Penwest Pharmaceuticals Co. Q2 2008 Earnings Call Transcript

Penwest Pharmaceuticals Co. (PPCO)

Q2 2008 Earnings Call Transcript

August 5, 2008 11:00 am ET

Executives

Jennifer Good – President and CEO

Ben Palleiko – SVP of Corporate Development and CFO

Analysts

Ian Sanderson – Cowen & Company

Ken Trbovich – RBC Capital Markets

Larry Neibor – Baird

Wayne Rothbaum – Quogue Capital

Scott Henry – Roth Capital

Arthur Freedman [ph] – Freedman [ph] Asset Management

Noelle Tune – Soleil Securities

Presentation

Operator

The matters discussed herein contain forward-looking statements that involve risks and uncertainties, which may cause the actual results in future periods to be materially different from any future performance suggested herein. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, intends, potentials, or similar expressions are intended to identify forward-looking statements.

Important factors that could cause results to differ materially include risks relating to commercial success of Opana ER, including our reliance on Endo Pharmaceuticals Inc.; for the commercial success of Opana ER and risks of generic competition; the need for capital regulatory risks relating to drugs in development, including the timing and outcome of regulatory submissions and regulatory actions; uncertainty of success of collaborations; the timing of clinical trials, whether the result of clinical trials will warrant further clinical trials, warrant submission of an application for regulatory approval of, or warrant the regulatory approval of the product that is the subject of the trial; whether the patents and patent applications owned by us will protect the company's products and technology; actual and potential competition; and, other risks as of – under the caption Risk Factors in Penwest's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2008, which risk factors are incorporated herein by reference.

The forward-looking statements contained in this press release speak only as of the date of the statements made. Penwest disclaims any intention or obligation to update any forward-looking statements. TIMERx is a registered trademark of Penwest. All other trademarks referenced herein are the property of their respective owners.

Good morning. My name is Karlene and I will be your conference operator today. At this time, I would like to welcome everyone to the Penwest's Pharmaceutical second quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I will now turn the call over to Miss Jennifer Good, President and CEO. Miss Good, you may begin your conference.

Jennifer Good

Good morning, everyone. I hope you are all enjoying your summer. Welcome to our review and discussion of Penwest results for the second quarter and six-month ended June 30th, 2008. Joining me on the call today is Ben Palleiko, Penwest’s Senior Vice President of Corporate Development and Chief Financial Officer.

I'll begin by providing an update on progress our company made during the second quarter as well as our priorities for the rest of the year. Then Ben will discuss the financial results for the quarter and six-month period. After our prepared remarks, we will open up the call to answer any questions you may have.

I am very pleased with the progress we made this quarter. As I have discussed before, our team is very focused on executing again several key deliverables. We have four key areas of focus for the year. They are, one, maximizing the Opana ER opportunity by supporting various activities around that product; two, advancing the development of our own internal pipeline; three, completing business development fields that increase the company's cash position and fund overhead as well as to partner attractive programs that are not core to the company's strategy; and finally, for managing our cash and the related burn with the goal of advancing our early stage pipeline while ensuring that our cash lasts to at least late 2009. I will discuss our progress during the quarter on each of these fronts.

Opana ER in the release of earnings late last week and reported strong sales growth for the Opana franchise. Combined net sales for the franchise increased 86% to $46.4 million for the second quarter 2008, compared with $25 million in the same period a year ago. Prescription volume for the franchise increased 97% in the second quarter 2008 versus the comparable 2007 period. For the six months ended June 30, 2008, net sales for the Opana franchise increased 60% to $86.7 million, compared with $54.3 million in the same period a year ago. As a reminder, we are involved with Endo only on the extended release product in this franchise, which according to recent IMS numbers represents about 82% of the underlying prescription demand.

Endo has continued to grow this product both in terms of script and market share. And we are looking forward to completing the $41 million royalty holiday allowed for in our agreement, and expect to recognize royalties for those products beginning in the third quarter of this year. Ben will discuss this in more detail in his comments.

Both Penwest and Endo are active in our ongoing effort to protect the Opana franchise. These activities include the prosecution of multiple additional patent applications, asserting RIP against the currently filed generics, executing a lifecycle management strategy for Opana ER, and finally, finding an international partner to market the Opana franchise outside of the US. Endo chose not to provide details around each of these areas on its quarterly earnings call last week so we will stay within the same boundaries.

Next, I will provide an update on our internal product pipeline. We made important progress during the quarter on each of our three products under development. First, a brief update on nalbuphine ER, a drug we are developing for moderate chronic pain that completed the Phase IIa trial in chronic pain in the first quarter of this year. We are currently designing a Phase IIb trial for this drug candidate. We also completed the formulation work during the quarter on a lower strength of nalbuphine ER, which we believe may be necessary based on the results from the Phase IIa trial.

The Phase IIb trial we are currently planning will utilize the flexible dose titration with the randomized withdrawal design. As I've mentioned before, we are excited about the role this product could play in managing moderate chronic pain. However, because pain is not core to Penwest’s strategy, we are actively seeking a partner to co-develop this drug. We are in discussions with a number of parties we believe to be very good development and marketing partners. Securing a partner for this product, and then dosing the Phase IIb trial are the two important priorities for this program over the next several months.

We are developing A0001, a molecule we enlicensed from Edison Pharmaceuticals for the treatment of certain mitochondrial diseases. These diseases are primarily progressive neurodegenerative disorders that are both chronic and serious in nature, and many of these patient populations meet the definitions for orphan drugs. There are currently no approved therapies for most of these diseases.

During the second quarter, we met with the FDA in our pre IND meeting and subsequently submitted an IND. In July, we began dosing the first study in our Phase I program, a single ascending dose study. The trial is designed to evaluate the safety and tolerability of A0001 at various doses, collect pharmacokinetic data, and determine if there is a maximum tolerated dose of the drug. We currently plan to enroll a total of sixty healthy volunteers, and expect results for this study by year end. Assuming the results of these trials support additional development, we anticipate the next study would be a Phase Ib multiple ascending dose trial in healthy volunteers, in which dosing could begin in early 2009. Following the Phase I program and subject to our availability of resources, we would expect the next step to be a Phase IIa group of concept trial in patients with mitochondrial diseases.

We have also been actively working with our colleagues from Edison to identify an additional NCE that we are entitled to under our agreement with them. That work is on track, and we expect to select the compound by yearend.

The final compound we have under development is PW4153, which is an extended release reformulation of a currently marketed drug set as dose multiple times a day for the treatment of symptoms associated with Parkinson’s disease. The goal of this formulation is to extend the dosing in our bill of the drug while minimizing the peak to trough ratio, which we believe may enhance the efficacy, tolerance, ability, and convenience of the drug for Parkinson’s patients.

During the second quarter, we submitted an IND, and in July dose of Phase I pharmacokinetics study. The purpose of this Phase I trial is to assess the bioavailability and pharmacokinetic blood levels of Penwest formulation of the drug in healthy volunteers. We expect results of this study in the third quarter. We will share the data with you once it has been analyzed and we know whether the drug’s development is moving forward.

The third key area focus for us this year is completing business development deals, with the goal of increasing the company’s cash position and partnering to advance attractive programs that are not core to our strategy. I’m very pleased that the progress we made on these activities during the quarter. I have all ready mentioned the licensing efforts we have under way for both nalbuphine ER and Opana ER international. Now I’ll spend a minute to discuss the licensing deal we closed during the quarter involving our drug delivery technology.

In May we announced that we signed a development and licensing agreement with Cobalt Laboratories Inc. to develop a formulation of an undisclosed compound utilizing Penwest TIMERx drug delivery technology. Under the terms of the agreement, Penwest will receive an upfront signing fee, milestone payments and royalties. Similarly, we currently have an ongoing project with Otsuka, in which we are also formulating a drug utilizing our technology.

Although these deals are not core to our strategy for Penwest long term growth, they do serve a very important shorter term purpose for the company. These deals help us fund our internal drug development infrastructure. They provide incremental cash. They give our team additional experience in working with different types of compounds. They provide additional potential revenue sources. And lastly, they provide development relationships with companies that we may be able to leverage going forward.

We have found that there’s a lot of interest in our TIMERx technology and our expertise in extended release formulation development. And our business development group is currently in discussions regarding several additional opportunities. We are trying to complete one to two additional drug delivery deals from the back half of this year. So with our efforts around out-licensing nalbuphine ER, partnering with Endo to out-license Opana ER internationally, and negotiating these drug delivery deals, our business development team is quite busy.

The final area of focus I mentioned is managing our cash and the related burn. As we advance our early stage pipeline, we continue to focus on ensuring that we are sufficiently funded to at least late 2009. We are managing our cash through downsizing of overhead and other expenses, trying to complete deals to build-up our cash reserves, and trying to be creative in renegotiating some of our expenses. A good example of this is our recent renegotiation with Endo, in which they agreed to pay directly all the legal costs for defending the IP around Opana ER. I know that tightly controlling our cash burn is the priority for our shareholders. And it is also a key priority for Ben, me, and our Board.

In closing, 2008 is a year in which our team needs to execute on the short term needs of the business while creating long term growth opportunities for Penwest. Clearly, the two most important overarching deliverables are doing deals that generate additional cash and investing that cash back into advancing our pipeline. I am optimistic about our ability to execute on both of these fronts. We have assembled a strong internal team that is talented, focused, and working hard to drive results.

I will now turn it over to Ben to discuss the financial results for the quarter and six months.

Ben Palleiko

Thank you, Jennifer, and good morning. The net loss for the second quarter of 2008 was $6.9 million or $0.22 per share, compared with the net loss of $9 million or $0.39 per share in the second quarter of last year. The decrease in the loss primarily reflects decreased operating expenses. For the six-month ended of June 30, 2008, our loss was $17.2 million or $0.61 per share, compared to $15.9 million or $0.69 per share for the comparable period in 2007. This increased loss is largely due to higher R&D spending, primarily related to expenses associated with our collaboration agreement with Edison Pharmaceuticals and lower interest income.

Total revenues for the quarter of 2008 were $1.3 million, compared with $712,000 in the second quarter of 2007. For the six-month ended June 30 of 2008, our total revenues were $2.1 million, compared to $1.6 million for the comparable period in 2007.

Over the past year, our mixer revenues have shifted to a point that our royalties on sales by Mylan Pharmaceuticals of Pfizer’s 30 mg generic version of Procardia XL no longer represent the preponderance of our revenues. For both the three and six-month periods of 2008, a significant portion of our revenues was derived from licensing fees and R&D reimbursements related to our ongoing drug delivery licensing collaboration.

In addition, our revenues from product sales increase in both periods of 2008, compared to 2007 due to increased sales of bulk TIMERx sold Endo for use and Opana ER, which was due to a price increase that we implemented in 2008 based upon the terms of our collaboration agreement with Endo. This price increase reflected the reimbursement mechanism in our agreement with Endo for our legal expenses associated with the ongoing and the litigation related to Opana ER.

In July 2008, we and Endo amended our agreement to have Endo pay all our future Opana ER patent litigation costs directly, and to reimburse us for costs we incurred prior to the amendment. As a result, our selling price for TIMERx will decrease. And we expect our revenues from product sales in future quarters will decline from the levels from the first and second quarters of 2008. However, just to be clear this does not reflect any change in expected underlying demand from Endo.

Recognized upfront payments are indeed reimbursements from our drug delivery licensing efforts represented $477,000 of our revenues in the second quarter and $566,000 in the six-month period of 2008, both up from zero in the comparable periods of 2007. Although these revenues are modest so far, we have been successful to date in finding opportunities to collaborate with companies seeking drug delivery technology and anticipate that we can continue to grow this part of our business. As Jennifer mentioned, while this business is not core to our strategy we continue to believe that it can help generate cash and in return offset our overhead expenses, while also providing for longer term potential benefits of milestone payments and sales royalties if the product can and is advanced to FDA approval. We will continue to pursue these arrangements based upon their expected financial returns and our capacity to work on them.

Selling, general and administrative expenses in the second quarter were $3.1 million, compared to $3.7 million in the year ago period. This decrease is primarily due to lower stock based compensation expense and lower facility related cost. SG&A expenses for the six-month ended June 30th, 2008, were $7.4 million, unchanged from $7.4 million in the comparable period of last year. And a reminder, the six-month period results include the $1 million dollar reserve established in the first quarter of 2008 in connection with the $1 million loan made to Edison.

Research and development expenses for the second quarter were $4.5 million, compared to $6.0 million in the second quarter last year. The decrease is largely due to higher expenses on nalbuphine ER in the second quarter of 2007 related to a Phase IIa trial that has been ongoing. We do expect our R&D spend for the rest of the year to be higher than in the second quarter as we commence trails for both A0001 and PW4153 in July. For the six-month ended June 30, 2008, our R&D expense was $10.9 million, representing an increase of $483,000 from $10.4 million in the comparable six months of 2007. This increase is largely due to payments to Edison for sponsored research and internal spending on A0001 in preparation for submitting our IND as well as increase stock based compensation expense, partially offset by lower expenses on nalbuphine ER and early stage product candidates.

As of June 3rd of 2008, we had cash investments of $28.7 million, compared to $23 million of December 31, 2007. We also have an outstanding balance of $10.8 million in our $12 million term loan, which began to advertise principal payment at the beginning of this year. We do not anticipate that we’ll withdraw the remaining $12 million term loan prior to the expiration to our ability to do so in September of this year.

Based upon sales of Opana ER for the second quarter of 2008 reported to us by Endo, we believed an additional $8.1 million of the total $41 million royalty holidays was applied during the second quarter leaving $5.9 million of the holiday remaining. Based upon current sales trends and forecast provided to us by Endo, we anticipate that we will begin to recognize royalty revenue from Endo on sales of Opana ER in the third quarter of 2008. As a reminder, once Endo commences royalty payments after the royalty holiday, they will be entitled to retain 50% of the calculated royalty amount in order to recoup a total of $28 million of development costs related to Opana ER that they funded on our behalf prior to the FDA approval of Opana ER. Although the duration of this partial royalty period depends entirely upon sales levels of Opana ER, based upon sales forecast provided to us by Endo, we anticipate that we will begin to recognize the full royalty rate from Endo by the end of 2009.

As we discussed in our first quarter call, we continue to exercise strict control over our expenses, and do not anticipate any increases in our spending for the remainder of 2008 that would cost us to adjust our previous guidance. Further, a significant portion of our quarterly R&D expense is related to the financial terms of our collaboration with Edison, which will be substantially completed by the end of 2008.

We continue to believe that our current level of cash and marketable securities combined with royalty payments we anticipate receiving will be sufficient to fund operations into at least late 2009, including what we believe is a prudent financial cushion as we continue to monitor Opana ER sales trends. In addition, as Jennifer has discussed, we are pursuing partnerships through Opana in Europe and for our nalbuphine ER program, which we expect would further increase our financial resources if completed.

Jennifer and I would like to open up the call for any questions that you may have.

Question-and-Answer

Operator

(Operator instructions) Your first question is from Ian Sanderson with Cowen & Company.

Ian Sanderson – Cowen & Company

Good morning. Thanks for taking the question. First, and I’m not sure if you can answer this, but I’ll give it a shot, any update you might be able to provide on Opana ER franchise extension plan, when we might hear a little more about that as well as the European licensing rights?

And then secondly, Ben, could you – sorry to make you do this, but could you just walk through the kind of the royalty steps coming up, which you just did, but I couldn’t write it fast enough on Opana ER.

Jennifer Good

So I’ll start, Ian. You’re right. I really can’t say too much because you probably could tell the new regime at Endo sort of I think staying in a little bit tighter box around this. I can say there are efforts are going on at both fronts. We’re happy with how it’s moving, but I can’t really give a whole lot more color on that. I think I need to respect their disclosure policies. Ben, I’ll let you take them to the money side.

Ben Palleiko

Yes. So the numbers I went through, sorry if I went so fast, are that they used up $8.1 million of the royalty holiday in the second quarter. There’s $5.9 million left. We expect them to start – we expect to start recognizing royalty payments from them in the third quarter, next quarter. Once they start making those royalty payments, they – it’s part of our amended agreement, they get to withhold 50% of those payments to – in order to recoup that $28 million, which is an agreed to amount of development expense they funded on our behalf.

Ian Sanderson – Cowen & Company

So you would just be recognizing – you won’t be recognizing the whole thing and just receiving cash of 50%. You’ll only recognize the 50%, correct?

Ben Palleiko

Correct. We will only recognize the 50%. That is correct.

Ian Sanderson – Cowen & Company

Yes.

Ben Palleiko

And again, how long that takes is dependent highly on how sales grow over time? But as we said there today, we’d expect to start recognizing the full royalty rate sometime at the end of 2009.

Ian Sanderson – Cowen & Company

Okay. And in terms of PTO feedback on the 192 patent, any schedule there?

Jennifer Good

So Ian, again, Endo’s patent they submitted that – the information – I don’t even have that in front of me. June-ish [ph]? Early June. And I think we’re expecting typically the next feedback point is three months later. Although I think that’s not set in stone. But I think sometime early September. We really don’t get interim feedback along the way. They sort of submit everything and you hear the answers at the end. So we don’t really have – we don’t have any color on that except that it’s in front of the examiner at this point.

Ian Sanderson – Cowen & Company

Okay. Thank you.

Jennifer Good

Yes.

Operator

Your next question comes from Ken Trbovich with RBC Capital Markets.

Ken Trbovich – RBC Capital Markets

Thanks for taking the question, a couple of clarifying points. I think, Jennifer, you mentioned that you were moving forward with plans to partner nalbuphine ER. Is that exclusively in Europe or are you opening this up to the US as well?

Jennifer Good

Yes. Good question, Ken. Originally, as you know, we have started off just going through Europe. While we were in the process of having European meetings, we started having US pain companies reach out to us, interested in the product. And started realizing that on both sides in the Atlantic people were interested in worldwide deal, so the light bulb came on that we might as well just sort of open up those discussions. So we are currently talking to players both here and in Europe and working through due diligence. We would hope to hopefully support these different parties who’ve shown interest and due diligence efforts, and get into actual contract negotiations during the third quarter.

Ken Trbovich – RBC Capital Markets

Okay. And then, is timing for the Phase IIb contingent in terms of the initiation of the program? Is that contingent upon securing a partnership? Or is this something you still have confidence trying to advance on your own if a partnership hasn’t been secured at that point?

Jennifer Good

Well I think the reality of our current cash balance is excess doing some deal and getting kind of a windfall of cash, in which case we’d probably revisit this. We just can’t really go start fire up on this straddle on our own. The asset is in course strategically. Pain trials aren’t cheap, as you know. So given our current set of assumptions, we’re doing everything we can to be ready to go. But I think at this point in time, we envision ourselves co-developing that product with somebody.

Ken Trbovich – RBC Capital Markets

Okay. And then, final question on nalbuphine, you mentioned developing a lower dose. Is that really to ease the sort of dropout rate in the early period in the trial?

Jennifer Good

Well it has to do with titration. I mean I think the drug is more potent that we thought it was. We were saying efficacy, I think at lower – at doses that we realize we probably need a lower strength. So it’s really around this whole titration issue. So it is kind of one in the same. But it’s just the fact that, as you know, the FDA is going to require us to find the minimum effective dose. And we sort of felt like based on our work, we probably hadn’t found this no effect dose yet. So we reformulated to a lower strength.

Ken Trbovich – RBC Capital Markets

Okay. And then just for Ben. In terms of the second quarter numbers, to what extent does that cash or the headcount reductions that were announced earlier in the year or should we see further reductions come to spend levels as a result?

Ben Palleiko

No. On the G&A side, pretty much all that was captured in the second quarter. And then, on the R&D side, R&D actually probably was – it’s probably below where I expected to go for the rest of the year just because the timing on some of the trials. But no, there’ll be no more impacts or new impacts of these activities that we did in the first quarter later on.

Ken Trbovich – RBC Capital Markets

Okay. And then, final question on the balance sheet side, could you walk us through any adjustments in terms of significant adjustments in the balance sheet items, whether it’s prepaid or accounts payable? Did you guys pay it down? It just seemed like the cash balance came in a little lower than what we would have anticipated considering the lower burn rate?

Ben Palleiko

Yes. We did have a mini fall AP pay down the second quarter, which probably brought you – which probably brought the balance on somewhere below, I guess, where you expected it today. I think that would have been the biggest adjustment on the balance sheet in the second quarter.

Ken Trbovich – RBC Capital Markets

Okay. Thank you.

Operator

Your next question comes from Larry Neibor with Baird.

Larry Neibor – Baird

Thanks. Good morning.

Jennifer Good

Good morning, Larry.

Larry Neibor – Baird

Assuming that you and Endo partner up with someone for European rights to Opana ER, what would your cut of the deal be?

Jennifer Good

Ben, go ahead. I’ll let you answer.

Ben Palleiko

Yes. So for Opana ER, anything related to Opana ER, the arrangement is that we split all the economics 50/50, equally. And so for anything related to Opana ER, half of the upfront, half of the amount on top to royalties we’d get. The only thing that nets against us would be the extent they had in a directly deal related cost. We’d let them deduct that out. But that’s the only adjustment that would have to be made.

Larry Neibor – Baird

Okay. How does that differ from your current domestic deal?

Ben Palleiko

Well, domestically in US, as you know, because of the amended agreement we have with them, we get a royalty on annual net sales. And that royalty, as you know, ranges between 22% and 30%.

Larry Neibor – Baird

What other great points on that deal?

Ben Palleiko

Well so there’s a total of six years. The only three that has been disclosed to that is we get 22% of the first $150 million on annual net sales. At that point, it goes up to 25% to an undisclosed breakpoint, as they said to us, four more breakpoints above that. And one year that’s been disclosed is we get 30% of all sales in excess of $1 billion.

Larry Neibor – Baird

Okay. Thank you.

Operator

Your next question comes from Wayne Rothbaum with Quogue Capital.

Wayne Rothbaum – Quogue Capital

Hi, guys. Good afternoon.

Ben Palleiko

Hi, Wayne.

Wayne Rothbaum – Quogue Capital

Or morning, I guess. Just regarding your guidance and on the timing of receiving or paying off this holiday, this R&D reimbursement. You’re saying end of ’09. So just trying to back in the math a little bit and throwing a few bucks in for the fourth quarter, which we’ll start receiving royalties, say third quarter, but through in a little bit in the fourth quarter. It looks like you’re targeting, I don’t know, $185 million, $190 million for Opana ER for 2009. Is this $190 million, $185 million-ish that does sound about right then?

Ben Palleiko

Wayne, that is entirely Endo’s disclosure. We are just not going to talk about Endo Opana ER guidance.

Wayne Rothbaum – Quogue Capital

Okay. Well I was just using the numbers that you laid out for when you think – because if you have a $28 million holiday, which you’re – about 11% is going against sales. So you could kind of back in the numbers, I guess. So I’m using actually the guidance you laid out, but okay. All right.

Jennifer Good

I like watching you and Ben financially duel here Wayne, for sport.

Wayne Rothbaum – Quogue Capital

Have a good day, I guess.

Jennifer Good

All right. Thank you.

Wayne Rothbaum – Quogue Capital

Thanks.

Operator

Your next question comes from Scott Henry with Roth Capital.

Scott Henry – Roth Capital

Thank you, and good morning. Just a couple of questions, first on the model, I guess, are you affirming your current SG&A and R&D guidance for the year?

Ben Palleiko

Yes.

Scott Henry – Roth Capital

Okay. And then, when we look at the R&D reimbursement and the royalty and licensing fee specific client items, do you think – should we see growth off of Q2? Or how should we think about those lines because they are close to – a bit stronger in Q2 than Q1?

Ben Palleiko

Right. So on the royalty and milestone payments line, what you’re going to see is – that’s going to ebb and flow a little bit because we obviously – we recognize the up fronts from those collaboration agreements as ratably over the development period. So those are going to ebb and flow a little bit. I mean in Q2, it’s probably a little strong on that because we can play it a lot of work on our first collaboration in the second quarter. There is still a meaningful amount of mile and royalties in that number. And so it will also be subject to movement just as that number goes up and down.

On their R&D reimbursements, again, we did a lot of work on our first collaboration on the second quarter. And so that number was fairly high. What happened in the third and fourth quarter, as you know, we signed a deal, that Jennifer referred to, in May. And how that number moves over the third and fourth quarters is going to depend largely on how much work we accomplish there. And quite honestly, we’re still lying out the plan for that collaboration. So it’s a little bit premature for me to be able to tell you if we’re going to get – if we’re going to recognize that kind of revenues over the rest of the year on that program.

Scott Henry – Roth Capital

Okay. And then perhaps just a bigger picture question with regards to the lifecycle management for Opana, I mean certainly Endo talks about it a lot. It’s very material to what happens with Penwest. Do you feel that there was any progress over the past quarter in terms of kind of moving from a strategic approach to a tactical approach of lifecycle management for Opana ER.

Jennifer Good

Yes. Scott, I do. I can’t give any color on it. But I can assure you that, Scott, reduced from sort of theory to practice.

Scott Henry – Roth Capital

Okay. Thank you. I appreciate you taking the question.

Jennifer Good

Yes.

Operator

(Operator instructions) Your next question comes from Arthur Freedman [ph] with Freedman [ph] Asset Management.

Arthur Freedman – Freedman Asset Management

Good morning, Jennifer and Ben. I wanted to ask a very quick question about the Endo. There was something that was said very quickly about they’re going to pay the legal cost, but there was something in exchange for that. I didn’t understand that part of it.

Ben Palleiko

Yes. So in our original agreement – so Endo’s always accepted the obligation to pay legal costs associated with patent litigation related to Opana ER. The way we work in the previous agreement – in our initial agreement was that the way that we’d recoup that was through how much we charge them for TIMERx, which we sold them in bulk.

As we got into the litigation process on the end, I think both of us – both sides realized that it was sort of a negative and overly complicated way of doing it. And so what we did in July – so subsequent to the second quarter, was we signed an amendment to that agreement. And I think Endo actually probably filed this amendment, which says in essence, two things – three things. The first is that Endo will directly pay all the litigation related expenses on the Opana ER patent defense. So they’re going to pay all of those costs directly going forward, which removes the need to work it into the pricing. The second is that they actually reimbursed us on lump sum for costs we’d incurred up until the day we signed them. And so we’ve actually received a substantial check in the third quarter. And the third is that they’ll also pay all the costs going forward.

Arthur Freedman – Freedman Asset Management

Okay. So that’s actually good news.

Ben Palleiko

Yes. It is a good news.

Jennifer Good

Good for us from a cash flow perspective because we have to recoup this over time. And I think it’s just cleaner. So it’s definitely good for us as we try to manage our cash.

Arthur Freedman – Freedman Asset Management

Okay. I just wanted to make sure I understood that. And one other question, could you just give a little more color on the Edison collaboration agreement? And where you see that going more for medium to long term?

Jennifer Good

Yes, Arthur. I mean it really depends on sort of the success of A0001. So essentially, we partnered with this very small little bio-techy company. We got A0001, which had sort of a little more to it than this NC on the (inaudible). We’re in the process of sorting out what that means. I think if the molecules look intriguing, essentially what Edison has is a discovery platform, sellout phase to predict what they think in vitro ends up in man. They focus around this mitochondrial medicine. I think if we get comfortable that those assays actually mean something. And they, obviously, are generating a series of molecules that maybe something we look to expand. Although, until we actually get proof around sort of the one or two we have, I don’t think you’ll so a whole lot more. We were sponsoring some research to help us support the transition of A0001 and getting one more MCE. That will end the end of this year. And I think we’ll just pause and move these two compounds through development and sort of see what we see.

So at this point in time, I don’t have a lot of long term plans. Other than they’ve been good partners, I think there’s good scientists there. But there’s a long road to go here to make sure these compounds – there’s actually something here.

Arthur Freedman – Freedman Asset Management

Okay. Great. Thank you very much.

Jennifer Good

You bet. Thank you.

Operator

Your next question is from Noelle Tune with Soleil Securities.

Noelle Tune – Soleil Securities

Good morning. Thanks for taking the question. Just one last here, I’m wondering if you guys were able to comment on the potential timelines for the two patent cases regarding Opana ER just in terms of what’s the next date of point, when do you think they’ll get started, that kind of thing?

Jennifer Good

So the two patents go out – I presume you mean 192?

Noelle Tune – Soleil Securities

No. Actually, I’m sorry. I should be more clear. I mean the legal cases.

Jennifer Good

I’m sorry, the legal cases. No. Endo hasn’t disclosed a lot. They’re both basically sort of bogged down on this whole discovery timeline right now. And there’s really not a lot to say. I mean there are no major points we’re watching for because they’re just really bogged down between lawyers.

Noelle Tune – Soleil Securities

Got it. So no color in terms on when they could potentially start?

Jennifer Good

No. I mean I don’t anticipate a whole lot of news. Well definitely, nothing in 2008. I know the impact’s case hasn’t even been scheduled for a trial yet. Activists are moving a little bit more along the path. But they’re still grinding along as well. So no, I don’t have any real good dates that are meaningful.

Noelle Tune – Soleil Securities

Great. Thanks.

Operator

Your next question comes from Ken Trbovich with RBC Capital Markets.

Ken Trbovich – RBC Capital Markets

Hey, Ben. I was wondering if you could give us an update on what the non-cash expenses were in the quarter for SG&A and R&D, or in total.

Ben Palleiko

Let’s see if I can get that handy.

Ken Trbovich – RBC Capital Markets

And then I’ve got a separate one for Jennifer, just as related to the commentary around the outlook. For ’09, any anticipation of potentially exiting ’09 with the full royalty. I guess, part of what I’m trying to make sure I can connect here is the plan on Nalbuphine ER, if in fact you were able to secure the partnering, it would seem that the cash flows become net positive as you exit next year. And I’m just trying to understand perhaps where I’m missing or am I becoming disconnected on your cash flow expectations only running through late ’09?

Jennifer Good

No. You’re right, Ken. And I think, Ben and my intent here is to run this company to essentially bridge us to that point where the Opana royalty stream comes in and we do turn cash flow positive. I think just because this whole one year gap of how the Endo sales progress, we sort of don’t want to be on record saying we can make it. You know what I’m saying?

Ken Trbovich – RBC Capital Markets

Yes. I hear you.

Jennifer Good

There is no disconnect, and Nalbuphine will be funded by somebody else. With the other two programs we have are small enough that if there’s good data, I think, it will make sense to fund those. And if not, then clearly we have a good royalty stream in Opana. So I don’t disagree with you. I think there’s just sort of 18 months between here and there. So Ben and I aren’t quite ready to say, well, we’re in the clear.

Ken Trbovich – RBC Capital Markets

Sure.

Ben Palleiko

So Ken, I just pulled out here? I mean for the second quarter, it’s slightly more than – in stock based compensation, it’s non-cash, obviously. And that’s a little more than $500,000 for the entire company in the second quarter. And then for through six months, I just got – I’ve got DNA, which is it’s about – well this is just off the cash flow statement, $567 million for depreciation, and about $186 million for amortization. I don’t have the three-month numbers in front of me.

Ken Trbovich – RBC Capital Markets

No problem. But the $500,000 was the non-cash option expense during the quarter itself.

Ben Palleiko

Correct.

Ken Trbovich – RBC Capital Markets

Okay. Thank you.

Operator

There are no further questions at this time.

Jennifer Good

We appreciate your joining us this morning to discuss our financial results. Ben and I will be at two investor conferences this week, the BMO Healthcare conference in New York City, where we will speak on Wednesday; and, The Banc of America Specialty Pharmaceuticals conference in South Hampton, where we will speak on Thursday. We look forward to seeing many of you there. Thank you.

Operator

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

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