Indivior PLC (INDV) 2016 Q2 法說會逐字稿

Well, good morning everyone, and thank you for coming to attend our first half results. I'm sure that you've read the statements about forward looking claims, and just to show you what the agenda for the day looks like. So I will make some opening remarks, and Cary, our CFO, will take you through the financials.

As you know, we've got a lot of litigation matters going on, so Javier is going to walk you through that, and then Christian will take us through the pipeline before I make some closing remarks about the future.

It's always a pleasure to come when things are going really well, and I would characterize at the moment that things are going really well. We've had a very strong first half. Operationally, we're in very good shape. We continue to see a healthy market growth in the U.S. business. Our film show is proving extremely resilient despite the increased intensity of competitive pressures, and yet we still see growth in our business. So it's our second consecutive quarter of net revenue growth.

Underpinning all of this, of course, is the win that we had versus the generic companies and the ANDA litigations, so that was a very important milestone to get behind us. Financially things are progressing very well, and particularly worthy of note is the strong cash generation that we continue have from our business. So Cary will talk more about that later.

The key value drivers for future growth, of course, lie within our pipeline, and the once-a-month injectable buprenorphine that will transform the future of treatment is progressing very well. We're very much looking forward to getting the topline efficacy results before the end of this quarter. The once-a-month risperidone product is a very interesting exciting product that I think it's worth reminding ourselves about. And this will be the first time ever that doctors have the opportunity to prescribe risperidone, which is the most prescribed active ingredient, to patients in a once-a-month dosing format which their most preferred dosing format. But Christian will take us more through some of that good news in his presentation.

Consequently, we've raised our topline guidance by 5% and our net income by over 10%. So with respect to guidance, let's just remind ourselves of what we said at the beginning of the year. So we always give our guidance based on what we think is what is most likely to happen, and we felt on balance this year that the market would be less risky, more stable, than last year. So we assume no deterioration in generic tablet pricing, limited impact of branded competition, and we've invested in the confidence of our own expertise and belief in the IP that we would win the ANDA litigation which, of course, we did. On the back of that, we started to increase our investments in optimizing the future value of our NPD.

So how have things moved on, what are we saying now? Well, there has been some slight drift on generic tablet pricing, but nothing significant enough to really disrupt our business. Consequently, our films being now very resilient, and we've only had to make tactical rebates here and there, and so we haven't had a huge rebasing of our rebate program to protect share. So all of which is very encouraging. That doesn't mean, of course, that we should be mindlessly optimistic for the future, there's still plenty of risk in our business even though we're managing it very well.

Generic discounting could begin to accelerate. This might be triggered by launch of more generics, some we've just seen; that there is a new buprenorphine competitor on the market with the probuphine [par]. We continue to cooperate with the government in their investigations, and we are not getting ready to file an appeal on one of our patents in the ANDA litigations. So consequently, we continue to have high levels of legal expenses.

So what's really changed in the U.S. market in terms of dynamics within the generic sector? Well, you can see there's been a little bit of a share fight between two of the players, Actavis and Amneal. This has caused a little bit of drift in the pricing, but as we said before, not material to have a huge impact. We're starting to see that share is stabilizing in the generic sector, so that's suggests that maybe the generic pricing might continue along a similar vein.

Despite all of this, here's the just the chart to show you the evidence that our film remains as resilient as ever, and that's because it's the technology that patients prefer to take and that doctors prefer to prescribe, and that payers prefer to reimburse.

We're very encouraged by the performance of our teams across Europe, and France, and Germany, and the U.K., that the share is proving very resilient in Europe. If you squint you might almost think that share has ticked up very slightly at the end of this chart, but overall it's not an exciting financial story in Europe at the moment. But you can make a share progression and volume gains and the government still implements austerity measures which sort of take it back in price.

So that, overall, is just a few opening remarks to set the context. Now Cary will take us through the financials.

Thanks, Shaun. Good afternoon, everyone.

So I'll start by taking a look at our P&L. As Shaun talked about a minute ago, our net revenue performance was very solid, up 3% year-over-year for both the half year and the second quarter; second quarter in a row where we've shown year-over-year growth. So we're very pleased to be reporting that.

Our gross profit for the first half of the year was $488 million on an adjusted basis, and $478 million on a reported basis. We had exceptional items in cost-to-sales of $10 million, and that was associated with some strategic initiatives we put in place in preparation for a possible negative outcome on the ANDA.

Our SD&A expense was $217 million, up 21% year-over-year. The biggest drivers there were the four-year costs of the infrastructure we put in place to be a public company in 2015, which grew over the year in 2015, in 2016 we're seeing the full impact of that. The other big increase in SD&A was also the litigation-related expenses from the legal matters which Javier will cover shortly.

R&D expense was down, but was up $5 million in the first half versus 2015 or 9%, in line with our original plans at the beginning of the year. And then we had exceptional items of $4 million in the first half in the expense line, and that was also associated with the strategic initiatives in preparation for a possible negative ANDA, which as you know we didn't have to worry about. So as a result, we wrote those expenses off.

I'll move to the next slide which really takes a look at our quarterly trend on an adjusted basis. So we've excluded the exceptionals in this view so you can see and get a better picture of what the ongoing business looks like. So again, on the net revenue line you see up 3% in the second quarter, up 4% in the first quarter. And then the other thing I'd like point out is now we are also seeing sequential growth. So Q2 revenue growing about 6% over Q1, and we hadn't seen a positive trend like that in quite some time. SD&A you see on an adjusted basis was $217 million in the first half versus the prior year R&D again at $59 million. Our operating margin in the first half was at 40%.

Our finance expense was at $26 million in the first half, you see $11 million in the second quarter, so that's down from the first quarter of $15 million. The biggest driver there is, I'll talk about it when we look at our balance sheet, but we bought back debt at a discount which helps to lower our interest expense, so we also get to recognize a slight gain on the benefit of buying it back at a discount. Our tax rate on an adjusted basis in the second quarter was 20%, which brings our year-to-date tax rate to 27%, slightly about our guidance of 25% for the full year.

And net income on an adjusted basis was $135 million for the first half, down 9%; but notable in the second quarter, our net income was actually up 18%. The biggest driver, again, in that year-over-year growth on that income was the fact that our tax rate was at 20%. So we talked in the past about doing things to optimize our tax rates and lower that overall, we're starting to see really tangible benefits from some of the actions we've taken.

Taking a little deeper look at our net revenue in the U.S., net revenue was up 5% year-over-year that's in drug, and by solid growth was in the mid-to-single high digits in the U.S. market. Our market share increased slightly to 61% versus 60% at the end of 2015. And we had a modest price increase that we took early in the year in January, and that was somewhat offset by annualizing rebates that were taken in 2015.

The rest of the world, as Shaun talked about, we saw a decrease of 7% year-over-year, but 4% on a constant basis. There's been a lot of concern among companies about the impact of the weaker British pound. We have the benefit of only about 5% of our revenues are in British pounds, so we have minimal impact we saw as a result of the dollar getting stronger. So overall total net revenue, again, up 3% year-over-year.

Operating expenses as I talked about a little bit earlier, the biggest driver in the SD&A increase the ongoing legal costs plus the annualized standalone PLC costs. If you're thinking in your models, you should pretty much look at the first half run rate and increases slightly as a result of the increased pre-commercialization investment we talked about making at the beginning of the year. Well, most of that is going to occur in the second half of this year.

R&D increases in line with the two products that are in Phase III, which Christian will be talking about later on, and I've already talked about the exceptional items.

Our gross margins on an adjusted basis, that's excluding the write-off of the costs I talked about associated with the negative ANDA planning. When you exclude that, gross margins were at 92%, actually up, versus 91% a year ago. And that was really driven by the fact we used to pay our third party manufacturer MonoSol a royalty, which that small royalty ended in the first quarter of this year so that going away increased our gross margin.

We also had the benefit of weaker British pounds. Because we have costs that occur in the U.K. we get some benefit on the cost side. I've covered the exceptional items that are impacting our gross margin, so I'll just talk about our operating margins which were down 4% year-over-year to 40% on an adjusted basis. And that was driven by the higher revenue and the higher expenses in SD&A, and cost of goods.

Our tax rate guidance, again, for the year is at 25%, plus this is on an adjusted basis so excludes exceptional items. Those exceptional items were $5 million in the first quarter of the year, and that's associated with some movement of assets within the group to optimize our long-term tax rate. So it's a short-term hit but we'll have long-term benefits as we're able to take advantage of things like the Patent Box in the U.K.

In the second quarter we recognize that per tax revision related to some unresolved tax matters of $14 million. And then we also because we exclude expenses when we talk about adjusted earnings, to be fair we also exclude the tax benefit we were getting on those expenses so that goes the other way from an adjusted standpoint. So when you do that, you see over on the second column the $9 million net exceptional adjustment in the second quarter. So excluding those two exceptional items our tax rate was 36% in the first quarter, 20% second quarter, year-to-date 27%. Being at 27% gives us a lot faith and confidence in our ability to hit the 25% guidance, we can get it.

As Shaun mentioned, we had strong cash flow this year in the first half generating operating cash flow on $230 million. Our free cash flow of $170 million driven by our earnings and the solid working capital management, as well as lower interest expenses I mentioned as a result of buying debt back. Our cash conversion continues to be very strong, generating 92% conversation rate.

And then taking a look at our balance sheet, not a lot going on our balance sheet. The two biggest drivers of the change in our balance sheet were the increased cash of $110 million versus the end of the year and the lowered borrowings, which I'll get into in a second.

So taking a look at our net debt position, our cash and cash equivalents now stand at $577 million versus our borrowings overall, of current borrowings of $47 million and long-term borrowings of $104 million. So that brings our net debt down to $5 million versus $174 million at the end of the year, and versus well over $400 million when we spun out from RB. So we're pretty happy with our progressing in deleveraging the bringing down our debt and overall finance costs. Part of the way we've done that is we repurchased $46 million of debt at a discount in the open market this year, that's on top of $75 million we did in 2015. We're continuing to maintain a pretty high cash balance. You may think that's not the most prudent thing to do, but in our mind it gives us a lot of flexibility in terms of being able to take advantage of M&A, of business development opportunities, and we'll continue to also look at lowering our debt possibly, or funding additional pipeline activities.

I'm going to end with the specifics on the guidance that Shaun talked about.

We're increasing our guidance for the rest of the year with net revenue going to a range of $1 billion to $1.30 billion and our adjusted net income, again excluding exceptional, in a range of $180 million to $200 million. We're making the same assumptions that we're going to reinvest $35 million of our gross profit back into the business. The difference is, originally a lot of that was going to be in R&D, as a result of some of the pipeline changes we're going to put that really into commercialization and pre-commercialization activities for the products that are in Phase III, which we hope to seek approval toward the end of 2017 into 2018. So we're going to invest in those products as well. This excludes exceptional items of $14 million that I've talk about, is that constant exchange rates, and again it has a tax rate assumption of a 25% tax rate.

So that's it on the financials. Now I'll turn it over to Javier who is going to give you some update on the legal matters.

Good afternoon, everyone. As Shaun and Cary mentioned, I'll be providing an update on the company's legal proceedings and we'll start with the ANDA litigation.

As Shaun alluded to, in the first round of our ANDA litigation against Actavis and Par, the court upheld the validity and enforceability of the 514 Patent, which enjoins Actavis and Par from launching a generic product until April, 2024. The ruling also found that the 150 Patent was valid but not infringed by the generic products, and that the 832 Patent the claims were invalid, but that certain claims if valid would have been infringed by the generic products.

On the back of that ruling, Actavis and Par have appealed the finding on the 514 Patent, and we have appealed the ruling with respect to those claims that would've been infringed had they been valid.

On June 29th, in the Teva Orange Book listed litigation the court in a Markman Hearing issued a somewhat more stringent interpretation of the 514 Patent with respect to the drawing of the film. On that basis, Par and Actavis have now moved the court to reopen the judgment on the 514. If that motion is granted, which is somewhat of an extraordinary request, but if that motion is granted it would deactivate the current appeals process and the merits of that new claims construction and the infringement argument would be tried in November.

The rest of our ANDA litigation is proceeding as scheduled. However, in related proceedings, the USPTO recently declined to institute three inter partes reviews that Teva had petitioned for on the three Orange Book patents, that declination based on procedural grounds. Shortly after that decision by the USPTO, Dr. Reddy's filed very similar IPRs and we're in the process of drafting objections and opposition to those IPRs.

Moving on to the FTC investigation. The Special Master appointed to review the legally privileged documents in April issued an initial report and recommendation as to how those legally privileged documents should be handled. That report is now with the court to determine whether to adopt all or part of the Special Master's recommendations.

In the class action antitrust litigation, the contingent of states, who in August of 2015 initiated a follow-on investigation to the FTC's investigation, informed us in July that they intend to file a civil complaint in the Eastern District of Pennsylvania asserting violations of state and federal antitrust and consumer protection laws.

The Department of Justice investigation is continuing. We are in the process of providing additional documents and other information to the DOJ in cooperation with their investigation. And finally, with respect to the legal proceedings we have with DDSI, the appeal that we filed regarding the PTO and PTABs holding that claims 15 through 19 of the 832 Patent are invalid has been scheduled for oral argument on the 3rd of August.

And with that, I will turn the microphone over to Christian for our pipeline update.

Thank you.

Good afternoon, everyone. I will now give you an update as to the status of our pipeline.

Let's start with the Suboxone Tablet. We recently had a meeting with the Canadian Regulatory Agency. You probably know that Suboxone Tablet is available there to an 8 mg. We basically presented data for two additional dosage strengths of 12 mg and 16 mg, and the agency has, Canada confirmed that bioequivalence criteria were met for both those dosage strengths. That will now lower to five in NDS which is the equivalent of an NDA of which will be supplemental NDS in Canada.

Very importantly also from a geographical expansion, we now completed the three required clinical trials for submission of the NDA to the Chinese in NDA. The final clinical study report of the clinical efficacy and safety trial was assigned in June, 2016, and we are currently planning then the NDA submission to the Chinese NDA by the fourth quarter this year.

RBP-6000 which is our (inaudible) buprenorphine depot formulation. And as you know, we are really trying to do something completely relative in the sense that we are not only targeting prolonged management of withdrawal symptoms, but very importantly how do you manage in the long-term the subjective and objective effects of opioids in that patient population. So from a clinical perspective, you may remember that we have currently two Phase III studies, the first one which is a clinical efficacy and safety trial over a six-month period. The database was locked on July 13th, and as you can imagine we are currently going through a very intense period of data analysis and interpretation, being totally on track then for the release of topline results by the end of the third quarter this year.

The second trial is then a Phase III open label safety extension study. The last patient first visit on that trial happened on April 29th, and again we are completely on track to deliver a database lock for that trial in the first quarter of 2017.

From a regulatory perspective, we were granted fast-track designation on the 23rd of May of this year, which will put us in an even better position to negotiate a potential priority review at the time we sit down with the NDA in the context of a pre-NDA meeting. And the planned NDA submission, of course, pending the outcome of that pre-NDA meeting, is still the second quarter of 2017.

Interesting developments with our intranasal naloxone product for the treatment of opioid overdose, you may remember that we were granted a temporary use authorization by the French Regulatory Agency, the ANSM; that was back in November of last year. The ANSM got back to us actually earlier this week, on Tuesday, the 26th of July, to basically give us the greenlight to actually launch the product on the French market under the ATU. The product was then launched on Wednesday, this week on the 27th, and will be available to patients in about a week, again, in the context of the ATU. So we are really, really, looking forward to start monitoring the impact of our product of curing overdose in the French setting over the next weeks and months.

RBD-8000, the cocaine esterase for the treatment of cocaine intoxication, we received a breakthrough therapy designation back in October, 2014. Since then, we had two Type B meetings with the Food and Drug Administration in order to further refine the clinical development plans and those plans are currently under review.

Alcohol use disorder and arbaclofen placarbil. You remember that we inherited this product from ZenoPort for a very different therapy indication, that was a spasticity in multiples sclerosis patients. Now the challenge for us was to test this product in a completely different patient population, that is alcohol-dependent patients, and over a wide range of doses significantly higher than those that you are using for multiple sclerosis. So that was the goal of this Phase IIA study. We basically aimed at characterizing the pharmacokinetics of arbaclofen placarbil with the capsules of 240 mg for (inaudible) alcohol-dependent patients in an in-patient setting.

So the outcome of the trial will now allow us to further refine the clinical development at a relatively high level. What we have seen is that this product is really well-tolerated in alcohol-dependent patients, but in the same token what we saw is a relatively high pharmacokinetic liability from one individual to another as you increase the dose. And as you know, this was a known territory for us when we started this trial. So we need now to understand the root cause of this inter individual pharmacokinetic liability, this is what we are currently doing, and we put together a series of studies between now and the first quarter 2017 to go to the bottom of this liability.

RBP-7000, our monthly risperidone depot. I encourage you to perhaps read these two publications. The first one that you see there on the top, is actually the publication on the clinical efficacy and safety data that was published in The Journal of Clinical Psychopharmacology a couple of months ago. And you will have the entire story about the criteria for the trial, and very importantly the success over a two-week period in terms of clinical efficacy and safety.

Very importantly, the second publication that you see there at the bottom, was all about the health economics and outcomes research (inaudible) that we used prospectively in this history trial. And the goal there was to really not only demonstrate the clinical efficacy and safety of the product, but its cost-effectiveness even over a relatively short period of time because the trial was an eight-week period trial. Although the trial was relatively short as agreed with the FDA, you already see a very significant impact on cost-effectiveness and the quality of life of these patients, which is incredibly exciting as we will follow these health economics outcomes in the long-term safety trial.

This is the trial that we are currently completing with being on track for last patient last visit at the end of this month. From a regulatory perspective, we are scheduled to have a pre-NDA meeting with the FDA in August with a planned NDA submission, of course, pending the outcome of the pre-NDA meeting the fourth quarter of 2017.

Last but not least, in order to become completely independent from Reckitt Benckiser, we started building a completely new R&D Center of Excellence in Hull here in England. These are a couple of pictures that were taken a few days ago so that you can appreciate that this piece of work is going really well. We hope that the building will be water tight by the end of October this year, allowing us to have the building by the second quarter of 2017, and then enabling us to be completely independent from Reckitt Benckiser by the end of 2017 as originally planned.

And last but not least, similar to last year we would like to announce our Indivior R&D Day that will take place in New York the first week of December. The invitations will be sent out in September/October, and this will be a live webcast as well for those who unfortunately won't be able to join us.

Thanks a lot.

OK, thank you, Christian.

So let's think about the future although our remaining priorities are for 2016 as we look ahead.

Well, clearly, we've had a very, very positive result in the litigation process but this is, like all legal processes, it's just another step in the process albeit a very important and substantial step. So we continue to focus on that and we want to resolve this and secure the long-term certainty for the future.

We've already talked about we've filed for appeal and we'll continue to work to good work there.

Our commercial teams will continue to drive the Suboxone resilience in the U.S. We will continue the good work on the pipeline, and I very much encourage you join us on R&D Day in September.

Since the under wind we have filed for a U.S. listing. For this one to be upfront, has nothing to do with Brexit, OK. So there's no whole thing about are we going to leave the U.K. This is simply that we have a lot of investors in the U.S. who are interested in investing in our business, they can't access the shares because they're not listed in the U.S. So this is why we think that this is a good thing to do and gives us future opportunity for growth. We'll continue to expand our global footprint, as we said before, not only in the U.S. but also continue to progress the painkiller opportunity in Europe, and we're currently preparing to file our NDA for the Suboxone Tablet in China.

So if we think about our first 18 months, we're very proud of what we've achieved, we've worked very hard, and we're confident that we have built an operation that's fit for purpose as independent public company. It was very important that we got this right, we have to separate from RB, we have to create a lot of new functions, we have to comply with best in class standards on the compliance and regulatory standards within ourselves and our own business, and we have to implement brand new SAP systems as we separate it out from RB. So we've done a very good job with all of this. We also took control of the Fine Chemical Plant to have control over the supply chain.

So 18 months in we think now is quite natural on this journey to now have a look at our cost base. So we're up and running now, let's go through a phase of doing benchmarking. Let's just look inside and see what we have, have we got any opportunities to optimize our cost base. So there are areas where we can make some savings. So there is no number to announce. We're at the very beginning of this process, this is really just to say this a mindset that we have as we think towards our future.

I did just want to pause for a moment to really appreciate what's just happened in the U.S. with respect to some new legislation and regulation. We know that opioid dependence is a huge problem, it is a public health crisis in the U.S. And something that's a little bit difficult to quite get your head around if you live in the U.K., is just how big a deal this is in the U.S. Because in the U.K. opioid addiction still leans more toward heroin users rather than painkiller dependence. But this is something that affects lots of people in America, it's a real middleclass problem, and most people are dependent on painkillers that were prescribed by their doctor. This is not a heroin substitute, this is not a sort of street junky time medication; this is a mainstream disease and a mainstream problem.

It's such a problem that more people die from opioid overdose every day in the U.S. than in car accidents. So there's over 25,000 deaths a year, so this is a really big deal. That is why the U.S. government has been tied up in developing legislation over the last, well, long period of time and very intensively over the last two months, to actually create an environment where it's easier for people to access treatment. So some key things that they've done that are very important to recognize.

First of all, by regulation they've increased the patient cap from 100 patients per doctor to 275 patients per doctor. So what this means in the medium-to-long-term that there will be an expansion in the distribution of treatment services to patients. So the floodgates are not going to open and suddenly thousands and thousands of patients surge through the door because less than 10% of doctors in the U.S. actually have a hundred patients at the moment for this particular disease. But it's very important for the medium and the long-term.

A new type of heath professional is now allowed to prescribe and treat these patients, and this is nurse practitioners and physician assistants. So for the first time ever, this highly talented and skilled group of healthcare professionals will be able to treat patients. But again, it won't be next week or next month; they have to go through some very careful and rigorous training which is entirely appropriate. But again, in the medium term we will see that this will enable to create a very positive shift in the environment in which we will be launching our once-a-month buprenorphine depot. So I think I really would encourage you to take a look at some of the U.S. media and really grasp what a big deal this is.

So if we think forward to our agenda, for the second half of the year you can obviously read this for yourselves, we will be at the healthcare conferences, and we're always pleased to talk to you on a one-to-one, so please take that opportunity and book us onto your schedule.

So in summary, we face the future with renewed confidence. We're very positive and upbeat about the future growth prospects for our business. But in the interest of fair balance it's also important that we recognize that we still do have risks within our business. We still have risk around the litigation that we're making great progress and manage. We have some serious government investigations, we're cooperating and we're meeting our part. Pipeline development always intrinsically carries some risk. I don't think any of this is new but just in the interest of fair balance I have to say that, and also recognize that we're making good progress with dealing with those risks.

So we very much look forward to carrying our business forward and to talking to you again in the future.

So before I take any questions and answers, I'm obliged to share with you the prescribing information for our Suboxone product, as we have talked about during the presentation today.

But now I'll be very pleased to take any Q&A.

Hi, Shaun. Thanks for questions. I have two. First, in your sales guidance you still implied decreasing sales in the second of the year after growth in the first half. But you still see similar trends in the second half. Could you elaborate on what your assumptions are, specifically, for the market and for Suboxone for the second half?

And the second one, can you elaborate?

On your sales charging for risperidone. And specifically, will you look to leverage your existing salesforce or recruit to [address and why the selection of physicians].

OK, I'll take the risperidone first, and then Cary can talk about the second half sales.

So with risperidone, we think this is a very attractive technology. We know that doctors wanted those patients on a monthly basis, and we know that despite all the innovation and all the new products in schizophrenia over the recent years, they still choose to prescribe risperidone more than anything else.

So we're currently evaluating whether we should launch this ourselves or whether we will do a deal with someone else to launch it, and the process is still under review.

So your question on the revenue is are we, if you just doubled the first half sales you'd get 10/60 and we put in a range up to 10/30. I think we're being cautiously optimistic on the market, there is a new brand of competitor that launched as well. We don't expect to have major impact on us, but we just feel like we're going to be prudent in terms of our overall assumptions that we've factored in in that guidance.

So it's fairly close to that number you see in the first half, but we are not expecting really any major changes in the market dynamics, just more of a bearing on the side of conservatism in terms of our assumptions in the second half of the year.

Steve, just a few questions. Firstly, just again on some guidance and looking forward. In terms of the R&D spend, obviously, there will be completion of certain studies that have been ongoing, and I think probably looking forward as less sort of Phase III studies that you just start to replace those. So just trying to understand the way you think R&D will go, given that the first half is obviously a lot lower than perhaps guided to at the beginning of the year. That's the first question.

Then secondly, just in terms of gain on the income, you've already done $135 million in the first half, so [maybe you, with that much to do] in the second half, so obviously all interlink with where the costs are going come from. I know you talked about $135 million primary second half weighted. Also, just in the first half is there any stocking in the second quarter, last year was very high, second quarter this year is getting high in terms of revenues. Is there some factor that's driving the second quarter?

And then have you got any more flexibility in buying that debt back. I believe there was some sort of cap in the amount you could buy back in the market. Have you reached that, are you able to do anything more?

Thank you.

Well, I'll start with that one since that was the last one. So there are structural things in the credit agreement that limit the amount of debt that can be bought back. In the open market we can always work to make modifications of that, but we can also pay down the debt at par without any penalty at this point any time we want. So we'll be fairly opportunistic in terms of when we do that, but we also have to balance that with other uses for our cash.

On the R&D, we don't give guidance beyond 2016. So in R&D there's still a fair amount of cost in the second half of the year associated with those Phase III programs because they won't be complete in 2016. So there is a higher share of cost in the second half, not dramatically higher, so again not the year-over-year increase that we projected when we gave guidance because we have made some adjustments in the pipeline. But I wouldn't expect, you shouldn't expect to see a major decrease in our R&D for the balance of the year.

On the net income question, as you recall, the investment I just talked about in pre-commercialization most of that is in the second half of the year. As well, as we still have litigation-related expenses that are continuing into the second half of the year, which is why you can't take the first half net income and double it and expect to see that for the full year.

And I think that was all your questions?

Just one question on the timing of the $14 million strategic investment exceptional. Has something in particular changed that's made you take that now? And what were your thoughts on the outcomes going forward.

And then another question on capital allocation. You've made strong progress with the debt pay-down and you've mentioned that you look at this as development. What sort of therapies (inaudible) would you look at and what level of cash or comfortable metrics do you need before you take action on that?

I'll take the $14, so, what happened was the $14 million is we won the ANDA litigation, that was the trigger for treating, recognizing the expense and treating as an exceptional. And just to be clear, it's not the litigation expense associated with the ANDA trial. That's a now ongoing SG&A expense, when it was specific activities and strategies that we spent money on in the event we would lose. And since we won we wrote the expenses off.

And then business development -

Then in terms of focus for business development that remains unchanged. You know, we are the world's leader in addiction medicine and we have very capable R&D teams that not only developed the once-a-month buprenorphine but also run some complex trials in schizophrenia.

So we do have capability outside of addiction and we've always said that from a business development point of view we prefer to get products and businesses in addiction. Beyond that we would look for products and businesses outside addiction, but preferably in CNS closely aligned to addiction. Where the capability and competency we have in terms of the intimacy of the relationships that we have with physicians, where we now have to have a dialog with the physician where we can teach the physician new things as they've all had to learn with addiction.

So that all is very much the same. Clearly, you would think each quarter that goes by our ability to execute the concept strategy starts to improve. Environmentally, in the broader market this sort of ridiculous frenzy that was going on a year ago on that Lumena and the prices that were being paid for things, the heats gone out of that. Our cash position has, obviously, improved and almost no net debt.

So we've got a very resilient franchise to build upon. So we're leading to a position where we have more choices about what we can execute. But don't read between the lines, I'm not sending a signal, I'm just stating that's how things are and we continue to look further how we can execute on our targets.

Thanks. Just two questions related to guidance again.

I remember full year you said margins would be more than 30% for the year, you've always done 14 the first half and you talked a little bit about investments in the second half. (Inaudible) opportunity to, perhaps, steer us a little bit on what kind of profitability we can expect for the full year?

And secondly, I know by nature exceptional items are exceptional. But in terms of planned activities in the second half, can you expect any other one-time items that you're aware of coming?

Thank you.

So your question on profitability. Unless where I understand other than - we've given a full year net income guidance, so that's about all I can give in terms of projected profitability in the second half; you can do the math on that. Again, there are reasons why you should just double the first half, obviously, because of the level of investments we're talking about in the increase in R&D.

And then, what was your question - exceptionals. The majority of them, again, there aren't a lot of exceptionals projected at this point in the second half. There definitely aren't any projected in the tax line which had a good chunk in the first half. But like you said, they are by nature, by definition things that you're not planning on happening. The other, the exceptions we tend know about were mostly related to one-off costs associated with spinning off and breaking out of RB, and most of that has already occurred.

Sorry, just one for, just like you just said, talks about the stocking in the second quarter whether there was [any grade] to stocking.

You know stocking and destocking with the wholesalers varies from period to period, but typically it's a week or two weeks of going from holding three weeks to two weeks, or two weeks to one week. There is no significant change in stocking year-over-year.

So this kind of heavy second quarter is -

Not unusual. It's not driven by - it's not driven by seasonality.

And then just the other question is just, have you just a bit more explanation of what's going on with you said the Actavis or what's in Par, and the fact that they can reopen the case in November potentially. I'm trying to understand that in a little bit more detail.

Sure. So in the Teva Orange Book litigation, a Markman Hearing was held. Teva petitioned the judge to interpret the 514 Patent in a way that Actavis and Par didn't in -

The judge -

It is the same judge. So he adopted in large part one of their petitions for claims. It has to do with the drying process for film. And so Actavis and Par have requested that the judge reopen his decision on the 514 Patent with respect to their infringement of it in light of this claims construction, and they want to introduce new evidence about their manufacturing process.

So in order to do that they've had to file this motion. No real sense of whether or not the judge will grant it, although it is somewhat an extraordinary belief that that's being requested. If it is granted, then that portion of the 514 infringement would be combined with the trial that's scheduled in November and it would also deactivate the current appeals process. Which means that the appeals process would get cancelled and wouldn't re-started again until after the ruling in the trials that are coming up in November.

OK, well, if there are no further questions, thank you very much, everyone, for coming and look forward seeing you again soon.