Alkermes Plc (ALKS) 2005 Q4 法說會逐字稿

Welcome to the Alkermes conference call to discuss the Company fiscal year 2005 financial results. 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 now like to introduce your host for today's call, Ms Rebecca Peterson, Vice President of Corporate Communications at Alkermes. Please go ahead.

Thank you. Good afternoon and welcome to the Alkermes conference call to discuss the financial results for our fiscal 2005, which ended on March 31, 2005. With me today are Richard Pops, our CEO, and Jim Frates, our CFO. Before we begin let me remind you that during the call today 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 including our revenue and expense expectations, operating plans, goals and objectives of management, proposed partnering arrangements and the regulatory expectations. Listeners are cautioned that these statements are neither promises nor guarantees, but are subject to risk and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements.

In particular, the risk and uncertainties include, among other things, whether regulatory approval for Risperdal Consta will be received in additional countries, whether we can continue to manufacture Risperdal Consta on a commercial scale or economically and whether Risperdal Consta will continue to be commercialized successfully, whether the FDA accepts the NDA submission for Vivitrex, whether the Company can successfully scale up and manufacture Vivitrex at commercial scale, whether Vivitrex will ultimately receive marketing approval and if approved whether it will be launched and commercialized successfully and whether the Company is successful in continuing the collaborative development of its AIR insulin and AIR hGH program and exenatide LAR program. And those risk factors contained in our press release announcing our most recent results and in our periodic results 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-Qs.

We undertake no obligation to update or revise the information provided in this call, whether as a result of new information, future events, or circumstances or otherwise. This afternoon Jim will discuss our 2005 financial results and then provide our financial expectations for fiscal 2006. Rich will then present a brief update on our progress with Vivitrex, our diabetes programs, and Risperdal Consta. We'll then open it up for Q&A. With that, I'll turn it over to Jim to review the financial results.

Thanks, Rebecca. Good afternoon, everybody. It has been an exciting fiscal year for us here at Alkermes in terms of both our clinical progress and our financial position. From a clinical perspective, the events of this past fiscal year include the submission of our new drug application for Vivitrex, naltrexone long-acting injection, with the FDA, a positive product decision made by Eli Lilly for the development of AIR insulin, and continued advances in our development program for exenatide LAR, partnered with Amylin and Lilly . In each of these programs we have achieved key clinical milestones that we believe provide a strong foundation for sustained value creation and growth. From a financial perspective, we have focused on driving these programs forward while at same time controlling our expenses in order to reach our goal of building a profitable pharmaceutical Company with an innovative pipeline. The successful uptake of Risperdal Consta in the marketplace continues to be a key driver on our path to profitability.

We also ended the year with a strong balance sheet, which at year-end included over $200 million in cash and investments. As a management team, I have to say, we have never been more optimistic about the Company and we think we have all the elements in place to take it to sustained profitability. First we look forward to the continued growth from Risperdal Consta, which if present growth trends persist we will have worldwide sales of more than $600 million in fiscal 2006. Second, we are preparing for the potential launch of Vivitrex in mid calendar 2006. We believe Vivitrex is a potentially important medication for the treatment of alcohol dependence, a major unmet medical meed. Finally, we have two innovative and potentially market leading products in development for diabetes treatment, partnered with Lilly and Amylin. Importantly, we believe we have the cash on hand to bring all these opportunities to fruition.

Rich will touch on our goals for fiscal 2006, so now I will review our financial results from fiscal 2005. Our loss on a GAAP basis for our 2005 fiscal year was 73.9 million or $0.82 a share, compared with a net loss of 102.4 million or $1.25 per share for the prior year. Because of the significant nature of certain noncash items, we feel it is important to discuss pro forma results that we, as a management team, feel more accurately reflect our ongoing operations. Pro forma net loss for fiscal 2005 was 64.8 million or $0.72 per share, compared to a pro forma net loss of 100.2 million or $1.22 per share in fiscal 2004. The decrease in the pro forma net loss for fiscal 2005, compared to fiscal 2004, was a result of an increase in revenues primarily related to Risperdal Consta and to increased research and development revenues. For a reconciliation of our pro forma net loss to GAAP, please see our press release, which can be found on our website, www.alkermes.com.

I'll move on to the specific line items now. Total revenues, comprising manufacturing, royalty and research and development revenues, were 76.1 million for fiscal 2005, compared to 39.1 million for fiscal 2004. This growth involves significant increases in each of the revenue categories driven mainly by growing Risperdal Consta sales. Total manufacturing and royalty revenues were 50.1 million in fiscal 2005 and 29.5 million in fiscal 2004. Total manufacturing revenues for fiscal 2005 were 40.5 million, all related to Risperdal Consta, compared to 25.7 million for the same period in 2004 of which 25 million related to Risperdal Consta. The increase in manufacturing revenues was due primarily to increased shipments of Risperdal Consta to our partner, Janssen, and to subsequent market demand.

Just as a reminder, we record manufacturing revenues upon shipment of product to Janssen, based on a percentage of Janssen's selling price. This percentage is based on the volume of units shipped to Janssen in each calendar year, with the minimum manufacturing fee to Alkermes of 7.5% of net sales. In fiscal 2005 our manufacturing revenues were based on an average of 8.1% of Janssen's unit net sales price for Risperdal Consta, compared to 9.8% in fiscal 2004. Based on J&J sales projections, we expect our future manufacturing fee for fiscal 2006, and for the foreseeable future, to be based on a 7.5% of the net selling price. Total royalties were 9.6 million in fiscal 2005, compared to 3.8 million in fiscal 2004, including 9.5 million and 3.1 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

Worldwide sales for Risperdal Consta were $378 million for our 2005 fiscal year. Research and development revenue under collaborative arrangements for fiscal 2005 was $26 million, compared to 9.5 million for fiscal 2004. The increase was primarily due to an increase in revenues related to work performed on our AIR insulin, AIR human growth hormone, and exenatide LAR programs. For fiscal 2005, the cost of goods manufactured was $16.8 million, consisting of approximately 14.5 million for Risperdal Consta and approximately 2.3 million for Nutropin Depot. In fiscal 2004 cost of goods manufacturing was $19 million, consisting of approximately $13 million for Risperdal Consta and $6 million for Nutropin Depot. The decrease in cost of goods manufactured was primarily the result of the June, 2004 decision to discontinue commercialization of Nutropin Depot. In addition, manufacturing efficiencies and increased volumes resulted in lower per unit costs for Risperdal Consta.

Based on our total manufacturing and royalty fees, we had gross margins for Risperdal Consta of 71% for this fiscal year. Research and development expenses for fiscal 2005 were $91.1 million. R&D expenses for fiscal 2004 were also $91.1 million. Our expenses for fiscal 2005 reflect a decrease in external research expenses due to the completion of certain components of the Vivitrex clinical program, offset by an increase in personnel costs and increased occupancy costs related to the expansion of the Company's facilities in both Massachusetts and Ohio, and costs incurred in the completion and submission of the Vivitrex NDA. During the fourth quarter we also incurred a one-time noncash charge of $2.5 million reflecting a change in our lease accounting and this is embedded in both R&D and SG&A expense. Based on an SEC interpretation letter to the American Institute of Certified Public Accountants issued on February 7, 2005, we now account for our leases on a straight-line basis. Previously, we expensed our lease charges as incurred.

This adjustment reflects a cumulative amount for the last five years since our lease inception. $2.3 million of this adjustment was recorded as R&D expense in our fourth quarter and the remaining $0.2 million as an SG&A expense. The adjustment was not material to our reported results in any quarter, either this or in the any previous fiscal year. Sales and general administrative expenses were $28.8 million in fiscal 2005, compared to $26 million for fiscal 2004, reflecting an increase in sales and marketing costs as we prepare for potential future commercialization of Vivitrex. At March 31, 2005 Alkermes had cash and total investments of $207.5 million, as compared to $148.9 million at March 31, 2004. This increase is due to the $145 million in net proceeds from the private placement of the Risperdal Consta secured notes that we did in February.

Let me now take a moment to review our financial expectations for fiscal 2006. Please note that certain statements I will make constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For information with respect to factors that could cause our actual results to differ materially from our expectations, please see the risk factors at the end of the press release, which is available on the Alkermes website or, in more detail, in reports filed by us with the Securities and Exchange Commission under the Securities Act of 1934, as amended, including our annual report on form 10-K for the year ended March 31, 2004. Before I begin, let me outline some specific assumptions that underlie these projections. First, while we continue to discuss the potential partnership with Vivitrex with several companies, to be conservative no partnership is assumed in our fiscal 2006 revenue expectations.

Second, we are preparing to launch Vivitrex in mid calendar 2006, and so our expenses include 30 to $40 million of related marketing, sales, infrastructure and clinical trial expenses. If we enter into a partnership for the commercialization of Vivitrex, these projections will obviously be revised. With that background, I will now turn to our financial expectations for fiscal 2006. Total revenue expectations for the upcoming fiscal year range from 110 to $125 million, with total manufacturing and royalty revenues from Risperdal Consta projected to range from 75 to $85 million for fiscal 2006. These expectations are based on our partner's estimates, which are subject to change. Specifically, we expect manufacturing revenues to range from 61 to $68 million, based on the expected increase in shipments of Risperdal Consta to Janssen. We expect the quarterly recognition of manufacturing revenues to follow a similar pattern as fiscal 2005, albeit from a larger base. That is, they will fluctuate from quarter to quarter and they will generally be higher in the fourth quarter than the first quarter.

With that in mind, we expect manufacturing revenues to be between 11 and $13 million for the first quarter of fiscal 2006 ending in June. This expectation is based on estimates for Janssen, who has the right to change the timing and amount of its purchases in sole discretion, and is also based on our ability to manufacture sufficient quantities to meet the estimates from Janssen. We expect royalty revenues to range from 14 to $17 million. This expectation assumes continued revenue growth of Risperdal Consta both in the United States and outside the United States. Once again, I might add, that we rely solely on sales projections received from Janssen to determine royalty revenue expectations, and such projections may not turn out to be accurate and are subject to change. From a financial perspective, we continue to believe that growth in our royalty revenues is the best indicator of the status of Risperdal Consta in the marketplace.

We expect research and development revenues will range from 35 to $40 million. This assumes continued collaborative development of exenatide LAR, AIR insulin and AIR hGH. And these expectations specifically include a $9 million milestone payment from Lilly for the start of certain Phase three efficacy studies in the fourth quarter of fiscal 2006. While we are very optimistic about these programs, there can be no assurance that our partners will chose to continue these programs. In addition, our expectations for research and development revenues assume that certain milestones and other assumptions related to our partner programs will be achieved. Our expectation for cost of goods manufactured for fiscal 2006 range from 23 to $28 million and are estimated based on projected orders from Janssen for Risperdal Consta and these orders, as I mentioned earlier, are subject to change. In addition, these costs are based on expected yields, which are dependent on a number of factors.

We expect research and development expenses for fiscal 2006 to range from 80 to $90 million. This expectation reflects our continuing efforts to advance our pipeline, including ongoing development for Vivitrex, additional clinical trials as well as increased work with our partners. Finally, we've included 5 to $10 million of spending on further early stage pipeline products. We expect sales, general and administrative expenses for fiscal 2006 in the range of 45 to $50 million. The increase will mainly be a result of additions to the sales and marketing infrastructure as we prepare for the commercialization of Vivitrex, if approved. Roughly 20 to $25 million of the total SG&A expense is associated with Vivitrex. We anticipate an operating loss, before interest, taxes and other noncash gains and losses, of 38 to $43 million.

Terms of net interest expense for fiscal 2006, we expect it to range from 17 to $22 million. This expectation reflects the interest expense of the Risperdal Consta secured notes of approximately $4 million per quarter, in addition to ongoing interest payments on our existing debt, partially offset by interest income on our cash and investment. On a GAAP basis, we anticipate a net loss of 55 to $65 million for fiscal 2006 or approximately $0.60 to $0.71 per share. For a share count assumption we've used the weighted average of 92 million shares for the year. The net loss expectation assumes no noncash derivative income or losses associated with the previsional call structure of the Company's convertible subordinated notes or other noncash income or expense recognized on the net increase or decrease, respectively, in the fair value of warrants the Company holds and no restructuring charges or recoveries.

Obviously for the -- the embedded derivative as well as our -- the warrants we hold there will be fluctuations from quarter to quarter. It's just impossible for us to estimate what those would be. We expected capital expenditures for fiscal 2006 will be approximately $30 million, reflecting our planned expansion of manufacturing infrastructure for Risperdal Consta and Vivitrex, among other things. This includes the addition of a new high speed, high efficiency fill line for Risperdal Consta and Vivitrex, an additional bulk production line for Vivitrex. And that would be our second bulk Vivitrex line. We have one up and running today. In conclusion, we are very excited about this next fiscal year. We believe that we have a solid financial plan that will allow us to deliver continued growth from Risperdal Consta, revenues which we -- while we spend on preparation for the launch of Vivitrex. Our two diabetes programs are also moving forward.

We, as a management team, remain focused on profitability. Of course, as we've said before, profitability in late calendar year 2005 is contingent on the structure and type of partnership we sign for Vivitrex. To be conservative, we've left the partnership out of our guidance, but profitability remains an important objective of our management team. I'll now turn the call over to Rich for a brief update on our product development candidates.

Thank you, Jim. Hello, everybody. I want to say congratulations to Rebecca, too, for her recent promotion to Vice President and let me just make a couple of comments and then we will get to the questions. We had -- we had a really good year. We made significant progress even in the first part of this calendar year with respect to advancing the product pipeline of this Company. This is, I've said many, many times to all of you, this is a multi-product Company and we are advancing it on multiple product fronts. Looking forward into calendar '05, we anticipate continued clinical progress in a number of areas, including Vivitrex, AIR insulin and exenatide LAR. Those things should become obvious to you as the year progresses.

Let me touch first on Vivitrex. We have achieved two major milestones for Vivitrex just in the past eight weeks. First, on March 31st, we submitted our new drug application, or NDA, to the Food and Drug Administration for the marketing approval of Vivitrex. Then a week later, on April 5th, we announced the publication of positive results from the Phase three clinical program for Vivitrex in the Journal of the American Medical Association, or JAMA. These accomplishments represent significant advancement for Vivitrex, one that we had scheduled and were managing towards, but accomplishments nonetheless. Next week clinical investigators will present further data for Vivitrex at the annual meeting of the American Psychiatric Association, APA, in Atlanta. I know many of you will be attending that. Data will be presented there from our Phase three efficacy study and, for the first time, data will be presented from the 12 month open label extension study that followed our six month efficacy study, as well as three other posters that Rebecca has probably made you aware of.

On the commercial side, we're continuing to develop the infrastructure that will support a successful launch to psychiatrists and addiction treatment specialists. We are creating a comprehensive managed care and reimbursement strategy. And we are meeting with key public and private payors. We also recently hired our first medical science liaisons, or MSLs. Through the work of our own staff here and the due diligence of potential commercial partners, we are obtaining in depth knowledge about this whole alcohol dependence market. We've identified physicians likely to prescribe our drug. We are understanding treatment patterns and protocols. And we are building important relationships with key opinion leaders in the field. This has been an ongoing process. We believe that with a specialty sales force of on the order of 100 reps, we can successfully access the key physicians who are currently prescribing pharmaco therapy and or anti-depressants to their alcohol dependent patients.

Having said that, we also see a significant opportunity to expand this market beyond the 2 plus million patients currently seeking treatment in the U.S., as there are an estimated 9 million people who are alcohol dependent and up to 18 million individuals in the U.S. who abuse alcohol. So this clearly represents a large and potentially much larger addressable patient population. For this reason, our strategy to reach these patients continues to be through the idea of expanding our capabilities through partnership with a company that can magnify our own commercial efforts. Our discussions with partners are ongoing. We are talking to a variety of companies from large multinational pharmaceutical companies to those with a specialty focus.

Because of the stage of development of Vivitrex, with the NDA submitted and an expectation for a calendar '06 launch, we are looking to a potential partner to provide two key elements at this time. First, additional resources in the preapproval phase to increase our readiness for launch. And second, commercial infrastructure in order to increase the sales, marketing and reimbursement functions post launch to a level greater than we would have been able to support on our own. We're seeing significant interest in the product. And we will continue to be patient until we strike the agreement that's in the best interest of all of us. Turning to our two diabetes product candidates, exenatide LAR and AIR insulin. We are quite excited about the progress we are making in these programs. And they should become increasingly visible over this fiscal year. Like alcohol dependence, diabetes is another disease where the majority of patients do not achieve optimal therapeutic outcomes with existing therapies.

With exenatide LAR and with AIR insulin, we believe we have opportunities to offer new approaches to these patients, who are struggling to manage their blood sugar on a ongoing basis. Recently, Amylin and Lilly's exenatide BID, or twice a day injection, called BYETTA, was approved by the FDA. It is the first in a new class of medicines known as incretin mimetics which work to mimic the glucose lowering actions of naturally occuring hormones called incretins. We look forward to the launch of BYETTA and we're optimistic about the role it can fill in the management of diabetes. Exenatide LAR is, as you know, Alkermes' long acting formulation of BYETTA, which offers the therapeutic benefit in a once weekly dosing regimen. Enrollment for the Phase two multidose study of exenatide LAR is now complete. The study is ongoing and we are on track to report the study results in the late 2005 early 2006 time frame with our partners in Amylin. The second major product in our diabetes pipeline is AIR insulin, our inhaled formulation of insulin that we are developing with our partners at Eli Lilly.

Lilly will be presenting clinical results for this product at the upcoming 65th annual scientific sessions of the American Diabetes Association, or ADA. Data being presented in oral session on June 14th will include the detailed results from the Phase two clinical study in type one patients. This was the key efficacy study that led to Lilly's go / no go product decision last summer. We'll also be showing results from a dose equivalence and response study comparing AIR insulin to injectable insulin, micro. To conclude here the product discussion with a couple of words on Consta, which has been a very significant success for us so far. Our work with Consta is not only the financial foundation for Alkermes at the moment but it's also provided us with the technical expertise and manufacturing experience that will be important -- have already proved to be important for the development of Vivitrex and exenatide LAR.

Risperdal Consta has also provided us, interestingly, with insight into the reimbursement landscape that is important and necessary to bring these products into the marketplace. From a clinical perspective, J&J continues to invest in a comprehensive phase four program. And they'll present 13 abstracts in posters covering Consta clinical data at APA next week. From a sales and marketing perspective, we expect continued sales growth. Our financial expectations for revenues related to Consta, which Jim described earlier, underscore, we think, J&J's commitment to building Consta into a first line therapy, an innovative therapy for the treatment of schizophrenia and potentially other neurophysiological diseases.

So the progress we made in the last few months has been significant and we think it is the beginning of what we think will be a productive year for the Company. Looking forward you should look at the following -- Clinical data on Vivitrex and Risperdal Consta at the APA meeting next week; A response from the FDA regarding the acceptance of our NDA submission for Vivitrex; Updates on our commercial partnership discussions for Vivitrex; Clinical data on AIR insulin at the ADA in June; and importantly the start of a two year safety study for AIR insulin, which we expect to happen in 2005. This is an important time for us here at Alkermes. We are proud of the work we are doing. We're excited about the year ahead of us. We feel like the Company fundamentals are quite strong, as we transition now from -- from -- from focused almost exclusive on Consta, a couple of years ago, to becoming a true multi-product Company. I feel that we are in an incredibly strong position now. We will report our progress across these programs, of course, to you over the next several months. And with that I'll turn it back to Rebecca.

We will now open up the call for Q&A. Operator?

[OPERATOR INSTRUCTIONS] Our first question comes from Thomas Wei from Piper Jaffray. Your question, please, sir.

Thanks very much. I wanted to just to clarify here should we interpret from the guidance and the press release that you're -- that -- that the goal that you had set out before of breakeven profitability by calendar end '05 that we should not think of things that way?

Hi, Thomas. It's Jim Frates. I think -- I think we have always been clear that two things are necessary for us to achieve that goal and I don't think that goal has changed. The first is continued growth from Risperdal Consta, which I think we are seeing in spades, and the second would be a Vivitrex partnership. I think we have heard from -- from many of you loud and clear that you didn't want us to include a Vivitrex partnership in our guidance. So that is what we have done. But make no mistake, it is still a goal for the Company and we are still very much focused on it. I think we're just trying to be conservative.

If for some reason -- I guess, how do you think about the possibilities of launching this with a partner versus launching it on your own right now? Should we interpret the change in the guidance to mean that you are more heavily considering launching the product on your own?

No.

And -- I guess, how are you actually -- when you talk about the SG&A spend for the year, how should we think of that? Is that mostly on prelaunch marketing activities or -- and when exactly are you going to pull the trigger on hiring the 100 rep sales force?

That is a good question and that is why I tried to give a little bit of guidance on that in my remarks. You know, as you know our PDUFA date is January 31, 2006. We're assuming a launch in mid calendar year 2006. And so it's really -- we don't have the heads for that 100 person sales force included in these numbers. That would be something that would be coming on really at the very tail end of this year or in the beginning of fiscal year 2007. But what you are seeing in that 30 to $40 million is really the ongoing Vivitrex development program, the infrastructure, the manufacturing, the infrastructure in sales management that needs to take place in front of that, as well as a, you know, significant amount of marketing dollars as well in an appropriate manner for a NDA staged product.

And one last question and I will jump back in the queue. So -- so should we think of that 30 to $40 million as kind of a starting point for the type of marketing spend that you would incur in a post launch setting?

Yes, I don't think that would be -- you know, that is a starting point. It is not a full year, as I mentioned, and I expect it to ramp up through the year, not really be taking place all in this June quarter. But, yes, I think it would be a starting point. It probably wouldn't be a total number.

All right, thanks.

You're welcome.

Thank you. Our next question comes from Jim Reddoch from Friedman Ramsey. Your question, sir.

Nice quarter.

Hi, Jim, thank you.

On a -- on Consta you actually mentioned that moving it up to first line was one of your goals. So can you just comment on how much you believe first line is penetrated right now, because, honestly, I guess, I hadn't really been making a distinction between different lines of therapy? And then secondly, can you just give us an update on reimbursement and how different states that had been holdouts are now looking at it? And thirdly, what do you think the primary poster or two of interest at APA on Consta might be, since I'm be down there. Thanks

Hi,Jim, it's Rich. I'll answer some of those questions. The interesting thing about Consta, and it's not -- it's not a new -- it's not a new story. But it really came as the data in the Phase two and the Phase three program began to emerge, that this idea that steady state concentrations of risperidone every two weeks, maintaining constant blood levels, was leading to better outcomes. And there's a thesis that says that continuous medication is probably a defensible point of view, does it say that it's a -- it's the appropriate way to treat -- the most appropriate way to treat patients with schizophrenia. So, I think, in the early days of the program, years and years ago, this idea that the oral tablets would kind of be the anchor and then you'd have line extensions for certain non-compliant patients. Over the course of development program it really evolved, to say that, boy, based on these outcomes, safety and efficacy, that you can take a group of patients that are pudably(ph) stable on oral antipsychotic, randomize some to remain on oral antipsychotics and others to go onto long acting Risperdal Consta.

The ones who go on long acting Risperdal Consta do better. And actually stands to reason both from a compliance point of view and from a pharmacokinetic point of view. So that's a long winded answer as to why I think you've seen Risperdal Consta move into the position where it absolutely can be considered a first line therapy.

Why don't I take that?

Yes, Rebecca, why don't you take the others.

Our reimbursement, Jim, has been secured in all states with the exception of New York. New York has not begun reimbursement in the community mental health centers, yet. Although they do reimburse in other treatment settings. J&J has not provided a time line publicly when they expect to secure reimbursement, but they are working on it. With respect to the APA, there's a number of (Inaudible-Audio trouble) being made, as Rich said,13. In particular, I think, the symposium on Sunday evening that's being chaired by Dr. John Cane, would be quite interesting. Okay, thanks very much. You and I can certainly talk off line if you want to get the -- .

Jim, Rebecca probably has a full list of those aspects and can zip them off to you if you want. Sounds good. Great. Thanks very much.

Thank you. Our next question comes, and I apologize if I mispronounce your last, Hari Sambasivam from Merrill Lynch. Your question, please.

Just a couple of quick questions. Just had a quick curiosity question on this $9 million payment from Lilly. It is due at the end of Q4 of fiscal '06 and I'm wondering is that now expected to be the start of the Phase three trials for AIR insulin or is that a different timing here?

Yes, no, Hari, I'm glad you clarified that, actually, because that's actually a milestone for the first defines efficacy study under our contract. The Phase three program, if you look at it a, you know, a different way is really beginning in mid year with the two year safety stud, as we talked about before. So this just happens to be a specific efficacy study as opposed to that long-term safety study. And we are expecting it at the end of the calendar year, really to be conservative because we don't really control the timing of the study, Lilly does. Does that make sense?

It does, yes, thank you. And the second one is you are putting money towards earlier stage programs or 5 to 10 million in R&D. Is this primary AIR epinephrine? Or are there other programs that are coming up? Or what has happened to AIR epinephrine at this point in time?

From a financial perspective, you know, I just wanted to cull out and give a little color from a R&D expense guideline. You know we spent a little money on a number of programs. And we actually have feasibility work that's going on now. I just thought it was important to break that out because going forward this year we hope to be able to talk more about some of those feasibility programs.

The question was what are those programs or have you described them?

No, we haven't, Hari. We haven't described a few of these things that are currently confidential at this moment.

And is it fair to assume that AIR FD at this point is relatively back burnered for -- until further notice?

Yes. I hate the term back-burned but -- just because of so much of the development effort and budget's going towards Vivitrex until we get to the launch phase and this partnering worked on. But I hope to -- I hope to re-establish FD on a faster track, hopefully during this year. But we haven't -- we will advise you to the extent when we start doing that.

That's great. Thank you.

You're welcome.

Thank you. Our next question comes from David Windley from Jefferies, Incorporated. Sir, your question, please?

First, I want to clarify the -- the Vivitrex, Jim, 30 to $40 million number that is included in the guidance is split 20 to 25 SG&A and 10 to 15 R&D. Is that correct?

That's correct, yes.

And then as I'm looking at Risperdal Consta gross margin on the manufacturing fee alone, the '04 number looks likes it's about 48%, '05 went up to about 64%, the '06 guidance actually looks down about 2 or 300 basis points from the '05 achievement. Could you talk about the dynamics that are -- that are affecting that? I think I understand the '04 to '05 but I want to understand the '05 to '06. And I'm just doing the math on the ranges of COGS that you gave to the range of manufacturing revenue that you gave.

Absolutely. And, you know, I -- we've always talked about it when we give gross margin guidance since we get paid 10% on every vial that's ultimately made. You know, that's the way I do it. You're breaking out our manufacturing fees specifically, which is obviously just fine. And I think your numbers, you know, from memory are close. You know, I just don't remember them specifically, but they sound in the range there and obviously it is not too hard to do that math. I think two things are going on in terms of the guidance overall. I think one, we are trying to be conservative. If you remember last year we went out with gross margin guidance that we beat handily this year.

Right.

And I think that is just the way we like to approach this, so we don't have any surprises on the gross margin side.

Okay.

Number two, we are expecting our second line to come onboard here. And given the high fixed cost of each of these lines, a lot of the gross margin relates to throughput. So even though we are seeing a vast increase in throughput, we are going to have a second line to, you know, spread over the cost of all those vials. You know, my hope is and our expectation is and our group out in Ohio is working very, very hard to not see a dip in gross margins. But, again, to be conservative I think we wanted to plan and continue that conservative route that we did last year as well.

Okay. So there's no more story than that. So the second line has some impact. Can you talk a little open-endedly about where that can go beyond the current fiscal year?

In terms of gross margins?

Yes.

Well, I think, you know, you've seen us -- we guided, you know, 60 to 70% and we were in the mid 70s in the last few quarters. And I think our focus for the group out in Ohio has been they increase capacity almost 100% in terms of the number of vials shipped. It has not been on eking every last efficiency out of the gross margins. We plan to double capacity again this year and I think they have done a very good job at -- and will continue to work to increase that gross margins and those efficiencies. I wouldn't want to speculate on how high we can get them, but I'd be quite happy if we continue to get them in the 70s. And we'll be aiming for the -- for higher than that as well.

Thank you. Our next question comes from Ian Sanderson from S.G. Cowan. Your question, please.

Thanks. A couple of Vivitrex questions. First, with Campro(ph) rolling out, my sense has been that some of the prospective partners for Vivitrex have been watching very closely the general practitioner adoption of Campro and can you just relate if you have any data points on that? You know, what feedback you're getting from interested partners, whether they are satisfied with that roll out or what they are looking for? Secondly, reimbursement assumptions for Vivitrex, what are your assumptions and how critical is reimbursement to a successful rollout of this? And third, I think I remember you mentioning on the last call regarding Vivitrex that there might be some -- a sub-population of abstinent patients in that trial that those data will be presented next week at the APA. Is that an incorrect assumption?

Ian, it's Rich. That's correct. You will see the data next week. Our experience has not been that partners are looking to the Campro rollout. And it stands to reason because people who really understand Vivitrex understand that it is a completely different approach to this treatment using Campro. It is an interesting flow of data that is beginning to develop on campro but its -- in our experience, it might be separate from yours. I don't know who you are partnering it with but in our case it hasn't really been -- it hasn't been rate limiting at all in the way the people are evaluating the Vivitrex opportunity. The reimbursement side is, I think, in any drug now is critical.

So one could attempt to mount an argument that said well there's a significant amount of private pay in this particular group. It's very different from schizophrenia, in that it's not a medicaid based by patient population, so on and so forth. But at the end of the day, to drive the types of numbers that we expect to drive with Vivitrex, reimbursement is critical. And so we are actually doing reimbursement work and have been for several months, managed care all the way through to the government. And we just think it is an essential part of doing this right.

And if I could actually ask two follow-ups. First on that -- on the abstinent patient population, do you think that is an important marker for the -- for treatment centers to adopt this given that my assumption is treatment centers really target abstinence. And whether for that, granted that's a small segment of the alcohol dependent patient population, you know, how important are those abstinence data to them? And secondly, on next Thursday J&J is going to have their analyst day and presumably talk quite a bit about paliperidone and just wondering, you know, what we should be expecting on the paliperidone depot side and how they are going to ultimately position Consta against that?

On the -- on the abstinence, I think the abstinence data are important. I think that one of the great advantages of Vivitrex, and one of the great features of the clinical data that we've developed is this idea of how you can test the pharmacology in a patient population that's actively drinking, recognizing that not everybody has abstinence as their treatment goal. We also recognize that abstinence is a very, very important part and it is the ultimate treatment goal for many patients in treatment. So it would have been -- it would have been problematic, I think, had our absence data not gone in the same direction as our data from patients who are actively drinking. Happily it does and it stands to reason as well. So I just think that that's -- that's all part of the robustness of the overall data set that says opiate reset for occupancy on a steady state basis over time will reduce drinking activity and support peoples' goal toward abstinence.

The -- the other point is just in the real world. I'm far from the Company's expert on this now that we have David Gastfriend onboard and I recommend that you do talk to him about this. It just gives you the ability then to be compatible with all kinds of different treatment modalities. Because there are types of alcohol treatment regimens that absolutely stress abstinence. And there are those that don't. And I think it's important that people understand that, as we've described it in the JAMA paper and will continue to be, this is a pharmacologic foundation to supplement psychosocial counseling to get you to your treatment goal, whatever it may be. And we are not going prescribe to you our preoria(ph) what's better than not. This is a very heterogeneous disease. On the -- on the -- on the J&J side, I really don't have any view. Just one semantic distinction I'll make is that they're not developing a depot of help, they're developing a new chemical entity separate from paliperidone, because paliperidone palmitates. So, it's an NTE with -- and they are hoping for an extended dosing duration and you will have to ask them about that.

Thank you very much.

You're welcome.

Our next -- actually we have a follow-up question from Thomas Wei. Your questions, please.

Thank you, I had wanted to ask whether or not you had requested priority review for Vivitrex.

Hi, Thomas. Yes, we did request priority review. Not that we necessarily expect to get it, but it offers us the ability to articulate in the context of the NDA the major features of the data set and the unmet medical need that we are addressing. It is not clear, and we've said this publicly many times, it is not clear to us with a 505B2 filing strategy the priority review actually exists under that -- under that approval route. But nonetheless, we have asked for but we've -- we strongly encourage people not to model it and to expect the normal standard review for Vivitrex.

And could you help us quantify with the expansion of Vivitrex manufacturing to a second bulk line how much did that take you from and to in terms of maybe patients worth of therapy?

Yes, sure, Thomas, it's Jim. I think we are just way too early in the process to be making patient projection numbers and I think -- I think the first bulk line that is up and running, we feel is going to be sufficient for launch quantities of the drug and we are starting a second line right now because we think there is enough upside in the project to warrant that. But we are -- again, we're just way too early to talk about it. We don't know price. We don't know duration of therapy per se, so we will update that you as we get closer to knowing those things.

What did change, though, Thomas, is that through the process of diligence with partners and also in our own forecast development over the last year and a half or so, is that we did move up the initiation of construction online, too.

And on the topic of potentially launching it on your own, maybe you can just help me understand again is that in the cards at all? How should we think about that possibility and is that -- while you're planning for the launch right now are you operating under an assumption that you are going to be doing this on your own to start?

I'm admiring your ability to ask the same question in so many different ways. So I'll try to answer it again. And that is we are entirely prepared to launch the product ourselves, because if you look at how tractable the problem is, 8000 physicians to call on with 100 or so reps. This is very, very biotech company sized problem. Having said that, our plan and our general guidance has been to enter into a partnership, because we think with more people behind it we can do better. But we are not going to give the product away for sake of leveraging somebody else's commercialization infrastructure. So we are motivated entirely by expanding the expected net present value of the opportunity to us as opposed to trying to make good on it.

And one last question. Given the actual PDUFA date, if you were to get a 10 month standard review, can you just help us fill in the blanks between that point and launch in mid '06? Is it just the hiring of the sales force or are there other things that you would need to accomplish post launch that might delay a launch.

Couple things. Our guidance, first of all, is based on primarily the average review time to approval in this particular division based on historical presidence of the agency, which is, I think, 15 or 16 months or so. So, we just -- just because one has a 10 month PDUFA date, as you know well, Thomas, often that comes in the context of an approvable letter with conditions and other things that need to be worked out. So from a modeling point of view, we modeled it launching in the mid-06 time frame. All that can change based on the nature of the review. If we were to get approval tomorrow, we would be scrambling to build sufficient inventory for launch. That will be -- if it moves up, that will become the key issue that will gate when actually we launch.

The hiring of the sales force, which it doesn't sound like that is going to happen this fiscal year. If you were to get approval on a 10 month PDUFA date, you're saying that the gating factor, even at that point, is building inventory? Or would it be hiring the sales force?

We'll make the decision at that time. Between now and January 31st, which is the 10 month PDUFA date, we're going to be -- we're going to be doing a whole heck of a lot of manufacturing, inventory build, preparing for a launch of the product and so on, with or without a partner. So, we'll have a much better view of that if we come out of January 31st with a full approval. Obviously, our instinct will be to launch it as fast as we can, but we will see where we are at that time.

Okay, thank you.

You're welcome.

We have another follow-up question from David Windley from Jefferies Incorporated. Your question, please.

Hi, Thomas' questions led me to one, so you can thank him for this. The -- as you -- as you manufacture large quantities of Vivitrex, how will you account for that? In otherwards, given that it -- you don't have a clear approval in hand, would you reserve against those inventory values?

Yes, I believe what the appropriate accounting for that, David, is to essentially put that on the balance sheet. We will be very clear about the value of that on the balance sheet, with the expectation that we have approval and good commercial product. And that is where it will stay until we know otherwise.

So you would leave the value of the manufacturing inventory grossed up on the balance street?

That's correct.

And what shelf life would that product have.

Well, we're assuming a similar shelf life to Risperdal Consta. That's ultimately for the label and the FDA to decide. Risperdal Consta, for instance, has a two year shelf life.

Okay. All right, thank you.

You're welcome.

And I show no further questions.

Great, thanks everyone for dialing in. Jim and I will both be available for additional Q&As if you have them. Take care.

Ladies and gentlemen, this conclude today's conference. Thank you for your participation and have a wonderful day. You may now all disconnect.