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Kos Pharmaceuticals (KOSP)

Q4 2005 Earnings Conference Call

February 23rd 2006, 8:30 AM.

Executives:

John Howarth, VP, IR

Adrian Adams, President & CEO

Kevin Clark, EVP. CFO

Juan Rodriguez, SVP & Controller

Analysts:

Ken Trbovich, RBC Capital Markets

Gregg Gilbert, Merrill Lynch.

Robert Hazlett, Suntrust Robinson Humphrey

Amy Stevens, SIG

Ian Sanderson, Cowen & Company

Steve DeNelsky, Safire Capital

Stelis Senenar, Investment

Robert Hazlett, Suntrust Robinson

Ken Trbovich, RBC Capital Markets

Operator

Good day everyone, and welcome to the Kos Pharmaceuticals, Fourth Quarter and Full Year 2005 Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Vice President of Investor Relation Jack Howarth. Please go ahead sir.

Jack Howarth, Vice President and Investor Relation

Thank you Glenn and good morning everyone. Welcome to Kos' fourth quarter and full year 2005 earnings conference call. Joining me on this morning's call are Adrian Adams, President and Chief Executive Officer, Kevin Clark, Executive Vice President and Chief Financial Officer, and Juan Rodriguez, Senior Vice President and Controller and Corporate Administration. I hope you all had a chance to review today's earnings release as well as our research and development milestone release. If you have any additional questions following this conference call, please feel free to call either Nichol Harber or me. I would also like to call your attention to the slides that company are remarks this morning. You can access the slides by going to the Investor Relation section of our website and clicking on the icon marked `Fourth-quarter conference call`.

Before we begin to discuss our results you should be reminded that this conference call will contained forward-looking statements that are intended to fall within the Safe Harbor provisions Under the Private Securities Litigation Reform Act. Several factors could cause actual events to differ materially from the forward-looking statements including those factors listed in the forward-looking information certain cautionary statements section of the Company's annual report on Form 10-K, to be filed with the SEC for the year ending December 31st 2005 and factors identified in other reports filed with the SEC. I would now like to turn the conference call over to Adrian who will highlight the key business and financial accomplishments for the fourth quarter and full year. Then Jaun and Clark will present the 2006 outlook and we will then open the call for your questions. Adrian will return at the end of the question and answer period to wrap up the call. Adrian, please go ahead.

Adrian Adams, President and Chief Executive Officer

Thank you Jack and good morning to each and everyone of you. Ladies and Gentlemen I am delighted this morning on behalf of everyone here at Kos Pharmaceuticals to share with you fourth quarter and full year results for the company. Record revenues continued significant cash generation, above market prescription growth across all product portfolio and excellent revenue progress on the research and development and corporate developments and license syndromes.

We continued to executive and deliver against the plan we have communicated and keeping with the company that is performing most of our peers in terms of revenue and earning momentum. The past three profitable years have seen as deliver on our promises. Our focus now is to conversation cost to a company that encapsulate volume creation, rapid and sustainable financial growth and a broader business model with an exciting research and development pipeline.

We would probably noted that we have not mixed or projected annual and quarterly earnings for 2005. This is primarily the results of the $5.5 million accrual equivalent $0.11 per share for potential additional tax liabilities for 2004 and 2005 that were recently identified in connection with the preparation of our final 2005 audited financial statements and didn’t a result on annual pursuing under line commission metrics. Turning to slide no 3, this slide shows a full year summary of our financial performance as well as some other performance highlights. As you can see, full year revenues reached approximately $752 million and impressive 51% increase over 2004. Excluding one time events net income for the year increased 44% to $131.2 million or $2.73 per share.

During the fourth quarter alone, we generated an impressive $98 million in cash from operations this bring in a total to about $238 million for the full year. The Company's cash and marketable securities balance at yearend was $413 million. As a result of cash generating during this record year we remain debt free, of course is in the strongest financial position in this history and this position as well to deliver on our future plans.

With regards to perceptions for our cholesterol and hypertension portfolios both sectors grew in excess of their respective markets despite a softening in the chronic these markets generally in 2005. This continued trend reflects success with our smart targeted sales and marketing, a focus on quality medical education particularly with Niaspan and Advicor growing supportive medical terms and data and of course our sustain highly differentiated position in the market place.

2005 was also a very successful year from a corporate development from licensing point of view. The year began with our strategic equity investment in Arizona pharmaceuticals, a company focused on oncology, diabetes and cardio-vascular research, along with this doing predictive responsive research on new atherosclerosis and HDL products. This was then followed by the successful transaction with by our laboratories, Biovail's and more recently with Jurinna for lattes space free compound called Ecaptiba, due to loss during the first part of 2007.

Our next slide, slide number 4 shows a summary of our research and development highlights for 2005. We received FDA approval of the SNDA for a 1000 milligram modified formulation of Niaspan and as you may have seen earlier today released filings on the plus study conducting on an optimized Niaspan modified formulation. We also completed and have now reported on the top of my results of the compile study, in addition to the disseminating the excellent results of the ARBITER of III study of the recent American Heart association meeting.

This lap of study demonstrated actual regression of atherosclerosis where Niaspan is used on top of starting therapy, a major finding with significant imprecations with patients, doctors and of course, course and its portfolio. The recruitments for our key phase III programs involving our Niaspan Simvastatin dislipidemia and Niaspan lovastatin intermittent claudication products are going well, and we would delighted to see the initiation for the major NIH sponsor outcome study AIM-High. The FDA approve the IND for our second generation inhaled insulin product and we are currently aggressively differ in this products the Phase III ready in early 2007.

The recent news on the approval of exubra gives us further confidence on the potential for inhaled insulin products and our highly differentiated product in particular. All of this together with some encouraging productivity and early successes from our work with Arizona pharmaceuticals in the HDL area reflects a good year for course, research and development. We are turning to our financial progress and have shown on our next slide, slide number 5, you can see both the continued strong sales evolution of course but also the product by product brake down of our revenues since the year 2000.

As you can see a combined total of our cholesterol franchise exceeded a 0.5 billion in sales for the first time in 2005, which is almost 10 full growth in 6 years, quite impressive I hope that you agree. In addition this slide also shows the successful contributions of our acquired products, which now account for approximate 26% of total revenues. Our next slide, slide number 6 shows that our cholesterol franchise continues to grow year-over-year, despite the introduction of a highly detailed LDL lowering cholesterol therapies and then even more competitive environment. More specifically total prescription grow out for our cholesterol franchise grew 13% during 2005 which was 20% more than the overall market growth rate and actual tablet growth which is a better proxy for growth actually grew 16% in 2005.

We are also seeing positive trends year-over-year in prescription growth from our hypertension portfolio are shown on slide number 7. Cardizem LA is completing in the $4 billion calcium antagonist segments of the US hypertension market. On total prescription grew 19% in 2005 compare with just a 1% growth of the market in 2005. As far the Teveten franchise members of the fast growing Anti-tension II receptive block a class, total prescriptions grew 12% this year compared to 2004.

Slide number 8 shows the excellent earnings progression since Kos first became profitable in late 2002. As briefly mentioned before, we grew EPS by 36% to $2.73 excluding one-time units. This momentum in earnings taken together with all growth in revenues has placed us in the top-tier performing companies in the pharmaceutical sector. We are proud of this. Over the past years we have consistently shown an impressive strengthening of our cash flow and overall balance sheet a trend that resulted in course becoming completely debt-free in the middle of 2005.

Slide number 9 shows our final position in 2005. We’ve finished the year with a cash of the marketable security balance of approximately $413 million and within the year it generated about $238 million in cash from operations. This must Kos in a wonderful position for continued measured investment in research and development, sales force and of course opportunistic corporate development unlike Interactive of this. All in all, a strong year for Kos on a year where we continued to deliver and implement against all focused, clear, and aggressive growth plan, a strategy that is summarized on slide number 10.

We intend to preserve an enhance the value of our core cholesterol franchise who continued smart sales and marketing, expanded sales force capacity, belong to the new improved range of Niaspan products and the ongoing investments in and realized all new clinical studies. In addition to maximize with the growth of our high potential in respiratory products, we also intend to fully leverage our research and development capabilities. This lateral point is no better illustrated and in the enhancements we also made this morning no the results of two key phase for research and development activities. Results of which I will brief I’d like to touch on even though strategic importance.

Firstly on slide number 11 on the top line results of the COMPELL study. A twelve-week randomized multi center open level study compared in the efficacy of combination therapy with Niaspan and low to moderate doses of Lipitor and Crestor against moderate to high doses of Crestor and a combination of Zocor and Zatia commenting on this ripes ore. The study showed that all of treatments were equal and our ability to lower LDL cholesterol achieving about or at least 50% of greater reductions of both 8 and 12 weeks. However, both Niaspan combinations achieve significantly greater in fact 2.5 to 3.5 fold increases in HDL cholesterol and significantly greater reductions and Triad have arrived LPA as compared to the other two treatment times.

This was the efficacy of statins and some of the LDL low in drugs into appropriate efficacy perspective. We look forward to these results been published.

And on the next slide, slide number 12 we illustrate the summer results from our flush with our optimized Niaspan modified formulation. As you can see, Niaspan NF showed a significantly improved overall flushing profile as compared with commercialized Niaspan with a 42% reduction in severity and a 43% reduction in duration of flushing. This was significant at the .0001 level. A significant note the reductions in the severity and duration were achieved in the absence of aspirin or other Incite co-administrators. Based on these exciting results we intent to launch a range of improved Niaspan products in the first part of 2007 and will include the optimized modified formulation.

Now, I would like to turn the call over to Koven who will discuss our financial outlook and strategy for 2006. Koven.

Andrew I. Koven, Executive Vice President and General Counsel

Thank you Adrian good morning every one. I am very pleased to have the opportunity this morning to share with you, Kos’ financial outlook for the coming year. 2006 promises to be another exciting and eventful year in the continued growth and evolution of Kos.

First, the highlights of slide 13. From a revenue perspective, we expect 2006 to be another year of strong revenue growth with our existing portfolio products generating organic revenue growth above the industry average and above the average of our peer group of companies. In particular, and most important we are confident that 2006 will be another year of strong revenue growth for our highly differentiated Cholesterol products. From earnings perspective 2006 will be year of transition for KOS with a number of one-time and transitional items impacting our reporting results.

As we have discussed on pervious earnings calls, KOS is the negotiating inventory management agreements with the major pharmaceutical wholesales. As of this week, we have signed agreements with each of the big three wholesales. Those agreements will result in a reduction in wholesale or inventory levels, which will have a one-time impact on revenue in earnings for KOS. As mentioned by Adrian, Kos has made the strategic decision to expand our sales force positioning our sales to take full advantage of our new product opportunities and enabling us to maximize the profit contribution of both our new and existing products.

2006 operating margins will be impacted by the cost of hiring and training our expanded sales force ahead of our anticipated 2007 new product launches. Markets will also be impacted by the level of royalty expense, which will peak this year both on our percentage of sales in an absolute dollar basis. As I'll discuss in a few moments, we see our cost structure improving significantly after 2006 in result a substantial expected declines in the level of royalty payments. Driven by an improved cost structure in the favorable outlook for our existing and pipeline products, we anticipate substantial revenue and earnings growth in 2007 and beyond.

Turing to slide 14 let me review our revenue outlook for 2006. We expect reported revenues to be in the range of $880 million to $900 million, a growth rate of 17% to 20% over 2005 results. Our expected revenue number is after and estimated one-time revenue impact of $45 million as a result of the IMA agreements. Excluding the impact of IMAs projected revenues would have been in the range of $925 million to $944 million suggesting underlying organic revenue growth of 23% to 26%. Both on a projected and IMA adjusted basis we believe that our revenue growth rate continues to compare favorable in industry as a whole into our peer group of specialty pharmaceuticals companies.

Slide 15 summarizes our earnings outlook for the year. We expect earnings for 2006 for accounting for stock-based compensation expense under a SAS 123 (NYSE:R) to be in the range of $2.25 to $2.35 per share. Including the accounting charge for non-cash stock based compensation expense we expect reported earnings to be in the range of $1.70 to $1.80 per share. As noted, IMA's sales force expansion in a peak level of royalty payments all impact earnings in 2006. Wholesale or inventory adjustments will impact earnings by approximately $0.33 per share. Most of this impact will be realized in the first quarter.

Cost associated with hiring and training and expanded co-sales force will impact earnings by approximately $0.23 per share primarily in the third and fourth quarters. I should note that we have not assumed any incremental 2006 revenue from these new reps. Adjusted for the one-time impact of IMA's and the cost of transitioning to a larger sales force projected earnings pre SAS 123 (R) would be in the range of $2.80 to $2.90 per share an increase over 2005 levels. This underlying level of earnings growth is expected to be achieved despite the fact that earnings in 2006 are expected to be negatively impacted by approximately $0.20 per share as a result of the increase in royalty payments as a percentage of sales.

As illustrated on slide 16 we believe that the margin compression we expect to experience this year will be transitional in nature. 2005 combined sales, marketing and royalty expense equal to 42% of net revenue. This total is expected to increase to 45% of sales in 2006 with 2/3 of that percentage of sales increase attributable to royalty expenses and 1/3 attributable to the cost of our sales force expansion. While we expect our level of sales expense to increase further in 2007, due to the full year cost impact of our large sales force.

Our royalty expenses are expected to decline dramatically resulting in a significant overall improvement to our cost structure. And 2008 we expect that decline royalties will result in a combined level of sales, marketing and royalty expenses significantly below 2005 levels on a percentage of sales basis.

Turning to slide 17, as we look beyond 2006, we are confident that after our year transition we will experience for new strong earnings evolution, and expanded sales force, new product launches and declining royalty payments should all combine to create a very favorable earnings environment for KOS, but we are not prepare to provide former guidance beyond 2006, we preliminarily estimates that 2007 earnings per share will be growth will be in the range of 30% to 40%, with that let me turn it back to you.

Juan Rodriguez, Senior V.P and Controller and Corporate Administration

Thank you Koven, we commit a lot this morning already, and giving you a lot to think about. This final slide, slide no 18, so what we believe a strong investment PCs for KOS. We believe that we are well positioned to execute in all strategies in both the market and clinical trends that turning in all favor. There is an increasing awareness in the benefits of HDL therapy in addition to LDL on progress referred, with the impending generalization of Pravastatin and Simvastatin. We believe positions as we will take a cost effective approach in treating patients and increasingly at a generic expecting to Niaspan capitalizing on the potential life saving benefits of improving overall a broader dislipidemic propounds.

We have a highly differentiated product franchisee will be only approved HDL therapy on the market which is supported by a growing body of clinical evidence. Niaspan approved safety and efficiency profile as well as life cycle management initiative should preserve and increase our strong market position even if when the competitive landscape changes. At the end of the day proven safeties and efficiencies is well positioned well most for the patients.

Our overall financial strength will be key to expanding our commercial brands. Measured investments in our sales force on a small targeted approach detail and we will expand our productivity. Our strong balance sheet excellent P&L leverage gives us the ability to make value added investments and acquisitions until fully exploit to our product franchises. Finally we believe we have a strong research development pipeline focused on created, value in house and life cycle management initiatives, new selling those products such as Niaspan, Simvastatin ,a second generation and have insulin product which has block buster potential and measured an developing NCE programs in HDL uploads gross caesarian the highlight just a few. Now I would like to turn the call back to the operator for the Q &A section. Operator please go ahead.

Question-and-Answer Session

Operator

Thank you, if you would like to ask a question please do so by pressing the “*’ follow by a digit “1” on your touchtone telephone. If you are using a speaker phone please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again “*” “1” if you have a question, we will pause for just a moment to assemble our roster. We will go first to Ken Trbovich with RBC Capital Markets.

Q - Ken Trbovich

Good morning, I gets the first question I have, just on the tax rate in the fourth quarter, could you explain a bit more why it was so high in the quarter and what we should expect going forward.

A - Juan Rodriguez

Hi Ken, this is Juan Rodriguez primarily the tax rate in the quarter was factor by the recent change in our assessment overall income tax status I think going forward you should expect to be somewhere in 38% to 39% of bracket that you will

Q - Ken Trbovich

Okay and then just quickly on the royalty discussion, there was an explanation I guess given with regard to '07 and the expectation that '07, the burden from the royalty expenses is going to be reduced, is that because of change in the royalty rates of or in a year or survival there or is that really result of a sales mix shift.

A - Juan Rodriguez

And I think obviously as you know in relation to items that in fact royalties and specifics in relation to Bal laboratories and the royalties to get a pharmaceuticals we have obviously has agreed with our partners get into great detail on that, but surprise to say that obviously as we move into 2007 we will be exist in the year 2006 where our royalties reached a peak and obviously has Kevin and very clearly articulated we see those relatives significantly going down from enormous. Okay then do you have any things them.

A - Kevin Clark

I think that’s I agree.

Q - Ken Trbovich

Okay and then Kevin I guess you mention that in your presentation the projected or potential for 30% to 40% growth above the '06 guidance is that before after the adjustments?

A - Kevin Clark

The 30% to 40% growth rate is over the guidance number, which is reporting number before the adjustments

Q - Ken Trbovich

Okay thank you

A - Kevin Clark

Thanks Kim.

Operator

We'll go next to Gregg Gilbert with Merrill Lynch.

Q - Gregg Gilbert

Thanks, I have a couple first for Kevin, would you might breaking out product sales for the fourth quarter by product. And can you also talking about mechanic in the IMS and how much inventory of wholesalers will be carrying on a go forward basis?

A - Kevin Clark

Gregg, I think one is can break just in terms of the revenue break down by product Niaspan roughly about 126 at the quarter about 24 as for the quarter about 31 then Teveten about 7, 7.5 and Cardizem LA 20 to 26 million

Q - Gregg Gilbert

Thanks.

A - Kevin Clark

And now your second question was in relation to the IMS

Q - Gregg Gilbert

Yeah can you talk about how they are close to the penal you mentioned most to be impacted in the first quarter where will that, is that simply revenue issue or is it also card issue and then the bigger picture is how much will they be carrying going forward what was the range of we till allow to carrying.

A - Kevin Clark

Well its in terms of P&L it is primarily a revenue issue our agreements with the three large wholesalers all kind imply again reducing their carrying levels to about 28 days of inventory. We expect that all three of them will as a target level by the end of this quarter and the account for, better than 80% of our revenues that would be at least 80% of the 45 million that allowed to be taken in the first quarter.

Q - Gregg Gilbert

Okay and then for Adrian, is there anything else in that range of improve Niaspan product that you have not talked about yet

A - Adrian Adams

Well I obviously for competitive and might be reasons I don’t want to go into lot of details obviously I hope you are interested in the results from our optimize modify formulation I think this is a serious we are listing but sometime we are delighted with the results from that flux study and obviously I think given the results of that study we believe that this is going to put all products in a strong position and the other product 2007. To put it in perspective because I think it’s a an interesting strategic question obviously a lot of questions have been raising in relation to be announcements led by Merk at the end of last year, and obviously questions on what they are doing you would obviously have to ask Merk to find to say that they showed two bits of data, one data was in reference to work comparing their proposed products, this is immediate release Niaspan shown a significant reduction in flexing profile. Niaspan current Niaspan compare to immediate release Niaspan shows a significant appropriate 80% decrease in flexing compare to immediate release Niaspan. The other day-to-day shop was very specific and targeted and that made reference to the patients who fell within the moderate to severe flushing category. The optimized modified formulation of Niaspan demonstrate today 42% reduction in severity and a 43% reduction duration we believe that together with a broaden range of Niaspan products will be very interesting competitive positioning in the other cardiovascular segments we were very glade with that numbers and despite with that I would like to say of you more a proper reinforcing the fact that from an IP point of view we have six issue partners of Niaspan, three partners on pending in relation to combination therapy and three partners spending in relation to combination therapy of Niaspan with other agents.

Q - Gregg Gilbert

If you are during last one for now this of course not going to combo utilize the modified form of Niaspan

A - Kevin Clark

No, It didn’t incorporate that because we initiated this work after that but obviously our plan would be over the course of time to include the optimized modified formulation in all Niaspan products.

Q - Gregg Gilbert

Thanks.

Operator

We will go next to Robert Hazlett with Suntrust Robinson Humphrey

Q - Robert Hazlett

Thanks good morning thanks for taken the questions. Just in terms Kevin my projects are coming back to this but 30% to 40% growth in '07 of what number could you is that the 280 to 290 figure

A - Kevin Clark

No, its all be 225 to 235 number

Q - Robert Hazlett

Okay thanks very helpful. In terms of the expand if you talk about expanding SG&A at the second half of this year as a one time item it’s fair to say that additional SG&A expansion might be contemplated as you look to launch the additional therapies in the beginning of 2007

A - Kevin Clark

I think in relation to specifics of 2007 obviously, we've not given any guidance on that and obviously we’ve not began the process or putting together all operational plans for that year, surprise to say that we believe that the sales force expansion that we are planning in the second half of this year but full rush in all for that is to increase our tactical and strategic flexibility in advance of the new Niaspan range of products the Kakibont and obviously in anticipation of the Niaspan Simvastatin combination and we believe that sales force which absence we look to exist this year with the sales force of around about 1000 sales professionals which as an side is going to be close to 2.5 times with sizable sales force which we had at the beginning of the tacketicle promotion we believe that the productivity that can come from that is very well position to leverage all those opportunities that were come in 2007.

Q - Robert Hazlett

Thanks just one more and I get back in line but is the existence of the chain relationship of why you wont be launching low flush earlier than the beginning of '07, versus may be the second half of ’06 or is that a labeling issue or something else could you just clarify that

A - Kevin Clark

Not at all absolutely nothing to do with the together co promotion with tress with that is going we have always maintained and I think we got a very good track record our focus is on making sure that when we launch role life new products new ranges of products etc that we have the right backup in terms of publications, the right backup in terms of labeling and that we are fully ready and prepare to maximize and what we believe is the considerable opportunities that comes with that so in absence it is all driven by desire to make sure that we continue to execute with excellence.

Q - Robert Hazlett

Okay thank you

Operator

We will go next to Amy Stevens with SIG, go ahead

Q - Amy Stevens

Hi, can you hear me?

A - Kevin Clark

Yes Amy how are you doing?

Q - Amy Stevens

Actually this is Alex from Royal Associates just on in a meeting from spending.

A - Kevin Clark

Yes I see

Q - Amy Stevens

I think is that some one already that the data agreement, if you wanted to ask you specifically if you are already expanding the sales force on that point

A - Kevin Clark

Yes as we mentioned in our release and obviously in the earnings call I like you know the when the third year of the co-promotion with Takeda, the assessment just to whether or not we Kos Pharmaceuticals want to continue with that co-promotion with Takeda are being considered as we’ve articulated in the past. Obviously, decisions to expand our sales force which we’ve announced this morning to increase the size of our sales force around about 215 in the later part of this year. It’s focused predominantly on putting our sales in a very flexible position in relation to tactical and operational capabilities to leverage the new product opportunities that are going to hit in the early part of 2007. So, we will be increasing the size of our sales force in the later part of this year and obviously, that has to put us in full control of very long, just that we have in the other part of next year.

Q - Amy Stevens

Okay, thank you very much

A - Kevin Clark

Thank you.

Operator

We’ll go next to Ian Sanderson with Cowen & Company.

Q - Ian Sanderson

Thanks for taking the questions. First, on the flushing data from Niaspan and if, is there are standard scale for measurement of flushing severity and so, looking forward you might be able to compare the products? Secondly, just a royalty reduction or the projected royalty reduction for 2007 contemplate changes in terms of the co-promotion agreement with Takeda had now been disclosed or potentially a termination of that agreement? And then third, where there any price increases on any of the key products in, so far in Q1.

A - Adrian Adams

I will touch on the first one. Koven will touch on the second one, and Juan will touch on the third one. On the first one on the assessments of flushing, there are some good models in place that are commonly used by sites and assessments of flushing in an excellence it depends to range in a scale between not depend, well on asked patients to assess the level, do severity and the duration of flushing in addition to the type of flushing. Flushing can manifest in a number of ways from a little bit of hitching to a bright revenues but appears in the most severe situations. So, in the assessments of our optimized formulation of Niaspan we used a commonly used analog, the measuring flushing which is equivalent to other analogs that have been disseminated over recent times and obviously we believe that the results that we’ve shown which again I emphasize with the significance of the 0.0001 level obviously demonstrated a significant reduction 42% percent reduction in severity and a 43% reduction in duration all of which are very important parameters measured in typical flushing analogs. Second question Koven?

A - Andrew I. Koven

Yeah, in terms of the royalty reduction you see, the data we shared with you in the slides on those percentages of sales those are based on our existing commercialization agreements including the Takeda agreement. So, the levels of expansion ’07 and ’08 reflect the existing Takeda agreement. If we decided we want to extend that agreement on some basics, we would have to make an economic analysis to well that’s, that makes sense if you would not, but the numbers we showed are the existing agreement.

A - Juan Rodriguez

Ian, the third question in the price increases, we didn’t have price increases in the first quarter of ’06 in the Niaspan of 12% and Zocor 9, Advicor 2% and the other products on a 15% price increases. And as we have mentioned like it’s quite interested and obviously we have been in a very good position with our franchise to leverage the two very important elements of growth and that is one of price and volume increase and I think in the end in the manage care environment where Niaspan is highly differentiated where you get very significant increase in potential, for less than in benefits, we still believe that our pricing that we have at our products is still extremely competitive in the marketplace. When one considers Zocor response in time flashed at over $4 ahead compared to Niaspan which is around about $2.40 so that we think it is very competitive for our product that can significantly decrease core events after 19% this is what you see with staffing so we believe we got good pricing power and we have been in a great position to be also leveraged, that last good maintain in competitive environment.

Q - Ian Sanderson

Okay and I quickly follow up on any update on reimbursement on by CMS under Medicare for deeper Niaspan

A - Adrian Adams

No I think there’s no, so overall what we mentioned as we speculated I think CMS have speculated with a considered Niaspan to be a vitamin products and therefore, its not reimbursable we obviously having discussions with the CMS Niaspan continues to be covered until we beginning of June, to put this into a perspective this applies to a very small proposition of the Niaspan overall sales and its about 1% to 3 %. Its obviously proposed 1% to 3% this is really important Niaspan as life saving therapy and it is not a vitamin being supplements from SGA agreements with so now, so we have ongoing discussion we want to make sure that in the end all patients to prescribe Niaspan get the product what they required to obviously ensure that they have life saving benefits, so that’s the situation we are at this point in time, and that’s all of our life stand on that.

Q - Ian Sanderson

Thank you

A - Adrian Adams

Thank you very much

Operator

We will go next to Steve DeNelsky with Zaffire Capital

Q - Steve DeNelsky

Hi am just trying to reconcile the inventory numbers I thought you said on the third quarter conference call you had about 2 months in the channel what you about $35 million and now you are saying its going to grew up $45 million constrain to reconcile that and if we can just sort of walk through how its going to, how that $45 million its going to slow out in throughout quarter in ’06 thank you.

A - Kevin Clark

Steve let me address that this is Kevin I believed I think you are correct what we said at the end of the third quarter that was that we had about 2 months of inventory in the channel that was an estimate, now it was based on our model estimating and difference between, cripes and take away from the distributors one of the benefits of signing IMA agreements is we now know exactly what the wholesalers had and in point of fact that the wholesalers had a good bit less inventory on hand and then we had been estimating which means by our mass this adjustment is less than would have been employed by 2 months bigger, I think it warning correctly I think its number was more in the order of 1.6 months when we got the actual data, in terms of how that’s going to impact the year we are assuming that about $38 million of that will be in the first quarter and the balance of it will come through the course of the year

Q - Steve DeNelsky

Thank you

A - Kevin Clark

Thank you

Operator

Operator Instructions, We will go next to Stelis Senenar with Buckman & Buckman

Q - Stelis Senenar

Hi may I go back to the 30% to 40% as that relates to the $70, $80

A - Kevin Clark

Yes your question

Q - Stelis Senenar

My question on your 30% to 40% increase in ’07 and how that, that’s relates to the $70, $80 after the non-cash charges 153.

A - Kevin Clark

Well let me say few things that regard if you look at our guidance for the year we are estimating expenses for FAS 123(R) of about $0.55

Q - Stelis Senenar

Right.

A - Kevin Clark

We think that level will be about the same level in ’07 so if you take 30% to 40% above the 225 to 235 and some track $0.55 from that you will be in about the right ball park in terms of our guidance

Q - Stelis Senenar

Okay great thanks a lot

A - Kevin Clark

You will see there was just to hear ways to go

Q - Stelis Senenar

Right good thank you.

Operator

We will take a follow up question from Robert Hazlett with Suntrust Robinson Humphrey

Q - Robert Hazlett

Yeah, thank you very much, just on even can you talk about may be some things that you might be doing to poster seven strips there and secondly if you could give us a status update or as much as you can on the differential for our partner for inhaled insulin or you making provisions to go that along.

A - Juan Rodriguez

Good question on the Teveton Franchise as you know the key differentiating feature of Tevetons and it’s a very good decrease in systolic blood pressure and if this whatever I think that the Teveton light over the course of last number of years, prior to be acquisition by course I think was in the matrix good environment on our key products with Teveton is to enhance the manage curve position with the product to allow us that to pull lock through into the private care environment. As you know our manage care organizations being the extreme successful and that’s the focus we obvious to fully leverage that improve an enhance position and that pull lock through into the private care position area. How many inhaled insulin felt we’re excited about our second generation that inhaled insulin just to reinforce we believe that the combination of our formulation which is preservative free room temperature stable and all device which as people realize when they see the executive device is passing period is highly differentiating we have several ongoing discussions with potential partners, meanwhile I think we are aggressively pursuing getting this product already for page 3 in the other part of 2007, this is situation we’re not be impress to market is a very good thing. We believe that our differentiated position is very high, we believe our inhale insulin at blockbuster potential and the interest in forth booked as with the helping with CRO discussions were for getting while we will not hold up any development for what we see as we in a highly differentiated offset.

Q - Robert Hazlett

Thanks very much

A - Juan Rodriguez

May be we’ll take one more question.

Operator

We will take a follow up from Ken Trbovich with RBC Capital Markets

Q - Ken Trbovich

Thank you Angie and just was a follow up with regard to the inhaled insulin program, the contemplate having to your safety data prior to initiation or at the part of ’07 program and then I apologize as we seek in the royalty side when you see that you include the data agreement, the existent agreement my understand in was originally a three agreement with couple years on the tail is that what is in the model when you looking out the royalties in ’07 and ’08.

A - Juan Rodriguez

A lot of counts, it is a three year co-promotion deal not the follow year or about this year unless we elect to continue that and there are a couple of years of tail payments involved and as Kevin mentioned like obviously those have been reflect in our projections going forward. On inhaled insulin I think one of the other benefits in course of not be in close to market is but obviously the focus in terms of the regulatory packages that is require for products is well defined for the product I think one of the challenges that Visor affect in getting executable approved and its being for a long journey for them is obviously innovation to the requirements to safety date for particularly relation to the potential moderate affects that we’re seeing with that. So we believe that the clinical requirement that we have in place for our inhaled insulin and the several aggress with assuming already to be implement in the first product of next year obviously includes all the parameters but we confident well actually get us through the regulatory process that includes appropriate safety data.

Operator

That concludes the question and answer session for today. I would now like to turn the conference back over to Mr. Adams Adrian for any additional or closing remarks.

Adams Adrian Adams, President & CEO

Thank you, operator and thank you, all for your participation in the call this morning. And of course your ongoing interesting in KOS and is exciting evolution, we will continue to deliver against our short, medium and long-term plan. A plan that we feel will transition this company to be the sustainable best. Thank you so much and you have a wonderful day

Operator

Thanks to everyone and that concludes today’s conference. You may now disconnect.

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Source: Kos Pharmaceuticals Q4 2005 Earnings Conference Call Transcript (KOSP)
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