Alkermes Plc (ALKS) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes conference call to discuss the financial results for the first quarter of fiscal 2005. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Alkermes' request. At this time, I would like to introduce your host for today's call, Mrs. Rebecca Peterson, Director of Corporate Communications at Alkermes. Please go ahead, ma'am.

Thank you. Good afternoon and welcome to the Alkermes' conference call to discuss the financial results for the first quarter of fiscal 2005 which ended on June 30, 2004. With me this afternoon is Richard Pops, our CEO, Jim Frates, our CFO, and Elliot Ehrich our Chief Medical Officer. Before we begin, let me remind you that certain matters we will discuss consist of forward-looking statements relating to, among other things, our expectations concerning the commercialization of Risperdal Consta, our future financial and business performance, operating plans, goals, and objectives of management, proposed partnering arrangements and regulatory plans, listeners are cautioned that these statements are neither promises nor guarantees, but are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. Contemplated by the forward-looking statements. In particular, the risks and uncertainties include, risks related to launch, pricing and market acceptance of Risperdal Consta and our other product candidates. Whether we can manufacturer Risperdal Consta and our other products at commercial scale or economically, and whether additional regulatory approvals will be received and those risk factors contained in our press release announcing our most-recent results and in our periodic reports filed with the SEC, including but not limited to our annual report on Form 10-K for the year-ended March 31, 2004. We undertake no obligation to update or revise the information provided in this conference call. Whether as a result of new information, future events, or circumstances or otherwise. During the call today, Jim will discuss our results and affirm our guidance for the year. Elliot will then provide an update on our pipeline programs, specifically our diabetes franchise. Finally, Richard will provide some closing remarks on Risperdal Consta and Vivitrex and then offer remarks on future milestones. We'll then open up the call for Q&A. With that, I'll turn the call over to Jim Frates.

Thanks Rebecca, good afternoon, everybody. We started fiscal 2005 with a solid first quarter from a financial perspective, we saw strong increase in Risperdal Consta worldwide sales, as our partner J & J continued to penetrate the marketplace and successfully promote this long acting formulation of Risperdal for the treatment of schizophrenia. This in turn has driven an increase in our revenues related to Risperdal Consta. The financials also reflect continued investment in our maturing pipeline, including our lead proprietary product compound Vivitrex for the treatment of alcohol dependence and the products in our diabetes franchise, inhaled insulin, and Exenatide LAR. Overall, we believe we are well-positioned to drive these programs forward and to reach our goal with building a profitable pharmaceutical company. Let me turn to a review of our financial results. Our loss on a GAAP basis for the quarter ended June 30, 2004 was 36.1 million, or 40 cents a share, as compared to a net loss of 30.6 million, or 47 cents a share for the quarter ended June 30, 2003. The net loss for the quarter ended June 30, 2004 also includes restructuring charges of $11.9 million, related to the decision by Alkermes and Genentech to discontinue the commercialization of Nutropin Depot which we announced earlier in the quarter. Because of the significant nature of certain non-cash items we feel it is important to discuss pro forma results that we as a management team believe more accurately reflect our ongoing operations. The pro forma net loss for our first fiscal quarter of 2005 was 25.5 million or 29 cents a share, compared to a pro forma net loss of 28.2 million or 44 cents a share for the same period one year ago. For a more detailed reconciliation of our pro forma net loss to GAAP, please see our press release announcing our financial results for the quarter that we released today which can be found on our Website at www.alkermes.com.

I will now review the specific line items in our results. Total revenues were 11.5 million for the quarter ended June 30, 2004 compared with 4.3 million for the same period a year ago. This is comprised of manufacturing revenues, royalty revenues and research and development revenues. Our total manufacturing revenues were 6.2 million and 1 million for the quarter's ended June 30, 2004 and 2003 respectively. Including, 6.2 million and .7 million respectively of manufacturing revenues for Risperdal Consta. The increase in manufacturing revenues was primarily due to increased shipments following the U.S. launch of Risperdal Consta as well as shipments to additional countries -- for additional countries around the world. Under our agreement with Janssen as most of you know, we record manufacturing revenues upon shipment of the product to Janssen based on a percentage of Janssen's net selling price. These percentages are based on the volume of units shipped to Janssen, which is a division of J & J in any given calendar year with the minimum manufacturing fee of 7.5% to Alkermes. We anticipate that we will earn manufacturing revenues at an average of 8.2% of Janssen's net sales for Risperdal Consta for the full fiscal year of 2005. This compares to 9.8%, which we received in fiscal 2004.

In addition, total royalty revenues were $1.8 million, and $.6 million in the quarter ended June 30, 2004 and 2003 respectively. Including 1.7 million and .4 million respectively of royalty revenues for Risperdal Consta. The increase in royalty revenues was due to an increase in global sales of Risperdal Consta by Janssen. Under the terms of our agreement with Janssen, we record royalty revenues equal to 2.5% of Janssen's net sales of Risperdal Consta. Research and development under collaborative agreements for the quarter ended June 30, 2004 was 3.5 million compared to 2.8 million one year ago. The increase is related to an increase in revenue earned for work performed on the Lilly inhaled human growth program and for work performed on several other collaborative programs. Just a note on the Lilly programs. In the first quarter we began to recognize funding for the work performed on the inhaled human growth hormone program and in the second quarter, we will start to recognize funding for work performed on the inhaled recognized revenue, excuse me, for work performed on the inhaled insulin program. For the first quarter of 2005, the cost of goods manufactured was $5.2 million, consisting of approximately $2.9 million for Risperdal Consta and approximately $2.3 million for Nutropin Depot. Cost of goods manufactured was $2.6 million in the first fiscal quarter of 2004, consisting of approximately 1.4 million for Risperdal Consta and 1.2 million for Nutropin Depot. The increase in cost of goods manufactured was primarily the result of an increase in production of Risperdal Consta for shipment to our partner Janssen.

In addition, as I mentioned on June 1, 2004, we announced an agreement with Genentech to discontinue commercialization of Nutropin Depot. In connection with this decision we ceased commercial manufacturing Nutropin Depot and recorded a one time write off of Nutropin Depot inventory of $1.3 million, under the caption of cost of goods manufactured, as I just reviewed. Research and development expenses for the first quarter of fiscal 2005 were 24.1 million, compared to last year's $21.7 million expense. Due primarily to an increase in personnel costs related to a proprietary and collaborator product candidate as well as an increase in occupancy costs and depreciation expense related to the expansion of our facilities in Massachusetts and Ohio. G & A expenses were $7 million in the quarter ended June 30, 2004, compared to 5.8 million for the same quarter one year ago. This reflects an increase in personnel-related costs notably within sales and marketing as we prepare for the commercial launch of Vivitrex as well as legal costs associated with our pending securities litigation. We also took a restructuring charge in the quarter. As I discussed earlier, Alkermes and Genentech discontinued commercialization of Nutropin Depot on June 1. In connection with this decision we ceased manufacturing Nutropin Depot as part of the discontinuation of the product we recorded restructuring charges of $11.9 million for the quarter, primarily related to facility closing costs.

Interest income for the quarter was .6 million, lower than the $1 million reported one year ago, resulting from lower cash in investment balances held during the three months ended June 30, 2004. Interest expense was 1.2 million and 3.5 million in the quarters ended June 30, 2004 and 2003 respectively. The decrease in interest expense was primarily the result of a decrease in the average outstanding debt balance and a lower interest rate payable on the convertible debt outstanding during the respective periods. In terms of other expenses we recorded a net charge of .3 million in the three months ended June 30, 2004 compared to net income of 1.4 million for the same period in the prior year, these related to net changes in the fair value of warrants held in connection with licensing agreement. Which are recorded as derivatives on the balance sheet. The recorded value of such warrants in publicly traded companies can fluctuate significantly based on fluctuations in the market value of the underlying securities. At June 30, 2004 Alkermes had cash and total investments of $126.9 million, as compared to $148.9 million, at June 30, 2003.

Let me take a moment now to reaffirm our financial guidance for fiscal 2005. We're on track to meet our total revenue projections which are in the range of 90 to $120 million, with total manufacturing and royalty revenues projected to range from 45 to $55 million for fiscal 2005. We expect manufacturing revenues to range from 38 to $46 million, based on expected shipments of Risperdal Consta. The revenues for Risperdal Consta are based on estimates from our partner of course, but has the right to change the timing and the amount of their purchases. Just a note on our strong manufacturing results for this quarter, we earned higher manufacturing revenues in our first fiscal quarter than predicted on our last quarterly conference call, due to the timing of shipments in the quarter occurring in June rather than in July. It's important to note that while we expect to be in line with our guidance for the entire fiscal year, the early shipments will impact the results for our second quarter, so that manufacturing revenues in the second quarter will be less than originally anticipated. As we have said in the early stages of launch our manufacturing revenues will be lumpy from quarter to quarter. We expect that to continue.

We continue to expect royalty revenues related to Risperdal Consta to range from 7 to $9 million, assuming continued uptick of Risperdal Consta in the United States and around the world. Once again, I might add that we rely on sales projections received from our partner to determine royalty revenue expectations and thus projections may not turn out to be accurate. We continue to project that research and development revenues will range from 45 to $65 million this fiscal year, this estimate includes anticipated revenue of between 15 and $30 million from a partnering transaction for Vivitrex. Our projections for cost of goods manufactured for fiscal 2005 remain from 19 to $23 million, and are estimated based on the projected order from our partner for Risperdal Consta. We still expect research and development expenses for fiscal 2005 to range from 84 to 94 million, as we continue to advance our R&D programs towards commercialization in particular Vivitrex. We also still expect to report general and administrative expenses for fiscal 2005 in the range of 29 to $33 million. On a pro forma basis before our restructuring, we anticipate a net loss of 35 to $45 million for fiscal 2005, or approximately 39 to 50 cents a share. And we continue to target profitability in late calendar 2005.

Again, we continue to expect that CapEx for fiscal 2005 will be approximately $25 million, reflecting our investment to build and expand our manufacturing infrastructure for Risperdal Consta, Exenatide LAR and Vivitrex. In summary, we had a solid start to fiscal 2005. With Risperdal Consta sales beginning to ramp continued fiscal discipline and appropriate investment in our pipeline, we remain focused on crossing into profitability in late calendar year 2005. So thanks for your attention to all that detail, I'll now turn the call over to Elliot for a review of our clinical development programs.

Thanks, Jim. As Jim noted, we continue to invest in our technology and product pipeline and our investment continues to yield results as we advance programs through the clinic. We believe the future growth of the company lies in these promising development programs and we are pleased to report that both our partners and proprietary programs are moving forward as planned. Now we have spoken in the past about Vivitrex and Consta and Rich will give you additional detail today. Today I'd like to highlight some progression in our diabetes programs. As many of you know, diabetes is a huge and growing problem where existing therapies are not providing sufficient treatment options for all patients. Alkermes is in the very fortunate position of having two key development programs for novel diabetes therapeutics which leverage our formulation capabilities. Diabetes is an excellent arena for Alkermes. An arena where we can apply our expertise in enabling therapeutics by changing delivery. Effective therapies exist for diabetes, however, the major medical benefit for these treatments is only fully realized if patients carefully adhere to chronic dosing regimens. The reality of the situation is that patients with diabetes are often unwilling or unable to adhere to demanding treatment regimens by improving or simplifying treatment so that patients receive their medications more reliably, we stand to have a profound impact on health outcomes and well-being.

Our two products in development are Exenatide LAR a long-acting formulation of Amylin Exenatide. Exenatide is designed to improve glucose control in patients with type II diabetes who are not achieving target glucose levels with diet and oral medications alone. The other product is inhaled insulin, a pulmonary formulation of insulin that we are developing with Eli Lilly. Let's start with Exenatide LAR. We are extremely excited about this product, particularly because the data emerging from Amylin's twice-daily injectable Exenatide has been quite positive which we believe speaks to the promise of the compound. Now, LAR is a long-acting formulation of Exenatide that is designed to allow for once a week to once monthly dosing as based on our Medisorb technology. The results which will be released in the second half of calendar year 2005 will be used to design a multiple dose study. That's a result from a Phase II dose proportionality study of 60 patients with type II diabetes.

Now the subsequent multidose study is in our view an important milestone in the development of a long-acting product. In this study, we will build from the findings of the single dose study by administering multiple doses over time to establish studies date levels, in essence we will begin to observe how Exenatide LAR will perform in the real world over extended periods of time in patients with type II diabetes. Now in tandem with the clinical work that's underway, manufacturing scale of work is ongoing full bore at our facility in Willington. Now let's turn to inhaled insulin. We are working with Eli Lilly to develop an inhaled formulation of insulin. Our inhaled insulin has a rapid onset of action, and is designed to be administered right at meal time. This is a major program for both us and Lilly. We have discussed with you in the past some of the key elements of this joint-development program which include clinical trial, construction of our facility in Chelsea, and scale up of our manufacturing operations. In addition, we have completed the design and two link for the inhaler that will be used commercially. Importantly we've had success in all of these areas. Know we've completed 9 clinical trials, and the product to date has shown an excellent safety profile.

We recently completed a phase II multicenter safety and efficacy study of 120 patients with type 1 diabetes. The study had a rigorous crossover design, patients had a total treatment period of approximately six months. Eli Lilly is approaching a major program milestone or product decision which is a go no go threshold for moving into late stages of development with a view towards product registration. We expect to have that decision this quarter. Based on the data generated in the program to date and on the growing excitement in the medical community for an inhalable insulin we are optimistic that our partner will make a positive product decision and decide to advance this program. So of course that is a decision that Lilly will have to make. As you can see, our pipeline is reaching some key milestones in the near future and we look forward to updating you on our progress.

Thanks, Elliot. This is Richard Pops. Good afternoon everybody I'll try to keep this brief. You may get the sense that this is quite an exciting time here at the company. The story of fiscal 2005 for us had been from the beginning of the year about revealing the breadth and the value of the product-development programs at the company. We are in the process of making this transition to the next stage of the company's development from a business perspective. We have our first major product, Risperdal Consta launched around the world, and it's beginning its revenue ramp up. With this, we have established a solid financial base from which we'll drive forward the pipeline and continue this trajectory towards profitability. We're executing on our plan to bring our first proprietary product, Vivitrex, to the marketplace. And I'll tell you a little bit more about that in a moment. And behind these lead programs, the most commonly identified programs with Alkermes Consta and Vivitrex and our next major product cycle based on our expertise in formulation sciences. Our DI diabetes products that Elliot just referenced. Our diabetes franchise, if you want to call it that, has continued to mature and data emerging from this program speaks to the potential of these extremely high-value products.

So I will start first with a little bit on Risperdal Consta. We saw a significant ramp in Risperdal Consta sales during the quarter. J & J reported worldwide Consta sales of $67 million, which was a 31% increase over the quarter ended 3/31 demonstrating the strong and continuing uptick of the product around the world. The product is now approved for sale in 64 countries and launched in 37. Including the U.S. Most recently, Janssen received approval to market Consta in Canada, which is another significant opportunity for the product. In the marketplace, Consta is demonstrating the promise that our novel delivery technologies offer to materially improve the therapeutic outcomes for certain key drug molecules. And there's increased awareness among practitioners of the tremendous value and potential for Risperdal Consta to improve the lives of their patients. The improving reimbursement landscape for Risperdal Consta is also driving the successful launch in the U.S. The reimbursement situation is still somewhat complex, but in general Risperdal Consta is covered under Medicare -- or Medicaid in 48 out of 50 states for Medicaid reimbursement and the drug is on their formulators. Coverage decisions are awaited in Texas and in New York. The Janssen team is continuing to work to facilitate reimbursement.

Janssen advocacy groups and key opinion leaders are actively working with the last two states to secure this reimbursement, and we understand from them that they are on the cusp of adding -- the cusp of adding Risperdal Consta to their formulas. It's important to point out I think and as I mentioned this in individual meetings that we've had, that the logistical and reimbursement issues that are so critical, essential in the launch phase of the product will give way over time to a focus on the value that Risperdal Consta is bringing to patients and doctors and families and payers. This is where we consider to see Consta shine. What will lead to the ultimate commercial value of Risperdal Consta are its inherent attributes in the outcomes the patients experience while on this drug. We've heard from the marketplace as well as from our colleagues at J & J, many favorable anecdotes on outcomes from patients and physicians, that remind us of why this product is growing significantly and why we continue to believe it will continue to grow significantly going forward. So in a nutshell we're very pleased with the way Consta is doing and we're looking forward to continue to report on this progress both financially and otherwise to you.

Let me move on quickly to Vivitrex. Here at the company there's an intense focus on executing against our development, regulatory, and commercialization strategies for Vivitrex. The success with Risperdal Consta provides a window into potential for Vivitrex. Vivitrex addresses an untapped pharmaceutical market with a clear medical need and a clear societal benefit. It's becoming increasingly clear to us that alcohol is being recognized as a therapeutic market with an unmet medical need and you can see day by day in the popular press more and more focus on the cost of addiction, both in terms of addiction to opiates as well as alcohol. During the quarter, we presented our Phase III data at several scientific communities, including the American Society of Addiction Medicine. We were very pleased with the positive response to this data at these meetings and from the community at large. Our team has continued its interactions with the NIH, including the NI triple A and Nida and we are building a strong base of support for the use of pharmacotherapy in the treatment of alcohol dependence and for Vivitrex based on its data itself. We are increasingly convinced that Vivitrex has the potential to meet a significant unmet medical need.

If you think about it, Vivitrex precisely is the type of product that Biotech and Pharma companies should be developing. It's an innovative new medicine based on advanced science, targeted towards treating previously unmet needs it's solving new problems in health care. Millions of people around the world abuse alcohol. Millions of patients in the U.S. alone meet the clinical criteria for alcoholic dependence, over 2 million people are seeking treatment, already seeking treatment, each year in the U.S. for alcohol dependence. This is not an orphan indication. This is not a new diagnosis. It is a highly prevalent medical condition. Interestingly we started this program several years ago with the idea that we could build Vivitrex into a major brand for Alkermes by focusing really on only a fraction of these patients. But, based on the quality of the data from our clinical program, and our increasing understanding of this disease, we now believe that Vivitrex can help a much larger number of potential patients. And in order to expand our reach to these patients, we have decided to partner this project with a major pharmaceutical company or a major Biotech company, or a specialty Pharma company.

We continue to engage in discussions with these partners for Vivitrex. Our standards are extremely high, the interactions are serious and energetic and we look forward to announcing a high-value partnership to you with attractive terms when we're done. I'm sure that some of you are aware that last week Forest Laboratories announced approval of Kam phral (ph) to later release tablets or (INAUDIBLE) for maintaining abstinence from alcohol in patients with alcohol dependence. We see this approval as a positive step for the alcoholism market and look forward to following this drug in the marketplace. For us, for Alkermes, the approval of Kam phral validates the need for effective long-term treatment options for alcoholism. And also shows the FDA's willingness to approve drugs when presented with data that suggest efficacy and safety in this indication. This is far from a zero-sum game. It's a game that's just beginning. It's our belief that the age of pharmacotherapy in alcohol dependence is just at its beginning. Our goal is to establish Vivitrex along with psychosocial counseling as the standard of care for alcohol dependent patients. Our clinical and manufacturing efforts are on track to support our consistently stated goal of an NDA filing in the first half of 2005 with Vivitrex.

As for the pipeline, the pipeline continues to mature and produce very promising results. And we're pleased that we're going to be able to shore more of the data that's emerging from these programs, particularly in our diabetes programs. These programs, as Elliot mentioned, leverage our core capabilities in formulational science to address one of the most significant health concerns of our time. And we're proud to be working on two of the most promising novel therapies for diabetes in development today. This is a key year for both of our diabetes development programs, and we'll update you on their progress over the course of the year. As you heard, you know, we're on the threshold of an important decision with Eli Lilly with respect to pulmonary influence and we're generating data in the clinic on Exenatide LAR. So over the course of 2004 you can expect us to announce Lilly's product decision as soon as we have it on the inhaled insulin program, report Phase II data with or partners at Amylin on Exenatide LAR, we'll continue to report to you our increase in the revenues related at the ramp and Risperdal Consta sales around the world. And we continue to be on track to announce the Vivitrex partnership in fiscal year 2005.

Overall, we're entering the second half of 2004 in a position of strength. We have a favorable financial position, Consta looks strong, we're executing against the Vivitrex plan and we have a full pipeline of products coming up behind our lead products which we believe will provide us with sustainable growth over the long term and the usual set of circumstances at this particular company. I think that our goal is to make that more self-evident in the investment community over the course of the coming year. We're clearly in a sweet spot, in terms of a biotechnology lifecycle. And we feel that we'll be making a major leap forward in 2004. I'll finish there. I know you have questions and I'll ask the operator to open up the question line. Thank you.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you would like to ask a question, please press the one key now. The first question comes from Rachel McMinn from Piper Jaffray.

Hi. Yeah, just a couple of questions. One, on Risperdal Consta. Do you have an update on Risperdal Consta potentially launching in France? I understand approval was some time ago?

Rachel, I'll take that , it's Rebecca. Our understanding is that the launch in France is imminent.

Imminent. Okay. And then just a financial question on the manufacturing revenues. Last time you did give us a little bit of quarterly guidance, Jim, can you give us a little bit of a hint to the second quarter manufacturing revenues be about equal or maybe less than what we saw in the first quarter given that you expect to see an impact on the second quarter?

Well, yeah. I think that if we shipped things that I was earlier predicting in June that we're supposed to be -- they were earlier predicted to go in July. I think you can safely assume that -- that that will impact the second quarter's manufacturing results again. We're not changing our guidance for the year so those things that we shipped earlier in the year, you know, will cause the second quarter to be slightly lower.

Sure. And then I guess just switching to Vivitrex. Two parts there. One is, can we get any more specificity on the NDA filing timeline beyond first Path 05. I understand that you're waiting on this safety data from your long-term safety trial. But will you need to complete that trial before you file? Can that be added as a safety update? And then, also, what are the chances of a priority review for Vivitrex given the Kam Phral application.

So, this is Richard. We will not provide any more specificity on it just for clarification. That we're waiting to complete the cohorters in the safety study and we're also waiting to be able to file, with a CMC section that reflects launching out of our 20 kilogram commercial-scale production line. So that's why we've kept the guidance at first half 2005. And the priority review question, Rachel?

Yeah.

You know, our -- we would like people to model it as a typical 10-month review cycle.

Yeah. That's how -- any changes to that we'll let you know but for now that's the right way to do it.

Okay. Thanks.

You're welcome.

The next question comes from Jim Reddoch from Friedman.

Thanks. On Vivitrex also, can you just remind us what conversations you've had with the FDA about approvable end points for alcoholism, because the drug that was approved recently, seemed to have a different end point than the one you're going for which is starting with abstinent patients and keeping them abstinent whereas yours is to reduce heavy-drinking events, I have a follow up to that.

Sure. I'll let Elliot answer that one.

Prior to initiation of the Phase III study, we had a number of meetings and conversations with the FDA about the primary end point for our Phase III study, the reduction in heavy drinking, and that -- the decision to use that as the primary end point was a mutual decision between Alkermes and the FDA.

So the FDA has implied that if you show statistical significance on that end point that it's approvable.

That was the content of our discussion, exactly. In addition the FDA has actually published an article highlighting the utility of reduction in drinking as an important outcome in assessing the efficacy of drugs for the treatment of alcoholism.

The --

Okay, thanks. And can you say if the 48 states that currently cover, Consta, which of those have -- has a pharmacy benefit.

It's a blended mix.

50/50? Close to 50/50, close to half and half?

It actually is -- it's a mix. I don't have the exact percentage.

And would you say that having one type of benefit over the other is impacting the uptake a bit -- a bit product in those states?

It's really -- I would direct the question towards J & J because it's a really complicated answer because just because it's deemed a certain pharmacy benefit or certain medical benefit state by state, there's various ways of actually getting reimbursement under those -- those various demarcations. So it's -- there's not a simple answer to it, and I -- I think that that really has been an area where J & J has brought a lot of expertise to bear. So we're -- we're not as deeply trained in the specific nuances on a state-by-state basis.

Okay. Great. And lastly just real quick, LAR, when could a pivotal Phase III start on that.

I would direct that towards Amylin.

Okay. Great. Thanks.

The next question comes from Hari Sambasivam from Merrill Lynch.

Yes, thank you. Just a couple of questions. The first, is -- I know Kam phral has been approved for use in patients who are already abstinent. Just given that -- I'm just wondering where you see Vivitrex positioned vis-a-vis Kam phral, you know, Kam phral, you know, as patients sort of -- as new patients have treated, how do you sort of see these two products interacting. A second question I also wanted to ask you that sort of relates to AIR insulin and as you may have seen in the markets today, there is some rumor or at least conjecture that Exubera may be delayed in Europe and I'm just kind of wondering if there -- you know, what sort of a time frame you're expecting -- I mean, if AIR insulin does go ahead, the time frame for, you know, how long the studies would take in terms of pivotals and so on, or what should we be expecting, is it a one-year pivotal, is it a two-year pivotal, what should we be expecting in terms of NDA filings, etc., etc., maybe you could just add some color on that?

All right. I'll take it to begin with, Hari. First of all with respect to Kam phral. As you know, this is a product that's been around for quite a long time. It was first rejected by the FDA based on the inadequacy of the first Phase III study that was conducted. We see Vivitrex plus psychosocial standard as the gold standard treatment for patients with alcohol dependence, based on the outcomes, data, and the ability to use the product the way that we've shown that it can be used once a month in a large six-month study. We expect patients to be on it for a long period of time. The principal impediment to a Kam phral state or Kam phral as a mass market product is really the need for -- for you to take a couple grams of this a day, three times a day. So it's a -- it's a product that you can talk to various physicians about how they might use it in the process of detoxing a patient over time or keeping them detoxified. But the key thing for our clinical trial and the position of our product is that we were able to show activity in patients who are actively drinking. And this is -- this is an important way that the drug can be used in the real world as you start bringing people into pharmacotherapy without the need for a major detoxification period in advance of putting people on drugs. Does that make sense?

Yes. Thank you.

Okay. With respect to the Exubera stuff. And it was an interesting day for us. The phone started ringing and we received a number of calls relating to the story. And we don't have a lot to say about it, a couple of things to say, though. First and I hope this is obvious. It would be impossible and certainly inappropriate for us to comment on factual matters relating to Pfizers and Aventis's interactions with the European regulatory authorities. We just don't know and we won't speculate. With respect to our program with Lilly, we see no change whatsoever in -- with respect to the story today. And today it is -- this appears to be a very significant trading phenomenon today, I'm not sure from our point of view as it relates to our program, that it has any substantive affect whatsoever. So I'll look forward to hearing what Nektar and Pfizer and Aventis have to say in response to all the hue and cry about it but our program is absolutely unperturbed by that.

Thank you.

Now with respect -- you asked a question on timing which is a good one.

Yes.

Part of the reason why one would not necessarily be surprised by pushback from any regulatory authority on submission that included one-year safety data in our view regulatory authorities have been quite clear on the need for two-year safety data upon submission. So --

Is that -- is your opinion that Europeans and the U.S. agencies both want two-year data?

I think that -- again speaking for myself, I think that that's certainly clear in the U.S., and I think, it's a reasonable conclusion drawn in Europe. But I have less direct experience myself on this call. There are people in this company who have, but me personally on -- on the European point of view but it's quite clear in the U.S. Okay?

Yes, thank you.

All right.

The next question comes from Bert Hazlett from Suntrust.

Thanks. Thanks for taking the question. Just a -- a follow-on on the Exubera issue. Is there any safety data, Richard, or -- or Elliot or -- that -- that you can speak to that might differentiate the products Exubera and AIR insulin that you've published to date again? I know we've seen some of the data in smokers. We certainly believe the enthusiasm is there for Lilly, you do, too. But is there anything where you can speak to directly to -- to differentiate the two programs in our mind? And, how long have patients been on your version to date and can that count in terms of the two-year programs that you're referring to?

First of all, Bert, I would say that the -- we won't do anything to introduce any space between our safety data and Pfizer's safety data at this time. You know, it's too early to say because the datasets are mismatched in terms of their size. And, also, we're the -- we're as big a fan as exists for -- for Nektar and Pfizer and Aventis to be successful in -- so we -- our understanding at this moment from our point of view is that it's a safe and efficacious product and it's working its way through the traps on the regulatory side and we're cheering them along the way because our strategy has always been to be the -- to be in the foot stream so we can understand what -- what the impediments are and so we have a very clear regulatory path in that regard. We will not talk about data -- I think probably is a -- isn't appropriate to talk about data particularly related to our Phase II study until such time as -- as Lilly makes their product decision. And, you know, we're drawing up on that relatively soon here. And then hopefully with positive product decision if we get that we'll be able to talk more about our experience in the clinic. So bear with us on that one.

Fair enough. Thank you.

You're welcome.

The next question comes from Dave Windley from Jefferies & Company.

Hi. On -- on Vivitrex, I don't think anybody's asked the question for any update you can give, Richard, on discussions in your commercialization or your commercial partner, considerations for Vivitrex.

Well, I -- I guess I would just say that it's quite lively. And, the difference today versus, you know, three months ago or six months ago, that we now are highly convinced that we can partner this product on attractive terms and it's really a question now of trying to understand and -- and compare the various idiosyncrasies of different deal structures that are available to us. And it's interesting, as I've said to others before, the financial considerations are necessary, but insufficient in determining who the partner might be. Because this is essentially a product that we feel like we understand it very, very deeply now, having been involved with it for so many years and with the key opinion leaders. We also feel like the way that it's presented in the marketplace is incredibly important and the selection of a partner is a -- is a decade-long commitment or so, or more. So we're being very, very careful about it. But we're quite pleased with the -- with the interest that we're seeing in the product. And, you know, it's not that we should be surprised by that. We predicted it but it's nice to see it being borne out now as we have discussions with multiple parties.

Could -- could one go so far as to say that you believe that the -- that the ultimate partner is someone that you -- that you have struck up conversations with already at this point, given cycle time of -- you know, the partner doing the due diligence on the product, or are you not -- can you not go so far as to say that?

Well, I think -- I think it's a fair question and it's hard to answer because clearly in the cohorted companies with whom we're negotiating now there's a potential to end up doing a deal, absolutely. But we also don't have a gun to our head. So if those negotiations fall short, we can -- we'll walk away. And there will be another wave of companies in the earlier part of the gestation period that will catch up by then. So it's -- it's interesting because your instincts are to get it done sooner rather than later because of the amount of work that goes into the diligence phase with multiple parties, but we're also -- we're also very interested in making sure we made the right marriage for a long period of time. So the answer your question, if you had to ask me, do I think we'll deal with a group -- among the group of companies we're talking to right now, my guess would be probably yes. But I'm willing to walk away in a moment's notice if the terms degrade beyond where we think that they're acceptable.

Okay. And then one more question. Jim, would it be possible to give a sense of how much of the increase in R&D was related to I guess further occupancy in Ohio versus personnel costs?

You know, I think, -- it's Dave, right.

Yes.

I think the -- you know, I would actually say R&D's actually down from -- from last quarter.

Okay.

It's up compared to a year ago. But it's down from, you know, the March quarter. So I think that it's really compared to a year ago, and, you know, both of them are involved.

Okay. And -- and -- I mean I can probably interpolate from the full-year guidance, but the current level is approximately a level you would expect to continue?

Well, you know, at this point, yes and, you know, I don't see it growing substantially as we go forward.

Right, okay. Thank you.

The next question comes from Lewis Webb from WR Hambrecht.

Yes, thank you. Richard, can you point to a time frame, either this month or September where you expect Lilly to give you the go, no-go decision with regard to AIR insulin?

We've been saying two, three. And we'll -- we'll hold to that.

You said Q3?

Yes, that's correct.

And Lewis, just to be clear, that's the calendar year.

Thanks.

You're welcome.

The next question comes from Seth (INAUDIBLE, AUDIO DIFFICULTIES) from Apex Capital.

Hi, good afternoon. A couple of questions. One's a clarification. For the -- the Consta manufacturing revenues for your fiscal second quarter, I guess, I ust want to make sure I understand exactly what the guidance was. Is it that the Q2 revenues will be less than Q1? Or will they be less than what your original expectations were? You gave 6.2 million, is it going to be lower than that or about flat?

Well, it's going to be -- it's going to be both of the things, Seth. It's going to be lower than what our expectations were because if you remember we said 3.5 to 4.5.

No. I understand I just wasn't sure if you meant that Q2 would be lower than the 6.2 million.

Yes and, you know, it certainly has the potential to be.

Okay. Perfect. I just wanted to make sure I understood that.

Yeah. No, thanks for the clarification.

And then on the gross margin side, I think last -- when you reported the -- your Q4, you said to take a look at gross margin as 50% roughly of combined Consta royalty and manufacturing fees and here it was just -- just a little bit over 63%.

Right.

I was wondering if you can walk us through what -- if -- you know, what number still stands and how that works.

Well, I think we're predicting for the overall year, a margin of around 60%.

60.

Yeah. And, -- so, you know, quarters -- you know, I'm looking back at the quarterly margins and you can look historically to. It really depends on, you know, we have a fixed nut, we're running that plant at its capacity and if you produce, you know, 10 batches in one quarter versus 8, you're going to have a better margin in the quarter where you produce 10. Because we're simply using more of that capacity. So that's why it -- they fluctuate generally.

And then speaking of capacity, where are you on the ramp up? I think you were going to start a second line if I'm not mistaken.

That's correct. Yeah. Later this year we expect a second line to come on-board and, you know that's -- that's -- we're still in that expectation.

And can you tell me right now with that second line what your Consta capacity would be?

I should take us -- based on our projections, it should take us at least for a couple of years. So we haven't really said specifically,--

Seth, I think, the only -- this is Rich again, I think the only thing we said publicly in previous calls was that with second -- with line two up we would be able to supply in excess of $1.5 billion a year in sales.

Perfect. Great. And then you're done with charges for Depot, correct, for the Nutropin Depot?

Yes. What -- you know, there are small charges as we go forward that are run through our restructuring line which are essentially our ongoing lease payments to the facility, but that's going to be outlined in great detail in our 10-Q.

Okay.

And they'll be small.

Great. Thanks very much.

You're welcome.

There are no further questions. I would now like to hand the call back over to the presenters.

Thanks, everyone for dialing in. If you have any additional questions, Jim and I will both be available for the remainder of the evening.

Ladies and gentlemen, that does conclude the program for today. Again, thank you for your participation. You may all disconnect.