Ligand Pharmaceuticals Inc (LGND) 2002 Q2 法說會逐字稿

Thank you for your patience and please continue to hold.

Your conference call will begin shortly.

Thank you all for holding and welcome to your conference this morning with Mr. David Robinson.

As a reminder to participants, today's conference is being recorded for transcription and replay.

Therefore, before you speak please state your name.

Also your lines are listen-only until the question and answer session.

At this time I'll turn the conference to you, Mr. Robinson.

Good morning everybody.

This is Mike Watts, Director of Investor Relations for Ligand and I am here with David Robinson our CEO, Tom Silberg our Chief Operating Officer and Paul Maier our CFO.

We'd all like to welcome you to this call today to discuss our second quarter financial results.

Before we get started let me just get the formality out of the way and say that as you all know there are risks and uncertainties inherent in our business and we will be making forward-looking statements this morning.

For more information on those, I would refer you both to the safe harbor statement of our press release as well as to our recent securities filings.

So with that administrative detail out of the way, I will turn it over to David.

Thanks Mike and thanks everyone for joining us this morning.

I'm going to try and focus my comments this morning in three parts - first, provide a little bit of perspective to the company's second quarter and first half financial results; secondly, to talk a little bit more about Avinza and our progress with Avinza; and thirdly, to talk about our progress in reaccelerating our specialty products.

So, in those three segments, I'll start first with comments related to perspective of where we are.

We entered 2002 with four commercial products growing in fundamentally specialty market niches and gradually expanding their utility

physicians' hands to expanded use indications in larger markets.

We entered also with our largest product pending approval with some uncertainty as to the timing.

We entered with a clear business and financial goal to grow our business to operating profitability in 2002 and transition to a growth and earnings positive company as we moved into 2003.

Our product sales plan to support those goals for 2002 included a solid growth into expanded use of our specialty products through additional clinical data, clinical advisory meetings between key opinion leaders, and medical marketing use trials, areas that were relatively new to the company, and add to that, following approval of Avinza, a robust Avinza product launch.

Earlier this quarter in July, we updated you of a inability to achieve the second quarter revenue targets and we provided some substantial detail to kind of some of our challenges related to that.

We revised our quarterly guidance, but we maintained our overall year guidance with a slightly altered product mix relying substantially more on growth in Avinza and substantially less in our specialty products.

We, in spite of that second quarter impact, we were able to reaffirm our guidance for the year.

And I'm pleased to say that with a little more time passed that we can report some positive early responses to our steps to reaccelerate growth of our specialty products in the second half of this year.

I'll comment by saying that I think the second quarter results married to the first quarter results continue to show a company in the first half showing substantial growth largely prior to the launch of Avinza and prior to some acceleration activities for our specialty products that will impact the second half.

We do believe that that snapshot of the first half, while positive, will show further substantial progress for the company across its business in the second half of this year and allow us to continue to meet our operational profitability goals for this year.

I'd like to focus now first on some further comments on AVINZA.

We launched AVINZA in late second quarter, began with an important gain initial foothold in distribution, rapidly addressed the PBMs, GPOs and access for our product and began promotion of AVINZA as the second quarter closed and the first quarter opened.

Where we are today is with about five weeks of full -- five to six weeks -- of full promotional activity with our 80-man sales force.

We have been able to gain now substantial feedback from the market of a qualitative nature.

We have also begun to receive the first of the early prescription audits

and related audits.

They start to give us little insights to the quantitative response of the market to AVINZA and to our promotional activities.

Based upon all of that feedback, from wholesaler quarters and retail demand, early prescription demand, managed care acceptance and our GPO dialogues, we continue to strengthen our confidence that AVINZA is taking off nicely and that the Company will be able to achieve its goals for this year.

We caution that the weekly prescription data still has not yet been rolled into a full first month's data so we don't know what the full first month's data is and that the weekly data remains simply a barometer, not an accurate quantitative assessment, of the overall prescription demand generation.

We would note that week-to-week we are beginning to see AVINZA prescriptions nearly doubling from week-to-week.

That is the most important barometer that we track at this early stage, rather than the absolute levels.

Absolute levels are impacted by the level of retail distribution and, obviously, in our very first month of retail distribution, we were fairly thin.

That distribution is getting better each week and will continue to get better throughout the first 6-9 months of launch of the product.

When you do not have retail distribution, there are prescriptions that don't get dispensed and there are others that get dispensed slowly with some delay.

So they do not show up in the prescription audits.

Retail distribution is, clearly, one of our high priorities for AVINZA as we move through the launch.

We believe, when you look at all of the barometers, the qualitative feedback from physicians, the support of managed care and the progress we're making in entering managed care formularies, together with the prescription data, all point very positively to our progress with AVINZA and we are clearly encouraged by that data.

We clearly need to see a continuing of the doubling of that prescription rate and that is what you would expect going-forward is for some period of time we need a very high rate of growth week-to-week and then we'll have to watch how that rolls into numbers for the months.

We have looked carefully at the launch of all of the sustained release products in the category.

So, looking back on when they were launched, the market in which they were launched, we've looked at the first six months of each of those products and without getting into gory details, we would only say that we are particularly pleased with our prescription growth and with the emergence of share as we start to monitor the AVINZA launch.

Early prescription data, we believe, is but a test barometer of how we're doing.

We would point to August as a meaningful month of prescription data to start to be able to plot demand curves and we believe by September we will have a much, much -- by September's data a much better handle on the quantitative take-off of the product.

You'll see from the press release some of the progress we've made on managed care and we think we are progressing nicely to get our

covered up to 150 to 200 million over the next several months.

You'll note that several organizations already have us in a, what we would call, a privileged position and others have us in a competitive position within those formularies; the difference between Tier 2 and Tier 3 within those formularies.

The other comment I would make on AVINZA is, of all the barometers that we track that are positive, the one we're paying most focused attention to right now, that we need to work more on, is accelerating the gaining of retail distribution and that is and continues to be a priority for this quarter and for next quarter, as we bring AVINZA to a full national product status.

You'll note from the press release that from our second quarter shipments to wholesalers of 11 and a half million, we brought only 4.1 million of that to the P&L and we have reported deferred revenue of 6.1 million, net after product cost of sales, we should see that revenue brought forward corresponding to underlying prescription growth in the next several quarters and so, in addition to the business we're doing in this quarter, there will be the deferred revenue recognition coming forward as well.

We believe that was the appropriate accounting treatment for AVINZA at the time of second quarter launch.

While it's always early in the ball game that you have to note where we are, I think you can probably gain from our comments that we believe we're off to a solid start with AVINZA and therefore are seeing some considerable excitement emerge in the company and in the customer base.

I'd like to turn now to some comments on ONTAK.

Clearly, as our currently largest single product ONTAK is important to our business goals.

ONTAK, we believe, has shown consistent with the actions that we took and announced more than a month ago.

ONTAK has shown very positive and surprising response to our refocused and accelerated activities.

We're not sure how much of that yet is simply that all of the work of launching AVINZA is now behind us.

The territories have been focused and the reps are settled down a bit more into those territories.

We're not sure how much of the rapid resurgence of ONTAK is due to that, and how much is due to better execution of our clinical advisory meetings, some opening of some of our expanded use trials and product pull through there.

But you'll note from the press release that July of this year was a record month for ONTAK.

It's the highest month on record, measured by end user shipments out of wholesalers.

While one has to be cautious about how quickly that translates to wholesaler buying, which is how we book our revenue.

It is particularly encouraging to see that from a second quarter, which was a little soft in demand, to coming out of second quarter and into third quarter.

We see ONTAK responding quite dramatically and recorded its highest month ever, measured in the most important pull through measure that we have.

We're encouraged.

We believe that is ahead of our schedule for second half and points to a positive evolution of ONTAK for a second half.

Correspondingly, we continue to see solid prescription growth.

Certainly not as dramatic over the past couple of months as ONTAK, with Targretin caps.

Targretin caps through the six months of this year was up eight percent in prescriptions and 12 percent in total capsules.

Showing higher growth in capsules due to largely a mail order pharmacy, which have much larger prescription sizes than retail prescriptions.

And Targretin gel, which is up 31 percent for the year.

We continue to see a solid growth in that demand.

We have not yet seen in Targretin capsules, the take off of some of the expanded use areas.

We are opening those trials in the second half and we do expect those to begin to have an impact on Targretin demand.

We don't believe it will be quite as quick or as dramatic as perhaps the ONTAK July results, but we do expect to see an acceleration of demand for those products during the second half.

We believe that with those trends, what we can say at this early stage of the second half, is that we believe that the second quarter is what it was and that our business as we look at the second half continues to be in a solid growth mode.

And that with each of our months since, we're gaining increased confidence of our ability to achieve our goals for this year ...

I think the press release largely covers the rather dramatic progress we've made in the capital structure changes and in eliminating the long-term debt of the company, so I won't go into detail there.

Suffice to say that as we enter the second half, we have the company positioned such that operational earnings as they emerge should fall fairly unencumbered to the EPS line without a lot of drag from non-operational expenses.

We certainly have the cash position of the company where we need it.

And as we move through to cash flow neutrality and earnings positivity, we don't anticipate any needs for additional operational cash for the company's business.

So I think with those comments, there are only one or two other perspectives I would offer that you can see in more detail from the press release.

We had fairly positive data continue to be published at ASCO on the addition of Targretin to

regimens combo chemo agents.

We believe that data, now married to some of the other combination data we've published, continues to underscore the attractiveness of Targretin added to standard chemotherapy for frontline treatment in non-small cell lung cancer.

We received during the last month what I would call gratuitous very good news.

Some leading researchers at an independent institution not funded or supported by Ligand did some very interesting research to understand the mechanism of action of an

product in non-small cell lung cancer patients.

And you'll note from the press release that in the "Journal of Clinical Cancer Research," a study was published which showed a very high positive and negative correlation between the level of

beta expression to our clinical end point - survival in human patients with non-small cell lung cancer.

That's about as close as it gets to validating a key clinical end point, and it showed a very high

value to high express levels in tumors of

beta to the survival of those lung cancer patients.

That's rather exciting science, and helps us to understand much better and to explain much better the clear correlation between the molecular target that Ontak - that Targretin uses and our clinical end point of survival for these patients.

I think it's particularly encouraging for our product as we see the acceleration of our clinical trials taking place.

The last several months of Targretin clinical trials have been fairly similar to the Avinza week-to-week doubling of prescriptions.

We're seeing month-to-month a very rapid acceleration of patient accruals in our trials such that we're gaining confidence that those large-scale trials are truly now accelerating to a point where we are within reach of achieving our goal of accruing those trials next year and that's also equally exciting for us.

I think that will largely cover my large comments on the prospectives of AVINZA, ONTAK and Targretin capsules and I think, with that, I will open for Q&A if there are any related to our release.

Thank you.

, I think we're ready for questions.

Thank you.

At this time if anyone has a question, please dial star 1 from your touch-tone phone and that will place your line into queue until your name is announced.

Our first question is from

.

Please go ahead.

It's

Capital Management.

Couple of questions.

First of all, could you give us some guidance on collaborative revenue going-forward?

Secondly, I thought the idea of distributing significant amounts of product was to strengthen the retail distribution, or at least the wholesale distribution.

Is it a disconnect between the wholesalers and the retailers in terms of getting product out to the retailers that's causing the fill rate to be low on prescriptions and do you have any data at all as to what that fill rate difference is and how that gap might close?

And the last question is just cover the situation with Elan, both in terms of the marketing agreement and whether you think you have substantial marketing force out there with 80 reps.

Should something not happen with the Elan agreement to get traction on the scripts on the back-half of the year for AVINZA and also what Elan -- what the

for negotiations or discussions related to the Elan share-ownership is.

I'll make a couple of comments and then I'll ask both Paul and Tom to jump in on their respective segments on the guidance with regard to other revenue or collaborative revenue and Tom to provide some additional discussion on AVINZA.

I think there are a couple of comments I'll make regarding the Elan situation.

First, I think -- and co-promotion -- I believe, from the data we have so far, Ligand and its 80-man sales forces are clearly gaining traction.

The product is being accepted, we don't know the full dimension of that yet, it is absolutely normal for a new product to have a certain rate of lost prescriptions until larger retail distribution is gained.

The challenge for a new product is always to do that as quickly as possible.

Clearly, demand could be facilitated and distribution could be facilitated if we had a larger set of sales forces on the products.

I think that is fairly clear and that is why, as quickly as we can, we will determine if Elan is able to be our co-promo partner, and that is the restructured Elan, if they're able to deliver the sales forces that are needed for the product, then the quicker we can bring them in the better.

Should they not be able to deliver those sales forces or not want to, based on their restructuring activities, we will bring another partner into the product as quickly as possible.

And that is in both Elan's and Ligand's best interests.

Elan continues to have a very significant profit interest and strategic interest in AVINZA and in the pain-control area.

So there is little doubt that they are deeply interested in the broadest success of the product.

If they're able to help us to achieve that best for them and us, if not, they clearly would want us to have a co-promotion partner to achieve that volume growth and pull through a profit through their manufacturing plants and for their longer term strategic business.

AVINZA is a strategic product to them for profitability purposes, so I think that we have common interests there.

Simply a question of making sure that the parties can get to a formula that works and that they have the sales force muscle to deliver the product.

So that is what we're working on.

We continue to work on it in third quarter and we very much want to resolve that issue as quickly as possible during this third quarter.

I think that, from our perspective, sooner is clearly better for us to bring a partner in.

However, we are not concerned from our perspective and our goals, we did not plan on a partner contributing to those goals this year.

Those goals we are committed to as a commercial enterprise ourselves and so far, the feedback looks pretty positive and so I think from that standpoint, if we can bring someone in sooner and get them into product this year, it's upside to us and if not, we're tracking to our goals with our capabilities.

The retail distribution phenomena and I'll ask Tom to comment further on that, the retail distribution phenomena is one that all new product launches struggle with.

We are very early in gaining that distribution and, as we pointed out in the last press release in July, we kind of have three waves planned.

The first wave begins with stocking wholesalers and getting wholesalers and retail pharmacies into a flow through of product.

That flow through of product doesn't happen all at once or immediately.

You start with a wholesaler and then you work to pull it through and we have third party contractors working to help us do that.

That activity is on going throughout this quarter as we move product from wholesalers to retail.

How quickly we do that is clearly the most important barometer.

As we move that product out, wave two begins and we go after a larger set of pharmacies.

So, we're still very much in that process and will be throughout third quarter and throughout fourth quarter.

So, I think if I've covered those, I'll turn it over to Paul to cover the issues on other revenue and then back to Tom for the discussion on AVINZA.

Thank you, David.

To your question with respect to other revenues, we reaffirmed our guidance again for the full year in the press release with total revenues of 126 to 140 million range and product revenues of 82 to 90 million, so, by derivation, the balance would be other revenues which is 44 to 50 and I would just comment that that category includes our on going R&D funding from our current collaborations that are underway, milestones that we receive as products progress through development and other revenues which would include categories such as the

relationship as options are exercised to acquire our royalty interest.

And in the first half we had 20 million for the first six months.

And so we expect that rate to increase in the second half.

OK.

I'll comment just a little bit more on the wholesaler and retail stocking of AVINZA.

And remind you that this product is slightly unusual in the sense that it is a schedule two product and therefore distribution at retail pharmacies is a little different than a normal antibiotic or cardiovascular product.

In that every retail pharmacist has to fill out a 222 form and mail it, not fax it or E mail it, but mail it to the wholesaler when the first order goes in.

So there's a - some logistical issues that need to be dealt with at every retail outlet in order to get the product shipped.

Now most retail pharmacies with regard to schedule two product have told us, and we were not surprised by this, that they don't want to just automatically stock schedule two products on the shelf until they see prescriptions.

With our 80 man sales force, we targeted retail pharmacies in each one of the metropolitan statistical areas that we covered where we knew we had high prescribers, where we would immediately begin promoting the product to them.

And therefore begin seeing prescriptions immediately.

So we had pharmacies stocked in each one of the metropolitan statistical areas that we covered during phase one.

Wave two is to begin expanding that through - in the independent work that we're doing with an outside vendor to work on independent retail stores and to work with the major chains.

In fact, ironically this week is the National Association of Chain Drug Stores marketing section meeting is being held here in San Diego.

And we, in fact, have been in dialogue with all the major chains as well as major wholesalers this week with regard to plans for pulling the product through into a broader distribution for wave two.

One question that was also asked was relative to tracking and that is, what do we know relative - how many pharmacies we are in.

Both the independent and the chain side of that is work in progress and we probably won't have our first look at what actual number or percentage of pharmacies we are in until probably the end of August and maybe not until September.

But that's part of the dialogue that we have ongoing with the chains this current week.

And I'll ask - the other thing is the Ligand shares - Ligand shares.

What's happening with those, given Ligand financial position?

I don't have any material new information I can give you on that.

We do have scheduled dialogues to progress on that issue.

What I can tell you is we have not yet filed a registration statement for those shares and we continue to be in dialogue about how to do that and apply the distribution for them.

So as soon as I have something that is appropriately disclosable, I will do so.

I believe that if you look at where our share price is, some part of this is, obviously, they can't be very highly motivated sellers at the current share price.

And that would be understandable from my perspective.

So I think that the dialogue will continue and we'll sort out a plan.

I just can't tell you I have anything right at this moment.

OK.

Thanks.

next question comes from

.

Go ahead, please.

Good morning, Paul, David,

.

I have two questions actually.

The first one is on your guidance and I want you to comment on if I look at your guidance, which gives me product revenues of between 82 and 90 million for a full year and your expectation for Avinza which is 30 million for the full year, and looking at the first half of Ontak and Targretin, that would lead me to conclude that you would have to double revenues for Ontak as well as Targretin in the second half compared to the first half, as you have to generate about 30 million in revenues there.

My question is this - is my line of reasoning correct here and if that is correct, are you - are you comfortable with that - with that guidance?

Are you comfortable that you can double those revenues for Ontak and Targretin in the second half?

Want to be sure that we have the same database.

Our second half goals for Ontak, consistent with guidance we've given, would not show that rate of growth.

So, if we take, for example, Ontak, which did thirteen-and-a-half million in revenue ...

Right.

... in the first half, we need to achieve somewhere in the 29 to 31 million range for the total year for Ontak.

So that really isn't a rate of doubling.

It's probably more like somewhere between 10 and 20 percent growth over prior year that we need to achieve.

So the Ontak goal, and I will mention we have had a price increase on Ontak, ...

Yes.

... so we will have higher on-average prices in the second half of this year, as well.

So I think the Ontak goal is actually relatively small.

The Targretin, because of the second quarter dip impacting it rather more than Ontak, Targretin looks substantially more aggressive, and I think there we do expect versus a 5.0 first-half sales, we do expect to have to nearly double the second half.

So Targretin is a little bit more aggressive - that's Targretin caps.

I don't know whether that answered your question.

If you average those two, since Targretin is smaller, the growth we have to actually achieve for Ontak and Targretin capsules, if we look at the combined first-half sales of those two products - 18.5 million, I think probably we would say that the second half has to be on average probably about 25 percent better than the first half.

Some part of that will be price and some part of that will be volume.

What I can say is Ontak is certainly, based on July results, substantially ahead of the demand pull-through.

You always have the issues of translation with the wholesalers but, over time, that issue goes away.

So I think that we don't feel the combination of those two for the second half at that average rate increase is really that aggressive.

Right.

OK.

The second question is on your gross margin.

I was wondering if you could elaborate a little on -- you mentioned it was lower in the second quarter with a different product mix.

Is that because of AVINZA or is that because of certain launching costs or -- could you be a little more elaborate on this?

, this is Paul Maier.

They're actually a mix of things that contribute to the lower gross margin in the second quarter and that would include the changing product mix based on the actual sales that we had and, certainly, AVINZA and ONTAK, which dominated, if you will, the product revenues in the second quarter, have a lower gross margin compared to Targretin and the gels.

And secondly, we have a certain component of cost-of-goods that's fixed, which is an amortization of the technology expense, so with a lower sales volume, that has a disproportionate impact on gross margin.

And thirdly, we did have some returns in the second quarter and so the mix of all of those did bring down the gross margin.

However, if you'll note in our press release, we did indicate guidance for the second half where we expect our margins in the second half to be more in line with where they were in the second quarter of 2001, which would get us back in the normal range.

OK, thank you.

Thank you.

Our next question comes from Tom

.

Good morning guys.

Morning, Tom.

Couple of questions.

It looks to me, and maybe I'm misreading this, it looks to me like the numbers for this quarter came in just a bit soft, even -- of some of the analyst's expectations -- even after the

.

I'm wondering if this is because of the 6 million in sales that was deferred?

I'm not sure how to exactly answer that one.

At the time -- we gave kind of a revenue alert in July -- we really didn't have enough information to give any guidance on a quarterly basis, so I think that if you don't focus so much on quarter, but look at the analyst models out there for the second half, I think the results are fairly consistent with the expectations for the second half.

I think that often, without detailed guidance, it's difficult to get a given quarter right and the analyst committee did a pretty good job of trying to get at the individual products for the quarter without guidance from the Company.

And we couldn't give much, we didn't know the details.

At that particular time we felt it more important to get the overall alert out.

So, I'm not sure how to answer that one.

I think as the analysts have looked at the products for the second half and for the year, I think the 2Q results, you know, whatever variations there might be from the analysts models are really not, in our view, material.

I think it's very difficult to take a quarter where you just have wholesalers putting off buying and drawing an individual product interpretive comments from that.

Because, usually, the decisions didn't relate to individual product demand or individual product inventories or things like that, it related to larger decisions by wholesalers in a given quarter to do something or not do something and so you can get a little bit too overly focused on an individual quarter, I think.

The deviations, in our view, weren't major and for the second half, where the range of analysts models

we think is certainly within the scope of the range of our guidance or, in many cases, conservative.

So, I don't know whether that helps with your question or not.

Yeah, no, that's good.

Paul, I know that we've extinguished a good portion of our long term debt, do we have any other debt on the books at this time?

The only debt that remains on the books, we have a convertible note with one of our corporate partners that's 2 and a half million dollars and we have some routine equipment financing, lease lines if you will, and neither one of those arise to any significant level.

So the bulk of the debt that we extinguished earlier this year dramatically changed our balance sheet and going forward, the only interest expense we'll have is the modest amount that comes from those two items I mentioned, which are in the vicinity, total, of around 5 million of debt.

So that's pretty insignificant compared to the rest of our balance sheet.

OK.

So, do you have a number then of about how much cash you expect to finish the year with?

We haven't given specific guidance on that.

We ended the second quarter with 44.7 million and we were just under 40 million in the first quarter and that's sort of in the range where we expect to be as we go forward.

Great, thanks guys.

Thank you.

Our next question comes from Stuart Wisethrop.

Phil Gross asked all my questions, thanks a lot guys.

Thanks Stuart.

Thank you.

Catherine Kim, your line is now open.

Yes, hi.

I just have several financial questions.

The first is, could you give some guidance on share count?

The current share count is primary shares outstanding about 71.3 million and fully diluted about 78.4 and the only changes to that are sort of routine as stock options are issued and we don't contemplate any capital transactions for the balance of the year.

Okay, and then in terms of your collaborative revenue, you said of the 44 to 50 million that you expect, how much of this is on going and -- like on going revenues that you expect and how much are related to new revenues.

Well, in terms of what's on going, that is pretty much the two collaborations that we have and so those are running at the annualized rate of 13 to $14 million range and then the balance would be milestones and other payments that come from royalty farma for instance and the amortization under FAB 101 of some of the prior payments that we've received.

Which the proper accounting is spreading those payments over the life of the collaboration.

Yes.

Ongoing, we would classify probably three things.

First is research funding that's

based that comes in by contract and, you know, that's pretty secure for the year.

The second component of that is what Paul referred to as the FAB 101 amortization.

That's kind of constant and fixed.

The third component that we would call recurring, is products in development with corporate partners.

Those are recurring to the extent that a product in active development until dropped will hit milestones.

The part of it that's not quite predictable on a quarterly basis is when that milestone will get hit.

So those three are the categories we call as recurring.

The fourth one, which is what we would call other license fees or royalty farma option exercises.

Those are not necessarily ongoing.

There are predictable timings of those, so you can look at some of our disclosures and see the timing of some of that royalty farma options, but the certainty as to their exercise is still an open matter.

So those we don't necessarily classify as recurring.

So license fees, those kinds of royalty purchase options, and kind of normal licensing in and out transactions, those are more uncertain.

So those are the kind of three or four categories that we look at other revenue in.

OK.

And then in the - if you could just tell me in this quarter you had an other net.

This is below the operating line.

Other net of a loss of 1.8.

Could you tell me what that composed of?

The - I think what you're referring to - the total other expense net was about 2.8 million.

One point eight of that was the final accretion, if you will, on the

debt.

That was the biggest piece of it.

As we paid that off in June, and we had to accrete it up to its full faced value of 15 million.

And the balance of that was interest expense related to the

debt for the portion of the quarter when it was outstanding and we have some other interest expense related to the lease lines.

And then there's a small piece that's our equity and acceptor, which had a small loss for the quarter.

When we issue our 10Q, there will be detail in there that will answer your question.

OK.

Great.

And one final question, the

partnership.

I just wanted to know, are you still intended to have some kind of announcement made during the third quarter?

Whether it be from a third party partnership or with

?

I think what we would say is reasonable to expect is, and this is the way we have approached our co-promotion activities - our first dialog is with our partner, Elan.

They do have an option, and we need to respect that option and complete our dialog with them.

That doesn't mean we have not received inquiries and conducted exploratory discussions based on those inquiries with other potential partners.

But I think what's reasonable to expect is we should have a clarification of - in the restructured Elan.

Can Elan and its sales forces going forward provide Avinza with the additional co-promotional effort that is needed to be all that it can be - I think we should have that issue resolved during third quarter.

I would not say that it would be to be expected that if Elan is not that partner that we would be able to announce in third quarter who the other partner is.

I think that would probably be a 4Q activity.

So you will know whether or not Elan is going to be in partnership by the third quarter.

We'll hear something before the end of this quarter?

I very much am working hard to accomplish that goal, yes.

OK.

Thank you, David.

Thanks.

Thank you.

The next question comes from the line of

.

Thank you very much, and good morning.

Just wondering if you could give me a little bit more color on your interactions with managed care.

What percent of the relationships are in place now?

What percent do you still need to get?

Also in terms of tier two and tier three designations, where is that lying at the present time?

I'll turn that over to Tom.

We, as you know, took a strategy with managed care on Avinza of contracting with the top PBMs as a priority and and the secondary strategy of working with the group purchasing organizations.

So I'll comment a little bit on both.

First of all, there are 16 top PBMs in the country which essentially manage 95-plus percent of the managed care lives.

And with that regard, we have contracts with two PBMs that have us on a preferred tier two status at this point, and those PBMs cover roughly 33 million lives.

We are in the late stages of negotiations and are very confident about a third contract for a preferred status of tier two.

That would put our covered lives well over 120 million.

We have an ongoing and very positive discussion with another large PBM for tier two status, although it's too early to make any comments on that, but that would increase that number significantly.

We have five tier three contracts in place, and of those five tier three contracts, we plan to revisit four of them next year for tier two status.

However, for the remainder of 2002, that will be - they will be tier three.

And we have eight pending contractual negotiations with the remaining PBMs.

It's a little difficult to comment whether we will get a referred status or a tier three status, but I might comment that the difference between tier two and tier three in this particular therapeutic area of sustained release ovoids is not incredibly significant.

It's nice to have.

It's nice to have a preferred status, but the real only difference between a tier two and tier three is the difference in co-pay that the patient must pay at the retail pharmacy counter and the difference between tier two and tier three can range anywhere from $10-20 per prescription.

Most of the PBMs tell us they cannot move a lot of market share from one product to another with that little difference in co-pay in this therapeutic area.

However, having said that, it's still our goal to get on as many tier two preferred status contracts as we possibly can.

We're very excited about the response that we're getting for two reasons.

Number one, the fact that we have two of them already and it looks like we'll get a third and we're hoping for more than that as the year unfolds, but we're also excited about the acceptance, the rapid acceptance, that PBMs have given us.

We have had meetings, both P&T committee meetings as well as clinical meetings with PBMs, within the first few months of launch, which is almost unheard of in launching a new product.

They usually wait six months to a year before they'll even talk to you.

They were talking to us within the first couple of months and that's very, very encouraging.

Moving on to the GPO, we have 10 group-purchasing organizations that essentially lock up all of the institutions.

Those would be hospitals, as well as hospices, long-term care and other facilities where institutionalized patients might be.

We, quite honestly, have also been in early dialogue with them, but we are expecting to get 91-100% acceptance of AVINZA on their formularies.

Now I'll comment that that's on the GPO level, we're still going to have to fight the battle in the director of pharmacy level in large institutions.

But having our product available on the GPO level is something that, quite honestly, we didn't expect and it's a bit of a pleasant surprise.

So we're quite pleased with that as well.

Great, thanks.

And, David, I was wondering if you could tell me if the negotiations with Elan are still separate in terms of the stock outstanding and, number two, the co-promote agreement?

I think I'd probably just comment that, as partners, we openly dialogue on both issues and have common goals to see both issues resolved.

I think that's probably as far as I'd go.

OK, thanks.

Thank you.

The next line open is Edward

.

Hi.

Hello, you hear me?

We can.

OK, thanks.

I just have a quick question about your guidance.

You have in the first quarter a $0.07 loss and a $0.17

loss.

In your press release that's in the third quarter you don't expect that to be operating profitable.

So if we assume a minimal loss there, say loss of zero cents, it looks like, from my math, that you'll have to

$0.16 in the fourth quarter, which seems like a pretty big ramp-up.

I'm wondering if my math is accurate and, if so, where you expect to see the gains, whether it be cutting expenses or specific products or revenues?

So, if I understood the question, it relates to do we expect a 3Q loss and does that mean that, combined with the first half losses, that we need a fairly substantial fourth quarter?

I think the answer to that is, yes.

I don't know that I can validate exactly the number that you threw out as to what we would need to earn in the fourth quarter.

I think we would need to do some further look at the detailed numbers.

I think you had done some quick math about the EPS we'd need in the fourth quarter; is that correct?

Well, it comes from your guidance of loss of 8 to gain of 2 for the year, so if you subtract out what you have lost over the first three quarters and assume it's zero for the third quarter I get 16 cents for the fourth quarter.

I'm sorry, you're fading.

We're not hearing the end of your comments.

Okay, it comes from what you've lost already which is 7 plus 17 so it's 24 cents and then you guidance for loss of 8 to gain of 2 for the year.

So if you just take the difference between loss of 8 and the fact that you've already lost 24, I get a gain of 16 to make up that difference in the fourth quarter.

To get to which part of the range of the guidance?

To get the lowest range which is loss of 8.

OK.

I don't have the numbers right here in front of me, but I think that math is probably not incorrect.

We do need to have a substantial fourth quarter and I think the business is, in fact, trending that way and we certainly see it as the probably first quarter of profitability.

Now, we're very early still in the third quarter, so we'll have to see what comes out of that.

We're having both a ramp of revenue and a ramp of expenses and you're never quite sure until the quarter is over where they land.

But I think, right now, we would not guide to a profit -- operating profit or otherwise in the third quarter and we do expect a substantial profit in the fourth quarter.

OK great.

Thank you very much.

Thank you, our last question in queue at this time is from Michael Solomon.

Please go ahead.

Good morning.

I just have a quick question about second half product sales for Targretin and ONTAK, how much of that do you expect to come from new clinic trials?

That's a real tough question.

I want to try and be helpful.

I think if you -- maybe the best way we can be helpful with your question is, I'll take one shot at it and maybe Tom can add something that would help with your question.

If you look at the momentum of our business and you say, doing what we're doing, what would we expect?

I think that's kind of a base line and then two things which move that and we're often surprised at how quickly it moves it.

Two things that move that are activities which we call clinical advisory meetings.

That's getting peer to peer oncologists, dermatologists, users of our products together to talk about their experiences, share their experiences.

Sometime that produces what we call business in label and sometimes that produces business off label.

What goes on in these meetings is often sharing of data and sharing of experience.

So the first thing we try and do is get peer to peer discussion going on because that's a heck of a lot better than our trying to talk to them.

All by ourselves.

The second thing that goes on is data is discussed.

Sometimes that data is from a physician's own

trial where we supplied drug free, so there weren't any sales component of it.

There were just - he generated data.

He went and told his peers.

His peers got excited.

They went out and put patients on it.

The second part of it is where we actually have trials that go up that are trials where drug is prescribed and commercial drug is what's used.

And those are often physicians

trials also.

They can be end label our house label.

So the two things that happen, the most immediate is getting clinical advisory meetings together discussing new data on our product peer to peer.

That produces the quickest responses.

As we've seen in the case of ONTAK, it can be rather rapid and rather substantial if people are excited by the data they discuss.

Right now, we think that an important part of the July success was, in fact, related to the holding of three clinical advisory meetings within the last five weeks.

That's a very positive sign.

There are also additional trials coming up on ONTAK in CLL and in PTCL, where commercial drug will be used.

We don't think that those play the major role yet in July, their impact will be in the second half of this year.

How to quantitate that is pretty difficult, but we certainly believe that in the second half of this year generating three to five million dollars in incremental business on ONTAK between the clinical advisory meetings and the additional initiation of trials is quite realistic for our activities.

And that's, in fact, what we're focused on for ONTAK.

In the case of Targretin, the response appears to be slower in terms of the take up of the drug.

I would note that our priorities for Targretin, while Targretin participates in the clinical advisory meetings also, the priorities we have for Targretin are non-small cell lung cancer and psoriasis.

So the trials that are just starting up in third quarter of this year and fourth quarter, are significant number.

I believe it's four or five additional non-small cell lung cancer trials and two psoriasis trials.

Now the response time for Targretin, we do not know yet.

We don't have enough experience to really be able to predict how much of the response will be like ONTAK and how much will be a little bit slower.

If you look at ONTAK, the reason that it's so much faster is ONTAK course of therapy is largely two to two and a half months.

And the revenue from that is 40 to $50,000.

In the case of Targretin, the revenue per patient is strung out over a period of four to six months and the revenue is eight to $10,000 per patient.

So as that works its way through, the response curve is different and I feel we just don't know enough yet to give too much guidance on Targretin.

The markets are so big you could be, you know, misleading if it really starts to take off but we have a substantial number of trials that are just now getting underway in the third quarter, and as we gain more experience with Targretin caps, we'll try to give some additional guidance on that.

I hope that was helpful, and if Tom, you have anything that would help with that question?

I'll add a couple of quick comments that was also in the press release that is on the clinical advisory meetings since the end of June, we have held three.

We have another one scheduled for this weekend that will be our fourth for the year.

And we have five additional planned between now and the end of October where the exchange of that clinical information takes place.

That should drive some additional use of the products and experimentation of the products, as David pointed out.

With the Targretin capsules, one of the things we're focusing on is the mechanism of action and some of the new information on the

beta receptor.

That is quite interesting and intriguing to clinical oncologists - practicing oncologists, and so therefore, that's being built into our clinical advisory meeting.

As it relates to our medical marketing trials, as David pointed out, roughly half of the ongoing medical marketing trials -

trials that we have for both Ontak and Targretin capsules are in new areas.

And in Ontak, that's CLL, non-Hodgkins and peripheral T-cell lymphoma, and in Targretin capsules, it's obviously non-small cell lung cancer and psoriasis.

So a good 50 percent of the trials that are either open or will be open are dealing with those priority indications - the therapeutic areas for Ontak and for Targretin capsules.

OK, thanks.

Thank you.

If anyone else has a question, please dial star, one from your touchtone phone at this time.

And

online - go ahead.

Yes, I have one follow-up question.

Could you please go over your major upcoming event points, maybe in terms of clinical data, just to give a little update on this?

I think what I would start with would be the - I mean I guess there's three categories - there's kind of the clinical data, there's the product milestone from corporate partners, and then there's let's say, other events.

So starting with the first category I think that for clinical and regulatory, we certainly expect in the second half of this year to release data on Targretin gel in atopic dermatitis.

That trial has been completed.

The data is under final analysis, and we do expect to release that in the second half of this year.

We expect and have released the first tranche of Ontak CLL Phase II data.

I think that was particularly positive.

We expect a release in the second half of this year of Ontak

non-Hodgkins lymphoma Phase II data from trials that we have conducted.

We expect Targretin caps, non-small cell lung cancer Phase III milestone of 40 percent-plus total patient accrual for this year.

That is a very important milestone for us.

And we expect continuing, as we have at virtually all of the meetings that we -- derm and op meetings -- that we attend, we have data releases at each of them, which cover Targretin and

, some combo studies in non-small cell lung, so those are the three principle and then ongoing clinical milestones.

We do have the ONTAC MAA CPMP recommendation that we are targeting to have this year.

And so I think those are the principle clinical and regulatory milestones.

On the corporate partner front, we do expect milestones from

on NSP989 and ERA923, we expect GSK, or

Smith Kline, the GW516 milestone, we have announced in the press release the receipt of the 929 milestone, we expect at least two more product milestones from Lilly this year and I think we're also pending important notification from GSK on a

agonist, there's a product milestone that is expected this year as well.

A major milestone that we have not put on the expected list but, clearly, is out there is

, Phase III data and/or

filing, we believe that

has completed its Phase III program accrual as announced by Pfizer, its one-year maturation of data period should be approaching an end and they will be enabled from that date forward with whatever time it takes them to translate to

, that's typically a quarter, they should be enabled to file an

.

We do not know exactly when they will file, it could be as early as the fourth quarter of this year or early next year.

But that is certainly a major milestone.

We have not put it on the expected list because we don't have enough information to know for sure, but that certainly is, clearly, there.

As we get more information on their plans, we will try to update the market on that.

I think that's one we would put on the "stay tuned" list.

I think the others, from the Company's standpoint, are really financial.

And that's just continue to grow AVINZA and our specialty business and bring the Company to profitability now that we have our capital structure and balance sheet in good shape and I think those are important milestones for us.

We're certainly focused on those.

Does that answer your question

?

Yeah, great.

Thanks.

Thank you and I have no further questions in queue.

Great.

Well, thank you very much everyone for participating on the call and, of course, as always, we will be available for additional follow-up questions over the course of today and going-forward.

Thank you very much.