Alkermes Plc (ALKS) 2007 Q1 法說會逐字稿

Welcome to the Alkermes conference call to discuss the Company's first quarter of fiscal 2007 financial results. [OPERATOR INSTRUCTIONS] At this time, I would like to introduce your host for today's call, Ms. Rebecca Peterson, Vice President of Corporate Communications at Alkermes. Please go ahead.

Thanks. Good afternoon and welcome to the Alkermes conference call to discuss financial results for first quarter of our fiscal 2007, which ended on June 30, 2006. 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 today, certain matters we will discuss consist of forward-looking statements relating to, among other things, the therapeutic value of our product candidates to patients, plans for clinical trials, our expectations concerning the successful commercialization of Risperdal Consta and Vivitrol, our future financial and business performance 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 these forward-looking statements.

In particular, the risks and uncertainties include among other things; whether we will be able to achieve the financial expectations provided. Whether the Company can successfully manufacture Risperdal Consta and Vivitrol. Whether Risperdal Consta will continue to be commercialized successfully by our partner Janssen. And whether Vivitrol will be commercialized successfully by Cephalon. Whether sales of Vivitrol will meet forecasted estimates. Whether third-party payors will cover or reimburse Vivitrol. Whether we are able to successfully and efficiently scale up and manufacture our product candidates. Whether advancement of our partnered product candidates will be delayed. And the outcome of clinical and pre-clinical work we and our partners are pursuing. Our ability to transfer manufacturing technology to Amylin. The time lines relating to the construction and the successful operation of the exenatide LAR facility. Decisions by the FDA or foreign regulatory authorities regarding our product candidates And those other risk factors contained in our press release announcing our most recent results and 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, 2006, and subsequent Form 10-Q's.

We undertake no obligation to update or revise the information in this whether as a result of new information, future events, circumstances, or otherwise. This afternoon, Jim will discuss our financial results for the quarter of fiscal '07. Rich will then provide an outlook on our business and an update on the pipeline, including the Vivitrol launch. We will then open up call for Q&A. Now, I will turn it over for Jim.

Thanks, Rebecca. Good afternoon, everybody. The first quarter of fiscal 2007 marks our fourth consecutive profitable quarter, excluding the impact of noncash share based compensation expense, and underscores our commitment to achieving sustained operating profitable. We reported 107% increase in total revenues, compared to the quarter ended June 30, 2005, driven by significant growth in each of the revenue categories. Our businesses is advancing according to our plans. Risperdal Consta is performing very in the well in the marketplace with worldwide sales of 390 million for the first half of calendar 2006, a 48% increase over the first half of calendar 2005.

Vivitrol is now commercially available and we're able to recognize net collaborative profit to offset certain expenses related to Vivitrol. In addition, our late stage diabetes products are progressing and are fully funded by our partners. These are promising novel therapeutics with attractive royalty rates to Alkermes. We expect to make continued investments at our own pipeline, including investing in proprietary products, while working to sustain non-GAAP operating profitability throughout fiscal 2007, excluding impact of share-based compensation expense.

In addition, our balance sheet remains strong. We ended the quarter with more than $373 million in cash and total investments, which includes the $110 million milestone payment received from Cephalon following FDA approval of Vivitrol in April. We further strengthened our financial profile with the conversion of our 2.5% convertible subordinated notes into just other 9 million shares of common stock, eliminating over $125 million in long-term debt.

I will now turn to our financial results for the first fiscal quarter ended June 30, 2006. And to be clear, I will compare Q1 fiscal year 2007, results excluding share-based compensation, with Q1 fiscal 2006 GAAP results that did not include share-based compensation, so we have an appropriate apples to apples comparison. Our net loss on a GAAP basis was $700,000, or a basic and diluted loss per share of $0.01 for the quarter ended June 30, 2006, as compared to a net loss of $13.7 million, or basic and diluted loss per share of $0.15 for the same period last year.

With the adoption of FAS 123R, as of April 1, 2006, we're reporting employee share-based compensation expense in our GAAP results for the first time. For the quarter ended June 30, 2006, the total share-based compensation charge was $9 million. We recognized $0.3 within the cost of goods manufactured, $2.8 million within R&D, $5.2 million within SG&A expenses, and we capitalized an additional $0.7 million in inventory. The impact of FAS 123R on our financial results for the quarter was a total expense of $0.08 per share. Again, because of the significant nature of certain noncash or nonrecurring items, including employee share-based compensation expense, we feel it's important to discuss non-GAAP results that we feel more accurately reflect our ongoing operations.

Non-GAAP net income for the quarter ended June 30, 2006 was $6.8 million or $0.07 per basic and diluted share, compared to a non-GAAP net loss of 13.8 million, or $0.15 per basic and diluted share for the same period last year. For a reconciliation of our GAAP and non-GAAP net income and loss, please see our press release, which can be found on our Website, www.alkermes.com.

And now, I'll move on quickly to the specific line items. Total revenues comprised of manufacturing revenues, royalty revenues, R&D revenues and net collaborative profit; were a record $51.5 million for the quarter ended June 30, 2006 and were more than double the $24.8 million we reported for the same period last year. For the quarter ended June 30, 2006 total manufacturing revenues were 22.2 million, of which 19.1 million related to Risperdal Consta and 3.1 million related to Vivitrol. This compares to 14 million for the same period in 2005, all of which related to Risperdal Consta.

The increase in manufacturing revenues related to Risperdal Consta was due to increased shipments to our partner Janssen to meet increased demand. With respect to Vivitrol, we manufacture the product and sell it to Cephalon at cost. We recognized these sales, which were $2.8 million in the first quarter, as manufacturing revenue. In addition, within manufacturing revenues, we recognized a 10% manufacturing profit on these Vivitrol sales to Cephalon, as we've reviewed before. This profit amounted to $0.3 million in the period. Manufacturing revenue -- excuse me, the manufacturing profit is recognized out of the milestone payments we've received from Cephalon and which we carry as deferred revenue on our balance sheet.

The royalty revenues related to Risperdal Consta were $5.1 million for the quarter ended June 30, 2006 based on worldwide sales of Risperdal Consta of 205 million, compared to 3.6 million based on worldwide sales of 144 million for the same period last year. Research and development revenue under collaborative arrangements for the quarter ended June 30, 2006 was 14.5 million, compared to 7.3 million for the same period last year. The increase was primarily due to an increase in revenues related to work performed on our AIR Insulin and Exenatide LAR programs.

I'll turn now to net collaborative profit related to the Vivitrol collaboration with Cephalon. This was $9.7 million for the quarter ended June 30, 2006 and consists of three elements. First, $27.4 million of milestone revenue was recognized to offset expenses incurred on the product by Alkermes of 8.5 million and by Cephalon of 18.9 million. Second, $1.2 million of milestone revenue was recognized with respect to the license we provided to Cephalon to sell Vivitrol. This revenue stream started upon the FDA approval of Vivitrol and is recognized on a straight-line basis over an expected 10-year life.

And third, we deduct or net off the payments that we made to Cephalon. So Alkermes made to Cephalon a payment of $18.9 million to reimburse reimburse Cephalon's product related expenses. As you will remember, Alkermes' reimburses Cephalon expenses this quarter, since under the terms of our collaboration agreement, Alkermes is responsible for the first $120 million of net product losses incurred on Vivitrol. Now, Alkermes did not record any net collaborative profits this same period last year. These three line items net to the $9.7 million in net collaborative profit we recognized as revenue in the quarter. Through June 30, 2006, we've incurred $68.2 million of cumulative net product losses, together with Cephalon on Vivitrol.

Okay. Now to cost of goods manufactured. For the quarter ended June 30, cost of goods manufactured on a non-GAAP basis was $9 million, of which 6.3 million related to Consta and 2.7 million related to Vivitrol. The cost of goods manufactured for the same period 2005 was 4.5 million, all of which were related to Risperdal Consta. The increase in cost of goods manufactured was due to increased shipments of Risperdal Consta to Janssen to meet increased demand and to shipments of Vivitrol to Cephalon in preparation for product launch. Research and development expenses in a non-GAAP basis for the quarter ended June 30, 2006, were $23.1 million, compared to $21.6 million for the same period last year. Reflecting an increase in expenses related to new personnel and to work performed on certain early stage pipeline products.

Selling, general, and administrative expenses on a non-GAAP basis were $11.3 million for the quarter ended June 30, 2006, compared to $9 million for the same period last year. Mainly reflecting an increase in sales and marketing costs, related in part to the increased commercial activity including the addition of Alkermes field personnel. Interest income was $4.3 million for the quarter ended June 30, 2006, compared to $1.6 million for the same period last year. Reflecting higher average cash balances and higher interest rates.

Interest expense for the quarter ended June 30, 2006, was 5.5 million, compared to 5.2 million for the prior period. Interest expense for the quarter ended June 30 includes a one-time net interest expense of approximately $780,000 relating to the early conversion of our 2.5% subordinated notes, which I mentioned earlier. At June 30, Alkermes had total cash and investments of 373.7 million, as compared to 303.1 million at March 31, 2006. This increase is due to the milestone payment received from Cephalon relating to FDA approval of Vivitrol.

I'll now conclude with a brief update on our financial expectations for the fiscal year. While we had a strong first quarter of financial performance, we're going to maintain our full-year financial expectation. There are a number of specific assumptions underlying these expectations for the full year, including the continued success of Risperdal Consta, sales of Vivitrol ranging from $35 to $45 million, the continued success of our R&D programs, our ongoing business operations and our assumptions about full year gross margins. We encourage you to review the specific assumptions underlying our fiscal 2007 expectations that were described in our year end fiscal 2006 press release issued in May.

Just to remind you, we continue to anticipate pro forma net income of $5 to $10 million for fiscal 2007, or approximately $0.05 to $0.10 per basic share, based on a weighted average shares of 100 million shares outstanding. The pro forma net income assumes no other noncash income or expenses related to the net increase or decrease respectively, in the fair value of warrants the Company holds. It assumes no restructuring charges or recovery and does it not include the adoption of FAS 123R, the accounting for share-based payments. We continue to expect the expense related to FAS 123R to be in the range of 30 to 35 million, or $0.30 to $0.35 a share in expense for fiscal 2007.

In conclusion, from a clinical, commercial, and financial perspective; we had a very strong quarter. Looking forward, we're focused on achieving our clinical and commercial objectives for the rest of the calendar year. Including supplying Risperdal Consta to meet market demand, playing a major key support our launch of Vivitrol, both on the commercial, and a major key for us obviously on the manufacturing front. Strategically, we're continuing to execute on our business plan and look forward to updating you throughout the year. And with that, I will turn the call over to Richard.

Good afternoon, everybody. This was obviously an incredibly important quarter for Alkermes, highlighted by both the FDA approval and launch of Vivitrol. Major milestones for this Company and we've been working on for many, many years. So, congratulations to all the folks who were involved with that. The promise of our technology here is now realizing two, innovative, commercially available products that we think provide a growing financial foundation for the Company.

But the story doesn't end there, with those two products, with Consta and Vivitrol. We also have very promising product candidates late in the pipeline with the potential to create substantial additional value. In addition, as Jim mentioned, excluding share-based compensation expense, we've reported now four consecutive quarters of operating profitability and we're focused as a management team on sustaining this profitability as we move forward.

So we feel like we are quite well positioned now to move into that select group of high value biotechnology companies that are characterized by marketed products, a robust pipeline and the ability to consistently deliver profitability and earnings growth year-over-year. So for an update quickly on the pipeline. Let's start with Vivitrol Since we and our partner Cephalon just launched Vivitrol on June 13, it's still very early in the launch phase and we have limited data to share with you at this time.

For those of who you listened to Cephalon's earnings call last week, you know that we'll intend to provide you with more information on sales after the quarter ending September 30. We're pleased to see Vivitrol in the marketplace now, providing patients and physicians with an important new treatment option for alcohol dependence. It's extremely gratifying to see leading edge healthcare organizations reporting the news of the launch of this product. For example, just recently, the Mayo Clinic, as one example, added information about Vivitrol to their Website.

As for our commercial efforts, the Cephalon sales team is out in full force targeting a core group of 2,000 to 3,000 and addiction medicine specialists who treat alcohol dependence. And the Alkermes team of 28 field personnel are working alongside Cephalon continuing to develop the market. We and Cephalon planned this targeted approach to ensure that the early adopters and their patients have a positive experience among each step of the process, from enrolling in the VIP3 support program to securing reimbursement, to setting up appointments for administrations and all patients receiving the Vivitrol injections. We learned from our experience, while we didn't do it ourselves on Risperdal Consta, but through our collaboration with Johnson & Johnson; to getting physicians comfortable with writing and administering prescriptions for a long acting injectible medication is important for the commercial success of the product.

With that perspective, one of the key indicators we're tracking most carefully right now, is physician enrollment in this VIP3 program. We're highly encouraged by the response from physicians to date. With more than 2,000 potential subscribers already enrolled in VIP3. Approximately 250 physicians have agreed to accept referral patients for administration. In addition, there are approximately 650 nurses across the country enrolled in VIP3 who are ready to provide injection support.

In terms of reimbursement, although we're just in the early stages of the launch, we're happy to report that reimbursement so far has been favorable. For the most part, Vivitrol is being covered as a medical benefit, as we anticipated. The level of success we've had with reimbursement for Vivitrol indicates to us at this stage that the product is appropriately priced. Further, to that point, anecdotes from our field personnel suggest the price has been a barrier to physician interest in the product. So, it's a great opportunity to launch a new drug into a new product -- a new drug into a brand new market, essentially. And Cephalon is making strong progress in educating and building the market, Where, for the most part, counseling has been historically viewed as the only treatment option.

As part of our targeted education and outreach, we and Cephalon have implemented a speaker program for the group of core physicians interested in helping others in their field about the role of medication in the treatment of alcohol dependence. Cephalon has found this program to be highly successful during the launch of other novel therapy in new markets. There's been a great round of enthusiasm around this program and additional activities will ongoing during the year. The launch is just beginning and the momentum continues to grow. And we'll look forward to sharing additional details with you as the launch progresses, particularly for the quarter ending September 30.

As you know, Alkermes is responsible for manufacturing Vivitrol. We're now operating our commercial production line at plant capacity. We're building inventory to support anticipated product demand. We are on schedule with an additional line that will more than double our supply ability late next year. And a third that could be available to manufacture commercial material in early 2009. We are today pleased with the execution of our supply chain and the supply of Vivitrol.

And our thanks go out to our highly skilled team of individuals at the facility in Wilmington, Ohio, who have helped make possible the commercialization of this product. They have been working hard, overtime now for a period of time measured approaching the years.

The commercial manufacturing of Vivitrol, is a direct result of our technical expertise and the manufacturing experience that we gain with Risperdal Consta. And I'll give you an update now on Consta. On that point, our manufacturing team recently produced the 10 millionth vial of Risperdal Consta, which is a great accomplishment for us. Also, we J&J continues to increase its manufacturing orders. We believe both are strong indicators that Risperdal's Consta revenue will continue to grow. Schizophrenia is extremely challenging to treat and requires ongoing care not only to control psychotic symptoms but also to prevent exacerbation and relapse. Experts in the field cite medication adherence as a primary concern in treating patients with schizophrenia. And data has shown that just a one to 10 day gap in medication can double the risk of rehospitalization for patients with schizophrenia.

J&J is continuing to educate physicians about the benefits of Consta. As part of their efforts, J&J has presented clinical data further establishing the tolerability and efficacy in treatment naive patients, as well as patients switching from another medication. J&J has also presented pharmaco-economic data demonstrating that treatment with Consta can reduce hospitalization costs. Almost three years after its approval, Risperdal Consta is still the only long acting atypical anti-psychotic commercially available. There's a great need for multiple treatment options in the schizophrenia market. We and J&J are constant that Risperdal Consta will remain an important product. And we expect continued sales growth in the years to come. Importantly, on July 1 of this year, the competitive acquisition program, or CAP program, became effective for Medicare Part B drugs, which provide another means of reimbursement for Risperdal Consta.

Turning briefly now to our diabetes product candidates. We and our partners are continuing to make progress in AIR Insulin and exenatide LAR programs. In early June we and Lilly announced the completion of patient enrollment in the two year safety for AIR Insulin. This study in Type 1 patients, is part of the comprehensive Phase III pivotal program and is required for registration.

Also in June, new data were presented at the annual meeting of American Diabetes Association or ADA. Data presented there included results from our Phase II study, which showed that patients are able to learn to use the AIR Insulin system with simple, self-direct training. The results from a Phase I study, which showed dosing equivalents between three two-unit doses and one six-unit dose. And the first ever published analysis from a Phase I study evaluating the effect of chronic pulmonary obstructive disease, COPD, on the pharmacokinetics and and glucodynamics of inhaled insulin.

With diabetes widely recognized as a public health crisis, there exists a great demand for new treatments that can help patients better manage their blood sugar. Patients need more acceptable treatment options. And availability of an inhaled insulin product is an important advance for patients. We're pleased to see that Pfizer is laying important groundwork for the inhaled insulin class, taking the time tow educate doctors and other medical professionals about diabetes care prior to making Exubera widely available.

Together with Lilly, we have developed a comprehensive clinical program for AIR Insulin. The Phase III program includes studies that are designed to generate data that will form the basis of a very competitive label, we believe, with the potential to address a broad patient population. The science and engineering behind AIR Insulin is highly sophisticated and complex. But ultimately, inhaled insulin is a consumer product. We believe AIR Insulin will be attractive to patients as a convenient and painless way of treating their diabetes. And we and Lilly will provide further details of the Phase III program, including timeline and submission dates, as the program progresses.

Exenatide LAR, which is our long-standing formulation of Amylin and Lilly's first in class product BYETTA, represents another medication with the potential to change the paradigm for diabetes care. BYETTA, as a twice a day injection, has been well received in the marketplace and we're excited about the commercial opportunity for our once weekly formulation. As many of you know, positive detailed results from the Phase II multi-dose study were recently presented at the ADA meeting. As previously reported, these data showed that 86% of patients using the 2mg dose of once weekly exenatide LAR achieved recommended levels of glucose control, as measure by hemoglobin A1C, with an A1C improvement of approximately 2% compared to placebo. None of the patients in the placebo group achieved recommended A1C levels.

In March; we, Amylin and Lilly announced that following discussion with the FDA, a long term, non-inferiority study of exenatide LAR has been initiated. This study is designed to demonstrate the type safety and efficacy data that could form the basis of an NDA. Patient enrollment in this non-inferiority study, which will compare exenatide LAR to twice daily BYETTA, on track. And we continue to expect the study to be completed in the second half 2007. Amylin recently reported the construction and process developments and scale-up activities are proceeding well, in parallel with the clinical program. Amylin expects to finalize its commercial manufacturing process by late '08, with plans to submit the NDA for exenatide LAR following completion of the commercial process.

So to conclude, we're continuing to make important progress across our business this year. We've already achieved a number of the goals we set for calendar 2006, including the approval and launch of Vivitrol and the presentation of key data from our diabetes programs at the ADA. Looking forward, you can expect the following; Obviously first, at the top of the list, an update on the launch of Vivitrol. Second, additional updates on the AIR Insulin program as we move through that comprehensive Phase III program. And three, the announcement of additional product development programs to our pipeline.

Alkermes has never been stronger. Its financial is sound and the pipeline holds great promise. We're excited about the work we're doing and look forward to updating you on our progress in the months ahead. With that, I'll finish and turn it back to you Rebecca.

Thanks, Rich. We'll now open it up to Q&A. Operator?

[OPERATOR INSTRUCTIONS] Our first question comes from Jami Rubin Morgan Stanley.

Thank you very much. Richard, can you elaborate a bit on this VIP3 program? What exactly do you mean that 2,000 physicians have enrolled in it? What is the process involved in enrolling in this program? Does it mean just checking a box or does it many that these physicians have been educated, their offices are lock and loaded, ready to administer Vivitrol to their patients? If you can provide a little more color as to what that means? And secondarily, what is the likely lead time between a physician enrolling and actively using Vivitrol? And my third question relates more to the reimbursement environment. How -- what does your market intelligence tell you about the breakdown in terms of cash versus private pay? Thanks.

Okay, hi, Jami. I'll answer some of the questions and then I'll ask Rebecca to answer because she's been playing the VIP3 side much closer than I have over the last two weeks. In general, the idea that we've -- would we learned from the Risperdal Consta launch was that early in that launch J&J realized that in addition to selling the product, what they really needed to do was create a field force that would help the physicians with the logistics of not only determining to use Risperdal Consta but whether they were going to give an injection, yes, no. And how to get it reimbursed for a first time -- for many prescribers who have never gone through the reimbursement process for a long acting injectible. So, what J&J ended up doing was essentially putting a dedicated group of people nationally to help with the logistics. VIP3 was considered prospectively noted to deal with these things right up front with the launch of Vivitrol. Because this is a new calling in the universe really, for a pharmaceutical sales force, many of these physicians have not really been very intensely using drugs in general, and in long acting injections in particular. And there are blind alleys one can go down the reimbursement side. So the idea was to try pre-register them and identify them and get there logistical information to place to facilitate the reimbursement process. And I'll let Rebecca give you a little bit more detail on that.

So, essentially Jami, what happens is a physician expresses an interest in being a participant in the VIP3 program and has to fill out a 1.5 page form to enroll him or herself in that program. And then the the system is in place to facilitate the administration of the product. Whether the physician needs support on the injection side or whether or not he or she has a patient identified. Then subsequent forms are filled out once the patient is identified. And thereafter the product is shipped. Does that give you enough detail, Jami?

Yes, I just was quite curious to know what would be the lead time? At what point after you've signed up and you've said, I'm a physician, I have patients, I'm now clear with the logistics; Would you expect then that office will be using Vivitrol right away? Or just based on your experience with Consta, how long does it take to educate a physician's office and then see prescriptions written and dispensed out their office?

It varies. And I think earlier in the launch it takes longer than later in the launch. And in many ways those are some the logistical issues that you've worked once you bring the product to market for the first time. And it changes -- it varies by various doctors and also by various payer programs and regions of the country. That's kind of a learning curve that you go up as you go. At steady state, it should be quite quick. But our experience is changing -- we have variable experience right now, as we're in the early days of it.

And then a question about the break down of the market between cash out of pocket pay versus private pay.

It's too early to say with any reliability but we expect this market to be a reimbursed market.

And we've had a positive experience with that such thus far with that Jami.

Thank you. Our next question comes from Hari Sambasivam from Merrill Lynch.

Yes, Richard, a couple of quick questions. Could you perhaps give us a sense as to how you're comparing this launch at this point in time versus would you saw from Consta in terms of both of them are medical benefits? I'm just wondering, in terms of buying, in terms of percentage of payors sort of reimbursing you at this stage; does this compare favorably with Consta, is it par, or is it behind? Maybe a little bit of color on that? And secondly, if you can maybe give us as send of who'e getting treated. You've got to label, which says you're looking at patients who can be abstinent at the time of treatment, etc. And I'm just wondering are docs essentially sort of trying to inject abstinent patients? Are they giving it to patients who are not abstinent? Do you have a sense of that at this point in time?

On the first question, I can tell you're asking us to compare it to other proprietary products that we've launched recently. So, I'm smiling, Hari. Actually, to your question on the first one, comparing it to Consta. It's actually very different than Consta. Consta was not a medical benefit. Consta was a buy and build product, a pharmacy benefit and also was dominated by a Medicaid population. So operationally and qualitatively it was a very, very different environment. So, it's very difficult for us to draw any comparisons between the two. And the calling universe, obviously schizophrenia and psychiatrists and those in the community mental health center, a very, very different calling universe. So I wouldn't -- I can't draw comparisons and I wouldn't anyway because I really don't think that they're directly analogous. It's too early to say. Obviously the product is being promoted on label. And physicians have been aware this product has -- is coming for several months now. So, we'll see with the passage of time how the actual demographics break down. But we find the label to be very, very congruent with the treatment practice out there and so we're happy with the way we can promote the product on label.

Thank you.

Our next question comes from Jim Reddoch, FBR.

Good afternoon. Surprise, surprise two, more Vivitrol questions. The first of those is, what about -- is there any sort of channel with this drug? Are doctors stocking or do you anticipate alcohol treatment centers stocking? And then the second part of that question is; Cephalon mentioned on their call something about wanting more experience with returns before they booked any revenues, which implies that they did have some revenues but did not back them, so maybe you can comment on that? But what is the return policy, exactly?

Well, the second question first. And that's really just accounting. Until you get a sense of a steady state notion of return, it's very difficult -- you're not allowed by the accountants to take it as revenue. So that's just an experiential thing that will hopefully be taken care of by the time we report numbers for the September quarter. So that's just an artifact of the fact that we only had a few selling days at the end June when the product launched.

There's nothing different about the return policy if this versus say Consta?

Well, that's the whole point, the accounts want you to have data. Theoretically, I don't see why it would be different than other products but we'll have our own experience as we generate data. But that's not -- that's just a matter of experience. The -- what was the first question you asked, Jim?

Is there a channel and has there been stocking?

We don't expect there to be stocking. This is shipped out of our central logistical site to the specialty pharmacy. I imagine that what we'll see is that different facilities have a steady state number of patients and that they'll -- I can see them keeping some inventory in order just not to have to wait a day to inject. But people will make that decision in the real world over time. But right now we're not modeling in a channel fill component to the launch.

Okay. Thanks.

That make sense? So, if you're a doctor treating 50 patients and you know you're going to be treating 100 in the next month, it wouldn't be crazy for you to start having some supply on hand.

Okay. That makes sense.

Thank you. Our next question comes from Scott Henry from Oppenheimer.

Thank you. I did just have a couple of questions. First, when Vivitrol was approved, there was some mention in the label, I believe, with regards to the possibility of having a patient where some sort of notification, whether it be a bracelet or some other means. I'm curious how that is playing out in the early launch? Is that happening or just some color around that issue?

Scott, just for clarification, there's no mention in the label of having to have patients wear something to identify themselves as on Vivitrol.

But I believe I read somewhere in there.

Maybe in an analyst report?

Did you write it?

Well, I think the concept behind it was if someone is to get in an accident and they have long acting Naltrexone in them, it would help to know that for proper care, so you wouldn't put them on an opiate.

So Scott, I think clearly there is language in the label that says that patients should be identified as patients on Vivitrol to make sure they get appropriate pain management in certain circumstances. And that has not been a problem to date. And we feel comfortable with the safeguards that are in place.

Okay. Could you expand on what those safeguards are?

No, I don't run clinicals, so I'll defer the question. But clearly, we have patients who have been on the drug for more than four years and that has not been an issue to date.

Okay. Well, thank you for answering that question. Just a second question with regards to Risperdal Consta and if J&J comes out with Paliperidone, I'm curious how you think that could -- there could be interaction between the two programs? Is it the same sales force that would detail Consta as Paliperidone or are there any agreements in place with regards to how that detailing process will occur?

Let's just be clear about one thing. And that is, there are two flavors of Paliperidone. The product where the NDA is filed now is Paliperidone ER and that has a PDUFA date in the fall. That's an oral once a day product. That's not a long acting injectible. The long acting injectible product is called Paliperidone Palmitate. It's still in clinical trial and its NDA has not been submitted. So it will not be in the marketplace in the next couple of years. So in the meantime, the Consta remains the only long-acting atypical injectible out there.

When they -- when and if Paliperidone Palmitate is successfully introduced to the market, a couple of important to -- we'll have to see at the time. What its safety and efficacy looks like compared with Risperdal Consta? And what the overall marketplace looks like at the time? And then I think, only then will we have a sense of how the product will be commercialized. At that point, we model Risperdal Consta being a very big product on patent for many more years. So it's -- in our view, it's going to be the team to beat. But obviously, we'll be driven by the data. But I just want to mention it because we've had some investors thoroughly confused, thinking it's a product that J&J currently has in front of the FDA now, Paliperidone ER is an injectible product and it's not.

Very, very correct in -- and we were not confused on that issue. I just wanted to get a sense of when a J&J rep goes in there and details oral Risperdal versus Paliperidone if it would cause any conflict between the Risperdal Consta franchise. It doesn't sound like it will.

On the oral to oral side, we don't expect that to cause confusion. I think the oral to oral switch strategy is just that. Because the oral Risperidone goes off patent in '07, in an attempt to switch over to the metabolite Paliperidone is a logical one for J&J.

Thank you for taking the question

You're welcome.

Thank you. Our next question comes from Jeff [Goder] from Cowen and Company.

Hi, it's Ian Sanderson. Thanks for taking the question here. First on the SG&A spending reported in the quarter, are there any unusual items or one-time Vivitrol launch costs in that number, or is that something we should be looking at as a reasonable to build our models on for the successive quarters?

Of course, other than the 123R expense. But if you're looking at the non-GAAP number that we reported, no. I think the difference between this year and last year, is last year we didn't have the sales force in the field. And there's some Vivitrol marketing that we'd have going on, so that's a good number going forward.

Okay. And then can you give a brief update on the manufacturing scale-up for exenatide LAR? I realize this is no longer your responsibility but is there anything you can say on that?

I'll just say, it is absolutely our responsibility in the sense that we're in that plant with Amylin and that's our technology being scaled. And we have a huge economic interest and medical interest in it happening. So, no, Amylin continues to take the lead. We let them take the lead on the communications side and we tend to just be congruent with them. I think Rebecca would have the most up to date. But we're talking about commercial readiness at the end of '08 and that's the time line that we're working on.

Okay. And then as a follow-up to the VIP3 program, do you have any -- it's early yet but do you have any idea of what percent of physicians that your team has called upon are equipped to administer Vivitrol in their offices versus have to send it out to somebody else to administer?

Ian, our preliminary understanding is that approximately 75% of patients are injecting their themselves.

Physicians.

Sorry, yes.

We don't take any patients.

Does that mean there are a lot of alcoholic physicians out there?

I'll punt on that question, but -- [laughter]

And then finally, do you have any comment on Novartis' patent litigation against Pfizer on the Exubera patient training patents?

No, other than watching with it great interest but we don't.

Thank you very much.

Thanks, Ian.

Thank you. Our next question comes from Rachel McMinn from Piper Jaffray.

Thanks very much. I don't know if you can color but on the 2,000 physicians that are -- or slightly more than 2,000 physicians enrolled in VIP3, can you tell what you us what percentage are currently prescribing right now?

No.

Okay. And maybe, Jim, could you give us a sense of --

I say it as a single-word answer. But it stands to reason, and again, I don't want to give any guidance on numbers here. But I don't -- I can't see a logical reason why a physician would join the VIP3 program if they didn't have an interest in ultimately prescribing Vivitrol.

It just relates to Jami's question originally, of what the lag time is. And if somebody makes that first step and says, yes, I'm interested, I'm willing to fill out the paperwork but when do they actually follow through?

Exactly. And it's actually even more dynamic than that, which I think -- from my point of view, it's great that we actually don't have anything to report in this quarter, and we'll have more experience for the September quarter. And that perhaps a physician might put a couple b patients on it to begin with and then a month later put on more patients. So, it's actually a more dynamic adoption model than you might immediately think.

Sure. Again, just trying to get a sense of how committed are physicians once they get to that stage. Of I'm in VIP3, so how likely are they to prescribe in the first couple of quarters. But we'll be patient, we'll wait for the next quarter.

We're being patient, so we'll ask you to be also.

Sure, sure. Just a follow-up, Jim, I don't know if it's possible, if you can give us a sense of a run rate. We really appreciate the guidance of 35 to 45 million for the fiscal year. But just a sense of do you expect a bolus of patients, or should we expect kind of a steady ramp, or perhaps a hockey stick? How should we be thinking about our quarterly run rate for Vivitrol sales?

Well, Rachel, I appreciate the question. We've never given that kind of specific guidance about -- particularly about sales levels that we don't control, with our partner Cephalon. It's early in the ramp stage. And we're all just going to have to be patient to see how this involves over time.

Then based off of something that you used to give us in terms of guidance on the manufacturing revenue side, should we think about the $3 million shipment to Cephalon in this quarter? With Consta typically the way it would work is it would be lowest in the first quarter and ramp up through the end of the year. Should we expect a similar pattern on manufacturing shipments?

Well, it's a good question. I think our manufacturing revenues always bump up and down. Particularly for Consta, We had a -- 19.1 is a good quarter. Our guidance for the year, for total manufacturing revenues is 85 to 95. 75 to 80 of that is Consta. And we have 10 to 15 million for Vivitrol. So seems to me that Vivitrol will be accelerating through the year and the timing of shipments really drives it as much as anything. So it was -- as I said, we're sticking to our financial guidance for the year. And we might have an up quarter here or a down quarter here but he manufacturing so far is going very, very well for both products this year.

Okay. And then just one more question. In terms of the, Rebecca, your comment, I think Cephalon had made that comment on their call, the 75% of physicians are expecting to inject patients on their own without the support of nurses, do you expect that? What do you think of that number? Any type commentary around that? It sounds relatively high. Do you expect over time if you broaden out that you'll need additional nursing support or that the vast majority -- or it's a self-selection process, that if they're interested in a long acting injectible in general they're going to have support already in place?

I think it's hard to predict with precision. That being said, we're encouraged by the number of physicians who are telling us that they intend or are injecting themselves. Also, we are seeing nurses and other physicians eager to take referral patients, so I think all of those are good signs. And we'll have to see how it plays out over time.

Thanks very much.

Our next question comes from Adnan Butt from ThinkEquity Partners.

Hi, a couple of questions on Vivitrol. Has the product been out long enough for physicians to have given multiple injections to a patient? Do you know of any cases?

Adnan, we're not going to comment on specific number of patients. We'll wait until after the September quarter to give you more details on that.

Okay. And in terms of enrolling in the VIP3 program, what if a GP or a primary-care physician shows interest, they can enroll and have any enrolled?

There's no reason why a primary-care physician could not enroll. I don't have the statistics to be able to tell you what the break down of how the physicians -- what the mix looks like.

But the majority right now are specialists psychiatrists?

Because those are the folks we're targeting.

Sure. And just a clarification, I think Richard said the Vivitrol manufacturing is pretty much operating at capacity. What does that mean?

Well, we've launched Vivitrol out of one commercial scale line in Wilmington, Ohio, the 20 kilogram process line, analogous to the size that we launched Risperdal Consta off of. And we're building additional capacity simultaneously with production on that first line. We intend to essentially be producing flat-out to meet the market demand and build inventory as the curve ramps, so that we have enough supply over the next couple of years. So, we're essentially manufacturing at capacity for Vivitrol now, in anticipation of the sales forecasts that we and Cephalon have come up with.

Can you say how much supply you can maintain?

Adnan, we have said on previous calls that we have capacity out of that line for the year to produce $150 to $200 million worth of product.

I'll get back in queue. Thanks.

I'm showing no further questions at this time.

Great. Thanks, everyone, for dialing in, and if you have additional questions we'll be here at the Company. Have a great evening.

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