Alkermes Plc (ALKS) 2006 Q2 法說會逐字稿

Welcome to the Alkermes conference call to discuss the Company's second quarter fiscal 2006 fiscal 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 like to introduce your host for today's call, Miss Rebecca Peterson, Vice President of Corporate Communications at Alkermes. Please go ahead.

Thank you. Good afternoon, and welcome to Alkermes' conference call to discuss the financial results for our second quarter of fiscal 2006, which ended on September 30th, 2005. With me this afternoon are Richard Pops, our CEO; and Jim Frates, our CFO.

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 reimbursement for and the commercialization and manufacture of RISPERDAL CONSTA, VIVITREX, regulatory approval for and the timing of the launch of VIVITREX, potential therapeutic benefits of exenatide LAR, the development and commercialization of exenatide LAR, the manufacturer of exenatide LAR by Amylin, the clinical program for AIR insulin, the intent of management to repurchase Alkermes common share in the open market, and our future financial and business performance, including our revenue, expense and capital spending expectations, operating plans, operating profitability, goals and objectives of management and 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. And in particular, the risk and uncertainties include, among other things whether we can continue to manufacture RISPERDAL CONSTA on commercial scale, economically or in sufficient quantities to supply the market, and whether RISPERDAL CONSTA will continue to be commercialized successfully, whether we can successfully scale up the manufacture of VIVITREX at commercial scale, whether VIVITREX will ultimately receive marketing approval in the U.S., and if approved, whether it will be launched and commercialized successfully by us and our partner, Cephalon, whether we are successful in continuing the collaborative development of AIR insulin and exenatide LAR programs, our ability to transfer manufacturing technology to Amylin, and Amylin's ability to successfully operate the manufacturing facility for LAR, the impact of the adoption of FAS123-R relating to the accounting treatment for stock options may have on our ability to sustain profitability in fiscal 2007 and beyond, whether we will actually purchase all of those shares for which we have authorization, or the timing or prices of such repurchases, and those other risk factors contained in our press release announcing our most recent report filed with the SEC, including, but not limited to, our annual report on Form 10-K for the year-ended March 31st, 2005. 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.

Today, Jim will discuss our second quarter fiscal 2006 financial results. Then Richard will provide an update on our pipeline and outlook on the business. We'll then open it up for Q&A.

Now I'll turn the call over to Jim.

Thanks, Rebecca. Good afternoon, everyone.

This was a very strong quarter for Alkermes and we're pleased with the progress we've made against our goals for the year. RISPERDAL CONSTA continues to perform well in the market place. J&J reported growing worldwide sales of $161 million for their third quarter and $424 million for the first 9 months of calendar 2005. We believe that RISPERDAL CONSTA's an important treatment for patients and provides a strong foundation for Alkermes' continued growth. We've also continued to make important progress with VIVITREX and in our clinical programs for AIR insulin and exenatide LAR. Rich will provide you additional details about those programs in a moment.

From a financial perspective, we are operating from a position of increased strength. We have reported a profitable quarter driven by RISPERDAL CONSTA sales, the recognition of a $9 million milestone payment from Lilly received in conjunction with the start of the phase III AIR insulin program and the recognition of net collaborative profit to offset spending on the VIVITREX program. We're also updating our guidance for the year to reflect our improved outlook. Finally, we ended the quarter with over $341million in cash having started the quarter with just over 343 million.

Strategically, we focused on key initiatives that we believe will create long-term value for shareholders. In October, Alkermes exercised our right to convert $15 million of convertible preferred stock owned by Lilly into 823,677 shares of Alkermes common stock representing less than 1% of the Company's outstanding shares. To provide you with some background on the convertible preferred stock, Lilly purchased $30 million of the convertible preferred stock in December 2002 to fund the inhaled insulin and human growth hormone programs. Pursuant to this stock purchase agreement with Lilly, we exercised our right to perfect an incremental increase in the royalty payable to Alkermes on revenues of AIR insulin. A key consideration in our decision was our belief and growing sentiment that inhaled insulin therapies have a potential to be an important new medication for the treatment of diabetes.

In conjunction with this convertible preferred stock conversion, Alkermes' Board of Directors authorized a share repurchase program up to $15 million of Alkermes common stock. The stock will be repurchased at the discretion of management either in the open market or through privately negotiated transactions. This repurchase program reflects our continued confidence in the potential of our product pipeline. It also reflects our desire to minimize the EPS dilution moving forward and to use our cash not our stock to secure that higher insulin royalty rate.

Another strategic initiative was the agreement we and Amylin recently entered into for the construction of a manufacturing facility and related technology transfer to enable Amylin to manufacture exenatide LAR. Rich will provide details on the agreement later in the call. From a financial perspective, the agreement removes the capital risk associated with the manufacturing facility of the once-weekly formulation exenatide LAR, since Amylin would be responsible for all costs associated with the manufacturing facility, including cost associated with the technology transfer. The agreement also provides us with the ability to focus on the continued expansion of the manufacturing facilities for RISPERDAL CONSTA and VIVITREX. While we continue our practice of not commenting on specific royalty rates for product candidates in development, the net economic benefit to Alkermes under both the exenatide LAR and AIR insulin programs is similar to what we receive on a net basis for RISPERDAL CONSTA.

I'll now turn to our financial results for the second quarter. Our income on a GAAP basis for the quarter ended September 30th 2005 was $11.8 million or $0.13 a share as compared to a net loss of $14.3 million or $0.16 a share for the quarter ended September 30th, 2004. Total revenues comprised of manufacturing revenue, royalty revenue, R&D revenue and net collaborative profit were 46.7 million for the quarter ended September 30th, 2005, compared with 18 million for the same period one year ago. This growth involves significant increases in each of the revenue categories. Total manufacturing revenues were 13.6 million and 7.7 million for the quarters ended September 30th 2005 and 2004, respectively. The increase in manufacturing revenue is due to increased shipments of RISPERDAL CONSTA to our partner Janssen to satisfy increased market demand. Total royalty revenue was $4 million for the quarter ended September 30th 2005 as compared to 2.2 million for the same period one year ago of which 4 million and 2.2 million, respectively, related to RISPERDAL CONSTA. The increase in royalty revenue was also due to the increase in global sales of RISPERDAL CONSTA by Janssen. Research and development revenue under collaborative arrangements for the quarter ended September 30th, 2005 was $16.7 million compared to $8.1 million one year ago. The increase was primarily due to a $9 million milestone payment paid by Lilly that I mentioned earlier in conjunction with the start of the phase III clinical development program for AIR insulin. When Alkermes first set our financial expectations for fiscal 2006 we include this milestone in our 4th fiscal quarter, however, the efficacy component in the phase III safety studies triggered the milestone payment this quarter. Net collaborative profit related to the VIVITREX collaboration with Cephalon was $12.4 million for the quarter ended September 30th 2005. This consists of 13.6 million of milestone revenue recognized to offset expenses incurred on the product by both Alkermes and Cephalon less the $1.2 million of payments that we made to Cephalon to reimburse its expenses related to the product during the quarter. Alkermes did not record any net collaborative profit in the quarter ended September 30th, 2004.

Costs of goods manufactured for the quarter ended September 30th 2005 were $4.4 million as compared to $2.4 million in the same period in 2004, all of which related to RISPERDAL CONSTA. The increase in COGS related to RISPERDAL CONSTA was due to an increase in manufacturing volumes to meet increased demand for the product. Research and development expenses this quarter were $19.4 million compared to $22.6 million for the same period a year ago, reflecting the completion of certain VIVITREX clinical trials in the last fiscal year and the fact that certain VIVITREX raw materials to be used in commercial manufacturing are now being capitalized to inventory rather than expensed to R&D. Selling general and administrative expenses were 9.1 million for the quarter ended September 30th, 2005 compared to $7.4 million for the same quarter one year ago. This reflects an increase in selling and marketing costs as we prepare for commercial launch of VIVITREX. Interest income for the quarter was $3 million compared to $0.7 million for the same period one year ago and interest expense was $5.2 million compared to $1.2 million for the same period last year. At September 30th, 2005, Alkermes had total cash and investments of $341.3 million as compared to $343.5 million as of June 30th 2005.

I'll now conclude my remarks with an update of our financial expectations for the fiscal year. Please note that I will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For information with respect to the factors that could cause our actual results to differ materially from our expectations, please see the risk factors at the end of our 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 Exchange Act of 1934 as amended, including our annual report on Form 10-K for the year ended March 31st, 2005.

We're essentially making two changes that positively impact our bottom line for fiscal 2006. Due to the amount of work we expect to perform in the VIVITREX program in preparation for our anticipated launch in the first half of calendar 2006, we're increasing our expectation for net collaborative profit. We're also reducing our expectation for net interest expense based on the additional interest income from anticipated higher-than-average cash balances and higher interest rates.

I'll now review each of the line items in turn beginning with total revenue. We're increasing our expectation for total revenue to a range of 150 to 170 million revised from earlier expectations of 140 to 165. We expect manufacturing and royalty revenue, excuse me, related to RISPERDAL CONSTA and VIVITREX to remain in the range of 85 to $95 million. Notably for the third fiscal quarter, the one that ends in December, we expect manufacturing revenue to be in the range of 13 to $16 million. That's 13 to 16. We expect R&D revenues to remain in the range of 35 to $40 million, and as I just mentioned we are raising our expectation for net collaborative profit from a range of 20 to 30 million to a range of 30 to 35 million. We expect costs of goods manufactured to remain in the range of 33 to $38 million. Research and development expenses are expected to remain in the range of 80 to $90 million. Selling general and administrative expenses are expected to remain in the range of 45 to $50 million. And that's where improving our operating loss expectation from a range of 13 to $18 million operating loss to a range of 3 to $8 million operating loss. We're also improving our expectation for net interest expense from a range of 12 to 17 million to a range of 10 to 15 million based on additional interest income that we're receiving from higher cash balances and higher interest rates. With these two adjustments our fiscal 2006 net loss expectation on a pro forma basis is now expected to range from 13 to $23 million or approximately $0.14 to $0.25 per share. This compares favorably to a range of a loss of 25 to $35 million or approximately $0.27 to $0.38 per share than we projected in August. As a reminder, the basic pro forma net loss per share calculation is based on an estimated 92 million shares of the Company's common stock outstanding on a weighted average basis for the year. We expect capital expenditures to remain the same as we predicted earlier, or approximately $35 million.

In summary, we've had a successful quarter financially. While there are some elements that could return us to a loss position in the next quarter, namely a one-time lease charge we expect on a sublease we're -- we are negotiating, and increase investment in manufacturing infrastructure, we feel that we have the elements in place to generate sustained revenue growth in the years ahead. Consistent with our previous guidance, we expect to break even on an operating basis by the end of this fiscal year if our key programs continue to perform to our expectations. We expect that we can sustain this operating profitability excluding any impact of our adoption of FAS 123-R. It was really a remarkably strong quarter and we look forward to keeping you up-to-date on the progress in the months ahead.

I'll now turn the call over to Rich.

Thank you, Jim. Good afternoon, everybody.

That was -- it was obviously a good quarter, and we're extremely pleased by the progress we've made, not just in the quarter, but over the last few months. What we're trying to demonstrate and I think we've done is strong execution in each of these major clinical and development programs. And we've also launched strategic initiatives that we think will further position the Company for long-term success. And I'll take a little time now to just comment on the progress we've made on a number of these different fronts.

From a financial point of view, the business is advancing along the lines we anticipated at the beginning of the year. As RISPERDAL CONSTA sales continue to ramp worldwide, Alkermes' royalties and manufacturing revenues are increasing accordingly and now they're reaching levels that we believe are very meaningful to our overall business, and you can see that translated through in the numbers. As I've stated before, we consider that RISPERDAL CONSTA and its revenue stream to be the financial foundation of this growing business. The next growth phase that you would superimpose on that of RISPERDAL CONSTA is expected to be VIVITREX. In addition to the net collaborative profit that we're able to recognize as a result of our collaboration with Cephalon, that Jim just described in the numbers, we obviously believe that the most substantial financial impact should come as this product candidate reaches the market place and begins its sales ramp. So with the vision of RISPERDAL CONSTA continuing to perform and the anticipation of VIVITREX launching next year, I think many of you are beginning to also recognizing the story doesn't necessarily end there. Following behind it are phase III inhaled program with Lilly, and the subject of more recent focus, exenatide LAR. These two product candidates represent strong and important new potential new product introductions in the coming years.

We've always asserted that an analysis of Alkermes should include all of our later stage development programs, rather than any single one. Why? Well, because from a strategy perspective, from an organizational perspective, from an operational perspective, from a financial perspective, that's how we're managing the business and that's how we're building the Company. This is a multi product company based on a range of our proprietary technologies. It's been our strategy for the last decade, we've stuck by it, and we believe it is beginning to bear real fruit now.

Enough of that. I'll give you just some of the highlights then of the major elements of the product and development programs. First CONSTA. As Jim said we continue to see strong sales growth with J&J reporting a nearly 13% over the previous quarter increase and an 88% increase compared to the same period in the previous year. With the recent approval in Italy, RISPERDAL CONSTA is now approved in 70 countries. As outlined by the recent New England Journal story describing the results of the KD [ph] trial antipsychotic drugs have become the cornerstone of treatment for schizophrenia. The KD study was designed to evaluate the overall clinical effectiveness of a number of oral antipsychotic medications in the treatment of schizophrenia as measured in this particular study by medication discontinuation. There was a short time to medication discontinuation for all treatments evaluated with about 50% of patients discontinuing their original study medication in the first six months, and 74% switching in the first 18 months. KD underscores the need for medications such as RISPERDAL CONSTA that can help patients stay on their treatment, improve their daily function, and reduce hospitalization rates. We believe that RISPERDAL CONSTA, which was not included in the KD study is becoming an important product in this therapeutic application. On the manufacturing side, we're also preparing for continuing sales growth. We're now shipping commercial product from our second bulk line and construction on our third bulk line funded by J&J is underway.

We have said before and I'll say again, that the success of RISPERDAL CONSTA, we see as highlighting the potential of this Medisorb technology to provide enhanced therapeutic outcomes for patients and it's really provided us with the know-how then to bring forward VIVITREX. As you know, our PDUFA action date is now December 30th, 2005. We're interacting with the FDA on a regular basis as they continue to review. We do not have any update today regarding the specifics of these communications other than to say that the review is proceeding in earnest and we expect to report back to you in this current quarter. On the commercial side, we and our partner, Cephalon, continue to anticipate the launch of VIVITREX in the first half of '06. You may recall that we will feel the field force of 28 treatment system specialists, or what we TSSs. These are high level positions responsible for understanding and coordinating the rollout of VIVITREX in key metropolitan areas with a view toward key prescribers and their interaction with patients, counselors, personnel who'll be administering VIVITREX injections monthly over time, specialty pharma and reimbursement. Today we've hired more than half of the treatment system specialists and expect to have the full team in place by the end of the calendar year. We're excited about the values they're already creating as we prepare for the commercialization of VIVITREX. Our TSS group will, of course, augment Cephalon's dedicated sales force.

Our interactions with Cephalon are intensifying as we approach the end of the year. We are pleased with our decision to collaborate with our colleagues at Cephalon and we're growing more and more excited about the launch of VIVITREX. We have a number of milestones still to achieve in this program. We still have to secure FDA approval for this product, but we're energized and we're highly motivated and we'll look forward to updating you on activities surrounding the anticipated launch of VIVITREX in the months ahead.

Turning to the diabetes program we've made important advances with AIR insulin and exenatide LAR. Two product candidates, very different, but represent novel ways to help patients better manage their blood sugars. In August, our partner, Eli Lilly initiated a second phase III safety study of the AIR insulin. This 12-month study is designed to evaluate the safety of our inhaled insulin system in 600 type 1 and type 2 patients with mild to moderate asthma or mild to moderate chronic obstructive lung disease. This is the second safety study now underway as part of a comprehensive phase III program that will include both efficacy and long-term safety studies. A 24-month safety study in approximately 400 type 1 patients began in July. The potential of inhaled insulin as a new class of medicine for diabetes care we think is clear. And we're pleased to be working with Lilly on this very important new product opportunity.

We've also reported exciting news in the exenatide LAR program. In August, Alkermes, Amylin and Lilly announced positive preliminary results from the phase II multi-dose study. As has been well documented by now, the study included 45 patients who were dosed once weekly receiving one of two doses of exenatide LAR or placebo. At the end of 15 weeks both doses of exenatide LAR were well tolerated and subjects achieved expected therapeutic levels of exenatide. Subjects in the high-dose group experienced the reduction of of A1C of approximately 2% compared to placebo at the end of the 15-week active dosing period. 12 of the 14 high-dose subjects who entered the subject with A1C greater than 7% achieved and A1C of less than 7% -- of 7% or less at 15 weeks while none of the subjects receiving placebo achieved this target. Patients in the high-dose group also achieved an average weight reduction of approximately 9 pounds compared to those receiving placebo. The most common side affect was mild nausea, experienced by approximately 20% of the subjects in the high-dose group compared to approximately 7% of the placebo group. We're very encouraged, of course, by these findings and we'll look forward to communicating with Lilly and Amylin the next dext [ph] of the program in early 2006.

Last week we signed an important agreement with Amylin under which they will assume responsibility for funding a manufacturing facility and for manufacturing the once weekly formulation of LAR for commercial sale if approved. Amylin will pay Alkermes a royalty on the net commercial sales. We will oversee the construction of the facility. We will be involved in scale up and will transfer to Amylin certain technology for the manufacture of the once-weekly formulation. We will continue to supply exenatide LAR for clinical trials. It was an important agreement, a way to reconciling of the various roles and responsibilities of the multiple parties. It's a significant step forward for the alliance and for the -- towards collaboration and from a strategic perspective, I really see it as a win-win for both companies. From an economic point of view, as Jim mentioned, the royalty to be paid from Amylin to Alkermes is consistent with the original development and license agreement. But now reflects the changes in the manufacturing responsibility. That is the net economic benefit to Alkermes is anticipated in the original agreement.

Finally, this agreement reflects the value of our Medisorb technology and know-how that makes long acting medications such as LAR possible. We view Amylin's and Lilly's enthusiasm for LAR highlighted by their willingness to fund and operate the facilities as a vote of confidence for the commercial potential of the product. And we're pleased with the progress that this program is making. This is one where there's much to do, but what's fueling the work is the tremendous excitement based on results of the phase II study. So I'll finish there. The progress we made this calendar year already has been significant, and we expect continued progress in each of the programs in the months ahead.

Looking forward, you can expect the following -- Obviously, first is a response from the FDA regarding our NDA submission for VIVITREX. Two is updates on our commercial strategy as we and Cephalon prepare for the launch of VIVITREX in the first half of '06 if approved. Three, an update on the next steps for the exenatide LAR development program in early '06. And, four, the start of the efficacy studies for AIR insulin in early '06. It's an exciting time. Each of these programs is making important progress, and in our view the fundamentals of the companies have never been stronger. We always ask you to remind yourself of the risks that we outlined in our filings, but we're feeling quite good about the business and we'll look forward to updating you on our work in our coming months.

With that I'll turn it back to Rebecca.

Great. We'll now open up the call for Q&A.

[OPERATOR INSTRUCTIONS]. Ian Sanderson, SG Cowen.

Good afternoon. Thanks for taking the question. A quick follow-up on exenatide LAR, the press release refers to the ongoing phase II trial. Were those interim data that we saw in August and if so will we see final -- should we look forward to final data coming up? Secondly, does the -- I presume the revised guidance does include the $9 million milestone payment from Eli Lilly. And actually related to that, does that collaboration with Lilly still cover other AIR programs including AIR hGH?

Ian, this is Rebecca. I'll take the first one and I'll let Jim take the second. The data that you saw from -- on the exenatide LAR program -- the phase II data was data from the active dosing period which was 15 weeks. There is a 12-week follow-up --

Oh, that's right. Okay.

-- just to look at pk.

Yes.

And I suspect you will be seeing additional data from the companies, but we'll leave that to Amylin to decide in what form they would like to present that data.

Okay. Thank you.

Hey, Ian. It's Jim. Yes, the -- I mean, the guidance -- we gave guidance for the overall results for the fiscal year and that's -- and we updated them. We essentially took our operating loss down, but the guidance we gave in August included the $9 million milestone, it just included it in the fourth quarter. We received it in the September quarter, so we booked it and that really shouldn't have any impact or any change. And that was a milestone just related to the beginning of essentially an efficacy portion of the phase III and the Lilly programs still do cover -- we have separate programs with Lilly. They are two essentially. One for their public, one for pulmonary insulin and one for pulmonary human growth hormone.

Okay. Great. Could I ask a follow-up or maybe you'll get to this, but the mechanics of the net collaboration profit on VIVITREX and it looks by your guidance that that's expected to be a little bit lumpy over the next couple of quarters. Can you just kind of give a rough sketch of exactly how that works?

Sure. So as I mentioned, we reported a net collaborative profit of 12.4 million essentially. And we paid 1.2 million to Cephalon. That gets netted out of what both companies spent so during the quarter, both Alkermes and Cephalon spent $13.6 million essentially on VIVITREX. And just the way the accounting rules tell us is that rather than recognizing an expense of what Cephalon's paying, we just net out what we pay them, so that's why we recognize 12.4. Going forward, we actually predicted an increase over where we were because I think we and Cephalon are going to be spending more effort -- it was an early estimate that we had in August. It wasn't a full month beyond when we got together for the first time in teams. Now here we are in the beginning part of November and we have laid out much more specific plans so we can make better estimates on about what we're going to spend. You'll also see, actually, when we -- I think, actually, you can see it on our notes or the financial tables in the press release, we've moved up to current portion of the unearned milestone revenue and we've made that $100 million and the long-term portion is now $46 million. So that essentially, plus the 13.6 that we spent, all that adds up to the $160 million that we got as an up front payment from Cephalon in June. So we've also added an additional quarter, obviously, because now we're looking out 12 months from today into September of next year and we'll be well into the launch phase at that point. So I wouldn't say that, yes, the spending is lumpy because it depends on when we have marketing meetings. It depends on when we sign products for consultants. It depends on when we hire people, et cetera, et cetera. But overall that spending is going to be increasing through the course of this year as we anticipate today.

Thank you very much.

You're welcome.

Mara Goldstein, CIBC World Markets.

Thanks a lot. I have a question just on the Lilly convertible preferred stock. You had said in the press release that you have elected to exercise your option for 15 million of the convertible stock. And that, if I remember correctly, locks you into a certain royalty rate on AIR insulin. What about the remaining 15 million? Do you have an option later to force that conversion? And is the royal -- is the royalty rate one royalty rate or was it tiered according to how much you -- or what you chose to exercise?

Sure, hi, Mara. It's Jim.

Hi, Jim.

Yes. We retain the option to convert the remaining 15 million, and you're smart to pick that up. So we still have that option.

And how long does that remain open for?

Well, we have that option, really, for the foreseeable future. So we'll comment on that. I mean, you'll know when we exercise it or when we announce that we have it I suppose. The -- the other thing too is it's really a direct one-to-one correlation with the amount of stock that we -- so for every dollar in stock that we convert, we get that appropriate and already worked out increase in royalty. So it is a one-for-one. So we've essentially solidified half the royalty that we have the opportunity to have and we have the remaining ability to solidify or perfect the higher amount with the second 15 million.

Okay. If I could just ask one more question, the $9 million milestone payment from Lilly, how come that was not amortized over a certain life, just recognized as a whole?

Sure, and it actually has to do with the timing of the assigning of the agreement. And also the way our agreement with Lilly works. Since Lilly is actually paying for all the work that we do and will continue to pay for all the work that we do, this is really a payment related to the trigger of work that we had already achieved. So the beginning of the phase III essentially recognized work that we had already achieved. And that's why -- and it's fairly standard under I think it's SAB101, the recognition of that milestone is a one time thing.

Okay. Thanks a lot.

Sure.

Jon LeCroy, Natexis.

Thanks for taking my call. Have I two quick questions. One is for VIVITREX filing, are you still in active discussions with the FDA or is it totally in their hands right now? And then I'll follow-up with another one.

This is Rich. We're in the stage of the review of the application now. We're in fairly regular dialogue with the reviewing division.

Okay. Thanks. And then the other is, did I understand you correctly for manufacturing and royalty revenue in 3Q, you're expecting 13 to 16 million?

No, That's just manufacturing only. It doesn't include royalties.

Okay. And then --

That related -- we reported 13.5 in that line this quarter.

Okay. Thanks. That's everything. Thank you.

Okay. You're welcome.

Chris Tanaka [ph], Slumber Capital Management [ph].

Hi, good afternoon. I was -- my question relates to VIVITREX. I was wondering out of the patients who are receiving oral naltrexone today, what does your market research tell you in terms of how much of that -- those scripts are paid for by insurance companies versus cash payments?

I'll take that one, Chris. It's Rebecca. It's about the -- the majority are paid for by private pay, but quite a substantial amount are out of pocket. For various reasons people elect not to get their insurance companies involved when they're seeking treatment for their alcohol dependence.

I think it's important to note though, Chris, it's Jim here, that we think the market for VIVITREX is very different from the market for oral naltrexone that has been historically seen in that oral product.

And what sort of a price premium would you expect to charge for VIVITREX compared to the oral drug, based on the clinical benefits?

We -- it's probably premature to say. Let's see how we come out of the FDA with the label and we'll announce it then when we roll out the launch plan.

Great. Thank you.

Thanks, Chris.

Thomas Wei, Piper Jaffray.

Thanks very much. I was wondering if you could help us split out that 12.4 million that you spent on VIVITREX this quarter. How does that split out between R&D and SG&A?

Well, Thomas, it's Jim. We're not going to get down to that granularity. I mean, I think you can look at our historical results and make your own estimates on that, but we haven't gotten to that granularity yet.

And maybe just -- as you had mentioned, you're bumping up the current portion of the deferred revenue. Can you give us any specifics on what you've decided to increase spend on?

Well, again, Thomas, rather than saying, gee, this is a decision to increase spending, I think it's more to do with a better laying out of the plans by the two companies together. Again, we made these projections on August 4th and each of the co-development teams hadn't even met yet when we made those projections. So I think as we move forward into the final stages of approval for this product and launch, it makes sense for us to be -- it's a very reasonable launch plan, I think, and it's still within the bounds of the $120 million of net expenses that we are responsible for under the collaboration in the launch phase of this product. So rather than saying, yes, we've decided to increase spending, I think it's just a better -- as time passes, we get better estimates.

Is it -- should we infer from that at all that that maybe there's been an acceleration in the launch date?

No.

And can you give us any update on -- since it -- you've given us guidance that the launch may lag the actual approval depending on inventory. Can you give us any -- any specifics around how that -- that inventory build process is going right now for VIVITREX?

We didn't -- we're not providing any visibility on now other than as we've mentioned before in our presentations, we are in Wilmington right now, very actively working on VIVITREX production along and also an expansion of the VIVITREX production to a second line, as well as constant production expansion and production of Consta [ph] to a third line. So it's a 24-7 activity. We will -- we'll give more specific launch information as we come through the FDA, set our specifications, make our determinations about launch and -- with Cephalon and then we'll roll out to you guys.

All right thanks.

You're welcome.

[OPERATOR INSTRUCTIONS]. Jim Reddoch, FBR.

Hi, can you hear me?

Hi, Jim.

Hi. My question was on inventory -- VIVITREX inventory and what exactly was the triggering factor for deciding to capitalize versus expensing inventory?

Sure, Jim, how are you? It's really the fact that we expect that inventory that we're buying now is going to be used in commercial product and so it's most appropriate to put it in -- excuse me, to put it in -- the ultimately cost of goods, but right now in inventory as opposed to expensing it as R&D. So essentially, if it's going to be used in a batch that we expect to be ultimately commercial product, we'll capitalize it, and we've started that process now, as you might expect given our plan for a first half launch next year.

There wasn't any certain reduction in risk that happened in your conversations with the FDA or anything that made you -- gave you that visibility?

No.

Yes, no, it's really just where the product is ultimately going to end up and that's where it goes. And we wanted to just be clear with that so everybody knows what we're thinking.

Okay, good, thanks.

You're welcome.

Ian Sanderson, SG Cowen.

Thanks. Just a quick follow-up. Is there a meeting set with the FDA for exenatide LAR in January?

Ian, we haven't publicly commented on our intention or our plans to meet with the FDA around the exenatide LAR program. But I know Amylin has publicly said on their conference call that they are working on determining the next steps for the program and we'll update you in early '06.

Okay. Great. Thanks.

Dan Katz [ph], Apex [ph].

Good afternoon, gentlemen and Rebecca.

Hey, Dan.

Hey, Danny.

Just one comment and then a question. I mean, I just wanted to congratulate on you the CONSTA number. Everybody seems to be so focus owed VIVITREX, but you've done an awesome job in growing the CONSTA royalties in such a consistent and large fashion. Can you comment on the PDUFA push out date now that we've seen two other companies have that same sort of situation? Is it more -- do you have more information now to be able to say that it was more the FDA not being able to reach the time line than it was an Alkermes situation?

Yes, I think that the way we characterized it when it occurred, thankfully, turns out to be the same way we feel about it today, which was it was pretty clear at the time that the FDA had not completed their review. And in the questions that we have received subsequent to that pushout from the FDA, it was clear that they hadn't completed their review. So I really -- I take it for what it was which was that they weren't able to complete the date by their PDUFA date. They used a -- the techniques that they can use at their disposal to push out the review date, kind of formulaically plus 90 days. You saw it happen with a couple other companies, as you mentioned, so I think it's nothing more or less than that.

Okay. And then in terms of the VIVITREX expectations on Wall Street, just taking CONSTA as an example, there were -- there was a wide range of numbers for CONSTA, most of which looking back were not accurate. Is there a way to have a better visibility on Wall Street with the VIVITREX launch?

It's a good question. It's one we've been thinking a lot about because -- so job number one, I think, is when we come out of the FDA with a label and with a product profile, sitting down and making sure we and Cephalon are on the same page, which it looks like we are, and in terms of the launch expectations and our launch assumptions and timing, and then to communicate to you guys in as careful a way we can, recognizing that CONSTA -- and remember the early days of CONSTA -- I know you do, Danny, a lot of people were thinking, boy, it's launching more slowly than we thought it might have launched. But I think people had to learn that injectable sustained released products administered in a physician's office are different than prescriptions for oral medications with a detailed sales forceout and able to generate script volume the day they launch. So I think we'll have to do a good job of both setting the overall expectations for the -- the magnitude of the potential product, and also just the shape of the curve on launch. So you tell us if we're not doing a good job on it, but we'll be doing that in earnest.

If VIVITREX's as successful then maybe the Street will start to believe you by the time LAR comes out.

Don't count on it, all right?

Thanks.

Thank you. I would now like to turn the conference over to our host for any further remarks.

Thanks, everyone, for dialing in. Jim and I are both available following the call if you have any additional questions. Have a good night.

Good night.

Ladies and gentlemen, thank you for your participation in today's program. This concludes the conference. You may disconnect and have a wonderful day.