Forest Laboratories Inc. F4Q09 (Qtr End 6/30/08) Earnings Call Transcript

Forest Laboratories Inc. (FRX)

F4Q09 (Qtr End 6/30/08) Earnings Call

July 22, 2008 10:00 am ET

Executives

Frank Perier, Jr - SVP, Finance and CFO

Larry Olanoff - President and COO

Analysts

Rich Silver - Lehman Brothers

Greg Gilbert - Merrill Lynch

Frank Pinkerton - Banc of America Securities

Corey Davis - Natixis Bleichroeder

Annabel Samimy -- UBS

Marc Goodman - Credit Suisse

Tim Chiang - FTN Midwest

David Buck - Buckingham Research Group

Dave Windley - Jefferies & Company

Gary Nachman - Leerink Swann & Company

Gene Mac - HSBC

Presentation

Operator

At this time, I would like to welcome everyone to the Forest Laboratories first quarter fiscal '09 Earnings 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) Thank you.

Mr. Frank Perier, you may begin your conference.

Frank Perier, Jr

Thank you, operator and good morning everyone. This is Frank Perier. Thanks for joining us today for the first quarter fiscal 2009 conference call. Joining me today is Larry Olanoff, our President and Chief Operating Officer.

By now each of you should have seen the earnings release that we put on the wires around eight a.m. this morning. 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.

Larry Olanoff

Good morning all. I will start today’s call by reviewing key company events for the quarter, then turn the call back to Frank, who will review the financial details of the quarter.

Our underlying business continued to perform well during the quarter as we saw solid prescription volume for all of our key marketed products. Reported earnings in the just completed quarter totaled $0.79 per share.

Excluding the one-time financial impact of terminating the AZOR co-promotion agreement with Daiichi Sankyo, earnings for the quarter amounted to $0.87 per share.

In addition to strong financial performance, we have also reported on several key milestones events, associated with advances in our late stage product pipeline during the quarter, including the submission of a supplemental NDA for Lexapro for adolescent depression and positive Phase III results for ceftaroline, in the treatment of complicated skin and skin structure infections.

Regarding our in-line products, Lexapro sales in the quarter totalled $583 million, an increase of 5.6% year-over-year. While Namenda sales were $219 million during the quarter, growth of about 40% year-over-year.

At the end of the quarter, the key national wholesalers held about two weeks of Lexapro inventory. A level that is consistent with the end of last quarter, while holding just hundred two weeks of Namenda inventory or approximately one day less than last quarter, which represents approximately $3 million of the Namenda sales.

Regarding Benicar projected end user net sales, which are recorded by our partner Daiichi Sankyo, were approximately $223.4 million in the quarter, with our partnership pre tax earnings for the quarter totaling $52.4 million.

Bystolic sales in the quarter were $4.4 million following the launch at the end of January this year. The launch continues to track at or slightly above our expectations and we are seeing an encouraging mix of patients, including significant numbers of patients switching from generic beta-blockers, those new to beta-blocker therapy and those patients who are continuing on their Bystolic therapy. At this time, we have already seen over half of the patients characterized as continuing patients which is indicative of an early success with Bystolic therapy.

Another positive measure performance is the sustained higher number of physicians writing there first prescriptions each week, along with a growing base of repeat prescribers. While still relatively early in the launch, our messages of overall excellent tolerability combined with strong efficacy continue to resonate with physicians, while growth in sequential prescription volumes remains steady through the initial launch phase.

Substantial progress has been made relative to Bystolic managed care coverage goals. Currently, Bystolic has achieved Tier two access on six of our fifteen strategic managed care plans with Tier three access on the balance.

Further, of the 168 plans that account for approximately 81% of the beta-blocker volume here in the US, Bystolic has predominantly tier two or tier three unrestricted access, which represents a tangible ongoing opportunity for the brand.

As we have fulfilled our detailing obligations for Benicar and have terminated our AZOR co promotion agreement, we have been actively re-allocating these details from AZOR to Bystolic, Namenda and Lexapro. All three brands are in detail-sensitive markets and we believe the additional details will add stability to Lexapro and yield incremental growth for each of the other marketed brands.

Overall, we are pleased with the strong performance during the quarter from our in-line products and are excited about the positive clinical trials results reported. I will now turn the call back over to Frank, who will provide more detail on the financial results.

Frank Perier, Jr

Thank you, Larry. First quarter total revenues, which are inclusive of sales, pretax earnings from the Benicar co-promotion, interest and other income totaled $966.8 million, an increase of 4.2% from the year ago period.

Revenues were comprised of $893.7 million of product sales, which increased 6.1% compared to last year. $52.4 million of contract revenue from the Benicar co-promotion agreement, which is comparable to last year, as well as $18.2 million of interest income.

Other contract revenue and other income in the quarter totaled $2.5 million.

Gross margin in the quarter came in at 77.9%, just slightly ahead of our expectations for the overall fiscal year, and the same as last year's fiscal first quarter.

SG&A spending during the quarter was $342.9 million, up 31.2% from last year. In addition to our ongoing spending level in support of in-line products, this quarter included significant investment spending to support the recent launch of Bystolic, as well as pre-launch activities for milnacipran. SG&A spending also included a one-time pretax charge of $44.1 million, related to a previously announced termination of the AZOR co-promotion agreement with Daiichi Sankyo. Excluding the one-time charge, SG&A increased by 14.4%.

Research and development spending was a $112.1 million in the quarter, a decrease of 18.1% from the year ago period.

For comparison purposes, I would highlight that last year included $28.5 million in milestone's development expenses across three partner companies, while the current period had no such charges. However, as our new product pipeline progressively advances, we continue to anticipate approximately $100 million of milestone expenses for the year, with over $70 million to be incurred next quarter and the balance in the fourth quarter.

Our respective tax rate in the quarter was 22.7%, due to the net impact of the termination of the AZOR co-promotion agreement and a discrete one-time tax adjustment principally related to a change in our improved tax estimates, related to the adoption of FAS 123R for stock-based compensation. We anticipate that the overall tax rate for the fiscal year will be approximately 22%.

During the quarter, we repurchased 6.6 million shares and continue to have an addition 9.2 million shares available under the existing 35 million share program. Actual shares outstanding as of June 30th were 304.783 million shares.

Our cash and marketable securities balance, as of June 30th was approximately $2.5 billion, an increase of $79 million from last quarter. Of this, $850 million or 34% of our cash and marketable securities balance are domiciled domestically, with the remainder maintained by our international subsidiaries.

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

Larry Olanoff

Thank you, Frank. As we move into fiscal 2009, we are in the midst of a busy period where we will be receiving additional clinical trial results for an array of later-stage compounds.

We now have two compounds under regulatory review at the FDA, milnacipran for the treatment of fibromyalgia and Lexapro for the additional indication for the treatment of adolescent depression.

In addition, we recently reported positive data for ceftaroline, a fifth generation injectable cephalosporin in two Phase III trials for complicated skin and skin structure infections. We are very pleased with this outcome and enrollment continues for ceftaroline in two Phase III studies for community acquired pneumonia, and we anticipate those results n calendar 2009. The data from these two indications, if supportive, will serve as our planned submission package to the FDA for initial marketing approval.

We anticipate receiving Phase III data for aclidinium in the treatment of chronic obstructive pulmonary disease later this summer. And if these studies are positive, they will serve as the safety and efficacy base for regulatory submission.

In parallel, we continue to generate CMC submission data for our novel dry powder inhalation device.

We also continue to work towards the regulatory submission for Bystolic for congestive heart failure, based on data from the senior study, and we anticipate filing a supplemental NDA for this product in the first half of the next calendar year.

Regarding linaclotide, we have previously reported the successful Phase II results for both the chronic constipation and the constipation predominant IBS indications. And steady progress has been made regarding the planned move into a full Phase III program for both indications. Working with our partner Ironwood Pharmaceuticals, we currently plan to initiate Phase III studies in the second half of this calendar year.

Turning to RGH-188, and the development pathway for the schizophrenia indication, the partnership has initiated a Phase IIb schizophrenia trial, which will further examine in detail, a range of lower doses, based on the encouraging results from the first Phase II study. This study is being performed in order to better determine an optimal dose to take into the planned Phase III program. We also expect to have Phase II results for RGH in the treatment of bipolar mania later this year.

This potential indication may present a significant opportunity, for this compound, in addition to the indication for schizophrenia. The Phase II PDE-4 program partnered with Glenmark for Oglemilast has moved into a group concept study in COPD, which is currently recruiting.

We are also progressing on an earlier stage programs, including discovery programs partnered with Gideon Richter and several Indian-based specialty CRO companies. While we believed that our late stage product pipeline could collectively represent several billion dollars of potential product sales in the long-term, sufficient to replace the revenues lost due to [product [expiries] for both Lexapro and Namenda, we must operate with the assumption that all four of our late stage program will ultimately result in either approved product or approved product that achieve our peak sales projections.

Given this assumptions, we feel it necessary to double the commercial potential of our late-stage pipe line by 2012 to advancement of our earlier stage programs, as well as the addition of development opportunities.

Moving to our financial guidance for fiscal 2009, we anticipate reported earnings per share to be in the range of $3.10 to $3.20 per share based upon solid first quarter performance.

Excluding the impact of terminating the AZOR co-promotion agreement with Daiichi Sankyo, we anticipate adjusted earnings per share to be in the range of $3.20 to $3.30 per share.

Frank Perier, Jr

Thank you, Larry. I will now offer some sales figures for the smaller products. Aerobid $3.7 million., AeroChamber $5 million, Campral $7.8 million, the Celexa brand $8.6 million. Cervidil $13.5 million. Combunox $100,000, Esgic including generic $900,000, Europe $19.1 million, other generic products $1.4 million, Infasurf $3.1 million, Lorcet including generic $2.3 million, Monuril $300,000, Tessalon including generic $8.8 million. Thyroids $14.3 million, Tiazac brand $1.9 million and Tiazac generic $3.5 million.

With that I would ask the operator to start the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line Rich Silver. Go ahead.

Rich Silver - Lehman Brothers

Hi, can you hear me?

Frank Perier, Jr

Yes Rich, good morning.

Rich Silver - Lehman Brothers

Good morning. Can you talk about the SG&A that we saw in the quarter, which seemed a little late at least relative to our estimate and what the implications are for spending in the coming quarters as you did comment on the R&D spending trend?

Frank Perier, Jr

I think, Rich in connection with the SG&A spend, we are a little late and that is recognizing the over-performance in the quarter and we anticipate there may be some additional opportunities for efficiency, but that overall we should be fairly close.

Rich Silver - Lehman Brothers

So, we should expect that to be made up in the coming quarters, is that what you are saying?

Frank Perier, Jr

Yeah.

Rich Silver - Lehman Brothers

Okay, and then I do not recall you having mentioned the dry powder device in the past, maybe I missed that, can you elaborate on that?

Frank Perier, Jr

Surely, that is the device relative to aclidinium and it is part of the planned registration of the filing package for the product. I think we have talked about the device in several other instances in the past and this is the same device that we have used in the clinical trials.

Larry Olanoff

I would like to just add to that. This is a program that really was evolved from Almirall, both having the growth in-house as well as supplying the company that had the device and married the two. To add to what Frank has said, the device is a very patient-friendly device, it's one that essentially delivers the dose, the daily dose of one dose. It is a multiple dose product, so you do not have to reload it at each time, and it also has a great attribute of being able to be used for combination products. Soother products could be used as well as aclidinium. So it really becomes the base for our franchise going forward. We are quite happy with it.

Rich Silver - Lehman Brothers

And then just lastly on milnacipran. There has been some reports of late that, some insurance companies have been a bit slow to cover Lyrica and this might be the case with Cymbalta. Can you comment on your expectations in light of what maybe some pushback from insurance companies on this indication?

Larry Olanoff

No, I think that is a fair assessment of what is going on.. I think the market is still sorting itself out. The whole launch of Lyrica was very important, I think that market place in the sense of improving the understanding and the awareness of the disease is the fact that therapies are coming. Cymbalta is coming out, I think it will stay in that course within the market. We look forward to taking advantage of that. We are aware that many of the plans for requiring step, that is true products that are not approved for fibromyalgia and I think we are taking that into -- I know we are taking that into account in terms of our forecast in our approaches to managed care going forward.

Rich Silver - Lehman Brothers

Okay, I will step back in the queue. Thanks.

Larry Olanoff

Thanks, Rich.

Frank Perier, Jr

Thanks, Rich.

Operator

And your next question comes from the line of Greg Gilbert.

Greg Gilbert - Merrill Lynch

Thanks, good morning guys.

Frank Perier, Jr

Good morning Gregory.

Greg Gilbert - Merrill Lynch

Good morning, I just want to confirm upfront. You were not changing guidance for any of the sales or expense items you gave previously for the remainder of the year. Is that true?

Larry Olanoff

That is correct.

Greg Gilbert - Merrill Lynch

Okay. Frank can you discuss channel inventory moves for the key products like you have in the past?

Frank Perier, Jr

Sure. I would be happy to do that Greg. As we indicated with Lexapro, it was right about two weeks, which was basically the same spot we ended last quarter. So no real movement in Lexapro with the major wholesalers. As we indicated we finished last quarter with Namenda right about two weeks and were just under, a little more than a day under two weeks in the current quarter. That translates to about $3 million in sales.

Greg Gilbert - Merrill Lynch

Thanks for that and then…

Frank Perier, Jr

And nothing unusual with the other products, Bystolic is right were we expected to be it this stage at launch.

Greg Gilbert - Merrill Lynch

Right. And then maybe for Larry how you have given the importance of Lexapro to the overall company's possibility and everything else. What you have done to access or get to the bottom of why the new prescription share has been slipping, other than which you mentioned with AZOR and putting more details back on Lexapro. Have you figured out what is driving the change. I thought we would have seen the decline, once the others went generic. There seems to be some sort of delayed reaction. So what have you learned on that front and what can you do, beyond the AZOR details and perhaps broadening the label? Thanks.

Larry Olanoff

Sure. That’s good question. We don’t think there is any one cause. Clearly managed care is pushing their influence across all the formularies and it relates to all branded products, proprietary products So we have that into account in terms of some our plan. We are still forecasting a modest growth in the market place and as we look at the only real competitor we have out there at this point as we see it is citalopram, which is a very good product. We believe we have a better product in escitalopram or Lexapro.

Having said that in the answer to your question, we are taking a number of steps; one we had acknowledged upfront, that we are moving our sales force emphasis over to Bystolic launch that we would really reduce our details in the short-term in Lexapro and now have the opportunity to bring a good number of those details back in this detail-sensitive market. It will take a little time to show that impact, but we anticipate that will be positive.

In the last few months, we have actually worked with a number of managed care plans, where we did not have previous formulary coverage and have been able to achieve now a very positive coverage in an unrestricted fashion. So without really busting our budget relative to our rebates. So that is a move forward, we think that will have an impact.

And we are looking at the individual patients in long-terms of various other strategies to defray cost, to improve not only the prescription rate but also the prescription to fill rate. So, we are looking across all. There are various categories in terms of opportunities to improve ultimate share and volume utilization.

Greg Gilbert - Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Frank Pinkerton

Frank Pinkerton - Banc of America Securities

Hi great. Just firstly, how was the new code for professional practice for the sales reps from pharma that was put forth. How does that change anyway, given your actions with customers and do you think that goes far enough from a standpoint of the way in which Forest interacts with doctors, and kind of provide the information to them for the products?

Larry Olanoff

No, we are not a member of such state, we are not a member of pharma but as a matter of routine, we have honored the code, in a sense that we follow the code, as it goes down. In certain states it becomes law anyway. So we are planning to fall within that timeframe in terms of enacting the code. The real issue here is, one can have an individual opinion that is the impact of the various changes. I think the impact that has been announced by pharma itself has been, that they try to deal with perceptions of whether this handing out tokens is having a dramatic impact in terms of buying loyalty. I do not think so. Not at the level of a sales professional, in a sense that people have experienced, but it is a public perception. It's one that can be removed.

In the end, our philosophy has always been very detail oriented, very physician oriented, as opposed to some of our competitors who make much bigger use of direct-to-consumer type approaches. We continue to be, and plan to continue to be, very physician-oriented and what we stress in our sales force is not the ability to hand out tokens, but the ability to impart useful information, balanced and fairly descriptive information. We feel that is the end result that needs to be achieved in the marketplace, to realize that quality and the use of such tokens as reminders we think is an aid. But once you take it out of the field, it is still a level playing field for all. We will continue to emphasize selling skills over the simple use of branded giveaways.

Frank Pinkerton - Banc Of America Securities

Okay, great and then kind of in a different area, and a follow up here if you do not mind. I always get into trouble when I watch CNBC, but this morning, the Roche CEO was talking about the reasons for their bid for Genentech. And he highlighted the fact that they personally look at the dollar as being at one of the low points from this point going forward, and now was the time for foreign companies to look in assets in the US pharma landscape. When I think of Forest, clearly, the company has been able to do a great job from a sales force perspective, with broader drugs competing against big cap pharma. So what is the likelihood pairing those who comment, you have a very good asset. Is there potentially, either a foreign buyer or foreign partner here that you can go with and how should investors think about the current evaluation of Forest, given that increase of M&A here in the near-term? Thank you.

Larry Olanoff

Well, we really cannot comment on anything going in regards to M&A. I can tell you that our sense is to remain independent. We have no plans to be acquired in this stage. We do recognize the quality of our sales force and our, I think a very commending presence in the primary care field, but in terms of Forest as an acquisition target it's arguably a mixed bag for companies because we have our products, which ultimately are our greatest asset. And subject to contracts with our partners and those contracts have different representations relative to whether or not an acquiring partner would also acquire those product. So I do not know that another company would buy us simply for our sales force, as good as it is.

Operator

Your next question comes from the line of Corey Davis.

Corey Davis - Natixis Bleichroeder

Thanks, just a couple of questions. Larry, first of all does that mean that I am not going to be able to get those coffee cups anymore at the meetings like APA?

Frank Perier, Jr

Up until it's January 1st you can get all the coffee cups you need.

Corey Davis - Natixis Bleichroeder

Second, do you know what the average age of patients on Bystolic are right now? Because, I thought part of the pitch was that especially in the elderly beta blockers were not as well tolerated in the elderly patients. So, are you seeing an upward age movement or is that more a function of the heart failure patients for which you do not have an indication yet?

Larry Olanoff

It's a g question, I haven't looked at that data, so I can't really comment directly. What I can tell you is that for those I get anecdotal reports in terms of patient successes or for that matter patient complaints and many of successes what I am seeing and they do involve patients who are especially elderly patients who really had problems with the fatigue issues. Except some individuals I know personally who have made that decision or their physicians made decisions to go on Bystolic and they are very happy with that change over in terms of their previous beta blocker therapy.

But you are right, you would expect that the population for hypertension would be bit lower and abrogates that for congestive heart failure. But I do not have the data.

Corey Davis - Natixis Bleichroeder

Fine, no problem. Second question is, if I am running the numbers correctly and Namenda days in inventory did come down just by one day, which is $3 million, it is still coming up shy of what I would have predicted based on the script they are using in kind of the previous couple of quarters. So is there any pricing pressure coming from managed care on Namenda that we should use to predict sales going forward?

Frank Perier, Jr

Well no there has been no pricing changes relative in Namenda Corey and with our own models, we came in pretty close to where we expected to be based upon scripts. We were pretty much spot on that number.

Corey Davis - Natixis Bleichroeder

Alright. Must be my error. And then last question and can you address this with in terms of Lexapro continued share declines and I think maybe Celexa is now the best example that we have of therapeutic substitution. But in my mind that would be driven more by managed care, than lack of promotion. So can you address that? Am I wrong in that assumption in that managed care is putting more pressure on and that is less correctible than it would be for you to initiate some new big sales force campaign on Lexapro promotion?

Larry Olanoff

I think there are elements on that issue in terms of what we track is prescriptions, written prescriptions versus filled prescriptions, and on that issue there is an element of sales force promotion in terms of getting the message out, both in terms of physicians, knowing where in fact managed care advantage is for Lexapro and that's a pretty widespread reality. But they may not have that perception, they may have had a patient who presented, had the difficulty in getting their script sales and that colors their whole view of their territory. We are getting that information into the sales force and I think in a more easily communicated fashion we have had in the past, and as well as reiterating that the advantages of Lexapro over other antidepressants, the advantages and pilot offers regards to other end anti-depressants. So, that's very important factor in going forward.

In addition, we had put some mechanisms in place, we can hopefully defray some of the additional cost of this for a period of time, that the patient experiences going with a branded product over a generic product and that we think will impact at the pharmacy level. There are some other initiative we are taking as well in terms of dealing with managed care and getting a better preferred physician within the managed care environment. So all things taken together we believe, will have a very positive impact going into the remainder of the year.

Corey Davis - Natixis Bleichroeder

And then Larry, one more question. RGH-188, the Phase IIb trial in bipolar mania, it was my understanding that it is the depression component of bipolar, that is a little bit harder to treat. Is there a reason why you are going just after mania not just straight bipolar?

Larry Olanoff

We have plans in a longer term to look at depression as the potential target for this product, as well other bipolar depression or mono-polar depression. But the general sequence of events in terms of how are predecessors have approached this within the area of advanced antipsychotics has been schizophrenia and for bipolar mania, the mania component first. It is a relatively straight forward study to do and it also sets your dosing parameters within the range or even a bit higher than what you see what you see with schizophrenia. So, I would say at this point we have been probably traditional to program design.

Corey Davis - Natixis Bleichroeder

Okay, great. Thanks very much guys.

Frank Perier, Jr

Thanks Corey.

Operator

Your next question comes from the line of Annabel Samimy.

Annabel Samimy -- UBS

Hi, thanks for taking my question. Couple of quick questions, first on Bystolic, did you – have you actually had discussions with the FDA, whether the senior study would be sufficient enough for a filing. And do you have any additional plans to conduct any other studies in CHF on top of this senior study?

Larry Olanoff

Yeah, good that is a good question. We have previously announced that we had discussion with the FDA around that precise issue, and we presented to them the construct and details of the senior study and they gave us directions that they believe that will be adequate for the filing. Obviously they will have to review the day themselves. So subject to their ultimate assessment, but we have at this point no plans to do any other large studies on congestive heart failure.

Annabel Samimy -- UBS

Okay, great and on the managed care side, you had a goal of being on 70% of formulary to Tier two or Tier three by year end. Can you just give us an update on where you are, with that goal for Bystolic?

Larry Olanoff

We believe that goal was very achievable. We may be able to stay ahead of our current plans in terms of the schedule, as I mentioned in the prepared comments this morning, we are moving ahead. We are already approaching that goal on some of the strategic managed care plan, and far we have covered about 81% of the actual beta blocker prescriptions and that now our Bystolic is placed on formularies that would account for that percentage either in a unrestricted Tier two or Tier three position.

Our objective as stated earlier is 70% of all managed care plans and we are actively pursuing that. We still believe that's and achievable goal. And that said of the whole managed care plans we hope to be about 30% in a Tier two position and the remainder in the Tier three.

Annabel Samimy -- UBS

Okay, and then one last question, I have to just go back on the whole Namenda issue. The growth is off like a 10% just from your last quarter and I was just curious to know, is there anything else going on within Namenda that would demonstrate that slower growth, because it's really the demographic for al- timers who don't support that kind of slow down. So is there something else going there that we should be aware of?

Frank Perier, Jr

No, Annabel, on a quarterly progression the growth is down, on a year-over-year it's up. Sometimes it could be attributed to just to think I guess and there is some seasonality to it and again it goes to the roll-over of the managed care plans, the Part D plans, between when people get to year-end and then roll over to January 1. So you do get some additional uptake in that quarter. There is nothing that we see in the market place or the script rate that will cause any concern relative to the Namenda scripts in sales.

Annabel Samimy -- UBS

Okay, great. Thank you.

Operator

Your next question comes from the line of Marc Goodman.

Marc Goodman - Credit Suisse

Yes, hi Larry, couple of questions. First of all on Lexapro; can you give us a sense of the absolute level of detailing, what is going on just in the past couple of quarters and how that is changed. I mean with Bystolic coming on you said that you had switched some warps to that. So would you give us a sense of the absolute level of detailing. Because I do not think share of voice in this category is the percentage really as relevant as it used to be?

Second question you talked about doubling the pipeline, can you give us a sense of the state of the deal pipeline, what it looks like out there, we ask you the question kind of every quarter but this one, you specifically even mentioned that you need to double the pipeline. And so can you talk about some other, are there things coming soon, late-stage type stuff? Has the market changed much.

And then a third question is on Benicar, which was pretty dramatically a different number versus the past couple of quarters. Were there some inventory changes going on, for that product we can talk about?

Larry Olanoff

Okay. I will the second question and let Frank talk to you on the first and third question. Regarding in the pipeline, what we said in the past year or so was, we look at the late stage opportunities, things that are in have Phase II results or later. We believe that amalgamated group if all successful based on what we still say our recently conservative forecast into the market place would more then replaced in the long-term the lost revenues due to the loss of exclusivity for Namenda and Lexapro.

Having said that though and looking at what we think is a reasonable estimate of success either in terms of managing the hurdle getting the product approved, with reasonable labeling for actually achieving the kind of numbers we want to achieve in the market place, we feel that in terms of that revenue base we should replace essentially double those number of opportunities in the longer term. And what we were doing to achieve that in a rough sense in terms of just to look at the number of products there, is try to come up with equal number of revenue generating products or equal amount of revenue generating products by either advancing products, which are currently in Phase II into late stage status whereby going out and acquiring additional products, through licenses or more direct acquisition. And so we are still very active in that regard and we are still looking very actively to late stage opportunities and we will continue to update the community as we go forward and are able to close the deal on a number of these. I will let Frank now talk about the detailing question and the Benicar revenues.

Marc Goodman - Credit Suisse

Well, Larry before you move out, can you just give us sense, as you are looking out there is the number of products you are looking at, is it even better than it was three months, six months ago? Has the dynamic out there got more competitive, it just seems like everyone is looking at the same products?

Larry Olanoff

No, I do not get a sense that it is any more competitive than it has been in the past. I think lot of our larger pharma competitors tend to look at very early on projects, discovery oriented projects. On the late stage projects, I would say there is equal number or not as much expanded number of opportunities. We clearly have expanded our scope, we are looking across broader therapeutic areas. But I do not think there is a deficit of opportunities, we're just trying to find those opportunities that we feel are the best investment. So in any given time we have got three or four, I would say fairly well advanced items on our list. But there are literally hundreds, if not thousands of opportunities we look at across the course of a particular year. But, we have not found a deficit of opportunities out there. I think you cannot make a prediction as to saying what or when you acquire one per quarter. We tend to go in for flurries of products, we have the capacities to do that. We could potentially sign three deals in a month and then go quiet for some months. So we take them as they come to us, and we evaluate it as quickly as we can. I will let Frank address your other questions.

Frank Perier, Jr

Yes, sure, Marc. Between the sales force coming back from Benicar, which basically occurred in June as well as the sales force coming back from AZOR, we have had a significant increase in the number of contact and equivalent details that we have for Lexapro versus planned increases of well over 250,000 in July, 250,000 in June for the quarter. So it’s a significant impact that we’ve got in getting that sales force back and it should, both is significant additional support in stabilizing the brand.

Marc Goodman - Credit Suisse

Would just give us a sense of what were the number of details six months ago, so just we have sense of a change?

Frank Perier, Jr

You are getting almost a 30% increase in number of detail versus planned.

Marc Goodman - Credit Suisse

And then on the Benicar?

Frank Perier, Jr

I am sorry, could you just repeat the question once more.

Marc Goodman - Credit Suisse

Well, Benicar revenues looked like they were much higher than they were in the past of quarters, I was just wondering if there was an inventory change or what is going over there?

Frank Perier, Jr

Our ability to attract the details between gross to net and inventories with BENICAR, have not been that good and the number does move around, and Daiichi Sankyo is in the best position to answer that question, to be honest. But we are very comfortable with the level of co-promotion income that we spoke to you in the quarter. Next question please operator?

Operator

Yes sir, your next question comes from the line of Tim Chang.

Tim Chiang - FTN Midwest

Hi, thanks. Well Larry I had a question about milnacipran. Have you guys completed the US study on that yet and also there is a blood pressure study and what is the status of that study finishing?

Larry Olanoff

What I can tell you is both those studies have finished their recruitment. We are still following patients in both studies and we do not have access to topline results. We will have those before the end of the year and we will have them available should they become needed to address any questions you guys feel you need to have?

Tim Chiang - FTN Midwest

But, once you reviewed that data, you do not plan on providing that data to investors, do you or?

Larry Olanoff

We would provide that data only, we don’t see those as material events necessarily in least in terms of any unexpected results at this point of those, we don’t have any results. But no we do not, we have not thought about whether we will be putting that data out in a broader way. We will actually have the data available for scientific conferences when the time comes.

Tim Chiang - FTN Midwest

And then just one follow-up on ceftaroline. Given the positive results you have seen in complicated skin structure infections, what is the logic behind that filing it, with just that indication?

Larry Olanoff

That is a very good question. We have gone back and forth on that in our early strategy session. We openly believe that though the comments in the market are strong that both those two indications that we are planning on filing, really control the majority of infections in the hospital market. And we feel that would be the best position to start with coming into the market. We don’t know where ceftobiprole will be in terms of how much time ahead of us now that it's for viewing and approval or action has been delayed. But that, we felt all along that coming in second to ceftobiprole having both those indications would be an important strategy and we have defined and set up our program accordingly.

Tim Chiang - FTN Midwest

Okay and then. I just had one follow up question for Frank. I had a lot of questions about the details and Lexapro. Could you talk a little bit about the absolute number of sales that you now have focused on Lexapro relative to a year ago. Is that number actually much bigger, given the fact that Benicar is not being promoted anymore?

Frank Perier, Jr

Tim, we do not normally talk about the operational details of the number of reps that we have got allocated products. What I would say is that, with the return of both the Benicar and now the AZOR sales force that, in addition to supporting the launch of Bystolic which is again a very big primary care of launch We have devoted significant sales resources to that launch and have supplemented some of those of resources with the return of some of the Benicar and AZOR reps. Namenda and Lexapro that we are probably slightly ahead of where we were detailing last year for Lexapro.

Larry Olanoff

And just to put it in perspective. When we had assigned two primary care sales force ultimately did the promotion of Benicar then later one to AZOR, we were still detailing Lexapro either in first or second positions but the adjustments just made with an emphasis on Benicar. Taking those sales forces back gives us a lot more flexibility on how to we adjust those first and second positions details.

Tim Chiang - FTN Midwest

So do you expect there to be a lag effect that there will be some benefit with all this increased promotion to Lexapro sales in the back half of this year.

Frank Perier, Jr

Well, our expectations for the year was twofold relative to Lexapro. We expected the market to grow at about 2% and it is kind of limping along maybe just shy of 2%. And we expected it to loose between 20 and 50 basis points a share over the year. Well, we have already lost that share. So our objective is to stem the share loss, stabilize the brand and potentially get some benefits in the back half of the year. I think that is probably what you should expect. But I think our real expectations is to just relatively maintain and stabilize the share basically where it is right now.

Tim Chiang - FTN Midwest

Okay, great, thanks a lot Frank. Thanks.

Frank Perier, Jr

Sure.

Operator

Your next question comes from the line of David Book.

David Buck - Buckingham Research Group

Yeah, thanks for taking the questions. A couple of clarifications for Frank and then a pipeline question for Larry.

Frank Perier, Jr

Sure Dave.

David Buck - Buckingham Research Group

Frank, on the R&D milestones, that you mentioned about $70 million. Were you referring to September quarter in that?

Frank Perier, Jr

Yes, correct.

David Buck - Buckingham Research Group

And then the balance in the second half of the year.

Frank Perier, Jr

Yes.

David Buck - Buckingham Research Group

And for SG&A, originally for fiscal '09, you talked about $1.3 billion. Are you still expecting that? And does that include the charge that we saw in the quarter?

Frank Perier, Jr

Yeah. We are at about $1.3 billion and yes, that would include the charge. We are over $1.3 billion including the charge.

David Buck - Buckingham Research Group

Okay, so the 320 to 330, obviously does not include that?

Frank Perier, Jr

No, it did not.

David Buck - Buckingham Research Group

And then for Larry, can you talk a little bit about aclidinium and the forum, when we are going to see the data. Has there have been any learning on your own in terms of just the mechanism of action and the safety profile of the mechanism of action of this product. Obviously SPIRIVA's data is not in yet. But have you done any work or heard questions from the FDA in regarding the mechanism itself?

Larry Olanoff

With Aclidinium the mechanism is well known, it is a muscarinic receptor antagonist.

David Buck - Buckingham Research Group

Alright

Larry Olanoff

Not different in principle than SPIRIVA, but the product has other different bio-pharmaceutics probably which we think make it dramatically different than SPIRIVA and we believe and I think pretty apparent and much more user friendly delivery device.

Regarding the efficacy we just presented in much more detail I should say; Almirall presented much more detail of the Phase II data that both relate to our licensing decisions at a recent ATS meeting and I suspect there will be in future presentations of the Phase III data, but we haven’t put those on quite yet on the calendar.

The only other question you raised in terms of safety, I guess I will read into that. There have been a number of the questions raised a few months ago about our potential increases in stroke which SPIRIVA. Is that that we you were getting at?

David Buck - Buckingham Research Group

Yeah.

Larry Olanoff

That was based on their placebo control data and kind of a long- term accumulation of data, the rates that they were looking at. You have to remember this is a population that is elderly and almost entirely long-term smokers who are already at risk for cardiovascular events. Our understanding is the numbers of the events they were seeing with SPIRIVA which were over that of the placebo group, but still within the range that one would expect in the background population.

So we have not been overly concerned with that findings in general. We have looked at our own database, we are not seeing any signals. Of course that database is still blinded, but the rates overall don’t impress us, as being any different than the background or even as high as the events that SPIRIVA had reported again within the background we can't come up with a mechanistic reason to explain why, if the fact there is a real association why SPIRIVA would be associated with such events. But we can comment at least on a comparative biopharmaceutical properties SPIRIVA has half life in the systemic circulation in the number of days, I think five or six days was our half life, our drug is essentially, entirely active within the lung and then is rapidly metabolized before reaching the systemic circulations. Our half life and systemic circulation when measured at very high doses above those that are being used clinically is about five to six hours. So, there is a vast difference in terms of systemic exposure between the two drugs.

David Buck - Buckingham Research Group

Then just a final, can you remind us what the economics are on combination products and what the development stages in the corporation between yourselves and Almirall?

Larry Olanoff

We see that the, we have announced that we are pursuing a Formoterol combination with Aclidinium and we are also in our earlier stage pursuing a steroid, clinical steroid combination with Aclidinium, we have not named steroid at this point. The beta agonist project is in Phase II. The economics are such, in terms of what we see by the way of potential returns to the franchise on a scale similar to the monotherapy itself. So we are quite excited about that opportunity going forward and then all those projects are wrapped into a general agreement that is similar in nature to the monotherapy one.

David Buck - Buckingham Research Group

Great. Thank you.

Operator

Your next question comes from the line of Dave Windley.

Dave Windley - Jefferies & Company

Hi. Thanks for taking the question. I wanted to ask more directly. Has the FDA on milnacipran asked for the ambulatory, blood pressure, safety data?

Larry Olanoff

No, the FDA has not asked for that yet.

Dave Windley - Jefferies & Company

They have not. Could you walk us through the management's decision process on not voluntary submitting that data?

Larry Olanoff

I would think there is an obligation to submit the data, I mean we have submitted all the safety data all long, by way of safety updates and the necessary blinded information. But the studies themselves are not complete. We have an unblinded study, so there is nothing to submit per se in terms of the results.

Dave Windley - Jefferies & Company

Alright. Understood. But and when those are complete, your plan is not to submit then was specifically requested by the FDA?

Larry Olanoff

Right now we do not have plans to have them completed at that time of the action.

Frank Perier, Jr

And the timing on the study is basically contemporaneous with action by the FDA at this point.

Dave Windley - Jefferies & Company

Right, right.

Larry Olanoff

We complete sufficiently in advance to necessitate their submission.

Dave Windley - Jefferies & Company

Excuse me, okay thanks. And then just on the sales force, you have commented a little bit on the additional details over Bystolic and back to Lexapro. Is the detailing capacity, has it been constant or has there been with the removal of sales reps off of Benicar or AZOR, did you take that opportunity to curtail the sales force of the detailing capacity some what?

Frank Perier, Jr

We have not made any change in the size or scale of our sales force, but the detailing capacity is basically the same as what we had enforced last year. And we certainly do not want – we are not in a position to be reducing the size of our sales force, given the sensitivity of the market and products that we have in the market already as well as the launch, supporting the launch of Bystolic and hopefully the launch of the milnacipran.

Dave Windley - Jefferies & Company

Right. So Larry just wondered if that might have been a contributor to the SG&A being little bit soft, but sounds like it was not.

Larry Olanoff

No.

Dave Windley - Jefferies & Company

The last question I have is, what is management’s read on the approval of Cymbalta for fibro and more specifically the label? Is there anything in that that is helpful or instructive relative to review of milnacipran?

Larry Olanoff

I think that the general reading would be positive in a sense that here is the same division reviewing our product with a similar general mechanism of actions. We believe we are very similar safety profile. So we take that as positive.

Dave Windley - Jefferies & Company

Okay, great. Thanks for taking the questions.

Larry Olanoff

Thanks, Dave.

Operator

Your next question comes from the line of Gary Nachman.

Gary Nachman - Leerink Swann & Company

Hi Larry. Just to clarify on milnacipran. Do you still feel just as good about the approval timeline as of PDUFA date or are you getting a little bit more conservative with that estimate?

Larry Olanoff

At this point, all we can say is that we have our PDUFA date in October. I am aware number of companies that had FDA requested delays on action dates. We have not got any messages according to that. We will continue to communicate with the FDA to see where they are in the process and all the questions they have asked us for on this division have been fairly routine, so we have not picked up on any signals that they are going to be late but you never know for certain.

Gary Nachman - Leerink Swann & Company

Okay. Frank, did I hear you right earlier that you said $70 million in R&D milestones in this coming quarter’s end, the rest in the fourth quarter. So nothing in fiscal 3Q and I would think a milnacipran approval would trigger milestones. Is that correct?

Frank Perier, Jr.

I have said $70 million in next quarter and there will be some minor milestone expenses in the third quarter but then a big chunk in the fourth quarter. And we do not really discuss as to what the milestones are. I would tell you that from an accounting standpoint that when you pay milestones for approval they would be capitalized and amortized over the life of the product versus being expensed to R&D on the.

Gary Nachman - Leerink Swann & Company

Okay. I was just more curious about the timeline as far as when there was going to hit.

Frank Perier, Jr.

Sure. As I’ve said, the bulk, 70% of it’s in the next quarter and then you have a little bit in 3Q and then replace will be remainder in 4Q, a chunk in 4Q.

Gary Nachman - Leerink Swann & Company

And the next on Bystolic, is there any way to take up pricing on the product? The price per prescription is so low and I guess that leads to your guidance for fiscal ‘09 of $60 million, seems like a long way to go to get there but I guess you are still confident that you are going to hit that number.

Frank Perier, Jr.

From our perspective the launch is on track. We are basically right on our estimates for getting to the $60 million and it's a long-slow build in a hyper tension category. You are not going to get this big explosive launch, but basically the feedback that the dated that we’re getting back relative to the number of docs per week that were new docs that were getting per week, who are writing scripts for Bystolic. The anecdotal feedback that we are getting from the docs relative to the messaging and looking at the number of repeat patients and then the sources of new patients, all the metrics point to the fact that we believe we are on track to achieve the $60 million.

Larry Olanoff

We also look at the realign of the week to week change in new Rx share against other previous cardiovascular launches in the category; high potentials. And it looks like we are tracking very well especially to our own experience with Benicar but also looking at things like AZOR or tech-turner, we are doing fine, we are happy with the fact that we are actually a little bit above our original projections.

Gary Nachman - Leerink Swann & Company

Okay. And pricing, I guess there is no real flexibility there if they keep it on part of the category?

Frank Perier, Jr.

We could take our normal annual price increase which is kind of the plan would be for the following fiscal year, but no, we are satisfied with the pricing where it is. In the economics everything we have built has been based upon this price level.

Gary Nachman - Leerink Swann & Company

Okay. On the fiscal ‘09 guidance, I am assuming that does not include anymore share buyback, is that correct?

Frank Perier, Jr.

That is correct.

Gary Nachman - Leerink Swann & Company

Okay. And then last one is for Larry, what all the strategy be with one still in Namenda once that is available in terms of trying to convert the franchise over? Are you expecting to take the bulk of the franchise of portion of it and how do you think formularies is not going to receive that? Thanks.

Larry Olanoff

That is a good question. We would anticipate based on previous switches of this nature that we are looking at roughly a third of the franchise in terms of turnover and obviously we are looking to maximize the timeframe that we have that opportunity in an exclusive basis. So, it’s a three year opportunity as we see it and we would try to be as much as two years a little bit more into market place after the loss of exclusivity for demand to be on that, we are not giving any guidance as to the timing as this was still following through the fact litigation and we will make a perfect determination probably early next year where we are.

Gary Nachman - Leerink Swann & Company

Okay, thank you.

Frank Perier, Jr

Operator we have time for one more question.

Operator

Okay, sir your next question comes from the line of Gene Mac. Your line is open sir.

Gene Mac - HSBC

Hello.

Frank Perier, Jr

Yes.

Gene Mac - HSBC

Hi can you hear me?

Larry Olanoff

Hi.

Frank Perier, Jr

I can hear you fine.

Gene Mac - HSBC

Yeah. On milnacipran I just had a question on how Pfizer is sort of positioning in the market based on symposium at your conference in June they basically are if you haven’t had a chance to get the feedback from that in separating fibromyalgia as having two components one with the depressive component on one sort of patients with sort of a three disruption component, which makes sense from Pfizer's perspective. And so setting up Celexa and another drug Xyrem for patients that have those three component disrupt those three component then Milnacipran and Cymbalta for patients who have a depressive component, I was just wondering would if you have any reaction to that in sort of positioning or sort of separation in the market and if that’s something that would be consistent with Milnacipran selling this?

Larry Olanoff

You made a good point. I think Forest is going where they have to go given the attributes of their product one of the major issues with Celexa is it does cause a substantial problem in patients, so presumably for that proportion of patients with sleep difficulties which I don’t think is a greater proportion of patients per say, the drug may have benefited and may have to be dosed to deal with that aspect in terms of when you dose it during the day. We think that there is actually greater opportunity for patients in terms of mood disorders and very importantly fatigue problems within this disease and that we think that this category across the SNRIs is specifically milnacipran which has got a somewhat increased activity on the neuro energetic side, it could be good particularly beneficial therapy. I think you can lead on some checking with the community, and the messages we are getting which I am sure you can go out and check yourself. Is that… at the moment they are just betting the SNRIs will openly be first line used drugs, so there could be a second line use.

Gene Mac - HSBC

Okay, okay and then quickly interest income with a little bit delay relative to expectation this quarter, is that all just interest rate impact or was there any sort of shift in the basket of where the money is being dumps off?

Frank Perier, Jr

No, it is basically all interest rates year-over-year and in fact, we are actually ahead of little bit ahead of our plan on interest income. And just the factor of where rates are today versus where they were a year ago, we keep the duration of our portfolio fairly current. So we move pretty much with the short-term rates.

Larry Olanoff

And we tend to emphasize liquidity albeit return if necessary.

Frank Perier, Jr

And there has been no change in the mix of our investments.

Gene Mac - HSBC

Okay, great. And if I could just get one more in a real quick on RGH-188, that these two data that you saw, have you guys reached in high dose, as long as you reached at those something in toxicity and could you characterize does it be any different than the other atypical type of antipsychotic?

Larry Olanoff

No, we didn't see any concerning dose limiting toxicity per say, as far the adverse of that profile, we thought we were as good or better than many of the other antipsychotics we weren’t seeing anything by way of the ECG changes, we weren’t seeing any metabolic effects of any proportion so the Phase II data was very encouraging from the safety perspective in terms of going down in dose it's just a general principle or first of all in the Phase II study the lower dose group for whatever reason seemed to be a little better on the efficacy side than the higher dose group have both shown, I think a clinically relevant change versus placebo. But, what we always call with the general principle is that given that all these ages have some pharmacological side-effects going with the lowest dose possible.

Gene Mac - HSBC

Thanks so much for taking my questions, you are helpful thank you.

Larry Olanoff

Thank you

Frank Perier, Jr

Okay operator, I think that concludes our call and thank you everyone for participating in the first quarter conference discussion of earnings. Thank you.

Operator

Thank you for participating in today’s conference call you may now disconnect.

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