Alkermes Plc (ALKS) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes conference call to discuss Company fiscal year 2007 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 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 our unaudited financial results for fiscal year 2007 which ended on March 31st. With me today are David Broecker, CEO of Alkermes; Jim Frates, CFO; and Richard Pops, Chairman.

Before we begin, let me remind you that during the call certain matters we will discuss consist of forward-looking statements relating to among other things, our expectations for turning the cost of basis of RISPERDAL CONSTA and VIVITROL, our future financial and business performance and regulatory expectations. Listeners are cautioned that these statements are neither promises or guarantees, but are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the forward-looking statements.

In particular, the risks and uncertainties include among other things, the outcome of the SEC's review of our accounting treatment for the VIVITROL collaboration, including but not limited to the possible restatement of our financial statements with respect to this collaboration, whether we will achieve the financial expectations provided, whether we can continue to successfully manufacture RISPERDAL CONSTA and VIVITROL at commercial scale economically, or in sufficient quantities to supply the market, whether RISPERDAL CONSTA will continue to be commercialized successfully by our partner, Janssen, whether VIVITROL will be commercialized by us, or our partner Cephalon, whether thirty party payors will convert or reimburse VIVITROL, whether we are able to successfully scale up, and manufacture our productivity, whether advancement of our partner's product candidates will be delayed, and the outcome of clinical and preclinical work we and our partners are pursuing, our ability to transfer manufacturing technologies to Amylin, the timelines relating to the construction of the EXENATIDE LAR facilities, and Amylin's ability to successfully operate the manufacturing facility for EXENATIDE LAR. Decisions by the FDA or foreign regulatory authorities regarding our product candidates, and those other risk factors contained in our press release and announcing our most recent results, and in our Annual Report on Form 10-Ka filed on August 14, 2006, and other periodic reports filed with the SEC under the Securities and Exchange act of 1934 as amended.

We undertake no obligation to update or revise the information provided in this call, whether as a result of new information, future events, circumstances, or otherwise. This afternoon Jim Frates will discuss our 2007 financial results and outline our financial expectations for fiscal 2008. David Broecker will then present an outlook on the business. We will then open it up for Q&A.

Now I would like to turn over the call to Jim.

Thanks, Rebecca. Good afternoon, everybody. Before I highlight our financial results for fiscal 2007, I want to bring your attention to a disclosure we made in today's press release. We recently received comments from the Staff at the Securities & Exchange Commission in connection with the periodic review focused on Alkermes' accounting treatment relating to the VIVITROL collaboration with Cephalon. As the Staff's review is ongoing, we are providing unaudited financial results while we answer the Staff's questions. It is important for you to all understand a few key points about this collaboration.

First we entered into the VIVITROL collaboration with Cephalon for the underlying economics of the agreement. This collaboration is a great business deal for Alkermes. To account for the transaction we applied our understanding of the accounting rules at the time we entered into the agreement. At this time, the Staff is still reviewing our accounting and gathering information. The Staff has not informed us that they disagree with our accounting methodology.

Finally, all accounting for deals like the Cephalon collaboration is evolving. The technical accounting world is currently debating the rules of the road. Our desire is to understand those rules so that we can make sure we are accounting for the collaboration appropriately. If any changes are needed, it is important to note that there would be no impact on the cash flows or underlying obligations of this collaboration.

We have always been transparent about our expenses and our accounting treatment for the VIVITROL collaboration from its inception, and the unaudited financial results presented today are based on our historical accounting treatment for the VIVITROL collaboration. With the SEC's review ongoing, we have elected to file a Form 12b-25 extension, which will allow us an additional 15 days to file our 10-K.

The discussions with the SEC should not distract from our overall financial performance in fiscal 2007. Our underlying business is strong. We have structured agreements so that our work is funded by our partners, with attractive economics upon commercialization.

RISPERDAL CONSTA serves as a strong foundation for the Company, and remains a highly profitable growing asset. We are continuing to work with Cephalon to increase sales of VIVITROL, and we have a promising pipeline with potential to fuel future growth. Financially we ended the year with a strong balance sheet, which included over $356 million in cash and total investments, and no convertible debt. From a cash flow perspective Alkermes was cash flow positive in fiscal 2007, and we expect to be cash flow positive in fiscal 2008.

Now I will move on to our unaudited financial results for fiscal 2007. Please see the press release issued today for additional details. Our net income for fiscal 2007 was $9.4 million, or $0.10 per basic share, and $0.09 per diluted share. This includes share-based compensation expense of $27.7 million, and compares to a net income of $3.8 million, or $0.04 for basic and diluted share for fiscal 2006, which included $400,000 in share-based compensation expense.

On a pro forma basis, excluding share based compensation expense and certain noncash or nonrecurring items, net income for fiscal 2007 was $37.9 million, or $0.38 per basic share, and $0.37 per diluted share. This compares to $4 million, or $0.04 per basic and diluted share for fiscal 2006, and represents a greater than nine-fold increase in unaudited net income. Total revenues for fiscal 2007 were $240 million, a 44% increase over fiscal 2006. Total revenues included $128.5 million in manufacturing and royalty revenues, $74.5 million in R&D revenue, and $36.9 million in net collaborative profits.

This compares to a total revenues of $166.6 million for fiscal 2006, which included $81.4 million in manufacturing and royalty revenue, $45.9 million in R&D revenue, and $39.3 million in net collaborative profits. As we have all fiscal year, I will compare expenses excluding share-based compensation so that you can clearly see the operating trends in our business from the previous fiscal year.

Costs of goods manufactured for fiscal 2007 on a non-GAAP basis that is excluding share-based compensation expense was $42.5 million, compared to $23.5 million for fiscal 2006. R&D expenses a non-GAAP basis were $108.7 million for fiscal 2007, compared to $88.9 million for fiscal 2006. SG&A expenses on a non-GAAP basis were $50 million for fiscal 2007 compared to $40.2 million for fiscal 2006.

I will now provide an overview of our financial expectations for fiscal 2008. Please note that I will make forward-looking statements. As a reminder, this year going forward we are including estimates of share-based compensation in each expense category. These financial expectations are subject to change pending the outcome of the SEC's ongoing review of the accounting for the VIVITROL collaboration. For our guidance today we have included net collaborative profit as we have calculated and disclosed historically.

We expect total revenues for fiscal 2008 to range from 240 to $260 million which includes the following: Manufacturing revenues for RISPERDAL CONSTA in the range of 95 to $100 million, manufacturing revenues for VIVITROL in the range of 9 to $12 million, royalty revenues for RISPERDAL CONSTA in the range of 26 to $28 million, R&D revenues in the range of 95 to $100 million, and net collaborative profit in the range of 15 to $20 million.

There are a number of assumptions underlying our revenue expectations, specifically for VIVITROL we expect end market gross sales to range from 15 to $20 million. This expectation is based on annualizing the gross sales of VIVITROL in April, which were approximately $1.3 million. Other revenue assumptions include the timing of orders from and shipments to our partners, yields on manufacturing, spending by Alkermes and Cephalon on VIVITROL, and continued success in our R&D program.

Turning to expenses for 2008, we expect cost of goods sold to range from 43 to $50 million, R&D expenses to range from 120 to $125 million, SG&A expenses to range from 65 to $70 million. These expectations for expenses in fiscal 2008 include 20 to $25 million of share-based compensation, and reflect continued work on partner programs, investment in our proprietary pipeline, and continued commercial activity by the Company's field personnel.

We anticipate net income of 10 to $15 million for fiscal 2008, or approximately $0.10 to $0.15 per basic share. For our basic share count assumption we used a weighted average of 102 million shares for the year. The net income assumes no other noncash income or expense recognized on the net decrease or increase respectively, in the fair value of warrants the Company holds in other public companies.

In conclusion, our employees worked hard to deliver strong financial performance. Our revenues from RISPERDAL CONSTA grew by nearly 40%, and we improved our margins. Our R&D partners paid a larger percentage of our expenses. Our business model is working. We are well positioned to deliver future earnings growth. Looking forward, we will continue to focus on supplying commercial products, helping to increase VIVITROL sales, and advancing our late stage pipeline.

With that, I will turn the call over to David.

Thanks, Jim. Good afternoon, everyone. Jim did a terrific job outlining our financial expectations for the fiscal year 2008. Since this is my first call as CEO of Alkermes, I would like to make a few forward-looking statements of my own, and outline some of the things you can expect from me and the rest of our leadership team.

The first thing you can expect from me is to continue to lead in the execution of our strategy to build a really special company, one that is focused on developing breakthrough products for patients. This is the reason I joined Alkermes more than six years ago, and today I feel stronger than I ever have about what kind of company we can build. With our technology, science, our expertise, and the capabilities we have created, we are well-positioned to grow our business significantly.

The second thing you can expect from our team are results. We have a lot to accomplish over the next couple years with RISPERDAL CONSTA, VIVITROL, AIR insulin, EXENATIDE LAR, and the rest of our pipeline. We have products to make, products to commercialize, NDAs to file, and manufacturing sites to build. Being the President and Chief Operating Officer, I had the opportunity to put together a great team of people, who really understand how to build a company. I can tell you we are all excited about the future.

With that, let me now turn to providing an update on our major programs. First, I would like to touch on RISPERDAL CONSTA. After just it's third year of availability worldwide, we expect RISPERDAL CONSTA to become a billion dollar blockbuster during this calendar year, joining only a very small group of biotechnology drugs, that have reached this remarkable milestone.

We believe the efficacy and unique formulation of CONSTA plays a key role in its commercial success. As you know we manufacture the product to supply a global market which is a significant achievement for our Company. J&J continues to invest in clinical studies of CONSTA, and the body of data supporting the use of this product as the treatment of choice continues to grow.

In addition, J&J is funding an expansion at our Wilmington Ohio manufacturing facility, to provide a third line of manufacturing capacity to support CONSTA. With this additional line we will have the capacity to manufacture approximately $2 billion in annual gross sales of RISPERDAL CONSTA at current selling prices. We are confident that CONSTA will continue to experience significant growth. The product remains the first and only commercially available long-acting injectable treatment for schizophrenia, and is currently marketed in more than 55 countries.

CONSTA has patent protection well into 2020, and any new entrant will need to compete against a billion dollar brand, with a strong body of data and several years of patient and payor experience.

Turning to VIVITROL, we are please to do see the efficacy we witnessed in our clinical trials borne out in the marketplace. The anecdotes we are hearing from doctors and patients are overwhelmingly positive, the challenge we and Cephalon face is in continuing to shift the treatment paradigm to include the use of pharmacotherapy for the treatment of alcohol dependence.

Cephalon's gross sales of VIVITROL were approximately $3.2 million for our fourth fiscal quarter, and $6.6 million for fiscal year 2007. Taken month by month for the quarter, gross sales of VIVITROL were approximately $1.1 million in January, $951,000 in February, and $1.1 million in March. As Jim mentioned, Cephalon's gross sales of VIVITROL were approximately $1.3 million in April.

With respect to the starter program, which Cephalon implemented in December of 2006, Cephalon has distributed approximately 12,000 starter kits to more than 2,000 physicians, with the goal of facilitating VIVITROL trial and adoption. Based on Cephalon's data, prescribers have administered starters to approximately 3,000 patients, and have started the benefit verification process for most of these patients. Although the uptake of VIVITROL has been slower than we anticipated, we still believe in the potential of this product. VIVITROL is fully funded by Cephalon through December 31, 2007, after which all profits and losses will be split equally between Alkermes and Cephalon.

We and Cephalon are continuing to invest in the product throughout the calendar year, and we will titrate our expenses to be appropriately in-line with sales growth. We and Cephalon are focused on managing the collaboration to breakeven in fiscal year 2009, and ultimately to profitability. This year Cephalon's commercial efforts include marketing initiatives at the local physician level, as well as several initiatives at a regional and national level.

We and Cephalon recently launched a disease awareness campaign called "Live Outside the Bottle," designed to increase awareness of alcoholism among the general public. Two-time Indy 500 Champion Al Unser Jr. recently joined forces with this campaign. Unser is in recovery for his own alcoholism, and is passionate about reaching out to others to let them know that recovery is possible.

In addition the disease awareness campaign includes newspaper and outdoor placements, an educational exhibit, and a website with a physician locator tool. The website may be viewed at www.liveoutsidethebottle.com.

Turning to our late stage diabetes portfolio, we are making strong progress in our development program for EXENATIDE LAR. In March we completed enrollment in the 300-patient pivotal study, and expect to report results in the fourth quarter of calendar year 2007. We are working side by side with Amylin to transfer the technology, and start-up its facility in Westchester, Ohio. Amylin recently stated that it is on-track for completing these activities in the second half of calendar year 2008.

We and our partner Eli Lilly and Company are also making progress on the AIR Insulin program. We are watching the launch of EXUBERA with great interest. Our perspective is that the inhaled insulin market will be driven by patient demand for the simple and safe delivery of insulin.

Together with Lilly, the leader in insulin treatment, we have developed a simple device, and implemented a comprehensive clinical trial program, designed to address the challenges EXUBERA faces. Our focus is now on supplying materials to Lilly to support the Phase 3 program. In addition we are expanding capacity at the commercial manufacturing plant in Kelsey, Massachusetts. And we have initiated most of the remaining development activities required to support the NDA filing for AIR Insulin until calendar year 2009. Beyond our late stage product candidates, we are planning for the future by applying our proprietary technology and development expertise to new opportunities.

Over the past year our pipeline has expanded to include several exciting programs, both proprietary and partner. These opportunities include three important compounds, the first is ALKS 29, an oral compound for the treatment of alcohol dependence that leaves our experience in the field of addiction. Next is ALKS 27, an inhaled formulation of trospium chloride, that we are developing with Indevus for the treatment of chronic obstructive pulmonary disease, and finally AIR PTH which is an inhaled formulation of Lilly's injectable parathyroid hormone, which goes by the brand name FORTEO, for the treatment of osteoporosis.

We expect to make important progress with these candidates during the calendar year. We are on-track to initiate a Phase I study of AIR PTH, and to report data from the Phase I/II study of ALKS 29 this summer. In the second half of calendar year 2007, we expect to report topline data from the Phase IIa study for ALKS 27.

In conclusion, fiscal year 2007 was a strong year for Alkermes, and I am very proud of what our employees have accomplished. With that said, we expect to do even better in fiscal year 2008. The key will be execution of our plan.

During the year our priorities will be, to supply product to meet the growing demand for RISPERDAL CONSTA around the world, to work with Cephalon to increase sales of VIVITROL, to report topline results from the pivotal study of EXENATIDE LAR, and to transfer the manufacturing process to Amylin, to advance the AIR Insulin program and continue to expand capacity at our inhaled insulin facility, and finally to continue to advance our early stage pipeline. We expect another productive year, and look forward to updating you on our progress.

With that, I will turn call back for questions.

Thanks very much, David. We will now open up the call for Q&A. Operator?

Thank you ma'am. (OPERATOR INSTRUCTIONS) Our first question comes from Elliott Wilder from CIBC World Markets. Your line is open.

Good afternoon. Can you hear me all right?

Yes, Elliott.

Hi, there. Wanted to ask ask a few questions about the VIVITROL franchise. With respect to Dave's comments that you are managing the partnership towards the expectation of profitability in fiscal '09, granted the expense associated with that partnership, expense levels have been relatively volatile over the last couple of quarters, but could you perhaps give us a sense of what level of sales you are thinking about in terms of talking about that partnership eventually reaching profitability?

Sure, Elliott, it is Jim. Thanks for the question. You know, at this stage it is really too early to say. I think we are very early in the life of this product, and it is very hard to predict the curve.

As an example the guidance we gave for fiscal year '08, through March of '08, the next twelve months, really what we did was we took an annualized April number of 1.3 million in sales, so to look out another year, and know where we are going to hit that inflection point is hard to do.

I think what you are hearing, though, is a commitment of both Alkermes and Cephalon to manage this product appropriately, and to turn it into a potential upside for us, as opposed to a drain for both companies. We still believe in the long-term value of this product. We are just going to manage the franchise as I think any smart company would do.

Following up on your commentary there, Jim, around the guidance in terms of annualizing the April number, granted the uptick of the product hasn't been what most have hoped for, but it is still trending upward, so sounds like that is just your attempt to be overly conservative on the numbers.

I hope we are not, I think you are right, I think we are trying to be conservative, and again we want to make sure we can deliver on the expectations that we promised. I will pointed out in our overall expectations last year we started off planning for a year where we were going to lose money, and we were able to make $9.6 million roughly, you know, under the numbers we reported today, so I think you are right in the way we are doing our planning, and we are going to work hard with Cephalon to see if we can change that slope faster than we have been able to so far.

Jim, I had a question for you with respect to the SEC questions that you received. I understand it is relatively early here, but you do mention in the press release, that your expectation is that it would basically not impact the underlying cash flows, or the rights or obligations under the collaboration, but it could in fact change the period of revenue recognition, or alter the revenue recognition over some period, and I am just wondering at this point do you have any idea as to whether or not there could be any impact on the actual mechanics of the collaboration, and specifically I am thinking about the flow of funds back to Cephalon?

No, no. Thanks for the question, Elliott. It really has to do with the work that we are doing and the nonrefundable payments we have received from Cephalon, those aren't going to change, it really has to do with how we recognize the revenue, and I will remind you we got paid up front for all this work. The question is over what periods ought we to be recognizing this revenue.

We have recognized it historically to try and match it with the work that we have done. It is a complicated accounting area, and there are in fact choices where we ought maybe to have recognized more revenue historically, or possibly more revenue in the future than we have and less historically. At this stage the Staff is still gathering information, and unfortunately we have to wait for them to do their work, before we can give you the information about how they conclude.

Okay. One final question with respect to ex-U.S. VIVITROL development. Any information you can provide us there?

This is David. As you know we filed in the U.K. and Germany at the end of March. We are expecting it will probably take about a year, twelve months, in order to hear back about the approval for those products, and right now what we are in the midst of is really trying to understand what the commercialization strategy in both those countries should be, doing market research, and discussions with the opinion leaders, et cetera, so when we have more information about what some of our specific plans might be there, we will provide those updates.

Thank you.

Thanks a lot, Elliott. Operator, we will take the next question.

Thank you. Our next question comes from Robert Hazlett from BMO Capital Markets. Your line is open.

Thank you very much for taking the question. I appreciate some of the additional disclosure in the guidance. Thank you very much.

In terms of VIVITROL, a couple different questions there. What do you think, is there one issue holding up the adoption of the product, or is it a combination of effects, and could you just remind us again, maybe some of the additional efforts beyond the program you described earlier, that you are employing to increase adoption? I guess I am just, is it a lack of adoption by the 12-step programs? Is it AEs? Is there a reimbursement issue? If you could just talk a little bit about some of the things there, and then I would like to ask about the agreement itself.

Sure, Robert. This is David again. Good question. I wish there were actually one single thing that was sort of holding VIVITROL back in the marketplace, because obviously we certainly would go after that one thing.

I think that what we are finding is the standard of care in this market continues to be counseling, and that the use of pharmacotherapy to treat alcohol dependence just represents a market build opportunity. Where we have seen success with VIVITROL, we have seen physicians really adopt it, the use of VIVITROL into their practice, and really orient themselves to the delivery, the reimbursement, all the other sorts of things that they need to do in order to change their practice and orient it towards VIVITROL.

There are examples where that is happening in the marketplace. Unfortunately it is just not happening as fast as we would like. It really is I think you heard us describe this before as one doctor, one patient at a time, and that is really what our focus is.

That is why we rolled out the starter kit program, to get starter kits in the hands of physicians, and expand the prescriber base, get them some first hand experience with the product. Hopefully that would address also some of the logistics issues, and buy some time so to speak, in order to work through the reimbursement issues. We see that happening.

We started now the disease awareness campaign to try and stimulate some patient demand, "Live Outside the Bottle," and I would encourage you if you haven't, to check out that website. An important aspect that is the physician locator tool, in which a patient can type in their ZIP code, and within a 25-mile radius pull up doctors in their area listed in this tool, and seek out treatment through them.

It really is one patient, one doctor at a time, working on things that we need to do at the field level to connect the dots so to speak, as well as at the disease awareness level with this "Live Outside the Bottle" campaign.

Thank you. That is helpful. Could you just as we try to move to profitability following on Elliott's line of questioning, can you remind us how many employees you folks have involved in the marketing of VIVITROL, and how many does Cephalon have, and how long are they required to employ those resources?

This is Rebecca. We have 28 MMDs, managers and market development here at Alkermes, and Cephalon has a salesforce of approximately 120 people.

120. Okay.

Clearly we will make decisions as we exit the year on what the appropriate size of that salesforce will be.

Moving to the SEC review, and the discussions about the agreement, are there any provisions of clawbacks? Is that what this is moving towards, and are there provisions for potentially giving the product back to you specifically? Is that in consideration at any level at this point?

No, Bert. It is really just a question of we have multiple, I have talked about 0021 a lot, and I have to say that more broadly in the industry a lot of CFOs are hearing from the Staff, questioning deals that are covered by 0021.

It is an area that is moving, and we have deliverables. We have manufacturing deliverables. We have product development deliverables, and we have a license that we have delivered, and the question is again was there value to the license at the time we signed the deal, or is it only after FDA approval that we should be able to take license revenue?

It is those kind of specific accounting questions that have to do with revenue recognition. It really has nothing to do with our relationship with Cephalon, and it is an evolving accounting field, so we are running through that review, that pretty much every company that has a deal like this is I think going under right now.

Okay. Thank you very much.

You bet.

Thank you. Our next question comes from Jami Rubin from Morgan Stanley. Your line is open.

Thank you. Can you hear me okay?

Hi, Jami.

Just if we can go through the VIVITROL numbers to date, it is kind of volatile, it hasn't moved much, but at least it is moving in the right direction. Just was wondering, January 1st is when the J-code was implemented, yet you actually dropped in February, grew a bit in March, is it still too early to read into these numbers? I am just wondering if sampling is skewing these numbers downward, if there is anything at all to read into this, and again what is the reason for the modest increase in April? Is it the effect of sampling wearing off, and doctors going out, or patients now actually buying VIVITROL, and just was wondering if there was anything at all to read into that?

My second question for you, Jim, I was just wondering in talking about your guidance, SG&A guidance for this year you are assuming a modest increase in SG&A. I guess I am a little bit surprised just given the very slow take off of VIVITROL, and yet the guidance is really not much different from I think what people were anticipating six months, a year ago, and just was wondering how much flexibility there is with respect to SG&A as I am sure most of that relates to VIVITROL.

Sure. I will take that first, Jami. Thank you. I think you are right, the SG&A is in-line with the current plans and the current spending that we have right now.

For the overall year, we are assuming that we are taking as a contract outlines we are assuming that we are taking half those losses on the products in the March quarter of calendar year '08. Right now again I think what we are trying to do is be conservative on expenses and conservative on revenue, i.e., we can obviously improve by spending less or by selling more. We are trying to be conservative with the guidance that we are giving, that makes sense.

Yes. I just was wondering how much actual flexibility there is with, in terms of the partnership with Cephalon? If revenues are not, we hope that revenues meaningfully pick up over the next three to five years, but if they are not, how much flexibility there is in sizing the salesforce?

I think you know so far we have worked very closely with Cephalon, and I would say there is a lot of flexibility. We really are acting together to manage this franchise, and I think we set up the deal in such a way where our incentive, the incentive of both companies are aligned, as we make decisions together.

Jami, this is David. Just a comment going become to your first question about the lumpiness of sales through January, February, March and whether there is anything we can read into this.

Again, as I think you heard us probably comment before, it really is hard to gauge what the traction of the sales ramp is. Each of those months obviously has a different number of selling days, and things like that, but also we gave away a heck of a lot of samples in that first quarter. I think you heard us tell you that we gave out over 12,000 starter kits, and in some respects some of us were actually projecting sales might go down, if those ended up in the hands of prescribing physicians, or physicians who were already prescribing the product.

I think fortunately Cephalon did a terrific job in targeting those to new prescribers, and so our sense is that we actually have expanded the number of physicians prescribing the product, as we mentioned we did some field market research through the Cephalon field organization, and determined that those 12,000 starter kits were given to 2,000 physicians, and that their estimate is that that is turned into about 3,000 patients, so I think you will kind of continue to see sales go up and down a little bit, until we get a better sense of how those starters are ultimately going to turn into prescriptions.

David, when does the starter kit, or when does the sampling program come to an end? Is there an actual end date, or are you going to keep it going and just see how, what kinds of returns you get on those samples?

It is actually something that we are talking about at a commercial team level between Cephalon and Alkermes. We have the opportunity to do more, but one of the things that we really want to try and understand, and why we went out and did some of this field research was to see what is really happening with the starters, in an attempt to understand how we can improve the overall program.

It is still an active point of discussion, but I think if you ask the field people, they would tell you it is definitely something, a tool that they feel they need in order to be successful in the marketplace.

Thank you.

Thank you. Our next question comes from Ian Sanderson from Cowen and Company.

Good afternoon. Thanks for taking the questions. On VIVITROL just an update on the outlook for an opioid dependence indication, I believe there may have been some discussions ongoing with the FDA on that.

Secondly, the step-up in the R&D revenues in fiscal '08, can you just provide some color on where most of that step-up might be coming, and then third, just on quickly on the interest expense for fiscal 2008, if I am correct, is that all the 7% RISPERDAL CONSTA notes, and is the face value of those 155 million?

Thanks, Ian, how are you? Let's see. R&D revenue. That was mainly driven by both the pulmonary insulin program and the Amylin LAR program.

Those programs are both last year moved squarely into the phase where we are spending most of our time, i.e., scaling up manufacturing, delivering product for big clinical trials, and beginning to prepare for eventual NDAs, so that work is going to continue through next year, and again that is part of the power of the business model as I mentioned earlier, that a lot of that infrastructure is now being paid for.

In terms of interest expense, you are absolutely right. It is related to the RISPERDAL CONSTA notes. As you know, that was an original issue discount, or an OID bond, and right now at 3/31, we have accreted the value up to $157 million. Every quarter we a create a little bit more, and the total value of the debt is 170 million.

Okay, thank you.

This is David. Just coming back to your first question on opiate. We continue to look at that opportunity, not just here in the U.S., but also evaluate it in the U.K. and Germany. When we have more information on the specifics of what we are going to do there, we will certainly provide greater clarity into that.

Okay. Is there an active trial going on in opioid dependent patients or not?

No, we currently do not have an active trial in opiate patients.

Thank you.

Thank you. Our next question is from Dave Windley from Jefferies.

I think that was for me. The question I had, Jim, for you was on the CONSTA forecast, wondering if the slower growth in manufacturing revenue in fiscal '08 versus 30 plus percent year-over-year comp in '07, is a reflection of maybe an order schedule that is a little ahead of the sales schedule, end market sales schedule, or an expectation by J&J that sales will begin to slow as the product matures, and they have another product with a similar indication coming out, or possibly a third answer, a third reason?

Hi, Dave. Good question. I think that it really has to do with the timing and mix of shipments, you know, and actually I will point out our inventory is a little bit higher, because we have actually got a fair amount of RISPERDAL CONSTA in inventory, or had at March 31, so as you know, all of our quarters tend to be lumpy.

A lot of it has to do with the mix of U.S. and Europe given the sales prices, and so I think it really reflects a conservative take by us on the future growth pattern, that we will see the orders through the year, and we will see what ends up in our fiscal year, but I don't think its got to do with any long-term change.

The sales growth, we had a very good first quarter, and the sales growth, you know, so far this year is continuing on a pace, and I expect, you know, we are continue to work on the third manufacturing line for J&J to have that expansion, so I think the long-term prognosis for the product from our perspective, from what we hear from J&J, remains, we are very optimistic about that. I think we just had a very, very good year, and much better than we anticipated in fiscal 2007.

Right. Thanks. On the manufacturing line commentary, on the CONSTA side, you have quantified I believe in David's comments, you quantified that the lines that are currently in place, or will soon be in place, will support 2 billion in annual end-user sales. I wondered if you could provide a similar figure for what the manufacturing lines on the VIVITROL side, what kind of end market sales would those lines support?

Yes. David, I think we have done it before when we first launched, and each line for VIVITROL is roughly 150 to $200 million of end sales.

You will have how many in place?

Right now we have one in place. Cephalon and us are working. We have construction going on in a second, and we have the potential for doing a third for VIVITROL, but as you can imagine we are looking at that, and we will be spending appropriately on the capital side, to make sure that we don't get ahead of ourselves, in terms of the production capacity that we have.

And then on the following, I think Ian's question on the R&D revenue, how many collaborative agreements are contributing to that line at this point?

We have again the main ones are Amylin and Lilly pulmonary insulin. We also have pulmonary PTH with Eli Lilly, as well as our deal with Indevus that contributes on that, and a couple more that are undisclosed at this stage.

Okay. There are a couple more. All right. Thank you.

Operator, we have time for one more question.

Thank you, ma'am. Our next question and final question is from Jim Reddoch, FBR.

Thanks for taking my question. Just to change the pace of the questions here a little bit, most of mine were answered, you do have two diabetes drugs. What was your take on the AVANDIA news recently, and how in your mind it may change the landscape for [Boden] BYETTA, or the insulins, particularly inhaled?

This is Richard Pops. I thought I would say something. I was just wondering if you can hear me.

Actually I think it is interesting only in the sense it reflects how complicated and interesting this Type two environment is going to be, and it is so early in the game for both inhaled insulins, and also for BYETTA and LAR. People assume a static background to model these products against, it is seemingly dynamic, and increasingly as you know in AVANDIA plus everything else, is that safety is increasingly the watch word that the regulators and Capitol Hill are focused on. I think specifically as it relates to LAR development, you have to then look at the various panoply of clinical trials that can be run with LAR within against existing treatments, which drugs do you actually pick as those comparators.

Those are important decisions. Because millions of dollars get spent in those studies over time, and you want to make sure you are using the right comparators. Early warnings and safety like that are useful in forward planning, but in general I think that the basic program for both EXENATIDE LAR and for inhaled insulin, is to develop first a very strong basis of safety and efficacy in the clinical trials, and then some of the studies that are focused on payors, so payors, almost this way, it almost takes for granted that the drugs are efficacious in lowering HbA1C.

The question then is for payors and physicians in the real world, how do they fit in the treatment mix going forward, and I think those are some of the actually more important questions for the ultimate development of the products, rather than just do they work in Phase III, yes or no. So it is a little bit of a rambling answer, but that is my thought.

Okay. Fair enough. Thanks.

Thank you all for dialing in, and we will be happy to entertain any questions that you have additionally. Both Jim and I will be available. Thanks and have a good evening.

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