Sciele Pharma Q3 2007 Earnings Call Transcript

| About: Sciele Pharma (SCRX)
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Sciele Pharma Inc., (SCRX) Q3 2007 Earnings Call October 31, 2007 4:30 AM ET

Executives

Joe Schepers - Director, IR

Patrick Fourteau - President and CEO

Darrell Borne - CFO

Analysts

Adam Greene - JP Morgan

David Buck - Buckingham Research Group

Don Ellis - Thomas Weisel Partners

Angela Larson - SIG

Ken Trbovich - RBC Capital Markets

David Steinberg - Deutsche Bank

Gur Roshwalb - Piper Jaffray

Alex Rygiel - FBR

Natalie Gazal - Banc of America Securities

Operator

Good day, everyone, and welcome to the Sciele Pharma Inc,Conference Call. Today's call is being recorded. At this time, I would like toturn the call over to the Director of Investor Relations, Mr. Joe Schepers.Please go ahead sir.

Joe Schepers

Thank you. Good afternoon, and welcome to Sciele Pharma's thirdquarter 2007 Earnings Call. I am Joe Schepers, Sciele's Director of InvestorRelations. Our speakers on the call today are Patrick Fourteau, President andChief Executive Officer and Darrell Borne, our Chief Financial Officer.

Please note that this presentation contains forward-lookingstatements, which are subject to risks, uncertainties and other factors beyondthe Company's control that may cause actual results, performance orachievements to differ materially from those anticipated in any forward-lookingstatements. These risks, uncertainties and other factors include, but are notlimited to those described under Business Risk Factors of our annual report onForm 10-K for the year ended December 31, 2006 and our quarterly reports onForm 10-Q, as filed with the SEC. The Company does not undertake to update theforward-looking statements to reflect future events or circumstances. I willnow turn over the call to Patrick Fourteau

Patrick Fourteau

Thank you, Joe. We are pleased to report strong financialresults in the third quarter of 2007 compared with the third quarter of 2006. Weachieved record sales of $99.4 million in the third quarter. This was a 33%increase in revenues compared with the same period of last year. We generatedEPS growth of 12% in the third quarter of 2007 versus the third quarter of2006. It is important to note that we increased our R&D investment to 9% ofnet revenue in the third quarter of 2007 or $9.3 million. In the first half of2007, we invested approximately 8% of total sales in R&D. This increase wasprimarily related to $2.2 million of in process R&D charges for ourrecently licensed product, completion of a Phase III patient enrollments forboth glycopyrrolate and the pravastatin/fenofibrate combination and theexpansion of the company's clinical and regulatory group.

We believe our product pipeline will deliver new productlaunches, which are the key drivers of our future growth. Our primary focus isto effectively use our resources to develop new product, with an emphasis onspeed to market. I will provide you with an update of our product developmentpipeline later on the call.

It is important to know that while we increased ourinvestments in R&D, we continued tight control of our SG&A expenses.SG&A expenses in the third quarter of 2007 were approximately $1 millionlower compared to SG&A expenses in the second quarter of 2007.

I will now cover the performance of our three divisioncardiovascular diabetes, women's health and pediatric products. Net revenue forthe company cardiovascular product line which includes Sular, Triglide,Nitrolingual Pumpspray, Fortamet, and Altoprev increased 10% to $65.4 millionin the third quarter of '07 compared with $59.6 million in the third quarter of2006. There was a delay in Triglide product delivery resulting in productbacklog that will be shift in the first quarter of 2007 instead of the thirdquarter of 2007. The other oil increased is that the last year was primarilydue to the prescriptions growth of Sular, Nitrolingual Pumpspray, as well as, Triglide,as well as, price increases.

Cardiovascular diabetes product accounted for 66% in totalsales in the third quarter of 2007. Total prescription of Sular increased 5% inthe third quarter of 2007 compared with the third quarter of 2006 based on IMS NationalAudit Plus data. Nitrolingual Pump spray total prescription increased 1% andnew prescription increased 8% in the third quarter of 2007 compared with thethird quarter of 2006 according to IMS Prescription Audit Plus data.

Triglide total prescription increased 31% in the thirdquarter of 2007 compared with the third quarter of 2006 according to IMSPrescription Plus data. In August 2007 Sciele andLifeCycle Pharma announced the approval of LifeCycle's fenofibratein 20 milligram and 40 milligram dosage grams. This will be the lowest dose fenofibrateon the market. We expect to launch this product in the first quarter and withthis new introduction we expect to increase our sales of fenofibrate market.

On the Women's Health business side, our Prenate family ofprenatal vitamin is one of the leading brand of prenatal vitamins in the US.Net revenue of the company's Women's Health products, which includes PrenateDHA, Prenate Elite, OptiNate, Zovirax, Ponstel and Ostiva increased 68% to$21.3 million in the third quarter of '07 compared with $12.7 million in thethird quarter of 2006. Women's Health product represented 21% of the totalsales in the third quarter of '07. At the end of June 2007 the companyintroduced Prenate DHA and we are very pleased with the initial success of thisnew product launch.

After approximately three months of promotion Prenate DHAhad an approximate 14% market share of the new prescription DHA market accordingto IMS National Audit Plus data. The Prenate DHA market continues to be thefastest growing areas of mineral vitamin market.

Our pediatric product division net revenues of this division,which include Orapred ODT; Methylin Chewable Tablets, Furadantin, Rondec andAllegra Oral Suspension, increased to $12.7 million in the third quarter of '07compared to $2.4 million in the third quarter of 2006. Pediatrics and other products represented 13%of the Company's total sales in the third quarter of '07.

This increase was primarily due to the AlliantPharmaceutical acquisition. Keep in mind that there are some seasonal salesfluctuations with many of our Pediatric products with stronger sales in thefirst and fourth quarter of the year. We rapidly integrated Alliant Pediatric sales force of approximately 75 repsand brought the total to 100 reps in the third quarter of 2007.

I would move now to the product development which I think isone of the most exciting areas of the company at this point in time. We areindeed very pleased with the significant progress we’ve made in our pipelinethis year. We believe that the investment that we are making in productdevelopment today will provide for the future growth of the company. Pleasenote that we plan to launch three to four products per year beginning in 2008.

The company’s children’s product pipeline includes eightproducts. One product has been recently approved by the FDA. Two products areunder review at the FDA; five products are currently in Phase III clinicaltrials. Let me remind you that a year ago we had only one product in ourpipeline. Beginning with our pipeline of cardiovascular products, we’ve fourproducts in development, all under review at the FDA. As most of you know, theFDA accepted the company’s Sular Supplemental New Drug Application with a PDUFAdate of November 2, 2007.

This new Sular formulation utilizes SkyePharma’s patentedGeomatrix drug delivery technology, which will enable us to offer lower dose ofSular for each of the current dose experience. Mylan recently filed a(inaudible) for only the 40 milligram dosage strength, and as a result we fileda lawsuit against Mylan in October 2007.

So, 40 milligram dosage strengthens only representsapproximately 14% of the lawsuit. Upon FDA approval, our plan will be to launcha new Sular formulation in the first quarter 2008, which will give us severalmonths to come to their patients to the new lower dosage of Sular before thecurrent patent expires in June of '08.

Now let’s move on to our products in Phase III, and we arevery pleased with the way we are progressing. I would like to spendparticularly some time updating you on the products pravastatin/fenofibrate combinationto treat mixed dyslipidemia. In October 2007, the company completed theenrollment of patients in its pivotal Phase III trial. There are 450 to 500patients enrolling in this efficacy trial at 75% in the US.

This trial will compare the pravastatin and fenofibrate combinationto pravastatin alone and fenofibrate alone. We expect to complete the Phase IIIstudy in mid '08 and plan to have clinical data to share with you in the secondhalf of next year.

European clinical data, that includes approximately 500patients, will be supportive to our 505(b)(2) filing. One of the primaryreasons which was pravastatin, was due to its excellence at the profile. We arevery excited with the new efficacy data that was just established onpravastatin. A study showing the long-term benefit of pravastatin was recentlypublished in the New England Journal of Medicine.

It confirms both the safety and efficacy of pravastatin. Inthis analysis, five years of treatment with Pravastatin was associated with asignificant reduction in coronary events or subsequent 10 years in line witheye cholesterol, who do not have a history of myocardial infarction. Pravastatinis the only statin that has been studied for difference of time interval. Webelieve therefore that this pravastatin/fenofibrate combination could be a verycompelling therapy and as we are ahead of competitors who are working on fenofibratewith other combinations statin; we feel comfortable that we could be a bigsuccess with that product.

Let me remind you that according to IMS Health's dataapproximately 30% to 35% of patients generally taking a fenofibrate are alsotaking a statin, all that 5% of statin users are also being prescribed of fenofibrate.

In July 2007, the company licensed Clonicel from Addrenexfor the treatment of hypertension. Clonicel is going in for pivotal trials forhypertension and 505(b)(2) NDA Filing with the FDA is expected in the firsthalf of '08. Previously we had projected a FDA filing by the end of 2007.Clonicle is a 12-hour sustained release formulation of clonidine hydrochloride.This sustained release formulation is designed to reduce sedation and dry mouthassociated with immediate-release clonidine, and a skin irritation associatedwith clonidine patches. There are approximately 10 million clonidineprescriptions for hypertension last year according to IMS as MPA data. Let'smove on now to our pediatric product line where we have three products indevelopment, all are under review by the FDA. While we have pushed backslightly the FDA Filing date for Clonicle for hypertension, we remain on track forthe treatment of ADHD. We are announcing a press release today that Addrenexbegan a patient enrollment for the pivotal Phase III trials using clonicle forADHD.

On August 15, 2007 the FDA accepted Summers Lab NDA with a PDUFAdate of April 15, 2008 for its innovative treatment for head lice. Upon FDAapproval, this product will be the first prescription medication that killshead lice by asphyxiation instead of utilizing a neurotoxic pesticide. Thisnovel product is an excellent opportunity for Sciele.Head lice treatments, including pesticides, have been banned in California, and otherstates are also moving towards taking the same action.

The prescription is a novel will counter lice treatmentmarket generated approximately $150 million in sales last year according toIMS. In September 2007 we completed our -- the enrollment of our GlycopyrrolatePhase III trials to treat chronic moderate-to-severe drooling in pediatricpatients. This condition often results from cerebral palsy and otherneurological disorder. The company has received all time designation forGlycopyrrolate. We expect to file an NDA with the FDA in mid 2008.

Finally, we have one product in development that willmarketed concurrently by our Women's Health sales force and our primary caregroup. It is Plethora Solutions, PSD502, an innovative treatment for thetreatment for premature ejaculations. You may have seen our press release thismorning announcing the initiation of the patient enrollment for the Phase IIIclinical trial. PSD502 is a unique operatory rapidly absorbed formulation oftwo well established local anesthetics, lidocaine and prilocaine dispensed in ametered dose spray. Additionally, we've also planned to introduce newformulation to our Prenate family of product, and we are refining the trial'sdesign for Rondec.

On the business development side, obviously as most of youknow we have been very, very active, and we are already very active in productdetail, and will look, and we continue to look at numerous opportunities tolicense and buy additional products.

Most of these opportunities are in cardiovascular, diabetesand Women's Health and Pediatric, and as we've mentioned before also thetherapeutic area that are of interest to us.

To briefly summarize where we stand, we continue to deliversuperior results while investing in products that are in late stagedevelopment, with the goal to bring and quickly to market. Once again with asuccessfully introduction Prenate DHA, we are continuing to demonstrate howeffectively launch product.

Most important, moving forward, we are building a pipelineof products that is transforming Sciele into a more fully integratedpharmaceutical company that is focused on developing new products that addresspatient.

Now, I will turn the call over to Darrell to discuss thefinancial highlights in more detail.

Darrell Borne

Thank you, Patrick. As Patrick discussed, the third quarterof 2007 has been another strong quarter for Sciele Pharma. We had solidincreases in third quarter 2007 revenues, and grew our EPS, while investingsignificantly more in R&D.

There was also an increase in depreciation and amortizationto $7.6 million in the third quarter of 2007 compared with $6.8 million in thethird quarter of 2006. In the third quarter of 2007, we had manufacturingdelays on Fortamet, Orapred ODT and Triglide resulting in higher shipments inthe second half of the quarter. This resulted in higher accounts receivable.

In addition the delay in Triglide product deliveries resultedin product back orders that will be shipped in the fourth quarter of 2007,instead of the third quarter of 2007. The manufacturing issues have now beenresolved. For the three months ended September 30, 2007, net revenues increased33% to 99.4 million from 74.8 million in the same period last year.

Net income for the third quarter of 2007 was $13.8 millioncompared with $12.3 million in the same period of 2006. Diluted earnings pershare were $0.38 in the third quarter of 2007 compared with $0.34 in the thirdquarter of 2006.

Earnings before interest, taxes, depreciation, amortizationand stock compensation expense, EBITDAS, a non-GAAP measure, was $31.7 millionin the third quarter of 2007 compared with $26.2 million in the third quarterof 2006.

The Company believes that EBITDAS is a meaningful non-GAAPfinancial measure as an earnings-derived indicator that approximates cash flow.EBITDAS, as defined by the Company, may not be comparable to similar measuresreported by other companies.

Cash flow per share, also a non-GAAP measure, was $1.63 pershare for the first nine months of 2007 compared with $1.27 during the sameperiod of 2006. We define cash flow per share as net income plus depreciationand amortization net of taxes, stock-based compensation expense net of taxes,and other non-cash expenses net of taxes.

The Company believes that cash flow per share is ameaningful non-GAAP measure of approximate cash flow on an EPS basis, which isutilized by the financial community to evaluate companies. Cash flow per sharemay not be comparable to similar measures reported by other companies.

Gross margins as a percentage of sales were 87% in the thirdquarter of 2007 compared with 86% in the third quarter of 2006. This increasein gross margins resulted from higher revenues and a change in the productsales mix.

Selling, general and administrative expenses or SG&Awere $47 million in the third quarter of 2007 compared with $36 million in the thirdquarter of 2006. The increase in SG&A expense in the third quarter of 2007compared with the prior-year period was primarily due to cost associated withthe sales force expansion. Our new pediatric sales force created through our Alliantacquisition, the launch of Prenate DHA and higher royalties and commissions.

We continued to maintain tight controls of our SG&Aexpenses in the third quarter of 2007, which were below our SG&A expensesin the second quarter of 2007.

Research and development expenses were $9.3 million for thethird quarter of 2007 compared with $4.5 million for the third quarter of 2006.This increase was primarily related to $2.2 million of in-process R&Dcharges for recently licensed products, completion of phase III patentenrollments for both -- patient enrollments for both Glycopyrrolate andPravastatin/Fenofibrate combinations, and the expansion of the company'sclinical and regulatory group.

Our R&D expenses in the third quarter of 2007 wereapproximately 9% of total sales.

As of September 30, 2007, the company had $204 million incash, cash equivalents and marketable securities. During the third quarter of2007, the company repurchased approximately $7 million or 305,214 shares of itscommon stock through a share repurchase program. As of September 30, 2007,approximately $33 million was available for share repurchase under thecompany's share repurchase program.

In addition to the repurchase, the company made additionalinvestments in product development and made tax payments related to theretirement of its $150 million convertible debt, totaling a combined $22million.

Turning our attention to guidance for 2007, Sciele Pharmare-affirms this full year 2007 revenue guidance within a range of $375 millionto $385 million. The company also re-affirms its guidance on full year 2007diluted earnings per share within a range of $1.53 to $1.58 per share after anon-cash expense of approximately $0.10 per share related to the company'sredemption of its 1.75% convertible notes.

This guidance assumes an R&D expenditure rate of 7% to8% of revenues, and reflects the anticipated range associated with Sularproduct sales based on the potential timing of the approval of the new Sularproduct. The 2007 EPS guidance does not include any additional shares from thenet share settlement feature of the company's 2.625% convertible -- contingentconvertible senior notes.

For 2008, Sciele expects to report revenues in the range of$430 million to $445 million. The company expects to report diluted earningsper share in the range $1.87 to $1.97 per share for 2008. This guidance assumesan R&D expenditure rate of 7% to 8% of revenues for 2008. This guidancedoes not include any unapproved products except the new Sular formulation orany potential one-time charges related to the new Sular conversion. The 2008EPS guidance does not include any additional shares from the net sharessettlement feature of the company's 2.625% contingent convertible senior notes.We are now ready to take your questions.

Questions-and-Answer-Session

Operator

(Operator Instructions). We'll go first to Adam Greene, JPMorgan.

Adam Greene - JP Morgan

Good evening, everyone.

Darrell Borne

Hi Adam, how are you?

Adam Greene - JPMorgan

Good. Few questions for you Darrell, on the guidance, youmentioned the excluding one time charges for the Sular conversion, whatpotential are one-time charges could we see, where exactly is that related?Second, what are your assumptions in terms of the Sular switch, the revenueguidance, what percentage of the franchise are you assuming gets converted by June?And then finally, what are you assuming in terms of for -- in the guidance forthe new rules for becoming of the conversion in terms of adding in the interestexpense?

Darrell Borne

Okay, let me try to take to them one at a time here. As faras the Sular charges: as far as one-time charges that we may incur, those wouldtypically be inventory related, and again a lot of that's going to be dependentupon when the product is actually approved. If it's proved early, obviously wecan convert earlier in the cycle. If we getan approvable letter obviously it will delay the launch of product slightly. So,it all depends on the timing of the approval of the product move, also dependon what if any inventory charges we did?.

Adam Greene - JP Morgan

Does this relate to if you had full inventory out of thechannel or?

Darrell Borne

No, it's not inventory of the channel, it would be inventoryin our warehouse.

Adam Greene - JPMorgan

Warehouse, okay.

Darrell Borne

The question was --

Adam Greene - JPMorgan

(inaudible) conversion rate in the revenue guidance?.

Darrell Borne

Yeah, as far as, the conversion goes we are targeting, as wehave mentioned before, in the 80% to 85% conversion rate range for the fullyear. Now, again, that all depends on when you actually start launching theproduct.

Adam Greene - JPMorgan

Okay.

Darrell Borne

And then the final piece that you have is on the, the potentialfor the FASB change on the Coco? It does nothave any impact of that as the FASB has not had a final ruling, as to how theyare going to handle and treat that. So there is no impact on that at this point,because we don't know what that is going to look like.

Adam Greene - JPMorgan

Okay, thanks.

Darrell Borne

Okay.

Operator

Thank you. We'll go next to David Buck, Buckingham ResearchGroup.

David Buck -Buckingham Research Group

Oh, yes thanks. Just in terms of the R&D expendituresyou mentioned in the commentary Darrell, just a $2.2 million charge, was thatall -- it’s essentially a one-time write-off from a line, is that correct? Andthen I've got a follow-up.

Darrell Borne

That actually is impresses R&D charges with the recentlyacquired licensing products. So it’s one in the line, but it was the twoadditional products, Sular and I believe it was also Altoprev. And that equatesto about $0.04 in it of itself.

David Buck -Buckingham Research Group

Okay, in terms of next year's guidance, can you give a senseof whether you have any type of new product approvals in there, and can yougive some sense of what your assumptions are for growth in the Women's Healthbusiness and also for you talked about, a little bit about Sular’s growth, butcan you give a sense of what you're expecting from the new form of Triglide. Andmaybe what some of the backorders did to revenues, what type of revenue impactthey had in terms of the back orders for the third quarter? Thanks.

Darrell Borne

Sure, as far as the guidance, what we had said was the onlyunapproved product that we have in the guidance is the new Sular. So we don'thave an anticipated any revenues associated with any of additional products, inparticular Sular, which obviously has a PDUFA date of April of '08. We don'thave any revenues associated with that in there. Clonicel, as you saw, waslooks like we are going to have the filing in the first half of '08 now versusthe end of '07. So it’s probably not likely that product would be availableuntil '09. As a result of that if you look at the pieces of growth for us, wecontinue to see a nice growth as you saw in Prenate DHA and the whole family ofproducts holding up very well as we launched that product. We would anticipateto continue to grow that revenue base, as well as, Zovirax that's a superproduct for us that we were able to license in from on a promotional basis fromBiovail, and it will have a continuing impact on the Women's Health revenues aswe continue to market that product.

As far as Triglide goes, obviously, we are anticipatinglaunching before year end. The new fenofibrate product andso that along with the existing Triglide formulations should continue togrow the cardiovascular franchise as we convert Sular scripts from old Sular tonew Sular. And don't forget Nitrolingual Pumpspray. Nitrolingual continues togrow and it had an 8% growth rate in Addrenex scripts this particular quarteron.

David Buck -Buckingham Research Group

And just a final, the backorder was immaterial in terms ofdollars?

Darrell Borne

If you'll see the backorders, I think, in total they areabout $5 million, and now it's a good time to change.

David Buck -Buckingham Research Group

Okay. Thanks.

Operator

Thank you. We go next to Don Ellis, Thomas Weisel Partners.

Don Ellis - Thomas WeiselPartners

Thanks. Good afternoon, guys.

Darrell Borne

Good afternoon, Ellis.

Don Ellis - ThomasWeisel Partners

Just a couple of questions, non-operating income shiftedover to a negative number this quarter, can you tell us what caused that?

Darrell Borne

Yeah, if you look at the cash that we have on the balancesheet, we've finished the quarter at $204 million. We spent approximately $22million on tax payments and product in-licensing cost, and we also repurchase,I think it was around $7 million worth our share repurchase. So, with that kindof cash flow coming out, we didn't have a significant balance like we have inother quarters, what you'll see is that we need to maintain close to about[$200] in a quarter in cash on average and about a 5% return to essentiallycover the costs associated with the Line of Credit and new convert -- the $325million convert.

David Buck -Buckingham Research Group

So should we continue to use the number like that for theDecember quarter of this year?

Darrell Borne

I would say we'll go down a little bit, but I would that itwould be -- it will be slightly negative for the fourth quarter. Going intonext year obviously as our cash balance continues to grow; it will wind up andbe in break-even and slightly positive.

David Buck -Buckingham Research Group

Okay. Next question is on the tax rate is little higher thanwhat we are looking for?

Darrell Borne

Yeah, as far as the taxes go, obviously, one of the thingsthat we've said is as we continue to work on development projects and a numberof these projects are actually international, Sular is an example of that. Asthose expenditures are off-shore, you do not pick up the tax benefitsassociated with that, so obviously there is that extra can give me a tick-up inyour tax rate. Going into next year obviously, we anticipate to get thebenefits for new Sular as well as for some of the other products. And so youshould see a tax rate in the 35, 36 range.

David Buck -Buckingham Research Group

For -- that's what you're assuming for 2008?

Darrell Borne

That's correct.

David Buck -Buckingham Research Group

Sure. That’s all the questions I had. Thank you.

Darrell Borne

Thank you.

Operator

Thank you. We'll go next to Angela Larson, SIG.

Angela Larson - SIG

Thanks for taking the question. Could you give us a littlecolor on the pediatric run rate? Do you feel like this quarter was fullyreflective of the quarter in the volume -- the transitions to be, and it'sgreater than we lined as complete and the inventories are stable?

Darrell Borne

To answer your question on that, obviously one of the thingsthat Patrick had mentioned on his portion of call is various seasonalities withsome of the products. Obviously with Orapred ODT with the first quarters andfourth quarters being the allergy season and obviously it's an asthma productyou typically see higher scripts in those two quarters. So, I guess, from a runrate standpoint you are going to have seasonality associated with that. Wewould expect to have some higher revenues associated with that. I would sayfrom a sales perspective, they were fairly normal for Orapred ODT, as you saw,as I also mentioned we had some manufacturing issues with that we are not ableto get the product until the towards the end of the quarter which obviouslycost our DSOs to go up a little bit. But a long story short, it's fairly -- itwas fairly normally for the PDS group.

Angela Larson - SIG

Great, and then on the SG&A cost savings, it's beengreat to see the sequential tightening there. Do you expect that to continue?And, I know, you don't want to give specifics for '08, but should we be lookingfor us to run in this general level, or because you have new launches, willthere be some expenditures beyond the norm?

Darrell Borne

If you look at the potential for next year there is going tobe quite a few product launches that we would anticipate. So, obviously, youare going to have launch costs associated with those products. As far as thesales rep cost we are not -- at this point unless we get additional productsthat would make sense to add reps we are not planning on adding any additionalreps. So, you would have a similar run rate, as far as, that is concerned. Thewildcard that everybody is taking into consideration is -- remember ourroyalties are in SG&A, and we have significant royalty rate on a couple ofproducts in particular, Orapred ODT, which is in the 35% range. So, as salescontinue to grow obviously the royalty portion of SG&A is going to continueto grow.

Angela Larson - SIG

Is there any chance you would start breaking that out?

Darrell Borne

Maybe a possibility, but right now we just work it intoSG&A.

Angela Larson - SIG

Okay. Thank you.

Darrell Borne

Okay.

Operator

Thank you. We’ll go next to Ken Trbovich, RBC CapitalMarkets.

Ken Trbovich - RBCCapital Markets

Thanks for taking my questions.

Darrell Borne

Hey, Ken.

Ken Trbovich - RBCCapital Markets

How are you?

Darrell Borne

We are doing well, thank you.

Ken Trbovich - RBCCapital Markets

Yeah, its look it, I guess one of the question I was tryingto understand with regard to the Women's Health business is Prenate DHA, howmuch stocking occurred during the quarter?

Patrick Fourteau

Not much, not much, as a matter of fact we have one productwhere we have moved faster than what we expected in term of updates, so weended up the quarter with fairly low levels.

Ken Trbovich - RBCCapital Markets

Okay, and then with OptiNate coming down while Prenate DHAis growing, is there any risk to the OptiNate channel inventory or is thatsomething you guys have already been in the process to many?

Patrick Fourteau

You know that we have IMA agreements in place, where theproduct was never “seller for us.” So, you know, the inventory is going down,naturally it doesn’t have any impact on our results.

Ken Trbovich - RBCCapital Markets

Okay, and then finally just with regard to the gains, Iknow, there was couple of questions about the new products and the fact thatyou guys, with the exception of the Sular line extension or new formulation,you don't have new products in there. Do you have launch cost associated withthe new Sular formulation in there?

Darrell Borne

We do have launch cost in there in the first half of theyear, yes.

Ken Trbovich - RBCCapital Markets

Okay, and then I know in response to Angela's question,you’ve said that you weren’t planning to expand the sales force. How are yougoing to sort of manage the new launches and perhaps try to reintegrate growthwith Sular, without expanding the sales force, I know, obviously in the lastfew months we’ve seen Sular's scrips decline, and at least in terms of the rateof growth even slowing, I am just sort of curious given the number of newproduct launches, how you guys plan to manage that?

Patrick Fourteau

Well, in terms of the new, obviously to be consistent wehave taken in our 2008 guidance, we have not taken any of the new products.Therefore, we have not taken any of the launch costs associated with it, andthose launch costs could include some sales force expansion. You make a verygood point, as far as Sular is concerned, because I thinkthat here it’s a debate internally, but and I'll give you the sense of thedebate. The debate is that we've always seen that we have been able to moveSular marketshare when we have increased the share of voice behind it. We areat discrete movement from 1 to 1.5 to 1.8 and those movements were alwayslinked to increase in size of the Sciele’s voice, increasing the number ofreps. With the new Sular formulation, what we would like to do is to find adeal that would allow us to increase the size of the sales force without havingto pay for it. Remember the way we did it when we launched the DHA. Wecontracted [Vivax] buyback that allowed us to pay for an addition to a 100 to200 reps, and that has allowed us to launch very successfully the product. Wedid the same, by the way, when with Addrenex products, and we are able toincrease the size of our PCP sales force paying for its users --acquisition ofthose products, and that has allowed us to increase the market share of Sularat that point in time. Here we are, as I mentioned, and maybe we have notgenerally, it was maybe a ground in that, also commented that I had but, we arevery actively looking at those opportunities and I, you know, you will see andI hope we will see very, very soon an opportunity that would allow us to moveconcurrently into the type of approach that we have taken with the Vivax.

Ken Trbovich - RBCCapital Markets

Okay. Then one final question, if you geta positive decision on the second should we expect that line extension thisyear or next?

Patrick Fourteau

It's going to be next year, anyway.

Darrell Borne

Okay. And then also, Ken, to that pointif we do get approval soon, obviously we will be working on the conversion inearly '08. So, obviously the revenues that are associated with old Sularand new Sular clearly will be impacted in the first half of the year. So Iwould anticipate lower revenues in the first half of the year, obviously higherrevenues in the second half of the year. So as you are modeling out yourrevenues and EPS, take that into consideration.

Ken Trbovich - RBCCapital Markets

Okay, thank you.

Darrell Borne

Okay.

Operator

(Operator Instructions) We'll go next to David Steinberg, DeutscheBank.

David Steinberg -Deutsche Bank

Thanks. I have a couple of…

Darrell Borne

Hello, David.

David Steinberg -Deutsche Bank

Hey, how are you?

Darrell Borne

Fine.

David Steinberg -Deutsche Bank

Good. Just a couple of Sular questions? First; Norvasc isnow being generic for a couple of quarters, I am wondering if you've seen anychanges at all in your formulary status since that's been genericised for sure?

Patrick Fourteau

Those have been certainly not -- no changes in formularystages. We have had some losses on Medicaid side, okay. That has been reallythe main impact, I think there is just a weight of big Norvasc becominggeneric, which is right now (inaudible) we were able to grow the scrips.

David Steinberg -Deutsche Bank

Right, okay. Okay. And then with regards to your Sularfranchise, next year, obviously it would include some existing Sular likelysome new Sular and potentially and hypothetically authorized generic in Sular.I know you indicated that to expect the new Sular in your revenues next year,but could you give us a sense of the level vis-à-vis 2007, do you think thefranchise, the aggregate franchise will be higher in revenues, lower inrevenues, about the same.

Patrick Fourteau

Yeah, let me first address two sides of your question. Ithink that you are, maybe, under wrong assumption when you think that there'sgoing to be old Sular and new Sular co-existing. But we're going to be doing itwhen we launch a new Sular, we're going to take the old Sular out. Okay, sowe're going to switch everything to the new Sular.

David Steinberg -Deutsche Bank

Okay.

Patrick Fourteau

So what you are going to find is that, to the point that wasmade by Darrel earlier and we are basically planning on adding an 80% to 85%conversion. So you are going to see on the TRX side most probably there will bean impetus, as you well know David when you launch a new product, the salesforce might be excited but it's going to be a difficult market. So I think thaton the TRX side you are going to see something which is going to be down may be5% to 10%, I would say minimum. Okay, however, that's going to be made up, morethan made up obviously by the impact of the price increases that we have put inplace that will play fully in 2008 than in 2007 and more importantly on thegross margin side, do not forget that's a new Sular formulation will have amuch better gross margin profile than the old Sular formulation.

David Steinberg -Deutsche Bank

Okay. So putting that all together than when you add up allthe revenue pieces should we assume revenues up slightly, obviously moreprofits….

Patrick Fourteau

As to the revenue, David we are very conservative by natureokay. So I let you do that --assume that from our standpoint the way we haveplanned that is to be extremely conservative.

David Steinberg -Deutsche Bank

Okay. Thanks a lot.

Operator

Thank you. We'll go next to Gur Roshwalb, Piper Jaffray.

Gur Roshwalb - PiperJaffray

Good evening. Thank you for taking the question.

Patrick Fourteau

Hu Gur, how are you?

Gur Roshwalb - PiperJaffray

Good, thank you. So several actually, but i first is aboutSular. How do you plan to position reimbursement for the new Sular and do youthink you would get any pushback from potential generic Sular that youtheoretically anticipated in the second half of '08?

Patrick Fourteau

To that first question, first of all in it's important toknow that we have already, we have a very active managed care group and we havehad some pretty good feedback right now there was the [AMCT] conference justlast week And we have been able to approach most of our partners in the managedcare side and I think that compared for both Sular as well as the addition ofour new Fenofibrate, will be well receive by the managed care. I don't thinkthat we'll have resistance there. So I don't think that from the reimbursementstandpoint we are going to have obviously changes for that standpoint.

Darrell Borne

Gur, there is also something else to take into considerationis Patrick had mentioned we will have higher gross margins on Sular, which willallow us to be able to give additional discounts if required. Which obviouslyputs us in a descent position from a managed care perspective, but as Patrickmentioned we think we are going to be in great shape.

Gur Roshwalb - PiperJaffray

Thank you and my next question, the current assumption fortiming of market entry for PSD502 originally I think it was being modeled outat least by me at the end of 2009 maybe early 2010, with the fact that youdon't need to do 12 months open label trial. Do you expect PSD502 to be on themarket earlier?

Patrick Fourteau

We would, but we are people from Missouri, even though my accent does notbetray it and stile we see it, we don't see it.

Gur Roshwalb - PiperJaffray

Fair enough. I have just two more quick modeling questions.The start up course for the initiation of Phase III for Clonicel and PSD502.Are they being booked in the third or the fourth quarter?

Patrick Fourteau

Those stuff are being booked by our partner, so we should dothe opposite.

Gur Roshwalb - PiperJaffray

Okay, and my last one. You characterized the Trigliderevenues, the delay is about $5 million, do we anticipate that being booked inthe fourth quarter?

Darrell Borne

We will ship those in the fourth quarter.

Gur Roshwalb - PiperJaffray

Thank you, very much. I appreciate the answers.

Operator

Thank you. we'll go next to David Buck, Buckingham ResearchGroup.

David Buck - BuckinghamResearch Group

Yes, thanks for the follow-up. Can you just give me a senseof what the actual pediatrics sales were in the quarter, just so I can get anapples-to-apples comparison and maybe some help on the Women's Health side,what approximately the (inaudible) was of sales and maybe some ranges, Sular whetherit was in the $27 million to $28 million range?

Darrell Borne

As you know, David we don't breakout individual productssales. To recall from the conference call that Patrick had mentioned thepediatric products were $12.7 million in the third quarter of '07, obviouslythat compared to $2.4 million in third quarter of '06. We have pediatric andother products in there. The other products were less than a million dollars.So it's very small, so that’s primarily obliviously the pediatric products. Onthe Women's Health front obviously that the revenues were $21.3 million for thethird quarter compared to $12.7 million in the third quarter of '06.

Patrick Fourteau

And for the Zovirax, remember the range that we gave earlierwhen we launched when we announced that deal it was around $10 million to $15million. As some seasonality to it, so model it around to top end of thatnumber with a little seasonality that would bring down that number.

David Buck -Buckingham Research Group

Okay. And on the gross margin front it’s a little bit softerthan we were anticipating in the quarter. Any I guess timing and priceincreases did that have any impact and should we be seeing a sequentiallyhigher gross margin in the fourth quarter?

Darrell Borne

Yeah exactly.

Patrick Fourteau

Yeah it's Patrick. What you typically see to your pointthere and when we do price increases and on the legalized last when we did wasback in the July timeframe. It typically takes about a quarter before thatactually plays out because as our IMA agreements with the wholesalers. So youdo typically see the price increases in the following quarter.

David Buck -Buckingham Research Group

Okay and one final one just for Patrick on. I think it wasaddress a little bit, but on the Sular the prescription growth slowing you hadtalked about previously, hope I guess when Norvasc went generic that you'll beseeing a return to prescription growth. I guess for 2008 you mentioned there ispotentially a prescription decline but can you give us a sense of fourthquarter would you expect any changes in terms of prescription growth rate andfor…

Patrick Fourteau

Fourth quarter I think what we are seeing is a flattening.There is a problem right now that you guys may be aware when you're onconference call with other companies, which rely on IMS data moving forward.You may be aware that IMS is revising their data. So right now when we are, aswe are not talking about big growth we're talking about 5% to 7% growth as wehave seen it in the course of the last two quarters. Obviously the changes inmethodology that IMS has could have an impact and it has not been determined of6% to 7% over statement. The previous month versus what they're going to reportmoving forward. So it's going to be a little bit difficult what obviously whatwe count on moving forward right now is really flat type of growth.

David Buck -Buckingham Research Group

And for new Sular what triggers the determination to take theold drug of the market. And is it going to be something immediately wait to seewhat prescriptions are at one month, two month?

Patrick Fourteau

It's got to be now then and now.

David Buck -Buckingham Research Group

Okay so when new Sular comes in the market old Sular goesoff is that right?

Patrick Fourteau

Yeah, it's like a magician trick. You see it, you don't.

David Buck -Buckingham Research Group

Okay fair enough, thanks.

Operator

Thank you. We'll go next to [Alex Rygiel] of FBR.

Alex Rygiel - FBR

Good afternoon it's Alex Rygiel on behalf of Robert Uhl atFBR. Just a follow-up question on Sular. One of the initiatives that justmentioned earlier was the increased focus on high Norvasc prescribers to try toget enough lasting prescriptions. But I'm just wondering if you've had anyfeedback on that. What has been, how is that strategy resonated with thoseprescribers?

Patrick Fourteau

Obviously it has not resonated to the extent that we wereexpecting it. So I think what we are seeing in term of growth, strengthening wehave not been able to convert, we are still able to grow with our existingbase. So in terms of sales strategy moving forward what you are going to see asa focus, on IR frequency with our existing prescribe base.

Alex Rygiel - FBR

And do you have any thought as to what bust on to thosebarriers. Why haven't those “prescirbers” come along with any commonobjectives, objections that they have been giving your sales reps?

Patrick Fourteau

Obviously they are used to, we have not been able to convenethem, that's all that I can tell you as far as we are concerned, because thisis not being something a message has not been strong enough to resonate theywere so used to Norvasc they know that its generic and now they are used tothat being generic and we have not been able to make a change.

Alex Rygiel - FBR

Great. Thank you.

Operator

Thank you, we’ll go next to Ken Trbovich, RBC CapitalMarkets.

Ken Trbovich - RBCCapital markets

Hi, thanks for taking this follow-up. Darrell just a quickaccounting question on the amortization expense does that reflect to fullquarter with Alliant or should we expect that going up in the fourth quarter?

Darrell Borne

No, that should be the ongoing run rate.

Ken Trbovich - RBCCapital markets

Okay. Thank you.

Operator

And we’ll go next to [Natalie Gazal], Banc of AmericaSecurities.

Natalie Gazal - Bancof AmericaSecurities

Hi thanks for taking my question. I don’t know that if hadmentioned this earlier, will your Sular line extension be in the same tabletform or will it be in pump spray?

Patrick Fourteau

Sular will be a new tablet formulation with a lower dose.

Natalie Gazal - Bancof AmericaSecurities

Okay. Thank you.

Operator

Thank you. And with no further questions, I would like toturn the conference back over to Mr. Fourteau for additional or closingremarks.

Patrick Fourteau

Well, we would like to thank you very much for yourparticipation in that call and if you have any additional questions we areobviously at your disposal to answer that. Thank you very much.

Operator

Thank you for your participation. That does conclude today'sconclude today's conference. You may disconnect at this time.

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