Alkermes Plc (ALKS) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes conference call to discuss the Company's first quarter fiscal 2013 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 is call is being recorded 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.

Thanks John. Welcome to the Alkermes plc conference call to discuss our financial results for the first quarter of the fiscal year 2013, which ended on June 30, 2012. With me today are Richard Pops, our CEO, Shane Cooke, our President, and Jim Frates, our CFO.

Before we begin, let me remind you that during the call today we will make forward-looking statements relating to among other things, our expectations concerning the commercialization of RISPERDAL CONSTA, INVEGA SUSTENNA, AMPYRA, FAMPYRA, BYDUREON, and VIVITROL, our future financial expectations and business performance, and our expectations concerning the therapeutic value and clinical development of our products. Listeners are cautioned that these forward-looking statements are neither promises nor guarantees, and are subject to a high degree of uncertainty and risk, our press release issued today, our Annual Report on Form 10-K filed with the SEC, and our other filings with the SEC, identify risk factors that could cause our actual performance to differ materially from those projected or suggested in the forward-looking statements.

We undertake no obligation to update or revise the information provide on this call as a result of new information or future results or developments. This morning Jim Frates will discuss our first quarter financial results, and Richard Pops will provide a brief update on the Company. After our remarks we will open you will the call for Q&A. I would like to turn over the call to Jim.

Thanks Rebecca. Good morning everyone. I am very pleased to report a solid quarter for Alkermes. The business is performing as we expected, and Alkermes' financial profile has never been stronger. We are on track to meet our expectation of over $0.5 billion in revenue, and non-GAAP net income in the range of $85 million to $105 million for fiscal year 2013.

Now let me walk through the results. We recorded total revenues of $152.2 million, which is 146% increase over the first quarter of last year, driven by the growth of our key commercial products, strong performance for some of our legacy products, and license revenue.

I will start my review by highlighting the contributions from our five key commercial products. First, revenues related to our long-acting atypical franchise RISPERDAL CONSTA and INVEGA SUSTENNA, were once again the most significant contributors to our top line during the first quarter. End market sales for RISPERDAL CONSTA and INVEGA SUSTENNA during the quarter were approximately $550 million. The combined franchise grew more than 14% on a dollar basis, and nearly 20% on an operational basis year-over-year, due to an increase in combined market share. For the quarter, Alkermes' recorded manufacturing and royalty revenues of $47.9 million for this product franchise, compared to $48.5 million of RISPERDAL CONSTA revenue in the first quarter of fiscal 2012.

This comparison is not indicative of the strong underlying growth of the franchise, as last year's quarter included unusually high RISPERDAL CONSTA manufacturing revenues, due to the timing of our shipments to Johnson & Johnson. What is most important to our financials is that this franchise is growing, and doing very well with 5% sequential quarterly end market sales growth.

Next, manufacturing and royalty revenues for AMPYRA and FAMPYRA were $17.1 million during the first quarter. Outside of the United States Biogen continues to launch FAMPYRA on a country by country basis, and reported net sales of approximately $20 million for the quarter. Acorda is scheduled to report US sales of AMPYRA next week.

Turning to VIVITROL. Net sales for the first quarter of fiscal 2013 were $12.4 million representing the 12th consecutive quarter of growth. This reflects more than 12% growth sequentially, and approximately 28% growth over the same quarter last year. During the first quarter of fiscal 2013, which was the first full quarter of the BYDUREON launch, Alkermes recorded BYDUREON royalty revenues of $3 million. This reflects our 8% royalty on an estimated $40 million of end market net sales during the quarter. Clearly this product is off to a great start, and we are excited about its future prospects.

In addition to our five key commercial products, during the first quarter of fiscal 2013 Alkermes earned revenues from legacy products, the most significant of which the $12 million from TriCor 145, and $10.9 million from the combined Ritalin LA/Focalin XR franchise. For these products our financial expectations for fiscal 2013 anticipate revenue erosion from generic competition, assuming generic entry in mid-calendar year 2012. with the revenues declining by roughly half each quarter starting in the September quarter.

During the first quarter we also recorded $20 million of intellectual property license revenue unrelated to our key clinical development candidates. This was recorded as manufacturing and royalty revenue. As we mentioned on our earnings call in May, we continue to expect total milestone and license revenue in the range of $20 million to $30 million for the full fiscal year, which was also included in our expectations for total revenue.

Switching to expenses. We continue to keep a sharp focus on managing the business. As a result, total operating expenses were in line with our expectations at $120.1 million for the first quarter of fiscal 2013, which included noncash charges of $26.2 million. This compared to total operating expenses of $75.8 million for the same period in fiscal 2012 for Alkermes, Inc., which included merger related expenses of $9.5 million and noncash charges of $7.6 million.

Our non-GAAP net income for the quarter was a positive $53 million, compared to non-GAAP net income of $3.6 million for the same period last year. These results included the $20 million in IP license revenue and no generic competition for TriCor and Focalin, which we expect will change in the quarters ahead. Nonetheless this quarter illustrates the transformative nature of the EDT deal, and its effect on our bottom line.

For a reconciliation of Alkermes non-GAAP earnings to GAAP, please see our press release issued earlier today. From a balance sheet perspective we entered the first quarter with $231.9 million of cash and total investments,compared to $246.1 million at March 31st, 2012. This change was primarily driven by changes in working capital, and we continue to expect to generate free cash flow in the range of $60 million to $80 million for fiscal 2013.

This was a very solid first quarter, with the business performing as we expected. We are off to a great start. That said, since we are only one quarter into the fiscal year we are maintaining our financial expectations for the year.

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

Thank you, Jim. That was excellent. Good morning everybody. Let me start by asking you to join me in congratulating Rebecca Peterson on her promotion to Senior Vice President at Alkermes, she plays a huge role here in the Company, and I know for many of you on the phone, so richly deserved and congratulations.

Let's turn to the business. We had a good quarter, to start off what I think is going be a very good year. With each quarter the benefits of this diversified portfolio become more clear. We find ourselves in this fortunate position of having multiple commercial products in diverse markets, with different commercial strategies and competitive dynamics. But let's step back for a moment and look at the big picture, how we got here, and where we are going.

On a macro level the ongoing global fiscal crisis and its resolution will have a long-lasting impact on governments, countries, states, and on the pharmaceutical industry. Pharmaceutical companies will need to become even more innovative in order to compete and bring important new medicines to patients who need them. Safety and efficacy are not enough. Our industry will have to be incredibly focused on articulating all of the benefits that medicines offer, both medical and economic. One of the ways to do this is come up with cures for previously untreatable diseases. This is a laudable goal, but one that carries a lot of risk, requires massive investment, and a lot of time.

The other way is to do what we are doing, which is to take as a starting point drugs with a track record of safety and efficacy, and build off of that to create new medications that demonstrate both clinical and economic utility. So what sets us apart at Alkermes is our approach to making new medicines. We apply our technologies and our expertise to create better products. We really think about how a medicine can be used over time in a chronic disease setting, with better outcomes for the patient, as well as pharmacokinetic benefits that are compelling to providers, who increasingly play a role in determining whether a patient is able to get the medication they need, so our tag line patient inspired is very reflective of the treatments we have in the market, and in our pipeline.

RISPERDAL CONSTA, INVEGA SUSTENNA, BYDUREON, AMPYRA/FAMPYRA and VIVITROL represent these types of medicines, unique in their classes and offering compelling benefits to patients and payors. These medicines seem to us to be indicative of the direction the pharmaceutical industry is going. Take our long acting anti-psychotic franchise, comprised of RISPERDAL CONSTA and INVEGA SUSTENNA, known as XEPLION outside of the US. This business is growing rapidly, and it has been for years, it has the potential to continue to grow for many more years because of the increasing awareness of the economic benefits of treating patients in the earlier stages of their disease with long acting medications with a goal of preventing relapse.

Physicians and payors around the world particularly outside the US have figured out that if they can prevent relapse in patients with schizophrenia, they not only improve the medical outcome for the patients, but they also save money from reduced rehospitalization and slowing the disease progression over time. So Alkermes' technology did not reveal a new pathway for the treatment of schizophrenia. What we did was create new medicines that enabled a fuller realization of the efficacy of the modern atypical anti-psychotics. This has led to a $2 billion franchise for our partners at J&J.

The same points are true for BYDUREON. The only once a week medicine of any treatment for type for the treatment of type 2 diabetes. BYDUREON is not characterized by its active moiety -- exendin 4, which is the same molecule as BYETTA. It is distinguished by its tolerability, its efficacy, and its once a week dosing, and how that fits into the lifestyle of the patient with type 2 diabetes, needing to take medicines for years and years.

The big news here, of course, was the announcement last month that Amylin will be acquired by Bristol-Myers Squibb in collaboration with AstraZeneca. We view this as an extremely positive development for the future of BYDUREON. BMS and AZ will bring significant scale to BYDUREON by deploying additional primary care resources, and leveraging their international footprint and experience in markets outside of the US. We are excited by the prospect that these two global companies will be communicating the benefits of BYDUREON to patients, physicians, and payors. BYDUREON is very early in its commercial life, it has a long patent life,new dosage forms based on our technology under development and a compelling profile. We look forward to working with our new partners to maximize the opportunity for this game-changing medicine.

VIVITROL, is like CONSTA, SUSTENNA, and BYDUREON, proven medicine in a dosage form that has a profound impact on its potential for long-term economic and medical benefit. Here we continue to make steady progress in the opioid dependence indication. There has been increasing interest in VIVITROL by opinion leaders across the country. VIVITROL now has a track record of safety and efficacy in the real world to build from. We are also starting to see the results of some initial pilot studies being conducted by third parties in state criminal justice systems. We see this field as a major potential growth opportunity over time, because of the increasing abuse of prescription pain killers and heroin, and a need for alternatives to incarceration and frequent recidivism.

AMPYRA is another one of a kind product. Our partners at Acorda continue to roll out new marketing initiatives and the early feedback has been positive. Acorda's partner Biogen also continues to make progress with the ex-US launch of FAMPYRA, and now has launched in eight markets, with planned launches in the remaining EU markets. So those are the five major commercial products.

The late stage pipeline is also advancing well, and builds on these same themes. ALKS 9070 is our long-acting prodrug of aripiprazole, which is currently sold as once-daily ABILIFY. The Phase III study of ALKS 9070 is on track for an enrollment goal of nearly 700 patients, and continue to expect top line data in mid-calendar 2013. The medical and market forces propelling this program are the same ones driving CONSTA and SUSTENNA, which I described earlier. The growing body of evidence of long-term efficacy and the pharmacoeconomic benefits of long-acting atypicals underscores the importance of new long-acting treatments for schizophrenia. Today there is only one sales force educating physicians on the benefits and clinical utility of long-acting atypicals, and that is J&J. We see new entrants to the market having a significant impact on growing the class. Otsuka has a new long-acting atypical that could be the next entrant in this class, and we look forward to hearing news on their product from the FDA very soon.

So where do we see ALKS 9070 fitting into this growing market? We see two differentiating features of 9070. The range of doses we can deliver and the product presentation itself. Based on our clinical data we believe we can offer 9070 dosage strengths to cover the full range of oral ABILIFY doses, including the highest dose that is commonly used to treat schizophrenia. This is an important attribute as it would allow clinicians to easily transition a patient from any daily oral dose of ABILIFY to a corresponding monthly dose of ALKS 9070. In addition we learned through our experience with CONSTA and SUSTENNA that product presentation matters in the real world. We are designing ALKS 9070 to be a ready-to-use prefilled syringe.

For ALKS 5461, an opioid receptor modulator for treatment of resistant depression, a Phase II study is underway enrolling 130 patients. We expect to have data in hand in the first half of calendar 2013. If these data confirm what we saw in our first proof of concept study, we will have a drug candidate with some incredibly attractive features. Namely a well-tolerated oral treatment for a large refractory condition, based on the new mechanism. Again, along with the medical benefits come potential economic benefits, as treatment refractory patients represent a complicated and potentially expensive group, requiring more intensive medical and pharmacologic intervention.

So finally I should mention that our partners continue to advance other late stage programs. J&J has initiated a Phase III program for a three month formulation of INVEGA SUSTENNA, using our proprietary nanoparticle technology. Two Phase III studies are expected to enroll approximately 1,800 patients, and are expected to be completed in the second half of calendar 2014. Earlier this month the new drug application for ZOHYDRO ER, an extended release formulation of hydrocodone without acetaminophen, was formally accepted by FDA, and assigned a PDUFA date of March 1, 2013. If approved Alkermes will receive manufacturing fees and royalties of approximately 20% on net sales of ZOHYDRO ER.

So we are firing on all cylinders here at Alkermes both from a development standpoint and financially. We are advancing our proprietary pipeline candidates, actively collaborating with our partners to maximize the opportunities for our licensed revenue drivers, and managing the business to deliver value for our shareholders. This was a great quarter for us, and I look forward to updating you on our progress over the rest of the year.

With that, I will turn the call back over to Rebecca.

Thanks, Richard. With that we will open the call up for Q&A. John?

Thank you. (Operator Instructions). Our first question many from Bill Tanner from Lazard Capital. Please go ahead.

Thanks very much for taking the question. Jim, a couple maybe for you on the revenue guidance reiteration. I guess if you just look at it being flat going forward you handily beat the high end. Curious if there is some seasonality that we should contemplate, or as Rich mentioned maybe some macro issues or is the Company just being a little bit more conservative at this point in time? Secondly as it relates to the EDT legacy products, just curious if Alkermes would have any visibility on perhaps there being a longer tail for some of them, I guess specifically TriCor? Thanks.

Yes. Hi Bill. I think certainly you can look at our revenues and multiply the quarter by four, and obviously we are off to a good start this year. I would first start by saying we are only one quarter in, and it is very early in the year to start predicting that the trends are going to stay the same exactly. There are two things that I would point you to.

One is we talked about and your second question relates to this, the absolute expectation that we have had from the very beginning that TriCor would see generic competition. As I mentioned in the notes, we have built into our plan that we see it starting in the September quarter, and the FOCALIN franchise is going to see generic competition from certain dosages as well. The longer that goes without generic competition obviously, that is going improve our revenue outlook for the year. At this stage really just like Abbott, we are going to take the lead from our partner and wait and see, but plan conservatively.

Second I would say just as Biogen talked about yesterday on their conference call or a couple of days ago, they are making certain assumptions about FAMPYRA pricing in Europe going forward. They are taking a conservative outlook at the lowest point they think the price will be. So our revenues will be affected by that until the true-up occurs, and we know the true price in January. We are also reflecting that in the next nine months of planning. I think that answers both of the questions.

Bill, you had a follow-up?

Just those two, thank you.

Thanks. Operator we will take the next question.

Our next question comes from Anant Padmanabhan from Cowen and Company.

Thanks for taking my question. Good morning and good afternoon. I wanted to ask about the 9070 program. So on clinical trials you have the ongoing Phase III for acute schizophrenia, and then a couple of other studies I believe a PK study, long-term study and stable schizophrenia. Could you talk about your regulatory strategies here, your discussions with the FDA, and maybe contrast it Otsuka's Phase III design? That is one. And discuss any potential rationale for licensing this product ex-US before the Phase III results? Thanks.

Anant, it is Rich. I will answer those. The 9070 program we have talked about with you all before in terms of our interactions with the FDA. Because we were able to leverage the existing clinical information on oral ABILIFY, we have an agreement that a single efficacy study will be sufficient for licensure in the US. That is the study you referred to on clinicaltrials,gov, which is the 690 patient efficacy study that is currently underway in acute schizophrenia. That will be sufficient for registration on the efficacy basis.

We also have an ongoing multidose PK study as well, just to continue to round out the file. The rate limiting study is the study that I mentioned. OUS I think that one of the striking things about the atypical franchise that has been built by J&J is the amount of commercial sales of the products they market outside the US. We said before CONSTA is sold I think in 92 countries throughout the world now. So I think that it is imperative for us to have an OUS strategy, and that OUS strategy almost by necessity will include partnering. Those discussions we felt like we would be in a stronger position always to partner the product post-Phase III data, but we are in the discussions now, familiarizing pharma potential partners with the program, and we will do a deal when it is time to do a deal, but we have no expectations on when.

Okay. Thank you. And actually just a quick clarification on BYDUREON as well. On the pen suspension and once-monthly formulation, can you clarify the royalty rate for those versions, is that also 8%?

That is right. You should model at this point as part of that same base, 8% on the first 40 million doses that drops down to 5.5% after the 40 millionth dose each year, and then it resets each year.

Okay. Thank you.

You are welcome.

Our next question comes from Tom Russo from Baird. Please go ahead.

Good morning/good afternoon. Congratulations on the strong quarter. Just to clarify Jim, your earlier comments on guidance. The $20 million for the IP license revenue can you just confirm that was always included in the guidance framework for this year, and that it was not included in the milestone's $20 million to $30 million, so the $20 million to $30 million milestones would be incremental?

Well, Tom, I think you have asked the question, it is actually included. It has always been included in our revenue guidance and it is exactly in the $20 million to $30 million actually, so that part of that license and milestone guidance is the $20 million, and we have $10 million more to deliver this year to hit the $30 million if that makes sense.

Okay. That does make sense. And then the maintaining the R&D and SG&A I think for the first quarter you are running below the low end for both of those. Is there just in terms of the pacing going forward, is there a certain timeframe where we should expect those to start to step up?

Yes, I think if you combine R&D and SG&A expenses you get $120 million. If you multiply that by four you get $480 million. Our guidance was $485 million to $520 million. I think on the SG&A side as you see VIVITROL sales continue to move, obviously we may decide to spend more in that area, and on the R&D side as we continue to enroll that very large worldwide Phase III study for schizophrenia, you are going to see some expenses increase there through the year. We are comfortable with our guidance and we have always tried to be conservative with it. And as I said earlier, it is really hard to predict being only 25% into the year.

Okay. And then last question I will just try you on this. The Bristol Amylin merger documents included some net revenue forecasts that were up in the $4.5 billion to $5.5 billion range, in the mid-20s and presumably the lion's share of that would have been BYDUREON. Just curious, do you have any sort of comments as a Company on that sort of outlook for BYDUREON, or for the franchise dominated by BYDUREON?

It is Rich. I will answer that. Obviously we won't comment on Bristol and AZ's forecast because we don't have them yet. I was just simply thrilled to see the valuation placed on Amylin in this competitive process with multiple parties there, and the valuation core of it as you referred to is BYDUREON. With the application of this new scale to the commercial efforts for BYDUREON around the world, and with our royalty participation everywhere, I think it is really favorable for us. You can almost back calculate it based on the valuations, at least at minimum where they think this product is going to go, and I think that is all favorable for us.

Okay. Thanks very much.

You are welcome.

Our next question comes from Cory Kasimov from JPMorgan. Please go ahead.

Good morning. This is Karen Jay in for Cory Kasimov. Thanks for taking our questions. I just have two. The first on the long-acting atypical franchise, and wondering if you could comment a bit on market dynamics and share trends. It seems like RC is still holding in really well, so is it really that it is still an underestimation of the overall market size, or is there share being taken from other products? And then relative to CONSTA, are you expecting it to hold onto its market share for a meaningful amount of time going forward?

Karen, I will take a shot at that. I think we don't have the particulars of J&J's results, in terms of where they are gaining share. On each of the last many, many conference calls they have talked about the growth as increasing market share. So we are not exactly sure where that is coming from. Some quarters it grows more in the United States, some quarters it grows more ex-US, and they both seem to be doing very well overall. In terms of the long-term success of RISPERDAL CONSTA, I think our view continues to be that RISPERDAL CONSTA is a product that has a lot of value, and will continue to hang in there much more than people I think on the outside have given us credit for. That being said, INVEGA SUSTENNA is also launching well around the world. That is where you are seeing the accelerating growth. We were certainly pleased to see the 5% sequential growth from last quarter.

Another note is the change in currency. The Euro as we know has been under a lot of pressure year to year, so that affects RISPERDAL CONSTA more than it affects INVEGA, because INVEGA has more relative sales in the United States, and CONSTA has more relative sales just because INVEGA is just launching in Europe, so there is a little bit of that going on in the numbers as well. Overall with a $2.2 billion franchise right now, if you annualize the run rate, and it doesn't look like growth is slowing down, we are just thrilled to be a part of it and to have 9070 coming in the wings.

Okay, sure. And my second question is kind of a follow-up on what was touched on about BYDUREON. Have you had any interactions with Bristol and AstraZeneca, and maybe to the best that you can, have you walked away from those feeling better about their commercial strategy, and a potential acceleration of the suspension formulations?

This is Rich I will take that one. I think until the deal closes it is not appropriate for BMS and AZ to have those interactions. We know both of those companies, so we will be ready to go as soon as that transaction closes, and be able to download our points of view and our assistance in anything we can do. But I think just reading what you guys have read, the public information about the way that the auction was conducted and the number of people who showed up and the interest in the product is consistent with what our view would have been, and that underscores our optimism.

Okay, great. Thanks.

Thanks KJ. We will take the next question.

The next question from Steve Byrne from Bank of America. Please go ahead.

Wanted to ask a little bit about the $20 million in IP licensing. When you realize that, is your partner here at the stages of just conceptualizing molecules with some long-acting functionality, or are they at the point of putting something in the clinic?

Steve, it is Rich. We won't comment any more on the technology and even its specific applications or its basic nature. We have over 1,000 patents around here, and we are actively always kind of looking for ways to value and gain value from our IP, particularly idle IP that we are not using in our lead candidates. So hopefully this will be kind of an ongoing part of our business over the years, as this IP franchise matures.

But conceptually could these lead to a royalty-generating stream much like--?

In this case you should think about this as a one-time payment, not with a tail on it. That won't always be the case. Each deal will have its own flavor, but this one just happened to be negotiated in the way that it is a one-time payment.

And Rich you indicated that you are in discussions with prospective partners on 9070. Has that been your initiative, or has that been more driven by the prospective partners?

I think the fair way to say is that we probably kicked those off, because there this was a product that wasn't really well known in pharma, because we moved from Phase Ib right to Phase III so quickly. But as you know there is a big scarcity value for late stage products, particularly with the Otsuka product coming along I think it is going to attract a crowd.

And just one for you, Jim. Any update on your plans to buy back some debt?

Thanks, Steve, for that. Well, now that we are continuing to expect that we are going to generate $60 million to $80 million in free cash flow, you can expect to see more news on that through the course of the year, and I will just remind you that we are obligated to do about half of the free cash flow under our term loan agreements, so we are watching the markets and we will be active on that before the end of the year I am sure.

Okay. Thank you.

You are welcome.

Our next question comes from Graig Suvannavejh from Jefferies. Please go ahead.

Thank you, and I want to add my congratulations to a very nice quarter. I have got two questions in particular. And they both, I guess one relates mainly to the pipeline and certainly we have got 9070 and 5461 right now kind of in mid to late stage clinical trials. How are you guys thinking about perhaps the earlier stage pipeline, and any desire to advance things there? And the reason I bring this up is while I thought the data for the depression asset was encouraging, it is a space that has seen a lot of attrition rates, and so just thinking about that next wave of products. And then my second question just has to do with a little housekeeping. I was wondering if you could break out in terms of the revenue from CONSTA and SUSTENNA just for modeling purposes? Thank you.

Greg, it is Rich. I will take the first one and have Jim answer the second one. Part of the reason I say what I said in my opening re marks is if you put some context around the type of R&D that we do here. And one of the other features of that type of R&D, which tends to build on known pharmacology but really view it through the patient's lens, and try to come up with drugs that have medical and economic benefits. We don't do a lot of blue sky discovery research here. A lot of what we do is fairly applied. We can actually think about what the molecules look like on the whiteboard before even begin designing them. As a result, we can actually do quite a bit fairly cost effectively. When you look at R&D spend in this Company the vast majority is driven by those late stage programs, that is why we tend to focus our public comments on those.

That said we have a very focused and rich earlier stage exploratory work going on. This stuff tends to incubate for certain periods of time and when they are ready, we elevate them to the point where we tell you that you should be concerned about them. We will continue to do that. R&D guidance of something on the order of $160 million, we feel like we have plenty of room in there to continue to replenish the pipeline. As big Phase III studies cycle through, that frees up budget then for the next generation of products. That is why we always felt comfortable post-EDT, saying that we think the revenues can grow faster than the expenses, because we think we can manage the R&D within those parameters. Jim, do you want to--?

Sure. The CONSTA SUSTENNA breakdown and as J&J mentioned on their call last week, total sales for the quarter were 550. CONSTA sales 355 around the world, and INVEGA SUSTENNA sales were 194, 195, in that range. And then in terms of our revenue, we had about $37 million in CONSTA revenue, and a little over $11 million in SUSTENNA revenue, and that will be in our Q actually broken down in the MD&A, and it was filed this morning, so if you want more detail you can look there.

Great. One last question if I could follow up. I think today is the PDUFA for ABILIFY depo, and just any updated thoughts on how you are thinking about the Otsuka and Lundbeck opportunity, and how that might impact the way you guys think about the opportunity?

I am an unabashed fan of their success. I am like a broken record. The same thing I used to say about VICTOZA's role in the GLP1 market. VICTOZA needed to be a big product to provide them the milestones or the pathway for BYDUREON to become a big product. One of the big problems with the long-acting atypical business in schizophrenia is that there is a dearth of other sales forces and policy people advocating the use of these medicines, that have so clearly demonstrated benefits for patients and payors. With market share in the US under 5%, this market should grow. And it going to grow through new entry and more education and more pressure on payment systems, to take a more enlightened view of the overall holistic cost of these patients and the better medical outcomes. I would like that drug to do well. We think our drug was designed with features that should differentiate it from that product, but we want more players at this party.

Thank you very much. And congrats on the quarter again.

Thanks.

Thanks.

Our next question comes from Ami Fadia with UBS.

First of all, for Jim with the nice cash flows coming out of the business besides paying back debt, are you thinking about anything in the lines of business development maybe in-licensing other technologies? Any color you can provide there, that would be great. Secondly on RISPERDAL CONSTA based on sort of orders that you received from J&J we have got a good start for the year with about $37 million in revenues, how should we think about modeling that going forward? Should we see some sort of seasonality or a dip going forward or not? It is good to help us get a sense there. The last question there was an adjustment for deferred revenue of about $3 million in the quarter. Can you give us a sense of what that was, and how we should think about modeling that going forward for the quarter? Thanks.

Sure, Ami. Let me start with the deferred revenue. I will go backwards because maybe that is the most technical. As we started to lay out our adjusted net income procedures, we looked around the industry obviously, and we wanted to try and get as close to cash earnings as we could. Those small milestones essentially are what they are, are ones where we have ongoing work. Ongoing with the partner. One might use ZOHYDRO as an example, where we are continuing to formulate and manufacture. The accounting rules say when you get a million or two dollar milestone in the door, that you should spread that over the life of the work that you still have to do with the partner.

Rather than spreading that over what we decided to do is take the milestones in our adjusted net income when they come in the door as cash. What will happen now as we recognize that, in the future we will actually be backing out those small amounts of deferred revenue that you would see running through our balance sheet and going forward. We will be backing those out of adjusted net income in the future. This year and next year as we have planned, those should help us. And then it will depend on how the milestones go with the rest of our business, as to whether that cash flow in the door will be more than the deferred revenue. But again you can look at our balance sheet and the deferred revenue, we have some deferred revenue from milestones that J&J has paid us for Russia sales of VIVITROL and ZOHYDRO and some other small programs. That is the deferred revenue piece.

The CONSTA piece, CONSTA has been doing very well. Ahead of where consensus would have it. This quarter there was a 2% drop as compared to last quarter, and I think we have seen quarters where it is flat, we have seen quarters where it has grown. I think as you look forward we are seeing a flat to slow decline in RISPERDAL CONSTA more than offset by the growth in INVEGA SUSTENNA. Let me remind you as that franchise grows, 14% on a dollar basis, 20% operationally last year for J&J, and 5% sequentially. I should also point out we are disclosing in our Q for the first time because the SUSTENNA numbers are getting bigger, the exact break points for the INVEGA SUSTENNA royalty. That royalty goes between 5% and 9%, and up to $250 million every calendar quarter we get so 0 to 250 we get 5% on sales. 250 to 500 we get 7%,and then on sales in the calendar year over $500 million, we get 9%.

As you compare that to our net take on RISPERDAL CONSTA of around 7.5 the more SUSTENNA that gets sold actually the better off we do economically. Economically we are really indifferent and the growing franchise is the key, and at $2.2 billion run rate right now we are pretty pleased with that franchise in general.

In terms of the cash flows we look all of the time at potential end licensing, certainly both in things that are accretive which is what we are obviously focused on driving our earnings right now. I think we have a deep pipeline of things on many products, but we are always looking at other potential deals. We have done that for years, and we will continue to do that. I think it is very clear that repaying debt can be accretive to us financially. We will look at repurchasing shares. We have done that in the past, and obviously we will have to do the valuation work on whether new technologies are going to more accretive than those alternatives. Is something we do all the time, and we will continue to update you when we make decisions obviously.

This is Rich. Let me make one additional point on that keying off the specific question that you asked, which was are we interested in in-licensing other technologies. Actually less interested in in-licensing technologies per se, i.e. formulation or drug direct delivery technologies. We evolved the business now to where the proprietary business are driven by product. We are actually interested in always looking at product development opportunities where are we can bring our particular expertise to bear. The days of our licensing platform technologies for the purpose of partnering with others, those days are probably over.

I think we time for two more questions. Thanks, Ami.

The next question from Mario Corso from Caris and Company. Please go ahead

Thank you, congratulations on a nice quarter. Wanted to ask a little bit on the gross margin and taxes, any updated thoughts there, It looked like gross margins a little bit ahead of last quarter? And then in terms of CONSTA and SUSTENNA, what kind of forecast, or what kind of plans even directionally do you think we should be thinking about in terms of the franchise growth? I mean an acceleration, a continuation, a slight deceleration over time? Thanks very much.

Sure, Mario. On the margins, we did have a good quarter. I think some of that goes with the vicissitudes of timing off manufacturing shipments but I would also point out though as BYDUREON and SUSTENNA continue to grow, those are 100% margin products, and as AMPYRA and VIVITROL continue to grow, those are products that we manufacture, our margins will get better as we push more, the fixed costs don't change we are in a good position there, and as we push more product through our margin should get better in general. We are looking forward to hopefully expanding manufacturing margins as we go.

From the tax rate as well, again, as our products that are based in Ireland, including BYDUREON and SUSTENNA do better, and we still have some substantial NOLs we can take advantage of, long-term structurally we are very, very pleased with where our tax rate will be, so we should continue to see benefits from that going well. And then the last question, could you repeat your last question, Mario?

In terms of the CONSTA and SUSTENNA franchise, just wondering how you guys are thinking about it, or how we should think about the franchise growth over time, acceleration, kind of maintaining the current growth, or really decelerating over time?

This is Rich. Maybe I will take that one, Mario. I think in terms if you just look at the J&J franchise, I think the trend line is looking backwards is what we would extrapolate from. The dynamic in the marketplace is interesting given the potential new entrant. If Otsuka comes into the market and increases the noise and brings more data, and is pushing access in particular with Medicaid, and outside of the US as well, I think the market can grow. So I think to be conservative we would just model it on some trajectory extrapolating from where we have been, but with some hope and expectation that the market based on merits could grow.

Okay, John, we will take one more question, and then we will wrap it up before the market opens.

Our last question comes from Bill Tanner from Lazard Capital. Please go ahead.

Rich, just had a question on the three-month SUSTENNA, and curious if you can remind us with the all end royalties for SUSTENNA versus CONSTA are? As it relates to the three month, is the contemplation this would then replace the one month? Do you have a viewpoint as to whether this could potentially expand SUSTENNA, and whether it could potentially erode CONSTA? Just some color around that would be great. Thanks.

Bill, I think my view of it is that ease of the dosage forms opens up a new shelf doctors and patients that might not have been available to the first generation Q2 weak RISPERDAL CONSTA product. So what we have seen in the numbers is that SUSTENNA didn't cannibalize CONSTA. It took over some of its growth, but it opened up the market, the franchise remember when it was CONSTA alone, it was about 1.5 billion growing, and now it is 2.2 billiongrowing. I think the three month, again it won't be winner take all on any of these things. That will just allow certain patients that are stable to segue to a longer dosing interval. But these patients have schizophrenia, right, so they are not going to be left on their own ideally I think for three months at a time. They need more frequent interaction with caregivers.

I would be optimistic that it is just part of this growing utilization of long-acting atypicals in general. Jim before reiterated the split, and I will have him do that again, as you might not have heard on the CONSTA versus SUSTENNA economics.

So the structure Bill would be the same for our license for the monthly SUSTENNA, the three months would be the same, which is that tiered annual sales-based royalty that goes 5/7/9%, and puts us right in the same ballpark as the 10%, net 7.5% that we get out of RISPERDAL CONSTA.

Thanks very much.

You are welcome.

Great. Thanks for dialing in, and if there are any follow-up questions don't hesitate to contact us here at the Company. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.