for the new Sular and do you think you would get any pushback from potential generic Sular that you theoretically anticipated in the second half of '08?

Patrick Fourteau

To that first question, first of all in it's important to know that we have already, we have a very active managed care group and we have had some pretty good feedback right now there was the [AMCT] conference just last week And we have been able to approach most of our partners in the managed care side and I think that compared for both Sular as well as the addition of our new Fenofibrate, will be well receive by the managed care. I don't think that we'll have resistance there. So I don't think that from the reimbursement standpoint we are going to have obviously changes for that standpoint.

Darrell Borne

Gur, there is also something else to take into consideration is Patrick had mentioned we will have higher gross margins on Sular, which will allow us to be able to give additional discounts if required. Which obviously puts us in a descent position from a managed care perspective, but as Patrick mentioned we think we are going to be in great shape.

Gur Roshwalb - Piper Jaffray

Thank you and my next question, the current assumption for timing of market entry for PSD502 originally I think it was being modeled out at least by me at the end of 2009 maybe early 2010, with the fact that you don't need to do 12 months open label trial. Do you expect PSD502 to be on the market earlier?

Patrick Fourteau

We would, but we are people from Missouri, even though my accent does not betray it and stile we see it, we don't see it.

Gur Roshwalb - Piper Jaffray

Fair enough. I have just two more quick modeling questions. The start up course for the initiation of Phase III for Clonicel and PSD502. Are they being booked in the third or the fourth quarter?

Patrick Fourteau

Those stuff are being booked by our partner, so we should do the opposite.

Gur Roshwalb - Piper Jaffray

Okay, and my last one. You characterized the Triglide revenues, the delay is about $5 million, do we anticipate that being booked in the fourth quarter?

Darrell Borne

We will ship those in the fourth quarter.

Gur Roshwalb - Piper Jaffray

Thank you, very much. I appreciate the answers.

Operator

Thank you. we'll go next to David Buck, Buckingham Research Group.

David Buck - Buckingham Research Group

Yes, thanks for the follow-up. Can you just give me a sense of what the actual pediatrics sales were in the quarter, just so I can get an apples-to-apples comparison and maybe some help on the Women's Health side, what approximately the (inaudible) was of sales and maybe some ranges, Sular whether it was in the $27 million to $28 million range?

Darrell Borne

As you know, David we don't breakout individual products sales. To recall from the conference call that Patrick had mentioned the pediatric products were $12.7 million in the third quarter of '07, obviously that compared to $2.4 million in third quarter of '06. We have pediatric and other products in there. The other products were less than a million dollars. So it's very small, so that’s primarily obliviously the pediatric products. On the Women's Health front obviously that the revenues were $21.3 million for the third quarter compared to $12.7 million in the third quarter of '06.

Patrick Fourteau

And for the Zovirax, remember the range that we gave earlier when we launched when we announced that deal it was around $10 million to $15 million. As some seasonality to it, so model it around to top end of that number with a little seasonality that would bring down that number.

David Buck - Buckingham Research Group

Okay. And on the gross margin front it’s a little bit softer than we were anticipating in the quarter. Any I guess timing and price increases did that have any impact and should we be seeing a sequentially higher gross margin in the fourth quarter?

Darrell Borne

Yeah exactly.

Patrick Fourteau

Yeah it's Patrick. What you typically see to your point there and when we do price increases and on the legalized last when we did was back in the July timeframe. It typically takes about a quarter before that actually plays out because as our IMA agreements with the wholesalers. So you do typically see the price increases in the following quarter.

David Buck - Buckingham Research Group

Okay and one final one just for Patrick on. I think it was address a little bit, but on the Sular the prescription growth slowing you had talked about previously, hope I guess when Norvasc went generic that you'll be seeing a return to prescription growth. I guess for 2008 you mentioned there is potentially a prescription decline but can you give us a sense of fourth quarter would you expect any changes in terms of prescription growth rate and for…

Patrick Fourteau

Fourth quarter I think what we are seeing is a flattening. There is a problem right now that you guys may be aware when you're on conference call with other companies, which rely on IMS data moving forward. You may be aware that IMS is revising their data. So right now when we are, as we are not talking about big growth we're talking about 5% to 7% growth as we have seen it in the course of the last two quarters. Obviously the changes in methodology that IMS has could have an impact and it has not been determined of 6% to 7% over statement. The previous month versus what they're going to report moving forward. So it's going to be a little bit difficult what obviously what we count on moving forward right now is really flat type of growth.

David Buck - Buckingham Research Group

And for new Sular what triggers the determination to take the old drug of the market. And is it going to be something immediately wait to see what prescriptions are at one month, two month?

Patrick Fourteau

It's got to be now then and now.

David Buck - Buckingham Research Group

Okay so when new Sular comes in the market old Sular goes off is that right?

Patrick Fourteau

Yeah, it's like a magician trick. You see it, you don't.

David Buck - Buckingham Research Group

Okay fair enough, thanks.

Operator

Thank you. We'll go next to [Alex Rygiel] of FBR.

Alex Rygiel - FBR

Good afternoon it's Alex Rygiel on behalf of Robert Uhl at FBR. Just a follow-up question on Sular. One of the initiatives that just mentioned earlier was the increased focus on high Norvasc prescribers to try to get enough lasting prescriptions. But I'm just wondering if you've had any feedback on that. What has been, how is that strategy resonated with those prescribers?

Patrick Fourteau

Obviously it has not resonated to the extent that we were expecting it. So I think what we are seeing in term of growth, strengthening we have not been able to convert, we are still able to grow with our existing base. So in terms of sales strategy moving forward what you are going to see as a focus, on IR frequency with our existing prescribe base.

Alex Rygiel - FBR

And do you have any thought as to what bust on to those barriers. Why haven't those “prescirbers” come along with any common objectives, objections that they have been giving your sales reps?

Patrick Fourteau

Obviously they are used to, we have not been able to convene them, that's all that I can tell you as far as we are concerned, because this is not being something a message has not been strong enough to resonate they were so used to Norvasc they know that its generic and now they are used to that being generic and we have not been able to make a change.

Alex Rygiel - FBR

Great. Thank you.

Operator

Thank you, we’ll go next to Ken Trbovich, RBC Capital Markets.

Ken Trbovich - RBC Capital markets

Hi, thanks for taking this follow-up. Darrell just a quick accounting question on the amortization expense does that reflect to full quarter with Alliant or should we expect that going up in the fourth quarter?

Darrell Borne

No, that should be the ongoing run rate.

Ken Trbovich - RBC Capital markets

Okay. Thank you.

Operator

And we’ll go next to [Natalie Gazal], Banc of America Securities.

Natalie Gazal - Banc of America Securities

Hi thanks for taking my question. I don’t know that if had mentioned this earlier, will your Sular line extension be in the same tablet form or will it be in pump spray?

Patrick Fourteau

Sular will be a new tablet formulation with a lower dose.

Natalie Gazal - Banc of America Securities

Okay. Thank you.

Operator

Thank you. And with no further questions, I would like to turn the conference back over to Mr. Fourteau for additional or closing remarks.

Patrick Fourteau

Well, we would like to thank you very much for your participation in that call and if you have any additional questions we are obviously at your disposal to answer that. Thank you very much.

Operator

Thank you for your participation. That does conclude today's conclude today's conference. You may disconnect at this time.

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