Cephalon Q3 2007 Earnings Call Transcript

Cephalon, Inc. (CEPH)

Q3 2007 Earnings Call

November 8, 2007 5:00 pm ET

Executives

Chip Merritt - Senior Director of Investor Relations

Frank Baldino - Chief Executive Officer

Bob Roche - Worldwide Pharmaceutical Operations

Kevin Buchi - Chief Financial Officer

Lesley Russell - Worldwide Medical and Regulatory Operations

John Osborn - General Counsel

Analysts

Jim Birchenough - Lehman Brothers

David Buck - Buckingham Research

Donald Ellis - Thomas Weisel Partners

Gregg Gilbert - Merrill Lynch

Corey Davis - Natexis

Michael Rockefeller - Morgan Stanley

Bret Holley - CIBC World Markets

Eric Schmidt - Cowen and Company

Annabel Samimy - UBS

Gary Nachman - Leerink Swann

Ronny Gal - Sanford C. Bernstein

Presentation

Operator

Good day everyone, and welcome to the Cephalon Third Quarter 2007 Earnings Call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Chip Merritt, Senior Director of Investor Relations. Please go ahead, sir.

Chip Merritt

Thank you. Today we will review Cephalon's financial performance for the third quarter of 2007. Before we begin, let me remind you that certain statements on this call may be forward-looking and are subject to risks and uncertainties associated with the company's business.

These statements may concern, among other things, guidance as to future revenues and earnings, operations, transactions, prospects, intellectual property, litigation and other legal matters, development of pharmaceutical products, clinical trials and potential approval of our product candidates.

The company also may discuss certain non-GAAP financial measures within the meaning of Regulation G during today's call. The information required by Regulation G is available in the earnings press release, and in the Newsroom section of our website at www.cephalon.com.

Additional information and risk factors affecting the company's business and financial prospects, and factors that would cause Cephalon's actual performance to vary from our current expectations, is available in the company's current Form 10-K on file with the SEC.

During this call, we will update full year 2007 guidance and introduce 2008 guidance. Please note that the guidance will remain in effect unless the company provides subsequent modifications or updates.

Our earnings press release is available at www.cephalon.com. Investors with further questions should contact me at 610-738-6376. This conference call is being webcast via the Cephalon homepage, and will be archived for one week after the call.

Speaking on today's call will be Dr. Frank Baldino, Chief Executive Officer, Bob Roche, Worldwide Pharmaceutical Operations, and Kevin Buchi, Chief Financial Officer. Also joining us today, Dr. Lesley Russell, Worldwide Medical and Regulatory Operations and John Osborn, General Counsel. Following remarks by Frank, Bob, and Kevin, we will be pleased to answer your questions.

Now, Frank Baldino.

Frank Baldino

Thanks, Chip, and good afternoon, everyone. Today we are going to discuss the highlights from the third quarter, talk about our opportunities for growth, and provide insight on our 2008 sales and earnings expectations.

Let's start with the business results for the quarter. We continue to deliver strong financial performance this year, in the face of what we knew would be a challenging transitional year. Our adjusted sales during the third quarter were $428.7 million, coming in at the high end of our guidance range of $420 million to $430 million.

Adjusted net income was $72.5 million, exceeding the high end of our guidance of $57 million to $63 million by $9.5 million, truly an excellent result. During the quarter, our R&D and business development activities created great opportunities for future growth. Here are a couple of the key achievements.

We obtained rights to AMRIX, the only once-a-day skeletal muscle relaxant approved in the United States. Bob Roche, our Head of Worldwide Pharmaceutical Operations will discuss this exciting opportunity in greater detail later in the call.

We successfully completed our study with FENTORA, in opioid-tolerant patients with non-cancer breakthrough pain, and later this month, we will file an sNDA seeking to broaden the label. We filed an NDA for the TREANDA for the treatment of chronic lymphocytic leukemia, or CLL.

We successfully completed our Phase III program, evaluating the efficacy and safety of TREANDA, and the treatment of refractory non-Hodgkin's lymphoma patients. And we are on track to file an NDA for this indication by the end of the year.

Also during the quarter, we reached an agreement in principal with the U.S. Attorney's Office in Philadelphia, to settle all federal and related state Medicaid claims concerning the marketing and promotion of our products.

Kevin will discuss the financial and accounting impact of the settlement later in the call. We operate in a highly regulated industry, and as such, we have always been committed to compliance in all areas of our business.

Over the past several years, we have worked to enhance our policies and practices in our commercial operations, and are not only consistent with the letter, but also the spirit of the law. In this ever-changing environment, we are committed to being on the leading edge of this evolutionary process.

To that end, we recently elevated the Chief Compliance Officer position to an Executive Vice President, reporting directly to me, with a dotted line to the Audit Committee of the Board. Our goal is to build compliance into the very fabric of our operations.

Obstructive sleep apnea is one of the most common sleep disorders. In the United States alone, there are approximately 18 million patients suffering from this debilitating disease, almost 2 million of whom utilize Continuous Positive Airway Pressure, or CPAP devices, the main treatment therapy today.

Recent publications demonstrated that significant numbers of OSA patients are suffering from excessive sleepiness are not adequately treated, despite compliance with CPAP devices. In fact, an article in the June issue of Journal of Sleep stated that despite up to seven hours of CPAP compliance per night of use, 50% of patients showed objective signs of excessive sleepiness.

This translates into almost 1 million OSA patients in America who may be excessively sleepy, despite being CPAP compliant. During the quarter, our CNS sales and marketing teams have been focusing additional efforts on promoting PROVIGIL for the treatment of excessive sleepiness associated with OSA.

Other articles in the Journal of the American Medical Association, and the Annals of General Psychiatry reported that OSA is linked with several other medical and psychiatric conditions, including obesity, hypertension and depression. Understanding the comorbidities of these conditions could help physicians better recognize patients who may be suffering from excessive sleepiness associated with OSA.

We believe that elevating the awareness among OSA sufferers that treatment exists for excessive sleepiness associated with this disease may make these patients more likely to seek treatments. In 2008, we intend to begin a focused, direct-to-consumer campaign, highlighting PROVIGIL for the treatment of excessive sleepiness associated with OSA.

With renewed messaging and an effective DTC campaign, and 1,000 representatives detailing the product, we expect to continue to grow this franchise in 2008 and beyond. To secure the future way for this franchise, we continue to study broader medical applications for NUVIGIL to realize its full potential.

To this end, the studies with NUVIGIL are underway, to further develop the clinical utility of this next generation wakefulness product. We soon will complete patient enrollment for a clinical trial with NUVIGIL, examining the effects of cognitive deficits of schizophrenia, and in a separate trial, continue to enroll for a study in bipolar depression.

Later, in the fourth quarter, we will begin a new program to probe excessive sleepiness associated with medical conditions, such as Parkinson's disease and others, in the hopes of securing a broader wake promoting claim in our NUVIGIL label.

We also will begin interim work examining the effects of NUVIGIL on cancer-related fatigue. In addition, we are conducting a Phase IV program designed to further differentiate the product from PROVIGIL within the existing label indication. We believe that data generated by all of these programs will enable us to successfully differentiate the launch of NUVIGIL.

Our pain franchise continues to show great promise. We successfully completed three registration trials that we believe demonstrate the broad clinical utility of FENTORA, in opioid-tolerant patients suffering from breakthrough pain.

These studies are part of an sNDA, including a comprehensive risk management plan that we will file with the FDA later this month. We expect the standard review period, and believe our clinical data supports a broader indication for this product.

Now let's turn to two products, AMRIX and TREANDA, which will lead our growth in the near term. Let's start with AMRIX, which we acquired in August. I have asked Bob Roche to say a few words about this new product opportunity.

Bob Roche

Thank you, Frank. AMRIX represents a terrific new opportunity for Cephalon. It is the only once-a-day skeletal muscle relaxant, or SMR, approved in America. And this along with its favorable efficacy and safety profile, will position it very competitively in this big and growing market.

The active ingredient in AMRIX is cyclobenzaprine hydrochloride, and this molecule is well known to most physicians as Flexeril, a drug they have been prescribing for many, many years. Flexeril, and other products in this space like Skelaxin and Soma, are typically dosed three or four times a day, and while they do work pretty well, their dosing regimens can create major compliance problems for patients resulting in suboptimal therapeutic outcomes.

For years, once-a-day dosing has been the Holy Grail in the SMR market, and now only AMRIX has it. Probably linked to this once-a-day dosing, AMRIX also has a very low incidence of somnolence, which is the most problematic side effect of the current SMRs. Our label clearly states that AMRIX has lower rates of somnolence than Flexeril, when dosed three times a day.

The market for muscle relaxants in the United States is very large and growing, with approximately 45 million prescriptions written in the past year. Cyclobenzaprine the market leader by prescriptions enjoys almost a 38% market share, or around 17 million scrips.

Clearly physicians know this product well, and are very comfortable using it. The market research we've done indicates that a once-a-day formulation, together with a low incidence of somnolence, will be a straightforward, compelling message to these doctors.

They tell us that they will use AMRIX because it will allow them to provide tremendous clinical benefit and convenience for their patients. AMRIX is being sold by our CNS and pain sales forces, and the fit with existing products is very close.

Most of their current doctors already prescribe significant amounts of SMRs, but we are also adding new physicians to the call universe of both the CNS and pain teams. As these realignments are complete, we will be able to reach 40,000 to 50,000 of the top tier prescribers of skeletal muscle relaxants.

In October, we made AMRIX available to pharmacies, and concentrated our efforts on stocking the distribution channel. We also began selective call activity on high prescribers and key opinion leaders, to ensure that they got some early experience with the product.

November marks the beginning of the widespread promotion of AMRIX, and already the feedback is very positive. We think AMRIX is going to be a great product. It will grow into a significant revenue generator in its own right, and help to bridge the company through the launches of TREANDA, NUVIGIL, and the extended indications of FENTORA in the years ahead.

Frank, back to you.

Frank Baldino

Thanks, Bob. Our Oncology business unit continued to make excellent progress during the quarter. On September 21st, we submitted an NDA to the FDA requesting approval of TREANDA, for treatment naive patients with chronic lymphocytic leukemia.

This NDA represents a significant milestone in our oncology portfolio as our first NDA filing for this franchise. If approved by FDA, TREANDA would be the first new therapy approved for the treatment of CLL since 2001. CLL is a slowly progressing disease of the blood and bone marrow, with an estimated 15,000 new cases diagnosed every year in the United States, according to the National Cancer Institute. TREANDA has an Orphan Drug Designation for this indication.

The Phase III trial in CLL evaluated the safety and efficacy of TREANDA compared to chlorambucil, in patients who were not previously treated for their disease. TREANDA met both of its primary end points, overall response and progression-free survival, and demonstrated an acceptable tolerability profile compared to chlorambucil.

We also recently announced positive results from our Phase III trial of TREANDA for the treatment of patients with indolent non-Hodgkin's lymphoma, or NHL, for a refractory to Rituxan. A disease that affects an estimated 25,000 to 30,000 new individuals every year in the United States.

The study evaluated the efficacy and safety of a single agent TREANDA in the 100 patients. The overall response rate as assessed by Independent Radiological Committee was 75%, and reached statistical significance, and the median duration of the response was 40 weeks, or 9.2 months.

The results are consistent with what we saw in our Phase II study, and if approved, this treatment will represent a needed alternative to existing therapies. Results from these studies with TREANDA for CLL and NHL will be presented at the American Society of Hematology meetings in December.

Beginning next year, we will be studying TREANDA in combination with the monoclonal antibody Rituxan, in patients with relapsed indolent and mantle cell NHL. The data that we have in hand in both CLL and indolent NHL, gives us great optimism that TREANDA will have an important role to play in the treatment of these hematological cancers.

Meanwhile we will continue to make steady progress on our clinical trial with lestaurtinib, or CEP-701. We expect to complete enrollment by the end of the first quarter in 2008, and file an NDA for the treatment of acute myelogenous leukemia, or AML, during the second half of 2008.

Annually, in the United States, there are 13,000 newly diagnosed AML patients, 25% to 30% of whom have an activating mutation of the receptor tyrosine kinase FLT3. CEP-701 is a potent inhibitor of selective tyrosine kinase, including FLT3. And CEP-701 has shown to be cytotoxic to AML blasts with this specific mutation.

In addition, based on CEP-701's ability to inhibit JAK2, we have begun a Phase II trial on myeloproliferative disorders. There have been several publications suggesting that JAK2 may have a role to play in MDS.

During the third quarter, we initiated a Phase I study with CEP-11981, a potent orally active TIE-2/VEGFR inhibitor. Genentech's Avastin has validated VEGFR as an appropriate target. It is a life-saving treatment option that is currently being evaluated in dozen of disease states.

Our preclinical data suggests that a product such as CEP-11981, which inhibits both TIE-2 and VEGFR may provide additional benefits, compared to targeting VEGFR alone, by preventing angiogenesis, when escape around VEGF occurs.

Our proteasome inhibitor CEP-18770 has entered Phase I development. We are also developing a PARP inhibitor with CEP-9722, an H3 antagonist, a tamper resistant opioid and other promising compounds. We have the strongest research pipeline of both early and late-stage compounds in our history, providing us with multiple opportunities for growth in the years ahead.

Finally, while we continue to make steady progress in increasing the sales and positioning awareness for VIVITROL, we have decided to right size the VIVITROL commercial activity. We reduced the sales force and sharpened the marketing program, which we believe will allow us to better exploit our opportunities to drive sales.

These efforts should result in improved operating performance of this franchise. We continue to believe that VIVITROL will become an increasingly important treatment option for patients suffering from alcohol dependence. We also expect, with a rationalized spending approach, VIVITROL could meaningfully contribute to our future earnings.

By 2010, we expect to have launched TREANDA, lestaurtinib, and NUVIGIL, and relaunch FENTORA with an expanded label. With a solid core business and a robust R&D pipeline, we have created a diversified business that can continue to deliver strong earnings growth for many years. In addition, we will continue our practice of seeking out M&A opportunities to accelerate our growth.

Now Kevin will discuss our financial performance during the quarter, and our expectations for 2008.

Kevin Buchi

Thank you, Frank. As Frank mentioned in his introduction, we reported adjusted sales of $428.7 million for the quarter, compared to $457.2 million for the third quarter of 2006, and basic adjusted income per common share of a $1.08, compared to a $1.71 per share for the same period last year.

CNS franchise adjusted sales increased 9% to $230.9 million. Pain franchise adjusted sales were $121.8 million, with FENTORA sales of $33.2 million, and branded ACTIQ sales of $56 million, and other adjusted sales were $76 million, a 20% increase over the same period last year.

We came in at the high end of our sales guidance range, reported lower than anticipated cost of goods sold and operating costs, to deliver adjusted net income $9.5 million above the high end of our third quarter net income guidance.

Our goal is to maintain inventory levels of between two to three weeks for each of our key products. At the end of the third quarter, we were near the low end of this range. When compared to the third quarter of 2006, R&D expense, as adjusted for certain pro forma items, decreased $7.9 million.

SG&A increased $27.3 million over the same period last year to $186.5 million. This increase was due to lack of reimbursement on VIVITROL spent and increased selling expenses, principally associated with our Takeda co-promote agreement.

During the quarter, we increased our existing reserve related to the U.S. Attorney's investigation by $369 million to $425 million, to reflect the agreement in principal reached during the quarter. Because we are continuing to work to finalize the terms of this settlement agreement, we have not yet recognized any tax benefit related to the aggregate $425 million reserve.

Our adjusted tax rate for the quarter was 39.2%, or 37% on a year-to-date basis. During the quarter, there were several adjustments that were made to arrive at adjusted net income. In addition to the adjustments to the increase in the settlement reserve, we excluded $22.3 million related to ongoing amortization of acquired intangible assets.

We excluded $15 million in recognition of a milestone payment related to our NDA filing for TREANDA. We excluded a $5.3 million gain associated with the extinguishment of debt. And we excluded the tax effect of these items. We have increased our full year 2007 earnings guidance.

Total sales guidance remains between $1.675 billion and $1.725 billion. The guidance for the CNS franchise is between $875 million and $900 million. The pain franchise is between $475 million and $500 million, and our guidance for other product sales is between $300 million and $325 million.

Adjusted R&D and SG&A expenditures are targeted to be between $320 million and $330 million, and $715 million and $725 million, respectively. Guidance for adjusted net income has been raised to be between $296 million and $303 million, which equates to a basic adjusted income per common share of between $4.45 million and $4.55 million, assuming 66.6 million shares outstanding.

Our assumed tax rate for the year is approximately 37%. Keep in mind that we are increasing our guidance, despite the increased spend and dilution associated with the launch of AMRIX during the fourth quarter. We are also introducing full year 2008 guidance based upon the following key assumptions.

An additional generic ACTIQ will enter the marketplace by mid-year, TREANDA will be approved and launched around mid-year, interest income will be reduced by $20 million, or around $0.20 per share, as a result of the settlement with the U.S. Attorney's Office.

Our sales guidance for 2008 is between $1.8 and $1.85 billion. This is an increase of $125 million over our current 2007 sales guidance. CNS sales guidance, which includes PROVIGIL and GABITRIL, is between $975 million and $1 billion. Pain sales, which include FENTORA, AMRIX, ACTIQ, and generic ACTIQ is between $500 million and $525 million.

To provide greater transparency into our growing oncology franchise, we offer oncology sales guidance of between $110 million and $120 million. Our oncology guidance includes U.S. sales of TREANDA and TRISENOX, and European sales of ABELCET, MYOCET, TARGRETIN, and TRISENOX.

Our guidance for other sales is between $190 million and $205 million. Consistent with previous years, our sales guidance does not include other revenues. Our SG&A guidance is between $710 million and $730 million, and R&D guidance is between $340 million to $360 million. Adjusted net income is between $344 million and $351 million.

This is a 16% increase over our current 2007 guidance, and equates to a basic adjusted income per common share of between $5.10 and $5.20, based upon 67.5 million shares outstanding, and a tax rate of approximately 37%.

This concludes our opening remarks. We will now open this call to you and your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Jim Birchenough with Lehman Brothers.

Jim Birchenough - Lehman Brothers

Hi, guys, and congratulations on the quarter, just a question on the settlement agreement. Given your requirements to maintaining a certain cash balance and the settlement that you will be paying: do you foresee needing to do any financing to fund part of the settlement?

Frank Baldino

Absolutely not. Let's have Kevin talk about your comment about minimum cash balances.

Kevin Buchi

Hey, Jim, it's Kevin. We ended the quarter with cash of over $700 million in the bank. I think I would probably start to feel a little uncomfortable on an operating basis if cash got below about $150 million. As you are aware, the business is generating a fair amount of cash, so a $425 million settlement in and of itself will not require a financing.

Jim Birchenough - Lehman Brothers

And, then just a quick question on your oncology sales guidance: What portion of that is assumed by TREANDA? And secondarily, just on TREANDA specifically: should we expect any Rituxan combo data at the upcoming ASH meeting?

Frank Baldino

Jim, let's let Lesley Russell answer the expectations at ASH, and then we will come back to Kevin for the breakout you requested.

Lesley Russell

We are pleased to have say we have three presentations at ASH. The first one is the results of the CLL study that we have talked to you about, only showing that the data was positive with statistical significance on the primary end points. The second presentation will be around our own lymphoma data, so in the Rituxan monotherapy, a resistant monotherapy study.

And then finally, we do have a platform presentation by Mathias Rummel, who has conducted a study comparing Rituxan CHOP to Rituxan TREANDA in first line patients, and that will receive a platform presentation.

Frank Baldino

So basically: we have three presentations on TREANDA at the ASH meeting, right?

Chip Merritt

Kevin, do you want to comment on Jim's second question?

Kevin Buchi

Yeah. I am going to dodge your second question, Jim, if I may. One of the nice things about having several products in the mix is to get a little bit of a portfolio effect going on. And so I would rather not provide guidance on a product-by-product basis. And that is kind of consistent with what we do in the CNS franchise and in the pain franchise also.

Jim Birchenough - Lehman Brothers

Thanks for taking the questions.

Chip Merritt

Thanks, Jim.

Operator

We will move on to David Buck with Buckingham Research.

David Buck - Buckingham Research

Thanks for taking the question. Good afternoon. In the 2008 guidance, Frank or Kevin: what level of prescription growth are you assuming for PROVIGIL? And: also for FENTORA? Secondly: what gives you the confidence that there is no additional generic ACTIQ until mid-2008?

And: if you don't want to give TREANDA specific guidance, can you give at least a base for 2007? What you think in round numbers the oncology franchise will do?

Frank Baldino

Hey, David, this is Frank. I will answer the generic question. There is absolutely no information available to us that is legitimate out there on whether or not a generic will come in at any point in time, or whether it comes in at all. We put an assumption in the model, not based on any information, but just to be conservative.

We wanted to make sure that you guys know that we are considering it, and if no generic comes in until mid-year, as Kevin said, then there is no downside to us, and of course if it's delayed beyond that, if it comes in at all, then there is nothing but upside here.

David Buck - Buckingham Research

Just a follow-up Frank: what about the efforts on the risk management program? Do you see that as perhaps an entry for generics?

Frank Baldino

For the generic ACTIQ products, you're talking about, in general?

David Buck - Buckingham Research

Yes.

Frank Baldino

Yes, sure. I think the FDA does require a risk management plan, and VAR and plots are our collaborators, if you will, on ACTIQ are under our license to use our risk management plan today. If a third party were to come in, they would have to create their own and manage their own. And we manage it for our partners. So that is just one data point and I am glad you brought it up.

David Buck - Buckingham Research

Okay.

Frank Baldino

I think you had some more questions for Kevin, I believe.

David Buck - Buckingham Research

Yes.

Frank Baldino

Do you remember the question?

Kevin Buchi

I actually think they were for Bob. I think they had to do with prescription growth on PROVIGIL and FENTORA. So if it's okay, I will punt it over to him.

Bob Roche

That's fine. Yes, David, hi. Bob here. I think the growth numbers that are in the targets for 2008 certainly represent a mix of prescription and price. I am not going to get into exactly what we anticipate for either one right now, but I think, suffice to say, that we are anticipating a pretty positive result of our efforts for PROVIGIL as we move through the end of 2007 and 2008.

This year, there has been a fair amount going on in the commercial efforts around PROVIGIL, as you can imagine. We have got a completely new promotional message focused on obstructive sleep apnea and excessive sleepiness.

We have a lot of very exciting new data on that particular indication, which has really allowed us to get very meaty with the message, and build a very strong promotional platform. And I am really very encouraged by the kind of results we are seeing there.

There have been certain changes in our promotional practices based on what we anticipate coming to an agreement on the corporate integrity agreement with regards. And finally with the preparation for the AMRIX launch, there has been a lot of territorial movement.

We have been focusing on different physicians. We have been gearing up for a whole new product and so forth. And so it's really not surprising to see some kind of a softening of the growth trend, but keep in mind we are still growing quarter on quarter at 9% here a product that on the market for almost 10 years.

With regards to FENTORA, this drug has had some negative press, as we are all aware, and our Dear Healthcare Professional and Healthcare Advisory Warnings certainly haven't helped our ability to keep the growth trend moving forward, but I think we are going to have all that behind us.

We have got the sales force really focused on the positive messages around FENTORA, and I believe that we are going to see growth going into 2008, and especially when we have the opportunity to promote the expanded label that Lesley is going to be giving us hopefully at some point late next year.

David Buck - Buckingham Research

Right. And just a final: a base for oncology for 2007?

Bob Roche

A base for oncology franchise 2007?

Kevin Buchi

I haven't formally provided it, but it's in the neighborhood of $90 million to $100 million.

David Buck - Buckingham Research

Okay, thank you.

Frank Baldino

Thanks, David.

Operator

And we'll move on to Donald Ellis with Thomas Weisel Partners.

Donald Ellis - Thomas Weisel Partners

Thank you. Good afternoon. I just have three questions. The first one is: will the misdemeanor violation of the FDA affect regulatory approvals in any way whatsoever?

Chip Merritt

John? John Osborn is here, our General Counsel, Don he can answer that for you.

Donald Ellis - Thomas Weisel Partners

Thanks.

John Osborn

No, Don, I don't believe it will.

Donald Ellis - Thomas Weisel Partners

Okay. Next one is: what exactly does a corporate integrity agreement imply, as far as: how you guys run your business?

John Osborn

Well, I think, the way we have been working with the government, it's pretty clear that the changes and the programs and the policies that we have been instituting over the last couple of years, and more fervently over the last year, have really sort of put us in line with the government's thinking on the corporate integrity agreement. And we believe that what we have in place today will be memorialized by that agreement, and what you are seeing is what you are going to get here.

Donald Ellis - Thomas Weisel Partners

Right. Great. Last quick question for Kevin: can you break out D&A, and SG&A and R&D for us?

Kevin Buchi

Yes, I can do that. R&D depreciation, $5.3 million, G&A depreciation, $2.2 million during the third quarter.

Donald Ellis - Thomas Weisel Partners

Thank you very much.

Kevin Buchi

You are welcome.

Frank Baldino

Thanks, Don.

Operator

We will now moving on to Gregg Gilbert with Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Thanks. I have a couple. First, on the settlement: what is the difference between the claims you are settling, and the ones being made by Connecticut? Are they similar? Or: fundamentally different?

Chip Merritt

John?

John Osborn

Well, they are based on different statutes, Gregg. Without getting into a lot of the technical stuff, the claims that we are settling are based upon alleged violations of the Federal Food, Drug, and Cosmetic Act, and they also cover any reimbursement claims under the Federal Medicaid program.

Connecticut has raised questions that also relate to our promotion and marketing, in that sense they are similar but the law that is basis of their concern, is a state civil consumer fraud statute. So in that sense, it is very different.

Gregg Gilbert - Merrill Lynch

Okay. For Bob: can you quantify managed care access for AMRIX? Or: provide any statistics on the different tiers you either have or expect to have for '08?

Bob Roche

Yes, I can. And what we are anticipating for AMRIX is relatively straightforward access into managed care. We have done analysis out there of currently marketed products, and we have done some research as to how the plans are going to be dealing with AMRIX, and between the third tier and second tier sorts of programs, we are looking probably at about 90% of the coverage for the product.

Prior authorizations do not appear to be a big issue here. We are not expecting them for AMRIX, and I'll anticipate somewhere less than 10% of the scrips would be prior off, and we have got the mechanisms in place to be able to work with those as well.

Frank Baldino

Why don't you put that in context of our experience with FENTORA and PROVIGIL for him?

Bob Roche

I think that it's going to be a lot more straightforward than either FENTORA or PROVIGIL. As you can imagine, many of the physicians who are prescribing PROVIGIL and FENTORA, are doing so for a variety of uses that they believe are absolutely correct for the product.

But managed care will always try to push back if they believe that they have got any kind of a foundation for potentially ducking a script here, and these are pretty expensive scrips. Conversely, scrips for the SMRs are pretty cheap.

These are on average only about 15 days of therapy, and they are not typically prescriptions that managed care would tend to really put up a lot of barriers against.

Gregg Gilbert - Merrill Lynch

Thanks. And then lastly for Lesley, a NUVIGIL question: what label additions or promotional claims, and can differentiate between the two of those, do you expect to get before the launch and after the launch? Thanks.

Lesley Russell

We are looking for sort of, we are looking at NUVIGIL in a variety of indications. So our longer-term goal is to explore opportunities outside of sleep, so that is the area of cognition and schizophrenia and the bipolar.

We are also planning an additional indication, in a much broader indication for excessive sleepiness, that would take us outside of the pure sleep disorder. So excessive sleepiness associated with medical conditions, such as Parkinson's disease, depression, or even traumatic brain injury. We would hope very much to have that program completed in 2010, in time for launch.

In addition, we are also conducting a Phase IV program to give us some promotional claims. And for example, one of those programs is, based on the literature, where there is very high comorbidity of OSA in depression, we are actually looking at a study in NUVIGIL for the treatment of excessive sleepiness in patients with OSA and depression.

So that will allow us to say and talk a little bit about the comorbidity. That is just one example of a promotional claim.

Gregg Gilbert - Merrill Lynch

Thanks.

Operator

And now we will go to Corey Davis with Natexis.

Corey Davis - Natexis

Thanks very much. The language in the press release with regard to the settlement also says that some states are involved in the settlement. Can you elaborate on which specific states are involved? And: outside of Connecticut that has already been discussed, can we assume that more states might try to get into this? Or: is that done at the state level?

Frank Baldino

Let me, before I turn over to John, talk about the specifics of the settlement, Corey. Let me give you sort of a blanket industry statement, about what's happening when these kind of settlements occur. You should, excuse us for the technology problem here.

Any way what happens routinely to every company involving these kind of settlements is that normally state, local, and private litigation ensues to various degrees with every single company in space, and you should expect that we are not going to be any different in that regard.

Now the question you have about the specifics of the settlement related to states in general, John has an answer for you.

John Osborn

Yes, Corey, let me make sure this is very clear, because we certainly try to be very clear in the language in the release. The release talks about our settlement of Federal and State Medicaid claims and as I said moment ago, that covers claims that are based upon reimbursement, both the all Federal portion and all State Medicaid portion reimbursement claims.

There may be, in certain states, programs at a state level that are other than the Medicaid program and so without giving you any sense of whether or not the claims are legitimate, I am simply trying to clarify factually for you that the vast majority of any claims that would be made by any government entity are covered by this settlement. There are Federal claims and State Medicaid claims.

Corey Davis - Natexis

Hopefully you are seeing growth.

John Osborn

And the Connecticut claim, again just to clarify, that is based upon a separate consumer fraud statute. There are other payments that might be made by Connecticut, but they are those that are relatively small and outside of the Medicaid program.

Corey Davis - Natexis

I guess, to ask it another way: outside of Connecticut, can we expect any more big numbers?

Frank Baldino

I think, Corey, the way we look at this is that the big settlement with the Feds, as John just iterated, it encompasses more comprehensive than people have imagined, and covers a lot of issues. There will be, most likely, state, local, private litigation, but that is not going to affect our business today and will not affect our business going forward.

John Osborn

Other states and private parties, Corey, but not big numbers.

Corey Davis - Natexis

Not big numbers. Thank you. You didn't want to break out TREANDA, so, I am assuming that you don't want to break out AMRIX from the group?

Frank Baldino

No. It's not Corey.

Corey Davis - Natexis

But my question is: which one do you think will be bigger?

Frank Baldino

Look, I would put my money here and there.

Corey Davis - Natexis

That is a fair question.

Frank Baldino

It's a really great opportunity, it's approved, it's on the market, it got a great label and that's our near-term focus. We are excited about TREANDA and we'll see where we are at the end of the year with AMRIX.

Corey Davis - Natexis

So, AMRIX is going to be bigger. My last question is for Kevin: tax rate at 37%?

Kevin Buchi

That is correct, Corey.

Corey Davis - Natexis

What is that?

Kevin Buchi

I am sorry, go ahead?

Corey Davis - Natexis

I was going to say, tax rate at 37%, higher than where it's been at 36%: anything going on we should be aware of?

Kevin Buchi

No, I don't think so. I think all you are seeing, if you look at kind of the tax rate that a U.S. taxpayer would pay on a top marginal basis, you are at 38%, 39% between Federal and State. Clearly, as we develop new products, we are going to try to do that in a way, which is more tax efficient than our current structure, but I think 37% is a reasonable estimate for 2008.

Corey Davis - Natexis

Congrats on getting the settlement done, I know that has been a big burden for you.

Frank Baldino

Thanks, Corey.

John Osborn

Thank you, Corey.

Operator

And now we will move on to Michael Rockefeller with Morgan Stanley.

Michael Rockefeller - Morgan Stanley

Hi. So, question for Lesley. I was just wondering: if you could remind us some of the benefits of using TREANDA versus the current standard of treatments, in both the NHL setting, and the CLL setting? Thanks.

Lesley Russell

Let me start with CLL and I think the study that we've done CLL was an active comparative study with chlorambucil, which is an old drug used pretty commonly in Europe.

Surprisingly, because I was surprised by this, it is still used a reasonable amount by community oncologists as their treatment of choice, because it is easy to give. And I think TREANDA will be a very good alternative for chlorambucil in those types of practices.

I also think that advantages against some of the more intensive regimens is that it is probably better tolerated and I think once you start giving fludarabine, cyclophosphamide, and Rituxan combinations, it is not a regimen for the lighthearted.

It is a fairly toxic regimen and bare in mind that many of the patients are elderly, I mean the median age for this disease is in the '70s. So, this is an elderly population that can't tolerate huge amounts of chemotherapy and I think bendamustine or TREANDA is pretty well tolerated, especially in the dose that was used in the CLL study.

As we move to non-Hodgkin's lymphoma, the space that will be with TREANDA we will be entering is that space occupied currently by the radioisotopes. So, that was an [impact]. And the reason why those drugs are really not used very extensively is because they are very complicated drugs to give, they are given by the nuclear medicine department, they have cold chain and then have to have to isotopes attached to them, so they are difficult compounds to use, but they are very effective. And I think our data with TREANDA is as good as those drugs and we have a much more convenient drug to give, so I think that is a good alternative to those regimens.

Michael Rockefeller - Morgan Stanley

And just to follow-up, in the NHL setting. What does the profile of TREANDA look like versus CHOP?

Lesley Russell

Well, I mean, I think that it's a single agent, so the main toxicity is hematologic, not surprising, so neutropenia, a bit of thrombocytopenia. Once you start going to regimens like CHOP, you are adding in Adriamycin, so with cardiotoxicity you are adding in vincristine with the neurotoxicity.

So, as a single agent, this is bound to be better tolerated than CHOP and we know from our Phase II data, where we combine TREANDA with Rituxan, it was very well tolerated. We haven't done an active comparative study, but side-by-side the tolerability of bendamustine/Rituxan is clearly better than CHOP or our CHOP.

Michael Rockefeller - Morgan Stanley

Thank you.

Operator

And now we will move on to Bret Holley with CIBC.

Bret Holley - CIBC World Markets

Hi. Thanks for taking my question. Lesley, I wanted to follow-up on the question of: TREANDA versus CHOP and really going into ASH. What your expectations are for the relative efficacy of TREANDA versus CHOP? I would expect that the TREANDA would be better tolerated, but the question is: do you have to have as good efficacy to really kind of drive adoption of TREANDA in that setting?

Lesley Russell

Well, I think the data you are going to see at ASH, you have to bear in mind; it's not my study, so I am not in a position to tell you the results. But I think the comparison that Dr. Rummel did undertook was Rituxan/CHOP versus RITUXAN/bendamustine. And he clearly believed going into the study that he could go for comparable efficacy and I think he powered his study to have for a non-inferiority of no more than 10%.

So, he is expecting overall response rates to be pretty similar and clearly expecting the tolerability of a two-drug regimen to be better than a five-drug regimen. And you are going to see that data at ASH, so you will be able to judge it for yourself.

Bret Holley - CIBC World Markets

Okay. And then, Kevin, just for one of us, something you said in the question-and-answer period: did you say that the 2006 oncology, 2007 oncology sales would be about 90 to 100?

Kevin Buchi

Yes, I did.

Bret Holley - CIBC World Markets

Okay. So: can we just extrapolate that you're talking about TREANDA sales in the range of 10 million to 20 million in 2008?

Kevin Buchi

I deliberately tried to dodge that. I will dodge it again with your permission.

Bret Holley - CIBC World Markets

Okay. But that is not crazy math on my part, correct?

Kevin Buchi

Your arithmetic is not crazy.

Bret Holley - CIBC World Markets

Okay. Thank you very much.

Operator

Now we will go to Eric Schmidt with Cowen and Company.

Eric Schmidt - Cowen and Company

Thanks for taking my question. Another one on TREANDA, maybe for Bob or Frank. Just wondering: how you think about pricing this drug? And: if there are any “comparator oncology agents” you would point us to, as things that you are looking at when you make this decision?

Frank Baldino

I think, Eric, this is a great question, but unfortunately, we are not in the position to talk about how we're going to price this yet. We would like to get the NDA filed on the NHL. We would like to spend some time working with our experts and talk about how this thing should be priced.

Sometime before the launch, we will be more forth coming about pricing expectations. I know this makes it a little tough for you guys to generate models, but unfortunately, we are just not in a position to do that now.

Eric Schmidt - Cowen and Company

Okay. Couple of nits on the guidance for Kevin, if I might? Firstly, revise the CNS franchise guidance for 2007, if I do the math there that implies a pretty significant down quarter-over-quarter in Q4. Are there any sort of inventory issues we should be aware about or anything there or am I reading too much into your relatively broad guidance?

Kevin Buchi

I think you are probably reading too much into the relatively broad guidance. I think we are expecting a relatively flat Q4 over Q3, which is kind of what we've normally seen with the product. There is no change in inventory.

The only inventory change that I noticed Q3 versus Q2 was a slight drawdown in branded ACTIQ inventories, which you would expect as the product is now generic. Inventories are a very low level and I am not expecting any significant change over year-end.

Frank Baldino

Don't forget, Eric, Bob's comments about the disruption around the AMRIX launch, and the readjustment and alignment of territories that has been involved. So, that's also factored into Kevin's thinking in the fourth quarter.

Eric Schmidt - Cowen and Company

Okay. And then: is there a basic share count for 2008 that goes along with that EPS guidance?

Kevin Buchi

Yes, there is. It was 67.5 million shares.

Eric Schmidt - Cowen and Company

Okay. And last question is just going forward: given the guidance on oncology franchise sales, are you going to be breaking out those sales for us or not?

Kevin Buchi

Yes, we will break them out on the press release when we have actual results as we do with the other franchises, yes.

Eric Schmidt - Cowen and Company

Starting next year?

Kevin Buchi

Yes, starting next year.

Eric Schmidt - Cowen and Company

Thanks a lot.

Operator

And we will take the final question. Actually, we will move on to Annabel Samimy with UBS.

Annabel Samimy - UBS

Hi. Thanks for taking the question. Just on TREANDA for a minute: have you done any, have you conducted any kind of pre-marketing research that gives you a sense of the level of awareness of TREANDA at this point and laid out what kind of market preference it may have based on its current product profile?

Bob Roche

Yes, Annabel, Hi, Bob here. We have been building up momentum within the oncology franchise, really since the ASH meeting last year and are now gearing up the overall business unit in preparation for the TREANDA launch in early 2008.

We are out there right now recruiting for our sales team, we are building up the MSL team, we have got a lot of outreach to key opinion leaders going on through the end of this year, focusing on ASH, and then throughout early 2008.

So I think there is going to be a lot of enthusiasm, and a lot of excitement building up around the product, especially when the data begins to flow through the system as we go through early 2008.

Annabel Samimy - UBS

Have you done any market share preference estimates at all?

Bob Roche

We are not getting those right now. I suspect that prior to launch, we will be doing all of the market research required. Based on the evolving profile of the product, to really get a sense as to how it is going to stack up against other treatment opportunities.

Annabel Samimy - UBS

Okay. Then one other question, if I may. Not to believe that the point, but with the settlement, and you mentioned that this was the big nut, and there should be smaller settlements afterwards: did that include Connecticut or not?

Frank Baldino

John will answer for that you, Annabel.

John Osborn

Annabel, I didn't mean to suggest that there would be other settlements. I just wanted to clarify that the potential liability, the scope of the sales that we are talking about here, when you are talking about Federal and State Medicaid, would dwarf any potential claim by a state non-Medicaid-based allegation. So I really that's all I am saying. We are not saying there will be any other settlements.

Annabel Samimy - UBS

And this excludes discussion about Connecticut?

John Osborn

We continue to have discussions with them, but I am not saying anything about where that might go.

Annabel Samimy - UBS

Okay. Thanks.

Operator

And now we will move on to Gary Nachman, with Leerink Swann.

Gary Nachman - Leerink Swann

Hi. Good afternoon. First, Bob: could you describe the right sizing for VIVITROL? Were those sales reps moved over to something else, or were they let go? And: what is exactly the plan to grow the sales force for TREANDA next year?

Bob Roche

Thanks a lot for the questions, Gary. I am not going to get into specifics about the numbers of individuals. Suffice it to say that now between ourselves and Alkermes, we have got about 70 folks who are fully focused, 100% of their time on this product opportunity.

Most of those obviously are here at Cephalon. We have moved some of the guys who were selling VIVITROL into other roles here. We are staffing up the oncology team, as we speak. We are finding new opportunities in the CNS and AMRIX sales teams, and we will continue to do that through the end of the year.

With regards oncology, I don't know that we have spoken about the specific size of this group, but it's certainly going to be competitive with the other mid-sized oncology teams that you see out there.

We are going to have all of the field-based resources that we need in place shortly after the first of the year. That's sales, that's managed care, that's MSLs, and that's other field-based key opinion leader development groups, and so forth. So, I am really excited about this. We have got a great team building in that area, and I think the launch of TREANDA next year is going to be a very exciting one.

Gary Nachman - Leerink Swann

What is that number? Is that 75 to 100, in that range?

Bob Roche

In that range, yes.

Gary Nachman - Leerink Swann

Okay. And also, since we are on this topic, for AMRIX: how many sales reps in total will you have detailing the product? And: in what position?

Bob Roche

The AMRIX team is going to be built on both our CNS and pain organizations, right now those numbers close to 500, and AMRIX will be a full launch mode detail for both of these teams as they go through the end of 2007, and throughout at least the early part of 2008.

We are going to give this product absolutely everything that it needs, in terms of sales force resource and out of pocket spend, to make sure that it is a big success.

Gary Nachman - Leerink Swann

Thanks. Frank did you say, in your prepared remarks, that you will be working on Rituxan/TREANDA combo on your own next year? And I guess maybe this is for Lesley also: do you have plans to actually go for that first line indication down the road? You can both answer.

Frank Baldino

I think Lesley will tell you exactly what we plan to do, but suffice it to say, we like all of you, are very excited and anxious about the data that is going to be presented at ASH. So we have got to look at that data, we have got to see how the trials are done, and if that trial passes a very high standard of excellence, and one that we think will suffice for a registration study, we would very much like to file it.

So I have to see what the study looks like and what the audits tell us. And based on that data information, I think it will guide exactly what we do in the end. And Lesley, do you want them what we have planned?

Lesley Russell

Well, little to add on top of that, we are clearly looking at a program with TREANDA in a number of indications; clearly combining it with Rituxan is a very obvious thing to do. I think there is clearly synergistic activity between TREANDA and Rituxan. So there is opportunities in lymphoma, there is opportunities to explore more in CML, and other indications where Rituxan is used, so we are very excited about it.

Gary Nachman - Leerink Swann

Okay. And then, last question for Frank, I know you guys want to continue to grow PROVIGIL, but, let's just say that PROVIGIL prescriptions don't accelerate, then: does it make sense to consider launching NUVIGIL sooner than 2010?

I am sure you guys talk about it a lot, but: how often do you revisit that strategy? And: is there a possibility that you could launch it sooner, if PROVIGIL doesn't turn out to be the way you want it?

Frank Baldino

Great question, Gary. I think Bob, he probably thinks we ask that question hourly here. But there are a lot of factors that influence our judgment here. One is our belief that PROVIGIL has got some growth in it. We have talked about guidance in 2008, that points to a pretty successful PROVIGIL year.

We think the scrips growth could be driven by two things. One is all the new data we have been telling you about, and some data on comorbidities with OSA and the excessive sleepiness associated with OSA that still exists, I think it is over 50%.

If you look at the OSA scrips today, specifically, at least market research point, OSA has grown from a 3% market share to roughly 11% or so, in just a three to four month of period of time with the new messaging, so we think there is a high-growth opportunity there.

And Bob will tell you also I think is that the direct-to-consumer campaign that we have planned should add some demand for PROVIGIL in the marketplace. So your assumption of what we do with NUVIGIL is predicated on, I guess, your assumption that PROVIGIL will not grow. We are just not in the same place on that.

We think it still will. That's however, we find that we are wrong, then all options are on the table.

Gary Nachman - Leerink Swann

Okay. That is helpful. Thanks.

Operator

We have time for one more question. We will take that from Ronny Gal, with Bernstein.

Ronny Gal - Sanford C. Bernstein

Good evening, guys, and congratulations on a great quarter.

Frank Baldino

Thank you, Ronny.

Ronny Gal - Sanford C. Bernstein

Just a couple of questions, just for clarification. First, regarding the integrity agreement with the Inspector General, you still have a lot of doctors using both ACTIQ and PROVIGIL off label very effectively for the patient, in multiple niches, both pain specialists and MS docs using PROVIGIL.

Are you going to be able to continue to support those guys under the integrity agreement? That is: if a doctor does not specifically treat cancer, or deals with a niche that is not covered by your current labels, would you be able to just continue to give them scientific information?

Frank Baldino

One question at a time, Ronny, because I am getting older, and I am going to forget the questions if you ask too many in a row. You can ask again when I am done here.

Ronny Gal - Sanford C. Bernstein

No, we just go to help you with that.

Frank Baldino

Yeah, that's helpfully. Regarding your corporate integrity agreement comment, I think we have in place today, and I think I said this earlier, and we have been working very closely with the government on this issue, we have in place today, what we believe, and we've had it in place for the last six months, what we believe are the essential components of a corporate integrity agreement.

And the final agreement from our understanding, and what we are planning on will simply memorialize all these tremendous changes that we have made. So where we are today in the marketplace, I think, is where we will be in the future. And the corporate integrity agreement will focus on methodologies and opportunities that we need to pursue to promote our drugs on label.

It doesn't speak to, nor does it address, how physicians use the drug in the marketplace. That is between them and the patients. So I think we will be in a good place.

Ronny Gal - Sanford C. Bernstein

Okay. And just a follow-on for Lesley, I think there was some comments about the ability to use the Rummel study as a basis for filing. Is that the impression you got about that study? Because that was not the one I got from talking to Dr. Rummel. Is there room that this study could be used as a basis for submission for the FDA?

Lesley Russell

I think we have to look at the data. And with Professor Rummel's permission, we will look at the data, and see whether it meets the standards required by FDA for submission. And once we have had the ability to look at how he collected the data, what the documents all say, how the sites handled data, we can make a determination on whether we could potentially explore filing that with the FDA.

We don't know yet, but it clearly is, that the study was conducted to a standard that would meet FDA expectations, and we certainly want to explore that.

Frank Baldino

I think, Ronny, my comments earlier, I think we are going to all learn a lot when we see the data, and better understand how it was conducted. It's going to have great impact, not only on whether or not we filed the study, but whether or not we do a trial on our own.

So there is going to be a whole lot of decisions made based upon what we learn at ASH, what we learn with our discussions with the investigator, and what we learn about the conduct of the study.

Ronny Gal - Sanford C. Bernstein

Great. Thank you very much, guys.

Chip Merritt

Okay. Thank you all for joining us today, and that concludes our third quarter conference call. Take care.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT.  USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail].  Thank you!