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Executives

Allison Wey - Senior Director, IR and Corporate Affairs

Pat LePore - Chairman, President and CEO

Gerry Martino - COO

Veronica Lubatkin - CFO

John MacPhee - President of Strativa

Paul Campanelli - President of Par's Generic Division

Analysts

Randall Stanicky - Goldman Sachs

Gregg Gilbert - Merrill Lynch

Anant Padmanabhan - Cowen & Co.

Adam Greene - JPMorgan

Richard Silver - Lehman Brothers

Jim Dawson - Buckingham Research Group

Morty Schnerr - BNP Paribas

Par Pharmaceutical Companies Inc. (PRX) Q1 2008 Earnings Call May 9, 2008 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to Par Pharmaceutical's First Quarter 2008 Earnings Call. My name is Jasmine, and I will the operator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Ms. Allison Wey. You may proceed ma'am.

Allison Wey

Good morning. Thank you. Welcome to the Par Pharmaceutical's earnings call to discuss the company's first quarter 2008 results. I hope you've had a chance to review the press release, which we issued yesterday afternoon. A copy of the press release is also available on our website at www.parpharm.com.

In addition, we are conducting a live webcast of this call, which is also available on the website. We're joined this morning by Pat LePore, Chairman, President and CEO; Gerry Martino, Chief Operating Officer; Veronica Lubatkin, Chief Financial Officer; John MacPhee, President of Strativa, and Paul Campanelli, President of Par's Generic Division.

Pat will provide opening remarks and comment on our achievements here today. Veronica will provide detail on the first quarter results and our outlook for 2008. Paul will provide some insight on the potential of Par's generic pipeline through 2012. And after Pat's closing remarks, we will open the call for questions.

Please note that today's conference call and webcast may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent any statements made on this call contain information that is not historical; these statements are essentially forward-looking and are subject to various risks and uncertainties detailed in the company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to Pat LePore.

Pat LePore

Thank you. Welcome and thank you for joining us today as we review Par's results for the first quarter of 2008. For the first three months of 2008, Par had revenues of $154.9 million and net income of $2.6 million or $0.08. Adjusting for a $5 million payment to Alfacell for the commercialization rights to ONCONASE, earnings per share were $0.17. This is compared with reported revenues of $234.2 million and net income of $41.5 million or $1.19 per diluted share for the same period in 2007. Adjusting for a one-time $20 million gain, earnings per diluted share were $0.84 in the first quarter of 2007. The decrease in revenues primarily reflects a year-over-year decline in new generic product launches and increased pricing pressures on existing generic products. However, we saw a 29% increase in Strativa's revenues from Q1 2007, driven mainly by increased net sales of Megace ES.

Before Veronica goes into the details of our first quarter results and Paul takes you through the generic pipeline opportunities, I want to take a minute to highlight some of the accomplishments we've made in both of our businesses in the first four months of this year. These accomplishments are evidence that we are executing on the strategy which we introduced at our Analyst Day in September, which should help make the case to our investors as to why we believe the value of our company can grow significantly in 2009 and beyond.

Working towards a goal of $250 million in annualized revenues by year-end 2010, Strativa announced in January that it had acquired the commercialization rights to ONCONASE from Alfacell, currently in development for unresectable malignant mesothelioma. Phase III results are currently being analyzed, and we expect to announce the results during the second quarter. If approved, we believe that ONCONASE has the potential to provide Strativa with a unique oncology platform with orphan drug status, strong intellectual property and future expanded indication opportunities.

In March Par began bioequivalency studies for Zensana, following the stability tests that were initiated in Q4 of 2007. Assuming successful completion of the studies and discussions with the FDA, we plan to file an NDA around the end of this year. Datamonitor estimates the commercialization potential for Zensana in the United States to be over $110 million in peak annual sales.

Last month top line results from a Phase III study were announced for Loramyc, our most advanced branded pipeline product. Loramyc is a local nuclide piece of buckle tablet of miconazole and is in development for oropharyngeal candidiasis or OPC. Loramyc achieved the protocol specified primary and secondary endpoints that required non-inferiority to the Mycelex Troche. These endpoints included clinical cure after seven and 14 days of treatment, clinical improvement and partial response. Analyses of the study continue, and a pre-NDA meeting with the FDA has been scheduled.

Assuming a continued favorable review of the data and positive discussions with the FDA, we plan to file a NDA in the fall. At a branded price, this market is worth approximately $500 million in annual net sales, similar in size to the megestrol market, in which we compete with Megace ES. The dynamics of the OPC market are similar to the megestrol market in that it is a well-established category that has been genericized for years, and Strativa is bringing to market an innovative new formulation. As with Megace ES, the key to a successful launch are securing reimbursement and generating trial among OPC treaters. Accordingly, we consider Megace ES to be a good proxy with commercial potential of Loramyc.

And just earlier this week, we announced that we amended our agreement with Spectrum Pharmaceuticals for $20 million to increase our share profits from the generic versions of GlaxoSmithKline's Imitrex injection. This will be immediately accretive to 2008 earnings and will provide a strong return on the company's investment. As a result of the agreement, Par's profit share will increase from 38% to 95% from the commercialization of sumatriptan injection.

To summarize, we're building a foundation for future growth, and we're excited about the prospects in both businesses, and are working diligently at maximizing profitability and improving shareholder value.

Now I will turn the call over to Veronica to cover the details of our financial results.

Veronica Lubatkin

Thank you, Pat. Good morning. I'm taking you through our results for the first quarter of 2008. I will start with a few comments on our revenue and gross margin results.

Total revenues for the three months ended March 29, 2008 were $155 million, decreasing 34% from total revenues of $234 million for the same period last year. Revenues for generic products in 2008 were $130 million, decreasing $85 million or 40% from generic revenues of $215 million in 2007. Lower generic revenues in 2008 were driven by competitive pressure, including for fluticasone, which declined $32 million, propranolol declining $26 million, amoxicillin down $14 million, tramadol down $6 million, glyburide/metformin declining $4.5 million, cabergoline which decreased $3 million, and lower royalties driven by ondansetron tablets, which launched during the fourth quarter of 2006. Partially offsetting these declines were increased sales of metoprolol resulting from the launch of additional strength in the third quarter of 2007 with an increase of $31 million.

Revenues for Strativa were $25 million in the first quarter of 2008, increasing almost $6 million or 29% over revenues of $19 million for the first three months of 2007, driven by net sales gains from Megace ES. The company's gross margin of $49.5 million for the three months ended March 29, 2008 decreased $38 million from $88 million for the three months ended March 31, 2007 and is driven by the sales and royalty impacts just discussed. The company's gross margin percentage declined from 37.4% to 32%, driven primarily by the increased sales of lower margin metoprolol and lower royalty income and lower sales of higher margin products such as propranolol, which launched in February of 2007, tempered by increased net sales and margins from Megace ES.

For gross margin I would like to take a minute to also provide a comparison of first quarter of 2008 versus fourth quarter of 2007. Declines versus fourth quarter 2007 gross margin are driven by the expected lower sales of higher margin generic megestrol following a fourth quarter 2007 backorder release, and tramadol following Par's exit from the market impacting the first quarter of 2008, as well as lower expected royalties and other product mix, including increased sales of lower margin metoprolol tempered by higher Strativa net sales for Megace ES.

As a percent of net revenues, the gross margin of 32% in the first quarter of 2008 is below 37% in the previous quarter, driven by the sales impacts just discussed.

Moving to operating expenses, the company's research and development expenses of $17 million for the three months ended March 29, 2008 increased $3 million or 22% from $14 million last year. The increase in expense is primarily attributable to the upfront fee paid related to the in-licensing of ONCONASE of $5 million, partially offset by lower costs of roughly $2 million related to PAR-101 development costs. PAR-101 was divested in the first quarter of 2007.

Total SG&A expenses of $31 million for the three months ended March 2008 declined $1 million or 4% from $33 million for the same period in 2007. Lower expenses related to sales and marketing of Megace ES, lower finance and accounting costs and lower stock-based compensation related to employment costs, which were tempered by increased legal fees related to ongoing litigation.

During the first quarter of 2008, the company recognized a gain on the sale of product rights of $1 million related to the sale of two ANDAs. In November 2007, the company entered into an agreement to provide certain information and other deliverables related to Megace ES to enable the formal technology transfer to a third party that is seeking to commercialize Megace ES outside of the US. The company recorded $625,000 in income in the quarter, when the company's obligations were fulfilled related to this agreement. The company's effective tax rate for continuing operations for the three months ended March 29, 2008 and March 31, 2007 were 36% and 35% respectively.

In summary, reported or GAAP net income for the first quarter of 2008 was $2.6 million or $0.08 per diluted share, which included a $5 million payment related to ONCONASE. Adjusting for this item, earnings per diluted share were $0.17 for the three months ended March 29, 2008. This is compared with reported net income of $41.5 million or $1.19 per diluted share for the same period in 2007, which included a $20 million gain on the sale to Optimer Pharmaceuticals, Inc. of marketing rights to PAR-101. Adjusting for this item, earnings per diluted share were $0.84 in the first quarter of 2007.

And now a review of liquidity and capital resources. Cash and cash equivalents of $231 million at March 29, 2008 increased $31 million from $200 million at the end of last year. Cash provided by operations was $18 million in the first quarter, driven by net income and adjusted primarily for depreciation and amortization of $6 million and share-based compensation of $3 million. Net accounts receivable increased by $20 million, driven by timing of customer collections, while inventories declined $20 million, driven by lower sales for certain products, some seasonality, and the timing of receipts at the end of the year 2007. Payables due to distribution agreement partners increased $9 million, due mainly to higher sales of partnered products in the first quarter driven by metoprolol.

First quarter 2008 DSO of 76 days is about 10 days higher than expected and as compared to the end of 2007. This is driven by a major wholesaler that had overdue invoices of roughly $16 million, and these invoices were paid a few days following the quarter, which has brought the DSO back in line to around the 65-day range that we expect. As of the first quarter 2008, inventory turns are approximately four times per year versus three times for Q4 2007. Turns have improved driven mainly by the timing of receipt of goods and some seasonality in inventory at year-end 2007.

Moving on to our 2008 guidance, the company's projections, although there can be no assurances, are based on its results for the first three months of 2008, as well as management's estimates regarding the impact of product competition on existing products and the market opportunity for certain of Par's generic pipeline products. Full-year 2008 earnings per diluted share are projected to be in the range of $0.65 to $0.85, excluding any potential pre-launch spending and milestones related to Strativa's pipeline products and includes the estimated impact of four new generic product launches: Sumatriptan vials and kits, clonidine, dronabinol and certain strengths of Rispiradone ODT. The new products will have an expected fully diluted EPS impact of between $0.25 to $0.47 in 2008.

Impacting 2008 and reflected in its full year EPS guidance are several additional factors affecting our business, including, R&D spending, which will increase as a run-rate versus what was spent in the first quarter of 2008. On a full year basis, we expect R&D to be roughly $55 million, excluding the Strativa $5 million milestone paid for ONCONASE or $60 million including the milestone. SG&A is expected to be roughly $121 million and may fluctuate due to legal costs associated with the Company's product litigation related to the success of its first-to-file generic strategy. The estimate does not reflect potential for strategic pre-launch activities, which could be in the range of $2 million to $5 million depending on timing of expected FDA approval.

We expect continuing price pressure on the base generic business. However, with respect to erosion expected in 2008, it should be noted that with the exception of cabergoline the majority of our key generic products already have multiple competitors having experienced major pricing pressure in the last several quarters, and such erosion will be tempered by the resumption of sales of tramadol in the second quarter of 2008.

As discussed earlier, we had exited the market in the fourth quarter of 2007, pursuant to a settlement agreement, and we were asked to come back into the market unrelated to the patent litigation. And finally, Megace ES is expected to contribute sales and margin growth in the remainder of 2008.

I will now turn the discussion over to Paul, who will provide an update on the generic business and provide more color around the future generic new product launches.

Paul Campanelli

Thank you, Veronica, and good morning, everyone. At this time I would like to provide an update with respect to our current generic strategy, as well as provide some insight on our generic pipeline through 2012. Regarding strategy, we continue to take an aggressive role in maximizing profitability and addressing challenges by focusing on strategic product selection. Specifically first-to-file, first to market, high barrier to entry product targets remains our primary objective. We are continuously placing greater emphasis on internal product development, and our R&D team is delivering first-to-file opportunities. This approach will allow our sales and marketing efforts to drive share, and allow us to retain greater revenues and profits.

Further, our shift to internal development will allow for maximum agility when having to respond to trade pressures post-day 180. Our business development and licensing teams continue to identify internal Paragraph IV opportunities and execute on select external development projects that will contribute to our fewer better product strategies. To date in 2008 our team has executed on several potential third-party first-to-file product opportunities, as well as negotiated two authorized generic prospects.

Additionally, we anticipate four new generic product launches with an estimated impact of $0.25 to $0.47 per fully diluted share. As Veronica mentioned, these products include Sumatriptan vials and kits, the clonidine patch, dronabinol and certain strengths of risperidone orally disintegrating tablets.

As Pat mentioned, we amended our agreement with Spectrum Pharmaceuticals for $20 million in cash to increase our share of profits from the generic version of GSK's Imitrex injection, which will be immediately accretive to 2008 earnings and provide a strong return on the company's investment.

As a result of the agreement, Par's profit share will increase from 38% to 95% from the commercialization of sumatriptan injection. As a result of the acquisition of remaining interest from Spectrum, we anticipate a range in net sales for the first six months from the product launch of $35 million to $40 million and a gross margin range from $20 million to $24 million. This strategic initiative will allow Par to be self-sufficient and agile, when distributing to our trade partners while retaining control of revenue and margin. As pointed out in our press release, the sumatriptan injection line is approximately $20 million in brand sales.

You will recall in February 2006, Par and Spectrum entered into a settlement agreement with GSK in order to resolve patent litigation. Under the terms of the agreement, we are permitted to launch with certainty on November 6, 2008, which is three months prior to the compound patent expiration of February 2009.

Having said that, I would like to point out that Par is exclusive on the 4 milligram stat dose kit, the 4 milligram prefilled syringe and the 6 milligram stat dose kit. Additionally we are semi-exclusive on 6 milligram prefilled syringe. These products will be provided to Par under a multiyear supply agreement from GSK.

Lastly, Par has received a license from GSK to bring 6 milligram sumatriptan vial to market under supply agreement from a third-party contract manufacturer, again exclusively starting in November 2008.

While generic competition is a fact of life, the promising detail I would like to point out is Par's generic sumatriptan starter kits and prefilled syringes are the exact devices that Imitrex patients have had access to since 1992.

Now turning to our R&D efforts and to provide investors with additional information by which to analyze the company, Par is providing a range of value for certain key generic pipeline products. Understanding the volatility of the US generic market, as well as the uncertainty around the timing of product launches, we felt the simplest approach to provide you with reliable estimates of the value of our generic pipeline was by estimating the first six months of net sales and gross margins of each product in the year the product launches. Since each full six-month period may not be in the calendar year of the product launches, some of the value will be realized in the next calendar year. Please note that these estimates do not include value after the initial six months following product launch.

However, we do recognize that these product launches will have value past the first 180 days, and in fact, these products were targeted for development due to the higher barrier to entry and fewer expected competitors, therefore providing stronger profits post 180 days compared to lower barrier to entry commodity generics. Additionally, while we are confident in our legal position, we need to emphasize to our investors that success is not guaranteed. As a result, we cannot predict with certainty a successful outcome on any given project. Therefore, there are no assurances of litigation success with any Paragraph IV opportunity.

Having said that; in 2009 we anticipate six key product launches that will have a range of net sales in the first six months of launch from $100 million to $135 million, and a gross margin range from $80 million to $110 million. These products include Methylphenidate ER, Alprazolam ODT, Amlodipine in combination with benazepril, Propafenone ER, Nateglinide and Tramadol ER.

In 2010 Par anticipates five key generic product launches that have a range of net sales from $60 million to $80 million and a gross margin range from $42 million to $56 million. These products include dexmethylphenidate XR, omeprazole sodium bicarbonate oral suspension, omeprazole sodium bicarbonate capsules, Oxaliplatin and diazepam gel. In 2011 Par anticipates two key generic launches that have a range of net sales from $20 million to $28 million and a gross margin range from $7 million to $10 million. These products include Rozuvastatin and latanoprost. In 2012 Par anticipates two key generic launches that have a range of net sales from $14 million to $21 million and a gross margin range from $12 million to $17 million. These products include Amlodipine in combination with Valsartan and Fluvastatin.

With respect to future R&D efforts, our generic strategy includes a target of six to 10 first-to-file applications per year. That being said, for 2008 our internal team has their efforts focused on approximately 11 Paragraph IV targets, and our external partners are focused on approximately five Paragraph IV targets.

Additionally, our business development and licensing team are placing great emphasis on continuously identifying first-to-file first to market opportunities, which include in-licensing, additional transdermal patch opportunities, difficult to source API and technically challenging formulations. Authorized generics continue to be core strength of the team. Currently two opportunities have been solidified if and when our planned partners require a generic launch. We have now implemented an aggressive lifecycle management program focused on product longevity, post-day 180, as well as bringing cost savings to our existing base business.

In closing, our team continues to execute against our strategic plan. We have been successful in our first-to-file submissions, and our generic business continues to show promising future strength. While our primary objective for 2008 has included refocusing R&D, supply chain and sales and marketing efforts, our current first-to-file status shows we're clearly headed in a positive direction.

With that, I will turn the call back to Pat for closing remarks.

Pat LePore

Thanks, Paul. As you've just heard, we feel very strongly about the value of the generic pipeline and that our strategy for both our generic and Strativa businesses are yielding successes that will generate long-term shareholder value. These successes are in line with those mileposts we laid out for you back in September. The value of our currently marketed products, the addition of the generic pipeline products Paul just described, progress towards FDA approvals for Strativa's exciting product pipeline, and other business development opportunities our teams are working on, we are confident will mean strong financial results in 2009 and beyond.

We can now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Randall Stanicky.

Randall Stanicky - Goldman Sachs

Great. Thanks guys for the question. Just a couple. First, highlighting the 30-month expirations, can you just talk about your strategy there in terms of monetizing your view to at-risk launch partnering? And then maybe can you just drill down a little bit, as you talk about some of these products, can you give us a little bit more detail on which products are partnered? And then going forward, your strategy to going alone on first-to-file filings versus partnering on some of these opportunities?

Paul Campanelli

Okay. Randall, this is Paul. Regarding the 30-month stay and launching at risk, obviously it's fairly early in several of the products. As we build our cases with our internal and external legal teams, we will assess the basis of potentially launching at risk, but at this time I would say it is premature in that regard. Could you just repeat the second part of your question, please?

Randall Stanicky - Goldman Sachs

Yes, as you look at, for example, your 6 to 10 first-to-files per year, historically Par has relied or been involved with partners on a lot of those opportunities. Much more of that has changed obviously. So, as you look at that targeted strategy, how much are you going to rely on partners versus internally generated first-to-files?

Paul Campanelli

Right, sure. So historically I would say that about 65% of our pipeline had been external. We are now shifting it actually about 65%, 70% to now internal development. So, as we move into the future, clearly the majority of our products are going to be internally developed as first-to-files.

Randall Stanicky - Goldman Sachs

Okay. Actually two real specific there. First of all, on TOPROL XL, can you just talk about the trends around that product given what we're seeing from a marketshare perspective?

Paul Campanelli

On Metoprolol? Currently we're holding about 30% of the market.

Randall Stanicky - Goldman Sachs

And how are you looking from a pricing perspective? How do we think about that going forward?

Paul Campanelli

Well, right now I would tell you that we are fairly flat. We are not seeing too much price erosion at this particular time. We were monitoring the approvals that were listed at the FDA website in March. I will tell you at that time, we had not seen any additional competitors come to the market. While they have approval letters, there were no further entries. So there is no need to erode price. If and when these two other companies eventually come to the market, we're well-poised. We have product, and we plan on defending our share. But at this time we see pricing to remain fairly flat.

Randall Stanicky - Goldman Sachs

Great. And my last question just on gross margin, the 32%, how do we think about that number -- I'm sorry if I missed it -- throughout the rest of 2008?

Veronica Lubatkin

Yes. So, for the 2008 outlook, there's a number of things that will impact the rate of gross margin. Obviously the new products will help gross margins on the generic side, and Megace ES sales and growth also will play a role in driving gross margins higher overall. The generic base business will go up a few points, and that's really driven by some non-recurring activities that occurred in the first quarter. So we expect going forward to have lower metoprolol and fluticasone sales, and those are low margin products for us. So that will drive the margin up, as well reentering the market for tramadol, which has a high gross margin will also help.

Randall Stanicky - Goldman Sachs

As we think about the range going forward for 2008, are you able to quantify that?

Veronica Lubatkin

Yes, I would say a couple of points higher than where it is now.

Randall Stanicky - Goldman Sachs

So sort of getting closer to the mid 30% range?

Veronica Lubatkin

Yes.

Randall Stanicky - Goldman Sachs

Okay, great. Thank you.

Operator

And your next question comes from Gregg Gilbert.

Gregg Gilbert - Merrill Lynch

How are you probability weighting the ANDA approvals in the '08 guidance, and is that covered by the range? And specifically what's your latest commentary on clonidine and level of confidence there specifically?

Paul Campanelli

I am sorry, was your question to 2008?

Gregg Gilbert - Merrill Lynch

Yes, first on '08. I will ask you about the later years later. But in terms of the specific earnings guidance, how are you probability weighting those? I think you said four new approvals you're baking in? How are you probability weighting those?

Paul Campanelli

Sumatriptan is a date certain, right, and that settlement agreement with GSK, we negotiated the November 6 date, that we are coming to market November 6, 2008.

Gregg Gilbert - Merrill Lynch

Right. What about the others?

Paul Campanelli

The other launches are obviously not certain, right. So if you looked at our range of low-end to high-end, a majority of the low-end ranges is driven by sumatriptan and the high-end range is driven by the combination of the other products, right?

Gregg Gilbert - Merrill Lynch

Right.

Paul Campanelli

So that is kind of --.

Gregg Gilbert - Merrill Lynch

What's the latest on clonidine and any back and forth or sense of confidence from the agency there?

Paul Campanelli

Yes, sure. So Gregg where we are is, if you go back a little bit in time, our development partners, Aviva, met with the FDA back in 2005 to come up with an agreement on how to handle the clinical trials with respect to irritation and adhesion. So a protocol was agreed to, and a trial was run in -- really a trial was run at that time and submitted to the FDA in January 2007. Those results came back passing, and at this stage of the game, there really are no issues. CMC is resolved, Bioequivalence is resolved, the clinical trials are passing, and labeling is complete. So we are anticipating the FDA to at sometime in the very near future approve the application.

Gregg Gilbert - Merrill Lynch

Okay. And then beyond '08, I know you are not providing formal guidance at this point, but how are you probability weighting those ANDAs internally? Is there any context you can provide around what you would be building into your own sort of three to five-year plan?

Paul Campanelli

We provided the range, and I think the low range is just giving you the insight that yes, we are risk adjusting, and they are probability weighted.

Gregg Gilbert - Merrill Lynch

And lastly, Paul will you be partnering products that require significant GPO contracting, or is that something you plan to handle internally? Thanks

Paul Campanelli

No, I don't. At this time Gregg, no, we do not have any plans.

Gregg Gilbert - Merrill Lynch

Thank you.

Operator

And your next question comes from Anant Padmanabhan.

Anant Padmanabhan - Cowen & Co.

Yes. Hi. I would like to ask a couple of questions in your Paragraph IV challenges. First, regarding generic Lotrel, could you tell us when your 30-month stay expires, and is your patent litigation linked in any way to Teva's case? And second, could you give us a sense of where the [Kresta] litigation is at the moment? Thank you.

Paul Campanelli

Sure. Regarding Lotrel, we're not linked to Teva. Obviously we are closely monitoring there, I think they had the marketing schedules for June. Obviously we are watching that very carefully.

Regarding our 30-month stay, our 30-month stay, I believe, expires about two months after the new drug strength code of February 2009.

Anant Padmanabhan - Cowen & Co.

Thank you. And the [Kresta] litigation?

Paul Campanelli

[Kresta] is very early at this stage of the game. So I think at this stage of the game, we would prefer not to elaborate the details.

Gregg Gilbert - Merrill Lynch

Okay, great. Thanks.

Operator

And your next question comes from Adam Greene. You may proceed.

Adam Greene - JPMorgan

Thanks. Good morning. I have a few questions. First, can you comment on Megace ES prescriptions? They have been flat for awhile. Just anything going on there or anything you can do to kind of change that?

Then following up on an earlier question on TOPROL XL, you launched the scored tablets not too long ago, haven’t seen much of a change in share. Any thoughts on that, and then I have a follow-up as well.

John MacPhee

It is John MacPhee. It was hard to hear your first question, but I believe you asked about Megace ES prescriptions trends and any comments we could make.

So in regards to that, we do continue to see growth opportunity for Megace ES in 2008. As you know, it is approaching the end of its third year, and it is, of course, our foundational product. Prescriptions for the first quarter of '08, they did exceed Q4 of '07 and were up 9% as compared to Q1 of last year. But our market shares are showing a slight downward trend. As you see, market growth has been strong.

We see growth opportunity in 2008 primarily for two reasons. The first is that we improved our sales force deployment in February of 2007. We were able to align our sales force in a way that reduced territory size, and our representatives as a result are making more calls, and we're seeing that increased productivity here in 2008. And we also see a few opportunities to improve reimbursement for Megace ES with a few key third-party pays.

Paul Campanelli

And this is Paul. Regarding metoprolol, the scoring question. I think the way we are looking at it is that when we launched the strength over the last year and a half, and we are clearly holding in excess of 50% market share. Later towards the end of 2007, the scoring issue became obviously problematic, whereby we started to lose share because of pressure from our trade partners.

I think right now the way we are looking at it is, we resolved the scoring issue with our partners, AstraZeneca, and we were able to get the scoring back into the trade on the 50, the 100 and 200 milligrams prior to March. I think that was a big win for Par. With that, we are now holding a solid 30%. So I would say that we are really not looking towards growing our share because that will create pricing pressures. We are right now just planning on holding a solid 30%.

Adam Greene - JPMorgan

Okay. And then two questions on the P&L. R&D I think you had mentioned a $55 million target for the year. I just wanted to confirm that, that does exclude the $5 million payment in the first quarter. And then secondly, following up on Randall's questions of gross margins, the brand gross margins have been bouncing around in the low 70s to high 70s. How should we think about the branded gross margins for the rest of 2008?

Veronica Lubatkin

We expect the branded gross margins to stay at about where they are now. And on R&D we do expect it to be $55 million on an annualized basis, excluding the $5 million payment for ONCONASE.

Adam Greene - JPMorgan

Okay. And you said it will increase throughout the year from the Q1 levels?

Veronica Lubatkin

That is right. There was some timing of Bio studies on the generic side in the first quarter, but we will recover that as we go through the rest of the year.

Adam Greene - JPMorgan

Great, thank you.

Operator

And your next question comes from Richard Silver.

Richard Silver - Lehman Brothers

On metoprolol, can you tell us what assumptions you're making for pricing going forward since you said that you haven’t seen any recent price changes? But what sort of scenario are you looking at in terms of your guidance for competition and pricing?

Paul Campanelli

Rich, this is Paul. I would tell you that moving forward we are planning on some modification on pricing, so we're taking it down a little bit at this stage of the game. Obviously our two competitors have yet to launch additional strengths. We're watching what happens with Watson. There's really no need at this time, but maybe a little erosion on the pricing.

Richard Silver - Lehman Brothers

So you will just wait until you see what they do, and then you might have to actually build a little bit more erosion or more erosion in, and could that affect the current guidance?

Paul Campanelli

It's built. Rich, it built, we built it in. We built it in already. We're are not seeing it yet, but it is built into the plan.

Richard Silver - Lehman Brothers

All right, thank you.

Operator

And your next question comes from David Buck.

Jim Dawson - Buckingham Research Group

It is Jim Dawson for David Buck. Would you give that SG&A guidance for '08 again? I missed that.

Veronica Lubatkin

Okay. On a full-year basis, we expect SG&A to be in the range of $121 million.

Jim Dawson - Buckingham Research Group

121, you said?

Veronica Lubatkin

Right.

Jim Dawson - Buckingham Research Group

Okay. And then just also, what was driving the generic TOPROL XL strength in the quarter?

Paul Campanelli

TOPROL XL strength in the quarter?

Jim Dawson - Buckingham Research Group

Yes.

Veronica Lubatkin

Higher sales of metoprolol quarter-over-quarter.

Paul Campanelli

Yes, obviously getting the score tablet, but you have to remember that Par was marketing an unscored tablet until March of this year. We got it back right really at the end of February, and that's what's driving it.

Jim Dawson - Buckingham Research Group

Okay. And then also just the effective tax rate for the quarter, we have got a low number, and I am wondering what the tax rate was, and if that lower number is a good number to work with and sustainable for the rest of the year?

Veronica Lubatkin

Yes, the effective tax rate is in the 35% range and expected to hold there on a full-year basis.

Jim Dawson - Buckingham Research Group

Okay, thank you.

Operator

(Operator Instructions) You have a follow-up question from Gregg Gilbert. You may proceed.

Gregg Gilbert - Merrill Lynch

Paul, did you see any of your large wholesale customers destocking in the first quarter?

Paul Campanelli

No, I did not see anything.

Veronica Lubatkin

Our trade pipeline was around the same level.

Gregg Gilbert - Merrill Lynch

Thank you.

Operator

And your next question comes from Morty Schnerr.

Morty Schnerr - BNP Paribas

Hi, its Morty Schnerr with BNP Paribas. I had to jump in and out of the call, so you might have addressed this. The guidance in '09 on the new sales, you are able to give projection on that. Are you able to give projections on your sales guidance for this year and next?

Veronica Lubatkin

I'm sorry, what was the question?

Morty Schnerr - BNP Paribas

Are you able to give total sales projections for this year and next for 2008 and 2009? I mean you're giving already for guidance on these new products and new generic sales, and I'm just wondering why you can't give on the -- you did not put that in the press release, but total sales?

Veronica Lubatkin

Yes, I mean at this time we're not giving it, but I guess we have given the EPS guidance for the full year. We have given some EPS guidance for the new products. We have given the full-year guidance for the R&D and SG&A lines.

Morty Schnerr - BNP Paribas

Okay. And is there any news on the -- are you still holding $200 million of the convertible and current liabilities. Is there any news on that?

Veronica Lubatkin

There is no change.

Pat LePore

It is the same.

Operator

And at this time you have no questions.

Pat LePore

Okay. Well, thanks everybody for joining the call and we will look forward to reporting out next quarter. Thank you.

Operator

Thank you for attending today's conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Par Pharmaceutical Companies Inc. Q1 2008 Earnings Call Transcript
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