Cephalon, Inc. Q1 2006 Earnings Conference Call Transcript (CEPH)

May. 3.06 | About: Cephalon, Inc. (CEPH)

Cephalon, Inc. (NASDAQ:CEPH)

Q1 2006 Earnings Conference Call

May 2, 2006, 5:00 PM Eastern

Executives

Robert Gruff, Vice President of Public Affairs

Dr. Frank Baldino, Chief Executive Officer

Robert Roche, Executive Vice President, Worldwide Pharmaceutical Operations

Kevin Buchi, Chief Financial Officer

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

John Osborn, General Counsel

Analysts

Greg Gilbert, Merrill Lynch

Adam Green, JPMorgan

Cory Davis, CG Capital

David Windley, Jeffries and Co.

Gary Nachman, Leerink Swann

Geraldine O’Keefe

Larry Neibor, Robert W. Baird

Mark Goodwin, Credit Suisse

Eric Schmidt, S.G. Cowen and Co.

Operator

Good day everyone and welcome to the Cephalon 1st quarter 2006 earnings announcement. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Robert Gruff, the Vice President of Public Affairs for Cephalon.

Presentation:

Robert Gruff, Vice President of Public Affairs

Thank you. Today we will review Cephalon’s financial performance for the 1st quarter of 2006. Before we begin, let me remind you that certain statements on this call may be forward-looking and are subject to risks and uncertainties associated with company business. These statements may concern among other things guidance as to the future revenues and earnings, operations, transactions, prospects, intellectual property, litigation, development of pharmaceutical products, clinical trials, and potential approval of our product candidates. The company also may discuss certain non-GAAP financial measures within the meaning of Regulation G during today’s call. The information required by Regulation G is available in the Newsroom Section of our website at www.cephalon.com. Additional information and risk factors affecting the company’s business and financial prospects and factors that would cause Cephalon’s actual performance to vary from our current expectations is available in the company’s current Form 10K on file with the SEC.

During this call we will update 2006 guidance. Please know that guidance will remain in effect unless the company provides subsequent modifications or updates. Our earnings Press Release is available on the internet at www.cephalon.com. Investors with further questions should contact Chip Merritt at area code 610-738-6376. This conference call is being webcast via the Cephalon home page and will archived for one-week after the call. Speaking on today’s call will be Dr. Frank Baldino, Chief Executive Officer, Robert Roche, Worldwide Pharmaceutical Operations, and Kevin Buchi, Chief Financial Officer. Also joining us today are Dr. Paul Blake, Worldwide Medical and Regulatory Operations, John Osborn, General Counsel, and Chip Merritt, Investor Relations. Following remarks by Frank, Bob, and Kevin we will be pleased to answer your questions - now, Frank Baldino.

Dr. Frank Baldino, Chief Executive Officer

Thanks, Bob; good afternoon everyone. 2006 has already been an eventful year for Cephalon. We have had very positive news regarding PROVIGIL, the approval of VIVITROL, and the Approvable Letter for NUVIGIL, as well as disappointing news from the SPARLON Advisory Panel in March.

Let me start with PROVIGIL. With PROVIGIL’s future secured, we are investigating new uses for this product; reinvigorating our marketing programs, investing in new clinical studies, and reaching out to a broader universe of physicians to expand the value of this powerful brand. Already this reinvestment is beginning to pay dividends as we say a strong upswing in PROVIGIL prescriptions during the second half of the 1st quarter. Indeed, total prescriptions for PROVIGIL in the quarter returned a doubled digit growth rate marked by a noticeable increase in new prescriptions. We expect that this encouraging trend will continue as we invest more resources in our franchise product.

Today we have a sales force of more than 400 people dedicated to selling PROVIGIL and we are well positioned to build this franchise into a billion dollar business. Just yesterday we announced the FDA’s Approvable Letter for NUVIGIL for wakefulness. We are working with the agency to complete the labeling. We have a three part strategy for rolling our NUVIGIL. This premium wakefulness drug with its long duration of action will enable us to position NUVIGIL for the treatment of particularly severe cases of excessive sleepiness. From here we intend to leverage existing data on fatigue and cognitive benefits and follow on critical programs to explore new markets for the drug. We expect to begin the process of switching to NUVIGIL by 2010, preserving our wakefulness franchise for many years to come.

The reason the FDA advisory committee recommendation of SPARLON was clearly a major disappointment; driven by a single case of suspected Stevens-Johnson syndrome ("SJS"). Since then we have gathered new information about the case that convinces us and our dermatology consultants that this patient did not, in fact, have SJS. We submitted this information to FDA several weeks ago and the agency has asked for an additional 90-days until August 22 to evaluate the new data. We continue to believe that SPARLON will become an important product for our future growth and we are working toward the goal of gaining FDA approval.

Let’s turn for a moment to another important milestone, the approval of VIVITROL. Awareness of the promise of drug for the treatment of alcoholics, a patient group estimated to number about 8 million in the United States, is growing noticeable among medical professionals. The results of the study are appearing in tomorrow’s issue of JAMA on the treatment of alcohol dependence, known as the COMBINE study as thought to by 20 experts in the field. The study concluded and I quote, “A patient receiving medical management with NALTREXONE, combined behavioral intervention or both, faired better on drinking outcomes whereas acamprosate showed no evidence of efficacy with or without combined behavioral intervention”. In early April, our partner offered me the achieved FDA approval to market VIVITROL for treating alcohol dependence in combination with psycho-social support such as counseling. This is another opportunity to do what Cephalon does best, define and understand markets, understand the needs of patients and healthcare providers, and provide comprehensive and integrated support for making a positive impact on human health. We have done this before, in wakefulness and in breakthrough cancer pain. Now we have the opportunity to repeat this success as we commercialize VIVITROL beginning this June.

To get more details on some of the exciting elements of the VIVITROL launch program, I’d like to turn the call over to Bob Roche, Executive Vice President of Cephalon’s Worldwide Pharmaceutical Operations.

Robert Roche, Executive Vice President, Worldwide Pharmaceutical Operations

Thank you, Frank. We are proud to be able to bring VIVITROL to the marketplace with our partners at Alkermes. We have been preparing for this opportunity for nearly a year now and are ready to introduce the product to a carefully selected group of physicians and caregivers. From the first time we looked at VIVITROL we knew it was a winner. Its efficacy and safety profile are excellent, but in this market you need more than a drug that works. One of the biggest problems in treating addictive is patient compliance which until now has been an unanswered challenge in the pharmacological management of alcoholism. What makes VIVITROL so unique is its ability to make compliance easier for the use of a single injection that lasts for an entire month.

Now, let me tell you a little bit about our launch plans. We have a dedicated sales team of 120 addiction specialty sales professionals, who for the last 4-months have been training, developing their (inaudible), profiling their physicians, counselors, and other caregivers, and defining the drug administration paragon on a client-by-client basis. At the same time, our marketing team has been developing the strategy and materials for the launch of VIVITROL which will take place next month. Our partners at Alkermes have also fielded a team of 28 managers of market development or MMD’s, who are supplementing our efforts and building future prospects for VIVITROL by exploring new markets and developing new customer groups such as employers and institutions.

The launch and commercial development of VIVITROL will also be supported by a ground breaking new program designed to make this great new product easy for physicians to use, accessible to the patients who will benefit from it, and importantly reimbursed usually the medical benefit under most manage care plans. We call this program VIP3 or VIVITROL Information for Patients, Physicians, and Providers. VIP3 is the most comprehensive product support program that I have ever seen in the industry. We designed it with a clear objective to maximize access to VIVITROL and to eliminate the hassle of administration and payment. VIP3 facilitates product availability, administration, and reimbursement and places a complete support infrastructure behind the patients’ effort to win in the struggle with alcohol dependents. Access to this support system and all the layers of service it will provide will be available to physicians, patients, caregivers, family members, employers, and others simply by calling a 1-800 number. The triaging system will then ensure that the inquiries handled in the proper fashion. VIP3 will integrate support services addressing each step in the identification and management of alcoholism including counseling, physician information, product availability, reimbursement, distribution, and administration all through a single point of contact. Believe me, there has never been anything like this program in the field of alcohol addiction and drug abuse. With VIP3 our innovative marketing programs and a combined field presence of Alkermes and Cephalon, I am confident that the launch of VIVITROL is going to be a great success and that many thousands of patients will benefit from this important new therapy.

Dr. Frank Baldino, Chief Executive Officer

Thanks Bob, turning now to our pain franchise the data we submitted with our NDA for our new Fentinol Effervescent Buckle Tablet (FEBT) for breakthrough pain associated with cancer is the subject this week of a platform presentation at the American Pain Society meeting in San Antonio, Texas. The company has also wanted studies to explore the role FEBT can play in relieving non-cancer breakthrough pain including lower back pain and neuropathic pain. Preliminary data on the use of FEBT for non-cancer breakthrough pain also will be presented at the meeting. We expect to hear from the FDA about FEBT by the June 30th (inaudible) date. In anticipation of approval during the next few months, we will train our sales force so that it is prepared to launch FEBT later this year. With a patent that extends until 2018 we believe that FEBT will contribute to our sales growth for years to come.

Cephalon also recently completed a phase 3 clinical program studying GABITRIL for generalizing anxiety disorder which includes 1,750 patients. We expect to unblind and analyze this data later in the quarter and announce results at that time. As you know, last year we took a series of strategic steps to create a fully integrated oncology franchise. These investments should begin to pay off for Cephalon in 2008. Today we continue to be encouraged by our progress on the clinical and regulatory front as we prepare to commercialize these opportunities.

Here are some recent highlights. We recently received orphan drug designation from the FDA for CEP-701 lestaurtinib which is in phase 2/3 development for patients with a (inaudible) acute myeloid leukemia bearing a FLT-3 activating mutation. Approximately, 25% of the AML population has this mutation. After discussion with the FDA earlier this year, we have taken steps to ensure the data from a single study is positive for the use and support of our NDA submission. In addition, an ongoing series of clinical trials sponsored by both Cephalon and third parties is exploring the efficacy of our oncology compounds for treating an array of cancer types. Among the most notable, is a study, the second this year in the Journal of Blood that demonstrates the efficacy of TRISENOX as the first line of therapy for acute promyelocytic leukemia. This study, in the May issue, showed that TRISENOX combined with all-trans retinoic acid or ATRA is an effective alternative to chemotherapy plus ATRA in treating newly diagnosed patients. The article also mentions the possibility of using this combination as an alternative to chemotherapy for low and intermediate risk patients.

We are also accessing the utility of TRISENOX in conditions other than APL and are planning to conduct clinical trials in AML and high risk patients with myelodysplastic syndrome. Similarly TREANDA or bendamustine is becoming the focus of attention from an increasing number of researchers. Data generated in Germany has demonstrated the utility of bendamustine and the treatment of a number of indications including chronic lymphocytic leukemia, breast cancer, multiple myeloma and first line treatment from non-Hodgkin’s lymphoma. Meanwhile, our study in Rituxan refractory non-Hodgkin’s lymphoma continues on schedule. Scientific discovery remains an essential commitment for Cephalon and needs that for us to contribute to our success in 2008 and beyond.

In Summary, we are looking for total sales growth of 25% for 2006. (Inaudible) secure revitalized PROVIGIL franchise and a diversity of new opportunities that we have created over the past few years. The VIVITROL approval and anticipated launch of NUVIGIL and FEBT are all important steps for further strengthening and diversifying our portfolio. By committing to the strategy that minimizes our reliance of any single product we have reduced our business risk while we continue to deliver industry leading financial performance. All signs point to 2006 becoming another high performance year for Cephalon with continued solid sales growth matched by equally impressive rates of earnings growth. Now Kevin will discuss our financial performance for the quarter.

Kevin Buchi, Chief Financial Officer

Thank you, Frank. Today we reported our 1st quarter 2006 financial results which included sales of $345.6 million, which is an increase of 30% over the 1st quarter of 2005 and basic adjusted income per common share of $0.86, an increase of 37% over last year. Sales came in somewhat under our guidance while earnings exceeded the high end of our guidance range. CNS franchise sales increased 28% to $161.3 million. PROVIGIL prescriptions increased 15% vs. the 1st quarter of 2005 to $602,000. This volume increase was partially offset by a decrease in GABITRIL volume. We believe the PROVIGIL sales volume reflect the renewed investment in the product that Frank discussed earlier.

Pain franchise sales, which at this point are exclusively active, were $117.5 million an increase of 15% over the 1st quarter of 2005; and other sales were $66.7 million, a 75% increase over last year. The primary reason for this significant increase was the addition of the (inaudible) portfolio of products which contributed $23.5 million; without (inaudible) other sales would have increased 13%.

As you would expect, each quarter there are normal fluctuations in wholesale inventory levels. Our goal is to maintain inventory levels of between 2 and 3-weeks reach by key products. At the end of the 1st quarter, inventory levels were at the bottom of this range. During the quarter, adjusted earned income expenses declined in comparison to last year as expected as much as the large scale clinical activity from 2005 is behind us. Adjusted SG&A increased in comparison to the prior year as we increased the size of our sales force, reinitiated marketing activity for PROVIGIL, and made preparations to several upcoming product launches. Adjusted expenses were generally below our expectations for the quarter as we moderated spending while awaiting clarity around the timing of new product launches.

Our tax rate for the quarter was 36%, higher than our guidance reflecting the fact that the R&D tax credit is not yet been renewed by Congress. During the quarter there were several adjustments that were made to arrive at adjusted net income. The most significant of these were $30 million related to up front payments on 2 product development agreements to Transdental Technologies, $19 million to exclude the ongoing amortization in acquired intangible assets, $6.8 million related to the adoption of the new stock option accounting rules associated with FAS 123R and $4 million related to the settlement of PROVIGIL patent litigation.

Based upon our current expectations for the year, we are raising our 2006 sales and earnings guidance. Our revised 2006 total sales guidance is now $1.475 to $1.525 billion, a $25 million increase over our previous guidance. Our guidance for adjusted net income is increased by $20 million to between $240 and $250 million, and our guidance of basic adjusted income per common share is increased $0.10 to between $3.90 and $4.10 assuming 61.5 million shares outstanding. Guidance for the CNS franchise remains between $665 and $715 million. The pain franchise is increased by $25 million to between $450 and $500 million, and our guidance for other product sales remains unchanged at $285 to $335 million. R&D and SG&A expenditures are targeted to be between $315 to $335 million and $545 to $575 million respectively. Our assumed tax rate for the year has increased to approximately 36%.

The company is introducing 2nd quarter 2006 sales guidance of between $380 and $390 million, adjusted net income of between $59 and $65 million, and basic adjusted net income per common share of between $0.95 and $1.05 based upon 61.7 million shares outstanding.

That concludes our opening remarks. We will now open this call to you and your questions.

Question-and-Answer Session

Operator

Thank you, Sir. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the “*” key followed by the digit “1” on your touchtone telephone. If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we will take as many questions as time permits. Once again, please press “*1” on your touchtone telephone to ask a question. We’ll pause for just a moment to allow everyone an opportunity to signal.

Our first question today comes from Greg Gilbert, Merrill Lynch

Greg Gilbert, Merrill Lynch

I just have a couple, first regarding the NUVIGIL label. Are there any issues other than how to handle the suspected SJS (inaudible) and when do you expect the final there?

Dr. Frank Baldino, Chief Executive Officer

To answer the question Greg, we have Dr. Blake with us today; Paul do you want to comment on that?

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

Yes, the main issue is that aspect that we’ve touched on the other things in there are all issues that we can deal with, with existing data and a safety update which is to typical of an approval, that normally we are expecting that.

Greg Gilbert, Merrill Lynch

Is there any clock you could tell us about?

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

We just have to clarify directly with the agency that we’ve understood their expectation correctly, we only got the letter pretty late on Friday – we need to clarify that before we can be confident about a time table.

Greg Gilbert, Merrill Lynch

Am I right to think about is there either a two or six month turn around from when you answer the question?

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

Those are the choices that the agency has, yes.

Greg Gilbert, Merrill Lynch

And Frank, how would you characterize the federal trade commissions request for additional information related to the PROVIGIL settlement, and do you think this will go anywhere or is it just a technicality in your view?

Dr. Frank Baldino, Chief Executive Officer

Greg, we have nothing with any federal agencies and technicalities, first and foremost – but, we have John Osborn here and John may want to comment on that.

John Osborn, General Counsel

Yes, hi Greg, the questions have been very limited and they have been, I’m not going to disagree with Frank, but they really have been clarifying questions and it’s been quite some time since we’ve heard from them – so I don’t know if I would say they were technical but they were simply of the nature to understand the filings that we’ve made, I’d put it that way.

Greg Gilbert, Merrill Lynch

And lastly, can you provide a specific timeline for the launch of FEBT and what’s in your plan there?

Dr. Frank Baldino, Chief Executive Officer

Well Greg, as you know, the (inaudible) date is June 30 of this year. Historically with the agency on the (inaudible) date you get an action letter, we do expect an approvable letter on FEBT. Once we receive that approvable letter we’ll see what kind of response they need and it’ll be the answer will be the same as you asked for NUVIGIL, it’ll be either a two or six month response time frame and we don’t expect anything unique on that (inaudible) application.

Operator

We’ll go next to Adam Green, JPMorgan

Adam Green, JPMorgan

Thanks and good afternoon – as you mentioned several time PROVIGIL has been accelerating nicely, just wondering what we could expect, what should we expect going forward for the rest of the year. Do you think growth will get back to levels that we saw in early 2005 in that high 20% range and also what you are making into your assumptions in terms of growth in your CNS guidance of 665/715?

Dr. Frank Baldino, Chief Executive Officer

I am going to give you a 30,000 foot view of what I think and then Bob Roche sitting next to me is going to give you a little more detail on that; it’s a really good question. I think, first of all the market for PROVIGIL hasn’t changed. The market is still a growth market; there are still millions and millions of patients out there who can benefit from the drug. The reason why the scripts diminished a bit from the end of 2005 for all the obvious reasons; we stopped spending money on the drug in anticipation of a different incentive event in 2006 – now that we have a drug for six more years, we reinvigorated our spend in our efforts around PROVIGIL and we are seeing the pickup in script growth. The fundamentals of the market are the same as they were over the last several years so we have to agree with you. We expect these scripts to continue to grow and to continue to have a meaningful impact on ups in the market that’s not getting smaller it’s what it was – it is a very a large underserved market.

And, Bob, why don’t you comment a little more specifically on what kind of trends you see happening with PROVIGIL.

Robert Roche, Executive Vice President, Worldwide Pharmaceutical Operations

Yes, Adam hi, Bob Roche – I am also very gratified to see this kind of performance on the base of our product. It has been in the market now for well over seven years. One thing that we’ve always seen with PROVIGIL is when we ratchet up the man power, ratchet up the share of voids that we apply to the product it has always responded and it’s responding again now. I would hesitate to think that we could get back to the very high levels of growth that we are experiencing as we left 2004 and early 2005, but I think you can see from the guidance that we’ve given for the CNS franchise the vast majority of which is obviously PROVIGIL that we are still anticipating really solid growth for this compound in 2006 and we see absolutely no reason why we shouldn’t continue that growth in 2007 and beyond.

Adam Green, JPMorgan

And lastly, if I can sneak a question in there for Kevin as well – I see the guidance is down a little bit, maybe you can talk about it.

Kevin Buchi, Chief Financial Officer

I think actually SG&A guidance was unchanged if I am looking at my sheet correctly. We did change it the last time when we included the X-fall on guidance.

Operator

Cory Davis with CG Capital has our next question

Cory Davis, CG Capital

Just a couple of questions, I know your guidance excludes it right now, but if you are able to launch SPARLON in the second half of the year, (NYSE:A) would you choose to wait just because the other three launches you have going on, and (NYSE:B) would it be accretive neutral or diluted to your earnings considering the launch clog?

Dr. Frank Baldino, Chief Executive Officer

It is a really good question; to answer the first part is we would absolutely launch it the first available opportunity. We think it is going to be a very successful drug, we are excited by what we saw in the clinical trials, we are excited about what we see today in the marketplace and we think SPARLON is going to be a meaningful contributor to our future growth so we are not going to miss a day in launching that thing – we are not going to hold it up.

The second part of the question is a little more complicated and I am going to pass that over to, who wants it – everybody is ducking here, Mr. Buchi can answer that question.

Kevin Buchi, Chief Financial Officer

Hi Cory, how are you doing? I think the obviously there are pre-launch costs associated with any new product that comes to the market. The later in the year the launch of the product comes the less opportunity you have to recoup those costs by product sales. If you were to launch it in the 4th quarter, I would expect for SPARLON to launch in the 4th quarter to be somewhat diluted. We haven’t done the calculations obviously because it is very sensitive as to exactly when that launch is but generally I think that is a very fair comment.

Cory Davis, CG Capital

Just my second question would be now that you have a lot of exclusivity time on NUVIGIL, Paul, maybe you could share more specifically the idea for (inaudible) or potentially expanding the label into the more specific areas around cognition and fatigue.

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

Well that is a really exciting opportunity you’ve identified – there are two sorts of approaches we could take, one is to look at other populations where excessive sleepiness remains a under certain medical problem and there are several of those, and then as you point out we could look at areas of cognition where that is impaired to try and restore or prevent further decline in a number of diseased states. Fatigue is another area that is particularly troublesome is a number of conditions - cancer fatigue where we have some exciting pilot data with PROVIGIL already and very impressive results with NUVIGIL that could warrant a very full program in its own right.

Cory Davis, CG Capital

Actually, one last question on NUVIGIL, could you remind us of the VIP protecting that. I assume that it is still protected by the particle size patent as well, but is NUVIGIL considered in the settlement?

Dr. Frank Baldino, Chief Executive Officer

It is, you’re right, Cory, it is indeed protected by that very patent you mentioned and also a number of other patents pending that we think will have further protection beyond that.

Operator

David Windley, Jeffries and Company

David Windley, Jeffries and Co.

Hi, first question is around gross margin did decline a little bit you had some price increases that were taken in the first quarter, but I know you also have some payments due as a result of the settlements. Could you elaborate a little bit on direction that you expect going forward. The impact on the current quarter and direction you expect going forward.

Kevin Buchi, Chief Financial Officer

Sure, David – it’s Kevin – I would expect gross margins going forward to look pretty much like the margins were in the 1st quarter. Actually, the biggest improvements are for the slight decreases in the 1st quarter margins where the inclusion of (inaudible) in the 1st quarter results. Businesses in Europe, in general, tend to be somewhat lower margin businesses and that is also true of (inaudible) business.

David Windley, Jeffries and Co.

Ok and on the R&D guidance you maintained that guidance, Kevin, I didn’t quite catch in your prepared remarks, was R&D a little bit below what you had expected for the 1st quarter or was it pretty much in line?

Kevin Buchi, Chief Financial Officer

The R&D was a little bit below what we expected, SG&A was also slightly below, and so both were somewhat below our guidance.

David Windley, Jeffries and Co.

Ok and finally on tax rates – you said tax rates would trend in what direction going forward?

Kevin Buchi, Chief Financial Officer

We are anticipating at this point in time a 36% tax rate for the year. Now if Congress were to put the R&D tax credit back in, depending as well as retroactively or prospectively, that could drop the rate for the rest of the year, but we are not assuming that at this point in time.

David Windley, Jeffries and Co.

And what magnitude would that have the effect on the R&D tax credit effect?

Kevin Buchi, Chief Financial Officer

Well the original guidance of 33-35% and that assumes that the R&D tax credit would be renewed. So, we’ve gone from a 33-35% range up to 36%.

Operator

We’ll go next to Gary Nachman, Leerink Swann

Gary Nachman, Leerink Swann

Hi, good afternoon, a few questions – first, the increase in the pain guidance is that due mainly to the price increases on the products that you took in the 1st and 2nd quarter, and I am assuming that these price increases on ACTIG has been pretty significant. What kind of push back are you getting from the formularies if any and do you think there is room for even more price increases before the end of the year on the product.

Dr. Frank Baldino, Chief Executive Officer

Well, the first part of your question, I think the answer is yes, a lot of the increase in ACTIG sales numbers reported were due to price increases. As far as, the (inaudible) I guess for a general comment about pricing strategy going forward or why we did or we didn’t, I think basically we have ACTIG for just a few more months. By the end of this year ACTIG is going to be out of our portfolio; and therefore, the behavior you are seeing here is very similar to what you see in the industry for products in the same situation.

Gary Nachman, Leerink Swann

It seems like you are not getting any real feedback from the formularies is that fair?

Dr. Frank Baldino, Chief Executive Officer

Yes, I think that they also realize that this is the end of the life of ACTIG and I think we are all on the same page as this.

Gary Nachman, Leerink Swann

Next question on NUVIGIL and the approvable letter and the comments around the SPARLON data and SJS, I mean if it does come down to labeling and in the end they do deem it to be a case of SJS and they want that SJS data to be more prominent on the NUVIGIL label – the most comment would be a black box. How do you think that could potentially affect the PROVIGIL label, if at all? Do you think there would make any changes to that?

Dr. Frank Baldino, Chief Executive Officer

I think, first of all you should know that SJS already exists in the PROVIGIL label and it’s, I think it was mentioned publicly at the advisory committee meeting on SPARLON that the incidents is approximately one in a million which is what the background rate of that condition is (inaudible) – they view it as a background rate and that is where it is. I don’t think that is likely to change on the basis of this single case.

As far as the NUVIGIL is concerned, I think it is prominent that’s a word that is hard to define what it means. Our expectation is going to move to a warning and that is really all we can say until we have further comment from the agency. I think the best thing for all of us to do is to wait and see how they come out in the case. Remember we started this conversation today saying we are convinced as are our experts that this is not a case of SJS, we just hope that the agency sees it the same way we do.

Gary Nachman, Leerink Swann

And then just on that point, I mean at the panel meeting, clearly they were focused mostly on this one case but there was concern with a number of other cases. Have you done any more work on those or are you pretty convinced…?

Dr. Frank Baldino, Chief Executive Officer

I am going to ask Dr. Blake to comment on that – if that is ok?

Gary Nachman, Leerink Swann

Sure…

Dr. Frank Baldino, Chief Executive Officer

I think that, my brief comments will be that the FDA reviewed those cases at the panel meeting and we sort of concur with their outcome. Paul, do you want to add more color to that?

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

There is not much more color to add. I think you’ve covered it., Frank. Those other cases have been dealt with, I think to the agency’s satisfaction, they have the information there in front of them and as Frank said we are even more confident that the case is a (inaudible) concern is clearly not Stevens-Johnson, that’s the opinion of the investigator, the dermatologist that saw the child at the time our experts, our dermatologists, as well as our internal assessment – so hopefully all of these people are not wrong and our belief is that we have convincing evidence now and the agency will agree with us.

Gary Nachman, Leerink Swann

Ok and then last question – I guess what are the plans to extend more into primary care with the PROVIGIL, NUVIGIL franchise if everything goes well – would you look for promotion partners or do you think you would do it yourself?

Dr. Frank Baldino, Chief Executive Officer

Well I get that question a lot as you can imagine, I think now that we’ve had PROVIGIL for a number of years, we think it will clearly benefit from exposure to the primary care space. We dabbled in primary care over the years, and Bob can tell you a little bit about what we’ve done, probably be helpful to tell you what we’ve done, but we haven’t had a concerned effort in primary care to date and by-the-way forget the primary care you can do it yourself. If you get a primary exploring all those opportunities and hopefully we will come to a conclusion in the near future. But, we have had some experience there, Bob do you want to talk about that market and the growth you might be seeing there?

Robert Roche, Executive Vice President, Worldwide Pharmaceutical Operations

We’ve actually been calling on certain members of the primary care community now for well over 2-years and with pretty good effect for both PROVIGIL and for ACTIG, much of the growth we saw for ACTIG for example in 2005 was as a result of new prescribers coming on board for that product for the very first time as opposed to long established prescribers increasing their usage. Not only for ACTIG but absolutely for PROVIGIL, we see that there is a lot of upside in this marketplace with a sales force right now of 400 we are really unable to make any kind of a consorted effort in primary care in a big way. So, in order for us to do that and to call on the 60 or 70,000 primary care physicians who would make up a market for something like PROVIGIL, we would have to expand our sales force dramatically probably about double in size or look for a partner and we are certainly evaluating those possibilities and others.

Operator

Geraldine O’Keefe, (Inaudible) has our next question

Geraldine O’Keefe

Hi, thanks for taking my question – just a few points for clarification really at this point. Just on the pain franchise, I think that your optimism and increase in your sales targets for the full year are (inaudible) being price increase and also stock piling of these products?

Dr. Frank Baldino, Chief Executive Officer

I don’t think the word stock piling was ever mentioned, Geraldine, I think – we really feel like we’ve made a big impact on the pain market, we think ACTIG is a great drug in the breakthrough of the cancer pain arena, scripts have been staying up where they have been for the last couple of months. We are pretty excited about that, and with the price increases we expect that to continue for several months to come. And I think that is really what we meant to say.

Geraldine O’Keefe

Ok so it is not misinterpreted then the stock purchasing as people think the product is going to go off the market and wanting to…

Dr. Frank Baldino, Chief Executive Officer

No, we think they are using the drug, we have a very good script rate – it has been a very high script rate that’s been now maintained for quite sometime and we expect that maintenance to continue. It is the only drug in the space – the only drug that bears a breakthrough pain indication in America, so I think a reasonable expectation is going to maintain its position in that market and with the price increases we put in place I think we will maintain these sales.

Geraldine O’Keefe

And maybe just one last question before you then move on in the NUVIGIL – don’t you think the chances are the FDA made for SPARLON before (inaudible) they approve NUVIGIL?

Dr. Frank Baldino, Chief Executive Officer

Yes, that is a really good question – I think the reason we put that little sentence in the Press Release was to make it clear that the agency was not looking at the conclusion of that SPARLON approval to determine whether it was going to be approved, it is just a matter of how to deal with that single case in the label of NUVIGIL. If you look at the time frame here, we just got the letter; it will take us time to respond to the letter. After we respond to the letter the agency has then the full 60-days. Yes, you are running into August anyways at the same time it is virtually an overlap in the timing so that does not concern us quite as much.

Operator

With our next question from Larry Neibor, Robert W. Baird

Larry Neibor, Robert W. Baird

Thanks, good afternoon. Have you determined your (inaudible) pricing strategy on yet?

Dr. Frank Baldino, Chief Executive Officer

We have determined that pricing strategy; we just have not announced the pricing strategy.

Larry Neibor, Robert W. Baird

That will come on launch?

Dr. Frank Baldino, Chief Executive Officer

Yes, the day of the launch all will be clear.

Larry Neibor, Robert W. Baird

Given the years worth of work that you put into developing the pre-launch market for (inaudible), how many scripts would you consider to be successful in the first 12-months after launch?

Dr. Frank Baldino, Chief Executive Officer

I am going to pass that really good question onto Dr. Roche here.

Robert Roche, Executive Vice President, Worldwide Pharmaceutical Operations

Thanks a lot, Frank. We clearly have our internal expectations and we have developed these along with our partners at Alkermes, we are in lock step agreement here on what we anticipate for this product and we will provide guidance for it I will presume when we are in a position to launch the product and to do so officially. Leave it be said that we have a lot of very, very positive feedback from the marketplace and I think expectations for this product are rightfully high.

Larry Neibor, Robert W. Baird

Thanks, I’d like to ask one further question please – give the request you put into the FDA for SPARLON is this based on new objective data or is this your experts and consultants supplying their subjective opinion?

Dr. Frank Baldino, Chief Executive Officer

You know it is probably; do you have an answer for that Paul?

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

Yes.

Dr. Frank Baldino, Chief Executive Officer

I was going to push it aside…

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

Or you truthfully answer it; we have some new data from the treating physicians at the time and with that more complete information and more complete assessment because there is more data on which to make the assessment, we are even more confident that as our external experts that this wasn’t the case of Stevens-Johnson syndrome.

Dr. Frank Baldino, Chief Executive Officer

So the answer to the question is objective data, new objective data.

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

New objective data that will reinforce the opinions of the experts and ourselves.

Operator

We will take our next question from Mark Goodwin, Credit Suisse

Mark Goodwin, Credit Suisse

Yes, a couple of questions – first of all could you talk about Europe and how much more expansion you are looking to do there?

Dr. Frank Baldino, Chief Executive Officer

Well I think the European market is not as robust a market as the US market is as you all know, but it is an important pharmaceutical market, Germany being the third largest pharmaceutical market in the world, France right behind it is the fourth so there is a meaningful amount of money to be made there and we intend to exploit that. Kevin’s guidance, which I do not have in front of me talks about $250 – 3-something – let’s just say that the percentage of our top line that is represented by Europe today is probably a bit on the low side.

Kevin Buchi, Chief Financial Officer

$285-$335 is the guidance…

Dr. Frank Baldino, Chief Executive Officer

So approximately 20% of our top line is coming out of Europe, is that fair?

Kevin Buchi, Chief Financial Officer

Yes….

Dr. Frank Baldino, Chief Executive Officer

With that in mind, Mark, I think the fair balance of business – I’d like to see it distributed closer to the 40% of our top line coming out of Europe so to get there we are going to have to grow organically. The good news is our European business is growing well as you noticed this quarter. The acquisition with (inaudible) with a nice growing business overall - especially the cancer products which are growing in the 13-14% of the year for the cancer franchise there; we think we have some organic growth that is contributing to that and also, as we’ve shown you in the past, Mark, on the (inaudible) front we’ll continue to grow in Europe as well.

Mark Goodwin, Credit Suisse

And that 40% is that kind of like a 5-year goal or is that a…

Dr. Frank Baldino, Chief Executive Officer

Well, yes it is a goal. If I can get it done tomorrow, I’ll get it done tomorrow, if it takes me 5-years so be it, but it is a target that we’d like to have and I think a fair balance of business would be 40% out of Europe and 50% out of the US and 10% out of the emerging markets of Asia. I think that would be a nice balance for us to have.

Mark Goodwin, Credit Suisse

A couple of years ago I remember you were trying to partner PROVIGIL when they were getting the new indications with you know in primary care – kind of take that to a new level of sales – can you just talk about the strategy this time vs. that time and why you never really got one done then. Was it because of the company’s partners or was it because you didn’t want to do it at that time and why now…

Dr. Frank Baldino, Chief Executive Officer

I think there is a mixed factor there, Mark – mixed reasons. We can talk about some of them for sure. One is it was pretty (inaudible) prospect of partners the like for PROVIGIL was going to be (inaudible) by this litigation that was ongoing so with that in the back of your mind, it was a more difficult opportunity to evaluate and certainly something they weren’t going to pay for. Those are the two factors. It was an economic, I am not going to do a bad deal just to do a deal and second of all you can’t get good economics with that sort of uncertainty lying in front of you. Since that time, things have changed. That uncertainty is no longer there and there is a consequence I think those kinds of discussions can have more meaning on the economic side.

Mark Goodwin, Credit Suisse

So you started this discussion already?

Dr. Frank Baldino, Chief Executive Officer

Yes, I think we sort of said it in the last, I think Bob made the comment, that there’s – we think there is a lot of growth in the primary care marketplace. We see it ourselves, we’ve called on a small segment of that market, it has grown beautifully and we think we can have a big impact on sales by doing that and those are the opportunities that we have and let’s see where we do.

Mark Goodwin, Credit Suisse

I meant like where are you in the partnering discussions – is that something that is going to take place this year as far as getting a deal done?

Dr. Frank Baldino, Chief Executive Officer

Why don’t we leave it as what I just said – realizing that everyday we don’t sell to that marketplace as a sale lost.

Mark Goodwin, Credit Suisse

And then lastly, maybe you could just talk about your strategy for oncology – obviously this is….

Dr. Frank Baldino, Chief Executive Officer

We are excited about…

Mark Goodwin, Credit Suisse

And where do you want to take this – I mean are there any other areas of oncology that you feel like you need to have a presence and so you are still looking for products to come…

Dr. Frank Baldino, Chief Executive Officer

These are all really good questions; we like the oncology space for a lot of reasons and Bob may want to comment on some of this as well.

I think the fact that it is a relatively small investment to get to the market with a 100 and so reps you can get to the major oncology centers around the United States as a relatively small investment compared to the CNS market where you need 100’s and 100’s of reps and if you want to get to the GP’s thousands of reps, so relatively speaking it is more of a niche market and the return on that investment has shown to be pretty good when you look at the other companies in the space.

As far as what we are focused on, we have focused on the (inaudible) side of this as you look at our products of TRISENOX or ATL and TREANDA for non-Hodgkin’s lymphoma and CEP-701 lestaurtinib for AML, we sort of have focused on the (inaudible) side and we think that is a really good area to be in, but you know cancer is not that big of an arena and expanding out of the solid tumor would not be that big of a stretch for us. It all depends on the opportunity.

Operator

And our final question today will come from Eric Schmidt, Cowen and Company

Eric Schmidt, S.G. Cowen and Co.

Good afternoon, Kevin question for you on the Key 2 sales guidance I think on a quarter-over-quarter basis, the mid-point of the range applies about 11% growth which is significantly higher than what we seen of late – is there an inventory built into that number or are you off to a particularly good start or how should we think about that estimate?

Kevin Buchi, Chief Financial Officer

I think that my view is that the 2nd quarter estimate is representative of what we believe underlined demand will be for the 2nd quarter. I am not expecting any inventory build in the quarter.

Eric Schmidt, S.G. Cowen and Co.

Alright can you just touch on some of the new filing indications that you have up your sleeve for PROVIGIL, you mentioned a renewed commitment on the R&D as well as the (inaudible) side?

Dr. Frank Baldino, Chief Executive Officer

I think there are a lot of things we can do with PROVIGIL and NUVIGIL and especially NUVIGIL with longer pad life on that product. We look at the markets we are serving today. The thing is utility that PROVIGL has shown us in the market in the area of depression – two years ago in the largest segment of sales and to this day it’s the largest segment of sales so doing more higher quality studies and the excessive sleepiness of fatigue associated with depression, especially with multiple anti-depressant products, it I think we’ll really add a lot of strength to that market and bring it forward.

With NUVIGIL also, the cognitive data is impressive. We continue to see more people doing work with cognitive endpoints both in the clinic and the pre-clinical work and really substantiating what we saw in our original studies. Remember the study we presented at the RND day and I think it will be published this. I have spoken to the effect of NUVIGIL as a cognitive enhancer in excessive sleepy people as well as normal people. There is a lot we can do there. Maybe we should think about combination of NUVIGIL with some of the traditional products being used today to treat cognition like (inaudible) and other things. So, yes, I think there is a lot of upside in those areas alone and if we spend a lot of time on the phone I could think of a dozen more.

Eric Schmidt, S.G. Cowen and Co.

Ok and then last question for Paul – because he seems in the mood to be answering questions today, can you just comment on what some of the subjective data is on the case of suspected SJS?

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

I don’t think I should go into detail, Eric and I did mention that the data was objective not just subjective. It is under review by the agency; I am sure they’ll come to their decision and then we’ll discuss that further when they reach their conclusion. Suffice it to say though, that we all are, our internal colleagues and our external advisors are extremely qualified, and are confident that this child did not have Stevens- Johnson syndrome.

Eric Schmidt, S.G. Cowen and Co.

Maybe if I can just throw it up a little further, I know there has been some speculation that maybe he a (inaudible) infection and wondering if you are able to confirm that through some culture or other assay?

Dr. Paul Blake, Worldwide Medical and Regulatory Operations

Well, certainly that was the first diagnosis mentioned by the pediatrician who saw the child when he got ill, but I don’t want to go into the specifics of what we have at the moment. I want the agency to come to their conclusion on the data we submitted and we remain confident in the outcome.

Operator

That concludes the question and answer session, gentlemen I’ll turn the conference back over to you for any closing remarks.

Dr. Frank Baldino, Chief Executive Officer

Well, we’d just like to say thanks for your participation. That concludes today’s call. Have a good evening.

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