Forest Laboratories, Inc. F4Q08 (Quarter End 3/31/2008) Earnings Call Transcript

Forest Laboratories, Inc. (FRX)

F4Q08 Earnings Call

April 15, 2008 10:00 am ET

Executives

Charles E. Triano – Vice President Investor Relations

Lawrence S. Olanoff, M.D. Ph.D – President, Chief Operating Officer & Director

Francis I. Perier, Jr. – Chief Financial Officer & Senior Vice President Finance

Analysts

Ian Sanderson – Cowen & Company

Gregory Gilbert – Morgan Stanley

Corey Davis – Natixis Bleichroeder

Jamie Rubin

David Book

Donald Ellis – Thomas Weisel Partners

Marc Goodman – Credit Suisse

Annabel Samimy – UBS

David Lickrish – Broadpoint Capital

Richard Silver – Lehman Brothers

Unidentified Analyst

Gary Nachman – Leerink Swann, LLC

James Kelly – Goldman Sachs

Unidentified Analyst

Presentation

Operator

Good morning my name is Natasha and I will be your conference operator today. At this time I would like to welcome everyone to the Forest Laboratories Incorporated fourth quarter fiscal 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the conference call over to our host Mr. Charles Triano, Vice President of Investor Relations of Forest Laboratories. Mr. Triano you may now begin your conference.

Charles

Good morning everyone. This is Chuck Triano. Thank you for joining us this morning for this fourth quarter fiscal 2008 conference call. Joining me today is Larry Olanoff, our President and Chief Operating Officer and Frank Perier, our Senior Vice President of Finance and Chief Financial Officer.

By now each of you should have seen the earnings release that we point on the wires just before eight o’clock this morning and the release is also available at our website www.FRX.com. By way of the Safe Harbor statement let me add that various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and actual results may be different. That being said, let me turn the call over to Larry who will comment on the business during the quarter.

Lawrence S. Olanoff, M.D. Ph.D

Good morning everyone. I will start today’s call by reviewing key company events for the quarter then turn the call over to Frank who will review the financial details of the quarter and the year. Our underlying business continued to perform well during the quarter as we saw an increase in prescription volume for all of our key marketed products. Reported earnings in the just completed quarter totaled $0.55 per share which included the $0.35 per share charge for our licensing payment to Novexel for rights to NXL-104.

In addition to strong financial performance we also reported on several key milestone events associated with advances in our late stage product pipeline during the quarter including positive Phase III data for a once daily version of memantine in moderate and severe Alzheimer’s disease, positive Phase II-B studies for linaclotide in the treatment of both chronic constipation and constipation predominate irritable bowel syndrome. The launch of Bystolic and FDA acceptance for review of a new drug application for milnacipran in the treatment of fibromyalgia.

Regarding our inline products Lexapro sales in the quarter totaled $577 million an increase of 9% year-over-year while Namenda sales were $226 million during the quarter, growth of 26% year-over-year. It appears that wholesalers collectively had inventory levels approximately one day lower for Lexapro and two days lower for Namenda at the end of the March quarter. This would account for an approximate decrease of $9 million in Lexapro sales and $4 million in Namenda. At the end of the quarter the key national wholesalers held about two weeks of inventory for both products.

Regarding Benicar projected and end user net sales which are recorded by our partner Daiichi Sankyo were approximately $182 million in the quarter with our partnership pre-tax earnings for the quarter totaling $58.2 million. Bystolic sales in the quarter were $11 million. As this is the first quarter of the products launch reported sales are mainly attributed to initial stocking by the wholesalers. As expected, our broad based early experience sampling program affected our reported sales but appears to have succeeded in its objective to drive good early patient and physician experience with the product. We have been encouraged by the early outtake of the product and the early positive response by physicians to the products’ profile and performance.

Regarding managed care contracting, we have completed the majority of presentations with key plans and we continue to anticipate that Bystolic should have unrestricted coverage in tier two or tier three by the end of the calendar year within the majority of the major plans. We continue to channel significant resources behind our large existing development pipeline about which I will go into more detail shortly as well as into launch activities for Bystolic and pre-launch activity for milnacipran while also providing the appropriate level of support behind Lexapro and Namenda. We are near the end of the Benicar co-promotion period and we will be reallocating details and associated investment to Lexapro, Namenda and Bystolic while continuing to receive residual profits on a declining scale for this brand for another six years.

Overall, we are pleased with the strong performance during the quarter from our inline products and very excited about the positive clinical trial results we have reported. I’ll now turn the call over to Frank who will provide more details on the financial results.

Francis I. Perier, Jr.

Fiscal fourth quarter total revenue which are inclusive of sales, pre-tax earnings from the Benicar co-promotion, interest and other income totaled $991 million an increase of 12% from the year ago period. Revenues were comprised of $898.7 million of product sales which increased 10.2% compared to last year, $58.2 million of contract revenue from the Benicar co-promotion agreement, an increase of 27% as well as $31.1 million of interest income. Other contract revenue and other income for the quarter totaled $2.8 million. For the full fiscal year total revenues increased 11% to $3.84 billion while product sales increased 10% to $3.5 billion.

Gross margin in the quarter came in at 76.6%. This level compares to 76.8% in our fiscal third quarter and 76.8% in last year’s fiscal fourth quarter. SG&A spending during the quarter was $327 million up 19.4% from last year. In addition to our ongoing spending levels in support of inline products this quarter included significant investment spending to support the recent launch of Bystolic. For the full fiscal year SG&A spending increased by 10.4%. Research and development spending was $225 million in the quarter and included a $110 million licensing payment to Novexel for the rights to NXL-104 and another $17 million for milestone payments to various partners. For the year R&D spending excluding initial license payments totaled $180 million, increased 21% over the prior year when excluding the IPRD charge for Cerexa and a licensing payment in the year ago period comparison.

As we have completed full year income allocation based upon final results the company’s effective tax rate for the full fiscal year was 20% resulting in an effective tax rate in the quarter of 12.7% for the fourth quarter. The full year effective tax rate was reduced due to a higher proportion of income attributed to lower tax rate jurisdictions principally Ireland. During the quarter the share repurchase program was not active. For the full fiscal year we repurchased approximately 8.9 million shares and we continue to have an additional 15.8 million shares available under the existing $35 million share program. Actual shares outstanding as of March 31^st were 311,407,000.

During the quarter we entered into a transaction with Myland to modify our agreement for Bystolic essentially reducing our royalty payment by 1,000 basis points beginning in 2011 and running through the end of the patent term which is expected to be in 2021. In connection with the modification Forest Holdings, Inc. paid Myland $370 million.

Cash and marketable securities balance at March 31^st was approximately $2.4 billion a decrease of $140 million from last quarter. Of this, $1 billion or 42% of our cash and marketable securities are domiciled domestically with the remainder maintained by international subsidiaries.

I’ll now turn the call back to Larry for a pipeline update and guidance review.

Lawrence S. Olanoff, M.D. Ph.D

As we move into fiscal 2009 we are in the midst of a very busy period where we will be receiving additional clinical trial results for an array of late stage compounds. In addition we are preparing a supplemental NDA for Lexapro for an additional indication of adolescent depression. We have had a preliminary communication with the FDA regarding a potential regulatory pathway for an additional indication for congestive heart failure for Bystolic. Based on this initial communication we believe we are likely to be in a position to submit an application for review with the existing clinical data mainly, the senior study. After we complete our final review of the existing database and study centers we will be in a better position to be more specific on the likely timing of that submission.

As I referenced earlier the once daily formulation of memantine achieved positive Phase III results which we believe are sufficient for a NDA filing. Linaclotide generated very positive Phase II-B results for two indications: chronic constipation and constipation predominate irritable bowel syndrome. With the linaclotide we plan to move in to a full Phase III program for both indications later this year with our partner Ironwood Pharmaceuticals formerly known as Microbia. By midyear we expect to release Phase III results for ceftaroline a fifth generation injectable cephalosporin in two Phase III trials for complicated skin and skin structure infections. In parallel enrollment continues for ceftaroline in Phase III studies for community acquired pneumonia. We anticipate those results in 2009. The data from these two indications if supportive will serve as our planned submission package to the FDA for initial market approval of ceftaroline.

We also expect to report results this summer for two Phase III global studies for aclidinium our long-acting muscarinic antagonist being developed for chronic obstructive pulmonary disease with our partner Almirall. If both studies are positive this could serve as a basis for our future NDA submission. We also expect to have Phase II-B results for RGH-188 in the treatment of bipolar mania later this year. This potential indication may represent a significant opportunity for this compound in addition to an indication for Schizophrenia. Regarding the development pathway for the Schizophrenia indication for RGH-188, the partnership has decided to conduct an additional Phase II-B study which will examine in greater detail the lower dosing regimen from the first Phase II-B study which included a flexible dosing arm ranging from 1.5 to 4.5 milligrams per day. The lower dose range from the first study achieved nominal statistical significance versus placebo which we reported in October of last year. Based upon a full review of data from the first study the partnership determined that it would be prudent to further examine fixed doses of 1.53 and 4.5 milligrams per day in a six week trial in order to better determine the optimal dose to take in to Phase III studies. We anticipate the new study to begin enrollment around mid calendar year.

The Phase II PDE-4 program partnered with Glenmark for Oglemilast will move in to a proof of concept study in COPD in the next month or so. We are also progressing on our earlier stage programs including discovery programs partnered with Gideon Richter and several Indian based specialty CRO companies. While we believe our late stage product pipeline could collectively represented several billion dollars of potential product sales in the next decade, we must operate with the assumption that not all of our late stage programs will ultimately result in approved products or approved products that achieve our peak sales projections. Given this assumption, we view it necessary to double the commercial potential of our late stage product pipeline by 2012 to either advancement of our earlier stage programs or by the addition of new development opportunities.

Moving to our financial guidance for fiscal 2009 this will be a significant investment year on the R&D line as well as the SG&A line as we continue to focus support on our late stage pipeline products and the currently marketed products while also funding a substantial launch effort behind Bystolic. We have also budgeted pre-launch and launch expenses for the potential approval of milnacipran for fibromyalgia. Overall, this leads to a projection of a 27% increase in R&D spending to $625 million which includes a $100 million cost in potential milestones for existing products. We are also projecting a 12% increase in SG&A spending.

We are projecting top line product sales growth of just over 6% and growth of approximately 4% for total revenues which also includes income from the Benicar co-promotion, interest and other income. Lexapro sales are projected to be approximately $2.4 billion next year based upon a price increase already realized, modest declines in market share and total prescription volume growth for the category of approximately 2%. Namenda sales are expected to grow 12 to 13% and Bystolic sales are projected to be approximately $60 million for the upcoming fiscal year.

Our projected tax rate will be approximately 22% for the coming fiscal year and we are projecting average fully diluted shares outstanding at approximately 308 million. Rolling this all up leads to an earnings per share projection of about $3.10 to $3.20 per fully diluted share. We view the increased R&D and SG&A spend as necessary strategic investments as we continue to manage the business with a long term goal of ultimately developing and marketing a portfolio of new products that will collectively more than replace the earnings from Lexapro and Namenda that we will lose when those products marketing exclusivity expires in the first part of the next decade.

Our first priority remains to provide for the future growth of the company’s revenue beyond this period. In addition to advancing our current pipeline and supporting our existing and future in line products we are also actively pursuing new product licensing opportunities and assessing potential acquisitions that can add additional opportunities to our development pipeline and inline products. This combined effort will continue to drive our decision making in allocation of resources as we look forward in to the next decade.

I’ll now turn the call back to Chuck to start the Q&A session.

Charles E. Triano

Before that, I will provide some sales figures for some of our smaller products for the fiscal fourth quarter. For Aerobid sales were approximately $4.3 million, AeroChamber $8.8 million, Campral $8.7 million, Celexa $4 million and as a note we no longer sell generic citalopram. Cervidil approximately $14 million, Combunox $160,000, Esgic $800,000. Our European business approximately $16.9 million, our other generic business $2.2 million, Infrasurf $3.4 million, Lorcet $2.2 million, Monuril $270,000, Tessalon approximately $865,000, Thyroid $14.1 million, branded Tiazac about $1.96 million and generic Tiazac approximately $850,000 for the quarter.

With that I would ask Tasha begin calling for the Q&A session please.

Question-and-Answer Session

Operator

Your first question comes from Ian Sanderson – Cowen & Company

Ian Sanderson – Cowen & Company

You mentioned in the prepared remarks that the SG&A guidance contemplates pre-launch spending for milnacipran in fiscal 09 as well as launch spending. Does the revenue guidance also incorporate some milnacipran sales? If you can kind of roughly give us how might those numbers change if milnacipran were pushed into fiscal 2010 launch?

Francis I. Perier, Jr.

As we indicated we have the investment spending built into the P&L to support the milnacipran launch as well as to support the Bystolic continued investment behind that launch. The corollary would be that yes, we have a sales forecast built in to the plan. We’re anticipating a fourth fiscal quarter launch with a third quarter fiscal approval of the product, similar kind of timing that we had with Bystolic this year and I think you could expect a moderate sales level probably just a little bit below what we had for the load in for Bystolic, the initial stocking for Bystolic this year. We fully anticipate – we’ve built a plan based upon the anticipation that we will get the product approved this next fiscal year.

Ian Sanderson – Cowen & Company

May I ask is that assumption based on any interim feedback from the FDA?

Lawrence S. Olanoff, M.D. Ph.D

What I can say at this point is that the review is going well. There’s no particular assumption other than working on the timeline, PDUFA timeline but there are no snags or hang ups in the review and the questions they’re asking are fairly routine.

Ian Sanderson – Cowen & Company

So just to follow up on Bystolic, sales projections for fiscal 09 what does that assume for formulary coverage and to the timing of that coverage coming on? And actually, could you tell us – you mentioned that you hoped to be tier two tier three with most plans by the end of the calendar year, could you sort of give us a sense of where you are currently?

Lawrence S. Olanoff, M.D. Ph.D

We really haven’t commented on the current representation within the plans. What we said is that we made presentations essentially to the vast majority of all plans. The major plans as well as many of the regional plans and those are going very well on the scientific side. We’re now in the contract negotiation phase and these will rolls in month-to-month or quarter-to-quarter. What our target has been and we stated all along is that we should be on 70% of the plans in either tier two or tier three unrestricted access by the end of this calendar year. Having said that, we expect that the majority of those unrestricted access positions will be tier three to begin with and as pull through grows over time we’ll see opportunities to grow into tier two. But, that mix will be primarily tier three to start. That’s I think, also consistent with what’s been historical legacy of beta blockers within these managed care plans.

Ian Sanderson – Cowen & Company

Okay. We’re hearing that the JNC VIII guidelines may recommend Bystolic and Carbetalol as first line beta blockers. Do you anticipate that and will that have a beneficial impact do you think on the formulary coverage?

Lawrence S. Olanoff, M.D. Ph.D

Can’t comment right now on the new guidelines per say but I think there has been some recognition by the field that the dilating beta blockers have some additional benefit over the class as a whole and may impart certain other benefits in terms of their overall ability to treat a broad range of patients as well as safety and tolerability. So, we would not be surprised if we get some mentioned along those lines based on that distinction.

Operator

Your next question comes from Greg Gilbert – Morgan Stanley

Gregory Gilbert – Morgan Stanley

Frank, can you help us with the potential timing of the $100 million milestone payments and also the tax treatment of milestone payments both for the quarter and for the $100 million for next year?

Francis I. Perier, Jr.

Sure Greg. The milestone payments are pretty much skewed towards the second and the third quarter in the fiscal year so we really don’t expect to make any planned milestone payments in the first quarter and very little in the fourth quarter. Again, it’s more skewed towards the middle of the year. The tax treatment depends upon which company is paying the milestone. If it’s for Forest Holdings it will be a beneficial tax rate, if it’s Forest Laboratories Inc it will be at the full federal rate.

Gregory Gilbert – Morgan Stanley

Okay. Then Larry, can you share with us the timeline for the ambulatory blood pressure studies that’s ongoing or being conducted by Forest and Cypress and how relevant you think the results of that study are for the approvability of the product?

Lawrence S. Olanoff, M.D. Ph.D

We don’t think that study is necessary for the approval of the product per say. We’ve done it as kind of a back up and it really relates – the data as far as the cardiovascular profile of the compound we’re very comfortable with especially given the long term safety record of the product overseas. It’s a product that has been marketed for almost 10 years overseas so all of that data has been provided to the agency. We did this study more in terms of anticipating any potential question for perhaps what is the daily swing of blood pressure and pulse measures and it was purely as a backup strategy. Having said that, the data should be available, the full study data should be available at or around the time of any PDUFA action on part of the FDA and if necessary we can provide them with data even prior to the PDUFA date. So, the study is going well, the recruitment is just coming to near or close.

Gregory Gilbert – Morgan Stanley

One last [inaudible] Larry given that your pipeline building strategy has tended to not require huge sums of cash up front, why not step up share repurchases especially at these levels?

Lawrence S. Olanoff, M.D. Ph.D

That’s a good question Greg and we’ve always taken the attitude that buying back shares is a useful strategy. We’ve spent close to $3 billion over the last few years achieving that purpose so we will look at opportunities. We like to keep a certain reserve of cash available in the US as it’s more difficult for us to seek strategies to recreate cash out of our non-US domicile cash so we work under that general approach. But, when cash is available in the US accounts we do seek to use it for share repurchase on an ongoing basis.

Operator

Your next question comes from Corey Davis – Natixis Bleichroeder

Corey Davis – Natixis Bleichroeder

Just a couple of questions, first Larry could you elaborate a little bit more on the FDA interaction based on the Nebivolol and does it have more to do with the fact that it’s tough to do a placebo control trial? Was their response encouraging or more like a, “Sure submit it and then we’ll decide,” type of thing.

Lawrence S. Olanoff, M.D. Ph.D

I don’t know how much more I can elaborate at this stage. Basically what we’ve always said to the street before was that we have an existing trial that our [Sensao] co-partner in a sense, now partnering in the [inaudible] but someone who markets for us in Europe through a partnership with [Nessence] Menarini has performed a trial some years ago. We think it appears on the surface to be a high quality trial and it has clearly a strong result in terms of a combined levity and mortality end points. It’s a published study, there’s nothing new about that. When we approached the FDA what our argument has been is that this was a good quality study and given the current environment the ability to do another study exactly of that sort or the more traditional issue would be difficult and the agency has in their communications indicated that they are willing to look at the study as supportive for a filing. So, our next steps as I indicated earlier is to finish our audit of the study both the database and the sites themselves and when we have that all in hand we will make a more formal communication relative to our timing.

Corey Davis – Natixis Bleichroeder

Secondly, would you ever consider doing a head-to-head study of spirivia versus aclidinium to prove a better profile or is that too risky of a study? If so, what would the timing of such a study be pre or post approval?

Lawrence S. Olanoff, M.D. Ph.D

That’s always a consideration. Having said that, there actually is some data already from the Phase II experience and the top line data has already been released to show some favorable profiling against spirivia and I believe that data will be released in more detail this spring at an upcoming conference at the American Thoracic Society.

Operator

Your next question comes from Jamie Rubin.

Jamie Rubin

I just wanted to follow up on aclidinium. First of all, have you seen any safety data from your Phase II or Phase III trials even though they were not powered to look at stroke?

Lawrence S. Olanoff, M.D. Ph.D

Good question Jamie. We have looked at the blinded data and the numbers we’re seeing is not raising any concerns. We’re looking at that relative to what varying [inaudible] reported for both their drug and placebo treated conditions and we’re happy with what we’re seeing. We’re not seeing anything to raise any alarms and are still waiting to determine better whether or not it’s a real trial even with spirivia.

Jamie Rubin

Just to follow up on that, if the uplift trial, the uplift outcome trial does reveal a safety issue with spirivia what would that mean for your clinical trials? Do you have to do additional trials? Because, my understanding is that your trials were not powered to look at stroke and I was just wondering if you’ve had those discussions or dialogs with the FDA?

Lawrence S. Olanoff, M.D. Ph.D

No, we haven’t had any specific dialog with the agency. The agency hasn’t raised this as an issue with us and I’m not sure how you would do a study to rule out a negative. What I can tell you is that we have a very large patient experience in the clinical trials that we’re representing as global studies within the Phase III program. In addition, both those trials are run for a duration of a year so we should have enough information to give the agency a reasonable estimate of what the rate of strokes are. I should also state and this is why I’m not certain yet and I think the agency also characterize it as an initial finding, I’m not certain that the issue of stroke with spirivia is a real issue. You have to take into account that you’re dealing with a patient population here who are well in to their typically late 50s, 60s and 70s who many of them have a long smoking history and are already prone to such cardiovascular events. If you look at the rates that you expect just on the basis of demographics the rates they are citing in their clinical trials are well within that range.

Jamie Rubin

Do you think that the outcome study, the uplift trial will resolve this issue once and for all? Or, could it raise concerns?

Lawrence S. Olanoff, M.D. Ph.D

I guess again, depending on what the comparers are it could either raise concerns or resolve the issue. I think that all I’m saying is that the early signals that [eye] has generated and reported is just that it’s an early signal.

Jamie Rubin

Okay. Just one other question, what were your Benicar sales this quarter?

Francis I. Perier, Jr.

They were about $182 million.

Jamie Rubin

Okay. The just finally, your guidance for fiscal 09 suggests a 7% decline in Benicar profits which would imply a significant slowdown in Benicar sales in 09. Can you just explain why you’re thinking that way?

Francis I. Perier, Jr.

We’re not anticipating that the sales will slow down Jamie but that –

Jamie Rubin

I know your profit scales down but still I’m surprised – I would have expected better performance. So in other words your anticipation for the kind of profits is entirely due to the scale down of profitability not because you expect a slowdown in Benicar sales?

Francis I. Perier, Jr.

We definitely don’t anticipate any slowdown in Benicar sales we actually expect them to increase fairly nicely.

Operator

Your next question comes from David Book.

David Book

Just a couple of questions, first on the profit split Benicar can you just remind us how your booking Asor profits if at all in the quarter and whether that will flow in to the Benicar line item? Also, on aclidinium Larry can you confirm that if the Phase II trials are successful that you plan to submit that? Just confirm that you plan to submit that this fiscal year to the FDA?

Lawrence S. Olanoff, M.D. Ph.D

I’ll comment on the aclidinium and I’ll let Frank comment on the question you raised about Asor. With aclidinium what we said is that if the Phase III trials are positive it will be the basis for our submission for the monotherapy. We have a number of issues around this NDA as you would normally expect with an inhaled product and we need to talk to the agency more before we can give a projected date for submission but I don’t know that it will be the end of this year or sometime in the following year. We’re not giving a projected date as of yet. Frank can comment on the Asor question.

Francis I. Perier, Jr.

In the Asor profit split we recorded just over $1 million of income in the current just completed fiscal year 08 related to Asor and have got just below $6 million in the plan right now for Asor.

David Book

Okay. And, where will that be booked?

Francis I. Perier, Jr.

We would – it’s been combined with the Benicar income at the moment.

David Book

Okay, understood. Just one follow up for Frank, on the guidance for the $3.10 to $3.20 for fiscal 09 there are some differences in spending levels but what’s your outlook for gross margin for product sales? Is there any change for rebating that you’re assuming or any decline in gross margin?

Francis I. Perier, Jr.

From a rebating standpoint we expect maybe half a point increase in rebates, nothing significant. The gross margin line is pretty much in line with the gross margin that we just reported. No big changes in gross to nets or in gross margin.

Charles E. Triano

David just one clarification, the Asor number for this quarter was not included in the reported Benicar number.

David Book

Was not included?

Charles E. Triano

No. It was a pure Benicar number that we reported this quarter.

David Book

So, it was in the contract revenue but not split out as Asor?

Charles E. Triano

Right.

Operator

Your next question comes from Donald Ellis – Thomas Weisel Partners

Donald Ellis – Thomas Weisel Partners

I just have two questions regarding pipeline. The first one is regarding the milnacipran and can you tell us if there is anything that you’re seeing in the Lyrica launch that makes you more or less optimistic about the market opportunity in fibro? Then the second question is regarding linaclotide, do you have any idea of roughly how many patients were in the IBS arm in your Phase II trials?

Lawrence S. Olanoff, M.D. Ph.D

In the first question in terms of the Lyrica launch, I mean I think there’s been some fairly positive news in terms of the ability of a major competitor to go out there and begin growing that market. We were happy to launch into a market where we have a number of competitors creating positive noise and recognition of a disease in a growing emerging market such as this. I think it’s all good in terms of getting that information out there and getting the market prepared when we launch. We plan to launch with some differentiating messages as well. The other question you raised related to linaclotide, the studies there were done, the total number of subjects we gave was about 420 patients and in that study we looked at doses, four different doses as well as placebos so you can kind of do the math in terms of the number of subjects. We feel we can get in these types of study designs we can show an effect in anything under 100 patients per group is a fairly positive message in the sense that you’re getting fairly large clinically relevant effects. In terms of going into Phase III we might revise the study somewhat just because we need to generate additional safety data as well.

Operator

Your next question comes from Marc Goodman – Credit Suisse

Marc Goodman – Credit Suisse

Yeah, two questions one is just on the spending for SG&A just overall for the upcoming fiscal year seem to be generally higher than I would have thought. Are you able to tone down the spend at all on Namenda and Lexapro? I mean I understand there is some pre-launch in there still for the new product and obviously Bystolic but I would have thought you were able to tone it down some and just given the level of increase it seems like the increase for Bystolic is pretty significant. Just talk about how your titrating SG&A and help us think about the following year given what you’re thinking about this year. I mean, is this the type of increase in spend we should be thinking about for the following year as well? Just one other question, can you just go over the strategy on the Schizophrenia for RDH going through the other Phase II again?

Francis I. Perier, Jr.

With regard to SG&A spend we have modulated down both Lexapro and the Namenda spending somewhat in 09 versus 08. I think the fact of the matter is with Bystolic we’re launching a very big primary care product and these are the types of investment levels that are required to get the reach and recognition that you need in this market. As we indicated we’ve got fairly significant investment spending behind Bystolic as well as behind milnacipran in fiscal 09 and we’re not really prepared to talk about fiscal 10.

Lawrence S. Olanoff, M.D. Ph.D

I’d just emphasize that we’ve put 2,000 reps behind this product and we see this as a slow steady growth opportunity because we’ve got a long proprietary lifetime of this product and we want to reach its potential over that long period of time. So, we believe this is a very good opportunity to invest in our SG&A spend and with more mature products you can reduce but you don’t want to too early abandon their opportunities as well. It’s a tough marketplace out there, one that we know very well and I think fairly comfortable what we put in by way of spends. Regarding your question on RGH-188 what we indicated is that along with our partner Gideon Richter we’ve decided to pursue a Phase II-B study. The original Phase II-B study, a proof of concept study looked at two dosage ranges. One was 1.5 to 4.5 so it was a six flexible dose type study. The other one was about nine to 12 and it ends up in these types of studies the majority of patients get titrated to the highest dose in the dose range. So, the majority of patients in the low dose group were seeing a dose of about 4.5 milligrams a day. Given the results of that and looking also at the results of some other agents, specifically Abilify that has a profile pharmacologically similar to RGH-188 we’ve decided to explore lower doses as fixed doses within the range we originally studied. So, we’re looking at dose groups versus placebo of 4.5 milligrams per day, 3 milligrams per day and 1.5 milligrams per day. We think that’s the best option. We can do this study relatively rapidly. We’ll start recruiting midyear. We think that’s ultimately the best option to choose the optimal dose to take into Phase III.

Marc Goodman – Credit Suisse

Just one follow up, should we view milnacipran as the same type of launch cost of what you’re putting behind Bystolic?

Lawrence S. Olanoff, M.D. Ph.D

We aren’t giving any particular guidance on specific launch costs for milnacipran but we will be looking to launch that product but with our specialty and primary care sales forces apportioned appropriately in terms of the number of details we openly believe we need to make within that market.

Francis I. Perier, Jr.

I mean, the investment again is going to be a fourth quarter launch next year similar to the fourth quarter launch we had for Bystolic. We’re probably in the range, maybe just below the range of what we spent on Bystolic this year.

Operator

Your next question comes from Annabel Samimy - UBS

Annabel Samimy – UBS

First on aclidinium can you tell us if you’re working yet with the commercial advisory or working with a prototype and how might that affect your NDA filing? And also, related to that is there anything specific about aclidinium in either its specificity or its mechanism that would make you feel more comfortable that there may not be any issues with stroke?

Lawrence S. Olanoff, M.D. Ph.D

I’ll answer the second part first. Again, I want to reiterate that I don’t know if spirivia is really associated with any increase in stroke and I don’t have a specific mechanism to attribute to that finding. So, at this point in time we don’t have a differentiation but I can say that one clear difference between spirivia and aclidinium is that spirivia has a much longer half life in the systemic circulation, it hangs around a lot longer talking about four or five days where we’re dealing with a half life of four to five hours. So, if there is a differentiating factor that could help in a general safety profile and we believe it will also affect powerabilty which is an important selling point is that the drug basically reaches its target destination along its first pass and then gets metabolized very rapidly in the systemic circulation.

The second question you asked is about the device per say. The device that we’re studying in clinical trials for practical purposes is identical to the device we wanted to market. We may have to deal with some additional manufacturing changes over time and we’ll talk to the agency about that but at this point for all practical purposes the design, the delivery pattern and the aspects of that device in clinical trials is for all practical purposes identical to what we will market.

Annabel Samimy – UBS

Okay. On linaclotide do you have any idea of the length of the Phase III program and how large it would have to be?

Francis I. Perier, Jr.

We’ve had some discussion. Annabel, we’re not yet in a position to come out with that information. We’ll have our standard post Phase II meeting with the FDA and we’ll review for Phase III. We certainly have a protocol but it’s not – at this point still premature for us to commit to trial design but we will once we have that solidified.

Annabel Samimy – UBS

Okay. Then one last question on Lexapro, what gets you comfortable that the market is still growing as the relative 2% rate as opposed to just flattening out because in the last few months it’s been looking below 1% to almost flat? Is there anything that’s making you feel it should stay about the 2% level?

Lawrence S. Olanoff, M.D. Ph.D

We’re still fairly comfortable with that projection. You have to look at the seasonality of this market as well. Looking at the numbers just in November and December through January in fact if you look at changes in total Rx they’re running – actually October 07 ran as high as 4.5% but then diminished into November 2.6, December 2.3, January 2.1 and was actually up in February of 08 6.1. So, I think that the 2% range is a comfortable range for us.

Operator

Your next question comes from David Lickrish – Broadpoint Capital

David Lickrish – Broadpoint Capital

Just a couple of quick questions on the clinical experience program, can you explain to me from the time that you initiate that program how long it will take to reach the 30,000 doctors that you have targeted? And, what kind of assumptions do you build into your forecast regarding retention rates, i.e. how many physicians will not only keep the patients on these sample products but then integrate it in to their broader practice going forward?

Lawrence S. Olanoff, M.D. Ph.D

The early experience program we built that in to really the launch few months so January, February, March, I think this month is starting to reflect more in terms of the inherent buy, there’s still some patient starter kits out there, we’re still trying to get in to the occasional high or mid level of doctors and get done experience. We always believe that as with many of our products the attributes of the product are so strong that the best way to realize its differentiating potential is to put it in the hands of the physician and give them an opportunity to see the truth in terms of the patient experience so that’s going well for us.

David Lickrish – Broadpoint Capital

Does that mean that you’ve already contacted or reached out to those 30,000 initial targets?

Lawrence S. Olanoff, M.D. Ph.D

Yes, I would say the majority of those targets have already received their patient starter kits and many of them have already run through those. So, going forward into this quarter there will still be some lingering effect but not a major one. You also should take in to account that we are very heavily sampling this product beyond the early experience program. The early experience program was novel in that each submission target received enough supplies for 10 patients for 30 days of treatment. In addition, we’re out there with a seven day sample bottles for a substantial number of patients as well so those are going on in parallel.

Your comment or your question about the kind of return prescription or repeat prescription rate, so far the numbers we’re looking at are very good. They’re actually riding a bit higher than our experience with Benicar.

David Lickrish – Broadpoint Capital

Just ballpark measures what is that normally 25 to 30%?

Lawrence S. Olanoff, M.D. Ph.D

I think it’s actually higher than that. I think it may be as high as 50%.

David Lickrish – Broadpoint Capital

So I guess my question would relate back to the guidance, if you’re thinking about 50% retention rates or 40% or whatever that’s used in your modeling, doesn’t that suggest that $60 million in terms of total sales for this year might be a little bit conservative?

Francis I. Perier, Jr.

Well, we’re using as an analog the Benicar launch and in the first 12 months of sales we’re probably looking at almost double what the Benicar launch was so we think we’re being – we’ve got fairly realistic in stretch goals in to the launch of this product. And again, it’s a dollar a day medication so we think we’ve built what we think is a pretty firm plan for the launch of this product.

Operator

Your next question comes from Rich Silver – Lehman Brothers

Richard Silver – Lehman Brothers

Can you clarify on the share repurchases whether you’ve assumed any and give us some sense of the quantity in your fiscal 09 guidance?

Francis I. Perier, Jr.

We have assumed some share repurchase activity relative to fiscal 09. I think we will pick it up and in order to average yourself down from the 308 level versus where we finished year end right now kind of give you a sense of where we’re going with it.

Richard Silver – Lehman Brothers

Okay. Then can you tell us in terms of your cash balances some sort of range where you expect to be by the end of fiscal 09?

Francis I. Perier, Jr.

Cash balances assuming steady state with everything that we’ve got right now would be around $3 billion.

Richard Silver – Lehman Brothers

Okay. Then just to make sure I’m clear, on the sales force expansion or potential sales force expansion you have none of that factored in to the fiscal 09 guidance, correct?

Francis I. Perier, Jr.

No. We have no planned expansion of the sales force factored in to fiscal 09.

Richard Silver – Lehman Brothers

And the PDUFA date is October what?

Lawrence S. Olanoff, M.D. Ph.D

It’s October –

Richard Silver – Lehman Brothers

[Inaudible] milnacipran, excuse me.

Lawrence S. Olanoff, M.D. Ph.D

It’s October.

Richard Silver – Lehman Brothers

Okay. But, you’re not providing anything more specific than that?

Lawrence S. Olanoff, M.D. Ph.D

No, we have not provided that.

Operator

Your next question comes from Unidentified Analyst.

Unidentified Analyst

Can you give us some color on the sampling program? When do you expect the sampling program to materially wind down from the launch?

Lawrence S. Olanoff, M.D. Ph.D

We think that the sampling program will continue throughout this year and again, as I said the routine sampling is something we pursue aggressively. As far as the early experience program we think that will be winding down largely through this second quarter of this experience, so the first quarter of our 09 year. Much of that early sampling program I think has reflected itself in the January, February and March time periods. There is some lingering into April and perhaps a little bit in to May and June but the vast majority of these patient starter kits have already been distributed.

Unidentified Analyst

Okay. And on the $100 million milestone again thanks for the color on the timing of those. Can you say which drugs in the pipeline are related to those? I’m sure milnacipran and linaclotide but any other ones as well?

Lawrence S. Olanoff, M.D. Ph.D

We really don’t give detail as far as what products the milestones will relate to. We just generally give the guidance as to the timing of when we expect to incur them. But, anything that should get approved I think you should certainly expect some milestones or significant clinical information.

Operator

Your next question comes from Gary Nachman – Leerink Swann

Gary Nachman – Leerink Swann

First on Lexapro regarding the share losses that you project is that because there will be less detailing efforts behind the product? And, should we expect continued share losses for the next several years or do you think it’s going to stabilize at some point?

Francis I. Perier, Jr.

As far as share loss the only projection we’re given at this point is this year. As far as detailing there’s been some diminution of detailing because of the Bystolic launch we had to fully anticipate that into the budget but with the change in the Benicar contract that now we continue to get revenue for the next six years but we have no spend behind that, that sales force time will be reallocated to Lexapro, Namenda and to Bystolic. It’s great having a cardiovascular trained sales force that can jump in and deal with Bystolic but we also appreciate that Lexapro is still a fairly detailed sensitive product and we’ll make sure we have enough muscle behind that as well.

Gary Nachman – Leerink Swann

Okay. But, there’s nothing in terms of formulary respect you’re seeing, everything is still status quo there?

Lawrence S. Olanoff, M.D. Ph.D

In terms of the top line numbers, in terms of contracts with formularies, if anything we’ve actually improved our situation over the last year. We don’t anticipate any major change there. Our biggest competitor out there continues to be citalopram.

Gary Nachman – Leerink Swann

Okay. On Bystolic, anecdotally is there any use of the product yet in CHF? Or, has it all been for hypertension? Then, can you give a little color on what’s going to be involved in the Phase IV marketing program for the product? It sounds like it is going to be pretty robust.

Lawrence S. Olanoff, M.D. Ph.D

We can’t comment on off label use because we don’t really track that and obviously we don’t promote that. I anticipate that some patients may see it for that purpose but all our discussions have been in hypertension. There may be patients with both hypertension and congestive heart failure where that treatment is appropriate. The other part of your question that related to the Phase IV program, I think what I can tell you and what we said before is you can assume we’re going after the obvious competitors both the current proprietary beta blocker as well as the recently proprietary or commonly used generic beta blockers. All the studies we’re doing are in various categories of hypertensive patients both to expand on the theme that we already have taken to the marketplace which is broad applicability across many different populations within the hypertension sphere without trying to niche it in any particular population as well as it’s tolerability and safety advantages and there are a number of ongoing trials that will trot out results over the next 18 to 24 months.

Gary Nachman – Leerink Swann

Okay, that’s helpful. Then if you ultimately get the CHF indication do you think that would warrant a pricing premium to where you guys are now?

Lawrence S. Olanoff, M.D. Ph.D

We haven’t really thought about that. I’m not sure there’s any logical way of seeking a price premium. We still believe that the majority of the market, the vast majority is hypertension, that’s where we see the growth. We’ve always seen congestive heart failure as a nice to have but not tied in to really what we think is future growth projections for this product. So, it will be an add on but it’s not going to drive our pricing strategies as I see today.

Francis I. Perier, Jr.

Our economics on this product have always been grounded and founded in the hypertension claim with achieving CHF as Larry said, nice to have.

Operator

Your next question comes from James Kelly – Goldman Sachs

James Kelly – Goldman Sachs

I guess just kind of talking about some of the other questions on SG&A and R&D growth, give a little more holistically why I’m looking at two product launches both the Bystolic and the milnacipran, two product launches that are relatively adjacent to where there already is field force and selling efforts help us put that in context with this level of SG&A increase now. And, I know you’re not giving guidance for the years fiscal 2010 and beyond but as we look at the pipeline out there the products are less adjacent so should we be thinking about an even higher levels of incremental spend? Any sort of thoughts you can give around that knowing of course that you’re not giving guidance beyond this year would be very helpful.

Francis I. Perier, Jr.

I think if you think about it, we’re not making any – in fiscal 09 there’s not any sales force expansion contemplated so the bulk of the investment is coming from the supporting materials, the sampling program, etcetera, the messaging and the meetings that take place in the field from a medical education standpoint. Again, these are both primary care detailed products so you’ve got the full reach that you have to invest behind. If you look in to the pipeline they might not be necessarily adjacent therapeutic areas with the exception of [inaudible] most are primary care type of product launches.

Lawrence S. Olanoff, M.D. Ph.D

Just to make a general statement our belief as we stated in the prepared message is that we really need to invest in our pipeline and invest in our new in line products as well as our existing products to maximize that growth. The existing products is obviously the fuel for that engine of investment and we aggressively are looking for more compounds. Our basic focus for now and for the next few years is to really secure revenue growth beyond 2012 and deal with a pipeline that can more than replace over the long term the loss in revenue we’ll experience with the loss of exclusivity on Lexapro and Namenda.

Francis I. Perier, Jr.

I think let’s keep in mind too that both Lexapro and Namenda have both been on the market for quite some period of time now and mature and maturing products and we’ve actually been scaling back the investment behind those products over the last three years to help fund both the R&D pipeline as well as most recently the launch of Bystolic and the pre-launch activity for milnacipran. So, our viewpoint is look, you get one opportunity to launch a product and you have to do it right the first time off the blocks. We’re going to put the investment behind the product that is necessary to ensure a quality launch.

Charles E. Triano

Operator, I think we have time for one more question please.

Operator

Your final question comes from Unidentified Analyst.

Unidentified Analyst

Year-over-year growth in the Namenda new prescriptions, at least according to our numbers looks like it’s been slowing a bit the last few weeks’ high single digits versus say 14 or 15% late last calendar year. Does that jive with the numbers that you have and if so why do you think it’s slowing a bit?

Lawrence S. Olanoff, M.D. Ph.D

Did you say new prescriptions Mike?

Unidentified Analyst

New prescriptions.

Lawrence S. Olanoff, M.D. Ph.D

New prescriptions. We’re looking at the numbers on our own sheets but basically Namenda has always been a volume play for us and this is a product that has opportunity to grow both in terms of share to an extent but largely due to market growth. The market growth we tend to look at both new and totals but we believe that the total typically is a stronger predictor of market growth and looking from October through February we’re still looking at numbers ranging between 10 and 14% rounded up and we’re not seeing any trend on that basis. Looking at the news, frankly at least on our monthly basis we’re not seeing any trends as well. If anything, there’s a trend up. But again, we think total is probably a better predictor and for the moment we may be a little off say 06 numbers but we’re still seeing numbers that can support our volume projections for next year, we’re comfortable with those.

Francis I. Perier, Jr.

Mike, it looks like over time total prescription growth as regressed down towards what we see as new patient growth in the Alzheimer’s market which is in the very low double digit range anyhow. So, I think we are comfortable with where we see the numbers, the data that it is suggestive of being a market that is growing above again what we think new patient growth we think is out there.

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