Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Allison Wey - Senior Director of IR

Pat LePore - Chairman, President and CEO

Jerry Martino - EVP and COO

Veronica Lubatkin - EVP and CFO

John MacPhee - President of Strativa

Paul Campanelli - EVP and President, Generic Division

Tom Haughey - EVP and General Counsel

Analysts

Rich Silver - Lehman Brothers

David Buck - Buckingham Research Group

David Moskowitz - Caris & Company

Randall Stanicky - Goldman Sachs

Greg Gilbert - Merrill Lynch

Bill Dezellem - Titan Capital Management

Ken Cacciatore - Cowen & Company

Elliott Wilbur - Needham & Company

Par Pharmaceutical Companies Inc. (PRX) Q2 2008 Earnings Call Transcript August 8, 2008 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Par Pharmaceutical Conference Call. My name is Karen, and I will be your coordinated for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like the presentation over to your host for today’s call, Ms. Allison Wey, Senior Director of Investor Relations. Please proceed.

Allison Wey

Thank you. Good morning, and welcome to Par Pharmaceutical’s earnings call to discuss the company’s second quarter 2008 results. I hope you had a chance to review the press release which we issued yesterday afternoon. A copy of the press release is available on our website at www.parpharm.com. In addition, we’re conducting a live webcast of this call which is also available on the website.

We’re joined this morning by Pat LePore, Chairman, President and CEO; Jerry Martino, Chief Operating Officer; Veronica Lubatkin, Chief Financial Officer; John MacPhee, President of Strativa; Paul Campanelli, President of Par’s Generic Division and Tom Haughey, General Counsel.

Pat will provide opening remarks. Veronica will provide detailed second quarter results and the revised guidance. Following Pat’s closing remarks we will open the call for questions.

Please note that today’s conference call and webcast may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent any statements made on this call contain information that’s not historical, these statements are essentially forward looking and are subject to various risks and uncertainties detailed in the company’s filing with the Securities and Exchange Commission such as Form 10-K, Form 10-Q, and Form 8-K reports.

I will now turn the call over to Pat LePore.

Pat LePore

Welcome. Thank you for joining us today as we review Par’s results for the second quarter of 2008. For the three months ended June 28, 2008, Par had revenues of $113 million, a net loss of $20.1 million or $0.60. This is compared with reported revenues of $167 million and net income of $2.8 million or $0.08 per diluted share for the same period of 2007.

In the first six months of 2008, Par had revenues of $268 million, a net loss of $17.5 million or $0.53 per diluted share. The decrease in revenues reflects a year-over-year decline in new generic product launches, increased pricing pressures on existing generic products, difficult reimbursement environment for Megace ES, and increased legal expenses.

The products we anticipated launching in Q2 either slipped into Q3 or have yet to launch. The lack of new product launches increased pricing pressure on the base business and the legal expenses have picked up considerably, some of which will not occur again at these levels and some which can be characterized as an investment in our first-to-file strategy.

As for Strativa, Megace ES did not grow as anticipated, primarily due to reimbursement status changes and a couple of significant Part D plans. As we all know, new product launches are the lifeline of the US generic business and are particularly critical to Par given our current operating model. Without them, we are left to continually eroding base generic business comprised mostly of commoditized products. And as we stated previously, our business model supports our first-to-file, first-to-market strategy.

With the second quarter behind us, we are already seeing the benefits of product launches in the second half of year and are in fact projecting earnings per share for the second half of $0.29 to $0.73. Additionally, look forward to 2009 and beyond as our pipeline of first to files comes to fruition.

Despite the difficulty in the quarter, we did make some significant progress on several fronts. Continuing towards a goal of $250 million in annualized revenues by year-end 2010. In April, Strativa announced that its development partner, BioAlliance Pharma reported positive preliminary top-line results from a Phase III study of Loramyc.

Subject to a complete review of the study results and further discussions with the FDA, it is anticipated that an NDA could be filed by year-end 2008. At a branded price, this market is worth approximately $500 million in annual net sales.

Also during the quarter, Strativa announced that Alfacell reported that the preliminary data from its Phase III clinical trial, which assessed treatment with ONCONASE plus doxorubicin compared to treatment with doxorubicin alone, did not meet physical significance for the primary end point of overall survival in unrespectable malignant mesothelioma.

However, based on the preliminary data from the Phase III study, statistically significant results were achieved in the subset of evaluable UMM patients who failed a prior chemotherapy regimen before entering this clinical trial. This subset of patients achieved a statically significant increase in overall survival when treated with ONCONASE plus doxorubicin compared to treatment with doxorubicin alone.

Alfacell is continuing with the planned submission of the remaining components of the NDA based on the statistically significant results of this subset of patients. In June, Strativa added a fourth product to its portfolio by acquiring the commercialization rights to the thin film formulation of ondansetron or MonoSol RX for $1.25 million.

MonoSol RX expects to begin bioequivalency studies before year end. Subject to favorable results, it is anticipated Strativa could file an NDA with the FDA within the next 12 months.

We made progress in the generic business recently as well. As we have previously announced in May, we amended our agreement with Spectrum Pharmaceuticals and paid $20 million in cash to increase our share of profits from 38% to 95% from the generic versions of GlaxoSmithKline’s Imitrex injection.

Par will be permitted to sell generic versions of certain sumatriptan injection products with an expected launch date no later than November 2008, giving Par three months of exclusivity before the patent expires. According to IMS Health, annual US sales of Imitrex are approximately $220 million.

In late June, the company launched dronabinol soft gel capsules Generic Marinol in three strengths. Par and SBC Pharma, an affiliate of Rhodes, will share profits equally from the sales of this product. According to IMS data, annual sales of Marinol are $190 million. Currently, it is just Par and the AG in the market, and we’re very pleased with our share of the market so far.

Just a few weeks ago, Par re-launched 12.5-milligram and 25-milligram meclizine HCL tablets after an explosion at the facility of its API supplier caused the company to source a new API supplier. At this time, Par is the exclusive supplier of the AB-rated generic product and we’re meeting the demands of the market.

I will now turn the call over to Veronica to cover the details of our financial results and take you through the revised guidance.

Veronica Lubatkin

Thank you, Pat. Good morning. In taking you through our results for the second quarter and year-to-date ended June 28, 2008, I will start with a few comments on our revenue and gross margin results versus last year and last quarter.

Total revenues for the three months ended June 28, 2008, were $113 million, decreasing 33% from total revenues of $168 million for the three months ended June 30, 2007. Revenues for generic products in 2008 were $93 million, decreasing $53 million or 36% from generic revenues of $146 million in 2007.

Lower generic revenues in 2008 were driven by competitive pressure including for [particizone] which declined $40 million for propranolol declining $7 million, ranitidine syrup down $3 million, cabergoline down $3 million, and lower royalties driven by ondansetron tablets which declined by $3 million.

Partially offsetting these declines are increased sales of metoprolol resulting from the launch of additional strengths in the third quarter of 2007 with an increase of $22 million. Revenues for Strativa were $20 million in the second quarter of 2008, down $1.6 million or 7% over revenues of $21.6 million for the three months in 2007 due to lower sales of Megace ES.

The company’s gross margin of $25 million for the three months ended June 28, 2008, declined $31 million from $56 million for the three months ended June 30, 2007, and is driven by the sales and royalty impact just discussed.

The company’s gross margin percentage declined from 33.7% in the second quarter of 2007 to 22.2% at the end of the second quarter 2008, driven primarily by the increased sales of lower margin metoprolol, lower royalty as mentioned and lower sales of higher margin products such as propranolol, which launched in February 2007 and benefited from increased net sales in margins from Megace ES.

As a percent of net revenues, the gross margin of 22% in the second quarter of 2008 is below 32% in the first quarter of 2008. The decline in the second quarter gross margins versus the first quarter were driven by zero meclizine sales and gross margin in the second quarter. Par marketed meclizine prior to an explosion at the facility of its API supply in February 2008.

Par commenced shipment of 12.5-milligram and 25-milligram meclizine tablets last month. At this time, Par believes it is the exclusive supplier of the AB-rated generic product. Par had spent two years qualifying a new API source and received the appropriate approval to manufacture and market meclizine utilizing its new API supplier.

Price erosion on our generic product portfolio, which included competitive pressure and included some shifts in customer mix and also certain one-time events, including sell off of excess of discontinued product inventories at reduced margins, shelf stock adjustments driven by price changes in the period, and inventory write-offs of certain pre-launch inventories related to new products launch delays. Lower sales and margin from Megace ES driven primarily by timing of trade buying and the non-recurrence of some favorable returns recorded in the first quarter.

Further impacting second quarter 2008 are the following negative impact versus the company’s previous full year guidance. The re-launch of meclizine had been expected in the second quarter of 2008, but was delayed to July. Par’s reentry to the market for tramadol, which took place in the second quarter of 2008, was negatively impacted by existing high-trade inventory levels. Par has been out of the market since November 15, 2007.

The delay in the launch of dronabinol from second quarter to third quarter 2008, lower than expected sales and margins from Megace ES primarily driven by lower than expected scripts in connection with a major Med Part D plan that imposed changes to reimbursement procedures for Megace ES.

Moving on to year-to-date results, total revenues for the six months ended June 28, 2008, were $268 million, decreasing 33% from total revenues of $402 million for the six months ended June 30, 2007. Revenues for generic products in 2008 were $223 million, declining $138 million or 38% from generic revenues of $361 million in 2007.

Lower generic revenues in 2008 were driven by competitive pressure including for fluticasone, which declined $72 million, propranolol declining $33 million, various amoxicillin products which decreased $11 million, cabergoline down $6 million, tramadol down $6 million, ranitidine syrup down $6 million, and lower royalties driven by ondansetron tablets which declined $11 million following launch in December of 2006. Partially offsetting these declines were increased sales of metoprolol with an increase of $53 million.

Revenues for Strativa were $45 million for the six months ended June 28, 2008, increasing $4 million or 10% over revenues of $41 million for the same period, June 30, 2007, driven by higher sales of Megace ES. The company’s gross margin of $75 million for the six months ended June 28, 2008 decreased $69 million from $144 million for the six months ended June 30, 2007, and is driven by the sales and royalty impact just discussed.

The company’s gross margin percentage decreased from 35.9% to 27.9%, driven primarily by pricing pressures experienced throughout 2007 and continuing into 2008, increased sales of lower margin products such as metoprolol and decreased royalty income, tempered by higher net sales and margins coming from Megace ES.

Moving onto operating expenses, the company’s R&D expenses of $16 million for the three months ended June 28, 2008, increased approximately $1.7 million or 12% from $14.3 million a year ago. The increase is primarily attributable to the company’s generic portfolio, which increased approximately $2.3 million, partially offset by lower Strativa related R&D expenses.

Strativa R&D expenses included the $1.3 million up front fee paid to MonoSol RX and development costs for Zensana. These increases were offset by the non-recurrence of $3 million in 2007, paid to a prior rights to late-stage compound.

The company’s R&D costs of $33 million for the six months ended June 28, 2008, increased $5 million or 17% from $28 million for the six months ended June 30, 2007, due to costs incurred in support of the company’s strategy to expand Strativa, principally through end licensing compounds and late stage development including the up front fees paid to Alfacell, relating to the end licensing of Onconase, to MonoSol RX for the rights to the thin film formulation of Ondansetron, development costs related to the development of Zensana and tempered by the non-recurrence of $3 million paid last year.

SG&A expenses of $37 million for the three months ended June 28, 2008, increased $3 million or 8% from $34 million for the same period in 2007. The increase was mainly driven by higher legal costs of $6 million, tempered by the non-recurrence of severance costs occurred in 2007 of $2 million.

Lower expenses related to sales and marketing behind Megace ES of $2 million lower compensation costs, including lower stock comp costs of $1 million. Higher legal costs were driven in part by increased product litigations including paragraph four activity around the company’s first-to-file pipeline.

Total SG&A expenses of $68 million for the six months ended June 28, 2008, increased $1 million or 2% from $67 million for the same period in 2007, mainly driven by higher legal costs, up $9 million, tempered by lower sales and marketing expenses for Megace ES, the non-recurrence and severance costs in 2007, and lower compensation costs, including stock compensation.

During the first and second quarters of 2008, the company recognized a gain on the sale of product rights of $1million and $500,000, respectively, related to the sale of multiple ANDAs. Also in November 2007 the company entered into an agreement to provide certain information and other deliverables related to Megace ES to enable the formal technology transfer to a third party that is seeking to commercialize Megace ES outside of the US. The company recorded $625,000 in the first quarter of 2008 related to this agreement.

The company recorded a realized loss of $2.1 million for the quarter ended June 28, 2008, which represented other than temporary impairment of the company’s investment at Hana Biosciences, Inc. By comparison, the company recorded an investment loss of $6 million in the three months ended June 30, 2007 relating to the loss in investment of funds that was invested in various floating rate structure finance securities. The fund was liquidated and there was no remaining equity for the limited partners.

However, during the three months ended June 28, 2008, the company reached a settlement in connection with this fund loss and received $1.7 million which the company recognized as gain in the second quarter.

Company’s effective tax rate for continuing operations for the three months ended June 28, 2008, and 2007 were 28% and 35% respectively. The company’s effective tax rate for the six months ended June 28, 2008, and 2007 were 26% and 35% respectively. The full year expected effective rate is subject to fluctuation based on level of pre-tax profits and the impact of permanent items on the tax rate.

In summary, reported net loss for the second quarter ended June 28, 2001, was $20.1 million or $0.60 per diluted share. This is compared with net income of $3 million or earnings of $0.08 per diluted share for the same period of 2007. For the six months ended June 28, 2008, Par recorded a net loss of $17.5 million or $0.53 per diluted share compared with reported net income of $44.3 million earnings of $1.27 per diluted share in 2007. The company generated strong cash flows in the second quarter and June year-to-date period of 2008.

Cash provided by operations was $31 million for six months ended June 28, 2008, which reflects continuing operations as adjusted for non-cash expenses including depreciation and amortization of $11 million and share-based compensation of $7 million that was driven by the liquidation of working capital, mainly lower inventory levels which is declined $33 million, lower net accounts receivable of $3 million as well as higher payables due to distribution agreement partners which increased to $8 million driven by higher sales of partner products mainly metoprolol.

Second quarter 2008 DSO of 75 days is about 10 days higher than expected turns and levels compared to 2007 and the overage is driven by specific overdue invoices that existed at the end of June are cleared as of this date and other items that the company is currently pursuing for collection.

As of the second quarter 2008, inventory turns are approximately 4.7 times per year versus 3.5 times per year as of the end of 2007. Turns have improved mainly driven by the timing of receipt of goods and some seasonality in the inventory at the end of 2007.

Moving now onto our revised 2008 full year guidance, the company’s projections, although there can be no assurances, are based on its results for the first six months of 2008 as well as management’s estimates regarding the impact of product competition on existing products and the market opportunity for certain of Par’s generic pipeline products and recently launched products including dronabinol and the re-launch of meclizine, both of which commenced sales in the third quarter of 2008.

Full year 2008 earnings diluted per share from continuing operations are projected to be in the rage of a loss from continuing operations of $0.06 to earnings of $0.38 per diluted share, down from previous full year guidance of earnings of $0.65 to $0.85 per diluted share, and this excludes any pre-launch spending and milestones related to Strativa’s pipeline products and includes the estimated impact of three potential new generic product launches, sumatriptan kits, clonidine and certain strengths of risperidone ODT. The new products have an expected fully diluted EPS impact between $0.24 to $0.39 in 2008.

Impacting 2008 and reflected in our full year revised EPS guidance are several additional factors affecting our business including the higher than expected impact of competitive pricing erosions experienced in the second quarter of 2008, which will have an impact on full year net sales and margins. We expect that pricing pressure on the base generic business will continue in the second half of 2008. But the rate of erosion is expected to be less than that experienced in the second quarter.

As discussed earlier, the second quarter included certain non-recurring impacts on gross margin including the sell off of excess in discontinued product inventories at reduced margins, shelf stock adjustments driven by price changes in the period, inventory write-offs related to pre-launch inventory related to new product launch delays.

The re-launch of meclizine has been expected in the second quarter of 2008, but was delayed till July. However, the re-launch of meclizine in 2008 will contribute significant profit to the second half of 2008 and will benefit from a significant price increase taken upon our re-launch of this product. Par commenced shipment of 12.5 milligrams and 25-milligram meclizine tablets last month.

At this time, Par believes it is the exclusive supplier of the AB-rated generic rated product. Par marketed meclizine prior to an explosion at the facility of its API supplier in February of 2008. Par has spent two years investing and qualifying a new API stores and received the appropriate approval to manufacture and market meclizine, utilizing its new API supplier. Also, Par launched dronabinol last month and expects additional second half launches including sumatriptan kits.

Megace ES is expected to contribute sales and margin growth for 2008, primarily driven by a price increase taken in July and a stable PRX volume. Full year script volume will continue to be impacted by more challenging than expected reimbursement environment including a change in reimbursement status that was implemented by a major Med D plan earlier in 2008. At this time, we are unable to estimate whether the company will be successful in improving reimbursement status for Megace ES for the remainder of 2008.

On a full year basis, we expect R&D to remain at our previous guidance of roughly $55 million, excluding Strativa and licensing fees for ONCONASE or $5 million in MonoSol RX of approximately $3 million. And finally, SG&A is expected to be roughly $128 million, which is higher than previous full year guidance of $121 million due to higher than expected legal costs associated with the company’s patent litigation including paragraph four legal costs.

With the second quarter of 2008 behind us, the company expects to see stronger results in the second half of 2008. Second half fully diluted EPS from continuing operations, excluding the impact on profits from Strativa milestones and potential pre-launch spending, the 2008 is expected to be in the rage of earnings of $0.29 to $0.73, and includes potential launches in the second half of sumatriptan kits, which is a date certain launch, risperidone ODT and clonidine, as well as the impact of recently launched dronabinol.

Meclizine is expected to contribute significant profits in the second half, including the significant price increase taken upon the company’s re-launch of this product last month. The second half is expected to benefit from a lower rate of generic price erosion including the non-recurrence of certain one-time events discussed earlier and higher sales in the second half of Megace ES following the July 2008 price increase. And lastly, we expect that we will incur lower quarterly operating expenses in the second half than we incurred in the second quarter.

And now, I’ll turn it back over to Pat for some closing thoughts.

Pat LePore

Thanks, Veronica. As we anticipated, 2008 is indeed a transitional year for Par, and the second quarter reinforces our focus on building a strong product pipeline in both of our divisions. With our third quarter launches of dronabinol and meclizine and potential additional launches later in the year, strong pipeline of first-to-file products, progress made in building Strativa’s portfolio of innovative brand of products should help [indicate] to our investors as to why we believe the value of our company can grow significantly in 2009 and beyond.

We’ll now open up the call to questions.

Questions-and-Answers Session

Operator

(Operator Instructions). Your first question comes from the line of Rich Silver with Lehman Brothers. Please proceed.

Rich Silver - Lehman Brothers

Yes, can you give us a better sense, when you look at the many variables that contributed to the shortfall, particularly both on revenues and on the expense side, just putting a little bit more meat around this as far as the magnitude of which one or ones might have represented the lion share of the shortfall?

And then secondly, if you’re looking at the base business and the erosion that – price erosion that you experienced, how much of that is a factor of, just not having new introductions perhaps as a way of stabilizing the base business, essentially the pipeline acting as a stabilizer in terms of the customer base?

And the third question, just on Megace ES, still trying to get a better sense of why we shouldn’t continue to see pressures on Megace ES and what is your outlook in terms of revenue contribution going forward?

Veronica Lubatkin

I guess starting with Megace ES, we do expect growth in the second half. We took a price increase in July of 2008, and the growth will be driven by that price increase, and right now, we are projecting stable PRX volumes for the products.

Rich Silver - Lehman Brothers

What was the price increase on that?

Veronica Lubatkin

12%.

Rick LePore

12%

Rich Silver - Lehman Brothers

Okay.

Veronica Lubatkin

So, we’re unable to predict what will happen in the reimbursement landscape, and we are impacted by changes in status that occurred in the first half. But despite that, the volumes have remained stable. In terms of the erosion that occurred in Q2, there were certain one-time events that occurred, including the sell off of excess inventory from discontinued product inventories that were at reduced margin that is we don’t expect to recur.

There were certain shelf stock adjustments that were given related to price changes that occurred in the quarter. There was also some shift in customer mix as we lost units with higher price customers and gained in lower margin customers. And then in addition, there was erosion against the base business, including, in some cases, meeting pricing pressures in anticipation of lower costs that we expect in the future as a result of new sourcing actions that we’ve taken, both internal and externally at the I port.

Rich Silver - Lehman Brothers

So, putting that altogether, can you give us some sense of what was one-time, what wasn’t, so that we have a better sense of what the real base is to be building from? Is it a $0.20 loss we’re building from? Is it flat earnings, just doesn’t really, it is very difficult for us to know what the appropriate real earnings base is if you strip out the one-timers since you’re not quantifying them, nor giving us a sense whether it is 50% in total or 25% in total if you look at one-timers versus ongoing weakness.

Veronica Lubatkin

Right. Well, I can’t underestimate the impact that having zero meclizine sales in margin in the second quarter. We had sales and margin of meclizine in the first quarter, and we did expect to launch that product, re-launch the product back in the marketplace in the second quarter, so that being delayed to the third quarter seriously impacted the second quarter.

There has been some shift in customer mix as I said, really driven by competitive pricing actions, erosion against the base business, and then with respect to the sell off of excess and discontinued product and the one-time event, they add up to say anywhere from $3 million to $6 million of impact on the period, so together with the loss of meclizine, that pretty much accounts for the loss.

Rich Silver - Lehman Brothers

So, the one-timers, you said it would be $3 million to $6 million of high margin business? $3 million to $6 million from one timers.

Veronica Lubatkin

Yes. That’s including sell off of stocks at a reduced margin which were one-time stock sales, shelf stock adjustments driven by price change in the period and inventory write-offs related to the pre-launch inventory that is were related to launch delays. And meclizine had an impact of about $3 million to $4 million as well lost out of the period, which resumes in the next quarter.

Rich Silver - Lehman Brothers

Right. Okay.

Veronica Lubatkin

And the rest is really driven by price.

Rich Silver - Lehman Brothers

The rest is driven by price and that’s obviously going to stay right where it is?

Pat LePore

That’s right.

Rich Silver - Lehman Brothers

Okay. So, it’s actually, the lion’s share is, in fact, ongoing and that’s the way we have to look at it?

Veronica Lubatkin

I would say about half of it is.

Rich Silver - Lehman Brothers

Half. Okay.

Veronica Lubatkin

Right.

Rich Silver - Lehman Brothers

That’s helpful.

Veronica Lubatkin

The second half, most important impacts on the second half are the launch of new products, dronabinol and meclizine re-launched and sumatriptan launched in the fourth quarter.

Rich Silver - Lehman Brothers

And on those, obviously 100% probability, well certainly meclizine and the date certain on Imitrex?

Veronica Lubatkin

And dronabinol launched last month –

Rich Silver - Lehman Brothers

And dronabinol launched as well.

Pat LePore

And to your point, new launches do help the base business erosion, gives it some more leverage.

Rich Silver - Lehman Brothers

Can you explain why the IMS scripts seem to be increasingly correlate poorly with anything that we see? I guess it is all about price? We just have no idea what kind of price erosion you would have?

Veronica Lubatkin

Right, and I believe there were sufficient stocks of meclizine, so even though we had no sales in the second quarter, there was sufficient stock in the service of script.

Rich Silver - Lehman Brothers

I will step back. Thank you.

Operator

Your next question comes from the line of David Buck with Buckingham Research Group. Please proceed.

David Buck - Buckingham Research Group

Yes, thank you for taking the question. Just if I look at the generic gross margin for a second and step back, you mentioned I guess about half of the impact was what you consider one-time, so if I look at the under 10% gross margin for generics, does that mean effectively that we'll be adding say a 20% gross margin for your generics business and new products add the rest? And secondly, what type of range can you give us for revenues that you're expecting? It is obviously -- for obvious reasons it is wide variance in earnings, but what type of revenue projections should we expect? Thanks.

Veronica Lubatkin

The gross margin in the second half the gross margin percent will benefit most importantly from the launch of new products, again Dronabinol, meclizine, with a price increase taking on re-launch and sumatriptan all helping second half gross margins. With respect to the base business, just to point out that over 50% of our generic based business from authorized generic products and the margins are lower with respect to those authorized generics, so with 50% of the generic base business margin rate not changing, we're really referring to the rest of the generic based business and that margin expected to stabilize in the second half.

David Buck - Buckingham Research Group

Is that a good approximation, though, roughly 20% gross margins for -- excluding those one-time items? And owned products, maybe 50 to 60 with exclusivity?

Veronica Lubatkin

I would say again, the generic based business margin will approach the high teens, again, with over 50% of the product line coming from authorized generics which have low margins so far, they're really driving the gross margin in the base business but the new products will bring up that gross margin if we're successful in launching all of those products.

David Buck - Buckingham Research Group

So start from the high teens. Okay. And then on revenue, just some sense of what we should be expecting for the full year?

Veronica Lubatkin

I think with what I gave you you can probably get there.

David Buck - Buckingham Research Group

Right. Okay. And the confidence level in having clonidine this year. You didn't call that out as the new product you're really counting on, but where is that in the process? This has been obviously a period of five years, six years?

Veronica Lubatkin

It is in the range. It is in our high range. We're not aware of any outstanding issues with the FDA at this time, but obviously, we can't speculate on FDA approval timelines.

David Buck - Buckingham Research Group

Okay. I will step back in queue. Thanks.

Operator

Your next question comes from the line of David Moskowitz with Caris and Company. Please proceed.

David Moskowitz - Caris & Company

Thanks a lot. Given the last series of questions, you came to approaching the high teens on the generic gross margin. Let me take another shot. If I add back the two $3 million impacts that you said, the shelf stock and so forth, and the other $3 million, I get to a gross margin for the generic business of about 16% for this period, so is that a little bit more accurate in terms of the baseline generic gross margin going forward before new products?

Veronica Lubatkin

Yes. Again, I think we expect the erosion in the second half to stabilize and add back those certain one-time events, you do get into the higher teens, and again expect the erosion rate in the second half to be less than it was experienced in the second quarter, and then the launch again of new products will help the rates.

David Moskowitz - Caris & Company

Okay. So 16% is about accurate, maybe a little bit up from there with stabilization, and I guess if you could just opine on that and then also the revenue erosion that comes with the same type of adjustments, the shelf stock and so forth, you talk about that impact in the quarter and what you think could come back into the base business in the third quarter?

Veronica Lubatkin

If you're talking the rate of erosion on the net sales --?

David Moskowitz - Caris & Company

Yes.

Veronica Lubatkin

Again, like I said, over 50% of our net sales are driven by authorized generics, so the rate of erosion on the net sales is a rather low percentage when comparing to the rate of erosion at the gross margin level, because we keep the minority share of those profits, so we can talk about it, but it is really not important to the gross margin erosion.

David Moskowitz - Caris & Company

What about on the top line, though, from the adjustments that you talked about with again write-offs and so forth, how did that impact the top line?

Veronica Lubatkin

Well, inventory write-offs would impact the gross margin. The shelf stock would not continue. They'll continue at the rate of future erosion, and we expect the erosion rate in the second half to be in the range of 10% annually.

David Moskowitz - Caris & Company

Okay.

Veronica Lubatkin

Gross margin level.

David Moskowitz - Caris & Company

On the Megace ES product, you had an increasing margin in the quarter year-over-year, so is that a function of lower rebates to third party reimbursement entities?

Veronica Lubatkin

No. There is a couple of things. We took a price increase in the back half of last year, so that helps the comparison year-over-year, and as well, we have more favorable royalty rates. Royalties are tiered royalty, and because we exceeded certain thresholds of sales, we're benefiting from a lower royalty rate overall.

David Moskowitz - Caris & Company

So we should expect that the margin that we saw in Megace to continue going forward?

Veronica Lubatkin

Yes.

David Moskowitz - Caris & Company

Okay. And I guess just a question, you guys had authorized a buy back provision of about $75 million previously, and I know you haven't been buying back shares. Is there any impetus to get back into the market on the stock?

Veronica Lubatkin

Just in the tight credit market, in order to carry out our strategy, we just think it is prudent to hold onto the cash.

David Moskowitz - Caris & Company

Okay. Thanks very much.

Operator

Your next question comes from the line of Randall Stanicky with Goldman Sachs. Please proceed.

Randall Stanicky - Goldman Sachs

Great, thanks for the financial detail. Pat, are you committed to a go it alone strategy?

Pat LePore

We're committed to our strategy right at this moment. We're always exploring what's best for our shareholders long-term. That's how I would answer that.

Randall Stanicky - Goldman Sachs

And then is it fair to assume as of right now, your three-year plan includes both a brand and generics business?

Pat LePore

As of today it does.

Randall Stanicky - Goldman Sachs

And then the last question, can you just remind us what percent of your current pipeline, your paragraph 4 pipeline is partnered versus what percent is Par exclusive?

Pat LePore

About half.

Randall Stanicky - Goldman Sachs

About 50%?

Pat LePore

Yes.

Randall Stanicky - Goldman Sachs

Great. Thanks for the color.

Pat LePore

You're welcome.

Operator

Your next question comes from the line of Greg Gilbert with Merrill Lynch. Please proceed.

Greg Gilbert - Merrill Lynch

Thanks. I want to start with Megace ES. What's the right sales per prescription level going forward, including the price increase?

John MacPhee

You're looking for -- Greg, this is John. You're looking for the sales per prescription?

Greg Gilbert - Merrill Lynch

Yes.

John MacPhee

The wholesale acquisition price is now about $520 a prescription. Okay? And if you want to take a look at what net sales is from there --

Greg Gilbert - Merrill Lynch

And can you quantify the negative effect in the second quarter that was due to buying patterns? In other words, that multiplier was quite depressed in the second quarter. Can you quantify what sort of a normalized level of sales would have been excluding the one timers?

Veronica Lubatkin

The sales equate -- over the June year-to-date period, the sales equate pretty evenly with the volume, but the script volume at the end of last year, we were closed over the holiday and so a few days of shipments fell into the first quarter, but the pipeline levels at the wholesale level fluctuate between two and three weeks and always have. They're still within that range.

Greg Gilbert - Merrill Lynch

John, can you put a little more meat on the bones as to actually what happened? Was it one contract or several, and what can you do about it going forward from a reimbursement standpoint?

John MacPhee

Yes, Greg. There were a couple of plans that changed the reimbursement status of Megace ES. I am talking about Part D plans beginning in 2008, but there was one that made the most significant change. One of the largest Part D plans instituted a step edit program, actually in many therapeutic categories, not just in the megestrol category. But megestrol was included in the change that they made resulting in a mandate there be a generic trial of three months before brands be prescribed, and so what happened there for Megace ES is in that plan, we lost a considerable amount of prescriptions across the months of, let's say February to June in particular. And that was the biggest impact.

Now at the same time, we were actually able to grow prescription demand in other segments of the market through sales execution and through improved reimbursement with some other plans, and that's why overall you see a flat prescription trend across 2008. We had some puts and some takes.

Greg Gilbert - Merrill Lynch

So for that big -- there is not much you can do in response there, it is not like you can cut price enough to get them back on board, you just take the hit on prescriptions and the ones you get come at a higher price?

John MacPhee

Actually, not necessarily. We are attempting a negotiation process to try and improve that reimbursement status. We just can't predict for you whether or not we'll be successful, but there is a dialog going on.

Greg Gilbert - Merrill Lynch

On the generic side, for how long do you expect to be exclusive on meclizine and what kind of visibility would you have on additional entrants?

Paul Campanelli

Yes, hi, Chris, this is Paul. We feel fairly confident that we'll have exclusivity through 2008. It is a very, very difficult API manufacturer, so I think we're confident through the rest of this year.

Greg Gilbert - Merrill Lynch

Okay. Can you comment on the relative gross margin of meclizine relative to the overall obviously higher, but can you give us more sense than that?

Paul Campanelli

Sure. The way you should be looking at this product, and I think Veronica characterized it very well, this is a force du jour issue whereby we had plant explosions and for all intents and purposes, we are treating this product as a re-launch, a new product entry on an exclusive basis, so you should be looking at margins typical to an exclusive new product launch.

Greg Gilbert - Merrill Lynch

Thank you for that. Lastly, for Pat, you touched on this a bit earlier. Has the recent performance on both sides of the business at all changed your and the board's thinking on the strategic direction or at least the speed with which you pursue what that strategic direction ought to be?

Pat LePore

I think we still believe in a strategy of building a good specialty business and being first to file or first to market on the generic side and trying to change the value driver of the business. As we try to get through this sort of period waiting for a lot of those things to hit, if we don't get value obviously, we always need to think about what's better for our company and for our shareholders, so we're always looking at those types of things, and as we said before, we can't comment on specific M&A activity, but we know we have an obligation to look at other alternatives.

Greg Gilbert - Merrill Lynch

Thank you.

Pat LePore

You're welcome.

Operator

Your next question comes from the line of Bill Dezellem with Titan Capital Management. Please proceed.

Bill Dezellem - Titan Capital Management

Thank you. We have a group of questions. The first one is relative to meclizine. What was the price increase that you took?

Pat LePore

We took approximately a 200% price increase.

Veronica Lubatkin

The re-launch was treated like the launch of a new generic product.

Pat LePore

It was a new price.

Veronica Lubatkin

New price, right.

Bill Dezellem - Titan Capital Management

That's helpful. Thank you. And then relative to your guidance, you did not bring the top end of the range down by the same degree that you brought the bottom end of the range down, so in essence, it appears as though you feel like there might be some upside that you did not have baked into your prior guidance in the second half of the year, excluding here the second quarter issues. Would you please discuss kind of why the top end did not come down to the same degree as the bottom end of the range?

Veronica Lubatkin

Well, I think it is the impact of new products on the overall range, and I think the -- we did not bring the new product guidance down, and so I think that's what you're seeing, but it is offset by the unexpected erosion in the second quarter that obviously pulled through on a full year basis.

Bill Dezellem - Titan Capital Management

Right. And then finally, relative to 2009, you have talked in the past that that was going to be a good year. Would you please refresh our memories relative to the details behind what's going to lead to the solid 2009 and maybe even provide a real wide EPS range?

Veronica Lubatkin

Yes. We have never given any guidance for 2009, but obviously, a lot of the new product launches that are occurring in 2008 will have a positive impact on 2009.

Bill Dezellem - Titan Capital Management

And would you please remind us what branded products you anticipate positively impacting 2009?

John MacPhee

This is John MacPhee. We continue to expect Megace ES growth across 2009, and based on our stated expectation that we can file Loramyc by the end of this year, that that could happen. There should be a Loramyc action date in 2009.

Bill Dezellem - Titan Capital Management

Thank you.

Operator

Your next question comes from the line of Rich Silver with Lehman Brothers. Please proceed.

Rich Silver - Lehman Brothers

Yes. Can you remind us what assumptions you built in on Toprol in terms of additional competition for the rest of the year?

Veronica Lubatkin

There is no real impact of competition that's built in except that we have built in some base erosion assumptions.

Rich Silver - Lehman Brothers

I am sorry, did you say you haven't built in any?

Veronica Lubatkin

I said the forecast that we will maintain share and there will be some erosion at the pricing level, but not at the range that we saw in the second quarter.

Rich Silver - Lehman Brothers

Okay, so you revised upwards your expectation for the product for the second half of the year?

Veronica Lubatkin

No. The second half of the year we believe is flat with the previous guidance, but we did get [towards half] back in the marketplace in the second quarter.

Rich Silver - Lehman Brothers

Okay. Thank you.

Operator

Your next question comes from the line of David Buck with Buckingham Research Group. Please proceed.

David Buck - Buckingham Research Group

Yes, thanks. Veronica, I guess the guidance for this year does exclude any pre-launch activity for the branded business. Can you quantify what, if any, actually you have planned that you're going to be excluding from that, or is it just something that may be extraordinary and wouldn't necessarily happen?

Secondly, for Veronica as well, just the use of cash, obviously you mentioned keeping cash on hand. How concerned is the Company about the potential for acceleration of the convertible debt? I know it is a 10-Q disclosure, but is that more boilerplate or do you think there is a real risk, and for Pat, what's the status of generic Lotrel, I believe it is a nice contributor to the P&L potentially for '09. Thanks.

Veronica Lubatkin

So, most of the pre-launch spending for Strativa will be in 2009, so we're expecting very limited levels of spending in 2008.

John MacPhee

Tom, on the convertible debt, as you know, we're in litigation. We feel very strongly in opposition that the convertible debt will not be converted before its 2010 date, and there is a lot of case law out there at the federal level that supports that.

David Buck - Buckingham Research Group

Just to follow up, is there a decision that you're expecting from the court that's important this year?

John MacPhee

Yes. We're just waiting for summary judgment decision by the court on, hopefully, it will be consistent with other federal circuit court decisions.

David Buck - Buckingham Research Group

Okay.

Paul Campanelli

This is Paul. In terms of Lotrel, we are -- as with any litigation, it's unpredictable. It is difficult to speculate, but I would tell you that we are scheduled to go to trial in mid-2009.

David Buck - Buckingham Research Group

Okay. When does your 30-month stay end?

Paul Campanelli

Our 30-month stay ends, I believe in February '09.

David Buck - Buckingham Research Group

Okay. So if it was a launch, it might be potentially at risk launch?

Paul Campanelli

We're not going to speculate on at risk launch. At this time, our 30-month stay is Q1 '09, and we're schedules to go to trial as I mentioned --

David Buck - Buckingham Research Group

Q3 or Q2. Okay, thanks.

Operator

Your next question comes from the line of Ken Cacciatore with Cowen and Company. Please proceed.

Ken Cacciatore - Cowen & Company

Thanks. Pat, just wanted to ask Randall and Greg's question a little differently. With all the recent activity in the space, you're seeing an interest in your assets increase or is there a change in the environment? Anything kind of a change from six months ago to today and then for John, if you could just let us know on Loramyc, the data was obviously released in the end of April. What's been the interactions with the agency and kind of give us a little more color around what we've been waiting for with the filing. Thanks.

Pat LePore

Ken I hate to do this. I will go back and we can't speculate on any kind of M&A activity around the Company.

John MacPhee

Okay. Alright. Ken, its John MacPhee. As it relates to Loramyc, as you know, we've announced -- BioLines has announced that the US pivotal trial is complete and it did meet its end points. As it relates to your question regarding the FDA, the NDA is being prepared. We are in discussions with FDA following all of the classic steps. There will be a pre-NDA meeting, and we could file the NDA this year. That is our current expectation.

Operator

Your next question is from the line of David Moskowitz with Caris and Company. Please proceed.

David Moskowitz - Caris & Company

Thanks for allowing me to have a follow-up. On the R&D guidance for this year, you guys spoke about $55 million. If I look at that in terms of the trends that you guys were running in the first half, it is much lower in the second half and also, it looks like a much lower run rate versus prior periods, prior years. Can you comment on that and then also, how should we think about the R&D base as we move forward into 2009?

Veronica Lubatkin

Just to clarify that $55 million, that is exclusive of Strativa milestones, so perhaps as you're looking back to last year, you're seeing some milestone activity we had in 2007, so $55 million is exclusive of those milestones, including the milestones that would be over $60 million, it would be in the $62 million to $63 million range, but, yes, there was just some timing of activity, heavier in Q2, so the reason we're giving a guidance of $55 million is to that you don't take Q2 and multiply it by 2 for the second half.

David Moskowitz - Caris & Company

So the actual R&D number is 62 to 63 as you've reported it?

Veronica Lubatkin

Yes.

David Moskowitz - Caris & Company

And can you comment on that base and as we move into 2009, at least in terms of type of growth we might see?

Veronica Lubatkin

(Inaudible).

David Moskowitz - Caris & Company

Okay, and also on the SG&A line, you raised that guidance up. Can you explain why?

Veronica Lubatkin

I am sorry, what was that?

David Moskowitz - Caris & Company

On SG&A, you did come up a little bit.

Veronica Lubatkin

Yes. We came up, and it is driven by mainly litigation costs, legal costs related to product litigations including paragraph 4 activity.

David Moskowitz - Caris & Company

So that's primarily as a result of what we saw in the first half of the year?

Veronica Lubatkin

Yes.

David Moskowitz - Caris & Company

Okay. Thank you.

Operator

Your next question comes from the line of Greg Gilbert with Merrill Lynch. Please proceed.

Greg Gilbert - Merrill Lynch

Hi, just double checking to make sure our mid-30s tax rate is still appropriate for the back half of the year?

Veronica Lubatkin

What was that?

Greg Gilbert - Merrill Lynch

What's the appropriate tax rate for the back half of the year?

Veronica Lubatkin

The effective tax rate will be impacted by a level of pre-tax income and the relative impact that permanent items have on that effective tax rate, so again, subject to the pre-tax income level, it will probably be in the 20% to 25% range.

Greg Gilbert - Merrill Lynch

That's what you're using for your EPS range?

Veronica Lubatkin

Yes.

Greg Gilbert - Merrill Lynch

And then a bigger picture question for Paul, can you talk a little bit more about the customer mix changes that were alluded to? I assume that was a generic comment, and sounds like more wholesaler than retailer business going forward, but can you give us a little more color there? That's potentially a big change as opposed to a one quarter issue. Thanks.

Paul Campanelli

I think that's right. I think that's right. I think in terms of being able to compete, having the first to file new product entries does allow us to really compete well at the retail level, so you will start to see some shifting at the wholesale level, but I will also tell you that we brought on -- recently brought on a government specialist to help us grow our government business and FSS business, so historically, you will see some lower margin business opportunities in swing to the government.

Greg Gilbert - Merrill Lynch

Can you comment on the changes that occurred, though, in the second quarter that negatively impacted results?

Veronica Lubatkin

There were a number of new competitors in the market that we felt, and a number of competitive pricing pressures. In some cases, if we launched units, we may have gained them back with a different customer mix, which impacted our margin, and then in addition, in many cases, we met pricing in anticipation of keeping share and units. There are a number of products where we have initiatives under way to reduce costs in the future, whether it is internal initiatives for new sources of ATI, and so it was important for us to keep units in order to realize those improvements in gross margins in the future.

Greg Gilbert - Merrill Lynch

Thanks.

Operator

Your next question comes from the line of Elliott Wilbur with Needham. Please proceed.

Elliott Wilbur - Needham & Company

Hey, good morning. Just a quick question on the authorized generic front. I think last quarter you disclosed you had two, and I didn't catch any updates to that if you disclosed them this conference call, so I am wondering if there is anything new there and then, also remind us whether or not those previously disclosed agreements are in fact included in this year's guidance or not? Thanks.

Paul Campanelli

Elliott, hi, it is Paul. Last earnings call, we did in fact disclose that we had two, and I would tell you that there is no certainty of launching AGs. At this time, we have one AG under contract, and again, there is no certitude that there will ever be any launch of AGs. We are, in fact, an insurance policy.

Veronica Lubatkin

And there is no AGs included in our guidance.

Paul Campanelli

Right.

Operator

Your next question is from the line of Rich Silver with Lehman Brothers. Please proceed.

Rich Silver - Lehman Brothers

Just one more on the customer side. So should we assume that with improvement in new product launches, that you actually would see a shift back to a more favorable customer base?

Veronica Lubatkin

Not with the base products, but obviously, yes with the new product launches.

Rich Silver - Lehman Brothers

Okay. Thank you.

Operator

This concludes the question-and-answer session. I would now like to turn the call over to Mr. Pat LePore for closing remarks.

Pat LePore

Just want to thank everybody for participating and following with us and we hope to be back at the next quarter with much better results. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Good day.

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

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

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

Source: Par Pharmaceutical Companies, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts