Noven Pharmaceuticals Q4 2007 Earnings Call Transcript

Noven Pharmaceuticals (NOVN-OLD) Q4 2007 Earnings Call March 27, 2008 8:30 AM ET

Executives

Joseph Jones-Vice President of Corporate Affairs

Jeffrey F. Eisenberg- Executive Vice President, Interim Chief Executive Officer

Michael Dennis Price- Vice President, Chief Financial Officer

Analysts

Timothy Chiang- FTN Midwest Securities Corp.

Michael Krensavage- Raymond James & Associates, Inc.

Ken Trbovich-RBC Capital Markets

David Windley- Jefferies & Company, Inc.

Lei Huang - Summer Street Research Partners

Andrew Shopick-Nutmeg Securities

Noelle Tune-Soleil Securities

Operator

Greetings, ladies and gentlemen and welcome to the Noven Pharmaceuticals 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) It is now my pleasure to introduce you host, Mr. Joseph Jones, Vice President of Corporate Affairs. Thank you. Mr. Jones, you may now begin.

Joseph Jones

Well thank you, Christian and good morning everyone and thank you all for joining us. A short while ago, we announced our financial results for the quarter and the year ended December 31, 2007. With us this morning to discuss our results, provide financial guidance and answer your questions, are Jeffrey F. Eisenberg, Executive Vice President and Interim Chief Executive Officer, Mike Price, Vice President and Chief Financial Officer, and others from Noven.

Before we begin let me remind you that some statements today, including our financial guidance, will be forward-looking. These statements will be made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. Many factors may cause our actual results to differ significantly from the guidance and other forward-looking statements provided today. Please consider the risks, uncertainties, and cautionary factors discussed in our press release and in our SEC filings.

If you are listening to a replay, this call was recorded on March 27, 2008. We may have made announcements since then relative to these topics, so you should review our most recent press releases and SEC filings.

During the course of this call we will refer to certain non-GAAP financial measures. We encourage you to review our earnings release, which is available at noven.com in the investor relations section, for a reconciliation of these measures to their comparable GAAP measures and for an explanation of why management considers these measures useful. Specifically, the non-GAAP measures that we’ll refer to are adjusted net income loss and adjusted earnings loss per share. We’ve excluded three charges from these measures: first a $100.2 million charge in Q3 relating to the portion of the JDS acquisition purchase price allocated to in-process research and development; second, a $3.3 million charge in Q3 related to the voluntary withdrawal of a portion of the Daytrana™ product and third, a $3.3 million charge in the fourth quarter related to separation agreements associated with the departure of certain executive officers, including our former CEO.

Now I’d like to introduce Jeff Eisenberg. For those of you who have not met Jeff, he served as Noven’s Senior Vice President until his current appointment, by the Board of Directors, to the office of Executive Vice President and interim Chief Executive Officer. Jeff also serves as president of the Novogyne joint venture. Jeff?

Jeffrey Eisenberg

Thank you Joe and good morning everyone. I’ll start with the issue that caused us to delay our earnings release and Form 10-K filing. The bottom line is we have resolved the issue, but reporting results today that are unchanged from the preliminary results we announced two weeks ago and we plan to file our 10-K in the next day or so. The issue was whether milestone payments should be deferred and recognized as revenues over time or whether they should be recognized when achieved. Our policy, which we have consistently applied for years, has been to recognize these milestones over time. I am pleased to report that we have received written confirmation that the SEC has completed its analysis of the issue and they have no objection to our current policy. Therefore, there will be no change in our accounting and no restatement of prior period earnings.

Now let’s talk about the pending leadership transition here at Noven. Earlier this year Bob Strauss retired as our CEO and chairman after ten years of service. We have now split the roles of chairman and CEO and Wayne Yetter has assumed the role of Non-Executive Chairman. Wayne has been a director since 2001 and has served as lead independent director since 2004. He is currently the CEO of Airspan and previously served as CEO of Novartis Pharmaceuticals and Astra Merck. As you know, our board is working with a national executive search firm to identify a permanent CEO, and we understand that discussions are under way with some very qualified candidates, to lead the company towards its future in specialty pharma. In the meantime, the board has appointed me to serve as interim CEO to lead the company until the permanent CEO is appointed.

Now those of you who have followed us for some time know that this full year earnings call is generally the form in which we first provide guidance for the current year. This morning we will review our 2007 results and 2008 expectations for our three business units. Right up front, let me summarize our progress and our challenges.

Firs, Novogyne had another record year. It reported its fourth consecutive year of double-digit growth in net income and contributed nearly $36 million to our results through our equity interest. It also distributed almost $29 million in cash to Noven in 2007. For 2008 our guidance will reflect expectations for continued growth at Novogyne.

Noven Transdermals improved in 2006, but we are working to address some issues. This unit saw gross profit on product sales increase 55% compared to 2006, reflecting higher transdermal product revenues and improved gross margins over the prior year. As you know, earlier this year we responded to an FDA warning letter. Our response remains under substance and review at the FDA’s Rockville office. The Florida district office, which originally inspected our facility and issued the warning letter, has indicated that our response appears to be adequate, subject to completion of the Rockville office review. We do expect a follow up inspection to confirm compliance. The programs we’re putting in place to address the FDA’s issues and enhance our quality systems, will increase production costs in 2008, particularly for Daytrana™.

In 2007 we completed the acquisition of JDS Pharmaceuticals, which has been renamed Noven Therapeutics. This is our commercialization arm, selling our Pexeva® and Lithobid® psychiatry products through a sales force. In December the FDA tentatively approved our third psychiatry product, Stavzor™ and Noven Therapeutics is expected to launch that product in the second half of 2008. Funding of launch and revenue recognition rules will limit Stavzors™ contribution in 2008, but Stavzor™ should become increasingly important to our results in 2009.

2008 should include commencement of Phase 3 studies for Mesafem™, our non-hormonal product for menopausal hot flashes. We are currently awaiting FDA feed back on our proposed Phase 3 protocol. If the program moves forward as planned, we expect to launch Mesafem™ in 2011 with a potential revenue impact on Noven that could be transformative even in the early years. Mesafem™ and other products will require significant investments in R&D as well as in sales and marketing in the years ahead, and that is reflected in our guidance. 2008 continues to be an investment year, but we expect will be substantial returns from future periods. In that regards, the board and management remains committed to establishing Noven as a dynamic specialty pharmaceutical company with diversified prospects, control over the success of our products, and a high earnings growth rate.

Now I’d like to introduce you to another member of our team. Mike Price joined Noven in November as vice president and CFO succeeding Diane Barrett. Mike is a CPA who began his career at PricewaterhouseCoopers. He has 25 years of professional experience, including 13 years as CFO of Bentley Pharmaceuticals, Inc., a New York Stock Exchange listed company with domestic and foreign operations. During nine of those years he was also on the Bentley Board of Directors. While Mike has been with Noven for only a few months, he has already made important contributions to the organization. Mike?

Michael Dennis Price

Thanks Jeff, for those kind words and good morning everyone. It is a privilege to be here serving Noven at his exciting time in its history. I know many of you from my days at Bentley and I look forward to meeting and speaking with all of you in the weeks ahead.

I’ll begin my review with Novogyne’s full year 2007 financial results. For 2007, Noven reported a net loss of 45.4 million for a loss of $1.84 per share. This compares to 2006 net income of $16.0 million or $0.66 earnings per share. Excluding the charges that Joe reviewed at the beginning of the call, Noven would have reported 2007 net income of $23.6 million or $0.94 per share.

2007 net revenues increased 37% when compared to 200, but not all of this increase was organic. It reflects Pexeva® and Lithobid® sales for the 4 ½ months of 2007 that we owned Noven Therapeutics and Daytrana™ sales for a full year. It also reflects increased sales of Vivelle-Dot®, due to increased license revenues, due to revenue recognition of additional Daytrana™ sales milestones.

Let’s take a look at 2007 sales by product and category. We recorded Pexeva® sales of $5.7 million and Lithobid® sales of $3.5 million. Sales of Daytrana™ to Shire increased 54% in 2007 to $13.4 million when compared to the 2006 launch year and sales of well-known therapy products in the US and abroad increased 8% to $42.5 million. The gross margin on product sales improved to 37% in 2007 compared to 24% in the prior year. 2007 gross margin benefited from higher product revenues and improved manufacturing utilization. Overall gross margin also benefited from the 66% average gross margins on sales of Pexeva® and Lithobid®, beginning in August 2007. Partially offsetting this improvement were Daytrana™ production and yield issues, a portion of the market withdrawal costs, and higher quality assurance costs, following the Form 483 that we received from the FDA in the summer of 2007. 2007 research and development expenses increased 22% $14.0 million, reflecting a $1.9 million increase in Transdermal clinical research and $1.5 million in total R&D at Noven Therapeutics, Most of which, related to the Mesafem™ and with the MQD projects.

Most of the Transdermal clinical research, related to earlier studies that we under take in preparation for seeking collaboration partners. 2007 selling, general and administrative expenses increased 82% to $39.6 million; the bulk of this increase was the absorption o f $10.2 million in Noven therapeutics expenses, 85% were selling and marketing related. The remainder of the increase in clued the fourth quarter $3.3 million charge for employee separations and $2.2 million related to the third quarter Daytrana™ voluntary market withdrawals.

As Jeff stated, Novogyne had another outstanding year. We recognized $35.9 million in 2007 earnings from Novogyne, which was an increase of 25% compared to 2006. Led by higher sales of Vivelle-Dot® Novogyne’s 2007 net revenues increased 12% to $148.0 million, primarily due while SG&A expenses increased just. 2% .With these significantly higher revenues and only slightly higher expenses, Novogyne’s 2007 net income increased 22% to $79.8 million. As a relative newcomer to Noven, I continue to be very impressed with the Novogyne business and its earnings power.

Now on to Fourth quarter results for Noven and Novogyne. Noven’s fourth quarter 2007 net income totaled $1 million or $0.04 per share compared to net income of $7.1 million or $0.29 per share in the “2006 fourth quarter. Excluding the Separation Charge, fourth quarter net income totaled $3.4 million or $0.14 per share. The decrease in earnings per share reflects the additional sales and marketing expenses, R&D and amortization costs associated with Noven Therapeutics. Our fourth quarter net income increased 35%, for the same reasons that influenced revenue growth for the full year. Noven’s fourth quarter gross margin on product sales of 28% was slightly below the 30% recorded in the 2006 fourth quarter. This decline is notable, however, when you consider the fact that the 2007 fourth quarter included sales of Pexeva®and Lithobid®, with significantly higher margins, largely due to many of the same issues that impacted Daytrana’s margin for the full year.

Fourth quarter costs of goods sold included about $1.2 million in amortization costs associated with sales of Pexeva® and Lithobid® and fourth quarter R&D expenses increased 44%, primarily as a result of $1million in research and development expenses at Noven Therapeutics.

SG&A expenses increased to $16.6 million from $5.3 million in the 2006 fourth quarter, reflecting $6.7 million of additional expenses at Noven Therapeutics and the $3.3 million Separation Charge discussed earlier.

Novogyne contributed $10.8 million to our earnings in the fourth quarter, representing a 16% increase over the 2006 fourth quarter. Novogyne’s fourth quarter net income increased 15% to $22.9 million, while the JDS fourth quarter net revenues increased 11% to $40.1 million, again as a result of higher Vivelle-Dot® sales. Novogyne’s fourth quarter gross margin, at 80%, was slightly improved over the 2006 fourth quarter and its fourth quarter SG&A expense increased 10% to $10.1 million, primarily due to higher expenses and promotional expenses in support of Vivelle-Dot®.

Now I’d like to spend a few minutes talking about our cash position. At year-end 2007 we had $14.0 million in cash and cash equivalents, $21.6 million in short-term investments, and $32.8 million in other investments that we’ve classified as non-current. Significant uses of cash in 2007 included the payment of about $130 million for the acquisition of JDS, tax payments of about $24 million, and $5 million of third quarter share repurchases under our share repurchase program. We also used cash in 2007 to reduce liabilities and to purchase fixed assets. We did not purchase any Noven shares during the fourth quarter. Significant cash proceeds in 2007 included $50 million from Shire, in the form of two $25 million Daytrana™ sales milestones. Almost $29 million in distributions received from Novogyne, and about $6 million from Shire related to our amphetamine patch development program.

Now let’s review the circumstances surrounding our auction rate securities. Our year-end investments included $32.8 million in auction rate securities that we have classified non-current following the failure of auctions since mid-February. This, of course, is not an issue that is unique to Noven. We believe these securities are of high credit quality, as more than 75% of them carry an AAA or AA credit rating, and all of them are considered investment grade. They are collateralized primarily by tax-exempt municipal bonds, and to a lesser extent, guaranteed student loans. None of them are collateralized by mortgages or by collateralized debt obligations. None of these securities were impaired at year-end and we continue to monitor the market and to consider its impact on the fair market value of our investments.

Given the nature or our investments, we believe that this is primarily a liquidity issue and not a credit risk issue and we’re taking steps to enhance our liquidity. Since year end, we’ve successfully liquidated about $17.6 million of our option rate securities and although our current cash flow projections indicate that we should not need to rely on borrowings to fund our 2008 operations, we’re in the process of establishing a revolving credit facility, which should further enhance our liquidity and serve as a back stop for unforeseen situations.

Now moving onto financial guidance for 2008. Our expectations for 2008 reflect the vision of management and the board of establishing Noven as a high growth, specialty Pharma Company. As Jeff noted, reaching our goals will require investments in R$D and sales and marketing that will reduce net income in 2008 from levels that we could otherwise achieve this year. We believe, however, that this investment will result in a longer-term growth rate that significantly exceeds what we could achieve with our drug delivery business models alone.

With that, I’ll ask Joe to review the details of our 2008 financial guidance.

Joseph Jones

Thank you, Mike. I’ll step through the major line items, beginning with 2008 revenues. We currently expect total net revenues for 2008 to be in the $100 to $105 million range. This represents about 20 to 25% growth over 2007. Our revenue guidance includes several components. 2008 revenues will benefit from a full year of Pexeva® and Lithobid® sales. We expect to recognize nominal revenues associated with the launch of Stavzor™ in the second half of 2008, perhaps in the million-dollar range. This reflects the fact that under current accounting principles, we’ll initially recognize Stavzor’s revenues using an estimate of prescriptions filled, rather than upon shipment of product. Stavzor™ will be a much bigger contributor to our revenues in 2009. Based on our partner’s current orders and forecast, we expect our Daytrana™ net sales to Shire to increase about 10% compared to 2007. We’ll report higher license revenues compared to 2007, as a result of the full year amortization of the Daytrana™ sales milestones received during 2007. Finally, we expect Noven’s hormone therapy product sales in the US and abroad to be relatively consistent with 2007 levels. Now that’s Noven’s HT product sales to its partners, not Novogyne’s HT sales to the trade. We do expect the JV sales to increase in 2008 compared to 2007. Note that our 2008 revenue guidance does not include revenues from any product that we may gain access to in order to leverage the Noven Therapeutics sales force. Our business development team is working toward that goal.

Now moving on to gross margin; we expect our overall 2008 gross margin to improve slightly compared to 2007 levels, that is in the 40% range or so. This reflects our expectations for additional quality assurance costs, as Jeff noted earlier. That’s a blended rate for the full year, and as you know our gross margin can fluctuate fairly significantly from quarter to quarter.

We expect our cost of goods sold in 2008 to include about $3 million to $3.5 million in amortization associated with the purchase of Noven Therapeutics products. This isn’t a straight-line amortization, so this amount may vary depending on sales forecasts and other factors.

Moving onto operating expense, we expect total operating expenses for 2008 to be in the low to mid $80 million range. Let’s review how this breaks out between our R&D and SG&A expenses. We expect our 2008 consolidated R&D expense to be in the mid $20 million range. Now this is lower than our prior guidance for two reasons: first, we’re no longer budgeting Phase 3 studies for Lithium QD in 2008. If after our analysis of this project is complete, we do proceed with Phase 3, those expenses will begin in 2009. Second, after challenging the business case for our generic Fentanyl patch program under current market conditions, management, and the board decided to discontinue Fentanyl development. This decision will eliminate R&D expense previously expected in 2008.

Now onto SG&A. We expect our 2008 consolidated SG&A expense to be in the upper $50 million range, including selling and promotional expenses in support of Noven Therapeutics existing products and the expected launch of Stavzor™. This is higher than our prior guidance, reflecting completion of our assessment of the appropriate level of investment and sales force alignment in support of existing and new potential products.

We expect our 2008 equity and earnings of Novogyne to increase about 10% compared to 2007. This reflects an expectation of underlying growth at Novogyne, resulting from a mix of prescription growth and price increases. We expect our interest income to decrease in 2008 compared to 2007, primarily reflecting lower cash and investment balances, following the cash payment for JDS in August 2007.

Finally, we’re still refining our analysis of our effective tax rate for 2008, but for now it would be reasonable to model something in the mid to upper 30% range.

That concludes my review of 2008 guidance and I’ll turn the call back over to Jeff Eisenberg.

Jeffrey Eisenberg

Thanks Joe. Noven’s long-term strategies for growth are balanced across our free business units. At Noven Transdermals we’re working to expand and diversify our transdermal product offerings through new patch development activities and new or expanded industry collaboration. We have the potential to earn and third and final $25 million Daytrana™ sales milestone when Shire sales reach $75 million in a trailing 12-month period. For 2007, Shire reported base internet sales Daytrana™ net sales of about $64 million. Shire recently announced that it has filed for approval of Daytrana in Europe and they said that it’s possible that Daytrana could be launched in Europe in the 2009 time frame. This could be to additional revenues and higher production volumes for Noven, which could assist with our efforts to improve our manufacturing margin. It would also bring additional global exposure to Noven’s products and technology.

Noven and Shire are also working on an amphetamine patch for ADHD that could address the sizable portion of the market that uses amphetamine-based products to treat this indication. At Novogyne, we’re working to maximize our opportunities by continuing effective promotion of Vivelle-Dot® and by working with Novartis to expand the range of products offered by the Novogyne sales force. 2007, the Vivelle family increased its share of the estrogen patch market by almost 5 percentage points to 57% and it gained over a full percentage point in the overall estrogen market. In 2008 we’re working to gain share on both fronts and we are well prepared as we have been in the past to address new competitive entries.

At Noven Therapeutics they are working toward new product opportunities to leverage that unit’s sale and working infrastructure. In December Stavzor™ received tentative approval from the FDA. We’d expect to launch that product in the second half of 2008. Stavzor™ will compete with Abbot’s depacor products with differentiation that includes a significantly smaller size of the high strength and an elegant softgel delivery system. Stavzor™ extended release is in formulation development by Banner Pharmacaps, the same company that developed Stavzor™ and it has the potential to contribute to our results in the year to follow.

As you recall, we have a once daily Lithium product in development called Lithium QD that was unsuccessful in a pivotal Phase 3 trial. We continue to evaluate future development of this product and we expect to complete a thorough analysis before committing to the significant costs associated with Phase 3 studies. We do not expect the organization to complete this analysis until the second half of 2008. As Mike mentioned, in 2008 we have budgeted only four pharmacokinetic studies.

Noven Therapeutics also has an active business development program underway to help us gain access to psychiatry or CNS products that could leverage the therapeutic sales infrastructure. This was always part of the strategy, but following the Lithium QD set back of last year it is an even higher priority for the organization.

In the women’s health arena, Noven Therapeutics has a non-hormonal product for menopausal symptoms that is scheduled to enter Phase 3 in 2008. MesafemTM is a low-dose paroxetine mesylate product for vasomotor symptoms. For the acquisition, the ADS met with the FDA on a proposed methadone protocol and received agency feedback. Subsequently, we submitted a revised protocol incorporating that feedback for the agency’s review and now revised protocol is working its way through the FDA review system. We expect to receive feedback in the near term and then proceed into Pivotal Phase 3 trials. We’re targeting a launch in 2011, and if approved, we believe MesafemTM net sales could be very substantial, potentially exceeding our current revenues several times over, with a very healthy gross margin.

Operator, I’d now like to open the floor to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions) Our first question comes from the line of Tim Chiang. Please state your question.

Timothy Chiang- FTN Midwest Securities Corp.

Hi thanks. I wanted to ask you a question about the gross margins for Daytrana. What sort of time line do you guys expect in trying to get the profit margins back up higher with that product?

Joseph Jones

I’ll jump in on that. Tim, this is Joe. How are you doing, by the way?

Timothy Chiang- FTN Midwest Securities Corp.

Good.

Joseph Jones

We talked a fair amount about some challenges that we had during the year with Daytrana and you’re well aware of them from some of the prior quarters. Some of the things that will help gross margin going forward, potentially, would be adjustments in the possible launch of

Daytrana™ in Europe, this could be a 2009 event, to the extent that that enhances volumes and improves our utilization, we certainly should be able to help things on that front. Also, a number of the things in 2007, if you categorize as one time, I mean the partial withdrawal, as you know, in the third quarter was hopefully an event that was unique to 2007, but it’s a critical goal to work forward and improve our margin on that product, and that we’ll be marching in that direction.

Timothy Chiang- FTN Midwest Securities Corp.

Just a quick follow up; is there any way you can, I notice you didn’t provide any sort of net income guidance for ’08. I mean is there any reason as to why you’re not doing that, even though you’ve provided a lot of detail on the revenue on the cost side?

Joseph Jones

Sure, Tim, I mean you’ve followed us for a long time, and we have not historically provided a net income or EPs guidance. Our policy and our strategy is to provide, I think, a healthy level of guidance with respect to the principle components of the business, and folks who work that through using the ranges that we give on each line item to come down to a bottom line; so, that’s been our historical practice, it’s worked reasonably well so far and that’s the direction we’re foreseeing.

Timothy Chiang- FTN Midwest Securities Corp.

Joe, I don’t know, did you guys give any sort of guidance in terms of how much revenue you expect in ’08 from the products, specifically Pexeva® and Lithobid® ?

Joseph Jones

No, we did not. I mean you do have some prescription information that’s available to you that should help you model on that front. I mean, you know that we had about 9.2 million for 2007 representing a quarter and a half of sales, but at this point, and we might look for other opportunities in the future of public forums to offer additional guidance, but at this point we just indicated that you should expect a full year of sales from Pexeva® and Lithobid®.

Timothy Chiang- FTN Midwest Securities Corp.

Just one last question, Joe; you know the SG&A guidance, the upper $50 million number, does that include additional sales people that you’re going to hire? I mean, what are the components of that number, is it just marketing expenses, much higher marketing expenses associated with Pexeva® and Lithobid® as well?

Joseph Jones

I’ll start on that. Compared to our prior guidance, I think it does reflect enhanced selling and marketing expenses associated with JDS products and in particular, you know we expect to launch Stavzor™ in August or there bouts in 2008, so, we do have a product launch in the second half of the year. Also, as Jeff and Mike noted, the organization just went through a full review of the sales and marketing strategies and plans to maximize, not only the existing JDS products, Noven Therapeutics products, and Stavzor™, but also other products that we may be seeking access to, to further leverage the Noven Therapeutics infrastructure. Therefore, yes it is sales and marketing driven and much of it relates to the Noven Therapeutics effort.

Timothy Chiang- FTN Midwest Securities Corp.

Okay, great. Thanks, Joe.

Operator

Our next question comes from the line of Michael Krensavage of Raymond James. Please state your question.

Michael Krensavage- Raymond James & Associates, Inc.

Good morning.

Joseph Jones

Morning, Mike.

Michael Krensavage- Raymond James & Associates, Inc.

The revenue from the JDS products in the quarter, of 5.9 million, did not cover the SG&A costs which were 6.7 million and then you had the R&D expenses. Therefore, my question is, how satisfied are you with performance of the business now and how long will you tolerate losses for? In addition, the other question is, what is an update on the Stavzor™ patent situation? Thank you.

Joseph Jones

I’ll take the first part. Mike, one thing to keep in mind when you look at Noven Therapeutics or JVS’s performance in 2008 is that the SG&A numbers do include some retention and performance bonuses associated with the JDS/Noven Therapeutics personnel. So when you look at the gross profit from JDS in 2007 and pull out from that about 1 million 6 in amortization and R&D, you get, actually you do end up with the gross profit of the organization as adjusted, coming mean very close to covering selling and marketing expenses; so that’s not the goal, obviously, we’re just building on these products. However, that’s the foundation that we hope to build on with the launch of Stavzor™, the continued promotion of Pexeva® and Lithobid® and hopefully other products that we can acquire. I’ll pass the call over to Jeff for a discussion on the Stavzor™ patent.

Jeffrey Eisenberg

Sure. Stavzor™, as Joe noted, we plan to launch in the third quarter of the year. Stavzor™ is a product that was developed by Banner Pharmacaps, it incorporates Banner’s proprietary softgel delivery technologies and Banner’s file patent that would cover the products, there are currently no issued patents that would cover the product or if they’ve been filed. We feel that the technology that banner employs in the product is unique and we feel that the product will be protected through those technologies, even without patents, for some period of time. Obviously we hope that those patents issue.

Michael Krensavage- Raymond James & Associates, Inc.

Thank you.

Operator

Our next question comes from the line of Ken Trbovich with RBC Capital Markets. Please proceed with your question.

Ken Trbovich-RBC Capital Markets

Yes, just a couple of quick questions. Joe, I guess I wanted to go back, I know you had mentioned in the guidance discussion that you thought the Daytrana™ sales would be up about 10%. Could you go back and remind us again, what the sales were during the full year for last year on Daytrana™?

Joseph Jones

Sure, let me just grab that…

Ken Trbovich-RBC Capital Markets

Then, I’ve got another question, I guess, that I can perhaps give you guys to think about or address. On the sale of the auction rate securities that just occurred, did that occur in the primary market or the secondary market?

Joseph Jones

Let me cover your Daytrana™ question, for full year 2007, Daytrana™, Noven’s Daytrana™ net sales, so that is our sales, our product sales to Shire, was about 13.4 million and Mike will touch on the auction rate issue.

Michael Dennis Price

Sure.

Ken Trbovich-RBC Capital Markets

Okay, thanks.

Michael Dennis Price

This is Mike. Those sales occurred in the primary market and essentially, what happened is, some of the auctions failed and some of them didn’t. Therefore, the ones that did not, we were able to liquidate the securities and even in circumstances where auctions did fail, we had investors step in and essentially assume our position with respect to those investments and take us out of those investments, all at par I should add.

Ken Trbovich-RBC Capital Markets

Okay and any sense then for, obviously the decision making process around what portion then, of the securities, were classified as long term rather than somehow recognizable or likely to be liquidated this year?

Michael Dennis Price

Right, right. Well what we did was we assumed that for any that we had not liquidated as of the date that we issue the financial statements, we will classify as non-current. So, the ones that we have been able to liquidate since year end, we’re going to consider current, and incidentally, I should add that late yesterday afternoon we were able to liquidate a another 1.3 million of these auction rate securities, even though the auction did fail.

Ken Trbovich-RBC Capital Markets

Okay and then just as it relates back to some of the commentary around the R&D, I didn’t hear any mention about preparation for life cycle management of Vivelle-Dot®. I know in the past there has been discussion of next generation and beginning the process of developing the next generation; where are you at in that process and is there any spending plan for ’08 in that regard?

Joseph Jones

We haven’t given specific guidance on that project or those specific expenditures, but we can tell you that it’s something that we are actively looking at and working on. If it gets to the point where we are in active development and we have some clinical results, we can start discussing that, but that is something that we’re quite focused on.

Ken Trbovich-RBC Capital Markets

Okay. It sounds like a maybe not in the number?

Joseph Jones

We do have some expenditure in our R&D line associated with that effort.

Ken Trbovich-RBC Capital Markets

Okay and then just following up on the Mesafem discussion, unfortunately I’ve been through some experiences with dialogue with the FDA around whether Phase 3 protocol can be extended. That would be positive during these, but obviously delay the program. How much sensitivity is there in the R&D spend if the FDA, you know, comes back with additional questions as opposed to simply signing off on the protocol?

Joseph Jones

I’d say a fair amount of sensitivity in the R&D line if that were to happen. I mean we, frankly we’re hoping for feedback by now, we would have hoped we would have received something by now. The FDA, as everybody is well aware, is having resource issues. As of now our plans haven’t changed, we still intend to start Phase 3 in 2008, relatively soon, but clearly if we don’t get the feedback from extended period of time, which is not what we expect, but if that were to happen that would delay the program and it would also delay the expenditures ,and a fair amount of the R&D the second half of 2008 is associated with Mesafem.

Ken Trbovich-RBC Capital Markets

Okay and are there any contingency plans where, if that happens, where you might simply invest those dollars in other programs?

Joseph Jones

I think that’s possible, but, I mean, I think the way you should analyze it, with the information you have right now, Ken, is if there were a slippage, we don’t have any reason to expect that at this time; but if there were, you know, some portion of 2008 guided R&D would likely move to 2009, but quantifying it more than that at his point is a little bit premature.

Ken Trbovich-RBC Capital Markets

Okay and then just one last question. Just in terms of the overall, sort of, the overall direction of the business as it relates to pipeline development, you know opportunistically, if you are able to find products to drop into the therapeutic bag, it obviously becomes almost immediately accretive, regardless of what the products may be; are there area’s where you see opportunities in terms of business development for either co promotions, or in licensing, or where do things stand in terms of trying to leverage that therapeutics business?

Joseph Jones

Well we have a very active program underway, evaluating opportunities can do just that, a variety of different types of opportunities including co promotions, and licensing product acquisitions, it’s hard to put a timeline on that. I mean we’re looking for the right opportunity at the right price, so it’s hard to say a specific time when that might happen, but that is something that we’re actively working on and we spend a good part of every week just on that effort.

Ken Trbovich-RBC Capital Markets

Okay, thank you.

Operator

Our next question comes from the line of David Windley, with Jefferies & Company. Please proceed with your question.

David Windley- Jefferies & Company, Inc.

Hi, thanks for taking the questions, I have a few. Following up on the Daytrana questions there, do you also have a gross profit number or a gross margin number, something along those lines either for the quarter or the full year for Daytrana?

Joseph Jones

We’re not offering one at this point, Dave, sorry about that. I mean if you could just work from our overall gross margin number that we provided for the business.

David Windley- Jefferies & Company, Inc.

Am I remembering incorrectly, isn’t that a margin number that you’ve given in the past?

Joseph Jones

Are you asking historically, Dave, or for 2008?

David Windley- Jefferies & Company, Inc.

No, historically.

Joseph Jones

Oh, I’m sorry. Sorry about that Dave, I thought you were talking about 2008 guidance.

David Windley- Jefferies & Company, Inc.

No, for the quarter or full year of 2007.

Joseph Jones

Yes. No although the first half of 2007 for Daytrana had a reasonable margin, the second half, with the issues that we faced, that we talked about today and talked about in the third quarter, there was no margin on Daytrana in the second half; so if you look at, on a blended year basis, and this is why we need to do much better, we did not have margin on Daytrana.

David Windley- Jefferies & Company, Inc.

For the full year?

Joseph Jones

That’s correct. That’s only with respect to our product revenues obviously, there is obviously the amortization of the milestones that we perceive et cetera that are in revenue, but with respect to our product revenues, our product sales to Shire, there was no margin.

David Windley- Jefferies & Company, Inc.

Okay. Is it possible to quantify the quality assurance costs that you’ve put in place, and to what extent are those ongoing?

Joseph Jones

Well we haven’t quantified specifically the component of ’08 expected expenditures that constitute those efforts, but those efforts will be, in some cases, short-term efforts and in some cases will be ongoing. What we have done is enhanced and we’re in the process of enhancing our quality systems and

-->

some[Author:LSC]

[Author:LSC]

of those efforts will be sustained. So it is a challenge for us, right now, the Daytrana margin situation, it will continue to be a challenge. I mean, as Joe said, it is certainly our corporate priority to do everything we can to increase those margin, but in the face of fairly flat volumes as well, it is a challenge.

David Windley- Jefferies & Company, Inc.

Right, okay. On the R&D spend, on the last quarters conference call the target was around $5 million and it obviously came in short of that; was that related to some of the same reasons that are leading to R&D guidance in ’08 being lower than prior, or were those, you know, basically what was the under spending in the fourth quarter on R&D?

Joseph Jones

If I could just stay general on that Dave, I think it’s the mix of the impact of the elimination of some of the projects we talked about in R&D guidance and timing issues with respect to the commencement of certain programs. Other than the Fentanyl program discontinuation, there has not been a determination of any public programs that you would be aware of; it really is timing and the elimination of those expenditures that we talked about.

David Windley- Jefferies & Company, Inc.

Okay and then coming back to Daytrana, a little longer question here. It looks like from the numbers you’re giving that fourth quarter Daytrana, you know, revenues of Noven, sales to Shire were sequentially down, as I believe Jeff mentioned, your prescription volumes or their prescription volumes in the marketplace are relatively flat for most of the last quarter or so, and I guess I’m just wondering from where do you get the comfort that you can see 10% growth, in I believe that’s what you said, in Daytrana sales. I mean it can’t be for sure, but it appears to me that the manufacturing issues have had a very negative and perhaps permanent impact on the long-term opportunity for Daytrana. I wonder about the growth of that product and I wonder about Shire’s enthusiasm for that product. Can you comment on that please?

Joseph Jones

I guess that’s a couple of points. First, in terms of the ’08 revenue guidance, I mean our ’08 expectations are based on forecasts and orders that we receive from Shire, so that’s how we based the 2008 guidance on Daytrana. When you look at a specific quarter, you’re talking about the fourth quarter of ’07, I mean timing issues do affect our quarterly results, so you won’t necessarily see a direct correlation between our sales to Shire in any quarter and their sales out are prescription, you know, that’s a period issue. When you talk about generally whether the manufacturing issues have had an impact, certainly I would agree that it appears that they have had an impact. There have been other factors that have an impact as well, including the Stavzor launch, but the reality is that we believe that the manufacturing issues have had an impact and we’re continuing to work with Shire to further improve the product and to improve that situation. The question of whether Shire has enthusiasm for the product, I mean Shire has filed for the product in Europe, I think that is pretty good evidence of continued enthusiasm and plans to grow the brand globally and that’s what we would expect to see over time.

David Windley- Jefferies & Company, Inc.

Have you had any issues with access to raw material for producing the product i.e. BEA quota?

Joseph Jones

Well during 2007 we did have some periods of time when the flow of API was inconsistent and in some cases it was due to delays in receiving quota and in other cases it was just due to inconsistent shipments from the drug manufacturers. For 2008 we have received, you know, a pretty good quotient of the quota we applied for. Nobody gets 100% anymore, it just doesn’t work that way anymore, but we received a pretty good portion and we wouldn’t expect, we certainly can’t assure this won’t be the case, but we wouldn’t expect to have quota issues during 2008 that will impact the supply of API.

David Windley- Jefferies & Company, Inc.

Okay and my final question here is around the business development activities that you referenced a couple of times. I guess if I don’t with hold my own opinion and just refer to the market, I think it’s pretty clear that the markets not too satisfied with the JDS acquisition and I guess my very blunt and straight forward question is, are you sure you have the right strategy and people in place to execute business development transactions in light of the lack of enthusiasm for the JDS acquisition by investors in Noven. Thanks.

Joseph Jones

Well let me start with the question on strategy. I think as we mentioned a couple times, the strategy that we’re following now, the strategy that was developed together with our board of directors is the strategy that our board and management is committed to execute on, and part of that strategy always has been to add products to the Noven Therapeutics portfolio for business development efforts and ultimately through organic R&D efforts. Now, with the question of people, we are in a management transition phase. We are, as everybody realizes, looking to bring in a permanent CEO. I can’t tell you that a new permanent CEO won’t take a look and tweak some of our strategies, that’s certainly possible. However, we believe we have quality people in how to do this evaluation and to execute these transactions and that’s the path we’re on.

David Windley- Jefferies & Company, Inc.

Okay, thank you for answering my questions.

Joseph Jones

Thank you, Dave.

Operator

Our next question comes from the line of Lei Huang with Summer Street Research Partners. Please proceed with your question.

Lei Huang - Summer Street Research Partners

Thanks.

Joseph Jones

Good morning, Lei.

Lei Huang - Summer Street Research Partners

Good morning. I have a question on your guidance. What kind of assumption are you making in there about your third sales milestone from Shire, and is there anything included in your ‘08 guidance for that?

Joseph Jones

No, there is nothing in our guidance with respect to the third Daytrana milestone. With that, specifically, we do expect to ultimately burn that milestone, assuming that we’ve gotten past the issues associated with our warning letter et cetera. Therefore, we would expect to receive that, but we’re just not giving a time frame at this point.

Lei Huang - Summer Street Research Partners

Okay and then as far as the higher production costs associated with Daytrana. Is it that, and I know you’re not providing line guidance for the margin specifically, but is it fair to assume that given the ongoing production issue, at least in the near term, that there isn’t likely to be margin associated with Daytrana for, perhaps the first half of the year, but maybe for the full year there will be margin?

Joseph Jones

Yes, really we’re not going to go that detailed in our margin guidance at this point, Lei, but I do, I promise you that a reasonable opportunity down the road as we update our guidance, we’ll look for some ways to bring some clarity to that.

Lei Huang - Summer Street Research Partners

Okay and then off on Daytrana, has Shire talked about any interest in getting the product approved in the US for adults?

Joseph Jones

Well that’s, they have not done anything about that publicly and we would defer to Shire on questions like that, on their strategy.

Lei Huang - Summer Street Research Partners

Okay, if they were to do something, how would Noven be involved? I mean would Noven be involved in the clinical trial aspect of it as well?

Joseph Jones

No, what would happen is Shire decides to pursue a different indication or a different patient population that they would design and conduct the clinical program. It would be involved through our normal; you know we would manufacture clinical supplies for them…. [indiscernable]

Lei Huang - Summer Street Research Partners

Clinical supplies, okay. Data, okay fair enough. Then on the other part of the guidance, someone had asked earlier about your higher SG&A guidance. If we can just visit that for a minute. It seems like relative to your last guidance for SG&A, it’s higher by about 10 million, so I’m trying to understand, on the margin, what has changed. I mean we knew that the Stavzor launch was coming sometime in third quarter and there will be increased launch costs and marketing costs, we knew that there was sales marketing support for a full year behind Pexeva and Lithobid, but on the margin, what’s contributing to that $10 million figure, can you break it down some more?

Joseph Jones

You mean break it down, I don’t think we can break it down in any more detail. We can say that generally, as we alluded to earlier, we have undergone a careful review of what the appropriate level of expenditures are for 2008, for totally existing products and prepare for the Stavzor launch and to petition the franchise to take advantage of future opportunity and determine that we’ve reached what we believe is the appropriate level of expense in 2008, and we characterized 2008 as an investment year. So, I think when you look at it that way, we believe we are positioning the organization to be positioned for significant growth going forward, but 2008 itself is an investment year.

Lei Huang - Summer Street Research Partners

Is it, would you say it’s more, can you say if it’s more on the head count side or more on the marketing side?

Joseph Jones

It’s more on the head count side when it comes to the therapeutics.

Lei Huang - Summer Street Research Partners

Okay, so it sounds like May and combined with what you said about this development, so it sounds like you’re preparing for a possible business development deal that could leverage a bigger sales force and that’s why you’re upping that head count.

Joseph Jones

Well I don’t want to get on this Lei, I mean strategy doesn’t depend on that. The decision we made was what we believe is the right one to maximize the opportunity in our existing product line. It has the associated benefit, we believe, of positioning us stronger, in a stronger position to take advantage of business development opportunities, but we don’t feel like we’re getting ahead of ourselves on that\.

Lei Huang - Summer Street Research Partners

Okay fair enough and then just last question regarding, oh back on the gross margin items. Can you provide any color on your margin assumption on the Novogyne piece of it?

Joseph Jones

I’m sorry Mike, could you just

Michael Dennis Price

On our sales to Novogyne?

Lei Huang - Summer Street Research Partners

Sorry, I meant the gross margin in the Novogyne product revenues - is that relatively stable?

Michael Dennis Price

Yes, if you’re talking about our gross margin on our hormone therapy product sales to Novogyne.

Lei Huang - Summer Street Research Partners

Right, your sales, not the equity piece.

Michael Dennis Price

Right. I don’t have the number right at my fingertips, but it’s you know, let me just research that for a second and Lei, I’ll follow up with a little bit more color on that in the course of this call.

Lei Huang - Summer Street Research Partners

Okay, well that’s it for me for questions. Thank you.

Operator

Our next question comes from the line of Andy Shopick with Nutmeg Securities. Please proceed with your question.

Andrew Shopick-Nutmeg Securities

Thank you and good morning. I think Dave’s question was very well phrased and the proper question to ask and I thank you for at least, your response to that. I do want to ask a follow up question about the auction rate security situation. Where are you currently investing proceeds from liquidated ARS’s?

Michael Dennis Price

We are keeping those very safe and very liquid. We’re putting them in money market funds to make sure that we do have access to those during 2008.

Andrew Shopick-Nutmeg Securities

Do you have any concerns about the status of the money market funds? Because I am hearing from some other CFO’s I’ve talked to about the situation, about some reservations about whether some of these money market funds may also be exposed to , so called, breaking the buck. Are you hearing anything like that, anything in the system that you’re watching?

Michael Dennis Price

We have had, we have daily discussions with the group that handles those for us and yes, I have heard that, and we monitor it on a daily basis. But we certainly want to make sure that we take all of the steps to eliminate this liquidity issue as opposed to further complicate it.

Andrew Shopick-Nutmeg Securities

Did I hear you say that you have sold another 1 plus million in auction rate securities in the last day or two, even though the auction failed?

Michael Dennis Price

That’s right, yesterday that happened, 1.3 million.

Andrew Shopick-Nutmeg Securities

And, are auctions continuing to sale pretty much across the board in this area of the credit markets?

Michael Dennis Price

I would have to say yes.

Andrew Shopick-Nutmeg Securities

Okay, thank you very much.

Michael Dennis Price

Okay.

Operator

Our next question comes from the line of Timothy Chiang with FTN Midwest Securities. Please proceed with your question.

Timothy Chiang- FTN Midwest Securities Corp.

Hi, thanks. You know I went through the trouble of plugging in your assumptions into my model and you know, I get to around pre tax income of around $14 to $15 million in ’08. Is that something that’s, is that a number that seems appropriate or a ball park at least? Again, I wanted to address this question to you Mike. Obviously you guys have run some of these scenarios out. Is that a number that you think is within the ballpark?

Michael Dennis Price

Tim, let me just jump in here and then I’ll let Joe add some color here. You know, I think we attempted to not give a bottom line number because, as you can see, there are ranges that we provided and depending on where you model out in those ranges provided, you can come up with a range on the bottom line.

Joseph Jones

Yes, Tim, I’m sorry, we’re not going to confirm or speak to the reasonableness of an EPS number. There are some fairly wide ranges in some of the line items we gave, which with your expertise and the other information you have about the market, you’ll make choices with respect to those line items, and that will fall through your model. So, I’m very sorry, but we’re not going to speak to the reasonableness of an EPS number at this point.

Timothy Chiang- FTN Midwest Securities Corp.

Okay, great. Thanks.

Operator

Our next question comes from the line of Noelle Tune with Soleil Securities. Please proceed with your question.

Jeffrey Eisenberg

Good morning, Noelle.

Noelle Tune-Soleil Securities

Good morning, how are you?

Jeffrey Eisenberg

I’m doing pretty well, thank you.

Noelle Tune-Soleil Securities

Great, just a couple of quick ones here, on Daytrana, I just want to make sure that I understand. Can you clarify that the third milestone does hinge on resolution of the warning letter in addition to the sales levels?

Jeffrey Eisenberg

I mean I don’t know, this third milestone is payable under the same terms as it always has been, that’s $75 million in trailing 12 month Shire sales.

Noelle Tune-Soleil Securities

Okay, so it’s not contingent upon the warning letter being lifted?

Jeffrey Eisenberg

It is not, that’s correct.

Noelle Tune-Soleil Securities

Okay. Then, stepping away from the Daytrana format, I’m wondering if you guys can comment on any internal planning you’ve done for the potential competitive launch of Evamist?

Jeffrey Eisenberg

Sure, that’s a good question Noelle. We have, as I’m sure you are aware, had a couple of situations in the last several years where we’ve had new competitive entries. Namely in the last couple of years claims in gels and variety’s came from the gels end of the market, with in some cases some pretty good hype. I think it’s fair to say that our Novogyne sales and marketing organization has done an outstanding job in each of those cases, preparing for those competitive entries and frankly, those products have not made significant inroads into the market at all. We’ve actually grown share since those products were launched. Evamist is a potential competitor we’re obviously taking very seriously. We are prepared for them. They have, you know we expect KV to have a significant sales force behind that product and a sales effort. We believe that we have, I think the market share gains we’ve achieved demonstrate this, and we believe we have the best product in the market. We believe that we still have the best product in the market once Evamist launches and while we certainly expect them to , you know, again, be a formidable competitor, we believe our sales force is very well prepared for that launch.

Noelle Tune-Soleil Securities

Okay, thanks for the comments, and then, one last question, quickly. Joe, when you gave the gross margin guidance for ’08, was that product margins or a total gross margin?

Joseph Jones

That was our gross margin percentage on product sales.

Noelle Tune-Soleil Securities

Okay, so in the 40% range.

Joseph Jones

That’s correct.

Noelle Tune-Soleil Securities

Okay, great. Thanks so much.

Operator

Our next question comes from the line of Ken Trbovich with RBC Capital Markets. Please proceed with your question.

Ken Trbovich- RBC Capital Markets Corp.

Yes, just a quick follow up. Mike, I guess we talked about some of the negatives on the auction rates securities. One of the things, I guess it’s a positive, we haven’t heard is what do the yields look like on those securities you still hold?

Michael Dennis Price

That’s a great question, I should have mentioned that in my earlier response. You know what happens when these auctions fail is, the interest is than payable at the maximum rate that’s allowed for in the indenture agreement, and those rates vary, but they’re typically tied to an index or some stated rate, but our interest earnings on the portfolio have ranged anywhere from 3.5% up to 12%.

Ken Trbovich- RBC Capital Markets Corp.

And those are on the auction rates specific securities?

Michael Dennis Price

That is right, during the sale year period.

Ken Trbovich- RBC Capital Markets Corp.

Okay and then so are most of these then, once they fail, they’re triggering up to the max rate?

Michael Dennis Price

That’s right depending upon, each of them vary depending upon what the indenture calls for.

Ken Trbovich- RBC Capital Markets Corp.

Okay, terrific, thank you.

Michael Dennis Price

Sure.

Operator

Mr. Jones, there are no further questions at this time.

Joseph Jones

Thank you, Christian. Just doubling back to Lei’s question from earlier, with respect to our gross margin on our sales to Novogyne, with respect to 2007, you’ll see in our 10-K that will be filed in the next day or so, that our gross profits for 2007 on those sales to Novogyne were a bit north of 50% and when you consider our overall guidance for the company for 2008 of about 40%, you should consider that the additional quality costs that Jeff and Mike both referenced earlier, they are able to be spread across the organization and aren’t just all allocated to Daytrana. So that does put a bit of pressure on each of the product areas and that should be considered when you are thinking about 2008 margins on our product sales to Novogyne.

So with that , I want to thank you all for joining us on this call, and for the patience you’ve shown between the last time we were going to announce results and today. We are really glad to have gotten past the issues that led to that delay. We’ll be available through out the day and in the coming days to answer any additional questions you have. We appreciate you joining us this morning, and have a good day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participations.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!