Alkermes Plc (ALKS) 2005 Q2 法說會逐字稿

(OPERATOR INSTRUCTIONS)

Good afternoon and welcome to Alkermes' conference call to discuss the financial results for the second quarter of fiscal 2005. With me today is Richard Pops, our CEO, and Jim Frates, our CFO.

During the call today, Jim will discuss our second quarter fiscal 2005 financial results and give you an update on our guidance for the year. Rich will review our pipeline programs and provide an update on Risperdal Consta, as well as an overview of upcoming milestones. We'll then take your questions.

Before we begin, let me remind you that during the call, certain matters we will discuss today consist of forward-looking statements relating to, among other things -- our expectations concerning the successful completion of development activities for our programs, including clinical, regulatory and manufacturing developments of AIR insulin, Exenatide LAR and Vivitrex; the filing of our NDA for Vivitrex; the commercialization and reimbursement of Risperdal Consta; gross margins on Risperdal Consta; the signing of a Vivitrex partnership; and our future financial and business performance, operating plans, and goals and objectives of management. 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 the results contemplated by these forward-looking statements. In particular, the risks and uncertainties include, among other things -- risks related to launch, pricing and market acceptance of Risperdal Consta and our other products; whether we can manufacture Risperdal Consta and our other products at commercial scale or economically; whether regulatory approvals will be received for our products in development; whether we enter into a collaboration to market or to fund Vivitrex, and whether the terms of such a collaboration meet expectations; and those other 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 and subsequent Form 10-Q. We undertake no obligation to update or revise the information provided on this conference call.

With that, I'll turn the call over to Jim to review the financial results.

Thanks, Rebecca. Good afternoon, everybody. Overall, we were very pleased by this quarter's financial results as our business continues to progress along the lines we anticipated at the beginning of the year.

This quarter we saw continued robust sales of Risperdal Consta, our long-acting formulation of Johnson & Johnson's antipsychotic medication Risperdal for the treatment of schizophrenia. Consta has been the key driver of our revenues over the past few quarter since its launch in the United States last December. With sales by our partner of over $200 million in the first nine months of the calendar year and a 25 to 35 percent quarterly growth rate through that time, the launch continues to go well.

This past quarter, revenue growth was also driven by the advancement of our collaborations with Eli Lilly for AIR insulin and AIR human growth hormone. With the increasing sales of Risperdal Consta, the decision by Lilly to advance inhaled insulin, and our anticipated Vivitrex deal, we remain on track to reach our goal of profitability in late calendar year 2005. I will turn to the financial results now in more detail.

The net loss on a GAAP basis for the quarter ended September 30, 2004 was $14.3 million, or 16 cents per share, as compared to a net loss of 26.2 million, or 31 cents per share for the same period in 2003. Pro forma net loss for the quarter was 14.9 million, or 16 cents a share, as compared with a pro forma net loss of 26.4 million, or 31 cents a share for the same period in 2003. The decrease in the net loss for the second fiscal quarter as compared to the same period in 2003 was the result of an increase in revenues related to our AIR insulin AIR human growth hormone development programs, as well as an increase in revenues related to Risperdal Consta. For a more detailed reconciliation of our pro forma net loss to GAAP, please see our release announcing our financial results for the quarter that we released today, which can be found on our website at www.Alkermes.com.

Total revenues for the quarter were $18 million compared to 7.5 million for the same period in 2003. Manufacturing revenues were 7.7 million, all related to Risperdal Consta, compared to 4.6 million for the same period in 2003, of which 4.5 million related to Risperdal Consta. The increase in our manufacturing revenues was due primarily to increased shipments of Risperdal Consta to our partner Janssen Cilag, a division of J&J. Risperdal Consta is now marketed in over 35 countries.

Total royalty revenues were 2.2 million for the quarter ended September 30, 2004, as compared to 0.7 million for the same period in 2003, including 2.1 million and 0.5 million, respectively, of royalty revenues for Risperdal Consta. This increase in royalty revenues was again due to increased global sales of Risperdal Consta by Janssen.

Research and development revenue under collaborative arrangements for the quarter was 8.1 million as compared to 2.1 million for the same period in 2003. The increase was primarily due to an increase in revenues related to work performed on the AIR insulin and AIR human growth hormone programs, and to work performed on several other collaborative programs.

As of September 30, 2004, we have spent the full $30 million in funding received in connection with our purchase -- with the purchase of our convertible preferred stock by Eli Lilly in December 2002, relating to the AIR insulin and AIR hGH development program. Beginning in the quarter ended June 2004, work performed on the AIR hGH program was recorded as revenue, and beginning in the quarter ended September 2004, work performed on the AIR insulin program was recorded as revenue. I will turn now to expenses.

Cost of goods manufactured was 2.4 million, all of which related to Risperdal Consta, in this quarter, as compared to 4.6 million in the same period in 2003, consisting of approximately 3.5 million for Risperdal Consta and 1.1 million for Nutropin Depot. The decrease in cost of goods manufactured was primarily the result of manufacturing efficiencies and increased volumes that resulted in lower per-unit costs for Risperdal Consta, as well as the 2004 decision in June that we took to discontinue commercialization of Nutropin Depot.

While we had very strong gross margins for Risperdal Consta of 76 percent this quarter, I should remind you that our gross margins may fluctuate from quarter to quarter based on product mix, manufacturing efficiencies and yield. For the fiscal year, we expect gross margins on Risperdal Consta to be in the range of 60 to 65 percent.

Research and development expenses were 22.6 million compared to 23.4 million for the same period in 2003. The decrease was primarily due to a decrease in external research costs related to the clinical trials of Vivitrex, partially offset by increases in personnel costs related to our proprietary and collaborative product candidates, and increases in occupancy costs. Sales and general and administrative expenses this quarter were 7.4 million compared to 5.9 million for the same period in 2003, reflecting an increase in personnel-related costs, especially within the sales and marketing group as we prepare for the commercialization of Vivitrex, as well as legal costs associated with the pending securities litigation, which we describe in our Form 10-Q.

At September 30, 2004, we had cash and total investments of $102.8 million as compared to $126.9 million in June 2004. The decrease was primarily as a result of cash used to fund operations and to acquire fixed assets. Now I would like to talk about where we stand on guidance for the fiscal year and update that for you.

Our key financial drivers are proceeding as anticipated. Risperdal Consta revenues are growing and Lilly is moving forward with the development of pulmonary insulin. The guidance update that we are making at this time is based on the recent decision to discontinue further development of the sustained release version of recombinant human follicle stimulating hormone, or FSH, for the treatment of infertility. Therefore, we are reducing our guidance for research and development revenues by $5 million, from a range of 45 to 65 to a range of 40 to $60 million for the year. As you know, this guidance includes anticipated revenues of between 15 and $30 million for the expected partnering transaction with respect to Vivitrex. With this adjustment, our total revenues are now expected to be in a range from 85 to $115 million, revised from earlier expectations of 90 to 120.

Guidance on our other revenue and expense items for fiscal 2005 remains the same. I will run through them now just to make sure everybody has them handy. Our expectations for manufacturing revenues remain in the range of 38 to $46 million, and the expectation for royalty revenues remained in the range of 7 to $9 million. Our expectations for cost of goods manufactured remains in the range of 19 to $23 million.

Research and development expenses are still expected to be in the range of 84 to $94 million. Our expectations for sales, general and administrative expenses remain in the range of 29 to $33 million.

One note to touch on in terms of our quarterly guidance. We expect Risperdal Consta manufacturing revenues to be in the range of 8 to $12 million for the quarter ended December 31, 2004, and to be in the range of 15 to $20 million for the quarter ended March 31, 2005. The anticipated increase in the fourth quarter is based on order flows and product mix, and matches what happened last year as well.

Therefore, our net loss on a pro forma basis, excluding any restructuring charges and noncash derivative items, is now expected to be in the range of 40 to $50 million, or approximately 44 to 56 cents per share -- again, 44 to 56 cents per share. The net loss per share calculation is based on an estimated 90 million shares of our common stock outstanding on a weighted average basis.

So with that summary, I will turn the call over to Rich to review the progress of our marketed products and our pipeline.

Thanks, Jim. Hello, everybody. It was a good quarter, an important quarter for us. We made a lot of progress on a lot of different domains.

At the highest level, Risperdal Consta sales are ramping, our NDA for Vivitrex is on track to file in the first half of the next year, the inhaled insulin had a positive product decision and is moving forward, and we hit an important milestone in our Exenatide LAR program. So this company, as I mention every time we speak, is a true multiproduct company. It's the way we designed it and it's the way the business is playing out. So let's cover briefly the most important components of the business as it stands today.

First let's talk about Consta. So, our partner at J&J reported sales of $86 million for Consta during the quarter, reflecting, I think, its excellent reception in the medical marketplace. We continue to receive from the marketplace and from our colleagues at J&J positive feedback on Consta and its benefits to patients. As the clinical experience accumulates in Europe, and now increasingly in the U.S., our confidence is growing in our belief that continuous treatment via long-acting injection has the potential to improve in an important way the treatment of schizophrenia. It's really gratifying for us here to see that theory now translate into practice.

As you know, the tie that binds all of these product development programs together at Alkermes is the potential for improved clinical outcomes based on our technologies. From the beginning, we saw patients with schizophrenia as, I should say, parenthetically we see patients with alcohol dependence, as a logical population for whom advanced formulations can make a real difference. The revenue ramp from this product is still in its early stages, but as Jim said, we see Consta as a major driver for our goal profitability at the end of 2005.

The big news, I guess, is the product was recently approved in Croatia and Venezuela, and that the (indiscernible) making 67 approvals and over 35 launches worldwide. On the reimbursement side in the U.S., Risperdal Consta is on the formularies in 48 states, and J&J expects it will be reimbursed in Texas by the end of this year and in New York in early 2005.

On to Vivitrex. The successes that we're seeing with Risperdal Consta, I think, provide a glimpse into the market potential for Vivitrex, which is our proprietary -- our own product, long-acting formulation of naltrexone for the treatment of alcohol dependence. We are getting more and more excited about our opportunity with Vivitrex as time passes. Vivitrex addresses an untapped pharmaceutical market with a significant unmet medical need and a clear societal benefit.

In the U.S., more than 18 million people abuse alcohol and more than 9 million people meet the criteria for alcohol dependence. Just in the U.S., over 2 million people each year seek treatment for alcohol dependence. This is not an orphan indication, this is not a new diagnosis; it's a highly prevalent medical condition, and the pharmaco therapy options currently available to patients are not optimal due to their daily dosing requirement. There is a tremendous amount of energy and work going on throughout the Company in developing the plans and working through the activities that will ensure the successful commercialization of this unique and, we think, important therapy.

So, let me highlight the three major areas to give you a sense of the activity. The first relates to the NDA timeline. Our plan for filing the NDA in the U.S. continues to be as it's been for the last year, in the first half of next year. We have made tremendous progress both in the clinical and in the manufacturing areas.

In April, we announced that we had completed enrollment of over 400 patients in the 12-month safety study. At this point, all patients have passed the six month mark. The safety setting includes patients suffering from alcohol dependence, but importantly also, opiate dependence and mixed substance dependence, receiving treatment in both a specialty and in a primary-care setting. This setting is a very important component of our NDA package, and we are very pleased with how it is progressing.

On the manufacturing side, we have completed the process development activities at the commercial scale and we're working now to complete all the validation and CMC activities necessary for NDA submission. This has been a big project in Wilmington and an essential central part of our strategy given our market projections for Vivitrex.

On the commercial side, we have a small but emerging and quite talented sales and marketing organization, which continues to lay the groundwork for a successful launch a Vivitrex. We are actively working to develop productive relationships with key opinion leaders and advocacy groups in the field of addiction. We continue both on our own, and interestingly, in collaboration with potential partners, to conduct market research with prescribers and payors to further refine the marketing and sales strategies and to better target the opportunities around this product. I think you can expect to see increased visibility around alcoholism and the challenges associated with its treatment through the execution of our publications and our PR activities over time.

Finally, partnering. Let me give you now an update on where we are on partnering. Our financial guidance, as you know, has been to include a deal in the fourth fiscal quarter, which includes March 31, 2005. We had the guidance to put it there because we knew we would be ongoing for the course of the year in these discussions, and that seemed like the most logical place to put it. We've included this assumption in our guidance because it's our clear intent -- and we want to make it clear to people -- that's our intent, to enter into one or more collaborations as a means of commercializing Vivitrex.

On the other hand, we are also determined to enter into only an alliance that gives us the true value-add that we want, in terms of financially and strategically. So we feel very strongly that we have a valuable product candidate in Vivitrex, and the quality of the program is increasing the further we proceed down the regulatory pathway to approval.

So we have ongoing interactions with potential quality partners. There is serious interest. And with the passage of time, as more diligence is conducted more risks are reduced, and the analyses become more sophisticated and more precise. So we continue on. This is the update. We're very confident in our strategy and we'll keep you posted as we continue to make progress.

Moving now into our pipeline projects, we're quite excited about this emerging diabetes franchise, as Rebecca likes to call it. Development of AIR Insulin and Exenatide LAR are on track, and we have received strong support from our partners in advancing these clinical development programs.

I probably don't need to remind you that diabetes is a serious disease. It affects an estimated 18 million people in the U.S. and more than 190 million people worldwide. Convenient therapies that can help control blood sugar are needed, and we are excited to be at the forefront of the next generation of therapies that could provide new treatment options for this patient population.

First let's spend a minute on AIR Insulin. We obviously were quite pleased with our collaboration's progress with Lilly and their commitment to develop our inhaled formulation of insulin. This inhaled insulin delivery system is based on our proprietary AIR pulmonary delivery system, which you have seen. It uses a small easy-to-use inhaler designed to provide drug delivery for a wide range of drug doses.

As we announced earlier in the quarter, the program achieved a major milestone when Lilly made a positive product decision, and it's proceeding with significant investment for the further development of this formulation. Further development will include both clinical trials and additional manufacturing activities for the inhaler system and the production facility.

As many know, the clinical trial activities for these programs, pulmonary insulin, are extremely expensive. We're currently conducting additional clinical trials that will ultimately support an NDA for the product, and we -- importantly, we expect Lilly to start the key two-year long-term safety study next calendar year.

Exenatide LAR is our other exciting compound for the treatment of diabetes. This is a long-acting formulation of Amylin's Exenatide. Amylin recently filed an NDA for Exenatide which is currently being reviewed by the FDA, and Amylin expects approval in April 2005. This is for the twice-a-day injectable version of Exenatide.

There's a lot of excitement around the long-acting version -- what we call Exenatide LAR -- which is based on our proprietary Medisorb injectable sustained-release drug delivery technology, the same technology that is the foundation of Consta and of Vivitrex. We and our partners in this program, Amylin and Lilly, just announced this week that we have made the decision to move forward with the LAR program and plan to initiate a Phase II multidose study in the first quarter of next year using a once-a-week dosing regimen.

This decision was based on the data from the ongoing single-dose studies which have demonstrated a sustained-release of Exenatide after a single injection that supports this dosing regimen of once a week. The Phase II single-dose study included approximately 60 subjects who were failing to achieve adequate glucose control using diet and exercise with or without the drug Metformin. Subjects were randomized to receive a subcu injection of Exenatide LAR at one of four doses or placebo, and they are observed for 90 days. Dosing and follow-up observation of the final LAR cohort is ongoing.

The Phase II multidose study planned for early next year will also include subjects failing to achieve target glucose control on Metformin or diet and exercise, and will be randomized to receive once-a-week interactions of Exenatide LAR or placebo. At this time, we expect that participants will receive study meds for about four months and will be followed for a similar period after the last LAR dose. That's all I was going to say about the pipeline projects. Let me close by just giving you another area of interest within the Company that we have been growing, and that relates to the management team.

As the business continues to evolve here, and as we're preparing for ultimately profitability and the expansion of the profitability of the business with these multiple products, we have been focusing on the management team in such areas as regulatory affairs, manufacturing, sales and marketing. So I'd just like to highlight a couple of the members of the management team who have recently been appointed to leadership roles.

Most recently, Pria Jambakar (ph) joined Alkermes in September as Vice President of Regulatory Affairs. Pria comes to Alkermes with an exceptional background, most recently as worldwide VP of regulatory affairs at the J&J division of Ethicon, and with previous regulatory position at Baxter and at BMF (ph). We are excited to have Pria with her expertise in registration and marketing support for major drugs, biologics and devices, and she takes on the responsibility for the government and regulatory affairs functions here at the Company.

Next let me mention the recent promotion of Lloyd Johnston as VP of Manufacturing. Lloyd's expanded responsibilities included the process development and scale-up of our AIR manufacturing facility in Chelsea. Many of you know Lloyd, have met him in tours here. He's made a meaningful impact in bringing the Chelsea facility online in record time, and he'll continue to lead the further evolution of AIR manufacturing operations as insulin makes further clinical progress.

Also representing new leadership for our Alkermes downstream capability is the addition of Ken Andrews as VP of Sales, Marketing and Business Development. Ken is a very experienced executive in commercial operations for drug products, and he quit a leadership role in sales and marketing at AHP, or American Hospital Supply, Genentech importantly, and at Centocor. He'll play a vital role and is playing a vital role as we prepare for the launch of Vivitrex.

I'm proud to welcome Pria, Lloyd and Ken to the management team, as they represent exactly the type of seasoned world-class people that we've always considered to be essential assets as we build this fully nucleated (ph) company.

So to finish up, we are excited about the progress we're making and the success we've had with Consta. Overall I feel like we're in a good position to achieve our goals through next year. Looking forward, we anticipate, among others, the following key milestones.

As I mentioned on the insulin program, the start of the two-year safety study for AIR insulin in calendar 2005 is an important milestone on the ultimate timeline for that product's approval. Second, the start of the Exenatide LAR Phase II multidose study we have alerted to you over the course of this year, and in our minds that's an incredibly important study for determining the commercial prospects for the LAR formulation. So we're really looking forward to generating data in that study.

The announcement of a marketing partnership for Vivitrex in the fiscal year, the filing of an NDA for Vivitrex in the first half of calendar '05, and are continuing to manage the business towards profitability, driven by continued revenue growth in Consta and additional approvals and launches of Consta worldwide. So we're looking forward to this and the potential they represent for the Company and its employees and shareholders, and we'll keep you updated on future calls. Thanks very much and we'll go to questions now.

(OPERATOR INSTRUCTIONS). Rachel McMinn, Piper Jaffray.

A couple of questions. First on Vivitrex, can you talk about what might be gating for filing the NDA? Is it more in terms of the clinical follow-up or are there additional manufacturing requirements that you think that would take you beyond this year, that that would be gating?

From the beginning we said that there were two or three things that would comprise the critical path for filing in the first half. The first was completing the enrollment and then getting the number of patients on a long enough period of time in the safety setting. And as I said, we completed that enrollment and we've now passed the six month point, so we're feeling very good about that winding up towards the end of the year.

The second critical thing was the manufacturing scale-up activities from the 1 kg to the 20 kg line. The 20 kg line is the same scale that we produce Consta at, and that was the scale we want to launch Vivitrex at, given where we think the product can go. So we have finished that. That development work was happening during the course of this year. We've now finished that scale-up work and we're moving now into the validation phase in preparation for NDA submission.

The third just related to the stability work that we are doing on the 1 kg material and the 20 kg material. And all that led to us suggesting that we would be in the first half of '05.

I guess what I'm getting at is that for the safety database, it seems like there might be a possibility that you could file the NDA without having the full 12 months, and that you could kind of file a safety update, and that maybe there was a good way to look at this that manufacturing is really what is gating.

If you said to us today you're done with safety, you can go ahead and file on safety, we would still have some work to do on it to be ready to file, and not just file but be ready to supply the market.

That's helpful. In terms of the publication, have you actually submitted the manuscript and when should we expect that publication?

We have submitted a manuscript and it's impossible to determine right now when it will be published. But we have written it up and it's been submitted.

Should we expect this to be in a high-profile journal? Do you have any sense of that right now?

We did not submit it to a low-profile (multiple speakers). Yes, we do. That's a hard one to predict. Obviously, the data is quite powerful and there's great interest in it. So we'll see where it ends up.

Maybe I misheard you because you didn't say it a second time, but did you -- when you talked about the Vivitrex partnership did you say that that was a fourth quarter event?

We have always said -- in the beginning of the year when we gave guidance we gave guidance to include it in this fiscal year. And so we said model it in the fourth fiscal quarter, so the first calendar quarter of '05, fourth fiscal quarter for us, simply as a placeholder. And we'll do the deal when the deal is ready to be done.

And then in terms of the 15 to 30 million, I've probably asked you this before, but can you help explain what could get you to 15 to $30 million? Typically with an upfront payment if it was going to be some amount in that range you would have to amortize that. So how should we think about what that guidance really means?

It's Jim. It's all governed by EITF 0021, which I talk about each conference call it seems. So you're going to break the deal into multiple deliverables. Some of those deliverables you pay for upfront and that money gets amortized over the life of the deal because it's viewed as a licensing fee. Another part of that funding most likely is going to be for our research and development funding, which for the year, the reason I gave a range of 15 to 30 is because depending on the timing, that research and development funding is going to be in that range. You can also actually look back on a full fiscal year to apply that R&D funding back through the course of the year. So depending on -- of course, you now have to make an estimate on what does the deal look like and what does the structure look like. But we feel very comfortable that the 15 to $30 million is a reasonable estimate for the kind of revenue we will be able to recognize in this fiscal year.

That's very helpful. One last question, also for Jim. Can you go into a little bit more on the COGS front? I guess I don't really understand why there should be such great fluctuations in order to meet your guidance range. We would have to assume as a percentage of manufacturing revenues at least, that would -- that the cost of goods sold for Consta would -- or would increase significantly in the second half of your fiscal year. And I guess I don't really understand what plays into that.

It really all depends on, you know -- the reason the COGS look so good this quarter -- let's start there -- is because our per-unit costs went down. So essentially we're making more Consta in the past quarter through the month, and not all of it shipped. A lot of it -- some of it goes into inventory as well. And because we have a large percentage of fixed assets compared to the variable costs of each of the production points, our per-unit cost has come down quite nicely. So things that can affect it is how many batches we actually make and produce in the future quarters. And I think it's just appropriate at this point to be conservative and aim for the range of 60 to 65 percent for gross margins.

The other thing that is happening is we have a second line coming on board. And if that line comes on board and we ship product out of that line -- cost of goods is a step function, i.e. you bring a whole line on board and you've go to hire another whole group of staff to staff that line everyday for the full quarter. And you may not produce batches through the full quarter, if that makes sense. It's really just a step function of when the second line comes on board and how much volume comes off of the first line and the second line.

And when is that second line expected to come on board?

It's anticipated in the fourth fiscal quarter, so it would be that March quarter again. But again, that's why we're laying out, I think, a relatively conservative cost of goods sales estimate. And hopefully we can come on the lower end of that range.

Ian Sanderson, SG Cowen.

The Vivitrex safety study, did that -- you mentioned the different types of patients that are included in that. Does the study have an efficacy component specifically for the opioid and other substance-dependent patients, such that you could get that into the label? And secondly, as I recall there were going to potentially be some data presentations for the Phase IIA studies for both AIR insulin and Exenatide LAR sometime early next year. Could you refresh us on the schedule there?

Why don't I take the second one first. We anticipate that we'll present the AIR insulin data at the ADA. The Exenatide LAR data is really at Amylin and Lilly's discretion. They do have plans to present it but have not made any official claim as to where they will present it.

(inaudible) press release (inaudible). With respect to the safety study, we absolutely are looking at efficacy measures. Remember, this is in an uncontrolled way (inaudible) an open label way. But we're actually quite interested in the opioid dependence and the mix dependency component. We haven't talked about it much because we feel like we have enough communication to do on the alcohol side, which is the big opportunity. But there are a lot of patience out there, and we're actually getting very interesting and constructive and positive feedback from the clinicians treating opioid-dependent patients in that clinical trial. So stay tuned for that.

If I could follow-up. The termination of the ProLease FSH program, I think, is the last of the ProLease programs. Is ProLease dead?

It's funny because we don't really approach the business in the same way as we did the old-fashioned way of ProLease and Medisorb. What's happened is that kind of the peptide and protein formulation capabilities are all melded together into what we basically consider injectable sustained-release microspheres. So I can't really answer it directly. What we're really trying to focus on now is on programs that are big opportunities for us as we prepare for profitability. So we're trying, as you're kind of seeing, a clear honing of the portfolio now into the major blocks that are going to be the major contributors on the R&D revenue side and also on the product profitability side. But no, the injectable sustained-release business is the basis of Consta, Vivitrex, Exenatide LAR, and other things as well.

Donald Ellis, Thomas Weisel Partners.

A couple of questions. Are you guys still working on the Epinephrine program? And if so do you have an update?

We are still working on Epinephrine program. It's actually not moving as fast as we would want it to just because it's an enormous amount of energy that's going towards the ones that we talked about on the call. So as soon as we get a little bandwidth around here, hopefully after we sign the Vivitrex partnership it will free up some resources. And you can expect us to be moving on that.

Have you guys -- have you provided any just even rough details on the design and the timing of what you think the pivotal inhaled insulin trials will look like?

To my mind, and I won't disclose anything that is not disclosable at this point, but the efficacy studies -- the pivotal efficacy studies for insulin are very much out of the textbook. So if you look at what other people have done here you'll see that you're going to be looking at glycosylated hemoglobin safety and efficacy over a certain duration. What is critical, and that's why I mentioned in the call this notion of when you start the two-year safety study, is really critical. And it's not so simple as just starting it. You want to start it with basically everything lined up exactly the way you want it to end, i.e. your directions for use, your device, your inhaler, your powders, your dosing, your dosing instructions -- all that stuff. So I think -- keep your -- if you draw the line on the timeline of the two-year safety studies, most of all of the clinical work happens in shorter lines underneath that line, if you see what I mean.

I do. Have you guys learned a lot from others that have gone before you?

An enormous amount.

Patti Bank, Pacific Growth.

Comments have been made with regards to the Vivitrex that the value potential that Wall Street is putting on the drug is incrementally different than how the possible drug companies are viewing it. Can you talk a little bit about that in terms of how they see that, and is this a definite first-line therapy? Are drug companies looking at this as, like, depression several years ago, in that it's a market that has to be developed but has huge potential?

I think that it's really interesting, because I don't think we have a whole heck of a lot of valuation period in this company for Vivitrex, certainly -- it's nothing we're particular troubled about, because those lines tend to converge with the passage of time. But I think it's part of the reason why people want to see us partner, is to have some external validation that there's actually a market there.

We're way ahead of that curve, because we have been doing diligence on our own. And also in the context of these partnering discussions we have partners generating models of what Vivitrex can do in the real world. And the numbers are quite surprising. They're quite exciting to us. And it's interesting. As you know, we have talked to a lot of different people about partnering, from specialty-type companies all the way through to the largest companies in the world. And people tend to come at it with their own biases. The specialty companies tend to see it is a specialty product, (indiscernible) might make sense. Because it is a classic specialty product. There's a group of docs here, addiction and alcohol dependence doctors who are uncalled on. They represent a very, very tractable audience for a biotech side sales force to go after.

The larger companies in the land acknowledge that, but they also say well, you know what, there are a series of concentric shelves here that you can go after a much broader calling audience at -- the limit of course being the GP. And I have been interested in some of the discussions we have been having with companies who are absolutely interested in the GP, maybe not at launch. but building towards the GP overtime. So it appears to us right now that if you look at the revenue projections for Vivitrex, they really are a function of the promotional spend you put against them and how ambitious you are in terms of the calling activity that you want to apply to the product. Because the overall target opportunity in terms of number of patients is so enormous, you can solve (ph) for whatever cut of it you want depending on what you want to deploy against it. Does that make sense?

It does. And also, can you talk about, without giving specifics of the deal, but in terms of the list that you're out now of potential partners, just how it's weighted towards specialty pharma companies versus Vicath (ph) or anybody else that might be interested in it?

I could, but I don't want to leave anybody with the mistaken impression that we're going one direction or the other. It's just very lively right now.

One other follow-up question for Jim. Can you just remind us, Jim, your position at Reliant, and how you would book a gain on that potentially if Reliant was to go public? Is that a onetime?

Sure, Patti. We own a little bit more than 12 percent of the equity in Reliant Pharmaceuticals right now. That is outlined really in our 10-K as well, if people want to go back and get more detail on that. It is -- Reliant now is a private company, but it is a C Corp., I think. And therefore, it would really be a balance sheet transaction if they were to go public. We would be able to then value the equity that we would have, and it would sit on the balance sheet valued at fair market essentially. And then when we made a sale of that equity, or if the company didn't go public today and was sold, we would really only book the gain as it were. But since -- for the last few years (indiscernible) before they switched they were an LLC. So we took our -- we had to take our share of the operating losses as any partner would in a partnership. And so that worked our basis essentially down to zero. So a theoretical example if we -- well, I probably shouldn't give a theoretical example. But any gain that we would receive, any cash we would receive would run through the income statement in the quarter when a sale was made.

Ian Sanderson, SG Cowen.

Just actually a quick follow-up. The Vivitrex market and the impressions there. What should we be looking at as Forrest rolls out Camphoral (ph)? And granted this is a much different drug, but what signals should we take from that rollout? What should we be kind of looking for to gauge the Vivitrex market?

Very little, in my opinion, very little. I don't get the sense that they are addressing the market with a product like we have or with the intensity that we are going after it. I will be curious to see how it does, but I think it's indicative. The biggest, the most important conclusion -- and this may sound self-serving, but it's actually the way I truly feel -- the most important part of the Camphoral approval was its approval itself at the Agency, which I think is indicative of a general interest in building the number of pharmacologic options there are for patients -- for physicians treating this disease. Because as you know, the data set was not particularly strong for Camphoral, and it's a three times a day oral medication. Yet there are physicians in the key opinion leader groups that we know that believe strongly that it has an effect, it will be useful, and they're looking forward to using it. So I think its representative that there's a sort of back pressure in the system for pharmacotherapy.

Do you think in terms of timing the potential partners are going to kind of wait and see how that goes, or do you think they don't read anything into it either?

I can only tell you from our experience to date, and that is it's not going to factor into any of our discussions that I am aware of.

Rachel McMinn, Piper Jaffray.

I figured I'd just jump back in, too. Just to follow-up on the conversations you're having with potential Vivitrex partners. Are you getting any pushback at all on the big pharma side, or I guess reticence about the idea that this is an undeveloped market? Is that something that you hear brought up as a potential stumbling block that pharma companies are a little bit nervous about?

, Absolutely. It's the first -- it's usually the first reflex reaction of almost everybody. And then it succumbs to primary market research and diligence. So it's interesting, we've kind of gotten comfortable to the -- that was really a phenomena that was happening earlier in the year on our first approaches following the completion of the Phase III clinical trial, but I think we are essentially past that with most of the key players that we're talking with. There are a couple of people that I would expect will come to the party even later, if it's around later. But that's exactly the obstacle that we had to overcome.

You may have heard me say it before, but kind of out of the blocks there were two groups of companies. There were companies that believed that addiction and alcohol dependence as a general grouping is really the next major opportunity in neuropharmacology. And then there's a group of people -- a group of companies that said there's no market there now and there never will be. In the former group we have had great success, obviously. It's just more of how you model it, what you have to spend to get into it, and what the competitive landscape looks like over time.

And so how -- so it sounds like you passed that one stumbling block, and would you just categorize the stage right now as companies are continuing to do market research as opposed to diligence on your product and the Phase III data?

We have got a lot of different companies and people are at different stages. They all go through their own maturations. Almost everybody has wanted to go into the market and ask their own questions directly in the marketplace. What is neat about that is in most cases we actually get that data too, so we actually have a significant amount of market research here that's been conducted by third parties that becomes an asset that we use in our other discussions. But, you know, like I may have said to the others, if somebody said to us you had to do a deal, we could do a deal right now. But I just think we're seeing better and more interesting structures in yield terms as the product becomes more known and as time passes, and as we knock down various regulatory, manufacturing, clinical risks.

I'm showing no further questions at this time.

Thanks, everyone, for listening in. If you have any follow-up questions, Jim and I are both here at the office. Thanks a lot.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect.