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Auxilium Pharmaceuticals Inc. (NASDAQ:AUXL)

Q3 2007 Earnings Call

October 31, 2007 10:00 am ET

Executives

Jennifer Evans Stacey - Executive Vice President, GeneralCounsel, Human Resources and Secretary

Armando Anido - Chief Executive Officer and President ofAuxillium Pharmaceuticals

Roger Graham - Executive Vice President of Sales andMarketing

Jim Fickenscher - Chief Financial Officer

Dr. Jyrki Mattila - Executive Vice President of BusinessDevelopment and Technical Operations

Analysts

Matthew Renna - Soleil

Gregory Fraser - Merrill Lynch

Lucy Lu - Citigroup

Chris Holterhoff - ThinkEquity Partners

Elizabeth Naldi - Piper Jaffray

Greg Gust - Roth Capital Partners

Operator

Good morning, ladies and gentlemen and welcome to theAuxillium Pharmaceuticals Third Quarter 2007 Earnings Conference Call. Today'scall is being recorded. At this time, all participants have been placed in alisten-only mode.

I will now turn the call over to Jennifer Evans Stacey,Executive Vice President, General Counsel, Human Resources and Secretary forAuxillium.

Jennifer Evans Stacey

Good morning, everyone. With me today is Armando Anido,Chief Executive Officer and President of Auxillium Pharmaceuticals. RogerGraham, Auxillium's Executive Vice President, Sales and Marketing, JimFickenscher, Chief Financial Officer, and Dr. Jyrki Mattila, Auxilium'sExecutive Vice President, Business Development and Technical Operations.

Before we begin, I would like to remind you that we willmake various remarks during this conference call that constituteforward-looking statements for purposes of the Safe Harbor provisions of thePrivate Securities Litigation Reform Act of 1995.

Forward-looking statements are all statements other thanstatements of historical fact and generally may be identified by the wordsbelieve, may, appear, feel, could, will, estimate, continue, anticipate, see,intend, should, plan, hope, potential and expect.

Today, our forward-looking statements will cover among otherthings, our plans in what we believe to be the prospects for the company,including statements regarding the timing for enrollment of patients inclinical trials for XIAFLEX, clostridial collagenase for injection, the timingof our BLA conditions for XIAFLEX and related product approval, the developmentschedule for our product candidates, the anticipated manufacturing output ofour facility in Horsham in 2007 and timing and effect of planned upgrades forsuch facility.

The interpretation of clinical results, the benefit topatients of XIAFLEX, our ability and opportunity to obtain regulatory approvaland commercialize XIAFLEX outside the United States. Our ability to achieve our2007 R&D milestones, the interpretation of market data, Testim sales and marketgrowth and the factors underlying such growth.

Our ability to achieve Testim market growth and the focus ofour future Testim sales force efforts and our anticipated financial performanceduring 2007 and the financial milestones we may achieve for 2007, including our2007 net revenues, R&D spending, selling, general and administrativeexpenses and net loss and the benefits to be realized by the company as aresult of recent additions to the management team.

Actual results may differ materially from those reflected inthese forward-looking statements as a result of the delay of clinical trialsfor our product candidates, adverse events in our clinical trials, studyresults, changes in regulatory environments of the industry, our inability tocompete effectively in our markets, our inability to manufacturer XIAFLEX, thefailure of our third party manufacturers or supplier to say meet theircontractual obligations as well as various factors discussed in our annualreport on Form 10-K for the year ended December 31, 2006, and our quarterlyreport on Form 10-Q for the quarterly period ended June 30, 2007.

Given these risks and uncertainties, you should not rely onany such factors or forward-looking statements. Forward-looking statementsprovide the company's expectations, plans and forecasts for future events andviewed as of the date hereof.

While the company may elect to update these forward-lookingstatements at some point in the future, the company specifically disclaims anyobligation to do so. Also today's call may not be reproduced in any formwithout our express written consent.

I am pleased to turn the call over to our Chief ExecutiveOfficer and President, Armando Anido.

Armando Anido

Thank you, Jennifer. And thanks to all of you who are joiningus on the phone or via webcast. The subject of today's call is to bring you upto date on our progress with our potentially company transforming, late-stagepipeline candidate XIAFLEX, discuss the record achievements of Testim, reviewour financial results for the third quarter 2007 and discuss our revisedfinancial guidance for 2007.

I am thrilled with the terrific progress we are making withour two key assets, XIAFLEX and Testim. The major headlines for the quarterare, first, we believe that we will complete enrollment in bothplacebo-controlled Phase III studies of XIAFLEX in Dupuytren's contracture bythe end of the year in line with our previous expectations.

As a result, we expect to have top-line results from thesetrials in second quarter 2008 and file the BLA in early 2009. The headline onthe Testim front is that we achieved record net revenues of $26.2 million forthe third quarter 2007, up 49% from the year-ago quarter, driven by stronggrowth in prescriptions and market share, but also aided by a modest increasein wholesaler inventories.

Based on these results and the outlook for the remainder ofthe year, we now anticipate that net revenues will be in the range of $92million to $96 million instead of the previously announced range of $88 millionto $92 million. Now let's take a deeper look at the progress we are making onXIAFLEX.

During the third quarter, we made excellent progress towardsachieving our development objectives for XIAFLEX. After months of hard work, wefiled a complete response letter to the FDA concerning the meltback issue thatwe experienced in late 2006.

And within 30 days of submitting the CRL, we received FDAclearance to initiate our Phase III clinical trials for XIAFLEX in thetreatment of Dupuytren's contracture.

We also disclosed encouraging results from the Xiaflextrials that were suspended in late 2006 and saw that 14 of the 22 patients whoreceived Xiaflex had clinical success while those who received placeboinjections showed no success. Most of these patients, as you know, had only asingle dose of Xiaflex.

In September, we announced that the first patients had beendosed in two Xiaflex Phase III studies, the U.S. Cord I and the Australian CordII studies. Finally, we were very pleased that the peer review Journal of HandSurgery published a comprehensive overview of the results of the initialpivotal Phase III trial of Xiaflex in Dupuytren's contracture.

We anticipate that we will complete enrollment in the Cord Iand Cord II studies before the end of 2007. I would also like to note that thetwo open-label non-controlled safety and efficacy studies that round out ourPhase III clinical program in Dupuytren's are also up and running as well.Inclusion and exclusion criteria, as well as the efficacy definition in theseopen-label studies, are the same as in the Cord I study.

Safety end points will be monitored in both open-label oradverse events. Clinical standard laboratory tests and vital signs, gripstrength of the treated hand and immunogenicity. Thanks to the dedication ofour manufacturing and quality teams, we have made tremendous progress ingetting the Horsham manufacturing facility ready to be our commercialmanufacturing site for the Xiaflex active pharmaceutical agreement or API.

We began manufacturing Xiaflex in Horsham late last year andby the end of December of this year, we expect to complete approximately 10batches of XIaflex at Horsham, including the API required for our BLA batches.We're very pleased with the quality of the product being produced and theyields we are achieving.

Early next year, we plan to implement a facility shutdown inwhich enhancement to the facility, primarily expanding supporting utilitieswill be made to allow for efficient production of commercial volumes ofXiaflex. Finally, we have been making progress in the European Union withregard to the Dupuytren's indication.

As part of the Joint II open-label study, we plan to enrollpatients in several different European countries. Two sites in Switzerland areexpected to begin dosing soon. We recently received approval of clinical trialapplications to commence dosing in Sweden and Denmark as well. Though webelieve that our current clinical plans for Dupuytren's contracture provides uswith a strong package for gaining approval of Xiaflex in Europe.

We are continuing to seek guidance on what additionalinformation would be required for a full regulatory submission includingwhether it will be necessary to conduct any trials other than those which wehave currently planned. Regarding Xiaflex in Peyronie's Disease, the in-lifeportion of the pre-clinical local tolerability study has been completed.

Xiaflex was dosed into four penile structures by using adosing scheme mimicking the expected clinical use. Histopathology,toxicokinetic and immunogenicity data is currently being analyzed. We expect tosubmit the results of this to the FDA during the first half of 2008. Pendingapproval from the FDA regarding the animal study, we anticipate initiating aPhase IIb study in second quarter 2008.

Let me now turn the call over to Roger Graham, our ExecutiveVice President of Sales and Marketing. Roger will share with you the specificsof our accomplishments with Testim during the third quarter. Roger.

Roger Graham

Thank you, Armando. Our performance in the third quarter of2007 demonstrates our continued excellent progress in growing the Testim brand.Testim quarterly net revenues reached an all-time high for Auxillium at$26.2million. In the third quarter, U.S. Testim total prescriptions grew by33.4% over the comparable period of 2006, while the U.S. gel market grew 17%during the same period.

The 110,000 total prescriptions that were reported in thethird quarter of 2007 by IMS represents our highest quarterly level ever.According to IMS, Testim's market share for the month of September increased toa record 20.7% of total prescriptions for the gel segment, up from 19.8% at theend of June 2007 and up from 18.2% at the end of September 2006.

According to IMS exponent data with the highest prescribingurologists we had a record market share of 38.8% in September. We believe thisongoing endorsement by our highest prescribing urologists speaks to the benefitthat Testim can provide to patients versus our competitors.

In addition to continuing to gain share in the urologysegment, we plan to focus future sales growth on attaining the same high sharelevels with our primary care and endocrinology audiences.

With our representatives' singular focus on selling Testim,we believe we can continue to utilize our resources to more effectively educateour customers on the advantages of Testim while increasing their screening for,and diagnosis of, low testosterone where appropriate.

For the balance of 2007, we will continue to focus onimproving our execution against this plan as we believe this will allow us tomaintain Testim as the fastest growing testosterone replacement therapy in theU.S.

Regarding Testim's patent coverage in the U.S., our currentpatent provides protections through June of 2008. In September, the USPTOissued a notice of allowance for certain claims from the pending application.We believe that the patent will issue at the end of 2007 or beginning of 2008.

Once issued, the patent should extend protection for Testiminto 2025. In addition, we expect continuations and divisional applicationswill be filed shortly in order to potentially further broaden Testim's patentprotection.

At this point I would like to turn the call over to, ourChief Financial Officer, Jim Fickenscher and ask him to take us through thefinancial details for the quarter. Jim?

Jim Fickenscher

Thank you, Roger. Good morning to everyone on the call. Iwill be focusing my comments today on the results for the quarter ended September30, 2007, but I will be happy to address any issues regarding the year-to-dateSeptember 30 results in the Question and Answer Session.

For the quarter ended September 30, 2007, we reported recordnet revenues of $26.2 million compared to net revenues of $17.6 million in thethird quarter of 2006, a 49% increase. The bulk of this increase can beattributed to the increase in prescription volumes and the price increase takenearlier this year.

As Armando mentioned in his discussion on Testim, we did seea modest rise in the number of day sales on hand in the wholesale channelinventory. We believe that this added approximately $800,000 in revenues duringthe quarter. In addition to the increased revenues from Testim in the U.S.,revenue related to shipments to Ipsen in Europe and Paladin in Canada wasapproximately $400,000 higher than the third quarter of 2006.

Net loss for the third quarter was $6.9 million or $0.17 pershare compared to a net loss of $11.8 million or $0.39 a share reported for thethird quarter of 2006. Total stock based compensation expense was $1.6 millioncompared to $1 million for the third quarter of '06.

Our gross margin on net revenue was 75.5% for the thirdquarter of '07 and 74.6% for the third quarter of '06. Gross margin reflectscost of products sold as well as royalty payments made to our licensor on thesale of Testim. The improvement in gross margin reflects the impact ofyear-over-year price increases partially offset by increases in lower margin,international product shipments and coupon usage.

Research and development costs for the third quarter of 2007were $9.8 million compared with $8.5 million for the comparable year agoperiod. The increase in R&D costs was primarily due to the increasedspending for the development and manufacturing of Xiaflex.

Selling, general and administrative expenses totaled $18.2million for the quarter ended September 30, '07, compared with $17.1 millionfor the year ago quarter. The cost for the third quarter of 2006 included a $1.8million cost to terminate Auxillium's co-promotion agreement with Oscientpharmaceuticals. Including the termination cost from the base the increase wasprimarily due to higher investment in promotional spending on Testim includingthe costs of increasing our sales force.

Pre-launch marketing for Xiaflex, and higher stock-basedcompensation expense. At September 30, 2007, Auxillium had $82.5 million incash, cash equivalents and short-term investments compared to $87.2 million atJune 30, 2007. We believe that our cash balance at the end of the third quarterwill take us into 2009.

As of September 30th, we had approximately 40.3million shares of common stock outstanding, plus outstanding warrants topurchase approximately 2.6 million shares of our common stock and 3.9 millionadditional outstanding employee stock options to purchase shares of commonstock at varying prices.

Armando mentioned earlier in the call, that we haveincreased our guidance for full year revenue to say $92 million to $96 millionfrom our previous guidance of $88 million to $92 million. We have alsoevaluated our spending patterns, and we believe that we may also spend a bitmore in research and development this year than previously anticipated largelydue to the earlier than anticipated initiation of the Phase III programs forXiaflex. Therefore, for 2007, we expect that research and development spendingwill be in the range of $40 million to $44 million, up from our previouslyannounced range of $38 million to $42 million.

We continue to believe that SG&A spending will be in thepreviously announced range of $74 million to $77 million, and the net effect ofthe changes in revenues in R&D spending results in a slightly little lowernet loss, which we now anticipate will be in the range of $39 million to $43million instead of the previously announced range of $40 million to $44million.

Thank you very much for your attention. And I'll turn thecall back over to Armando.

Armando Anido

Thank you, Jim and Roger. What a great quarter. In additionto the accomplishments we just described, we continue to add depth andexperience to our team. I am pleased to announce four recent key personneladditions to Auxilium designed to help us continue driving Testim revenues anddeveloping Xiaflex into a potential blockbuster product.

First, Bob DuFour joined Auxilium in the role of VicePresident, Marketing reporting under Roger. Bob joined us from Wyeth and brings20 years of experience to our marketing team. His most recent role was that ofVice President and Global Business Manager, Oncology, where he was responsiblefor leading and building a cross-functional team that prepared the organizationfor Wyeth's launch of Torisil.

Secondly, Nancy Fetrow joined Auxilium in the role of VicePresident, Project Management, reporting to Jyrki Mattila, our head of R&D.Nancy brings over 20 years of experience to the role. Most recently from AstraZeneca, where she held positions of increasing responsibility within theclinical drug development and project management departments.

Bill Groft joined Auxilium in the role of Senior Director,Manufacturing reporting in to Mike Cowen, our head of manufacturing. Bill comesto us from CollaGenex and has over 10 years of experience in the developmentand manufacture of small-molecule products inclusive of ointments, gels andsolid dosage forms.

Finally, Dave Fetko joined Auxilium in the role of SeniorDirector, Engineering and Facilities. Prior to joining Auxilium, Dave wasengineering director, Worldwide Engineering and Real Estate at Johnson andJohnson corporate. He has more than 20 years of pharmaceutical andbiopharmaceutical experience in the areas of solid dosage, sterile andbioprocess engineering.

We welcome our new Auxilium team members and believe theirbreadth of experience will be invaluable to us as we continue to develop as anorganization. I would also like to share some additional good news for us.Auxilium has recently been named as one of the 10 Best Places to Work in thegreater Philadelphia area by the Philadelphia Business Journal.

A recognition much Auxilium's achievements in creating apositive work environment that attracts and retains employees through acombination of benefits, working conditions, and company culture. Also, Deloitteand Touche named Auxilium a rising star in its 2007 Technology Fast 50 programfor the greater Philadelphia area, a ranking of the regions 50 fastest-growingtechnology and life sciences companies by percentage of revenue growth.

We have also been informed we're one of three finalists forthe life sciences company of the year award in the Eastern Technology Council's2007 Enterprise Awards. The Enterprise Awards recognize the achievements of thePhiladelphia region's most outstanding technology and life sciences companies.

We're very pleased with the excellent progress in the thirdquarter toward achieving our development objectives for Xiaflex, and we believewe're on track to continue the recent momentum by completing enrollment by theend of 2007 in both the pivotal Phase III U.S. cord 1 study and the Australiancord 2 study.

Also, our record net revenues in the third quarter 2007further demonstrate our tremendous progress in growing the Testim brand, and weare very happy to be increasing our revenue guidance for 2007.

In closing, let me first thank our shareholders for yourcontinued support. Additionally, I want to give a special thanks to ouremployees for their untiring energy, spirited enthusiasm and relentlesscommitment to making Auxilium a success. We're truly excited about theprospects, opportunities, and potential for success in front of us.

Thank you. We're now going to open up the call forquestions. Operator?

Questions-and-Answers Session

Operator

(Operator Instructions) Your first question comes from theline of Matt Renna with Soleil. Please proceed.

Matthew Renna - Soleil

Hi. Good morning, guys. Great quarter. My question relatesto the Testim IP. You mentioned filing some additional information on Testim inthe near term. Can you elaborate on that? And maybe comment on what yourthoughts are on your ability get a 30-month stay on any paragraph III that maybe filed already when you get the new patent issued? Thank you.

Armando Anido

Matt, there are multiple questions, I guess in your onequestion. And let me start with, you know, we continue to believe that we willhave, post the allowance, should be able to get our issuance sometime beforethe end of the year, beginning of next year.

As we have stated previously, if you remember back to, Iguess, in February when the USPTO asked us to break up the patent into threedifferent pieces and actually to go forward with only one of them, we mentionedat that particular point that more than likely we would end up filing somedivisional applications in order to pursue the composition of matter and themethod to manufacture and that will happen shortly.

In addition, the claims that are being supported at thispoint with the current allowance, we believe that there is probably a fewadditional pieces to further broaden those claims that we believe we should goforward with some continuances.

And that is the subject of what we will plan to do in orderto further broaden the expected issuance and then later on, hopefully broadenthe patent protection with the divisional as well.

The last question, I think that you asked was relative towhether or not we will be able to get a 30-month stay, and if there is somebodythat does file a Paragraph IV and we do believe that we do have significantprotection with this patent once issued and that we do believe that, we have apotential to get the 30-month stay because we have not had any of them thathave been filed against us.

No Paragraph IV is have been filed at this particular pointand we do believe that we do have the ability to get the 30-month protection ifsomebody does file.

Matthew Renna - Soleil

Great. Thanks, guys.

Operator

Your next question comes from the line of Gregory Fraserwith Merrill Lynch. Please proceed.

Gregory Fraser - Merrill Lynch

Thanks, good morning, guys.

Armando Anido

Good morning, Greg.

Gregory Fraser - Merrill Lynch

Can you tell us where Testim wholesaler inventory levelsstood in number of days at the end of the quarter?

Roger Graham

You know, Greg, we have not ever disclosed the exact numberof days. What we have always said and will continue to say is that we do haveinventory management agreements in place with the three major wholesalers.

And that those IMAs do require them to remain under 30 daysof inventory, but there is no bottom end to it. So what we did see this quarteris that we did see a modest number of days increased that represents about$800,000 in incremental revenue.

Gregory Fraser - Merrill Lynch

Are you still below the 30-day level maximum?

Roger Graham

We are within the IMA contracts at this point.

Gregory Fraser - Merrill Lynch

And can you break out the absolute dollars of internationalsales during the quarter?

Roger Graham

Yes. I think that we had a $400,000 increase quarter onquarter and the absolute number I think was in the neighborhood of --

Armando Anido

$600,000. And remember, Greg, that they comes from a coupledifferent components. We have milestone recognition that's just about $200,000per quarter, which is the amortization of previous cash payment that we'vereceived and so then there was just slightly less than $500,000 in shipment toIpsen and Paladin.

Gregory Fraser - Merrill Lynch

Okay and your R&D guidance apply a pretty wide range for4Q. What are the important factors that we should consider that could influencespending so much? Is it primarily driven by the speed of enrollment in the Dupuytren'sstudies or are there other programs could start during the quarter?

Armando Anido

I think it's primarily, due to the speed of the enrollmentand getting patients into the XIAFLEX. I mean, for the most part, that is avast amount of our spend, as well as the manufacturing side of it as well.

Roger Graham

So, just a little more, I mean, obviously, not only thetotal number of patient get enrolled but also the total number of patients whoreceived, who have already been enrolled but would like to receive a secondinjection and, or a third injections, things like that.

So, each injection along the way has a fee associated withthat, and so it depends a little bit on the timing of when those come in. Andthen, as Armando mentioned, there is some items within the manufacturing thatwe're expecting to fall into the fourth quarter but the timing that far isalways a little bit in the air as well, so that's why the range.

Gregory Fraser - Merrill Lynch

Okay. Thanks. I will get back in the queue.

Roger Graham

Great.

Armando Anido

Thanks, Greg.

Operator

Your next question comes from the line of Lucy Lu withCitigroup. Please proceed.

Lucy Lu - Citigroup

Good morning. Thank you.

Armando Anido

Good morning.

Lucy Lu - Citigroup

I am wondering, if you could just remind us the poweringassumptions for the stipulated studies and so that...

Armando Anido

Okay. Lucy, can you repeat the question? We're having a hardtime on this side hearing it.

Lucy Lu - Citigroup

Sure. I am wondering, if you would just go over the poweringassumptions. Basically, what the primary end point is and how the studies arepowered? What kind of benefit you're hoping to see in the Xiaflex pivotal study?

Armando Anido

I think that relative to the powering, if you go back to theoriginal pivotal trial that we did with 35 patients and we saw 91% efficacy andzero for placebo. We obviously are significantly overpowered in a 216 patientstudy here in the United States with cord 1.

And, I think, that the powering assumptions, if you use the91% and the zero, take you into the high 99-point something percent. And theintent was not to really take a look so much at the efficacy, but it was drivenby the number of patients is driven by the FDA's requirement for a certainnumber of patients to be followed out for a twelve-month time period.

So the 216, assuming some folks don't make it out through a12-month period for follow-up and some fallout, we had to get to that number inorder to ultimately have that twelve-month time period.

Lucy Lu - Citigroup

Okay. Now, Armando, I'm not doubting, whether or not thereis efficacy. I am just wondering, if you could just provide us that informationbefore the study results get released? That's all I'm asking.

Armando Anido

I am trying to understand, Lucy. I don't know exactly whatthe question is, what are you…

Lucy Lu - Citigroup

I am just wondering in the pivotal study, is there an efficacyhurdle for the study to be positive? I mean, we obviously think the studyshould work. I am just wondering, if there is an efficacy hurdle that you haveto meet?

Armando Anido

I think that one of the things that we have commented onpreviously, Lucy, is that we have built into this the power that would say thateven if our efficacy were only 50% and placebo were to achieve 25%, that westill have more than sufficient power to win.

So, I am not sure that, that answers your question entirely,but hopefully that gives you a reasonable perspective on kind of -- I don'tknow that we have an absolute minimum number, minimum percent efficacy at thispoint in the trial design.

Lucy Lu - Citigroup

Okay. Thank you.

Operator

The next question comes from the line of Chris Holterhoffwith ThinkEquity Partners. Please proceed.

Chris Holterhoff - ThinkEquity Partners

Hi, good morning, guys.

Armando Anido

Hey, how are you, Chris.

Chris Holterhoff - ThinkEquity Partners

Good, thanks. Just a question on Testim sales. Seems likethe majority of the increase here is due to higher number of sales forcetargeting the highest-prescribing urologists. I guess, going forward-- justwondering how important you believe this switching study that you reference?How important that is and maybe you can comment, speculate what that study, theeffect of that study on Testim sales might be, going forward?

Armando Anido

Okay. I won't speculate, but I am going to let Roger takethe question on the focus with urology and primary care. We are pretty happywith the results of the independent trial that Larry Lipshultz performed, andwe believe that it further supports that Testim is the better of the twobrands, but Roger can talk a little bit about the focus in urology and primarycare as well as I know.

Roger Graham

Good morning, Chris. Yeah. I think-- as Armando stated,we're obviously very pleased with the results that we're seeing in urology, andI think that's due to the long-term dedication we've had here at Auxillium withthat audience and however, we do see an opportunity with the endocrinology andprimary care groups. And you'll recall that last year, we completed the Oscientco-promotion deal and took over that portion of the responsibility here atAuxillium.

And we're really just now approaching a full year of havingresponsibility for those audiences, so we continue to see positive growththere. Certainly not to the extent that we do with the urologists, but we'regoing in a very positive direction with both audiences. And we expect that tocontinue, and, as a matter of fact, we feel that there is an opportunity toaccelerate that, and that's what we want to try to do.

Chris Holterhoff - ThinkEquity Partners

Okay. Great. Thanks for taking the question andcongratulations on all the progress.

Armando Anido

Great. Thanks a lot, Chris.

Operator

The next question comes from the line of Elizabeth Naldiwith Piper Jaffray.

Elizabeth Naldi - Piper Jaffray

Hi, guys, thanks for taking my call. I was just wondering,if you could give any updates on when you might expect data from BioSpecificsfor new indications for Xiaflex?

Armando Anido

At this particular point it’s really in the hands of thefolks at BTC to provide us with any additional data and information about newindications. They have yet to provide us at this particular point with any newindications since the frozen shoulder indication back couple years ago.

Elizabeth Naldi - Piper Jaffray

Okay, great. Thanks.

Operator

(Operator Instructions) Your next question comes from theline of Greg Gust with Roth Capital Partners. Please proceed.

Greg Gust - Roth Capital Partners

Good morning. Congratulations on the quarter.

Armando Anido

Thank you, Greg.

Greg Gust - Roth Capital Partners

Yes. I just have one quick question, probably for Jim. Ijust wondered what gross-to-net factor that you used to account for discounts,rebates and coupons when coming to your net sales, I mean is there some numberwe should be using for that?

Jim Fickenscher

Yes, Greg, at this point we haven't disclosed the exactnumber. What I can say to you is that we think that it’s fairly normal for theindustry, and it is, let's say, in the mid-teens type of arranged, but we don'twant to get specific as the exact percentages.

Greg Gust - Roth Capital Partners

Okay. So mid-teens?

Jim Fickenscher

Yes.

Greg Gust - Roth Capital Partners

Yes, and also, for some reason, we had-- the OpEx came inconsiderably lower, materially lower, about $1.5 million to $2 million lower,than what we had modeled. Is this just an issue of the timing or is thatsomething we should expect going forward or I mean, can you explain thediscrepancy there?

Jim Fickenscher

It’s hard for me to say because I don't know exactly whatyou included in your model there. But, potentially, with the R&D, we onlysaw the first few centers enrolling patients in the third quarter, so maybethat's part of the reason we do see an acceleration of the R&D happening inthe fourth quarter and that's with our guidance indicates.

I think that we're starting to get to the point now, Greg.On the SG&A where the big bolus of increase regarding Oscient-- Theswitch-over from Oscient to our own sales reps is going to diminish on ayear-over-year basis in the quarter. In fact, in aggregate, there wasn't reallyall that much of a change this year. But we had the $1.8 million payment thatwe made in 2006 that made it look like there wasn't much of an increase, but weare still a growth company.

Our expectation is that we are going to continue to fill outthe organization to prepare for what we think will be rapid success with Xiaflexand growth in the future. But we try very hard to control expenses and toinvest our shareholders' money wisely, so I think that's about the best I cansay with regard to the OpEx.

Greg Gust - Roth Capital Partners

That's great. Thank you.

Operator

There are no additional questions at this time. I would nowlike to turn the presentation back over to Armando Anido for closing remarks.

Armando Anido

Great. Thank you very much, operator. And thank you all toour shareholders and employees that are on the line. It has been a greatquarter for Auxillium, and it has to do with the tremendous amount of energyand effort that our team has been putting behind it.

And we continue to see a very, very bright future forAuxillium, particularly on Xiaflex and Testim. So thank you all very much. Takecare.

Operator

Thank you for your participation in today's conference. Thisconcludes the presentation. You may now disconnect. Good day.

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