Barr Pharmaceuticals, Inc. Q2 2008 Earnings Call Transcript

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 |  About: Barr Pharmaceuticals Inc. (BRL)
by: SA Transcripts

Barr Pharmaceuticals Inc. (BRL) Q2 FY08 Earnings Call August 7, 2008 8:30 AM ET

Executives

Carol A. Cox - Sr. VP, Global IR and Corporate Communications

Bruce L. Downey, Esq. - Chairman of the Board and CEO

William T. McKee - EVP and CFO

Christine A. Mundkur, Esq. - CEO - Barr Laboratories, Inc.

G. Frederick Wilkinson - CEO - Duramed Pharmaceuticals

Analysts

Gregg Gilbert - Merrill Lynch

Ken Cacciatore - Cowen and Co.

Ronny Gal - Sanford C. Bernstein & Company Inc

David Buck - Buckingham Research

Robert Jones - Goldman Sachs

Marc Goodman - Credit Suisse

Adam Greene - Stanford Group

Rich Silver - Lehman Brothers

Gregg Gilbert - Merrill Lynch

Tim Chiang - FTN Midwest Securities

David Buck - Buckingham Research

Edmund C. Kim - JPMorgan Securities Inc

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Barr Pharmaceuticals Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Instructions being given at that time. [Operator Instructions]. And as a reminder, this conference is being recorded.

I would now like to turn conference over to our host, head of Investor Relations, Ms. Carol Cox, please go ahead.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Well, thank you, Ruth. Good morning everyone and welcome to Barr’s earnings conference call for our second quarter and six months ended June 30, 2008.

Earlier this morning, we issued our press release through PR Newswire and have posted a copy on our company’s website at www.barrlabs.com. A copy of the release has also been provided to the Securities and Exchange Commission on Form 8-K.

This morning’s conference call is being webcast live and can be accessed through our website. A replay of the conference call will also be available from beginning at 10:30 AM Eastern Time today through 11:59 PM Eastern Time August 21st.

Before we move on to today’s prepared remarks I would like to take a moment to inform investors of several matters. First, in order to provide more transparency in to the adjustments included in our adjusted earnings, our release includes a chart showing our consolidated P&L on a US GAAP basis, a column for the adjustments impacting each line item as a resulting and adjusted P&L. Secondly, we intend to file our Form 10-Q with the SEC no later than tomorrow, Friday August 8th.

Finally I would like to remind investors that we incorporate on this conference call by reference, the risks and uncertainties set forth under the heading forward-looking statements in our earnings release and in our most recent filings with the SEC, all of which are available on the Investor Relations section of our Company’s website.

Should statements made by management contain information that is not historical, these statements are essentially forward-looking and are subject to risks and uncertainties and consequently actual results may differ materially from those expressed or implied on today’s conference call.

Joining me on today’s conference call are our chairman and CEO, Bruce Downey, Bill McKee, Chief Financial Officer, Christine Mundkur, our CEO of Barr Laboratories and Fred Wilkinson, the CEO of Duramed Pharmaceuticals.

Bruce will provide an overview of the financial results for the quarter and six months ended June 30, 2008 and provide an overview of the company’s updated guidance for 2008. Following Barr’s prepared remarks, Bill McKee will review the financial results for the quarter and six months period in greater detail. And finally, we will open the call up to questions. I would now like to introduce Bruce.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Thanks, Carol, and good morning everyone. We had another strong quarter. Our GAAP earnings per share of $0.52 versus $0.41 a year ago and our adjusted earnings were$0.64 a share versus $0.77 a year ago.

As Carol mentioned, there’s a reconciliation between the GAAP earnings and the adjusted earnings in the chart attached to our press release. Just a note to explain the results versus the guidance we gave in May at our first quarter conference call. As you may recall, we earned $0.57 in the first quarter and indicated in the call in May that we anticipated earnings to be down sequentially in the second quarter.

At the time we gave that guidance, we anticipated that the generic Yasmin launch would occur after the close of the second quarter in July and in fact, we were able to launch that product two weeks early or a week early and the launch quantities and consequently the sales and earnings associated with the launch of that product actually fell in the second quarter.

The sales for the… of Yasmin for the quarter were something over $40 million and had about a $0.09 impact on our earnings per share for the quarter. So you back out the$0.09, we earned approximately $0.55 a share adjusted for the second quarter, which is still above the consensus number of $0.53 as a consequence of actually stronger than expected performance across the board.

So that… with that sort of explanation, I think you can see how we went from guiding lower than to $0.57 to actually earning an adjusted basis $0.64 for the share… shares for the quarter. I think we had a very strong top line growth for the quarter. Total revenues were $779 million versus $634 million a year ago. Our generic business revenues were $557 million versus $484 million a year ago. Our proprietary business, our top line was $118 million versus $102 million a year ago and our alliance development and other revenue line is $93 million versus $36 million a year ago.

So across all of the different activities of the company, we experienced very strong revenue growth in the quarter. To close out the financial discussion, I will repeat… reiterate today our earnings estimate for the year of the stand alone company for $2.75 to $3.05, slightly back weighted as you can see and relative to the third and fourth quarter, we see it slightly back weighted into the fourth quarter versus the third.

Obviously the big news at the company occurred after the close of the quarter and that’s the announcement on July 17 that we will be selling the company to Teva at a price of $66.50 a share, valued at 60% cash, 40% stock and using the closing price of the Teva shares on July 16. Since the announcement, the Teva shares have traded up somewhat and in today’s market; the sale price is approximately $68 a share and obviously will vary day to day as the share price of Teva shares goes up and down.

The process of working toward the close of the transaction is well under way. We’ve made our Hart-Scott-Rodino filing last week. We’re working on the necessary regulatory filings for the European market and all of that’s proceeding in an orderly way. At Barr, we’re preparing our proxy statement which will be submitted to our shareholders for the vote on the transaction which we expect to occur… the vote to occur sometime in early to mid-December backing up the proxy that would be sent out approximately 30 days… 35 days prior to that, all working toward the close of the transaction before the end of the calendar year.

Right now at Barr we’re focused on continuing the success, the things that have made us successful as a stand alone company to turn over to Teva the strongest possible set of assets. One measure of that, of course is our… the productivity in R&D program which has been very strong over the first half of the year. We currently have over 70 ANDAs pending at FDA. Eight of those are injectable which will complement the seven injectable products we have in the market.

We have four ANDAs pending at the FDA. One we expect to have approved later this quarter and actually launched late in the quarter, early in the fourth quarter. We have over 300 registrations pending in Europe and the rest of the world. These registrations cover approximately 90 different molecules. We have over a 100 generic products in our pipeline. We have four ongoing Phase III trials in our proprietary business and in addition have completed two other Phase II trials earlier this year.

We’ve also completed our first set of trials related to a biologic product and we expect to file the adenovirus vaccine BLA later this month. We’re continuing the G-CSF trials in Europe and we are continuing the clinical program for a second biologic product here in the United States, the identity of which we have not disclosed for competitive reasons.

Apart from the very strong R&D and financial results for the quarter, some other highlights, Allergan bought out the future payment obligations for the Sanctura product for $53 million. We’ve launched in addition to launching the Yasmin product, we settled the Yas patent challenge and with the date certain launch in the future, we’ve obtained a favorable ruling on the Mirapex case that I think is surprising some of the prognosticators and the industry, we follow along. We had a very strong case and the judge actually validated that belief with this ruling. We’ve had completed our trial in the NASACORT patent challenge in May… obtained full OTC status for Plan B in Canada. So across the board I think, both financially and in the underlying business sort of sets the stage for future growth and future profitability, the quarter was a very successful one.

With that, I’ll turn the call over to Bill, who will take you through some of the individual line items and the P&L and as Carol mentioned, we’ll open it up for questions after Bill’s discussion.

William T. McKee - Executive Vice President and Chief Financial Officer

Thanks, Bruce. Good morning everyone. The total revenues for the quarter were… as Bruce mentioned earlier, $779 million which were up 23% compared to the prior year, and up 17% on a constant currency basis driven by both, higher product sales and higher alliance and development revenues. The total product sales were $675 million in the June quarter, up approximately 15% or $89 million compared to the same period last year, reflecting both higher proprietary and generic product sales. On a constant currency basis, total product sales increased about 10% as compared to the prior year.

Sales of the generic products… of our generic products were $557 million during the quarter, up $73 million or 15% as compared to last year’s total and up about 9% on a constant exchange rate basis. Of that total, North American sales accounted for $340 million while the remaining sales of $217 million were recorded in our European and rest of world markets.

Our North American sales of $340 million were up $44 million or 15% versus the prior year driven by higher year-over-year sales of our oral contraceptives and the slight increase in our non-OC products. Generic OCs totaled $155 million in the quarter, an increase of $39 million or 34% compared to last year. The year-over-year increase is primarily due to the $45 million of sales from the June 2008 launch of Ocella, our generic version of Yasmin which more than offset lower sales across a number of our other OC products due to lower pricing and lower market share.

Excluding the contribution from Ocella, our generic OC products were about $110 million which were down versus last year as expected, but up as compared to last quarter, reflecting higher sales of Kariva and higher sales on several OCs due to customary tradeshow buying patterns which occurred in the second quarter.

We continue to anticipate that our generic OC sales will be up in the second half of the year versus the first half and previously we indicated that we thought the total OCs would be up about 10% to 15% year-over-year. It looks like the OC sales will now be up above that high end of the range, more in the 15% to 20% range for the full year.

Non-OC sales in North America totaled $184 million in the fourth quarter, an increase of $5 million or 3% driven by higher sales of vitamin D product and Claravis due to higher demand for these products, as well as sales of alendronate, which we launched in February 2008.

Partially offsetting these higher sales were lower sales of Ondansetron due to lower volume and pricing, as well as lower sales of Desmopressin and Warfarin principally due to lower pricing in those markets. Sequentially, our non-OC sales in North America were up about $15 million, reflecting higher sales across a number of different products and due in part to the customary trade show buying activity I mentioned earlier. We do anticipate Q3 sales in our non-OC line to decline off of Q2 levels and probably be a little bit higher than our Q1 levels, but then we see a fairly significant increase in that line in Q4, driven primarily by anticipated new product launches.

Our rest of world sales totaled $217 million in the quarter, an increase of $29 million, or 15% as compared to last year. On a constant currency basis, our rest of world sales were ahead of our internal plan, but were down slightly, as strong sales growth in our CEE region and in particular Russia was offset by lower sales in Croatia and Poland. The decline in sales in Croatia was due to a lower influenza and respiratory season in the region, as well as increased competition. While the sales decline in Poland is primarily due to the timing of sales between Q1 and Q2 of this year, as our overall year-to-date sales in Poland are above last year’s sales.

Turning to the proprietary segment, the sales for the three months ended June 2008 totaled $118 million, an increase of $16 million or 15% from the same period last year. The year-over-year increase reflects higher sales of Diamox, which benefited from higher pricing and the absence of supply shortages, which negatively impacted last year’s sales.

In addition, we recorded increases in sales of SEASONIQUE and ParaGard, both due to increased product demand. These increases more than offset a $5.5 million decline in sales of SEASONALE due to lower pricing from generic competition.

On a sequential basis, our proprietary sales increased by $23 million, or 24%, with strong sales increases across the portfolio, including a rebound in Cenestin sales off Q1 levels, as well as higher sales of ParaGard and ENJUVIA. As we look into the second half of the year, we continue to forecast significant sales gains as compared to the first half of the year, driven by expected demand growth for our promoted products, especially PLAN B, and by contributions from a forecasted new product launch late in the third quarter or in the early fourth quarter, which should more than offset lower sales of our non-promoted products.

Alliance and development revenue totaled about $93 million in the quarter, up about $57 million compared to last year. As Bruce mentioned, this increase was principally due to the $53 million payment we received from Allergan on the Sanctura product, but in addition, our revenues earned under our license agreements with Shire were up significantly compared to last year, reflecting higher reimbursements for increased R&D investments, offsetting these increases was somewhat lower revenues from our arrangement with Teva on generic Allegra.

Turning to the margins in the generic line, our reported gross margins on generic product sales for the three months ended June was about 45% as compared to 49% in the prior year, excluding adjustments, the adjusted margin in the current period was around 52% as compared to 55% last year. In the current year period, the adjusted margins were negatively impacted by a few things.

First, the margins on Ocella are far lower than on our other generic products because of arrangements we have with raw materials suppliers and with Bayer. The margins were also negatively impacted by changes in FX rates because currency fluctuations have a greater impact on our costs then on certain of our revenues. We make sales in U.S. dollars in certain countries outside of the U.S. and as a result, changes in foreign currency rates have a… don’t have as significant impact on our sales as they do on our cost of sales, all of which are incurred in non-U.S. dollars. And finally, we had somewhat lower absorption of fixed costs compared to last year, really reflecting higher production, or ramp-ups in production that we initiated last year in order to meet goals of increasing our inventories.

On the proprietary side, our reported margin for proprietary products for the three months ended June was 69%, excluding adjustments, the adjusted margins were about 84%, which was in line with our full year rate for 2007. Go up a couple of percentage points as compared to the first quarter of 2008, primarily due to increased margins on Diamox, Zebeta and Ziac, three of our legacy products, which we have the benefit of lower royalty costs due to the expiration of our royalty agreements with a third party.

Turning to the operating expenses, SG&A expenses were $221 million in the quarter, up 18% or $33 million compared to last year’s total. About half of that year-over-year increase reflects the impact of the weakening dollar, excluding the impact of FX; we did incur higher sales and marketing costs in Europe, both to support O.R.C.A, the German-based oncology company that we acquired in September of 2007, as well as incremental sales and marketing costs in Russia, Hungary and in Croatia. In the US, SG&A costs were up modestly, reflecting higher promotional spending on SEASONIQUE and PLAN B and higher legal costs, which were mostly offset by significantly lower consulting and internal audit costs as compared to last year.

R&D expenses for the quarter increased by about $12 million in the three months ended June 30, 2008 as compared to the prior year period, reflecting about $4 million increase as a result of change in the foreign currency rates, as well as higher bio-generic development costs and higher proprietary clinical study costs.

Net interest expense in the quarter was $20 million compared to $34 million of net interest expense in the same quarter last year, primarily due to lower interest costs due to lower debt balances and lower interest rates. The lower interest expense was somewhat offset by lower interest income, also due to declining rates and somewhat lower average cash balances this year compared to last year.

At June 30, we had total debt of approximately $2 billion, while our cash and short-term marketable securities totaled around $540 million and in the second quarter we of course made our scheduled principal repayment of $50 million on our five-year term loan. As we discussed on our last call, in April we drew down approximately $285 million from our $300 million revolving credit facility to refinance debt previously held by our PLIVA subsidiary.

On June 19, we raised a new $300 million five-year term loan and used the proceeds of that new term loan to restore the liquidity under our revolving credit facility. Other income and expense was less than $1 million in the second quarter, which is down compared to a $5 million gain in the prior year. The decrease primarily relates to a gain reported last year that was not repeated in the current year due to the sale of a hedging contract in last year’s second quarter.

Turning to income taxes, the company’s effective tax rate increased in the current quarter to 46% from about 35% in second quarter of 2007, and increased to 45% for the six months ended June from about 37% in the first half of last year. The rate for both the three-month and the six-month period ending June 2008 was negatively impacted compared to last year by a change in the mix of income between certain U.S. and foreign taxing jurisdictions, a shift in the company’s investment portfolio from tax exempt to taxable securities, the loss to-date of the benefit from the U.S. R&D tax credit, which expired at December 31, 2007, and has not been reenacted, as well as higher overall FIN 48 provisions in the current year as compared to the prior year. Although our tax rates through the second quarter have negatively impacted by the absence of the US R&D tax credit, we do expect that legislation will be reenacted near the end of the year and will be applied retroactively.

We currently believe our GAAP tax rate for 2008 will be around 44%, which is up a bit compared to the around the 42%, we previously anticipated. Though we still expect the adjusted rate to be in the range of 35 to 38% for the year, but clearly within that range, the adjusted rate has also moved up slightly.

On an EBITDA basis, we had $212 million of EBITDA in the quarter ending June, as compared to $178 million in the prior year period. And it was up about $57 million on a sequential basis. Operating cash flows totaled $68 million in the quarter, as increases in our accounts receivable due to the timing of product sales; for example, the Yasmin sales near the end of the quarter offset the increased net earnings. Cash flows from investing activities in the quarter included investments in CapEx of around $33 million, which was up from $27 million in the prior year and up about $3 million from the prior quarter.

I wanted to just make a couple of other comments on the guidance that Bruce outlined early in the call. We are maintaining the earnings range in the 2.75 to 3.05 range. We are still heavily weighted toward the second half of the year, although not as much as we previously anticipated, both because of the launch of Yasmin and also because of the results for the quarter are a little bit ahead of what we internally had projected. So, as we look out through the second half of the year, we will still be heavily weighted toward the second half of the year, just not as much as we previously anticipated.

I noted in looking at the First Call consensus yesterday and today, that the consensus is around $0.80 for the third quarter and I would encourage everybody to take a look at those numbers and consider them in relation to the timing of the Yasmin launch, which as Bruce said, added around $0.09 or $0.10 to the second quarter results and would also ask you to take a look at the tax rates, going forward into the second half of the year.

With respect to the…sort of the earnings trend in the second half of the year, Q3 will clearly be up compared to Q2 and then Q4, we do expect to be significantly above Q3, reflecting, you know, principally that the timing of new product launches, as well as we do see the tax rate declining in the fourth quarter, consistent with our estimated timing of when the US R&D tax credit legislation will be reenacted.

So, with that, Carol, I’ll turn it back over to you.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Okay. Thanks, Bruce. Thanks, Bill. Ruth, if you could open it up to the questions and answers. And again, I would remind everyone, if you could please limit your questions to one, so we could have an opportunity for everyone to ask a question.

Question and Answer

Operator

Alright, thank you. [Operator Instructions]. And there is a question from Gregg Gilbert with Merrill Lynch. Please go ahead.

Gregg Gilbert - Merrill Lynch

Thanks, good morning.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Good morning. Gregg.

William T. McKee - Executive Vice President and Chief Financial Officer

Good morning.

Gregg Gilbert - Merrill Lynch

Two quick questions. Bill, first, can you tell us what gross margin would have look like without Yasmin generic and for Bruce, do you believe your accommodation with Teva will spur other large generic M&A transactions in the near to mid-term? Thanks.

William T. McKee - Executive Vice President and Chief Financial Officer

Gregg, on the margin question, the… an adjusted basis, Ocella had a negative impact of about a little more than a percentage point. So, it reported around 52%. It would have been a little over 53%.

Gregg Gilbert - Merrill Lynch

Thanks.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Gregg, I didn’t bring my Teva cards this morning, but there’s been a movement for consolidation for the 15 years, I’ve been in business and I think at any point you can say in the near or mid-term you could expect some additional consolidation. I don’t have any particular one in mind, but I would be surprised if something didn’t happen.

Operator

And the next question comes from Ken Cacciatore with Cowen and Company. Please go ahead.

Ken Cacciatore - Cowen and Co.

Hi, guys. Just had a quick question. Bruce if you could comment on Famy Care, Mylan made an announcement yesterday that they have signed them up for oral contraceptives, and any thoughts you had about that company and that threat.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

I don’t think it’s imminent. We have some…we know something about the company and I know they make these products for other parts of the world. As I’ve said all along, it’s very challenging to bring 20 some new products to market. There have been rumors of people going in the business for a long time and the reality is, there have been very few entrants, because it’s challenged. And I don’t expect them to be out any time soon.

Ken Cacciatore - Cowen and Co.

Okay, great. And then just another one on Actiq, Cephalon’s talking about having the risk management program in place around September. Any complications that you think you would have in matching that risk management program and having your own Actiq ready to go ahead of…I know there’s a bit of discrepancy about the FTC agreement or when it expires, but any thoughts about timing behind your own Actiq?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

No, we continue to be, stand ready to make the product and comply with the risk management program. We continue to sell Cephalon product. Our agreement with them runs through September 2009, not 2008, and we believe it’s extended a year beyond that because of the FTC order. You know, we have made what we think are the appropriate assumptions about the competitive environment and we continue to expect generic Actiq competition this year.

Ken Cacciatore - Cowen and Co.

Okay. Thanks, guys. Congratulations, again.

Operator

And there is a question from Ronny Gal with Bernstein. Please go ahead.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Hi, Ronny.

Ronny Gal - Sanford C. Bernstein & Company Inc

Good morning, guys. Congratulations. Couple of quick ones. First, about the impact of the same deal Ken mentioned about your investment requirements under Hart-Scott-Rodino is there now a case why buying Teva will not have to divest one of the sets of products given the additional competition coming to the market? And second, can you tell us a little bit about plan B, if you can help us think about how to normalize this year without that issue of inventory swing, as we think about the sales of the product next couple of years?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Well, first of all, on the Hart-Scott-Rodino side, I think it’s premature to say what, if anything, Barr and Teva would have to divest as part of the consolidation. We’ve made our filing. I believe we’ve had a preliminary meeting with the FTC, but it’s far too early to make any predictions about how that’s going to work out.

Our Plan B, our projections that Bill indicated, we think will be up over the second half of the year are based on our estimate of demand sales, which we believe were significantly above ex-factory sales, in the first and second quarter, and if they grew first quarter over fourth quarter last year, second quarter over first quarter of this year and we expect them to continue to grow over the second half of the year. I don’t think…I haven’t familiarized myself with the in-depth line item projection beyond 2008. So, I don’t think I’m prepared to comment on that.

Ronny Gal - Sanford C. Bernstein & Company Inc

And just a quick follow-up, I guess is your opening offering to the FTC to keep the…to not have to divest those oral contraceptives?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

You don’t make an offering. You make a filing and then the FTC responds to that. So, we’ve not made any, any filing. I note that Watson has a complete line of products. That Sandoz has filed applications for at least some products. You hear Mylan saying they are going to bring out 22 products and so they must have those under development. So, you see, I think competitive marketplace of Prasco with Authorized Generics, you have a number of competitors there and so I don’t think it’s a foregone conclusion or anything has to be divested.

Ronny Gal - Sanford C. Bernstein & Company Inc

Thanks.

Operator

And the next question comes from David Buck with Buckingham Research Group. Please go ahead.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Hi, David.

David Buck - Buckingham Research

Hi, good morning. Just a couple of quick ones. First, can you give an update on just where the negotiations are with Ortho Tri-Cyclen Lo and any other negotiations that you’re having on settlements. And, Bruce, can you give the outlook just that you’d be expecting for ParaGard after this year. It’s obviously been a source of growth and strength… would you say that you still expect growth as we enter ‘09 or do we think that it’s starting to slow down after ‘08? Thanks.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Generally we don’t comment on our settlement discussions unless there’s some precipitating event that causes them to become public but… and clearly that was the case in Ortho Tri-Cyclen Lo. We continued to work forward to get the agreements finalized and I expect it to be settled and as we indicated when we pulled the case from the court’s dock at earlier this year.

I think we’ve also confirmed that over the… over years now, we’ve had discussions with Sanofi about the possibility of settling some of the disputes we have with them. Beyond that, we haven’t commented and I don’t think it’s appropriate to comment on the substance of those discussions at this point.

On ParaGard, it continues to be a very strong product. It’s grown nicely. We expect it to continue to grow. If you look at that subset of the contraceptive market, you have two IUDs in the market, Mirena, which is a significantly larger product at this point in time than is ParaGard, but we see no reason why growth in ParaGard can’t match the growth that we’ve seen in Mirena. It’s a very good product. It’s a very cost effective contraceptive product. It’s safe, so I think it’s a… it’s something that’s going to continue to grow.

David Buck - Buckingham Research

Okay, thanks.

Operator

And the next question comes from Randall Stanicky with Goldman Sachs. Please go ahead.

Robert Jones - Goldman Sachs

Hi, it’s actually Bob Jones on for Randall. I had a question on the press release. I know you mentioned that outside of Yasmin, you saw… volume in pricing down on some of the other oral generic contraceptives. Could you talk about this going forward? If this is something you expect to see in the back half of the year? And then also along the same lines, are you seeing an offset to this in your branded OCs, IUC, SEASONIQUE, and is the direct to consumer campaign maybe a result of that?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Well, SEASONIQUE continues to grow. It’s a promoted product. We expect it to grow in second half of the year over the first and it’s grown this year over last. So, yes, we… it’s true that the promoted products tend to erode the volume for the generic products in the contraceptive area.

So, yes, we expect to see our promoted products continue to grow and as a result of our promotion and the promotion of other companies, the volume of the generic OCs to decline slightly. But I think Bill gave our guidance in his remarks. We expect overall generic OC sales to be up something north of 15% year-over-year. Obviously heavily second half weighted because of the launch of generic Yasmin, but we continue to see other products strong as well.

William T. McKee - Executive Vice President and Chief Financial Officer

And I would also add that, as we talked about in the first quarter, when we saw the reduction in the OC sales in the first quarter, we talked about the change in customer mix and so forth, which… that, we anticipate continuing through the year.

The only other thing that I would remind everybody that we previously talked about as well is that with the MIRCETTE patent expiring in the fall, we are anticipating competition on our Kariva product. So, that’s one additional factor that, will bring down the non… the portfolio of OC products other than Ocella. So… but that’s all factored into the guidance we gave earlier in the year and what we just updated.

Operator

[Operator Instructions] And the next question comes from Marc Goodman with Credit Suisse. Please go ahead.

Marc Goodman - Credit Suisse

Yes, we started talking about Plan B, but could you talk about the inventory levels for Plan B? Are they back down to normal levels such that in the second…

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

We believe so. We believe so, Mark.

Marc Goodman - Credit Suisse

Okay, so we’re done and now demand is there… and that was starting when? Was that starting on 10th beginning of the quarter or August?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

I would say at the end of… end of last quarter, beginning of this quarter.

Marc Goodman - Credit Suisse

Okay. Second of all, paragraph 4. You usually give us a sense of what we should be focused on as far as next stage. Obviously there’s Ortho and Mirapex, Nasacort…these are the stage products that everyone’s assuming you guys are in settlement negotiations. Is there any other products that we should be focused on for the next six months or so or even when you’re with Teva for the…. call it the next 12 months.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Well, we’ve got Allegra-D is a product that’s out there, that I would call your attention to and I think… well, I don’t have the list in front of me, Mark. I know we provide that cheat sheet at the various conferences and…

Marc Goodman - Credit Suisse

But nothing’s…

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Nothing stands at… right now we’re focused on the near-term opportunities of TRI-CYCLEN LO, some of the other… Mirapex, some of the other products that we’ve talked about over the last several months.

Marc Goodman - Credit Suisse

And the last question is just on Germany. You said Germany was down versus last year. I remember last year in the second quarter it was unusually big, but can you just talk about what’s happening in Germany right now and whether you expect those sales to ramp up significantly later in the year?

William T. McKee - Executive Vice President and Chief Financial Officer

Mark, its Bill. On Germany, there was a slight decline year-over-year. I think that’s principally due to the fact that the sales in last year’s quarter reflected buy-ins under the AOK contract, which didn’t get repeated to the same magnitude this second quarter, but, I think it’s more of a timing issue, still very strong market and we’re still doing very well in that market. Yeah, and it’s down on a constant exchange basis. It’s up on an absolute basis.

Operator

[Operator Instructions]. And the next question comes from Adam Greene with Stanford Group. Please go ahead.

Adam Greene - Stanford Group

Thanks, good morning.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Good morning, Adam.

Adam Greene - Stanford Group

Good morning. Bill, I think you had mentioned that fourth quarter should be up significantly due to a new product launch. Are you referring to SEASONIQUE low launch in the fourth quarter, or is the spike-up due to a new generic launch?

William T. McKee - Executive Vice President and Chief Financial Officer

Adam, it’s generics and I would also point out that we do have a proprietary product launching in the second half of the year, which could either be the end of Q3 or in Q4. So, that could also shift things around between Q3 and Q4, but the principal item I was addressing in terms of the increase, between Q3 and Q4 is driven by the new product launches on the generic side.

Adam Greene - Stanford Group

What gives you the visibility on the generic side? Is it a patent expiration product or 30 months stay, or what gives you the confidence in that product launch?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

There are no legal impediments to the launch of the product, just requiring the approval.

William T. McKee - Executive Vice President and Chief Financial Officer

Right.

Adam Greene - Stanford Group

Okay. Thanks.

Operator

And the next question then comes from Rich Silver with Lehman Brothers. Please go ahead.

Rich Silver - Lehman Brothers

Good morning.

William T. McKee - Executive Vice President and Chief Financial Officer

Hey, Rich.

Rich Silver - Lehman Brothers

Maybe you answered this question. I’ve been on and off the call, but on Yasmin in terms of stocking, was all of the stocking booked in the second quarter or might there be some in the third quarter?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Virtually all was in the second quarter Rich.

William T. McKee - Executive Vice President and Chief Financial Officer

Right, and I will comment that the substitution rate for the quarter has been extremely strong. It’s over 80% I think at this point.

Rich Silver - Lehman Brothers

Okay, and second question is, and you may have answered this, Allegra-D, can you just give us a little bit more detail on exactly where you are with that in terms of… on the legal side?

William T. McKee - Executive Vice President and Chief Financial Officer

We have approval, final approval from the FDA. It’s subject to the same patent challenges that Allegra is subject to, where we’ve won summary judgment on five and six and the sixth patent is one that really relates more to damages that we might incur. There’s an additional patent on Allegra-D. What to do with the product is completely within our hands.

Rich Silver - Lehman Brothers

So on the additional patent, is that the lynch pin of it all?

William T. McKee - Executive Vice President and Chief Financial Officer

I’ll say no more than to say that what we do with Allegra-D is solely within our control.

Rich Silver - Lehman Brothers

Okay. Thanks very much.

Operator

And we do have a question from Gregg Gilbert.

William T. McKee - Executive Vice President and Chief Financial Officer

Coming back around, Gregg.

Gregg Gilbert - Merrill Lynch

I was sticking to the two-question rule.

William T. McKee - Executive Vice President and Chief Financial Officer

It’s a one-question rule, Gregg.

Gregg Gilbert - Merrill Lynch

I think it was two, right, Carol? Anyway. Bill, can you talk about Croatia, Poland and…you said Germany was a slight decline. Can you quantify the increases or decreases for Croatia, Poland and Russia? Or at least review what you said about those, in terms of whether they grew or shrunk?

William T. McKee - Executive Vice President and Chief Financial Officer

Let me get my notes here, Gregg.

Gregg Gilbert - Merrill Lynch

Okay.

William T. McKee - Executive Vice President and Chief Financial Officer

I don’t think I said, but just that they were… just that they had declined in Croatia due to the lower influenza and respiratory season as well as increased competition and that sales in Poland had declined, but it appears to be primarily due to the timing of sales between the first quarter this year and the second quarter this year as the year-to-date sales through the first half of 2008 are in line with our expectations and are above last year’s totals.

So it’s on… on the Poland side, more of a timing issue and we haven’t quantified it, Gregg, so I guess I would respectfully decline to do so at this point.

Gregg Gilbert - Merrill Lynch

Okay, and for Bruce, to follow up on the ACTIQ question you were asked earlier, if you’re expecting generic competition in ‘08, additional generic competition, that implies that you don’t believe the FDA will apply the new risk management program that will be for Fentora to ACTIQ, is that correct?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

We have taken what we think are prudent… made prudent assumptions about generic competition or additional competition in the market, Gregg, and I think that…

Gregg Gilbert - Merrill Lynch

It’s more conservatism than a micro assumption based on what I’m asking, right?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

I’m not sure what you’re asking. We think that we can meet any new requirement and we can make the product ourselves and we’re prepared to do that when and if the FDA imposes those requirements and gives us the green light to make the product. And until then, we’ll sell the product we buy from Cephalon.

Gregg Gilbert - Merrill Lynch

Fair enough, thanks.

Operator

All right, and we have a question from Tim Chiang with FTN securities. Please go ahead.

Tim Chiang - FTN Midwest Securities

Hi, Bill.

William T. McKee - Executive Vice President and Chief Financial Officer

Hi, Tim.

Tim Chiang - FTN Midwest Securities

I had a question about… you had a settlement with Shire on Adderall XR… are there any clauses with that settlement once that you’re… once you’re bought by Teva? I mean is there anything that really changes with that settlement?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

No.

Tim Chiang - FTN Midwest Securities

Okay. And, Bill, I wanted to ask you about the tax rate. I know one of the big drivers when you bought PLIVA was a potentially lower tax rate and what have been the challenges in trying to get a lower tax rate over the past couple of years?

Because I know Teva’s saying the same thing that they expect to have a much lower tax rate as well. But what’s really… what has been going on there for you guys?

William T. McKee - Executive Vice President and Chief Financial Officer

The challenge is not an unexpected one and it’s one that would over time still be one that we would overcome, I guess, is the word. And that is an increasing portion of the profitability of products needs to reside outside of the United States and that occurs through increased development activity, increased manufacturing activity, more of the value creation components of products need to be attributed to jurisdictions and activities occurring outside of the US.

In our business because of the nature of the development timelines and ability to transfer products, you can’t just pick them up and move them from one place to another. It takes time to get a portfolio of products that would have the characteristics that would lead to greater profits being assigned to other jurisdictions.

So… and we are doing the things today and have been since the day we closed the PLIVA transaction to over time… to have products where an increased portion of the profitability would be generated outside of the US. So I guess, the challenge is only that it doesn’t happen overnight. But it’s not a challenge in the sense of… we don’t know what we need to do or we’re unable to do it. It’s just that it takes time, it takes time to do it.

Tim Chiang - FTN Midwest Securities

Great. Thanks a lot.

Operator

And we have a question from David Buck with Buckingham Research Group. Please go ahead.

David Buck - Buckingham Research

Yes, thanks. Just two quick questions. First for Bill, can you give us some sense of what your US pricing trends have been? And for Bruce, just to follow up on the question about consolidation, can you… one of your competitors referenced the fact that they saw the sales process heating up in some… for certain smaller generic companies. Could you give a sense of where you think regionally you might see more or less consolidation? Thanks.

William T. McKee - Executive Vice President and Chief Financial Officer

David, the pricing questions just… the general pricing trend question is always a hard one to address or maybe it’s actually an easy one to address, because in general in the brand business, we have opportunities to raise the price and in the generic business we generally don’t and generally over time prices decline as new competition comes in and those are still the same fundamentals that have always been in place.

The things that affect us obviously are new competition on products in our portfolio, but short of specific events on specific products, meaning, new competitors on specific products, I don’t get the sense that there’s any significant fundamental shifts in the pricing environment in the market.

David Buck - Buckingham Research

Just to follow up on that, do you have a sense of what your 12-month-old, for example, base business products might have been declining at?

William T. McKee - Executive Vice President and Chief Financial Officer

No.

David Buck - Buckingham Research

Okay.

Operator

And the next question comes…

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

The second question, David, if I understood it, what region of the world do we expect to see consolidation, I think it’s fair to say, and the European market characterized with larger number of small and medium-size companies and there’s been a lot of activity in consolidating those over the last couple years that we’ve… since we’ve been paying particular attention, just because there are more companies in that region of the world than there are in the U.S., I would expect the consolidation there to be more… larger number of consolidations there than here.

David Buck - Buckingham Research

You expect that to be because the markets are changing more towards tender markets, or why do you see that being the case?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Well, because they are… if you’re expecting consolidation, the place for the largest number of companies are probably the place for the largest number of consolidations will take place and that’s why I see it there and we see it for companies that are for sale or being shopped that are presented to us. So that’s why I say Europe more likely than the United States.

David Buck - Buckingham Research

Okay. Thanks.

Operator

The next question comes from Ronny Gal with Bernstein. Please go ahead.

Ronny Gal - Sanford C. Bernstein & Company Inc

Hi, guys. Bruce, can you help us think a little bit… we know that usually…

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

I don’t know if I can help you think, Ronny. That’s really a big assignment.

Ronny Gal - Sanford C. Bernstein & Company Inc

I see with my level of thinking, probably does not take too much. I’m wondering and something we don’t really have any experience with is, how to think about the volume or the volume lost by companies upon acquisition? I think Mayne to the idea is that, typically 20% of the volume will be… where the company gets to be in play. Where does that come from? How should we think about it in terms of… typically how much volume should be… it could be lost in the transaction… exact to competition?

William T. McKee - Executive Vice President and Chief Financial Officer

Well, I don’t know what their experience is. We’ve had two significant acquisitions in the last seven years. Duramed and PLIVA, and we lost no volume in either.

Ronny Gal - Sanford C. Bernstein & Company Inc

So in the U.S. market, you just don’t think that’s necessarily going to happen?

William T. McKee - Executive Vice President and Chief Financial Officer

No.

Ronny Gal - Sanford C. Bernstein & Company Inc

Okay. Now, going back to Eastern Europe, one of the synergies that was mentioned by Teva is that, your sales force in Eastern Europe, that in certain countries where they do not have one today. Can you just go a little bit into more detail, talk a little bit about your market coverage in those geographies, number of sales people, what is the asset there that you bring in to the table?

William T. McKee - Executive Vice President and Chief Financial Officer

Well, I think that Teva described it. There are places where we do business and have sales force and portfolios in Eastern Europe where they don’t and therefore the consolidation of the companies will give Teva access to those markets more easily than if they tried to construct a Greenfield operation in those countries.

There are other countries where we both have sales forces and the opportunity will be there to either increase the coverage or reduce the costs, so that there are a lot of opportunities there and they are different for each different market.

Ronny Gal - Sanford C. Bernstein & Company Inc

Can you put a little bit meat on that in the major markets? Russia, Germany, Poland?

William T. McKee - Executive Vice President and Chief Financial Officer

Well, I think we have a much bigger presence in Germany and Croatia than Teva. We both have a significant presence in Russia, and the consolidated company will have a very significant presence there.

We’re both in Poland. I’m not sure who’s larger there, but together we are very, very strong. We also have a pretty big component in the UK, where they are already the number one company. So, you have to lay them down each and go country by country. It’s not easy to do off the top of my head.

Ronny Gal - Sanford C. Bernstein & Company Inc

Okay. Thank you very much.

Operator

And the final question comes from Edmund Kim with JPMorgan. Please go ahead.

Edmund C. Kim - JPMorgan Securities Inc

Great, thanks for taking my question. I’ve got two. Firstly, should we expect some traction and movement in the Teva case anytime soon, since the Teva case is heading to trial?

And similarly on the litigation front, are you more positive today that Nasacort will be settled, and then secondly, can you characterize the nature of the two projects, that you referred to in your prepared remarks on the biogenerics. Is it antibody related, or is it work related to your complex macro molecule?

William T. McKee - Executive Vice President and Chief Financial Officer

That’s three questions. I’ll try and get them. Obviously there tends to be activity in the case as trial approaches. Generally if there’s a settlement, it’s when a trial approaches and if you don’t settle the case, you’re going to get a result from the court. So, yes, I expect activity in… to heat up because of the scheduling of the trial.

We haven’t… in the biologics area, we mentioned Adenovirus which we’re filing the BLA this month. We have the G-CSF trial under way in Europe, with our partner, Mayne, and now Hospira and we have an undisclosed product that I’m not going to disclose in this call that’s in clinical trials here in the U.S. There was a middle question there.

Edmund C. Kim - JPMorgan Securities Inc

Did the Nasacort settlement?

William T. McKee - Executive Vice President and Chief Financial Officer

Oh. It’s possible. We have a hearing on September.

Edmund C. Kim - JPMorgan Securities Inc

September

William T. McKee - Executive Vice President and Chief Financial Officer

We have shown willingness and readiness to settle cases on reasonable terms and we stand ready to do that here. I always believe that compromise and uncertainty is preferable to sort of the binary result you get from the court decision. Whether the other side agrees with me or not, we’ll find out later.

Edmund C. Kim - JPMorgan Securities Inc

Should we…

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

Not today.

Edmund C. Kim - JPMorgan Securities Inc.

If I may, should we look at the September data that drop that firm date?

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

No.

Edmund C. Kim - JPMorgan Securities Inc.

Okay. Thank you.

Bruce L. Downey, Esq. - Chairman of the Board and Chief Executive Officer

You can see in Yasmin, it’s possible to settle cases after they are decided. Even if the court rules on the 9th, which I’m not sure we expect.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Alight. Thank you, Ruth, if you just provide the replay information. And thank you, everyone.

Operator

Alight. Thank you. Ladies and gentlemen, this conference will be made available for replay after 10:30 am today until August 21st at midnight. You may access the AT&T executive play back service at any time by dialing 1-800-475-6701 and entering the access code 930193. International participants may dial 1-320-365-3844. Again, those numbers are 1-800-475-6701. International is 1-320-365-3844 and entering the access code 930193.

That does conclude our conference for today. And thank you for your participation and for using AT&T Executive Teleconference. And you may now disconnect.

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