Cephalon Inc. Q4 2005 Earnings Conference Call Transcript (CEPH)

Cephalon Inc. (CEPH)
Q4 2005 Earnings Conference Call
February 14th 2006, 5:00 PM.

Executives:

Dr. Frank Baldino Junior, Chief Executive Officer
Kevin Buchi, Chief Financial Officer
Paul Blake, Worldwide Medical and Regulatory Operations
Robert Roche, Worldwide Pharmaceutical Operations
John Osborn, General Council
Chip Merritt, Investor Relations
Robert Grupp, Vice President of Public Affairs

Analysts:

Don Ellis with Thomas Weisel Partners.
Eric Schmidt with S.G. Cowen
Jim Birchenough with Lehman Brothers.
Larry Neibor with Robert W Baird
Corey Davis with J P Morgan.
Marc Goodman with Morgan Stanley.
David Buck, The Buckingham Research.
Greg Gilbert, Merrill Lynch
Adam Greene with First Albany Capital.
Gary Nachman, Leerink Swann company.
David Windley, Jefferies & Company.
Michael Meyers, Trivium Capital Management
Terry Kayson, Merrill Lynch.
Greg Gilbert, Merrill Lynch
Gary Nachman, Leerink Swann company.

Presentation:

Operator

Good day everyone and welcome to Cephalon Fourth Quarter and Yearend 2005 Earnings Announcement. Today's call is being is recorded. At this time for opening remarks, I would like to turn the call over to Mr. Robert Grupp, Vice President of Public Affairs for Cephalon. Please go ahead sir.

Robert Grupp, Vice President of Public Affairs

Thank you, today we will review Cephalon's financial performance for the fourth quarter of 2005, and for the full year. Before we begin, let me remind you the certain statements on this call may be forward-looking, that are subject to the risks and uncertainties associated with Company business. These statements may concern among other things; guidance's as to future revenues and earning, operations, transactions, prospects, intellectual property, litigation, development of pharmaceutical products, clinical trials, and potential expansion of labeled uses of our products.

The company also may discuss certain Non-GAAP financial measures within the meaning of regulation G, during today's call. The information required by regulations G is available on the investor section of our website at www.cephalon.com. Additional information and risk factors affecting the Company's business and financial prospects and factors that would cause Cephalon's actual performance, to vary from our current expectations is available on the Company's current Form 10-K and 10-Q on file with the SEC.

During this call, we will update 2006 guidance. Please note that guidance will remain in effect unless the Company provides subsequent modification or updates. Our earnings press release is available in the Internet at www.cephalon.com investors with further questions, should contact Chip Merritt, at area code 610-738-6376. This conference call is being webcast in the Cephalon homepage and we will be achieved for one week after the call.

Speaking on today's call will be Dr. Frank Baldino Junior, Chief Executive Officer, and Kevin Buchi, Chief Financial Officer. Also joining us today are Paul Blake, Worldwide Medical and Regulatory Operations, Robert Roche, Worldwide Pharmaceutical Operations, John Osborn, General Council and Chip Merritt, Investor Relations. Following remarks by Frank and Kevin, we will be please to answer your questions. Now Dr. Frank Baldino.

Dr. Frank Baldino Junior, Chief Executive Officer

Thanks Bob and good afternoon everyone. The events of last few months have transformed Cephalon dramatically. The last three years, we were positioning the Company for life without PROVIGIL. Now we enjoy the enviable prospect of retaining PROVIGIL while preparing to launch four exciting new products, in 2006.

Today we look forward to a very different and exciting 2006. With the settlement that we recently raised with all four, first of all challengers, we expect to market PROVIGIL until atleast 2011 unfettered by generic competition. With the expectation that modafinil would be generic in mid 2006, invest in this product declined in 2005. Now we have identified new investor for PROVIGIL and we intend reinvigorate our clinical and commercial programs for this product.

We begin new phase IV study to explore new issues, generate fresh data and we kindle physician interest. One thing is clear, with another six years to develop the market for PROVIGIL, we have a major opportunity to further build this brand and to create a billion dollar Modafinil franchise. And most immediate opportunity brought on by PROVIGIL settlement is to maximize the profitability Vivitrol. A chip from the plan, they call for the rapid transition from PROVIGIL to NUVIGIL with the defined and brief period of time, to one in which we can take full advantage as the combined merits of both products.

We intend to the market both PORVIGIL and NUVIGIL and we will maximize the collective value of products for patients and for Cephalon. The recent presentations and publication, our enthusiasm for NUVIGIL, continues to build. Pharmaceutical generic and pharmacy dynamic data, published in journal of current medical research in opinion described the longer duration of action, lower dosing and improved safety profile and cognitive benefits associated with this drug. The data also showed improved patient concentration later in the day with NUVIGIL.

At lower dose and that achieve required does of PROVIGIL, similar results report at 44th annual meeting of American College in Neuropsychopharmacology in early December with the focus with treatment of excessive sleepiness associated with chronic Shift Work Sleep Disorder. Third member of modafinil family is a SPARLON a product candidate for the treatment of ADHD in children and adolescents.

We believe that the SPARLON with it's efficacy in Benign Safety Profile will be an attractable alternative to current ADHD treatment. We believe that the FDA panel meeting schedule for March 23rd when we highlight these advantages and further differentiate the products from other marketed ADHD therapies. The net result of this product service will be increased confidence in SPARLON among patients and physicians.

Meanwhile, data continue to be presented and published, supporting the efficacy and safety of this product. In January a pediatric study published in the journal of Clinical Psychiatry, shows SPARLON to be well tolerated and yield significant improvement ADHD symptoms at home and at school. Similar results reflected in data published in early December in the Journal of Pediatrics.

In summary our modafinil franchise is the future of provisional security, is well positioned for meaningful growth for years to come. Turning to Vivitrol, our primarily Alkermes receiving approvable letter from FDA, in late December. Alkermes has recently announced, that the FDA agreed that no additional pre-clinical pharmaceutical generic date is needed prior to approval. Label discussions with the FDA are continuing and we are on track for product launch in second quarter of this year. We look forward to bringing, this promising new product to the market.

As you know ACTIQ has been an enormously successful product for our company. In late 2006, we will transition our success with ACTIQ into fentanyl effervescent buccal tablet or FEBT, our next product for the treatment of break through cancer pain. With FEBT we intend to move beyond cancer pain. We have initiated global programs to study in the drug for the management of breakthrough lower back pain and neuropathic pain, creating an opportunity to develop FEBT for a much larger market.

Finally, the global program study in GABITRIL for journalizing anxiety disorder continues. And we have completed enrolment of more than 1,700 patients. We expect to announce results when the program is completed in the second quarter. But we are fortunate enough to obtain positive results from two of these three studies. We expect to submit an application to the FDA in mid 2006, for potential approval in 2007.

March 5, Cephalon's fourth quarter story and our acquisition of Zeneus holdings. Zeneus bring Cephalon a strong drug portfolio with expected 2006 sales of approximately $100 million. Zeneus is a growth business, with it's growth driven by three oncology products Myocet, Abelcet and Targretin. With Zeneus, we expand our European operations to include 18 European countries, including a strong presence in each of the five key countries. These five markets the UK, Germany, France, Brazil and Spain account for 70% of the $100 billion European pharmaceutical market.

We have also increased our European sales and marketing critical mass by 50%, and our regulatory and clinical staff in European is doubled. This acquisition gave us presence in European needed, to have meaningful impact on sales and their content. We also significantly enhances the momentum of our oncology franchise, providing us with a platform we are launching new oncology products in European market.

In 2005, we create a vertical integrated oncology business, our decision to move forward on our integration plan was driven by the exciting results of CEP-701 and patients with replaced Acute Myelogenous Leukemia. The data on 701 presented at the meeting of the American Society of Hematology, the ASH meeting demonstrated a 45% overall response rate in patients with AML.

With this past most exciting revelation in that data, and the correlation between the presence of the FLT3 Mutation patient themselves, a clinical response. Specifically, every patient who bear the FLT3 Mutation in his bone marrow was sensitive to 701, so they complete or partial response to this drug. The ability to predict, which patients will respond to the therapy, represents a substantial advantage for patients and payers alike.

Also presented at the ASH meeting was data on Treanda, showing a 74% response rate the patient with Non- Hodgkin's Lymphoma were refractory to Rituxan. It was particularly noteworthy is that this response was observed in a population and with 50% of the patients had relapsed on three or more prior systemic treatments. So much has transpired at Cephalon in recent months the Provigil patent settlements, preparation for for major product launches, the Zeneus acquisition, progress with oncology portfolio. With this progress this coming year promises to be the best in our history by a wide margin. And the outlook for 2007 and 2008 is even brighter. Now our Chief Financial Officer Kevin Buchi will provide more detail on the fourth quarter and full year 2005 financial result as well the outlook for 2006.

Kevin Buchi, Chief Financial Officer, Principal Accounting Officer and Sr. VP

Thank you, Frank. Today the reports are full year 2005 financial results which included revenue of $ 1.2 billion, the diluted adjusted income per common share of $2.76, inline with our previously issued guidance of $2.70 to $2.85. Product sales for the year were $1.16 billion, which is an 18% increase over 2004. Sales of PROVIGIL were $512.8 million, a $0.17 increase over 2004 with approximately 2.2 million prescriptions sold during the year. ACTIQ sales were $211.8 million, a 19% increase over 2004 with approximately 471,000 prescriptions sold, and the sales GABITRIL was $72.3 million, a decrease with 23% from 2004 with approximately 775,000 prescription sold. Sales of other products principally from our European operation and the full year revenue CIMA LABS totaled a $159.7 million, a 57% increase.

By the end of September we have accomplished our goal of reducing wholesaler inventory levels to be between two and three weeks for each of our key products. During the fourth quarter they were no unusual changes in wholesaler inventory levels. Both SG&A and R&D expenses for 2005 were within our guidance on this. During the fourth quarter there were several adjustments to be made to arrive at our 2005 adjusted net income. The most significant of these were the $71.2 million in-process research and development charge associated with our recent acquisition in Zeneus Holdings, $20.8 million of amortization expense relates to the right-off of the intangible assets associated with the probable termination of the distribution agreement relating to PROVIGIL in the UK. A $27.1 million right-off of previously capitalized deferred debt issuance cost associated with our 2% notes that was required by GAAP once the rise in the company's stock price caused the most to become convertible, $10.6 million of SG&A expense related to generic distribution rights under the settlement agreements signed in December with generic drug companies. Finally we record the $95.5 million tax benefits due to our reassessment of the realizeability of our differed tax assets as of the end of 2005. Since we issued our original guidance in November 2005 a number of events have occurred which have an impact on the key assumptions underlining that guidance. As a result our new 2006 guidance is based upon the following revised assumptions. Nuvigil and SPARLON are approved for launch in mid 2006. Generic version of the modafinil do enter into the market in 2006 and fentanyl effervescent buccal tablet or FEBT is approved and will be launched at the end of 2006. Based upon these assumptions our 2006 guidance for total sales is $1.55 billion to $1.6 billion. A $200 million increase over our previous 2006 sales guidance. The product mix is as follows.

CNS franchise which includes PROVIGIL, GABITRIL, SPARLON and NUVIGIL is $765 million to $815 million. The pain franchise which includes ACTIQ and a FEBT is unchanged with $425 million to $475 million and our guidance for other product sales is $285 million to $335 million reflecting our acquisition of Zeneus. SG&A guidance for 2006 is estimated at $630 million to $660 million, a substantial increase over 2005 levels, because of the resources dedicated to new product launches. R&D expenses for 2006 is targeted to be between $315 and $335 million, a 5% to 10% decrease from 2005 levels, reflecting a declining clinical activity from 2005. We anticipate that our tax rate for the year would be approximately 33% to 35%.

For 2006, we expect our adjusted net income to be in the range of $220 to $230 million. Cephalon had three series of convertible debt outstanding, each of which are modified by cold spreads, and each of which activates spot price, or in the money and are includable for accounting purposes in the fully diluted shares outstanding calculations. Unfortunately the number of additional shares required to be included in this is highly volatile and does not fairly represent the economic reality of these transactions. Therefore while we will continue to report both basic and fully diluted income per share, we will be providing future guidance based upon the basic income per share.

The GAAP measure, already disclosed in our financial results, and which is based on actually shares outstanding. For 2006, we expect our basic adjusted income per share, based upon the 58.1 million shares currently outstanding is in between $3.80 and $4 per share. This represents approximately a 35% increase over the $2.88 basic adjusted income per share reported in 2005. As previously mentioned these figures will exclude amortization intangibles and expenses associated with FAS 123R. The company is introducing first quarter 2006 sales guidance of $355 to $365 million, adjusted net income of $37 to $41 million and basic adjusted income per share of between $0.65 and $0.70 based again upon the 58.1 million shares currently outstanding. We expect sales and earnings to increase throughout the year of various products are launched.

Since our last call, our share prices depreciated substantially. On advantage to rising share prices the opportunity has also to improve our balance sheet. That concludes our opening remarks. We will now open the floor to you for questions.

Questions & Answers

Operator

The question and answer session will be conducted electronically. If you'd like to ask a question you may do so by hitting "*" 1 on your telephone, "*" 1 for questions. If you are using a speaker phone please make sure the mute function on your phone is turned off so the signal can be read by our equipment. We'll pause a moment to assemble our roster. We will go first with Don Ellis with Thomas Weisel Partners.

Q - Don Ellis

Thank you, actually I have three quick questions. The first one is regarding, can you give us the reimbursement in the quarter for the Alkermes and Vivitrol expenses.

A - Frank Baldino

Hey Don. Kevin do you know what's he's talking about here.

A - Kevin Buchi

Yeah, this would be the amount of money that people receive back from the Vivitrol. Unfortunately Don I don't have that number in front of me. It's not hugely material at this point in time.

Q - Don Ellis

Okay great. The other question is what is your I mean FDA dealing with some these amphetamines and Cardiovascular risks. How do you think that SPARLON stack up against the amphetamines or cardiovascular risks.

A - Frank Baldino

First, a good question Don and we have Paul Blake with us today, who will sort of answer that for you.

A - Paul Blake

Hi yeah. Thanks for the question. Well, modafinil is chemically and pharmacologically quite distinct from the stimulants, and so we expect a very thorough and good outcome from the advisory committee meeting that begins on the 27th March. Remember that modafinil is being marketed in the US since 1999 and in Europe since 1994, a very confident in the cardiovascular profile. We think the labeling that we have is appropriate and then we have got quite a different profile from the stimulants.

Q - Don Ellis

So without, I am not asking you predicted with what we are going to hear out of the FDA but you guys looking at this as a positive, you are going to go out at these panels and review their comments.

A - Paul Blake

I have been doing drug development for a long time and I am very confident in data we have got, I don't want to be over optimistic about anything to do with an advisory committee meeting which is somewhat uncertain in it's outcome, but it is advisory to the FDA, we have got a strong set of data over the years and they were very confident in the package we have put together.

Q - Don Ellis

Alright thanks. Got a quick question for Kevin, regarding gross margins in the quarter they were little bit lower of what we have, little bit below the average for the year. What's a good number for us to use for 2006?

A - Kevin Buchi

I still continue to use the number you see in the fourth quarter for 2006. I think that's a reasonable profit you should expect to see going forward.

Q - Don Ellis

Okay. Thank you very much.

Operator

We'll go next to Marc Goodman with Morgan Stanley.

Q - Marc Goodman

May be Kevin, just expand, and then can you just talk about why the gross margin is come down, what has impacted it?

A - Kevin Buchi

As far as you get the product mix on there were couple of small onetime things in there but nothing hugely material. If you are modeling for 2006 I think using the 15% to 16% cost of goods or expense of sales that we have in the fourth quarter is a reasonable number going forward.

Q - Marc Goodman

And then the – am still looking through the press release, can we talk about what stock options FAS 123R impact for the '06 numbers are going to be.

A - Kevin Buchi

It is in the back of the press release, we are excluding it from the basic guidance that we are providing. I think that number is posted in the back of the press release and we sure that it is right location.

Q - Marc Goodman

Okay here we go it is $50 to $54 where is it $0.30 to $0.40.

A - Kevin Buchi

Yeah that is it.

Q - Marc Goodman

Based on 58 million shares?

A - Kevin Buchi

Well the - yes that number of course is based upon shares in the option plan not based upon primary shares outstanding.

Q - Marc Goodman

Okay. And then can you just talk about the tax rate in the quarter.

A - Kevin Buchi

I mean the tax rate for the year was – it came in around 31% little lower than we had anticipated. We got some pretty substantial benefits associated with R&D tax credits during the year.

Q - Marc Goodman

Okay so that was one of those one time things. All right I get back to you.

A - Kevin Buchi

That's a very skeptical comment it was good tax planning for the year.

Q - Marc Goodman

All right, congratulations.

A - Kevin Buchi

I appreciate it.

Operator

We will go next to Jim Birchenough with Lehman Brothers.

Q - Jim Birchenough

Hi guys. Just think ahead to '06 if all goes well in you grow the top line and bottom line presumably your share prices are going to reflect that and the result is going to be a bigger gap between your basic income per share and your full diluted GAAP numbers. What are you planning on doing to address that issue in terms of add divergences that's going to happen if your share price is continues to climb.

A - Kevin Buchi

No I think the unusual thing about the fully diluted numbers with our capital structure with the core strength that we have around the desk. Its really the increase between basic numbers the fully diluted number has no relationship to economic reality since it because some of bizarre calculation you have to go through. I mean if that was the principal reason for us wanting to move to the basic and certainly not, we will be watching our hands in the fully diluted or we don't acknowledge we got a lot of convertible debts in our balance sheet if this is a fully diluted number makes no sense.

Q - Jim Birchenough

Okay great and just I'm looking for the pipeline, can you layout the development timewise for TREANDA as well as CEP-701.

A - Kevin Buchi

Yeah Paul Blake can answer that for you Jim.

A – Paul Blake

CD701 which is the drug we have been working on longest. We are looking at clinical recruitments taking about another 12 months, little bit uncertain at the moment because we've seeing great interest since the ASH symposium from actual and potential investigators that reopens from European sites so we have seen a nice uptick recruitment. I don't want to predict the timing and filings but in general we are looking at something next year I don't want to be any more specific than that. With the TREANDA again we just getting to grips that we have integrated the Salmedix program very well, we've been discussing with the agency some potential modifications to the protocol and again we are looking at something about a year to complete that clinical program.

Q - Jim Birchenough

Great one final question I jump back in the queue within the CNS franchise within your guidance for '06, can you say what good portion of that Gabitril would account for?

A - Kevin Buchi

I think it is, Gabitril is a product as you know which has been declining because we haven't been promoting it for the last year or so. It's a small proportion.

Q - Jim Birchenough

Okay thanks.

Operator

We'll go to our next Eric Schmidt with S.G. Cowen

Q - Eric Schmidt

Good afternoon the question on the spending rate in 2006 I guess I had expected a little bit pressure off the pipeline that you might actually pull back on the SG&A spending maybe even R&D spending as well, and return some money to shareholders or buybacks on these convertible bonds. Can you just speak frankly…

A - Frank Baldino

Happy to talk to you about it, I think if you look at the press release we are pretty clear there, Kevin's comments actually really covered this clearly. The R&D spend has come down considerably from last year, a 10% reduction on the expense which is substantial. The SGNA is going up we have four drugs to launch to 2006. Launching four drugs in the same year is a costly enterprise we never had the luxury not too many companies have had the luxury of launching four drugs in the same year so. As we stated what would happen last year the SGNA expense has increased to reflect those in product launches in the R&D has decreased substantially to reflect the fewer number of clinical trials going on in 2006. So that answers that.

Q - Eric Schmidt

Well both of those numbers might have increased from three months ago. I mean it sound like you are even willing to push further, apparently we will know to ramp up those franchises and maybe you could comment on that.

A - Frank Baldino

The SGNA increase from the first guidance we gave obviously reflect the wonderful opportunity, Eric, we have with selling Provigil in 2006. We haven't spent any money second half of '05 on Provigil we expected not to have within our portfolio now we got a retailer now we got to market it. So the increase in spends related to not only the four products to launch in 2006 but the opportunity to continue to grow and develop the Provigil franchise going forward. If any of those increase and their SGNA needs in that number that haven't been there and prior guidance.

Q - Eric Schmidt

Good point. Kevin the gross margin guidance you gave for '06 does that include any royalties you are paying under these settlements is that where would see that line it.

A - Kevin Buchi

Yeah that's where you'll that Eric. That correct and yes it does.

Q - Eric Schmidt

Okay and just one last question in terms of the Carlsbad for the late five, is that something you think you need to settle with over time or is that not a viable threat to your opinion.

A - Kevin Buchi

John can answer that for you.

A - John Osborn

It's in our immediate concern because as you know they were not among those file initially and I guess I just say well I am confident that we'll be able to take care of that along the way.

Q - Eric Schmidt

Okay thank a lot and congrats on the other settlements.

Operator

We'll go next to Corey Davis with J P Morgan.

A - Corey Davis

Thank. Now that you got more certainty than you had in all of your previous four years and a big investment in here in '06 that's what we think in about a consistent long term earnings growth outlook. I think will be on an out years specific guidance what kind growth do you think is reasonable over the next couple of years, 20%, 25%, 30%.

A - Frank Baldino

Oh great it a really good question and we are not going to give you the specific percent is nor are we going to give you a specific guidance number for years to come, but clearly this is an investment year as you said and SGNA largely in 2006. Last year you saw and incredible investment in clinical R&D. I get it's ready to launch these drugs in 2006 and yeah launch year is always more expensive than non launch year so I would expect that SGNA spend to come down next year. I would expect clinical research to stay pretty much where it is. Of course opportunities could change that, there are tremendous opportunities going forward they are not in our place today. I just think '07 is a way of looking like there are going to be very strong growth years for net income lines. And that's where our goal is and we hope we can achieve it.

Q - Corey Davis

And on Nuvigil, does that get launched as kind of a high-end Provigil at a premium and given that it might take time to more full develop the cognitive benefits, how should we think about how you co-position us two products.

A - Frank Baldino

The good news is we have Robert Roche with us today. He's going to answer those questions for you.

A - Robert Roche

Hi Corey we are obviously still evaluating a number of options around the launch of Nuvigil, we haven't seen the final label yet we have not announced any pricing strategy as yet. I think the really exciting news is that we are not anticipating having the switch provigil prescriptions to Nuvigil or any kind of a short time frame in the near future and that we got the opportunity to Provigil probably to provision Nuvigil strongly in the sleep market. I think that, as we go through 2006, we are going to be launching with our current sales organization, we have opportunity with products profiled, the extended duration of ACTIQ very exciting clinical benefits in Cognis and elsewhere that, are really looking to resonate strongly with the sleep community. And I think, that's were, we are going with initially.

Q - Corey Davis

And Paul, can you dismiss the notion among some in the market that the scheduling of SPARLON might change from that of – yeah, my impression is, that's impossibility even with molecule scheduling is already set?

A - Paul Blake

Yeah, you are right, the molecules scheduling is already said, it's schedule for and that sign is going to remain.

Q – Corey Davis

And last question to Kevin, the diluted EPS number does make sense, I guess, if you use stock to retire the debt, a) am I correct and b) can you walk us through your different options on the retiring your debt, I think you alluded to that in your final prepared remark.

A - Kevin Buchi

Actually, I would did debate that, maybe the best way, I would be happy to go through the fully diluted calculations as it relates to the convertible debt and cold spread, it's some detail offline. But the number that you include in the fully diluted fallback debt, in the course but it actually, there's no bear any relationship towards the mighty issue in terms of the number of shares to attire with that. Certainly if you would to retire the debt for stock, the number of shares to issue will be increased and that will appear both in the basic and in the fully diluted shares outstanding number.

Q – Corey Davis

And Kevin, When do you have the first option to do that?

A - Kevin Buchi

We have the first option, the first set is callable by us in I believe 2008 is the first crunch.

Q – Corey Davis

And last question, if Barr can't gets it's own, the generic ACTIQ approved are the economics for Cephalon noticeably different if you supply that for them?

A - Kevin Buchi

I think, the way deals the FTC decree it’s structure Corey, is that, there is a opportunity for Cephalon to sell the product to Barr to satisfy the needs of the FTC to put the product on the market, we will make a little bit of money on that, because there is nothing that going to transform us in one way or the other,

Q – Corey Davis

Great, fair enough, thanks.

Operator

We will go next to Larry Neibor with Robert W Baird

Q - Larry Neibor

Thank you. Good Afternoon. Could you give us some idea of what Vivitrol contribution is in your another revenue line for 2006?

A - Kevin Buchi

The question of Vivitrol contribution, is that what you said. We have been assiduous in trying not to give additional detailed behind the various franchise lines that we provided. So, I rather not do that, I mean certainly you know, we have provided the guidance in that line 285 to 335 . We previously told you that Zeneus represents $100 million of that, until I gives you the kind of range for everything else, which will give you atleast an order of magnitude of what we have in that.

Q - Larry Neibor

Great, thank you.

A - Kevin Buchi

Welcome.

Operator

We will go next to David Windley with Jefferies & Company.

Q - David Windley

Hi, thanks for taking my questions. Kevin, you said, in your prepared remarks that there were one and meaning changes in channel inventory levels and I noticed ACTIQ revenue was up sequentially but scrips were actually down on an absolutely basis, so it looks as if there was some channel movement, I wonder if you could give a little more color around that?

A - Kevin Buchi

Overall, what we saw based upon the data we are getting back from the wholesaler is actually fairly minimal changes in wholesale inventory levels for the three products. Certainly there is couple of million here or there but overall, the change virtually negligible and I think, one product it didn't appear to material to me.

Q - David Windley

Okay, Frank, you talked about how anticipating PROVIGIL generic and reducing investment and the support of that product scrips depict that reduced investments. How quickly do you think, you are ability to read up investments in support of that product, would be – should we expect to see prescription growth reaccelerate in PROVIGIL specifically.

A - Frank Baldino

I think, that's a really good question. I think, the way should look at this is that, once we realize by the end of the year, they are going to see a way to clear this litigation. We did start reallocating sales and marketing expenses to PROVIGIL, nothing happens overnight, it's going to take a couple of quarters for this thing to start having an impact. So, that's what you should expect.

Q - David Windley

Okay and then conversely on ACTIQ because your ending is clear there, scrips that also done slower there but I guess, we should expect that trend would continue on the slow end, given that, you probably won't invest in that.

A - Frank Baldino

I think, you see on our guidance for the pain product that Kevin issued earlier exactly right.

Q - David Windley

Okay and as you think about on the regulatory front, as you think about – the guidance that or the expectations that you had for approval and launch dates for the products that are at the FDA today and once we have gotten some feedback on so far. Is that change your view at all and may be that is, that's reflected in the guidance as well. But does it change your view at all as to the cycle time that FEBT might come out of the FDA?

A - Frank Baldino

I have been asked that question a lot, it's really a good question. I think, it's really hard to predict what the FDA is going to do, it's extremely hard to predict what they are going to do in different positions, SPARLON is in the separate division from NUVIGIL which is a separate division from FEBT.

Q - David Windley

Right.

A - Frank Baldino

So, there are different individuals with different sort of operating mentalities and it's very very difficult to predict what's going to happen. I think, we know where SPARLON is, we are very confident in that approval, we are very confident with the timeframe approval going forward. We know where NUVIGIL is and are very confident in that timeframe as well. We are in discussions with AMC on OEF or FEPT and I am going to ask Paul Blake, to give you a little color on that. But we expect from what we seen today, we don't expect, it's always hard to predict, we haven't seen anything to change our view. At the end of the year launch of FEBT, Paul, you want a, add more color to that.

A - Paul Blake

A little bit more color but number in different sentiments, we had end of phase II meetings to agree that phase III program with that division, we had pre NDA meetings. So, what was – this was expected, the file is expected for review, there's lot of things that should be happening or happening, we put an action date as you know, I think, of June 30th. But you also know that things in general not just Cephalon but for many companies are going a little slow on that than previously. And it's a very cautious organization at the moment but we are doing everything we can to respond to any questions they have in the most timely fashion and look forward to getting an approval. on the action date and dealing with the conditions of the approvability as they arise.

Q - David Windley

Okay.

A - Frank Baldino

Recent experience with this pain division, it was most recently it was sugar free AQTIC and which is the another 505 D2 application, some of it is OVF and some of it FEBT. And that was done on time, on schedule, so one data point for you is that our last experience, decision in '05 with that division was, it was everything handled on schedule.

Q - David Windley

Good point and final question in terms of timing, wanted to clarify that, for the modafinil based product launches, the assumption is mid year and for FEBT it's, say, the end of the year to assume like, late fourth quarter or how should I get more specific on that?

A - Frank Baldino

It's, there's a lot of moving parts to the launch of OVF and FEPT here, one is, triggering of the Barr consensus, to launch OVF and start eroding AQTIC sales is a very much consideration at the forefront of our thinking in this. So, there is lot of moving parts, when this things gets launched FDA approval date is certainly one of those events that is going to drive this decision, but there's another economic event that going to sort of direct we do here and if you can understand what I am saying.

Q - David Windley

Sure, thanks for the color.

Operator

We will move next to Gary Nachman with Leerink Swann company.

Q - Gary Nachman

Hi, Good Afternoon guys. Very quick question, to follow up on SG&A, what have been with some of the pre-launch activities Sparlon and Vivitrol so far, the SG&A is ready regarding for ramp up pretty significant in the fourth quarter. And what should we expect, I guess, leading them for the launching of those product and may be more specifically.

A - Frank Baldino

A little louder.

Q - Gary Nachman

Oh, yeah, could you hear me.

A - Frank Baldino

Much better.

Q - Gary Nachman

Okay. So I am just asking about the pre-launch activities with Sparlon and Vivitrol, the SG&A is ready to trying to ramp up pretty significantly, what should we expect, I guess, leading up to the launch of those products, may be more specifically can you talk about, where you are with sales force build for Vivitrol.

A - Frank Baldino

Yeah, may be, we have got Robert Roche to answer that, there's a lot of these activities have already began especially related to progress of Bob's won't you fill in with that.

A - Robert Roche

Yeah sure Gary thanks for the question. We have started, pre launch activities with Sparlon, those really began in the later stage of 2005, we needed to be full prepared to launch that product at the earliest possible time frame which was early in 2006 and we were ready with our sales organization fully in place I'm talking about the CES (phonetic) sales organizational that was being tasked with not the only the with the launch of Sparlon and Nuvigil, but now also the continuing sales in Provigil. So yes those SG&A expense have began and a matter of fact they are very much in train today and will continue to through 2006 at an increased rate over last year. And you asked specifically about Vivitrol sales organization our addiction medicine sales team is also fully in place. We have about a 120 sales folks out in the field with management and lots of medical science liaison support. So this group is also very ready to launch GABITRIL and given the opportunity to do so and certainly the regulatory affairs developments over the less to several weeks gives us every hope that's going to be very soon indeed.

Q - Gary Nachman

Okay maybe I can stick with you Bob on the GABITRIL anything that you are doing right now to turn that product around or is it really depend on getting positive GAG data.

A - Robert Roche

Gary this has been one of the most difficult things that I've ever had to deal with, to build the products up to a $100 million plus grand and then have to watch it decline over last year to where it is now. And although we see that decline certainly slowing down this is really not a whole lot that we will be able to do until we get those new data, which we are hoping to really begin to understand over the next couple of months. So once we get those positive GAB data once we understand where the drug is going to go then my sales organization and marketing team will absolutely be re-energized to begin this position this product bridged future as another key filler in Cephalon's future growth strength.

Q - Gary Nachman

Okay Frank in your prepared remarks you side as for Provigil there is a lot of new phase IV study, can you elaborate on that a little bit, what types of new indications or what types of maybe head to head studies is that what you are thinking of.

A - Frank Baldino

Oh I think the ability to tell drugs depends on a lot on the new information you have about it in the clinical setting. And that has been our experience over 18 years here and I think for over last 8 or 9 years we are selling Provigil. The more data we generate the more interest among the Physician community and the better the sales perform. In 2005 if you recollect we did shut down phase IV investment in Provigil and now we have the luxury of increasing that. As far as specific studies are concerned we don't have any head to head comparisons goes, last time, I looked there wasn't another drug in our space that is used to treat excessive sleepiness. So we have the luxury of being the only player in the ever increasing market. But we do have opportunities to revisit the utility of Provigil and in the indications that we are pretty much selling it to today and hopeful expanding those so that we have a direction of where to develop the drug in the future. We are very interested and always been interested in the depression market and we have opportunities to look further into the role of Provigil there. I expect some studies to be done there. And I think there is other opportunities in the neuropsychiatric market that we will look at as well.

Q - Gary Nachman

I guess when i mentioned head to head, I was thinking of maybe rebirth of NUVIGIL since it is has potential benefits.

A - Frank Baldino

I think Bob outlined the three part strategy on NUVIGIL we are going to position it for those patients who wish initially who need that longer duration of action and perhaps the lower exposure that it offers. The second phase of the NUVIGIL launch will be to position it as one of two products that excessive sleepy patients can use so that there is an umbrella under which both products can be utilized broadly in that population. And third, in 2010 as we begin to transition away from Provigil once again NUVIGIL will have an opportunity to transition we have an opportunity to changes in the Provigil market to Nuvigil at that time.

Q - Gary Nachman

Okay just last question for Kevin, I know the EPS guidance obviously does include diluted shares but just to clarify on the adjusted net income that you gave. Does that include after tax or is that really completed excluded from the equation here.

A - Kevin Buchi

No, actually that, given the way that we are required to do the fully diluted calculations, we are using treasury stock method, so there is no add back anyway. So the adjusted net income number we are providing is just that, it just net income.

Q - Gary Nachman

Okay, perfect thank you.

Operator

We will go next to with Adam Greene with First Albany Capital.

Q - Adam Greene

Thank, good afternoon. Most of my questions were answered however, hoping you can break out Trisenox sales, and also if you throw any color on the margins in Zeneus and where we can see that going forward.

A - Frank Baldino

Hold on Adam we will get you some answers here.

Q - Adam Greene

Thanks.

A - Kevin Buchi

'05 the price in our sales, were about $10 million. that Europe.

Q - Adam Greene

Can you just break that up going forward or just as requested?

A - Kevin Buchi

It is relatively small product and we've blend it in with our other products sales category. I would rather keep those categories as they are.

Operator

And we will go next to Greg Gilbert, Merrill Lynch

Q - Greg Gilbert

Thanks a couple first for Paul has the FDC asked you to prepare anything for March Panel meeting at this stage.

A – Paul Blake

We are in discussion with Now in regard to that. We do know that they'll be focusing on the 23 on Psychiatric adverse events because that's the focus of the Panel Meeting the day before that mark the drugs that address ADHD and we've been invited to take part in that if we wish as well, so that's the most specific one at the moment and we are getting ready to be exchanging briefing documents and further detail will emerge in a few weeks time.

Q - Greg Gilbert

Okay and then going back Provigil settlement Frank I assume you provided FDC the details of the MMA, have they asked for any follow up information after the typical submission.

A - Frank Baldino

No, Adam given the sensitivity of this we are going to pass this question over to our General Counsel, John Osborn

A - John Osborn

Adam yes we have paid the required filings, no we have not heard from them and I wouldn't like to certainly expect that we would or we wouldn't if it is not a circumstances in which the FDC approves or blesses the settlement we have an opportunity to review the documents as you probably know but it is not a can do hard stuff, uno process where they actually approve anything.

Q - Greg Gilbert

It was more a question of whether any additional info has been requested beyond which you gave and I understand that there is no blessing required.

A - Frank Baldino

I did mention you may not have heard me I did mention that no we have not heard back from them for, we are pressed for fresh information.

Q - Greg Gilbert

And lastly Frank you can call me Greg if you want. What is the most focused areas of business development at this stage after a very busy year.

A - Frank Baldino

Sorry about the name here Greg, we got a black board with names on it and Chip underlining the wrong guy here, so my apologies.

Q - Greg Gilbert

It's alright as long as my Mom's not listening.

A - Frank Baldino

But I think BD group for us here, we've been pretty active on the MNA front I think we got a lot of stuff to digest here we intend to do that. We'd like to add another product in Europe sure we would specially in oncology product where we think that's an important area for growth for us. We would like to add another pain products in America given the success we have had with ACTIQ and the opportunities we see in front of us with OVF or FEBT, yeah these are things in our radar screen, nothing imminent. But this is an important part of growth for all companies and we are happy to have the repertoire to do this.

Q - Greg Gilbert

Thanks.

Operator

We will go next to David Buck, The Buckingham Research.

Q - David Buck

It's a particular question a couple of short questions, first on GABITRIL Frank or Paul Blake is there any place order in the R&D budget for an additional study for GAP if you do not see successful results in 2Q. Secondly if you look to '07, '08 would you again expect a ramp R&D spending can you give some target in terms of percentage of sales, percentage of revenues and finally just for Kevin my understanding based on the conversion rate of about 70 is that you will be adding roughly 10 to 11 million shares is that accurate looking at if we did choose to diluted EPS roughly 20% dilution, thanks.

A - Frank Baldino

I'll start with Kevin's question since I forget the first two already anyway you have.

A - Kevin Buchi

By the way, if I can call you Greg, David? Probably your arithmetic is roughly accurate as you know, David it’s very important dependent on stock price, the current stock price is low 70s, it’s about that right.

Q - David Buck

Okay.

A - Frank Baldino

As far as the budget concerns for '06, regarding Gabitril you know we have a have a budget and we spend accordingly, nonetheless we also make priority decisions, we make the management decisions here. And if we were to decide that another studies wanted, we would just move things around and fund something else or not find something in and fund Gabitril. We don’t have any data at this point of time. I don't know whether or not another study is required. The one thing that, we did realize is anxiety similar to the depression study that it’s not an usual to have large number of studies required to get two good ones. Paul Blake is with us and he is part of the team that helped to develop number of products at depression (phonetic) and Paul might want to add some color about what’s usually involved there.

A - Paul Blake

Thanks, Frank. Yeah, sadly, you don’t always get what you expect our number in my days with swift fine developing, including to do a number of studies, we didn’t get one for one in any of the psychiatric indications whether it’s depression general anxiety, disorder, or panic disorder and that is just the reality of, that is why you don’t know quite as much you would liked about it, the patients or the conditions and regulatory standards are going up all the time but there is strength there, if we do any more studies, we will find a way to do that.

A - Frank Baldino

Does that answer your question David?

Q - David Buck

I think so. So I get the message is that, it looks like maybe close enough you may reevaluate another study. And just one final on the R&D going forward into ’07?

A - Frank Baldino

I think, we like to, that’s a good question actually, it’s been a topical discussion for us. Yeah, we don't give data for '07 so I am not going to give you a number but nonetheless we are beginning to bench mark ourselves against the industry and finding sort of the right or the appropriate comparable groups to do that against. And if you look across the universe, General Tech is at the high end of our R&D spend and some companies are the lower end of R&D, I think pharma is about 14% or 15% of the top line. Our top line isn’t big enough to get down to 14% and I don't think, we will be spending like Genoside spending, something in between may be appropriate for us.

Q - David Buck

Okay.

Operator

We go next to Terry Kayson, with Merrill Lynch.

Q - Terry Kayson

Hi there. A couple of housekeeping questions. First of all, the royalty that are paying to the Generic company against your settlement, where are you going to recognizing those in your income statement?

A - Frank Baldino

That will be recognizing cost of it’s sold, that will be recognizing cost of goods sold but at the end the correct answer would be fairly right now.

Q - Terry Kayson

And then as far as the one time payments that were necessary at the times of the settlement, is that that item that you are seeing at the cash flow statement under acquisition of intangible assets because two, I guess, two of those settlements occurred in the fourth quarter?

A - Kevin Buchi

Now, the acquisition of tangibles, we will include a variety of other things including things likely the intangibles associated with these acquisitions and other things.

Q - Terry Kayson

So, where are those one time payments on, whether we will be sort of, how are you able to sort of backward calculated the Mege.

A - Kevin Buchi

He is accounting.

A - Frank Baldino

You will be able to do that.

A - Kevin Buchi

We didn’t disclose the details, we are try to get into that level.

A - Frank Baldino

Correct.

A - Kevin Buchi

In terms of the settlement on that, public consumption and because leave to that.

Q - Terry Kayson

Okay and then lot of house keeping questions, in terms of the share count, what's the maximum number of shares, if assuming at essentially infinite share price that could be included into the diluted number?.

A - Frank Baldino

I think, I have directly saying that, given the way, given the bizarre way that calculates and operates at an infinite share price, I think, you have infinite shares in the calculated – take of that valuation. I think, we are going up.

A - Kevin Buchi

This is why we moved away from that calculations, it’s unpredictable, it’s inaccurate and doesn’t reflect the economics of the convertible transactions that we undertook. So, this is exactly why we moved to another GAAP measure, a direct number of shares so to eliminate the concerns around this. And if we were take down our debt in the future as we did that, the actual number of shares reflecting the amount (phonetic) what it appear in the direct outstanding shares calculations. So, there will be no doubt anybody’s part with it and it will be more actually reflected that way.

Q - Terry Kayson

Okay and last one is, put in here, the tax rate for 2006, what you think that’s going to look like ?

A - Frank Baldino

I think, we provided 33% and 35% of our guidance for that one.

Q - Terry Kayson

Okay, thank you.

A - Frank Baldino

You are welcome.

Operator

We will take our final question from Michael Meyers with Trivium Capital Management.

Q – Michael Meyers

Good quarter and good outlook Gentlemen, thanks.

A - Frank Baldino

Thanks.

Q – Michael Meyers

I have a few remaining questions, I am going to repeat one or two of the questions that have been asked already. Frank, in terms of your last comment, I am going to playback or just want to use to do and I haven’t looked at the covenance on the debt, bu,t you seem to in a way the economic impact that others may, I got to include it in the fully diluted share account. Can you tender for these bonds privately regardless of other constraints if you wanted to do that, can you buy these back on a private basis?

A - Frank Baldino

Yeah, I mean you can always do that, I mean, as you see throughout, our histories as an organization, it’s an individual or groups of individuals were to offer to exchange their longs for a stock, we can always to that under 28.9. Now we have not initiated that but they would are certain sure they will do it. And we can’t initiate that but if they were to do that, but they wouldn't that. To your other points though on the shares included, may be if something we take offline and kind of work through the calculations but the calculation that we are required to build through in GAAP, actually ignores the number of shares that you would actually have to issue under these bond, only include in the money of amount not the bonds, in the money of amount of the high end core and completely ignores the offsetting low end core. So, it’s really is a very peculiar calculation that you are require to go through and the number of shares included in the fully diluted because they impact not represents the number of shares that would be issued under these bonds.

Q – Michael Meyers

Okay.

A - Frank Baldino

It is already our vision, that going to direct shares.

Q – Michael Meyers

Okay. Kevin, thanks , it’s really helpful. Just one final question, can you give us any sense for the incremental SG&A spend, I think you drew very clear about the buckets and we appreciate the robust nature of the product launches for this year, but can you give any more guidance, can you give us any more guidance on the incremental SG&A spend rom 580 to 620 that you gave back in January?

A - Frank Baldino

Yeah, that the incremental SG&A spend was almost entirely attributable to the acquisition of Zeneus. As you recall when we acquired that, we said Zeneus acquire that, we said is a business, we roughly $100 million in revenue, we would expect it to be roughly P&L neutral until this time, as you bring additional product into that business. With third quarter, with $100 million of revenue, you got to significant of SG&A component coming in, that's what broke the guidance number up principally.

Q – Michael Meyers

So to speak, thank you very much.

Kevin Buchi, Chief Financial Officer, Principal Accounting Officer and Sr. VP

That concludes today's call. We would like everyone for your participation, good evening.

Operator

Ladies and Gentlemen, this thus concludes today's teleconference. We appreciate your participation

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