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Santarus Inc. (NASDAQ:SNTS)

Q4 2007 Earnings Call

March 3, 2008 5:00 pm ET

Executives

Martha Hough - Vice President of Finance and Investor Relations.

Gerald Proehl - President and Chief Executive Officer.

Debra P. Crawford - Senior Vice President, Chief Financial Officer, Treasurer and Secretary.

Bill Denby - Senior Vice President Commercial Operations.

Analysts

David Amsellem - Friedman Billings Ramsey

Annabel Sammimy – UBS

Ian Sanderson – Cowen

Craig Dickson - Hemler Incorporated

Angela Larson - FIG

John Vabo - Point Rich Capital

Operator

Welcome to the Santarus fourth quarter 2007 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Martha Hough.

Martha L. Hough

Good afternoon and thank you. This is Martha Hough Vice President of finance and investor relations. Thank you for participating in today’s call. Joining me on today’s call our Gerald Proehl, President and Chief Executive Officer; Debra P. Crawford Senior Vice President, Chief Financial Officer, Treasurer and Secretary and Bill Denby Senior Vice President Commercial operations. Earlier this afternoon Santarus issued a press release announcing our 2007 fourth and full year financial results which is available on our website. This call is also being broadcast live over the internet at www.santarus.com and a replay of the call will be available for the next two weeks under the investor relations section of our website. During this call Santarus management will be making forward-looking statements. Please keep in mind that risks and uncertainties involved in the Company’s business may affect the matters referred to in forward-looking statements. As a result the Company’s performance may differ from those expressed in or indicated by such forward-looking statements. Further these forward-looking statements are qualified in their entirety, by the cautionary statements contained in the press release and the Company’s Securities and Exchange Commission filing. Content to this conference call contains time sensitive information that is accurate only as of the date of this live broadcast march 3, 2008. Santarus undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. With those comments I would like to turn the call over to Gerald Proehl. Gerry

Gerald Proehl

Thank you Martha and my thanks to everyone for joining us this afternoon. Today we are reporting a strong fourth quarter in which total revenues increased 38% to $28.3 million and net product sales for Zegerid were up 24% to $24.1 million, both compared with 2006 fourth quarter. The fourth quarter is historically a strong quarter for pharmaceutical sales and we saw fourth quarter Zegerid net product sales increased 23% more vigor, prescriptions grew 10% both compared with third quarter 2007.

This strong fourth quarter sale performance revolved from continued Zegerid descript growth as well as modest increased in a whole seller inventory levels due to typical year and buying pattern, which may have some impact on that sales for Zegerid in the first quarter. We also believe that the promotion, the proportion of prescriptions moving to a managed care contracts began to stabilize during the quarter allowing us to maintain an average selling price at levels comparable to 2007 third quarter. Our solid fourth quarter performance was in acumen finish to a year of numerous business development and commercial accomplishment. Our year-over-year results were impressed up with total revenues for 2007 increasing 92% to $94.4 million and Zegerid net product sales growing 73% to $79.4 million both compared with 2006. Our net loss for 2007 was $44.3 million, a decrease of 22% compared to $56.5 million loss in 2006. Both our top line and net loss results met or exceeded the guidance we gave in the middle of last year.

Debbie Crawford will review our financial results in greater detail later in the call.

We are pleased to report that Zegerid continues to outperform the brand of PPIs in quarter-over-quarter and year-over-year percentage growth in prescriptions. As I had mentioned, Zegerid brand prescriptions grew 10% sequentially from 2007 third quarter to the fourth quarter while delayed-release brands, Nexium, Prevacid, Protonix, and Aciphex as a group showed a volume decline of 0.5%.

Total prescriptions for Zegerid brand for all of 2007 compared with 2006 grew approximately 116%. This compares with a 3% decline for the delayed release brand as a group.

In terms of absolute prescription volumes compared with 2006, the Zegerid brand increased by approximately 460,000 prescriptions in 2007 to 860,000 prescriptions reflecting new patient starts and patient switches from all the branded PPIs which as a group lost 2.4 million prescriptions.

Among our fourth quarter and recent business highlights are the following: Last November, we entered into agreements granting exclusive right to GlaxoSmithKline to commercialize prescription and OTC immediate-release omeprazole products in GSK’s international region including in Africa, Asia, The Middle East and Central and South America. These agreements also include distribution and sale of Zegerid brand prescription products in Puerto Rico and the U.S. Virgin Islands. GSK paid us $11.5 million upfront fee and will pay us sheer double-digit royalties ranging from the mid-teens to the mid-20s on net sales of any products sold under these agreements.

The total annual IMS sales for PPI products in selected markets covered by these agreements were approximately $2 billion and showed 22% growth. We are extremely pleased to have a leading global pharmaceutical company like GSK as a partner outside the Continental US and are pleased with GSK’s progress to date including our announcement late last month that GSK has launched Zegerid in Puerto Rico and U.S. Virgin Islands.

Annual IMS sales for PPIs in those territories were approximately $124 million and showed 24% growth. We are impressed at the effort and excitement that GSK is bringing to launch Zegerid in this market. GSK is also moving ahead with the necessary work to make regulatory applications to sell licensed immediate-release PPI products in a number of other countries within the international region.

In early January, we reported positive results from a clinical trial with immediate-release Zegerid capsule and Protonix delayed-release tablet and Prevacid delayed-release capsule. The study evaluated the effects of morning PPI dosing on 24 hour gastric acid control of patients with symptoms of GERD. The results showed that Zegerid reached a pH greater than 4 in 20 minute which was significantly faster than the competitor drugs Protonix and Prevacid. In addition, the control of gastric acidity measured as the percent time with gastric pH greater than 4 for patients taking Zegerid was approximately 43% longer than patients treated with Protonix, a significant difference with the P value of less than 0.001 and approximately 22% longer than patients treated with Prevacid, a significant difference with the P value of 0.005.

An abstract of data has been accepted for a poster presentation on Sunday, May 18 at this year’s Digestive Disease Week meeting which is taking place May 17 through the 22 in San Diego and we expect the manuscript to be submitted to a peer-reviewed publication later this year.

We are also pleased to report that Schering-Plough was continued doing progress in its development efforts under our OTC license agreement and we expect that Schering will submit an NDA for its first licensed OTC product in the March-April time frame. As a reminder, in October 2006 we licensed exclusive rights to Schering to develop, manufacture, market and sell Zegerid brand OTC products in a lower dosage strength of 20 milligrams of omeprazole in the US and Canada. We estimate that the US market for OTC heartburn products had sales in excess of $1.5 billion during 2007.

Going forward, we may receive up to an additional $22.5 million in milestone payments upon the achievement of specified regulatory milestones. Our understanding is that the OTC approval process follows the same time lines as the process for prescription drug approval. Therefore, the FDA will have 60 days to review any NDA submission and determine if it is substantially complete. If it is determined to be complete, the NDA would be officially accepted for review. Assuming FDA approval and product launch in addition to royalties and any licensed OTC products marketed by Schering-Plough, Santarus may receive additional sales milestone of up to $37.5 million. Assuming the approval of launch of Zegerid branded OTC products we believe the promotional activities for the OTC products may also positively impact brand recognition for Zegerid products in the prescription market.

In terms of an update on the litigation with Par, we continue to be at a very early stage in the litigation. As a reminder, Par filed an Abbreviated New Drug Application or ANDA as relating to propose generic versions of our capsule and suspension products and Par is seeking approval to market those products prior to the July 2016 expiration of our patent.

In response, we filed two patent infringement lawsuits against Par which have been consolidated and are currently pending in the Delaware District Court. An initial scheduling conference that’s held in February and discovery is expected to begin in the first half of 2008 with a trial date scheduled in July 2009. As we have previously indicated, we have confidence in the patents covering our Zegerid products and we intend to vigorously defend and enforce our patent right.

With those remarks, I will turn the call over to Debbie Crawford. Deb?

Debra Crawford

Thank you Jerry and I would like to add my welcome to those joining us this afternoon. I will discuss highlights of our fourth quarter and full year 2007 statement of operations, review some balance sheet highlights and discuss our outlooks for 2008. Additional financial information will be included in our Form-10K for the year ended December 31, 2007 which we expect to file with the SEC this week.

Net product sales for the fourth quarter of 2007 were $24.1 million representing 24% growth compared with net product sales of $19.3 million in the fourth quarter of 2006. As a reminder the 2006 fourth quarter next sales included $3.4 million in connection with the reduction in allowance for product return. In both periods net product sales included sales of our Zegerid capsule and suspension product. Total revenues for the fourth quarter for 2007 where $28.3 million, consisting of the $24.1 million in net products sales and contract revenue of $4.2 million. Total revenues for the fourth quarter 2006 were $20.5 million consisting of $19.3 million in net product sales and $1.2 million contract revenue.

Contract revenue in the fourth quarter of 2007 included compensation under our co-promotion agreements with Victory farmer and CBC as well as amortization of previously received up front received from Otsuka America pharmaceutical and sharing class and on one month of amortization of the upfront payment from GSK received in December 2007. Of the 11.5 million upfront payments from GSK, a total of $9 million is being amortized to revenue, over an 18 month period. The 18 month period is the length of our ZEGRID product supply obligation to GSK in Puerto Rico. GSK will work during this period to establish direct relationships with third party manufacturers. The remaining $2.5 million represent our waiver of initial royalty obligation and what’s recorded as deferred revenue which will be recognized as revenue when the royalties are earned.

In summary contract revenue in the fourth quarter of 2007 included $2.4 million of amortized revenue and $1.8 million in co-promotion fee. We reported a net loss for the fourth quarter of 2007 at $8 million or $0.16 per share, compared with a net loss for the fourth quarter of 2006 at $7.5 million or $0.15 per share. The 2007 net loss included an increase in non-cash stock base compensation expense of approximately $4.6 million, due primarily to equity compensation programs for employees below the Vice President level implemented in the 2007 fourth quarter.

Our cost of sales was $2.2 million in the fourth quarter of 2007 representing 9% of net product sales, compared with $1.5 million in the fourth of 2006 which was approximately 8% of net product sales. We reported license fees and royalties at $3.4 million in the fourth quarter of 2007, compared with $2.7 million in the fourth quarter of 2006. Those of which consisted a royalties payable to the university of MISSOURI and to Otsuka America based on net sales of our ZEGRED products. This royalties totaled approximately 14% of net product sales in those quarters.

Looking ahead of note is their agreement with the University of Missouri calls for a sales milestone of $2.5 million to be paid to the University when Zegerid net sales including sales of any products by GSK or Schering-Plough reach $100 million within a calendar year.

Selling, General and Administrative expenses were $29.5 million for the fourth quarter of 2007 compared to $23.1 million for the fourth quarter of 2006. The increase in SG&A was primarily a result of cost associated with our sales force expansion in late 2006 and the previously discussed non-cash stock based compensation expense off set in part by decreases in advertising and promotional expenses. For the year ended December 31, 2007 total revenues increased 92% to $94.4 million compared with total revenues of $49.2 million for the year ended December 31, 2007.

In 2007 total revenues consisted for $79.4 million in net product sales and $15 million in contract revenues. Total revenues in 2006 consisted a $46 million in net product sales and $3.2 million in contract revenue. For the year ended December 31, 2007 we reduced our net loss by 22% and reported a net loss of $44.3 million or $0.87 cents per share compared with the net loss of $56.5 million or $1.19 per share for the year ended December 31, 2006.

Moving onto some balance sheet highlights, as of December 31, 2007 we had cash, cash equivalents and short term investments of $64.7 million compared with $75.5 million as of December 31, 2006. The decrease of $10.8 million resulted primarily from our net loss for 2007 adjusted for non-cash stock based compensation and changes in operating assets and liability. The $11.5 million received under the GSK license agreement in December 2007 was included in our cash balances as of December 31. We are pleased with our year end cash position. We believe that we will not need to raise additional funds to finance our current operations for at least the next 12 months. However we may pursue raising additional funds in connection with licensing or acquisition of new products. Sources of additional funds may include funds generated through strategic collaboration or licensing agreements or through equity debt and our royalty financing.

With regards to our financial outlook for 2008, Santarus expects to report total revenues in 2008 of $115 million to $130 million. Including estimated year-over-year growth of Zegerid net product sales of 25% to 35%. We accept to achieve break even in the fourth quarter of 2008 including contributions from existing contract revenue sources that components of which my include milestone or other payments. Wit those comments I would like to turn the call over Will Denby.

Will Denby

Thanks Deb. We are pleased to report solid growth in Zegerid prescription, as Zegerid continues to be the primarily emphasis for all of our field sales representatives, with our co-promoted products, NAPRELAN and Phospho-soda EZ-Prep promoted in the second sales positions to primary care and GI physicians respectively.

For the fourth quarter, Zegerid brand total prescriptions were approximately 253,000, up 71% over approximately 148,000 in total prescriptions in the fourth quarter of 2006. Zegerid capsule prescriptions totaled approximately 223,000 growing 96% compared with the fourth quarter of 2006. As you know, capsules are the dosage form preferred by physicians and patients.

For the full year, Zegerid brand prescriptions totaled approximately 860,000, an increase of 116% over 2006. To re-emphasize Jerry’s earlier point, the delayed-release branded PPIs lost 2.4 million prescriptions when taken as a group making our increase of approximately 460,000 prescriptions all the more impressive. Zegerid capsules comprised 86% of the total for the brand and grew 211% over the prior year.

I want to briefly discuss the changing market dynamics in the PPI market, starting first with the current situation with Protonix and recent generic launches of that drug. As the situation has been complex and somewhat confusing to our customers, to recap, late in December of last year an unauthorized generic form of Protonix or pantoprazole sodium was launched, followed in late January of this year by an authorized generic and a third generic pantoprazole sodium entry. The impact of these product introductions could have a positive impact on Zegerid if promotion of Protonix is reduced or Protonix is pulled from the prescription PPI market. Then we may be able to improve our formulary position with certain managed care providers and increase our share of voice with physicians. Second, while challenges are ongoing, generic versions of Nexium and Prevacid may be approved by the FDA this year and may or may not be launched. In addition, the introduction of generic omeprazole’s 40 milligram dosage strength is possible this year. We are closely monitoring these developments and will provide updates on our quarterly calls as appropriate throughout the year.

Now, getting back to Zegerid; in January, we increased the wholesale acquisition cost or WAC price for our Zegerid capsule product by 9% and our powder product by 6%. Our WAC price for our capsule product is now $3.90 a pill which continues to be attractive at approximately 20% below the WAC price of market leading-products such as Nexium and Prevacid.

Turning to our sales activity, we recently held our national sales meeting which included training on the positive new clinical data that Jerry discussed a few minutes ago. With this data, we now can discuss Zegerid’s favorable performance when taken in the morning before breakfast which is the dosing regimen recommended by many physicians. In addition, for those patients who suffer from episodes of nighttime gastric acidity, Zegerid has demonstrated excellent control of gastric acid during the night in two comparative studies. These data taken together allow our sales force to discuss with physicians the benefits of rapid and continued acid control using Zegerid during the day or during the night. Our sales force is excited to have this new clinical data to further differentiate our Zegerid products and we are looking forward to having a peer--reviewed publication from this clinical study in the coming year.

Moving on to our co-promotion activities, we began promoting NAPRELAN of last year and the second sales position to our targeted primary care physicians. Given the initial sales credit under the NAPRELAN co-promote agreement the product did not confuse substantially to contract revenues in the fourth quarter. We put significant emphasis on NAPRELAN during our recent national sales meeting and we expect our NAPRELAN co-promotion activities to make a greater contribution in 2008. We also began promoting Phospho-soda EZ-Prep to gastroenterologists and their medical staffs during the fourth quarter. The fleet product a complete system for about cleanings prior to the medical procedure of examination is promoted in the second sales position both by Santarus and the inventive sales organizations and we feel we have made good progress on this product under our agreement with fleet.

We remain focused on continuing to grow Zegerid prescriptions and our market share in 2008 and to the success of our co-promotion activities. With that update I’ll turn the call back to Gerry.

In closing I want to emphasize that we are strongly focused on executing our strategy to build value in our business be our three key initiatives. First we will continue to focus on growing the Zegerid brand. It is important for investors to keep in mind that we have five issued US cotton as far as their products which expire in mid 2016, as well as several other pending patent application. We believe that it is important to derive the, maximum potential from our investment in the Zegerid brand in the US prescription market. Our commercial organization is focused on increasing sales for Zegried, to reveal sales promotion, marketing program and managed care contracting.

Second; we will seek to diversify source of revenue through strategic relationship. Our goal is to maximize the value of our PPI intellectual property with milestones and royalties falling from our agreements with Schering-Plough for Zegried branded OTC products and royalties from our agreements with GSK and their licensed territory. We will continue to evaluate opportunity to license out PPI technology in additional markets outside of the US.

Third, we will work to expand our product portfolio. We continue to evaluate products that we couldn’t license co-promoter require. In assessing such opportunities, we look at many factors including unmet medical need, fact differentiation, market dynamics, target audience and return on investment and in addition we will maintain a keen focus on managing our business. We plan to continue to control cost and preserve capital or perusing our growth initiative and seeking way to expand our commercial reach through business development activity.

With that overview, I would now like to open the call to questions; operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Gerald Proehl

And while we are waiting for questions, I would like to inform you that we will be presenting at the Cowen 28th Annual Health Care Conference on March 18 at the Marriott Copley Place hotel in Boston. Should you be attending this conference, we certainly would invite that meet with us in person. If you are unable to attend, a webcast of our corporate presentation will be available on the Santarus website. Okay operator, we are ready for the first question.

Operator

Our first question comes from David Amsellem with Friedman Billings Ramsey. Please go ahead with your question, sir.

David Amsellem - Friedman Billings Ramsey

Hi, thanks for taking my question. So just on managed care are you expecting that the portion of scripts making through managed care channels will begin to re-accelerate in 2008 or do you think that the trend that you saw in the fourth quarter will sort of bear out going forward this year?

Will Denby

This is Will. I think in our fair markets we talk about the summer price stabilizing. I think we expect sort of a constant contribution for managed care in terms of the percent of revenue that they represents, I don’t think there will be much change in that.

Gerald Proehl

Hey this is Gerry, just to add to, to Bills comment, I think what we expected to happen is kind of what’s happening which is when you get a managed care contract like we have with United Healthcare. The first prescriptions you get are going to be coming from physicians specifically for those patients that are on United Healthcare Insurance. What will happen now over a period of time is that that doctor gets more comfortable writing prescriptions for patients that have United Health care. They will start write prescriptions for the other patients that are implants that might maybe more favorable to us as far as the overall. We made a percent that we are getting and I think that’s what we are seeing is we are gaining more prescriptions, but it’s a broader base of patients and a broader base of insurance plan.

Debra Crawford

This is Debby. I would just felt however that to the extent that there are opportunities for us to gain additional favorable formula position, especially in light of the photonic situation that could create an other dynamic where we are accessing incrementally new business, but under a new plan. So, it is a dynamic situation I think. Certainly in the last year we have seen a significant impact and a benefit of entering into the contracts that we have and so we certainly will work to improve our formulae positions to the extent we can give in this pratonix situation.

David Amsellem - Friedman Billings Ramsey

Okay that’s helpful and then the second question if I may is just the house keeping question on the contract revenues, can you discuss the other components of the amortized contract revenue portion other than the GSK upfront payment.

Debra Crawford

The other amortization is on a straight line basis, so those are Otsuka and Schering-Plough, their upfront payments are amortized on a straight line basis, so those amounts would be the same as in prior quarters. In the third quarter what you had was a milestone payment from Schering-Plough of $5 million, so that would be the only variable in that situation.

David Amsellem - Friedman Billings Ramsey

Okay and then just one last question. Do you expect as we get closer to the OTT launch by sharing we expect that the sales force either the Inventive reps or the Santarus reps maybe enlisted in any way with the -- to help with the commercialization of the OTC or is this squarely the focus of the sharing sales force.

Gerald Proehl

Yeah David, this is Gerry. I think right now the way Schering is thinking about this is that their effort is really going to be by Schering folks. They don’t currently have folks calling directly on the physicians were calling on. I think most of their effort would be the consumer advertising, the consumer campaigns that they would put in place.

David Amsellem - Friedman Billings Ramsey

Okay thanks.

Gerald Proehl

Your welcome.

Operator

Our next question comes from Annabel Sammimy with UBS.

Annabel Sammimy – UBS

Thanks for taking my question. Just real quickly do you – will pratonix in the market do you have any sense that you might have more levy to start increasing prices given that pratonix is the most attractively priced in the market.

Gerald Proehl

Yeah Annabel this is Gerry. Certainly if we stated it and you point out Zegried and pratonix for similar looking price, both are about 20% below the market leaders like Maxine and Prevacid, certainly it’s something that will look at as we move forward in our overall strategy. I think right now we are pretty focused on meeting with some of the managed care plans where praton is in a preferred care two position and really have an opportunity ton potentially negotiate for vegerative for the preferred care two position. As Debby pointed out, we think it gives us an opportunity to drive volume of business initially maybe in those plans but then to spread to other plans also.

Annabel Sammimy – UBS

Okay great and also just and since the beginning of the year, description trends we see basis of generally trending in the 90, that’s in fully range and I guess since pratonix was launched in December, would you have already expected to see some kind of uptick in your prescriptions or it’s really about just negotiating with magic and getting on this formula and you should really be seeing any change in the prescription yet in the -- since pratonix generic comes down in the market.

Gerald Proehl

Yeah I think a couple of thins. Typically what you might expect in a I’ll call it a normal situation where a generic launch is a branded company basically stops all their promotion, all their sampling then you might see an ability to start to move some of those new prescriptions like have to move to the other branded products. I think this is a little bit of an odd situation and that while it is still out there promoting their product and so you have the generic pantoprazole that’s out there, but you also continue to promote. I think as we move through the situation, if Wyatt determines that they are going to reduce their promotion, either we are reducing their sales force or reducing their sampling that I think you will start to see some of those new prescriptions start to move over to the branded products of which Zegried’s wants.

Annabel Sammimy – UBS

Is that they are promoting their own brand and product or they are promoting their offer out to that or their own generic for it.

Gerald Proehl

We are hearing actually both from folks in our field sales force.

Annabel Sammimy – UBS

Okay thank you.

Gerald Proehl

Welcome.

Operator

Our next question comes from Ian Sanderson with Cowen.

Ian Sanderson – Cowen

Good afternoon. Thanks for taking the question. Can you remind us Gerry what the dose of Schering’s OTC Zegried would be relative to the prescription dose and whether they are going to continue with the Zegried brand mane in the OTC market and do they have minimum promotional spend commitments under the contract?

Gerald Proehl

For the first question is on the dosage, it’s 20 mg growth and that’s for mind folks. In our capsule formulation about 94%, 95% of our overall prescriptions are at 40 mg. So we certainly think that there is an opportunity for them to grow the brand at the lower dosage form so that patients that would be typically be OTC is why we continue to grow our product at the 40 mg dosage formulation. The second question has to do with brand name and Schering is obligated to use the Zegried brand name unless of course the FDA would not allow them to do that, so they all plan on submitting with the Zegried brand name. We would expect that that’s how it would be marketed. Your last question has to do with minimum level of promotion. There is a minimum threshold level of promotion for Schering and we would expect based on our discussion with them that they will not only hit the minimum but I think it’s their expectation that their like would be above the minimum.

Ian Sanderson – Cowen

Have you disclosed what that minimum level is and also have you disclosed a rough royalty range here?

Gerald Proehl

So we have not disclosed what the minimum is, what I can say is we really looked at a couple of things. Number one we looked at what on a relative basis what P&G was spending and pralosic OTC, well so look that on a relative basis what the sales potential were for OTC and that’s how we came up with number and both Schering and Santarus feel very comfortable with that number that it’s substantial enough to make an impact. Again I think one of the things that Schering pointed out to us is they really believed that Zegried is going to be one of their OTC products and so they are going to spend appropriately.

Ian Sanderson – Cowen

Yeah the rough royalty rate?

Gerald Proehl

As far as the royalty rate is that what we’ve said publicly is that we’ll get a low double digit royalty and that’s it.

Ian Sanderson – Cowen

That’s great. Thank you very much.

Operator

(Operator Instructions) our next question comes from Craig Dickson with [Hemler Incorporated.]

Craig Dickson - Hemler Incorporated

Hi, I have been a stockholder for quite a few years and I never did find out the factors that were responsible for the decline in stock price over this past year. Any information there you can give me there so I can understand where we are headed?

Gerald Proehl

Sure, I think if you look at the decline in our stock price, the major impact was the filing of the Par ANDA and the Paragraph IV Certification against Zegerid. Certainly that’s where we saw the largest decrease in our stock price down into the $2 range and I think that’s probably, if you ask most they would tell you the weakest impact on the reduction of our stock price.

Craig Dickson - Hemler Incorporated

When do you anticipate that to be resolved?

Gerald Proehl

So the current trial is scheduled for July of 2009 and typically one might expect that -- if you go all the way through the trial a decision might happen either late 2009 or first half of 2010. Certainly, there is the possibility that could be some settlement either in that time frame or sometime before but that’s a reasonable time frame I think for getting through the trial.

Craig Dickson - Hemler Incorporated

Thank you.

Gerald Proehl

Welcome.

Operator

Our next question comes from Angela Larson with FIG.

Gerald Proehl

Hi Angela

Angela Larson - FIG

Hi this is Sladia on behalf of Angela, thank you for taking the question. I had a quick question about naphthalene and the CD phosphosodo to promote effect. I know it’s pretty minimal this quarter did you expected it to become more prominent in 2008.

Gerald Proehl

Sure so this is Gerry. I think on the fight for the EV prop there was certainly contribution in the fourth quarter of 2007. We do expect to see a probably frontally larger contribution in 2008 as it relates to naphthalene I think it’s still pointed out that there was a credit that was -- that we had to get over before we could get the revenues from naphthalene and so we have now passed that credit and so anything we generate will start to see coming into our financial. So, we do think it will be better then it was certainly in the fourth quarter of 2007.

Angela Larson - FIG

Thank you

Gerald Proehl

Welcome

Operator

Your next question comes from John [Vabo] with Point Rich Capital.

Gerald Proehl

Hi John

John Vabo - Point Rich Capital

Thanks for taking the question. One house keeping item Debby, do you know what the cash flow from operations in that quarter would be if you take out the Glaxo payment?

Debra Crawford

Yes, actually our cash flow was positive in the fourth quarter slightly and that really is due to a couple of different things but primarily has to do with timing of wholesale orders in the fourth quarter. Orders were strong in November and therefore we collected those payments in December and so that was a little bit of unusual item and then the other is just changes in our working capital. Generally timing of payments made for rebates and other liabilities which can’t fluctuate in any given quarter, so it’s certainly was other positive quarter for us in terms of cash flow.

John Vabo - Point Rich Capital

And so the receivable looked to me like it was about, it was a $3 million swing to Q4 and then I am sorry I missed it when you were going through numbers. What was the non cash impact from the stock on G&A in that end of the quarter?

Debra Crawford

Yeah, in the fourth quarter our total non cash stock phase compensation was just under $6.8 million. $6.1 million of that would have been reported in SG&A.

John Vabo - Point Rich Capital

Alright and then I am sorry, so this point it was total non cash.

Debra Crawford

This one it was in a total stock base comp in the quarter.

John Vabo - Point Rich Capital

Okay and is that going to be pretty much the run rate from here or….

Debra Crawford

I wouldn’t think so, no because as we discussed briefly in the fourth quarter we had some special programs if you will in terms of options granted as well as accelerated vesting for employees below the Vice President level. So, I do believe that created additional expense in the fourth quarter that would not be recurring.

John Vabo - Point Rich Capital

Okay so that wouldn’t be amortized over the life of that -- well certainly the acceleration wouldn’t -- right I mean that would be.

Debra Crawford

Right, the acceleration is really the key driver there because in essence we would have taken our expense as you related to -- it was specific to options that it had been granted to employees below the Vice President at a price of $5 or greater. So that expense would not be ongoing.

John Vabo - Point Rich Capital

Okay. So would it be fair to maybe look at the Q3 SG&A run rate and then kind of make some assumptions for base growth in that SG&A, I don’t get it.

Debbie

That’s probably a more reasonable approach rather than looking at portfolio.

John Vabo - Point Rich Capital

Okay, alright. And then my other question was just with regard to how you are approaching that generic situation in the managed care component of your sales. What makes you think that managed care isn’t going to drive even harder on the generic side as it which is the performance of the drug versus the others or it’s a royalty these drugs, I mean what makes you think that prescription market doesn’t continue to shrink with an increasing number of generic alternatives?

Will Denby

Well, I think from the standpoint of promotions -- this is Bill, you take a major competitor out as the promotion comes out and so is the sampling. So from that point of view, our share of voice may go up if Protonix decides to cease their promotion of their branded product. In terms of the generics, insurance plans really need to provide a menu of benefits to their clients and so to the extent that they want to provide branded products as part of the menu, Zegerid provides them an alternative, where Protonix won’t. That being said, generic intrusion continues to be an issue for the branded products. With omeprazole for instance, people run through that brand, even on generic and still need to find alternatives and we would be an alternative brand product.

John Vabo - Point Rich Capital

So is it a way to think about is that you could get a significantly higher share of a smaller pie, is that sort of the way.

Will Denby

Yeah, I think that’s fair to say.

Gerald Proehl

And the way to think about it is managed care plans are always going to try to push a patient to a generic, whether that’s generic omeprazole or generic pantoprazole. They way they do is generally putting that tier 1 for lower co-pay but as Bill points out generally because they are competing against other insurers for business, they want to offer folks options and so what they do with the branded products is they put them on to either a tier 2 with a higher co-pay than tier 1 or tier 3 which is the even higher co-pay and that’s how they deal with the cost differential. But they want to offer alternatives. As we mentioned, of all the branded PPIs, Protonix had the highest preferred position on tier 2 as that product moves out of managed care to physician, we think that there is an opportunity certainly for Zegerid to be able to -- to gain some of those positions which would ultimately lead to a slightly lower co-pays for any patient that might Zegerid which we think will increase our overall prescription volume.

John Vabo - Point Rich Capital

Okay. That was helpful. I just -- I was curious if you happen to know what percentage of the branded scripts were in the tier 2?

Gerald Proehl

I don’t know if I can tell you want percentage of the branded scripts were in tier 2. If you look at Protonix, probably their formulary position, probably two-thirds of their formulary position was in tier 2 and about one-third in tier 3 so that a substantial piece of their managed care business is actually in a preferred position.

John Vabo - Point Rich Capital

But you don’t happen to know offhand is it just sort of ballpark, I mean do you think a-third of the total market is in tier 2 and 3 and…

Gerald Proehl

I don’t know offhand. I would say a bulk of the market or the majority of the market would be considered tier -- would be in tier 3 and the reality is why most insurers deal with generic or branded products is they really put a back on the patient to decide whether or not, they want to pay a higher co-pay in order to get the branded product. I think the important thing obviously is as Bill pointed out is if you have a major competitor as no longer promoting or sampling their product to a physician it gives our sales representatives a better chance of getting a doctor that’s going to write a new prescription for Zegerid as opposed to maybe for Protonix.

John Vabo - Point Rich Capital

Okay, alright that makes sense. Thanks very much, I appreciate it.

Operator

Our next question comes from Ian Sanderson with Cowen.

Ian Sanderson - Cowen

Hi Debbie, could you just provide a little bit more color on your guidance with profitability in Q4 including milestone? What is anticipated in that number and how sustainable could that be into ‘09?

Debra Crawford

With regards to the guidance we have given Ian, we tried to provide a perspective that we have confidence in achieving the breakeven breaks upon our existing contracts and we just waned to make sure that people understood that some of our contract revenue is recurring and some of it is not. But our intent certainly is that we are working to have sustainable profit in our business and breakeven as a key milestone, a first step if you will in achieving that profitability over time.

Ian Sanderson - Cowen

Okay, agreed.

Operator

There are no questions at this time. Please proceed with your presentation or any closing remarks.

Gerald Proehl

Let me call by saying again that we appreciate your interest and support. We certainly look forward to keeping you appraise of our progress. If you have any further questions, please feel free to contact me, Debbie Crawford or Martha Hough. Have a great night.

Operator

Ladies and gentleman that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.

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