Forest Laboratories Inc. F3Q08 (Qtr End 12/31/07) Earnings Call Transcript

Forest Laboratories Inc. (FRX)

F3Q08 (Qtr End 12/31/07) Earnings Call

January 15, 2008 10:00 AM ET

Executives

Charles Triano - Vice President, Investor Relations

Larry Olanoff - President and Chief Operating Officer

Frank Perier - Senior Vice President, Finance and Chief Finance Officer

Analysts

Rich Silver - Lehman Brothers

Jim Kelly - Goldman Sachs

Annabel Samimy – UBS

Michael Rockefeller - Morgan Stanley

David Lickrish - Broadpoint Capital

Gary Nachman - Leerink Swann

Dave Windley - Jefferies & Company

Ronnie Gale - Bernstein

Frank Pinkerton - Banc of America Securities

Gur Roshwalb - Piper Jaffray

Corey Davis – Natexis

Andrew Swanson - Citigroup

Greg Gilbert - Merrill Lynch

Tim Chiang - FTN Midwest

Presentation

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Laboratories, Incorporated's Third Quarter Fiscal 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I will now turn the call over to Mr. Charles Triano, Vice President of Investor Relations of Forest Laboratories. Mr. Triano, you may begin your conference.

Charles Triano - Vice President of Investor Relations

Thank you, Michelle and good morning everyone, this is Chuck Triano. Thanks for joining us this morning for this third quarter fiscal 2008 conference call. Joining me today is Larry Olanoff, our President and Chief Operating Officer; and Frank Perier, our Senior Vice President of Finance and Chief Financial Officer.

By now each of you should have seen the earnings release that we put on the wires a little before 8:00 O'clock this morning and the release is also available at our website, frx.com.

By way of a Safe Harbor statement, let me add that various remarks that we may make about future expectations, plans, and prospects for the company constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and actual results may be different. That being said let me turn the call over to Larry, who will comment on the business during the quarter.

Larry Olanoff - President and Chief Operating Officer

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

Our underlying business continues to perform well during the quarter, as we saw an increase in prescription volume for all of our key marketed products, Lexapro, Namenda, Benicar and Azor. Reported earnings in the just completed quarter totaled $0.96 per share, a growth of 23% over the year ago period. In addition to strong financial performance, we also reported several achievements regarding our product pipeline during the quarter, including FDA marketing approval for Bystolic for the treatment of hypertension, the submission of a new drug application for Milnacipran for fibromyalgia, positive results for our Phase III trial of Lexapro in adolescent depression and supportive proof-of-concept results for RGH-188 in the treatment of schizophrenia.

Regarding the inline products, Lexapro sales in the quarter were $603 million, an increase of 11% in year-over-year sales. It appears that wholesalers collectively had inventory levels of approximately 3.5 days higher than at the end of the September quarter. This would account for an approximate increase of some $23 million in Lexapro sales for this quarter. The balance of the performance can be attributed to good volume growth for the brand, as we did not have any price increase for the brand during the quarter.

The SSRI/SNRI total prescription volume growth rate has been just under 4% so far this fiscal year, slightly ahead of our fiscal year growth projection of 3%. Although, there is always some short-term variability in the reported growth rates for the market, we continue to see this larger mature market as one that can generate low single-digit unit growth on an annualized basis.

Moving to Namenda, the brand's performance has remained strong with 26% growth in sales over year and the brand posting its first quarter with excess in sales of $200 million, coming in at $219 million total. Combination use of Namenda with cholinesterase inhibitors remains very prevalent, and currently accounts for approximately 60% of its utilization. The markets overall prescription unit growth so far this fiscal year has been approximately 11%, which is inline with the rate of growth of new patients entering the market. It appears that wholesalers increase their inventory levels for the brand at the end of December after a draw down for the brand at the end of the September quarter. Collectively they held slightly more than two days in additional inventory at the end of the December quarter as compared to the end of September, which equates to approximately $5 million in sales.

As we announced last week, we, along with our partner Merz, commenced litigation against several Paragraph IV fillers challenging the Orange Book listed patent, which currently expires in April 2010, but which is expected to be extended until mid-2013. This action extends the five-year Hatch-Waxman exclusivity by 30 months to April 16, 2011.

Regarding Benicar, it continues to grow inline with our planning. Projected end-users sales, which are recorded by our partner, Daiichi Sankyo, were approximately $185 million with our partnership pre-tax earnings for the quarter totaling $52 million. While still early in its launch, Azor prescription volume is steadily increasing and its launch has been similar in trajectory to Benicar monotherapy at the same point in time post launch. Also, following the launch of Azor, Benicar and Benicar HCT's market share have both continued to grow, thereby, expanding the entire Benicar monotherapy and fixed dose combination franchise.

Looking at the managed care situation for Lexapro and Namenda, our calendar 2008 contracting is complete and we do not see any meaningful difference in rebate levels. In addition, Lexapro has been moved up from non-formulary status to Tier II within one of the top five Medicare Part D plans, while Namenda continues to have coverage in virtually all plans.

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

The approval and launch of Bystolic represents an advance in the beta blocker market, as the product demonstrates efficacy in a broad patient population compared to other beta blockers and does so within excellent tolerability profile, particularly regarding side effects commonly observed for beta blockers such as fatigue, sexual dysfunction and depression.

Bystolic combines vasodilating properties with high selectivity for beta 1-receptors further differentiating it from other beta blockers on the market. We are very pleased with the products label and it's approval with one of only a handful of new chemical entities approved by the FDA during calendar 2007.

Although, the beta blocker market is highly generic, we believe that the differences in Bystolic's profile will be meaningful to physicians and patients. Given that generic products are generally not promoted or sampled, we will have an excellent opportunity to communicate Bystolic's attributes directly to physicians.

Following our national sales meeting to be held at the end of this month, we plan a full launch of Bystolic with approximately 2,000 members of our sales force in early February. We are currently conducting an extensive early experience program whereby approximately 30,000 physicians across the country are being provided with 30 day supplies of Bystolic up to 10 of their patients. We anticipate that this early experience program will build momentum for the brand, ahead of our national rollout of detailing and sampling programs.

Regarding managed care contracting, we are in the midst of conducting meetings with all the key plans and would expect that Bystolic should have unrestricted coverage in either [care 2 or care 3] physician by the end of the calendar year with a majority of these major plans. I would suggest that given the early experience in place and our plan to aggressively sample this product, we anticipate that reported prescription volume during the first few months of the launch will in fact under represent the number of patients being dosed with the product as samples are not reported to the prescription reporting database.

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

Frank Perier - Senior Vice President of Finance and Chief Financial Officer

Thank you, Larry. Fiscal third quarter total revenues, which are inclusive of sales, pre-tax earnings from the Benicar Co-Promotion interest and other income totaled $998 million, an increase of 12% from the year ago period.

Revenues were comprised of $918.1 million of sales, which increased 10.6% compared to last year. $51.7 million of contract revenue from the Benicar Co-Promotion agreement, up 33.9% increase, as well as $25.9 million of interest income. Other income in the quarter was $2.5 million. Gross margin in the quarter came in at 76.8%, this level compares to 77.4% in our fiscal second quarter and 76.5% in last year's fiscal third quarter.

SG&A spending during the quarter was $286 million, up 6% from last year remains on plan which includes investment spending to support the launch of Bystolic and free launch activities for Milnacipran.

Research and development spending was $108 million in the quarter and included approximately $5 million in milestone payments. Our effective tax rate in the quarter was 22.8%, and we plan that our blended annual rate would be approximately 21.6% for the full year.

During the quarter we repurchased two million and 120 million shares of stock. And we continue to have an additional 15.8 million shares available on the existing 35 million share program. Actual shares outstanding at December 31, were 311,365,000.

Our cash and marketable securities balance on December 31 was approximately $2.6 billion, an increase of $222 million from last quarter. Of this, $789 million or 31% of our cash and marketable securities are domicile domestically with the remainder maintained by international subsidiaries.

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

During the quarter, we established a $500 million revolving credit facility, which provide additional flexibility to finance corporate initiatives and business development. The facility can be expanded to $750 million.

I will now turn the call back to Larry for a pipeline update and guidance review.

Larry Olanoff - President and Chief Operating Officer

Thank you, Frank. As we move into 2008, we are coming into a very busy period where we will be receiving clinical trial results for an array of later stage compounds. In addition, we are preparing a supplemental NDA for Lexapro for an additional indication of adolescent depression and plan to meet with the FDA regarding a potential regulatory pathway for an additional indication of congestive heart failure for Bystolic.

A once-daily formulation of Namenda is being evaluated in a Phase III moderate-to-severe Alzheimer's trial, which is now fully enrolled and will report out during the current calendar quarter.

Regarding aclidinium, our long-acting muscarinic antagonist being developed for chronic obstructive pulmonary disease with our partner Almirall, enrollment of two large Phase III trials has been completed and we expect top-line results for these studies in the second half of calendar 2008.

Phase III studies for ceftaroline, a fifth-generation injectable cephalosporin, have also progressed. Both studies in complicated skin and skin structure infections have completed in enrollment and we have also begun enrollment in both studies for the community-acquired pneumonia indication. We anticipate the skin and skin structure results by the end of calendar 2008 and the community-acquired pneumonia results in 2009. These data from two indications, if supportive, will serve as our planned submission package to the FDA for initial marketing approval.

Phase IIb data for linaclotide, for chronic constipation and constipation predominant irritable bowel syndrome, is expected during the first half of 2008. This is a very interesting compound with a novel mechanism of action, which acts locally in the gut with extremely low systemic exposure, which may be an important safety benefit for this class of agents. This mechanism is in contrast to serotonin-based compounds which act systemically.

We also expect to receive Phase IIb data for RGH-188 in the treatment of bipolar mania later in the year. This potential indication could represent a significant opportunity for this compound in addition to an indication for Schizophrenia. We also are working towards generating proof of concept data for neramexane in Alzheimer's disease. We plan to conduct this study primarily outside the US, and are still securing study centers and anticipate starting that study in 2008.

Regarding oglemilast, the Phase II PDE4 program partner with Glenmark, we are assessing our options with Glenmark, we are assessing our options with Glenmark to determine the optimal path forward for the program to generate proof-of-concept data. We're also progressing on our early stage programs, including discovery programs partnered with several Indian based specially CRO companies.

Our late-stage product pipeline may collectively represent several billions dollars of potential product sales into next decade. Although, we must operate with the assumption that not, all of the late-stage programs will ultimately result in approved products. Given this assumption, we view it necessary to double the size of our late-stage pipeline through advancement of our early stage programs, as well as by the addition of new development opportunities.

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

Moving to our financial guidance for fiscal 2008, given the strong quarterly results reported today, we have increased our projected earnings per share range for the fiscal year from $3.35 to $3.45 from previous guidance of between $3.10 and $3.20. Both of these ranges exclude the $ 0.15 per share charge for the licensing payment to Microbia for linaclotide.

We also would update our original R&D spending guidance to approximately $490 million, which includes planned products milestone payments of approximately $46 million, approximately $34 million of which has already been paid, fiscal year-to-date, but excludes the $70 million licensing payment to Microbia.

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

Charles Triano - Vice President of Investor Relations

Thanks, Larry, and before we poll for questions, I'll just do our usual housekeeping, with some of the product sales for the smaller products.

For Aerobid, sales in the quarter were $4.9 million. Aerochamber, $10 million. Campral, $7.9 million. Celexa brand, $3.7 million, zero for Generic Citalopram, we no longer sell that, Cervidil, $14.6 million, Combunox, $0.5 million, Esgic, $830,000, the Europe business, $17.5 million, Generic business $3.3 million, Infasurf, $3 million, Lorcet, $2.7 million, Monurol, $300,000. Tessalon, $1.9 million, the Thyroid franchise, $15.3 million, Tiazac branded, $2.3 million, and Tiazac generic, $4.2 million.

With that, I would ask Michelle to begin the polling for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Rich Silver of Lehman Brothers.

Rich Silver

Lexapro and market share expectations in the past, I think you have said that you had hoped to gain modest market share overtime. Now that there is no longer any real brand competition other than Cymbalta, can you comment on what your expectation is in the coming year for the market share on Lexapro?

Larry Olanoff

Thank you, Rich. We're not giving guidance on the current year yet, we're standing by what we stated for the current, for this fiscal year in terms of what our expectations are with the product, overall, but we're not yet giving guidance, we'll provide that in our April call.

Rich Silver

And can you maybe at least comment on recent historicals and why you think that the market share of Lexapro continues to decline even without or with less brand competition than you've had in the past?

Larry Olanoff

We've not seen any substantial decline in the market share; it's pretty much been flat. So, we're not really not speaking to that as an issue here, but the market growth continues, it's a little higher than what we had predicted for this year, we've stated that in the earnings release. I think the key in terms of the market dynamics is, this market hasn't changed over this past year, Cymbalta has shown some growth, it's starting to modulate or plateau, and this is still a market that is also heavily influenced by these generic products and we'll continue it to be so, so that our dynamics and our parameter is really operating between the branded products which includes Cymbalta intersection, we've done that I think fairly well over the time and continuing to do with managed care on the use of generic SSRI's.

Rich Silver

Second question, can you talk about -- as you are preparing for the launch on Milnacipran, kind of intelligence that you've been gathering with Lyrica now actually out there being promoted for fibromyalgia. What you're learning from maybe that experience and how that might help you on Milnacipran?

Larry Olanoff

It's also a good question. I think what we've learned thus far is that the market is receptive to the use of approved agents in this treatment of the disease, they are embracing that opportunity. We know that Forest has been very active in terms of direct-to-consumer advertising. What we hear from our experts is that, there is room for multiple agents in this market, with multiple mechanisms of action. There will be a lot of poly-pharmacy anticipated; there will be a lot of switching anticipated. I think Pregabalin is establishing its profile in the market, both upsides and downsides, and it will be an agent which will be looked towards as potential use in combination with products that can also treat changes in mood state, changes in fatigue, other parameters in addition to pain, which are important in the treatment of this disease.

Rich Silver

And just, as your expectation on the regulatory front with Milnacipran, that the FDA will accept the application and that third study will not be required for final approval or that that third study would not be necessarily change the timeframe on the PDUFA?

Larry Olanoff

That is our expectation, I think what you stated that the FDA will accept the file as complete and we'll review the file on the basis of the two studies submitted.

Rich Silver

Okay. Thanks very much.

Operator

Your next question comes from Jim Kelly of Goldman Sachs.

Jim Kelly

I just wanted to ask a question first about the pricing, the relative pricing associated with Lexapro. You mentioned that there was no price increase in the quarter, but as I try to back into it based on both the wholesale impact this quarter and also in the year ago quarter it seems that potentially if something happen as with relative price or may be a price increase didn’t have a full effect, was there any sort of change in the way rebates are accrued or is there, do you guys have a true-up at year end that might have been, in year end calendar that might have been important here, that’s my first question?

Frank Perier

No, Jim. There has been, when we look at our discounting in the current quarter, just reported, we were basically holding right in the same discounting rate that we've held through all year and there has been really no movement versus expectation in the discounting that for managed care and the gross to nets.

Jim Kelly

Okay, great. And then just lastly, and if you mention a commented about SG&A guidance for this fiscal year and I missed it, I apologize, but could you just update us on how we should see flows for SG&A going into the fourth quarter given the plans around Bystolic.

Frank Perier

We didn’t update any guidance, Jim, but we’ve – I think we’ve said a long, we do except an increase particularly in the launch cost for Bystolic in the fiscal fourth quarter. So you should except to see a part, a certain increase in SG&A, Q4 versus Q3. And that has been budgeted into our yearly budget and when we gave guidance at the beginning of this fiscal year.

Jim Kelly

Thank you.

Operator

Your next question comes from Dave Windley of Jefferies & Company. Your next question comes from Annabel Samimy of UBS.

Annabel Samimy

Hi. Thanks for taking my call. I have several questions on the pipeline front. First on RGH-188, were you going to provide a full analysis of schizophrenia trial at some point this year?

Larry Olanoff

We plan to -- we would like to have that data released at a scientific meeting, if possible sometime this year, or probably later, the later part of the year. We're still working with our partner Gedeon Richter, in terms of the most appropriate presentation forum.

Annabel Samimy

Okay. And you're also conducting some Phase for Bystolic trials, where you're going to be, I think you had mentioned that you are going to be reporting it around the time that you are launching, are we going to see some of that data as well?

Larry Olanoff

We're not reporting the scope of the trials, we'll start showing some of that data, I think in the first year of launch, but there are a number of ongoing trials and there will be some additional work, that additional analysis from some of the pre-existing US and European data.

Annabel Samimy

Okay. And then finally on ceftaroline, there were some draft guidance that was put out in October of 2007, a set guidelines on how to define non-inferiority, are your trial's designed in line with this draft guidance given the comments earlier than this. And also what are your expectations around some of the key issues to be discussed at the upcoming FDA panels on some of the antibiotics, and how might that effect your trials going forward?

Larry Olanoff

Yeah. I think the guidance was very general in nature, and it, I believe, covered both, potentially in-hospital as well as oral products, injectable as well as oral products. What I can tell you is that, our studies are being designed very conservatively taking into account FDA feedback, both in general and in specific to these compounds relative to non-inferiority margins and other patient parameters and patient entry characteristics, so we are comfortable with the designs of the trials that they should represent a conservative end to what is likely to come out of these advisory committees. That’s the best I can tell you at this time.

Annabel Samimy

And do you have any comments on the advisory panels that are coming up with some of the issues might be?

Larry Olanoff

Not often. I know that two products that are been reviewed and they are both -- I believe that both being reviewed in skin and skin-structure type infection trials. And again, those have been fairly standard so I don't expect a lot of controversy there.

Annabel Samimy

Okay. Great. Thank you very much.

Operator

Your next question comes from Michael Rockefeller of Morgan Stanley.

Michael Rockefeller

Questions, first on linaclotide. Do you expect to have the linaclotide data in time to present a DDW in May?

Larry Olanoff

No. To my awareness, the data is not being presented at that particular meeting. We're just planning the release of data in the first half of this year.

Michael Rockefeller

Okay. And then Larry, can you just give us some on detail on both the IBS-C and the chronic constipation markets, in terms of both market dynamics, differences between prescribing how that’s in those markets, and also, in terms of market size?

Larry Olanoff

We really haven’t commented on the markets per se in relationship to linaclotide, other than say, we have interest in both markets. I think the -- what I can say, is the market in chronic constipation is probably a bit more stable than the one in constipation-predominant IBS, that's all the IBS market is at question now because of the, really a lack of any widely used agents that are approved. So it will have to be redefined when new agents come into the market.

I think, both market opportunities run in a range that make it interesting individually for this compound. And obviously added together could be a nice return for the product, but we’ve not given any sizes or estimates of size.

Michael Rockefeller

Okay. Then the last question is on aclidinium. There was also a draft guidance issued by the FDA for COPD drugs in development, does your protocol fit within this current draft guidance given that you had started the Phase II and III studies before it was issued?

Frank Perier

That's correct. The guidance actually is pretty non-specific and it does grant a range of different endpoints. Interestingly, enough of our protocols cover the majority of those endpoints. But as far as there is no, nothing in the guidance that suggest that anything we plan for the use of this particular agent, which is a well-recognized agent will fall outside in terms of what the FDA is requesting.

We'll have more dialogue as a matter on that, of course, go forward getting ready to submit the NDA. But at this point, we don't anticipate any surprises. This is a, again, I would emphasize this is an established mechanism and the FDA seems to feel comfortable operating within traditional endpoints for drugs within an established mechanism.

Michael Rockefeller

Thanks and congrats on a good quarter.

Frank Perier

Thank you

Operator

Your next question comes from David Lickrish of Broadpoint Capital.

David Lickrish

Just a very quick question on aclidinium. Can you better describe for us the mechanism of action and maybe how you intend to differentiate that drug relative to the other therapeutic options?

Larry Olanoff

Sure. Yeah. Thank you for the question. The aclidinium falls in a traditional mechanism of action, category of a muscarinic receptor antagonist, which is helpful in terms of us driving a lot of comforts in terms of its potential to show positive results. Obviously, there is also large Phase II trial, which more data will be available this year in Scientific Conference, describing the efficacy of this drug versus placebo.

Having said that, the main engine in the market which is now I think approaching or has gone beyond a $1 billion in sales is Spiriva all similar mechanism of action but we believe that Aclidinium can be differentiated from Spiriva based on a number of factors. One is that the drug is metabolized very rapidly in the lungs themselves, we would see in relative terms less systemic drug levels which means less of the traditional side effects, such as dry mouth and potentially urinary issues. In addition, we think that the device, which we would enter the market, which is a very elegant multiple dose device will provide benefit over the current Spiriva devices available in the US. And finally, we think that there may be some differences in the product in terms of speed to onset of action.

David Lickrish

Okay, thanks. And I just want to review, if I can ask a follow-up question. You made some comments in your opening commentary with regard to doubling the size of the late-stage pipeline or the pipeline in general. Can you be any more specific?

Larry Olanoff

Yeah. That the comments really related to the late-stage pipeline which would involve either advancing compounds currently in the pipeline or acquiring new compounds through license or acquisition from new opportunities and new franchises for that matter.

David Lickrish

Thanks very much for taking the call.

Operator

The next question comes from Gary Nachman of Leerink Swann.

Gary Nachman

Two questions. First, what's your market research telling you in terms of not having the CHF indication or Bystolic at launch, how much of a disadvantage is that if any?

Larry Olanoff

Thank you for the question, Gary. We don't think it's a major disadvantage, by any means. It's nice to have opportunity and we are going to continue to pursue it. But we see about 80% of the market are better for this agent in hypertension and we price it accordingly, we're really entering the market with our hypertension price and I think a very favorable price relative to managed care expectations and ability to negotiate. So our entry and I think the majority of our sales going forward will be based on hypertension, but we will continue to pursue CHF as a secondary indication.

Gary Nachman

Right and on that point, have you started any other CHF studies yet or have you been waiting for your meeting with the FDA? And just when do you think that meeting is going to take place roughly?

Larry Olanoff

We think that meeting will occur in the first half of this year. And, no, we haven't started any other program at this point.

Gary Nachman

Okay. On Namenda the growth continues to be strong. Are you guys doing even better on long-term care because the IMS scripts didn't point to such a big number in the quarter? So, is that the piece that we are missing or you are doing even better?

Larry Olanoff

We believe that we continue to get better penetration in long-term care and as we said there was a slight up tick relative to wholesaler inventories versus last quarter which basically came back to normal levels, which we thought when we had our last conference calls, we thought they would in this quarter.

Frank Perier

Yeah, I don't know that we can make any comments in terms of how the IMS data may or may not reflect the long-term care situation; it's obviously a continued focus for us, we had pretty good relationships in terms of the various plans that cover that category.

Gary Nachman

Okay. And then thinking about the [one still in] Namenda, how do you think formularies would potentially handle that, knowing that the price deal, it could go generic in a few years? And what have you guys thought about on that front?

Frank Perier

We really haven't commented on that to date. I mean it's -- for us it's the strategy that we are going to have to evolve as we look at the expiry issues for this product in the legal situation, we've also really have been careful not to comment on that including our filing strategy.

Gary Nachman

And lastly for Frank could you just remind us how Azor is recorded in the P&L? Thanks.

Frank Perier

Sure. Azor, similar to the Benicar co-promotion agreement will be recorded through other income when we get to the profit split.

Gary Nachman

Okay, thanks.

Operator

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

Dave Windley

Hello.

Larry Olanoff

Hello, Dave,

Dave Windley

Yes, okay. Can you hear me?

Larry Olanoff

Yeah.

Dave Windley

I guess [phone line] didn’t work. Okay, so, wanted to ask you a question on the hypertension products, first of all on Benicar, and particularly the HCT version. We are seeing scripts weaken a little bit there. Is that -- should we assume that those scripts are going to Azor (inaudible) combination?

Larry Olanoff

No. Actually, our reading of the data is that we have seen growth in those two products and so we have been very happy, in fact, at this point we are not seeing any kind of relation of those two products, and in fact we are directing Azor at a different patient population than those products apply. Although, we go to Benicar users, as that's one of our targets, because they are familiar with the product, but clearly we differentiate the use of Azor against Benicar and Benicar HCT into a more severe population. Patients that are already taking calcium channel blockers in one shape or form.

Dave Windley

So, you view Azor as completely additive to the Benicar franchise?

Larry Olanoff

Overall, yes.

Frank Perier

Overall, yes.

Dave Windley

Okay, moving on Lexapro and the adolescent studies that you have done, is that information or is that data available and having any impact on prescription-writing habits at this point or is it really not until you file and get potential approval on the sNDA, that that would have an impact?

Larry Olanoff

I would anticipate that any substantial impact would be only after we are able to gain approval. We don't promote the product into that population. We can't by law.

Dave Windley

Okay. And the cycle time on that. I missed when you said you thought you'll get that sNDA filed.

Larry Olanoff

We would plan to file that supplemental NDA in the first half of this year.

Dave Windley

Okay. And then is it ten months cycle.

Larry Olanoff

The standard review, we would anticipate, although, we might ask for some type of priority consideration, but we will plan on it -- a standard review.

Dave Windley

Okay. Last question on Namenda's patent restoration activity. What's the earliest you would anticipate hearing from the PTO or from I guess whatever agency is responsible for the restoration? When is it you guys still expecting to hear from that, hear on that, for Namenda?

Larry Olanoff

Sure Dave. There is no statute with which the agency has to come back. Obviously the patent is valid until April of 2010, so the easy answer is, at some point ahead of that, but we filed a year ago, just over a year ago, December of 2006. So, we might look for something within two years of that data, which would be, maybe around the end of this year. But again there is no statute or time limitation that they have to review and give us the decision.

Dave Windley

Okay. Thank you.

Larry Olanoff

Sure Dave.

Operator

Your next question comes from [Ronnie Gale] Bernstein.

Ronnie Gale

Hi, couple of questions. The first one is on Namenda. Teva have been making some noises about coming to the market with generic Aricept this year. If there is a generic Aricept earlier than expected, what is your take about the impact on Namenda?

Frank Perier

Good question, but I don't think we'd have, we wouldn't see, at least we are not anticipating any major change in Namenda revenue and that over 60% of the use of the product is in combination with the acetylcholinersterase inhibitor, if anything, if there was a growth in the market because of the introduction of a generic, in the overall use we would potentially grow in Namenda with it.

Ronnie Gale

Interesting. Second about the aclidinium combination product, can you give us an update on both the formotorol combination and I think Amarillo, they are working on a corticosteroid combination, that’s an interesting combination product, can you give us an update on both a formotorol combination and I think Almirall mentioned they are working on a corticosteroid combination? That's an interesting combination with their LAMA's. Can you tell us a little bit about where it fits into this therapy?

Larry Olanoff

The first combination you mentioned which is a long-acting beta-agonist formotorol, that is proceeding along and we anticipate possibility of it being in Phase II clinical trails, yet this year, this calendar year.

As far as the combination with a corticosteroid we really haven't commented further on that in terms of the selection. We've clearly as consideration, something we would consider pursuing, but we haven't really commented on any detail at this point.

Ronnie Gale

Great. Thanks guys.

Larry Olanoff

Thanks Ronnie.

Operator

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

Frank Pinkerton

My question on the Namenda side, I know you have the deal for memantine. Are there any other markets that that drug is trying to be extended into and where studies are being done?

Larry Olanoff

I am not aware of any specific activities going on in terms of extension of the products in other markets really not part of our business aspects. We just have the market in the US.

Frank Pinkerton

Okay. And then, secondarily shifting gears here, capital flows, not only in the former markets but many markets have changed with over $2 billion -- around $2 billion on the balance sheet. As you go out and look for in-licensing opportunities in other potential deals, can you speak to what you're seeing from a standpoint of available activity, price on that activity and changes in other companies out there holding some of the, maybe IP or development products and more willingness to sell with kind of the changing markets? Thank you.

Larry Olanoff

It's a good question. I think our horizons in terms of what we look at and the kind of deals we structure have changed substantially in last, I'd say three years or so in that. For us everything is about gaining products and whether that is through a traditional product license, a product acquisition, a small company acquisition or even a more larger potentially transformed or merger, these are all considerations as we go forward.

What we see I think in today's terms, more in terms of what we're opening, considering there are a number of small companies typically private companies that are making themselves potentially available as an acquisition. We still talk to those companies both on the potential for product licenses. And if that doesn't suit the discussion going forward, we look at them potentially as acquisitions. But its all been in all on friendly terms thus far. That's the way we've operated.

But I don't know that there are more companies available in today's world in licensing considerations going towards the acquisition, approach or just simply we've been more involved in the last few years. So it has opened our eyes in terms of opportunities. We do look far and wide and we continue to look as I mentioned in terms of our ambitions to expand our late-phase pipeline.

Frank Pinkerton

Thank you.

Operator

You have a follow-up question from Gur Roshwalb of Piper Jaffray.

Gur Roshwalb

Hi. I was wondering if you can give any commentary on how we should think about R&D going forward, especially giving your interest in doubling the late-phase pipeline?

Frank Perier

What we stated in the past is that we're looking towards spending approximately 14% to 15% of our sales on R&D going forward. But we wouldn't be hesitant to increase that number if the right opportunities came along. So we believe our primary mission is building our revenue growth out in the next decade. Clearly, we have the -- our issue with exclusivity loss for Lexapro and Namenda in 2012 and we are struggling to bring more products in to assure ourselves that we have enough shots on goal so that beyond 2012 in the out years we'll see that revenue growth that we need to provide for the shareholders.

Frank Pinkerton

Thank you. And one quick modeling question and -- what is the typical wholesaler activity you've guys have seen in the March quarter? Do you expect to go down again?

Larry Olanoff

That's a very good question. We have definitely seen a pattern where, particularly a couple of the major wholesalers have their year-ends at March 31. We do see an increase in buying around the holiday periods at December 31, and then we have seen in the last couple of years where there is a decrease in inventories right around March 31, and then it tends to bounce back in our fiscal first quarter.

Frank Pinkerton

Thank you

Larry Olanoff

Sure.

Operator

Your next question comes from Corey Davis of Natexis.

Corey Davis

And that is, would you consider buying back the Bystolic royalty stream from Mylan to increase your margins or would you prefer to preserve the cash for deals on new products at this point?

Frank Perier

Corey, we're always -- it's a very good question, we are always open and opportunistic. I think through the right value we would certainly consider it, but we'd certainly do have a preference to retain our capital and look towards additional products to add into the pipeline. As Larry indicated, we definitely have a strong desire overtime to significantly increase (inaudible) over the pipeline.

Corey Davis

Can you, if you were to do that can you use the Irish cash to do that?

Frank Perier

It certainly depends on the structure of the arrangement and there are certainly ways that we can utilize our offshore resources.

Corey Davis

And in terms of buying companies, is buying a European company the only way that you could use that Irish cash?

Frank Perier

Not necessarily, no.

Corey Davis

Just have to be something creative?

Frank Perier

Depends upon the structure and the rights that come along with principally US company.

Corey Davis

Fair enough. Thanks very much.

Operator

The next question comes from Andrew Swanson of Citigroup.

Andrew Swanson

Just a couple of quick ones. First, there has been a lot of talk about the Bystolic CHF filing, but I was wondering if there has been any shift in terms of the timeline there? It wasn't necessarily mentioned on the list of other pipeline catalyst as we look forward?

Larry Olanoff

We haven't really spoken to a timeline for the filing, because its really going to be determined by our discussions with the FDA. What we said repeatedly is that, we plan to meet with the FDA in first half of this year. Once we receive guidance from them in terms of what the filing would look like, we'll get back to the financial community in terms of where we are and what our plans will be.

Andrew Swanson

And then in terms of lifecycle management, you've talked a lot about once-daily Namenda. Is there any form of Lexapro lifecycle management that's currently in any stage of clinical development?

Larry Olanoff

We haven't really commented on that for competitive reasons, actually at some point where we have more to talk about in terms of more data, more close to a potential filing we'll get back to you on that kind of an opportunity. But all I can say is that, we continue to remain very interested in looking to extend lot of the useful lifecycle Lexapro beyond the 2012 date.

Frank Perier

But I would add Andrew that we are operating unto the March of 2012's expectation for the end of market exclusivity.

Andrew Swanson

Okay. And then finally, you talked a little bit about improving formulary position with Lexapro, but at same time not necessarily increasing discounts. I mean can you just speak to that? It seems counterintuitive that that would happen?

Larry Olanoff

Well, there's a number of things that has been happening or could happen in the future that could give us some leverage in terms of improving formulary position. There are a number, not many, but there are a few formularies out there that are not, we are not seeing any or not rebating on the product and yet we are tracking at close to national share. So, those opportunities become available on a time-by-time basis, when the plans are reviewing and we are in discussions with them, accordingly. In addition, we are continuing to generate a good bit of data, both clinical and more, to the point economic data that shows, demonstrates the value of that product, especially in light of its competitive pricing position versus the SNRI's.

And then finally, as I indicated early, we have plans to file for an indication of adolescent depression. If that indication is granted by the FDA at some time in the future, we will be the only proprietary anti-depressant marketed for that indication. So, those are all factors that help us in our negotiations with the managed care plans.

Andrew Swanson

Thanks very much

Operator

Your next question comes from the line of Greg Gilbert of Merrill Lynch.

Greg Gilbert

Thanks. I have a couple. Frank, just to make sure I understand the guidance change. Other than a slight reduction in R&D milestones, are there any other cost related changes or is it all just higher sales.

Frank Perier

Greg it's principally just a little bit higher sales and a little bit less R&D spend than we thought, principally around milestones. The timing of one milestone which will extend out into next year and then the milestones related to this (inaudible).

Larry Olanoff

Our clinical trial spending pretty much remains on track from our guidance.

Greg Gilbert

Yeah. Okay. On Bystolic, what is the net price you're expecting there?

Larry Olanoff

We haven't given the net price, Greg, we've talked about general pricing, very competitive with Toprol-XL, we haven't given a net pricing at this point, but you're looking at a dollar something range a day for the brand.

Greg Gilbert

Okay. And Larry, you talked about formulary access goals for the product?

Larry Olanoff

Yes.

Greg Gilbert

How will you stand coming out of the box, obviously you're going to sample a lot of it, are there going to be any access challenges before sort of you hit your goal of a good coverage by year-end, just want to make sure this is not any different from any other launch.

Larry Olanoff

That was good question. I think, I don't anticipate we'll be on formulary immediately, they have to make decisions, we're reviewing clinical data with all the major plans right now, and then we'll begin pricing discussions. But at this point, we have very -- we think very good stocking, in terms of getting the retail pharmacy shelves prepared to launch the product, and we don't anticipate in any major access problems going forward. I think this is not a category that typically managed care has put high restrictions on, or high hurdles, and for us it's a matter of negotiating I think Tier-2 versus Tier-3 status as we go forward.

Greg Gilbert

Frank, you are including some revenue stocking in the March quarter regardless of the script?

Frank Perier

Yes. Greg, it's a good question. We do anticipate that we'll probably have just under $10 million of stocking sales in the quarter.

Greg Gilbert

Great. And last question, Larry, on RGH-188, can you give us a little more color about what you're looking at, in sort of this next round of Phase II work beyond what you learned from that last study? Thanks.

Larry Olanoff

We haven’t commented in terms of where we’re going with schizophrenia yet. We’re still talking with, Gedeon Richter whether that means going ahead to a Phase IIb study, perhaps with some different dosing considerations versus going right to Phase III.

What we have commented on is that we do expect before the end of the year data in bipolar mania. And we’re looking in that study, its similar doses that we studied in schizophrenia trial.

Greg Gilbert

Okay. I guess I misheard you early on. So just to be clear, we do not yet know your plans whether to do additional Phase II work or go to Phase III for schizophrenia?

Larry Olanoff

That's correct.

Greg Gilbert

Okay. Thanks.

Charles Triano

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

Operator

Okay. Your next question comes from the line of Tim Chiang of FTN Midwest.

Tim Chiang

Thanks. I just had a follow-up. I think you've mentioned price [Technical Difficulty].

Larry Olanoff

Tim, you are really breaking up on the range on your mobile and if you could please repeat the question.

Tim Chiang

Sure. My question is tied to Bystolic. It really comes down, do you plan the price of Bystolic comparable to generic version of the [Technical Difficulty]. And also you have clean label [Technical Difficulty].

Larry Olanoff

Did we lose, Tim?

Frank Perier

Tim, are you still there?

Tim Chiang

Can you guys hear me?

Larry Olanoff

We got the price question, we didn’t get the product label question.

Tim Chiang

Just basically, how do you monetize a clean label with Bystolic in a very competitive generic?

Larry Olanoff

Okay.

Frank Perier

Yeah. I think the -- the pricing I think will be closer to the prescription pricing for Toprol

Larry Olanoff

The branded products.

Frank Perier

The branded product. And as far as the label, that's a great entry point for us in terms of dealing with managed care. That may address your question in term of monetizing that. I think that helps us in terms of our negotiations going forward with managed care. I don't think the price at the retail level is going an issue for the customers.

So, we don't really see that as a problem going forward. I think it's all going to be in the discussion to managed care. And then, again, coming in with that label and also the published data for the product in terms of its efficacy profile, and clearly, what we think will be a very positive experience getting into the market, getting drug into the hands of physicians that's where we're so aggressively sampling this product.

I think all this will translate into a significant pull-through pressure and I think and managed care, given it's previous history in this class of agents, I think all in all, we have fairly optimistic plans going forward in terms of breaking this product into the market and getting coverage on a majority of plans in a fairly short period of time.

Tim Chiang

Do you have any internal target for market share [Technical Difficulty]?

Larry Olanoff

Yes. And that's why they are internal.

Tim Chiang

Okay.

Larry Olanoff

We haven’t commented on market share. What we'll do at come in April, we'll provide guidance for the year in terms of where we see sales going.

Tim Chiang

Okay. Great. Thanks a lot.

Frank Perier

Thank you.

Larry Olanoff

Thank you, everybody.

Operator

At this time, there are no further questions. Mr. Triano are there any closing remarks.

Charles Triano

No. Thank you, everybody for your attention this morning.

Operator

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

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