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Auxilium Pharmaceuticals Inc. (NASDAQ:AUXL)

Q4 2007 Earnings Call

February 14, 2008 10:00 am ET

Executives

Jennifer Evans Stacey - EVP, Secretary and General Counsel

Armando Anido - President and CEO

Roger Graham - EVP of Sales and Marketing

Jim Fickenscher - CFO

Analysts

Salveen Kochnover - Jefferies

Greg Fraser - Merrill Lynch

Thomas Wei - Piper Jaffray

Leland Gershell - Cowen and Company

Donald Ellis - Thomas Weisel Partners

Marshall Urist - Morgan Stanley

Matt Renna - Soleil

Steve - Citi

William Ho - Banc of America Securities

Operator

Good morning, ladies and gentlemen, and welcome to the Auxilium Pharmaceuticals 2007 fourth quarter and full year earnings and 2008 financial and operational guidance conference call. (Operator Instructions)

And I will now turn the call over to Jennifer Evans Stacey, Executive Vice President, General Counsel, Human Resources and Secretary for Auxilium. Please proceed.

Jennifer Evans Stacey

Good morning, everyone. With me today are Armando Anido, Chief Executive Officer and President of Auxilium; Roger Graham, Auxilium's Executive Vice President of Sales and Marketing; Jim Fickenscher, Auxilium's Chief Financial Officer; and Dr. Jyrki Mattila, Auxilium's Executive Vice President of Business Development and Technical Operations; and Dr. Tony DelConte, Auxilium's Chief Medical Officer.

Before we begin, I would like to remind you that we will make various remarks during this conference call that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other than statements of historical fact and generally may be identified by the words believe, may, appear, feel, could, will, estimate, continue, anticipate, see, intend, should, plan, hope, potential and expect and similar expressions.

Today, our forward-looking statements will cover, among other things, our plans in what we believe to be the prospects for the company, including statements regarding the timing for reporting of topline results from CORD I and CORD II clinical trials for XIAFLEX; clostridial collagenase for injection for the treatment of Dupuytren's contracture; the timing of our BLA submission for XIAFLEX and related product approval; the development schedules for our product candidates; the utility of product made at our Horsham facility; the interpretation of clinical results; the benefit to patients of XIAFLEX; our ability and opportunity to obtain regulatory approval and commercialize XIAFLEX outside the United States; our intention to explore partnering opportunities for XIAFLEX in Europe as part of its ongoing evaluation of options to maximize the product potential in Europe; our ability to achieve our 2008 R&D milestone; the interpretation of market data, Testim sales and market growth and the factors underlying such growth; our ability to achieve Testim market growth and the focus of our future Testim sales efforts; and our anticipated financial performance during 2008 and the financial milestones that we may achieve for 2008, including our 2008 net revenues, R&D spending, selling, general and administrative expenses and net loss; and the benefits to be realized by the company as a result of recent additions to the management team and the Board of Directors.

Actual results may differ materially from those reflected in these forward-looking statements as a result of the delay of clinical trials for our product candidate; adverse events in our clinical trials; study results; changes in the regulatory requirements for our industry; our inability to compete ineffectively in our markets; our inability to manufacturer XIAFLEX; failure of our third-party manufacturers or suppliers to meet the contractual obligations; as well as various factors discussed in our annual report on Form 10-K for the year ended December 31, 2006 and our quarterly report on Form 10-Q for the quarterly period ended September 30, 2007.

Given these risks and uncertainties, you should not rely on any such factors or forward-looking statements. Forward-looking statements provide the company's expectations, plans and forecasts for our future events and viewed as of the date hereof. While the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so. Also today's call may not be reproduced in any form without our express written consent.

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

Armando Anido

Thank you, Jennifer, and good morning to all of you who are joining us on the phone or via webcast.

During our call this morning, I will review the tremendous progress that we made as a company in 2007. I will then ask Roger to provide you with an update on Testim performance for the fourth quarter of '07, and Jim will take you through the financial results for the quarter. I will come back and provide you with guidance for '08, and then, as part of our ongoing evaluation of how to maximize XIAFLEX potential in Europe, discuss our intention to explore partnering opportunities for XIAFLEX in Europe. We will conclude by opening up the call for your questions.

Before I get into the meat of the call, let me give you the Reader's Digest version of our '07 accomplishments. One, Testim achieved a record $95.7 million in net revenues in '07, up 40%. Testim achieved $27.7 million in revenues for the fourth quarter of '07, up 42%. Testim remains the fastest growing testosterone replacement therapy product in the United States. The 968 patent issued on January 22, 2008 with protection through January 2025.

Secondly, we made tremendous developing XIAFLEX in 2007 by, first, completing enrollment in the pivotal Phase III CORD I trial by mid December, second, completing the consistency batches for the biologics license application, and third, expecting to continue to release topline CORD I, CORD II results in second quarter of '08, and ultimately submitting the BLA for Dupuytren's contracture in early 2009.

Finally, we added significant strength and depth to our management team and Board of Directors. On the senior sales and marketing leadership, folks like Roger Graham, on the senior R&D leadership, folks like Tony DelConte, and then two new industry executives to the Board.

Now, let's go to the details. The strategy that my management team and I have put in place is quite straightforward, focus our efforts on getting XIAFLEX approved for commercialization in the US and Europe, develop the market for a successful launch and continue driving Testim growth. As with more strategies, the key to success is execution, and as I look back on the year, I believe our team delivered.

Let me start my review with XIAFLEX. We made great progress on the development front with XIAFLEX in 2007 despite starting the year with a real challenge, the [melt-back] manufacturing issue. Faced with this difficulty, our team responded with experience, urgency and poise.

We worked systematically through the problem making sure that we had the appropriate data to demonstrate that we had corrected the issue before asking the US Food & Drug Administration to review our data package. We were rewarded with a very quick review from the FDA and the ability to restart the trials earlier than anticipated. To-date, we have not seen any indication that the melt-back issue will return.

We received clearance from the FDA to initiate our Phase III trials for the treatment of Dupuytren's contracture in August, and we were able to enroll the first patients in the pivotal US CORD I trial and the Australian CORD II trial in September. Within three short months we were able to complete enrollment in the two double-blind placebo controlled trials.

We also made significant progress in completing enrollment in the two open label clinical trials JOINT 1 and JOINT 2. We have now completed enrollment in the US JOINT 1 and are nearing completion of the JOINT 2 open label study. At this point, we continue to actively enroll patients in JOINT 2 in Europe and we expect to complete enrollment in the first quarter.

To-date, we have enrolled approximately 840 patients in all of the clinical trials, which we started in third quarter '07, and these patients have received in excess of 1,800 total injections. We expect to report topline results from the CORD I and II studies in second quarter of this year.

With regard to manufacturing of XIAFLEX, since we acquired the Horsham facility, we have completed approximately 10 production batches, including the commercial scale batches that we plan to submit as a conformance slots within our BLA. We have worked closely with the commercial scale [filling and line utilization] company, and we believe that we have a commercially viable process in place.

Finally, we made good progress on the Peyronie's front as well. We have completed the in-life portion of the animal study requested by the FDA, and we are evaluating the results for histopathology, toxicokinetics and immunogenicity. We plan to present this data to the FDA in the first half of 2008 and pending positive results in agreement with the FDA, we expect to begin dosing patients in a Phase IIb study of XIAFLEX for the treatment of Peyronie's disease by the end of the second quarter.

Now, let's switch to our current commercial product, Testim, which continues to be an asset that churns out fantastic results. We believe that Testim is an important part of who we are at Auxilium and will be for the foreseeable future. Testim continues to be the fastest growing testosterone replacement therapy on the market.

And in 2007, revenues increased to $95.7 million, up 40% over 2006. We ended the year with 21.5% share of the gel market. We were able to grow Testim prescriptions 35.2%, almost twice the rate of the gel market growth. We believe these tremendous results were driven in large part by our decision in late 2006 to increase our sales force to 150 representatives.

Creating long-term viability for Testim is a focus for all of us at Auxilium. Last month, the US Patent and Trademark Office issued a Method of Use Patent covering Testim through January 2025. And we successfully listed it that same day in the Orange Book. To-date, we have not received a Paragraph IV certification.

In 2007, we continued to add depth and strength to the senior sales and marketing and R&D management teams at our Board at Auxilium. We are very pleased to have Roger Graham leading our commercial efforts. He has already strengthened the commercial team, bringing in key individuals in marketing, sales, national accounts and reimbursement areas.

In addition, we are pleased to welcome Dr. Tony DelConte to Auxilium in the newly created role of Chief Medical Officer. Tony will head our preclinical, clinical and medical affairs at Auxilium. Tony's most recent role was that of Senior Vice President, Clinical Research at Genaera. Prior to that, he served as Senior Medical Director of US Clinical Development and Medical Affairs at Novartis.

Finally, we strengthened our Board of Directors with the addition of Dr. Renato Fuchs and Dr. Dennis Langer. Dr. Fuchs and Langer bring tremendous expertise in biologics manufacturing and research and development respectively. We welcome our new Auxilium team members and believe their breadth of experience will be invaluable to us as we continue to develop as an organization.

Looking back at our capital markets activities last year, the company completed the sale of approximately 3.7 million shares of common stock at a price of $14.50 per share, which represented an at market deal raising approximately $49.9 million. Six new cell site analysts commenced coverage of Auxilium in 2007, and the company's market cap increased from $500 million at January 1 of 2007 to $1.2 billion at December 2007.

Now, let's turn tell the call over to Roger. He is going to share with you the specifics of our accomplishments with Testim in the fourth quarter of '07.

Roger Graham

Thank you, Armando. Our performance in the fourth quarter of 2007 demonstrates our continued excellent progress in growing the Testim brand, and as Armando mentioned earlier, our ability to execute against our strategic plan.

Testim quarterly net revenues reached an all-time high for Auxillium. Revenues were up 42% over the comparable quarter of 2006. A corresponding 115,600 total prescriptions that were reported in the fourth quarter of 2007 represent our highest quarterly level ever of 32.4% versus 4Q of '06.

According to IMS Health, Testim's TRx market share at the end of December 2007 was 21.5%, up 3.3 points from December 31, 2006. We believe this is quite impressive given that the market grew 17.7% during 2007. According to IMS exponent data, within the highest prescribing urologists on whom we call, we had a market share of approximately 39.2% in December of 2007. Additionally, since taking back primary care coverage and expanding our sales force in the fourth quarter of 2006, we've experienced positive growth in primary care.

According to IMS exponent data, our share of our highest prescribing primary care customers now stands at 29% up 6 share points from 23% in December of 2006. These results were achieved in large part due to the tremendous efforts of all of our outstanding medical sales consultants. Particularly noteworthy was the performance of nine of our top medical sales consultants, [Rick Kane, Dean Patty, Kim Gallegos, Dwayne Moore, Christopher Chesky, Bob Paige, Jason Rauser, Reg Stauchill and Meg Dunaton] each more than doubled their business versus 2006.

Our efforts in 2008 will continue to focus on driving share with Testim through a variety of branded initiatives developed for healthcare providers and their patients. Additionally, we will continue to place a premium on a superior level of execution here at Auxilium, as we believe this will allow us to maintain Testim as the fastest-growing TRT therapy.

In addition to brand specific efforts, we also continue to educate all appropriate audiences on the need for screening for low testosterone. Toward this end and with the new patent for Testim secured, we plan to expand our clinical efforts for Testim to establish a leadership role in developing data for testosterone replacement therapy.

In the first quarter of 2008, we plan to implement the Testim registry in the US, or TRIUS, a TRT registry that will assess long and short-term outcomes of TRT. We believe that registry will further enhance the data set for Testim and provide additional insights on the value of Testim and TRT therapy. In addition, we plan to build out our medical affairs leverage efforts under the leadership of our new Chief Medical Officer, Tony DelConte to support all major development and expand medical information, communications and education programs.

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

Jim Fickenscher

Thank you, Roger, and good morning to everyone on the call. I'll be focusing my comments today on the results for the quarter ended December 31, 2007, and I will be happy to address the year to-date results in the question-and-answer session.

For the quarter ended December 31, 2007, we recorded record net revenues of $27.7 million compared to net revenues of $19.5 million for the fourth quarter of '06, a 42% increase. The revenues for the quarter included $1.1 million in shipments to our ex-US partners and amortization of deferred revenues for milestone payments previously received.

Net loss for the fourth quarter of 2007 was $11.9 million or $0.29 per share compared to a net loss of $12.8 million or $0.36 per share reported for the fourth quarter of 2006. Total stock-based compensation expense in the fourth quarter of 2007 was $1.8 million compared to $1.1 million for the same quarter '06.

Our gross margin on net revenue was 73.9% for the fourth quarter and 74.5% for last year's fourth quarter. Gross margin reflects the cost of product sold as well as royalty payments made to our licensor on the sales of Testim. The decline in the gross margin rate reflects a lower margin rate on international revenues and increased coupon usage, partially offset by the impact of year-over-year price increases on US Testim revenues.

Research and development costs for the quarter of '07 were $14.5 million compared with $12.2 million for the comparable year ago period. The increase in R&D cost was primarily due to the increased spending for development and manufacturing of XIAFLEX.

Selling, general and administrative expenses totaled $18.9 million for the quarter ended December 31, '07 compared with $15.8 million for the year ago quarter. The increase primarily reflects higher investment in promotional spending for Testim, including the cost of increasing our sales force, pre-launch efforts for XIAFLEX, and higher stock-based compensation expense.

At December 31, 2007, we had $76.1 million in cash, cash equivalents and short-term investments compared to $82.5 million at September 30, 2007. We believe that this cash will last us through the second quarter of 2009.

As of December 31, 2007, we had approximately 40.8 million shares of common stock outstanding, plus outstanding warrants to purchase approximately 2.3 million shares of our common stock and 3.8 million outstanding employee stock options to purchase shares of common stock at varying prices.

Thank you very much for your attention, and I'll turn the call back over to Armando.

Armando Anido

Thanks, Jim. Now let's talk about our expectations for 2008. We will focus on continuing to unlock the value of our two key assets XIAFLEX and Testim.

We anticipate that net revenues will be in the range of $120 million to $125 million, an increase of 25% to 30% versus 2007. We expect research and development spending will be in the range of $52 million to $56 million, which includes $2 million to $3 million of stock-based comp.

We anticipate that selling, general and administrative expenses will be in the range of $88 million to $92 million, including $7 million to $8 million of stock-based comp. As a result, we anticipate that our net loss will be in the range of $44 million to $48 million, including stock-based comp expenses in the range of $9 million to $11 million.

With respect to XIAFLEX, we expect that we will release topline results of CORD I and CORD II trials in the second quarter, and that we will submit the BLA for Dupuytren's contracture indication in early 2009. Pending the animal study results and the FDA's approval, we look to start a phase IIb study in Peyronie's disease by the end of the second quarter.

This morning we are announcing our intention to explore partnering discussions for XIAFLEX in Europe. This is the next step in our ongoing evaluation of how to maximize XIAFLEX potential in Europe. We believe XIAFLEX is a significant Phase III asset, and it had already generated tremendous interest from potential partners.

To-date, however, we have refrained from engaging in any discussions. We believe we have two broad options available to us to commercialize XIAFLEX in Europe; one, let's to do it on our own; or two, establish a partnership. We believe we can only compare the merits of these two options after finding out what a potential outlicensing arrangement could bring. Therefore, the final decision is to how and by whom XIAFLEX will be commercialized in Europe, depends on the results of discussions with potential partners, which will begin starting today.

I'm sure you will agree that 2007 was a strong year for Auxilium and that we have focused our sights on achieving some very significant milestones in 2008.

In concluding, let me thank our shareholders for your continued support. Additionally, I want to give a special thanks to our employees for their untiring energy, spirited enthusiasm and relentless commitment to making Auxilium a success. We're truly excited about the prospects, opportunities and potential for success in front of us.

Thank you. We are now going to open up the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Salveen Kochnover of Jefferies. Please proceed.

Salveen Kochnover - Jefferies

Sure. Thanks for taking my questions. Armando, when you look at partnering XIAFLEX in the EU, are you looking at partnering it just for Dupuytren's or for all indications given the potential for significant off label use here?

Armando Anido

That's a great question, Salveen. I think our intent right now is actually to focus it on Dupuytren's and Peyronie's disease, which are obviously the furthest long. And that's what we're looking to have discussions on with potential partners is about those two first indications.

Salveen Kochnover - Jefferies

Okay. And then where do you stand in regards to opting in for rights to the cellulite indication from BioSpecifics.

Armando Anido

Yeah. I think that is an option we always have if we want to exercise it based on the contract that we have with them. And to-date, we have not had it presented to us from the folks at BTC. And hopefully, we'll anticipate as they get additional data or as they have data to present to us will determine whether we actually take it on or not.

Salveen Kochnover - Jefferies

Okay. And are they running any proof of concept trials there that you could look at?

Armando Anido

At this particular point, they are not running any current trials that I'm aware of.

Salveen Kochnover - Jefferies

Okay. And then just going to Testim for a second, when do you feel that you'd be out of the clear here in regards to Paragraph IV challenges, and if one emerges, how would you respond to this?

Armando Anido

Yeah. I think, Salveen, everyday that I come walking into the office and there is nothing on the fax machine or there is nothing that comes in certified mail makes me feel better everyday. But I don't know that I have a drop-dead point where I'm kind of feel like it's not going to potentially happen.

Now, it's something that at this particular point you would have anticipated that if somebody were in there they would have come forward, but it doesn't. There is no timeline they have to go through in order to get it to us. So, at this particular point, we're happy that it hasn't happened to-date. We feel more confident today than we did several weeks ago when we first filed it. And we'll see what happens.

On the other note if somebody now files after the January 22 timeframe, then obviously a Paragraph IV certification would give us -- we would without a doubt get a 30-month stay at that particular point.

Salveen Kochnover - Jefferies

Perfect. Thank you.

Armando Anido

Yes

Operator

Your next question comes from the line of Greg Fraser of Merrill Lynch. Please proceed.

Greg Fraser - Merrill Lynch

Good morning, guys.

Armando Anido

Good morning, Greg.

Greg Fraser - Merrill Lynch

When was the last price increase for Testim and how much was that?

Armando Anido

We actually took a price increase on Testim on January 1 of this year and it was 8% price increase.

Greg Fraser - Merrill Lynch

Okay. And when will we learn more specifics about your lifecycle management initiatives for Testim.

Armando Anido

I think, as Roger highlighted, one of the key lifecycle management plans is to initiate a registry this year. That will help us in gathering additional data about the use of Testim and about the use of testosterone in replacement therapies. And then, as we continue to progress, we'll hopefully, as we have other ideas on lifecycle management, will share those with you downstream.

Greg Fraser - Merrill Lynch

Is there any R&D work being done now on a different formulation?

Armando Anido

We always have some things that are ongoing in R&D and taking a look at Testim specifically. BUT we haven't really disclosed anything specific about what they are up to yet.

Greg Fraser - Merrill Lynch

Okay. And then on XIAFLEX, when do you expect to have more clarity on what will be required for a filing in the EU, and if you do need to run additional studies of that and important consideration with respect to whether you bring a partner on board?

Armando Anido

Yeah. We actually are continuing to get feedback from various member states in Europe at this particular point. And we hope to complete those evaluations some time in the first quarter of this year, and then determine exactly what the requirements -- if any additional requirements are required beyond what we already have. And at that particular point we will determine what the right path will be. I think that, obviously, as we start talking to partners they are going to be interested in some of those discussions and understanding what our current regulatory path would be. And as we learn more we will share it with them and ultimately share it with you all.

Greg Fraser - Merrill Lynch

Okay. Thank you

Armando Anido

Great thanks Greg

Operator

Your next question comes from the line Thomas Wei of Piper Jaffray, please proceed

Thomas Wei - Piper Jaffray

Hi thanks. I had a question on the ongoing CORD studies, can you help us understand even on a blinded basis what some of the types of safety issues that you are seeing are and whether or not the rate or the type of adverse events have been in line with your expectations?

Armando Anido

Yeah Thomas, we actually are not ready to disclose anything relative to safety whether its blinded or unblinded, I can tell you that if there would have been anything really dramatic that happened, we would have had to probably stop the trial or changed it one way or another, but to comment any more about any of the safety issues. You will hear all about it in the second quarter when we unblind the trial.

Thomas Wei - Piper Jaffray

Can you share with us anything about how that discontinuation rate from those studies has been relative to what you powered the trial for originally?

Armando Anido

Yeah at this particular point we have no information for you relative to any discontinuations or so.

Thomas Wei - Piper Jaffray

And then just lastly o that preclinical study in the Peyronie’s indication, if I remember correctly from the last call it seemed as though you were or maybe it was from the update earlier this year, you were at this similar stage where treatment had been completed and you were going through the process of analyzing things, can you not share with us anymore information on say relative to your expectations of the entry and that recovery process. Has that gone in the way that you had expected it would?

Armando Anido

Yeah, we have finished it. It does take some time in order to evaluate the histopathology, toxicokinetics, as well as the immunogenicity, but it is not something that once you stop the [inlight] portion that you get a result right away. So we are still in a process of finalizing that at this point. And as we've said all along, we actually, probably won't say anything else about this, until you hear us say that we are starting back into the Phase IIB or we are not starting back into the Phase IIB.

Thomas Wei - Piper Jaffray

Okay, thank you.

Armando Anido

Alright, thanks Thomas.

Operator

Your next question comes from the line of Leland Gershell of Cowen and Company. Please proceed.

Leland Gershell - Cowen and Company

Hi, good morning guys. Thanks for taking the questions.

Armando Anido

Hi, Leland.

Leland Gershell - Cowen and Company

Just wanted to ask on Testim a couple of questions, could you comment on the number of reps you have now and how you expect that absolute number will increase throughout 2008?

Armando Anido

At this point, Leland, we have over 150 folks that are in place selling Testim. And I would anticipate for the balance of this year that we will stay there. Towards something we look at, but there is no plans this point of time.

Leland Gershell - Cowen and Company

Okay. And then inventory levels in the channel, how does that compare with prior quarter.

Armando Anido

They were actually pretty comparable versus the third quarter of last year. They always have a little bit of movement within a couple of days, but there weren’t significantly different than the third quarter of this year.

Leland Gershell - Cowen and Company

Okay. And if you could quantify the royalties paid outside of US sales on Testim?

Armando Anido

Yeah, for the ex US on Testim, we actually had $1.1 million in revenue. Alright, but that includes that shipments.

Jim Fickenscher

We do normally about $200,000, Leland and the amortization of the previous milestones, it's about $900,000 worth of shipments in the fourth quarter to parties outside of the US.

Leland Gershell - Cowen and Company

Okay great and then one question on XIAFLEX, you mentioned you're exploring new opportunities this year. Do you have any expectations on timing of decision on which way you are going to go and if you do secure any new partner would that be ahead of the BLA filing, would it be in 2008 any thoughts there?

Armando Anido

Yeah, we don't have an exact time line at this particular point, Leland I think that today we are starting to have conversations with folks that have expressed interest in it, as well as those we have interest in and potentially talking to. And as time goes on we'll give you little bit better look at what the timeline would be.

Leland Gershell - Cowen and Company

Okay, great. Thanks for taking my questions.

Armando Anido

All right. Thanks Leland.

Operator

Your next question comes from Donald Ellis of Thomas Weisel Partners. Please proceed.

Donald Ellis - Thomas Weisel Partners

Thank you, good morning guys.

Armando Anido

Good morning Don.

Donald Ellis - Thomas Weisel Partners

I just have two quick questions, the first one for Armando, second one for Jim. The first question is, has anything changed in the last year regarding your estimation and may be fine tuning of the market size for Dupuytren's and Peyronie's.

Armando Anido

No, I think that the best data that we have is the data that we generated back in '06 and it's the most comprehensive data, because it was approximately 600 physicians that we spoke to in the US and Europe, with the profile that we had of the product at that particular point. And I think that you can expect us that after we have the CORD 1 and CORD 2 top line results and we have a better characterization with a broader number of patients, in the trials that we will probably try to repeat that same study in order to kind of fine tune the data that we have.

Donald Ellis - Thomas Weisel Partners

Okay. Then second question is for Jim. Can you just give us accounts receivable, inventory and then may be discuss gross margins in December quarter versus the September quarter?

Jim Fickenscher

Sure. So at this point we haven’t broken out accounts receivable and inventories we only talk generally about working capital, $64.9 million at the end of the year. With regard to -- I was having little trouble hearing you Don, was it gross margin you wanted to.

Donald Ellis - Thomas Weisel Partners

Yeah, the second question was the gross margins, December quarter versus the September quarter.

Jim Fickenscher

Yeah so the December quarter was 73.9%, I have to look at the third quarter.

Donald Ellis - Thomas Weisel Partners

75.5%.

Jim Fickenscher

Yeah. Okay. And that’s primarily driven by the high level of international sales where the margin is considerably lower than what we get here in the United States.

Armando Anido

Exactly

Donald Ellis - Thomas Weisel Partners

Got it, great, thanks a lot

Armando Anido

Thank you Don

Operator

Your next question comes from the line of Marshall Urist of Morgan Stanley, please proceed

Marshall Urist - Morgan Stanley

Yeah, hi guys good morning. So first question on Testim, in terms of where your inventory management agreement stand, how quickly should we expect to see the price increase start to flow through this quarter?

Jim Fickenscher

Yeah, I think the inventory management agreements say that they really should not carry more than a 30 days supply. All right, so you would anticipate that it would happen probably no later than the February time point.

Marshall Urist - Morgan Stanley

Okay.

Jim Fickenscher

The other piece is that, remember there are some agreements with some managed care programs that we have that may have an impact on the exact realized price increase that we do get. So, I think that is probably not a good idea to expect that all 8% would be realized in this year.

Marshall Urist - Morgan Stanley

Okay. Got you thanks and the second question on XIAFLEX, can you took it off where things stand open label studies and how much experience you guys expect to have in terms of patient numbers with the drug from the new facility by the time you complete enrollment?.

Armando Anido

Yeah, our anticipation is that we are going to be injecting patients with our own drug product that's manufactured in Horsham. And the exact number of patients at this particular point I can't comment on, but it will be a reasonable number to make us feel good that the comparability work that was done in-vitro actually translates into humans.

Marshall Urist - Morgan Stanley

And then just in where enrollments stands there.

Armando Anido

We have about a total between the CORD I, CORD II, joint I and joint II, today we have 840 patients that have been enrolled collectively in all of those.

Marshall Urist - Morgan Stanley

Okay.

Armando Anido

And if you go back to December, when we said that we had concluded the enrolment in CORD I and II, we said it was just in excess of 300. So you got somewhere around 500 people basically in joint I and II studies. Yeah, and Marshall just a refresher, remember that the comparability that we did, the Horsham material is comparable to the Cobra material, which we ended up showing comparability to the original BTC material. So, our expectation is that as we have now used for the most part Cobra material and the vast majority of these patients to-date, that the Horsham material should be no different.

Marshall Urist - Morgan Stanley

Okay, great. Thanks guys.

Armando Anido

Great, thanks.

Operator

Your next question comes from the line of Matt Renna of Soleil. Please proceed.

Matt Renna - Soleil

Good morning, guys.

Armando Anido

Hi, Matt, how are you?

Matt Renna - Soleil

Great, thank you. Question on your 2008 guidance on the SG&A line. Can you give us any color on how much of that could be considered one time associated with the BLA filing towards the end of the year. I wouldn't expect you to guide for '09 and beyond, but how should we think about that as a run rate, as maybe a base from which to layer in cost for your XIAFLEX sales force?

Armando Anido

Within the SG&A if there is anything on the BLA filing, it would end up in the R&D line as opposed to the SG&A. So, I don't think there is anything necessarily within SG&A that I would call one time cost. I think what you see on the increases in the SG&A versus '07 a big chunk of it frankly is the FAS 123R non-cash cost associated with requirement to expense those. And it's kind of a full year burden of the changes that we've made to our structure here last year. So there is not a whole lot in there that I would call one time. With regard to R&D I mean we're still in a position where we're continuing to do a fair amount of work this year. We think this is an appropriate amount of expense to get all the trials done that we are anticipating, that we need to do today. So as with anything for these types of trials ebb and flow, you hit peaks and then you move onto different trials.

Matt Renna - Soleil

Great. And then just a quick follow-up question, if and when you do an ex-US deal do you get to keep all those economics in terms of upfront payments to do you have to payout to Bio Specifics and if so can you may be quantify that payout?

Armando Anido

Yeah there is a portion of fees that we would be required to pay to BTC. We've not disclosed that to this point in time, but I would say that it's a fairly small percentage, it is certainly not the majority of the economics. So, the large majority of the economics will stay with us.

Matt Renna - Soleil

Great. Thanks for taking my question.

Armando Anido

Sure, thanks Arnabdo.

Operator

Your next question comes from the line of Lucy Lu of Citi, please proceed

Steve - Citi

Hi this is [Steve] signed in for Lucy.

Armando Anido

Hi Steve.

Steve - Citi

My question is regarding Peyronie’s, I just want to know what kind of data do you need to generate study in phase IIb’s trials and what are the key findings in terms of safety?

Armando Anido

Yeah, I think that Steve as we have mentioned the FDA’s concern regarding Peyronie’s was that because the plaque tends to form right in the tunica, they suspected that there may be a high likelihood of people inadvertently injecting in to the tunica, the corpus, the van, and they wanted to understand what the impact of XIAFLEX would be and not only the impact, but then what the potential recovery time was.

So I don’t know that the FDA has a specific target in terms of saying what the level of impact and what the recovery time exactly should be, but they wanted us to replicate or look at what our dosing was going to be in humans and then try to replicate that in animals. So, as the data comes out, as we feel comfortable about it and then get it to the FDA. We’ll obviously have some discussions with them about either positive results or whatever the results are from the studies.

Steve - Citi

Okay. Thanks a lot

Armando Anido

Great Thank you

Operator

Operator Instructions. And your next question comes from the line William Ho of Banc of America Securities, please proceed

William Ho - Banc of America Securities

Hey guys thanks for taking my questions. A few questions, the first with request to the Testim and the patents that you received on the 22nd, there has been concerns and questions from investors that with respect to what would happen if someone had filed an [end] prior to the 22nd, would you be able to still have the 30 months stay and what would you do if that were to have occurred?

Armando Anido

Yeah, well as we have been saying, if somebody had filed an end prior to the 22nd that it is not clear whether or not we would get the 30 months stay or not. You could ask a number of lawyers and you are going to get somebody is going to say that we probably would have been there, some that are going to say that we won't and I think that it will only really come up, as if somebody has already been in there. It is very clear though that if somebody files after the 22nd that we then are without a doubt eligible for a 30 month stay.

William Ho - Banc of America Securities

Great, and then second question is, with respect to the prior trial, just with respect to safety, one of the adverse events were the lymphadenopathy that you had seen. Can you characterize that adverse event a little bit more and discuss whether or not you are significantly concerned about that with respect to safety and did those all resolve?

Armando Anido

Yeah, as we look at the data that was presented in the Journal of Hand Surgery and the initial pivotal trial, so about a third of patients that actually had some form of lymphadenopathy and basically it subsided after a mean of around 2 weeks to 3 weeks without any medical management at all. Couple of schools of thought on what that could be, one it is a foreign protein that we are injecting in, so could be some reaction. Secondly, as the cord does break and the fragments go out they are excreted out through the axillary lymph nodes, could be causing some irritations through those lymph nodes.

William Ho - Banc of America Securities

Do you have expected that from the collagenate and that's not something you are overly concerned about?

Armando Anido

I think the investigators were not at the end of the day overly concerned about it. I think that they felt that since it did subside on its own without any medical management, that it was not a huge issue. Obviously, we are checking that in the pivotal trials that we're doing now. And we'll see if it remains the same or if it changes in anyway.

William Ho - Banc of America Securities

Alright, Thank You. And then do you have any latest thoughts on pricing?

Armando Anido

I am sorry.

William Ho - Banc of America Securities

Can you discuss your latest thoughts on pricing?

Armando Anido

On pricing for XIAFLEX?

William Ho - Banc of America Securities

XIAFLEX., yes.

Armando Anido

Yeah, as we've been talking about, the benchmark that we currently are using is the pricing that surgery cost today here in United States is about $5,000. And I think that we still believe that, it's probably in that range, but over the next 18 months to 24 months, as we get prepared to launch the product, we are going to do an awful lot of work, first and foremost the characteristics of the product are going to be much better defined after we conclude the pivotal trials and the open label trials.

So that's going to give us a fuller profile to really go and talk to manage care about it, to go and talk to physicians about, and the payers. And then we're also looking at kind of the risk and benefit of surgery, as well. And this is the cost of surgery today. It is about $5000 per surgery. But there are significant complications that do arise, that do have some cost involved. And at the end of the day, we're going to take a look at how we compare to the full-end cost of surgery, and then see whether or not have an opportunity to go beyond what we are thinking today.

William Ho - Banc of America Securities

Okay. Great thank you.

Armando Anido

All right.

Operator

That does conclude the question-and-answer session, I'll now it back to Armando Anido for closing remarks.

Armando Anido

Great. Well thank you guys very much for listening in this morning. Hopefully you’ll agree that we had a phenomenal 2007 and we’ve made great progress both on the Testim front as well as XIAFLEX. And that we’re really excited about the milestones that we have for 2008 and what’s in front of us. So, thank you all very much and look forward to getting you up to speed later on, on other things, thanks

Operator

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a good day.

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Source: Auxilium Pharmaceuticals Q4 2007 Earnings Call Transcript
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