Bausch Health Companies Inc (BHC) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Quarter 2010 earnings Conference Call for Biovail Corporation. At this time, all participants are in a listen only mode. This conference call is being webcast on the worldwide web at www.biovail.com. (Operator Instructions) As a reminder a replay of the Conference Call will be available until 7:00 PM Eastern Daylight Time on Thursday, May 13, 2010 by dialing 416-695-5800 or 1-800-408-3053 using access code 2058403 followed by the pound sign. On behalf of the speakers who follow, investors are cautioned that the presentations and responses to questions may contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 and which comprise forward-looking information under applicable Canadian provincial securities laws. For the purposes of this caution we refer to such statements as forward-looking statements.

Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. Forward-looking statements include but are not limited to our goals, targets, strategies, intentions, plans, beliefs, estimates, expectations, outlook, guidance, and other statements which contain language such as likely, should, guidance, believes, anticipates, expect, intend, plan, will, may, target, and other similar expressions.

For additional information about the material factors or assumptions underlying such statements and about the material factors that may cause actual results to vary from those expressed or implied in such statements, please consult the Company's earnings press release dated May 6, 2010, and available on the Company website, as well as its filings with the US Securities and Exchange Commission and the Canadian securities and administrators, including the Risk Factors detailed in its most recent Form 10-K. The Company does not undertake to update any forward-looking statements except as required by law. At this point, I would like to turn the call over to Nelson Isabel, Vice President Investor Relations and Corporate Communications for Biovail Corporation. Mr. Isabel will moderate today's call.

Thank you, Operator, and good morning everyone. On behalf of Biovail thank you for joining us. On this morning's call, Biovail Management will describe the progress made to date with respect to the Company's new strategy, as well as discuss the financial and operating highlights for the first quarter of 2010. Joining on today's conference call are Bill Wells, Chief Executive Officer of Biovail Corporation, Gilbert Godin, Chief Operating Officer, and Peggy Mulligan, Chief Financial Officer. All will be available to participate during the question and answer session with research analysts immediately following our remarks. We will try to get to as many questions as possible while limiting the call to approximately one hour. Other participants are encouraged to follow-up with the Company after this morning's call by calling 905-286-3000 and asking for Investor Relations. Bill, please go ahead.

Thanks, Nelson. Good morning, everyone. Biovail delivered solid financial results with a 27% increase in revenues and adjusted cash EPS quarter on quarter. We also closed two new business development fields in specialty CNS in the first quarter. We have maintained the momentum from 2009 and made further progress implementing our business strategy, which we believe will move Biovail to high growth. It was almost two years ago that we launched our new specialty CNS strategy and we're well ahead of where we thought we would be at this point. We have now completed eight transactions that in aggregate improved both the near-term and long-term outlook of the Company. Our business development success has allowed us to become a credible and desirable partner for emerging pharma companies with development stage assets in CNS.

The number of interesting programs that we've already brought into our pipeline in conjunction with the many opportunities that are still available to us clearly validates our selection of specialty CNS as our initial target therapeutic area of focus. Our first transaction of 2010, acquiring the Canadian and US license rights to Staccato loxapine, enables the deployment of a specialty sales force, an important element of our long-term strategy. This allows for the retention of a greater share of the economics of our products and provides more control over branding, marketing and pricing. When fully leveraged, which we expect within a couple of years, this sales force should provide the opportunity for very attractive financial returns. Staccato loxapine is a product that we're very excited about. Depending on the outcome of the FDA review, we expect to launch the product late in the first quarter of 2011.

Our current plans are to establish a hospital based sales force of approximately 60 to 100 reps. Although we would likely not hire the actual reps until after FDA approval, we will be incurring pre-launch costs in 2010. Having refined our plans over the past couple of months, we now expect these costs to be approximately $10 million this year. We believe that at maturity, Staccato loxapine alone is sufficient to absorb the operating expenses of a sales force. However, we do intend to in-license or acquire additional specialty psychiatry products to better leverage the associated infrastructure costs. We're working on several of these. In addition, several of our current pipeline opportunities fit nicely with Staccato loxapine, such as Pimavanserin in combination with Risperidone in schizophrenia and further down the road, from a hospital sales perspective, CX717 for the treatment of respiratory depression.

As you've seen in the past two years, our focus is on building both parts of our business, our operating business, which provides near-term growth potential and cash flows exceeding $400 million per annum, and our development business or pipeline, which increases our growth potential in the medium to longer term. We continue to have numerous opportunities in hand to build both parts of our business and the resources to do so. Let's talk quickly about financials. Biovail delivered strong cash flow from operations in the quarter, $93 million before changes in working capital and excluding a legal settlement, demonstrating the strength of our operating business. At the end of March, we had over $650 million in available liquidity for business development, representing considerable fire power.

Peggy will review the financial highlights of the quarter shortly. Our restructuring efforts are largely complete and as a result, we expect to reap the benefits of the bulk of our targeted annual cost savings of $40 million to $60 million in 2010. Our business development group remains very active with ten to 20 products or companies currently in our deal flow. Several of these are at the term sheet stage. As we've said, our preference is to complete a transaction for a commercial product or products that would be immediately accretive to revenues and cash flows. We're working hard on several of these, although as always, we cannot predict the success or timing of any business development transaction. Now let's talk about Wellbutrin XL. Our targeted non-sales force programs to support market share and patient and physician loyalty are now in full swing.

While it's too early to gauge the success of the programs, we're pleased by the level of physician participation we're seeing. Over 6,000 physicians have received the sample packs that they requested after registering with the program and we're now seeing a visible level of coupon redemptions. Recent IMS data have been encouraging. We expect to see the full impact of these initiatives in the next few months. The Wellbutrin transaction has so far provided much better financial returns than originally projected. Let me point out that in the first quarter of 2010, we saw a planned reduction in wholesaler inventory levels ahead of a change in the national drug code for the product. This reduced revenues for Wellbutrin XL by approximately $2.5 million in the first quarter of 2010. Before I hand the call over Gilbert, let me highlight a change in Biovail's dividend policy.

Given the strong financial performance of the Company over the past several quarters and in anticipation of continuing robust operating cash flows, Biovail's Board of Directors has decided to increase the Company's contemplated quarterly dividend by 5.5% to $0.095 per common share. The new policy balances the Board's desire to provide an immediate cash return to shareholders, while providing the Company with ample resources with which to implement its long-term growth strategy. At the current stock price, the new policy equates to a dividend yield of 2.3%, the highest of all specialty pharma companies. However, as always, business development will have first priority for use of Biovail's cash generation as we go forward. Gilbert will now provide an overview of operations in the quarter and an update on the pipeline. Gilbert.

Thank you, Bill, and good morning, everyone. I'll begin my remarks this morning by providing an update on Xenazine, which was launched to US specialists by Lundbeck in late November, 2008. Through April 30, 2010 a total of 2897 patients have enrolled or are in the process of enrolling with the Xenazine distribution center and 24,172 scripts have been filled. Approximately 17 months post-launch, Xenazine continues to track to our 4,000 to 6,000 peak patient number. As we've discussed previously, the rate of enrollment has slowed, as the initial migration of patients from the longstanding compassionate usage program to the commercial program is largely complete. We believe this reflects the still naissant understanding about many US neurologists of Xenazine's rather unique titration regimen. Accordingly, Lundbeck is focusing it's marketing efforts on helping a broader number of physicians fully understand the safe and effective use of Xenazine and the drug [rems] program. Switching to the sale of non-core assets.

In January, 2010, we completed the sale of our Dorado, Puerto Rico manufacturing facility for net cash proceeds of $8.5 million. Activities conducted at this facility have been transferred to our Steinbach facility. As we discussed last quarter, due to a significant positive increase in demand for some of our diltiazem based product, our Carolina site will now remain open indefinitely. As a reminder, we expect to realize over $70 million in proceeds from the sale of non-core assets. As of today, we have realized approximately $63 million in such sales and expect to realize the remainder in 2010. I will now discuss some of the highlights of our product development efforts. In the past 24 months, we've made significant progress in building a specialty CNS pipeline. Today, we have eight CNS programs in development targeting a range of specialty indications, including agitation associated with schizophrenia and bipolar disorder, Parkinson's disease, Parkinson's disease psychosis, Alzheimer's disease psychosis, [levodopa finedusis kanadia], and respiratory depression and Tourette syndrome.

Our latest transaction, completed in March, was the acquisition of US and Canadian rights to a series of AMPAKINE compounds from Cortex Pharmaceuticals. A noral formulation of one of these compounds, CX717, has demonstrated utility in two small proof of concept studies in preventing opiate induced respiratory depression, a brain mediated breathing disorder. This life threatening condition is most commonly treated with opiate receptor antagonist, which are effective in treating respiratory depression, but interfere with pain control rendering them unsuitable in the surgical or post-operative settings. CX717 may overcome this limitation. However, before we can move forward, an intravenous formulation must be developed. This work is ongoing. Our most advanced specialty CNS program is Staccato Loxapine. We think the product represents a great opportunity for Biovail and we are in the planning phase ahead of the product's potential launch in the first quarter of 2011.

As Bill mentioned, the refinement of our pre-launch plans for Staccato Loxapine result in anticipated costs of approximately $10 million in 2010 versus our prior expectation of $10 million to $20 million and we'll begin incurring these costs as early as the current quarter. There's no change to our anticipated investment range of between $40 million and $70 million in 2011, spread evenly through the year, depending on the breadth of the label approved by the FDA. As a reminder the FDA action date is October 11, 2010. Turning to Pimavanserin, we had a constructive meeting with the FDA earlier this week to discuss the clinical program required for the use of the product with Risperidone in schizophrenia patients. The FDA clarified that it views the program as combination therapy as opposed to adjunctive therapy.

As such, it will follow the combination trial rules, which generally provide for a simpler development path, which is the good news. However, the distinction does mean that two pivotal studies will be required. We're currently assessing what the potential impact will be in terms of the cost and timeline for an NDA filing. Based on the need to complete routine safety assessment before beginning the Phase III program, our preliminary estimate is that it will add approximately six months to our original timeline. It will also result in planned R&D expenses in 2010 being pushed into next year, as a Phase III program may not commence until early in 2011. This will reduce budgeted R&D expenses in 2010 by approximately $10 million. Turning quickly to our Legacy pipeline. The Phase III study for BVF324 in Europe are ongoing.

As we reported last quarter, enrollment is occurring slower than we had anticipated, although it does appear to have picked up over the past month or so. The slower than expected enrollment will also result in approximately $10 million in R&D savings in 2010. As such, our R&D expenses for the year, which include the expenses of our contract research division, will be approximately $20 million below our original assumptions. Accordingly, we now expect to invest $110 million in R&D, excluding upfront and milestone payments in 2010. I will end my remarks with a few comments on (inaudible) healthcare reform. We are still in the learning stages of the various items contained within the legislation and significant uncertainty currently exists within the industry. However, we believe our exposure is not material given the nature of our commercial portfolio and the structure of our supply agreements.

In the first quarter of 2010, the legislation did not have a material impact on our financial results. With respect to the fee that will be imposed on pharmaceutical manufacturers beginning in 2011, based on what we know today, we don't believe it will have a material impact on Biovail's operation. That concludes my remarks. I will now turn the call over to Peggy Mulligan, Biovail's Chief Financial Officer. Peggy.

Thanks, Gilbert, and good morning, everyone. In accordance with US GAAP, Biovail reported a net loss of $3 million or a loss per share of $0.02 in the first quarter of 2010. These figures reflect $51 million in acquired in-process research and development expenditures related to the transactions of Alexza and Cortex and other specific items that in aggregate negatively impacted net income and EPS in the first quarter of 2010 by $52.4 million and $0.33 respectively. Accordingly EPS, excluding specific items, was $0.31 in the first quarter of 2010, a 10% increase compared to the prior year period. In the first quarter of 2010, cash EPS was $0.55 compared with $0.42 in the first quarter of 2009. Excluding a legal settlement, cash EPS is $0.59 in the first quarter of 2010, a 27% increase over the prior year period as similarly adjusted. A reconciliation of GAAP EPS to cash EPS, as well as the table listing specific items, is provided in our first quarter earnings release issued this morning.

Total revenues for the three months ended March 31, 2010 were $220 million compared with $173 million for the first quarter of 2009, an increase of 27%. Product revenues in the first quarter of 2010 were $212 million compared with $165 million in the first quarter of 2009, a 28% increase that reflects higher revenues from Wellbutrin XL, tetrabenazine products, Biovail Pharmaceuticals Canada, the ZOVIRAX line, the Company's generic portfolio and Legacy products. Partially offsetting factors include lower revenues from ULTRAM ER . Wellbutrin XL revenues were $50 million in the first quarter of 2010 compared with $20 million in the 2009 period, a 147% increase that reflects the May, 2009 acquisition of the full US rights to the product, partially offset by the impact of the introduction of generic competition to the 150-milligram strengthen in May, 2008.

Revenues in the US were also impacted by approximately $2.5 million as a result of the planned reduction of wholesaler inventories in anticipation of the change in the NDC code for this product in the second quarter of 2010. The supplied Wellbutrin XL tablets to GlaxoSmithKline for distribution in Europe and other markets generated revenues of $4.4 million to Biovail in the first quarter of 2010 compared to $2.4 million in the prior year period. ULTRAM ER generated revenues of $7.9 million in the first quarter compared with $20.6 million in the 2009 period. This decrease reflects the November, 2009 introduction of generic competition to the 100-milligram and 200-milligram strength of the product. This was partially offset by incremental revenues from the supply of an authorized generic formulation of those dosage strengths, which held a 59% share of the generic extended-release tramadol market in the first quarter of 2010.

With respect to Biovail Pharmaceuticals Canada, or BPC, first quarter revenues were up 53% year-over-year reflecting the strong performance of Wellbutrin XL and Tiazac XE, as well as the positive impact of fluctuations in foreign currency exchange rates. At cost of exchange rates, BPC revenues were up 28% in the first quarter of 2010 compared with the prior year period. Turning to the expense side of the income statement, Biovail's R&D expenses in the first quarter were $66.9 million compared to $14.5 million for the first quarter of 2009. The year-over-year increase primarily reflects $51 million in acquired IPR&D related to the acquisitions of the US and Canadian development and commercialization rights to Staccato Loxapine and certain Ampakine compounds. Looking forward, and as Gilbert mentioned, we now expect to incur R&D expenses of approximately $110 million in 2010, which includes expenses associated with our contact research division, but excludes upfront and milestone payments.

As a reminder, we continue to target a total R&D investment of $600 million in the 2008 to 2012 period, which equates to an average of $120 million annually. This is the level we're comfortable with going forward based on our current business. To invest north of $120 million per year, we would like to see a corresponding increase in our revenues and cash flows and, of course, our business strategy is designed to achieve just that. Biovail's balance sheet remains strong. At the end of the first quarter of 2010, we had cash balances of $103 million. The Company had $350 million in convertible notes outstanding, other long-term obligations including the current portion of $28.3 million, which represents the balance of the purchase price arising from the acquisition of the worldwide development and commercialization rights to tetrabenazine in June, 2009, and no outstanding borrowings under its committed $410 million revolving credit facility.

Cash flow from operations was $44.8 million in the first quarter of 2010 compared with $47 million in the first quarter of 2009. Cash flow from operations before changes in operating assets and liabilities was $86.9 million in the first quarter of 2010. Excluding the payment of a legal settlement, cash flow from operations before changes in working capital was $92.8 million in the first quarter of 2010, a 27% increase versus the prior year period as similarly adjusted. For a more comprehensive detail pertaining to Biovail's financial and operational performance for the three months ended March 31, 2010, please refer to the earnings news release distributed by the Company earlier this morning. As Bill mentioned, Biovail's Board of Directors has increased the Company's contemplated quarterly dividend by 5.5% to $0.095 per common share. In line with this new policy, the Board has declared the payment of a dividend of $0.095 per share payable July 5, 2010 to shareholders of record on June 2, 2010. The ex-dividend date is May 31st. That concludes my comments.

Thanks, Peggy. I'm pleased with the operational and financial success of the first quarter of 2010. We've clearly maintained the momentum of 2009 and we're aggressively moving forward with our strategy. We have over $650 million in available liquidity to pursue the many interesting business development opportunities available to us. As our track record indicates, we'll continue to be prudent with our capital allocation decisions. We're even more optimistic today than when we started Biovail's transformation two years ago. We've made a lot of progress since then, but much remains to be done and 2010 is clearly an investment year for Biovail. We're preparing to take the next major step in our strategy, the rollout of an in-house US sales capability and we believe Staccato Loxapine is a great product with which to do this.

We're also advancing a number of our development pipeline candidates into pivotal trials and this is evident in the R&D investment we're making in 2010. I'm proud of the pipeline we've developed in such a short period of time. We have a great mix of early, mid and late stage opportunities that target unmet medical needs in a wide range of specialty CNS indications. We remain confident that the investments we're making today in our pipeline will provide attractive long-term returns for our shareholders. We'll now take questions. Operator?

(Operator Instructions) Our first question is from Marc Goodman from UBS. Please go ahead.

Good morning guys. First, on Xenazine, can you give us some color on what's going on behind the scenes there? Obviously, the number of patients that moved into the program has slowed quite a bit from the past quarter and so what is happening out there? And then second of all, just on the Pimavanserin, are you fully committed to doing this? It sounds like this is going to be a couple of years type program and it's going to cost you a little more money or maybe I'm wrong. Just talk about that. And then the other, the second generation Xenazine for Tourette's, aren't we supposed to start that trial? Maybe you mentioned it, I didn't hear you, but is that going to start soon, just remind us on that, please.

Good morning, Marc, this is Gilbert. I'll handle the first question on Xenazine. First of all just want to remind everyone we are quite confident that we will get to the target, 4,000 to 6,000 patients, in the peak years and the level of penetration (inaudible) therefore and I think that 17 months into the launch we're flirting with the 2,900 level, almost 3,000 patients, so it just goes to show that this is an indication that will require time. We accept the fact that it could take three years, maybe four years to peak year sale. You're right that the Jan and Feb numbers were pretty slow, not to say flat, not unlike most of our brands, however, but we've seen an uptick in new patients in March and that is indicative of what we're doing. There are really three prongs as to what's happening behind the scene. I guess the easy patients are one that transitioned and got onboard in '09.

What is happening now is that we're making sure that we're rounding up those patients that for years didn't have any cure, any products to treat the symptoms of the disease, [corrius] specifically. So running of these patients making sure that they are aware of the existence of the treatment and that they take these steps to visit with their treating physician or the specialist. The second element is to overcome the natural cautious approach that is being induced by a fairly strong REMS program and a set of informations that are provided to the patient that are indicative of the level of committment they need to make and the process of undergoing treatment. So these elements will result in some delays and some patient could take as much as three months to eventually get onboard. The third element, we alluded to it in the discussion earlier, in the presentation earlier, is to insure that this titration regimen is well understood and this titration regimen is not an usual titration approach.

Typically, products that will require titration will, that will be required to handle the emergence of adverse events that will subsequently subside, so that the dose can be pushed further and maximize the efficacy. In the case of Xenazine, it's a little counterintuitive in that from the moment that side effects will appear as a result of treatment, the ideal level, the ideal dose may be a notch back. In other words, you treat up to side effects that are considered to be bearable and manageable and that's pretty much what you can expect in terms of efficacy. So these things have led to some confusion early on and there are great efforts and very focused efforts being done by our partner, Lundbeck, to make sure that this understanding is complete.

Are there patients that are leaving quite a bit or are they staying on once they -- ?

Yes, there's a rate of dropouts that is not insignificant, but it's not completely unexpected. It is a belief of Lundbeck and ours that this can be optimized and that it will be lowered over time as there's a good understanding of what the treatment regimen should be.

So is this dropout rate, is that something you can disclose? Is it like 20% or is it higher or -- ?

We haven't disclosed what that dropout rate has been. All I can tell you, Marc, is that it's not something unexpected.

What about the pricing of the average annual pricing for this? What should we be thinking? Any changes?

No, actually the pricing, the average price is directly dependent of the average dosage and this average dosage in milligrams per day is slightly higher than the original forecast, so it's still tracking well from that standpoint and reimbursement is, no change on the reimbursement front, no issues.

Marc, this is Bill. Good morning. Let me address your question on Pimavanserin. I assume the question was directed towards the program as combination therapy with Risperidal.

Right.

We had our FDA meeting. I actually think that the outcome of that meeting was a good outcome for us. We continue to be very excited by this program. They clarified that we should be looking at this as a combination treatment and the combination treatment rules appear to be much simpler and easier than the pathway we thought we were going to have to go with as adjunctive therapy. So we actually view that as quite good news and diminishes the risk of the program. Now at the same time if it does mean that we are going to have to do two trials, which implies probably a higher cost, although we're still busy quantifying that at this time, and also a little bit of extra time on the program. So from our perspective you've got lower risk but slightly higher cost and slightly longer time. Overall we think it's good news and we continue to be excited by the program. Your other question was related to tetrabenazine, the BVF 018 program. We do expect to initiate that program probably early, sorry, third quarter this year.

Thank you. Our next question is from Chris Schott of JPMorgan. Please go ahead.

Great, thanks. Just the first question is regarding the in-licensing of the CNS assets around the sales force. Just to follow-up, are you referring here to primarily in-market assets or are you still looking at additional late stage products that are either filed or near filing, maybe more like Staccato loxapine. And I know the timing is not fully under your control here, but is your goal here or do you expect to have additional in market products beyond Staccato loxapine for your sales force in 2011 or is this more just a, is this a longer term goal you're thinking of on that front. And I just have a couple follow-ups from there?

Sure. We're looking at both in-market opportunities and also at some which would be late stage but are still in development. So we have several opportunities that we're looking at in order to try and compliment the sales force for Staccato loxapine. I think as we originally modeled the product, we had assumed that the product would carry the full cost of the sales force for the first couple of years. Obviously, we would like to do better than that in terms of bringing in a product to absorb some of the additional cost of that sales force and so that's what we're focused on doing at the moment.

Okay. And then just on the R&D side of things, I know excluding the onetime charge I guess R&D was maybe roughly $15 million this quarter. You addressed some of this, but can you just help us understand a little bit about the timing and drivers for the R&D ramp as we think about the remainder of 2010 and just kind of when should we think about -- I know you have got a number of programs kind of layering in here, how that kind of just trends through the rest of this year. And just then on the R&D side as well, a final question on Pimavanserin. At this point are you planning on running these two studies in parallel or would you consider just doing one, seeing the outcome and then kind of doing them I guess serially, maybe just address that issue? Thanks.

Let me take the last question first, on Pimavanserin. The answer is I don't know yet about whether we're going to do them in parallel or serially. We need to have a better understanding of the design of the programs and the risk associated with those programs before we make that decision. So that's something that we'll update you on as we get better analysis. With regard to the R&D budget, it is back end loaded for this year, so it is much more heavily weighted towards the second half of the year. The reason is that we're starting a number of trials in the second half of the year and so consequently, we expect to have much more expense in the third and the fourth quarter. As you have heard in our commentary earlier, we are seeing the total R&D spend coming down somewhat for the year, now to around $110 million, primarily because of the delay in BVF324 in terms of enrollment and also some of the delay that we would be seeing with Pimavanserin as combination therapy based on the feedback from the FDA. It's a little bit of a moving target.

As we get more information from our interactions with the FDA and as we see how the trials are moving, we will keep adjusting that number and we'll let you know how that works out. Let me emphasize, however, that we are very focused on controlling our R&D spend, making sure it does not get out of proportion in terms of our sales and revenues, and we will only grow it beyond that $120 million limit that we talked about if, in fact, we are successful in increasing revenues and cash flows in the future. So it's something we're very aware of in terms of that we have to manage it and make sure that we're getting the appropriate returns out of it.

Great, thanks, and then one final question just along those lines of building cash flows here, just your latest thoughts on the potential for another Legacy type transaction, maybe similar to a Wellbutrin type deal.

Obviously, working hard on a number of different opportunities on that front. Some of them are Legacy type opportunities and some of them are products which are in market that have growth potential associated with them. I would love to be able to do a transaction like that this year. We're going to try hard to do that, but as I say every time we get on to the subject, we can't control the timing or the success of these, it takes two to tango with these opportunities.

Thanks very much.

Thank you. Our next question is from David Amsellem of Piper Jaffray. Please go ahead.

Hi, thanks. Just a couple. First on Wellbutrin, I know it's early, but longer term, how do you think about the impact of the promotional activities. I guess, in other words, do you expect to see a stabilization of prescription volumes or more conservatively a slowdown in the rate of volume decline. Just give us some color on what your thoughts are longer term.

Good morning, David, this is Gilbert. First of all as I think we've been repeating it every month, we're always quite pleased with the continued performance of the product. Relatively slow erosion, clearly staying clear of the average analog. As you know you probably witnessed yourself, January, February here again was weak. March was pretty strong, April is holding pretty nicely so far, so we associate that with, I guess, the strength of the brand and the overall circumstances in that marketplace, but also I think we're starting to see here permeating potentially some of the effect of that tactical plan that we've deployed. In the first cycle, and there would be a number of such cycles during the year, we first detailed approximately 13,000 physicians that we had identified as loyalists to the brand.

Close to half of them have requested and received sample kits. We're now going to a second cycle, broaden that target so that we can get more physicians onboard. So we have 6,200 loyal physicians that have the means to initiate treatment with new patients. We have also provided them with vouchers, think of them as co-pay reduction coupons or card, and here again, we're seeing after only one month, we're seeing a fairly meaningful number of voucher redemption. We're slightly north of 1,000 of those between the time that it hit their desk and the time that we took a first read. So it's a good start. We hope that to get that number up there and we have to bear in mind it's a little investment that actually increases as the redemption increases, but it also brings the associated revenues. So we will monitor that and continue to report periodically. At this point, anyway, we appear to be getting the traction that we would hope to get at that early stage.

What's encouraging to me is that we initiated some of these similar types of programs with ZOVIRAX last year and they really started kicking in in the fall of last year and we've seen actually very strong performance of ZOVIRAX, which appears to be continuing into this year. And all of our analysis indicates that it is highly correlated with the activity that we've been doing. So we have an example of where these types of programs have really worked for us and so we -- and we're starting to see some indications of that with Wellbutrin, so that we find intriguing and are hopeful as we go forward.

And a quick question on 324. Now that dapoxetine, it looks like it's available in the UK and J&J is rolling it out, what are you hearing about how the product has been received thus far. Now that that product is available do you expect that that could have the result of speeding up enrollment of your study?

Well, obviously, we're paying close attention to it, but the fact is we haven't heard a lot about how that product is being received in the European market and that actually concerns us a little bit because we had always planned on kind of slipstreaming behind that product and having J&J develop that market and then we would come in with a product that we thought had certain advantages and the lower price than dapoxetine. So watching it closely, but I'd have to say that so far we have not seen dramatic signs of uptick on that product.

Okay, and then one last quick question on Canada. Do you remind us if there are generic filings pending on Tiazac XC and Wellbutrin XL and then just remind us where those are right now?

Actually, there are no filings that we are aware of for either of those two products.

Great. Thanks guys.

Thank you. Our next question is from Gregg Gilbert of Banc of America. Please go ahead.

Thanks, good morning. I have a few. Gilbert, are the patient enrollment numbers you quoted for Xenazine net of dropouts?

I believe, yes, they are, yes. These are the patients that are undergoing treatment or enrolled in the what we call the Xenazine treatment center, meaning that their case is being processed and worked through the various reimbursement systems, whatever the case is.

Just to give you a little more context on that, it's not unusual to have dropouts and when we originally modeled this product, we did model a rate of dropouts and certainly for Huntington's patients we appear to be in line with that rate.

And did you see any inventory stocking in 4Q that may have reduced 1Q a bit and care to share any goals on enrollment or sales or any other metrics for the year on the product?

Gregg, this is probably your question is about inventory movement quarter-over-quarter?

Yes from the fourth quarter of last year to 1Q of this year.

Yes, we've seen and we always every year see, fortunately I might say, some transient inventory fluctuation quarter-over-quarter. It does seem to explain some of the Xenazine, let's call them the factory sales number, but it's also something that we've experienced in the past. I think we commented abundantly last year on Zovirax, for example, in the first quarter where we were starting from what appeared to be a higher inventory position that was decreased into Q1. This year is kind of the reverse. So it's fairly (inaudible). It is something that we don't have much control over. I think that we have been reporting and Lundbeck has been reporting such inventory fluctuations in the specialty channel as well.

And have you shared or will you share any goals for this year for sales for the product or patient enrollment goals for the year other than just the peak estimate?

No, we have been sticking so far to, I guess, the patient target and I think that we're tracking quite nicely. Lundbeck has been, I guess, voicing some directions on the sales, but I would refer you to them if that was required.

Okay. And then a couple quick ones for Peggy. Can you give us accounts receivable and inventories. And also if we adjust the Wellbutrin XL sales in the quarter for the destocking you quantified and divide by prescriptions, should that be a pretty good level to use going forward or could the couponing and other programs put downward pressure on that calculation? And I understand you could manage that to some extent, but can you help us with that sort of calculation ex the destocking?

Gregg, I actually don't have my balance sheet in front of me. Would it be okay if I gave you a call on that afterwards?

No problem.

The NDC code that's an intentional drawdown to switching over, so we do expect that to get made back up for your math there.

And going forward, I'm trying to get a sense for the negative effect of coupons and other programs on that sort of sales per TRX relationship or do you plan to raise net price such that (multiple speakers).

I guess that we can't answer that question specifically. What I can tell you, however, is that the value of a coupon that would be redeemed at its maximum value would not necessarily be material in the grand scheme of things.

Okay.

It would allow us to provide the brand at a co-pay level that is competitive if not equal to that of a generic. So if you look at what those co-pays are these days, a general co-pay could be $5, could be $10. Brand co-pay could vary anywhere from $15 to $50. So the average coupon is going to be somewhere bridging that difference, experience will tell us what it is, but as you can see in the grand scheme of things and considering the number of patients that will hopefully come onboard as a result of that, it is not necessarily something that is good reading material.

Just to summarize, we're not expecting a significant impact on sales from the cost of the couponing or for the titration packs.

But that's helpful and lastly for Bill, a bigger picture question. Given the importance of business development to your model, can you remind us of the size and structure of your BD team and what you do internally versus with external advisors and curious how flexible that size and structure is as the target environment changes between more R&D type deals versus more financially oriented deals and how you deal with those shifts. Thanks.

Sure. We have 12 people directly involved in the business development effort, a team of eight which is focused on licensing opportunities and a team of four which would be focused more on the M&A type of opportunities. In addition to that, there is a substantial involvement from Senior Management, including myself. I'm involved in every single one of these deals and so it receives a great deal of focus throughout the Company. Obviously, when you get involved in due diligence, the number of folks who were involved is much wider, because you'll have teams from our sales and marketing area, you'll have teams from regulatory, you'll have teams from Clinical Development that they are also in there looking at these products. But the core team that's really out there sourcing the opportunities, doing the analysis, negotiating the deals would be all 12 individuals. Obviously, we do leverage it by using third parties, investment banks, and sometimes consultants on particular transactions.

Thank you very much.

Thank you. Our next question is from Tim Chiang of CRT Capital. Please go ahead.

Hi, Bill. It seems like you're continuing to benefit from better than expected performances in Canada. Also your Legacy business and your generic business. Can you provide some comments on that and do you expect these types of growth figures to continue through the year?

Hi, Tim. We certainly are seeing very strong performance out of those businesses. I think we can expect that to continue for the next little while. What is -- but part of it is -- it's certainly in the generics business is fortunate circumstance because our diltiazem products are benefiting from the difficulties that a couple of competitors have had in producing a product and so we're picking up that incremental volume. In Canada, the business is just doing well. It's firing on all cylinders. We had some product launches over the last couple of years. Those products are doing very well. Our sales force is doing a great job. We're out there actively looking for new products to bring into the Canadian market and so just feeling very good about it.

On the Legacy products, I think you're seeing the benefit of us paying attention to it and managing it better, doing the kinds of things Gilbert has been talking about with the couponing, the sampling. In the case of ZOVIRAX, we put in place a CSO that was highly attuned to what we wanted to do, working very closely with them on the marketing and we're seeing the results. And so I think it goes to show that with Legacy products there actually is growth there if you manage them properly.

Okay, great. Thanks.

Thank you. Our next question is from David Steinberg of Deutsche Bank. Please go ahead.

Okay, thanks. With regard to your ZOVIRAX franchise, are you still planning for a competitive launch from May to later this year? If so, could you share with us some of your strategies? How many reps are they going to put on it, what sort of pricing strategies are you aware of, and longer term, what -- you haven't had much competition in this area for a long time, what percent of the business do you think they might be able to take from you?

Okay, obviously you're relating to a product, I believe, is now in the hands of Meda, so it's an interesting product and I mean by that it's a relevant product in the category. However, we need to remember that it will only compete in one of the two indications of ZOVIRAX and that is cold sores or Herpes labialis. They do not have the indication for genital Herpes, so it's a bit less than half the market, the topical market that is in place here. Secondly, and I would argue most importantly, the challenge in that market is that the prescriber base for topical is absolutely huge, but the average number of scripts by each prescriber is very low. There's therefore a real economic commercial challenge for the launch and the positioning of a new brand.

As you know, ZOVIRAX has been around for 20 years. Is the absolute reference when you think of topical treatment using anti-viral products. It has formidable brand equity and the foundation that I just described here is broadened pretty strong. So we are focusing with our little dedicated sales force, we're focusing on 10,000 of those 120,000 physicians. They represent about 20% of the prescription. That's where, of course, the greater volume is and it makes our efforts cost efficient. We're also, through a number of white space program, reaching second and third layers of those prescribers and making them, reminding them about the existence and the benefits of ZOVIRAX and making their prescribing of the product easy through programs such as the one we described earlier.

Yes, I think the point there is that with this huge prescriber base, 120,000 prescribers, for a competitor to get to that prescriber base to influence them, it would be enormously expensive and so I think it's highly unlikely that they are going to be out there trying to detail all of those prescribers. They will probably concentrate only on the top decile. But there, it still represents a relatively small amount of the volume of the, what is being prescribed. And so while I don't want to minimize the competitive threat, it's a good product and undoubtedly it will have some impact on us. I don't think this impact is going to be overwhelming at all.

Okay, fair enough. And then with regard to your external strategy in bringing in new products, a year ago it was difficult. The number of these products you've gotten from private companies or smaller publicly traded companies, I was just wondering with -- was it easier to get financing with more money going into venture capital with public companies having easier access to capital? Has it changed the equation in the types of deals you can do, the prices you can pay, as some of these companies are now feeling more secure about their future and perhaps less willing to give up some key pipeline products?

We're seeing just as many opportunities as we did two years ago. In fact, in some ways the quality of the opportunity is perhaps even better because we've got to know the space better and people are bringing opportunities to us now because they know we're very active in the space. Generally for private companies or for in-market products where you'd be buying the product, I'm not sensing that the prices would be much higher than what we had to pay over the last two years. The one exception would be where we're looking at acquiring a public Company. In that case, stock prices have risen and so clearly the economics are more pressured in that one particular case.

Okay, thank you.

Thank you. Our next question is from Randall Stanicky of Goldman Sachs. Please go ahead.

Thanks guys for the questions. Just a couple of follow-ups. First, Bill, you talk about looking, obviously, for additional opportunities, including Legacy opportunities, but as you transition the portfolio more towards the CNS focused franchise, and obviously there's been a lot of progress towards that front, is there an opportunity at some point to revisit the existing product lines which may not fit exactly into that therapeutic focus, but perhaps provide good cash flow today but could fund additional business development opportunities if you could monetize some of those in terms of sales of some of those products looking ahead.

Well, we try to be very pragmatic about it and so somebody shows up with an offer for a product and we do the net present values and they're offering us more than what we can realize in terms of net present value, my intention is to be very pragmatic about that and we'd take the deal if it's a better deal. The fact is with our tax efficiencies and our ability to manage these products, it's going to be very difficult for anybody to offer us a better deal than what we can do ourselves. We just haven't seen it yet.

Fair enough. And then let me approach the on market revenue opportunity question a little differently. Of the ten to 20 opportunities that you're talking about being more near-term, can you give us a sense of what percent of those would be pipeline opportunities versus what percent would be on market product opportunities?

Well, more than half would be pipeline opportunities, but there's still a substantial number which would be in-market current revenue cash flow producing opportunities. I can't give you an exact number, but it's still a substantial number.

Okay and then Peggy, just a question for you. On ZOVIRAX, did we see the full impact of the step down, I guess, in the gross margin given the supply cost change in that relationship this quarter or would that be a 2Q timeframe?

You saw the start of it, for all you are going to take about 50%, the full impact will be in the second quarter.

Okay, that's helpful. Thanks guys.

You're welcome.

Thank you. Our next question is from Annabel Samimy of Thomas Weisel Partners. Please go ahead.

Hi, thanks for taking my call. Just again a few follow-ups. On the Pimavanserin trial, the combination rules that you mentioned, rigid vrsus risky, be a little bit more specific about how that reduces the risk of the program?

You faded a little bit in the end, Annabel, so you want to know what specifically about the program?

What is it about the combination, the rules of the combination trials that reduces the risk of the Pimavanserin program?

Okay. Well, actually the combination of rule aims at demonstrating that the combination is synergistic and that, therefore, it's superior to product A alone or product B alone and that, of course, a combination in doing so is also separating clearly and statistically from a placebo, so it's a four arm, fairly straightforward study. The outcome is -- it's not subject to a lot of interpretation, it's about the performance with respect to the primary end point. So I guess in a nutshell, that's what it is, where adjunct therapy approaches more complex and often much more specific to the issue at hand because it's an additive to an existing treatment. So that's why we're saying it's simpler.

Okay. Maybe I missed this, but are you going to be running the two Phase III programs in tandem?

We don't know that yet, Annabel. That's going to be subject to future analysis.

Okay. And then separately on the Staccato loxapine, you have, I guess, refined your investment for the product ahead of the approval. Is this any indication of discussions that you've had with the FDA that have lead you to scale back the investment or is it just optimizing investment and we shouldn't read too much into it?

It has nothing to do with the FDA. This is just because as we're getting closer, we're hardening the actual plans and obviously we are finding ways to do things more efficiently and we are going to be trying to trim costs where we can do that prudently.

Okay. And just the comment about how you would be interested in adding more product to support the sales force. Is that just to leverage a new sales force or is it because as you're doing your market analysis of the Staccato loxapine market, you're saying that maybe it's not as large as you might have expected?

No. It's always been part of our plan that we would introduce additional products for that sales force. That would be normal. You would expect the sales force to be carrying at least two to three products in the bag. So don't take this in any way as a diminution of our enthusiasm about Staccato loxapine. It does not represent that. The products that we are looking for would not only help to spread the cost of the sales force, but it would also bring revenues and cash flows themselves. So we are looking at opportunities that we think would be attractive opportunities in and of themselves.

Okay, great. Most of my other questions have been answered, thank you.

Thank you. Our next question is from Hari Sambasivam of National Bank Financial. Please go ahead.

Yes, thank you. Bill, I had a quick question on loxapine. With your initial sales force I'm assuming that you're essentially targeting the hospital sales force for schizophrenia. That's your initial target, but depending on your label, could you just tell me what kind of flexibility that you have or that you are building to address the bipolar aspect of it and also the outpatient segments, please, with the 60 to 70 people that you're trying to hire?

Hi, good morning, Hari, this is Gilbert. I'll take this one. First of all, there is a possibility that we will be granted with what we call, refer to as a broad approval that will allow us to market the product both for inpatients in the institutional setting and for outpatients. In other words, in the greater retail world calling on private practice psychiatrists. So that's kind of the ideal case is that right from the get go we get this broad label and no restriction. The other possibility, of course, is that becomes sequentially, first with the inpatients, controlled medical setting that eventually results in the approval in the broader setting.

Having said that, we believe that even if we were to get the broad label right from the get go, we will need first to establish the product and gain acceptance in the medical community and that it is essentially a kind of a mandatory passage through the institutional setting. So the launch that we're preparing will address those possibilities, but in any event we'll first and foremost concentrate our fire power in the institutional setting, make sure that we gain acceptance, that we gain access and sequentially, later during the course of 2011, we would broaden the approach and amend the resources so as to cover the field of the broad field psychiatrists in the US retail market.

Is it fair to assume that the agitation in the bipolar segment, would you see that in a hospital setting, Gilbert, or would you see that in an outpatient setting?

Well actually, we see potential in both settings. It is, however, the data that we have seems to point to a greater share of underlying cases of schizophrenia in the institutional setting, but it's not exclusively related to schizophrenia. We also see conversely that in the outpatient setting the opportunity is more skewed towards bipolar patients. Having said that, both indications, both underlying disease states would be covered in both settings of care.

Thank you.

Thank you. Our next question is from Bert Hazlett of BMO Capital Markets. Please go ahead.

Thanks, just have one or two on Pimavanserin and one more broad question. On Pimavanserin, I just want to make sure I understand it very clearly. Is there still a question of whether or not you will move into Phase III with that compound?

No, there is not. I think we got a good result out of the FDA meeting and our intention is to move forward with Pimavanserin as combination therapy with Risperidal.

Great. And then in terms of the timeline, I think previously you had said in other calls that a trial might take 24 months. These two trials then might take 24 months and if you begin them in mid 2010, that's tentatively, or you still have to some decision to make here, that potentially puts filing maybe around, excuse me, adding the six months that puts filing around the end of 2012 or completion of the studies around the end of 2012 and then filing in mid 2013, is that a timeline that seems reasonable at this point? Filing mid 2013 that is.

Yes, I don't want to comment on filing dates. What I will say is that we have some tox work that we have to do. That's going to delay things by about the six months, which means that Phase IIIs would probably not start until next year and then that the sort of 18 to 24 months seems like a reasonable time period for Phase IIIs. We have still not made the decision yet about whether we would run the Phase IIIs in parallel or we would run them sequentially. That obviously would have a major impact on the timeline.

Okay. And then I guess taking a step back, to build a critical mass in specialty CNS area, is there a target number of licensing or a target number of revenue that you feel you would need to get to? I know there unpredictable nature of the licensing, of course, but do you have a goal that you'd like to set for movement into this to achieve critical mass in specialty CNS?

Well, on a product by product basis, we target $75 million to $300 million in peak sales for a product. In terms of critical mass in specialty CNS, we already have a very significant CNS business. It represents about half of our existing business. I'd say we already have critical mass. We just want to build on it.

Okay, thank you.

Thank you. Our next question is from Doug Miehm of RBC Capital Markets. Please go ahead.

Good morning. Just a couple follow-up questions. When we look at gross profit margins, they are a tiny bit lower than I anticipated this quarter. Anything going on there with product mix and should we expect those to rebound a little bit as we go through the year. And then secondly on the SG&A, is this a good run rate? Were there any meaningful legal expenses in there, excluding the onetime item?

On the gross margin, Doug, there is a bit of suppression from the wind fall and (inaudible) did a good business, but not at the Wellbutrin XL profit margin levels. So that is a mix factor affecting it and, as I mentioned to somebody else, the ZOVIRAX supply price change is largely in but not fully for this quarter, so the mix will continue to bounce around a little and affect that gross margin. On the SG&A side, probably a fairly reasonable run rate. There were some product related litigation costs in there and, of course, some of the sales costs for the Wellbutrin program that Gilbert talked to, which obviously we expect are going to have very positive returns.

Thank you.

Thank you. There are no further questions registered at this time. I would like to return the meeting back over to Mr. Wells.

Thank you very much, Operator. Let me close by reminding everyone that our annual general meeting will be held in Toronto at 10 AM Eastern Time on May 18th at the Glenn Gould Studio. I look forward to seeing some of you there. Thank you very much for your attention. We appreciate you being on our call.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you all for your participation and have a great day.