Ligand Pharmaceuticals Inc (LGND) 2002 Q3 法說會逐字稿

Thank you for holding and welcome to your conference call today with David Robinson.

I would like to remind everyone at this time that your conference call is being recorded today for transcription and replay purposes, and for transcription purposes, please state your name before you speak.

Mr. Robinson, I will turn the call over to you now, and thank you for using Sprint Conferencing Services.

Good morning, everybody.

This is Mike Watts, Director of Investor Relations for Ligand.

I would like to welcome you all to this call this morning to discuss our third quarter results and other recent news.

I'm here with David Robinson, our Chairman, President and CEO, Paul Maier, our Senior Vice President and CFO, and Tom Silberg, our Executive Vice President and COO.

Just to get the administrative detail out of the way, I would point out to you that we will be making forward-looking statements this morning, and also, as you all know, there are risks and uncertainties inherent to our business.

For more information about these, I would point you toward the safe harbor section of our various press releases issued yesterday, as well as to our recent Securities filings.

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

Thank you, Mike, and thank everyone for joining us this morning.

Ligand had a solid third quarter -- both strategically and operationally.

And as you can tell from the multiple press releases, we made substantial progress towards addressing some of the key issues which had, over the past several quarters, interrupted our robust drive of shareholder value, established early in the part of this year.

We believe that on both a strategic front and the operational front as we talk through the news, that substantial progress has been made in addressing many of those issues.

On the strategic front of course, we are announcing the restructured AVINZA license and supply agreement with Elan, subject to the completion of a financing, a stock repurchase agreement and a corresponding lock-up on a portion of the shares held by Elan, and a lock-up on the bElance with an orderly plan for distribution at the backend.

We have also continued to make substantial progress in the co-promotion area for AVINZA and I'll be giving some more comments on each of those, going forward.

At the operational level, and I plan to ask Tom Silberg to elaborate on the broad comments that I will make.

We had also a solid quarter with third quarter results being our best at the revenue line with a 32 percent growth in revenue.

Product sales, our best quarter ever with 45 percent growth in product sales, and that was after leaving a deferral of product sales of around 1.8 million to be carried forward.

And our per share loss was also down 23 percent for the quarter, with operating expenses growing, but tracking pretty much to expectations for the quarter.

We believe that ranks as a solid quarter, if it were just those operating results, but within those operating results, we believe they signal some important further progress and firming up of our business.

The launch of AVINZA is off to a solid start, and I expect Tom to update you in more detail on that.

We believe that the progress made in the marketplace is now becoming clearer and more predictable with the range of variations, at least narrowing somewhat.

Traditionally new product launches have a wide range of variation and I think that AVINZA is beginning to declare itself in the marketplace with some important modifications or refinements, as we'll call them, to our launch efforts.

We believe the progress made to date can be further accelerated and Tom will be telling you about that.

We also saw gratifyingly in the third quarter a rebound of our in-line products, and such that we feel pretty comfortable that some of the abnormal buying patterns of the wholesalers in the second quarter are returning to a more normalized pace.

And we have witnessed in the third quarter, going into the fourth quarter, a further acceleration of our two principle products, ONTAK and Targretin capsules, with some gratifying and measurable increased in growth relative to the past two or three quarters.

So we believe that that has firmed up quite substantially our in-line business, and as we move into the fourth quarter, we can expect further solid progress in the normalization and growth of that business.

Our business does, however, continue to be less predictable than we would like.

Some of that is due to an organic cause which is simply a business of few products that needs to be diversified and a concentration of buying power in the hands of a very few customers.

We believe as we grow that business and add additional products like AVINZA that that diversification will have a natural organic smoothing out and making more predictable our business.

And we also expect to get better at predicting that business and various big customers' buying behaviors.

We would note, however, that that somewhat less predictable business is perhaps not the critical feature of Ligand today.

We are not yet transitioned to a fully profitable EPS company or story such that predictability on a quarterly basis is the be-all.

So we would note that what we believe to be the most important dimensions of our business is that we get better and more predictable, but more importantly with some of the strategic transactions we have at hand that we take some major leaps forward to unlock shareholder value and our ability to drive it going forward in and around the AVINZA asset.

We believe that AVINZA is an important asset for us for the next several years and that our ability to control, drive, and create value for our shareholders around that product is an important feature of the company perhaps only second to the exciting potential that we see evolving in our Targretin product line where our non-small cell lung cancer trials continue to accelerate their accruals towards a next-year full accrual of both trials and to hopefully the emergence of Targretin as a major drug in non-small cell lung cancer.

That and some of the Targretin Gel data in and around hand dermatitis are other very important value drivers for the company over the next several years.

I'd like to turn now to a few comments on our strategic opportunities which we believe are a much more important feature of Ligand today as a diversified product company.

The restructuring of AVINZA, the license and supply agreement, and the corresponding stock repurchase and lockup agreement we believe represent major progress towards realizing the full value of AVINZA for Ligand shareholders and increasing Ligand shareholder value.

It's no secret those have weighed heavily upon the company and its shareholders over the past several quarters, particularly the substantial amount of uncertainty surrounding it.

We believe that these transactions have begun to directly address, and quite favorably for Ligand shareholders, that uncertainty and to start to bring control and ability to maximize into the hands of Ligand.

The restructuring of the AVINZA agreement first provides substantially improved operating profit margins by reducing the AVINZA supply and royalty cost from Elan to about 10% of sales from a previous supply agreement of 30 to 35% of sales.

We gained rights to sub license and to obtain co-promotion partners at our pace and of our selection, and Elan has agreed to forego its co-promotion option.

Ligand gained additionally the rights to qualify and purchase AVINZA from a second manufacturing source to bring certainty, and certainty to supply back up to supply, and increase our ability to supply both Ligand's needs, and a possible future co-promotion partner.

We gain ownership of the NDA and full direct regulatory management of AVINZA with the FDA and/or the Canadian authorities.

We consider that important in this category of drugs, which is the subject of active state and Federal activity.

We think that having the direct dialogue is a very important part of optimizing the drug, whether it be from the management of the marketing of the product and risk management programs that we've agreed to with the FDA, or whether it be additional activities that the agency might engage in, we think that contact is important.

The restructuring transactions, we believe, and have had assessed as accretive to EPS on an if-converted basis in 2003, and as a second measure of the financial attractiveness of the restructuring, the AVINZA break-even sales level for the $100 million to be financially rewarding is as low as $70 million per year, such that the confidence that management and Ligand are expressing in the product can be quantitative as a low break-even point, and therefore in our view, not a high risk for Ligand shareholders.

The payment of the $100 million, subject to financing completion, we believe to be extremely positive and important to our gaining the flexibility to proceed with the dialogue with co-promotion partners, and to have, let's say, a position of strength from which to complete our dialogues.

One can easily imagine that trying to move all three pieces of a puzzle into place to bring a co-promotion partner in is a worth objective, a difficult challenge, and leaves a lot of leverage in the hands of third parties.

We believe that this restructuring will put the economics in the hands of Ligand shareholders, and the leverage in the hands of Ligand shareholders, and with that, we believe we know how to do business deals and with this, we'll be extremely facilitative to that process.

We would say that on the co-promotion partner front, we continue to make good progress with multiple parties, and that we believe that the flexibility that this restructuring will bring us will allow us to look at the full range of possible models for co-promotion with the best economic solution much more doable because Ligand would be in control of these rights.

So, we continue to see this as an important step forward.

We recognize it is not the final step, and so we will not cease to pursue that important partnership to make AVINZA a major and important drug in the market place for chronic moderate to severe pain.

With those comments, I'll make just a few on the share buyback.

There's been a substantial amount of concern that we have heard from existing shareholders and potential new shareholders with regard to the shares held by Elan of Ligand.

We recognize that this is not a full solution.

We do believe that it is a major and important risk reduction through the repurchase and retirement of 2.2 million Ligand shares held by Elan, and of course, buying agreement by Elan to lock up the remaining shares with agreements through amended registration rights for the orderly distribution of Ligand shares after that lock up period.

I believe this clarifies substantially that the shares are, in fact, held by a seller that recognizes their intrinsic value, appreciates that intrinsic value, and is seeking, together with the company, an orderly distribution of the Ligand shares.

We believe that there's been considerable speculation that the contrary is the case, and we think this does help the market to deal with that dimension of this overhang.

We are pleased with the cooperation that these two important agreements clearly underscore between Ligand and Elan, and we believe they should be of some considerable importance to giving the market confidence that both companies are working to both realize the potential of AVINZA, and restore the drive to Ligand shareholder value that was characteristic of the company in the earlier part of this year.

I think with those comments, I will call upon Tom to give a more complete update on the operational side of our business.

Then we'll ask Paul Maier to give a quick summary of the forward-look and guidance that the company is giving.

Then we'll open the process for Q&A.

Thank you, Tom.

Thank you, David.

I will comment relative to several of our products and some of the activities that we have ongoing from a commercial point of view.

I'll start with AVINZA.

And first of all on AVINZA -- one thing we continue to track very carefully is the overall sustained-release opioid(ph) market to determine whether this market continuing to grow as it has in the past.

And through the first half of 2002, prescriptions in the sustained-release opioid (ph) market and revenue continues to grow.

Revenue is 17 percent above the previous year, so we still have a very robust sustained-release opioid(ph) market, I think fueled by the fact that pain is still a very under-treated issue here in the United States.

Our average weekly prescription growth on AVINZA is growing 12 percent, roughly, week-over-week.

We're very pleased with the trends that we see with AVINZA and prescriptions, and we are still on target through October to hit our roughly 20,000-prescription goal by the end of the year.

We anticipated we needed roughly 3,000 prescriptions in October and based on our calculations of weekly prescriptions with the DDD calculation added in to cover hospices, long-term care and so forth, we do believe that we are on track with just over, slightly over the 3,000 prescriptions for the month of October.

Managed care continues to receive AVINZA very positively.

We are on tier two contracts that is preferred or not necessarily preferred, but the tier two, which is a positive position on PBM's, which manage over 100 million lives.

Our MD and patient reception of the product continues to be very positive.

AVINZA, when prescribed for a patient who requires that level of pain relief when given once a day, does deliver full 24-hour coverage of pain relief.

So the product profile is holding up during the first few months of promotion and that is very, very encouraging to us from a commercial point of view.

Looking forward, we see there are three key factors that impact and will continue to impact the growth of AVINZA.

The first one, is of course, our sales force and our ability to reach our and hit with frequency the high prescribing pain specialists.

The second one is programs.

I'll cover those as well, the programs that we can implement.

And the third one is retail stocking.

And first all on the sales force side, as you have read, perhaps we have increased our sales force to 50 pain specialists.

During the first few months of launch, albeit summer months of launch, we launched with 35 pain specialists in roughly 19 to 20 contracted sales force, which dealt with covering, not only community dermatologists, but we're also trying to cover some of the high prescribing primary care physicians in this marketplace.

In reviewing the impact of our promotion, it was very obvious to us that the pain specialty group that is the anesthesiologists and board certified pain physicians, were much more prolific in their prescribing and were the early adopters in this market.

We therefore, have switched our sales forces to 50 sales people dealing with the pain specialists, affording the opportunity to not only hit the top prescribing physicians, with a high rate of frequency, but also gives us the opportunity to cover roughly 70 to 80% of all prescriptions written by that class of physicians.

So with our 35-oncology representatives selling our in-line product as well as AVINZA to oncologists who prescribe SR Opulates.

We have a very targeted 50 rep sales force now focusing specifically on the pain specialist.

We believe that program, those sales force, that sales force, I mean, should be completely fulfilled in the field and promoting by the end of this week.

So we anticipated a much more prolific response from the pain specialists as a result of our sales force activities.

During the month of October, actually late September and into October, we also begin programs, programs such as speaker programs.

We have, since the last week of September, we have over 400 physicians, that is pain physicians, pain specialists, or pain prescribing physicians, have attended speaker programs, which cover, not only the state of the art of pain treatment, but also obviously the key factors regarding AVINZA.

Those programs, we believe will have a very profound affect as well on the uptake of AVINZA.

Throughout the month of October, we have also begun our nurse educator program.

We have 60 nurses who are oncology nurses who were trained and provided the appropriate background information and material to promote or educate, I should say, oncology nurses relative to AVINZA.

That program also began in October and it will be running throughout the remainder of the year.

We also in late September - early October initiated a coupon program.

Our coupon program is pretty similar to the rest of the marketplace in that it allows a physician who is interested in giving AVINZA a try on a patient a free 10-day supply to see how the patient responds and to get some clinical feel for the product.

Other examples of programs that have begun during the third quarter and will continue throughout the [Inaudible] this year and into next year are examples such as the Chemotherapy Foundation Society Meeting, which is being held this week in New York City.

We are running two programs at that meeting.

We anticipate somewhere between 100 to 150 oncology nurses as well as oncologists to attend two programs.

One will be done - conducted in the middle of the week, and one will be conducted toward the end of the week.

Again, similar to our physician speaker programs, these programs are designed to not only cover sustained-release opioid treatment, the need for pain treatment, but certainly the specifics regarding AVINZA.

I also mentioned retail stocking as an important factor for AVINZA.

Retail stocking we have been somewhat disappointed with.

We anticipate that we are stocked probably in somewhere between 2,000 to 3,000 retail pharmacies.

We believe that we need to be in the somewhere between 15,000 to 20,000 retail pharmacies with this product.

So, our retail-stocking program has been disappointing.

Stocking has been disappointing to date, but we believe we have some pretty specific and aggressive activities ongoing that should rectify that.

We have a very competitive retail-stocking program, which we are currently implementing with both the chain retailers as well as the independent retailers.

That program actually began in the field this past Monday, and early feedback not only from our sales force but also from an Independent Pharmacy Association meeting we attended a few weeks ago has been very positive and we're very encouraged by the first few days of orders coming in that we now have a program that is meaningful to the retail pharmacy and that we believe we can begin to achieve the retail stocking that we anticipate.

Our goal in the retail stocking, given the size of our sales force and programs that we've conducted to date, we anticipate that we could achieve somewhere between 7,500 to 10,000 retail stores stocked with AVINZA before the end of the year.

So we obviously will continue to grow retail stocking after the first of the year into the second - first and second quarter of next year, as well.

We believe that that's important because first of all, we don't want to lose any prescriptions and the second thing is we also don't want to have patients and physicians inconvenienced in any way.

So we believe the retail stocking part of AVINZA is an important part of our program.

So, with the retail stocking program, the execution of our speaker programs and nurse educator programs and so forth, as well as the refocusing of our sales force, we're very comfortable and continue to be very optimistic about the progress of AVINZA and the overall growth.

Turning to our inline (ph) products - ONTAK, first of all.

The withdrawals from the specialty wholesalers on ONTAK continues to improve.

Through October we have well over 21,000 vials or units of ONTAK have been withdrawn from the specialty wholesalers to clinics, practicing oncologists, as well as major medical centers.

In fact, October, the withdrawals of--excuse me, of ONTAK, was our best month ever.

We anticipate that we will have, in October, withdrawn well over 2,800 vials, so this is the best month we've ever had, and we're very encouraged with that.

Since June, we have conducted nine consultant advisory meetings, and we have one more planned sometime in early December.

These are programs where we provide practicing oncologists a view--a clinical view of our programs with both ONTAK as well as Targretin.

ONTAK generates interest in CTCL--the CLL peripheral T-cell graph versus host, those programs are quite well received by the community oncologists.

We are getting more comfortable with dealing with clinical--with the community oncologists with regard to ONTAK, and we believe the community oncologist is also getting more comfortable with ONTAK because we are looking at data relative to the number of the cycles of ONTAK that they use, how they use the product, the dose that they use, and all those indicators seem to indicate that the community oncologist is getting a whole lot more comfortable with the use of ONTAK, and specifically, experimenting with the product in areas outside of CTCL, such as I mentioned, CLL, peripheral T-cell and so forth.

So we're very pleased with the withdrawal, and with the progress to date on ONTAK.

On Targretin capsules, our prescription rate continues to grow.

It's up over 8% from last year, what is perhaps even more exciting is that--not the growth of 8%, but that the extended units, that is the number of capsules per prescription actually has increased 15%.

Now, what we believe this is, in looking at it, is the prescriptions themselves are increasing in the number of capsules, therefore the doses of Targretin capsules are improving.

We believe this also indicates that there is some use of the product in the non small-call lung cancer area, and some experimentation, which we think is very, very positive, and we think is reflected also in our Physician Assistance program.

In the second half of the year on Targretin capsules, we have conducted non small-call lung cancer advisory board, we have conducted two non small-call lung cancer consultant meetings, and we have conducted, as I mentioned before, nine consultant advisory meetings, we have one more planned for December.

We believe Targretin capsules is also responding very nicely to our consultant advisory meetings.

Closing out on gels, our prescriptions are Targretin gel continue to be pretty positive.

Where for the first three quarters of the year were 25%, over previous years, our interim data on hand dermatitis, we anticipate to be quite well received by the dermatology community, and we look forward to actively talking with our dermatologists about that data during the first quarter of 2003.

We are confident that our commercial efforts are on track with the execution of the ten consultant advisory meetings this year, and we have plans for over 20 more consultant advisory programs next year, and as I mentioned before, we are also on track with the refocusing of our 50 pain specialty sales force to generate market share growth in the sustained-release opioid market for the remainder of this year and well into 2003.

So, with those comments I will close and turn it over to Paul Maier.

Paul?

Thanks, Tom.

Well, given the update on the sales trends and the product activities that Tom just outlined in his operating review, I wanted to provide an update on our guidance for the fourth quarter of 2002.

And we've provided guidance for the in line products of product sales between 14 and $15 million in the fourth quarter.

And with AVINZA, our guidance is between eight and $10 million in product sales, for a total of between 21 and a half and $25 million in product sales, and for the fourth quarter, total revenues between 36 and $40 million.

Likewise, with respect to our operating expenses, we anticipate that we will be in the range of 25 to $28 million for the fourth quarter.

And as a result, we do expect for the fourth quarter of this year a modest operating profit -- a positive operating profit for the quarter.

Given that, I think we're now at the point in the call where we can open it up to questions and answers, so I would ask Jane, if you could that please?

At this time, if anyone has a question, please press star, followed by one on your touchtone phone.

Mr. Robinson, I don't see any questions at this time.

We'll wait just a little bit longer.

Oh, here ...

There usually are.

Yes, sir.

The first question is from Stephan Loren.

Mr. Loren you now have the floor.

Thank you very much.

Stephan Loren from Legg Mason.

Good morning.

I have a few questions for you just referring to the deal, if possible.

Your plans, obviously, are to take over -- at least, some control of the production of AVINZA.

And number one, I was wondering if you plan to outsource or build, and if that has any effect on the royalty you pay on the product that is either outsourced or produced by Ligand?

Yes.

Good morning, Steph, and thank you for the question.

One of the things that we had heard multiple times from our shareholders -- and were obvious to management, as well -- is that managing risk by having a sole supplier was an important strategic underpinning to this important asset.

So, we have gained flexibility to qualify, at our leisure and pace, a second source of manufacture that would be other than Elan, and to be able to source product from that supplier.

That would give us two on line sources.

That would give us volume, flexibility, and backup supply in the event of any plant catastrophe.

So, we do intend to do that.

It will be outsourced; that is, it will be another contract source, not a Ligand build.

There are other suppliers out there -- not a large number -- but we do intend to proceed down that pathway.

That will not affect -- the composition of the 10 percent of cost of sales is roughly split into a small royalty and a cost of sales, percent of sales to make up the 10 percent.

That small royalty will be payable irrespective of where we source the product.

OK.

Thank you.

Couple other questions as well.

First of all, we now have an opportunity for a co-promoters.

I was wondering if you could speak to the timing of that deal.

Is this something that you're just going to be starting negotiations?

Are you far down that road?

And what are the targets, what type of target companies are you going after?

The short answer is I guess you would say we've gone down the road with some potential partners, and because we couldn't go down the road simultaneously doing these transactions with all of the potential partners, we have some others that we will bring into the process.

With the increased certainty of what we control, the flexibility in the deal structure is expanded.

So it's a continued urgent high priority for the Ligand management team to complete a co-promotion deal.

This will give us the flexibility to complete it on the best terms for us.

We continue to want to try and accomplish that in the fourth quarter of this year, such that we get a partner out there early next year.

Only an extraordinarily attractive deal that we haven't currently on the table, would want us to delay that too much.

I think that if we found in additional partners, we have not been able to dialogues simultaneously with.

We found a better fit, a more exciting application of skills and manpower to AVINZA, then we might be tempted to take the extra time to complete that dialogue.

The range of partners that we have talked to is diverse.

They range from mid-size specialty companies, like ourselves, perhaps more mature commercially, and with larger infrastructures, but they range from those mid-size companies all the way up to larger companies and larger sales forces.

I think we also will have and will complete dialogues to assess the model of contracting portions of our expansion of sales force for the product.

Gathering of this kind of economics also makes that possibility extremely attractive to our shareholders.

So as we wrap up our process to bring much more muscle to the product, we will also look at that option.

That's kind of the full range of possibilities there.

OK, one final simple question before I jump back in the queue.

As I do the math, you booked $6.1 million of sales, and approximately $4.3 million of that were from deferred sales, leaving about $1.8 million for actual sales in the quarter.

What's going on here that, in your mind, is keeping the sales numbers from not reflecting the demand in prescriptions?

Well I think every new product Stephan, as you know, usually is characterized by large stocking of the wholesalers, which flows through the retailers at some pace, and then is replenished in the wholesalers.

So that's kind of normal for a large retail distribution product that is the flow-through.

What we have done because of the high degree of uncertainty when we first launched, we took a conservative approach to booking that revenue.

Some companies just book whatever you ship and whatever you're paid for, so when we did our initial shipments in 2Q, which were about eleven-and-a-half million, we could - we were in fact paid for that and that put the wholesalers in good position to stock as many retailers as pulled through the product.

So all that really is going on is we took a conservative position to insure that we got a good handle on demand and that all revenue recognition would be clear and final.

That revenue flowed through in the third quarter, and we expect the remaining deferred revenue outstanding as at third quarter to be pulled through fairly shortly, probably in the fourth quarter of this year.

So all that's really happening is as the wholesalers have bought - the merchandise is flowing through to retail, we need to help the retail pull through from the wholesalers, and that's what Tom's incentive package, which is nothing more than what the other competitors are doing out there, we now have a competitive package to gain retail stocking because as you would imagine, everyone is battling for retail space.

This is a category of substantial monitoring and [vigalency] to retail pharmacy because of the schedule two nature that don't have unlimited space and so there is competition for stocking.

We now have a competitive deal.

As demand has grown and we're now, you know, in a doubling rhythm of our prescriptions, that will make it easier for retail pharmacy to jump into the product with the upfront investments that they need to make, which range from, you know, to $500 for a simple stocking all the way up to $2,000 per pharmacy for a full one-bottle per strength stocking.

So all that's really going on is the movement of product to retail, and as that moves, the wholesalers reorder and restock.

And I think that where we perceived the process, we're a little bit behind what we expected in coming into fourth quarter.

We expected more pull-through from retail in the third quarter.

And so what we're probably going to accomplish is what we expected in the third quarter and the fourth quarter and what we expected to have accomplished by the fourth quarter will probably now move into first quarter and second quarter.

Not necessarily lost sales, but sales recognized in the pull-through of retail demand first and second quarter of next year.

I think that that's pretty much what's going on.

We're more confident with fourth quarter for two very simple reasons.

Demand level is substantially up.

We expect 15,000 to 20,000 prescriptions in the fourth quarter.

We've got a good run rate and growing.

That's impacting retail pharmacies.

They're seeing those prescriptions.

So the response to a new deal, which is now very competitive with what the other three or four players are doing to get retail distribution - that competitive deal is what Tom was referring to where we're finding some fairly positive early feedback.

So we think that achieving the 7,500 to 10,000 pharmacies in the fourth quarter is realistic for us.

This retail distribution is something we will need to continue to build on the product; it--at the thin levels we had in third quarter, we were probably losing some prescriptions.

Patients cannot be too patient and wait too long for a new product prescription when they are in pain, so when I physician sends them, and they drop in to a few pharmacies and don't find product, the next stop is back to the doctor for an altered prescription.

So we do believe that this is a must accomplishment for the Company, and we're now at a much more competitive position to accomplish it.

Hopefully that addressed your questions, Stephan?

It did, thank you, and I'll jump back in the queue to let somebody else have a chance.

Okay.

The next question is from David Cowen.

Mr. Cowen, you now have the floor.

Good morning.

A few questions, one is, could you just explain why the gross margin on AVINZA is in the sort of 71 level when Elan is only getting 10% for royalty and manufacturing?

Paul, why don't you take that one?

First of all, the 71 to 72% gross margin that we guided for the fourth quarter is the overall gross margin, it's not specific to any one product, and it's based on the sales mix that was included in our guidance.

But to your underlying question on the gross margin, currently the--in the prior contract with supply agreement, the cost of goods was between 30 and 35% to Elan, and under the new agreement, it will be approximately 10%; however, in terms of what runs through our P&L, we have certain other technology amortization, which is included in cost of goods, so for instance, in the case of the AVINZA product, we paid certain milestones as the product moved through the development cycle, and final approval, and those milestones are on the balance sheet as an asset, and we amortize those over the patent life of the product, so that's an additional cost that is reflected in the cost of goods.

And of course, the product mix in any given quarter will fluctuate depending on the overall mix of the product.

In the case of the AVINZA product going forward, by virtue of us completing this transaction with Elan, the significant improvement in the cost of goods for us does improve our overall margins, and so it's very volume sensitive going forward, so as we increase our volumes of product sales, the fixed component of amortization will have a lesser impact.

I hope that gets at your question.

Okay, and then the Elan--percentage originally varied over time, does the percentage that they have now, the 10%, vary over time or is that fixed as we go forward?

That is essentially fixed at approximately 10 percent, and as David mentioned earlier, there is a component in there that relates to the actual manufacturing cost, and another component that's a small royalty.

And for AVINZA, if you could comment on the PBM lives covered on that--on agreements?

We have AVINZA available in literally all of the top ten PBMs.

The only difference is the top -- the ones that I mentioned earlier -- the top three that we have, where we have 100 million lives -- greater than 100 million lives covered in tier two -- all the other PBMs make AVINZA available, only it's available under a tier three, which means there's a slightly higher co-pay.

So, we have a real good competitive position with three PBMs -- three of the top ten PBMs, which cover greater than 100 million lives, and we have a very solid and competitive position on the others being at tier three.

Great.

And then, in the press release about raising $135 million convertible debt, you have a sentence about using the proceeds of security for the notes.

And I didn't understand what that meant -- if you were to escrow the cash or something like that.

I think, David, we're probably not permitted to go into discussion or detail in this call on that convertible offering.

I'm sure you appreciate the guidelines that management are giving about discussing that offer.

That's fine.

It was just the sentence -- I didn't understand what you meant.

You said, "use the net proceeds as security for the notes."

Yeah.

Let me reference other offerings that have gone out.

I think all that really is an escrow of the coupon payments for a period of time.

So, if you look at coupon payments, they're made typically for three years to a hard call point.

And if you look at some other converts that have gone out in the market -- OSI, the [regeneron] convert -- they had features where a certain number of years of the coupon payment were escrowed to give some additional comfort to the bond holder on credit risk.

Thank you very much.

The next question is from Jay Van Kevison.

Mr. Van Kevison, you now have the floor.

Hi, guys.

How are you doing?

Pretty good, thanks.

Good morning.

Good morning.

I just wanted to cover a couple of issues -- the first one being the operating expenses for Q4.

I just wanted to get a better understanding of the breakdown of how we get to the 25 to $28 million range.

How that breaks out between cost of goods, R&D, and SG&A?

That amount is excluding cost of goods, so it is just R&D and SG&A.

And that compares to the total of those comparable categories in the third quarter that was $26.4 million, and we don't break that down any further.

OK.

And the second question is relating to -- if you could just break out the issue in terms of demand versus what's in the channel -- wholesale versus retail?

If you would give a little more light on that, that would be very helpful.

As it relates, Jay, to AVINZA?

That's correct.

For the fourth quarter -- is that really your question?

No, today -- using today's levels.

Where are we today in terms of what is in the channel, where in the channel is it, who -- the wholesaler versus the retailer, and where do we expect that to be in Q4, as well?

Yeah.

I don't know that I have that detail here.

I think what -- I actually don't have that detail.

Tom, do you have some sense of what that is?

I think the breakdown for the 4Q at the big picture level is within the eight to 10 million of guidance that we've given.

We certainly expect to complete the revenue recognition, so that's probably 1.8 in and around there, million of that.

The bElance is a combination of prescription-demand pull through and retail stocking pull through that's replenished in the wholesalers.

And I ...

The only thing that I might add to that is we have, our initial wholesale shipments, we probably have moved into retail, probably half of that, and that's a guess.

And it's not being, as I mentioned earlier, the product isn't being heavily stocked or broadly stocked in retail pharmacies.

And we anticipate we're in right now between two and 3,000 pharmacies.

We need, as I said before, we need, we know we need to be in 15 to 20,000 pharmacies in order to not lose prescriptions and not inconvenience physicians and patients.

So we have, we still have probably 50% or so, sitting somewhere in the wholesalers.

The rest of it has perhaps been pulled through by prescriptions with very little, at this point in time, product sitting on retail pharmacy shelves.

We hope that, not hope, we're very confident that with the, with the retail stocking program, that we're just executing this week, that we can improve that position at the retail level significantly.

Typically I think our expectation is that wholesaler, you know, once you have a demand curve that everyone can see and understand, we expect the new product launch, wholesaler inventories to settle down into the three-month area.

So as we all come to understand demand levels better, that demand made up of retail stocking, and prescription pull through, that's what the wholesalers see as demand, we expect them to settle into the three-months quite quickly.

So probably by first quarter next year, that's what they'll look at as their normal stocking of AVINZA, and we would expect sometime throughout the course of next year, that that three-months held by them would in fact be reduced further, to a normal retail distribution pull through product.

And that's kind of a transition that AVINZA is in right now.

So I don't know whether that helpful.

Unfortunately it's not quite a science yet, until we all get a better handle on the rate of growth of demand, than it gets to be a much more scientific formula.

Just one follow-on on that.

This is Matt Maceran speaking.

On the, the demand that you're demanding in scrips, be kind of the end market demand for the year.

Did you say for AVINZA that was something like 20,000 scrips?

Yes.

Is that right?

Yes.

The range of 20 to 25 is where we think the demand growth is headed.

That's a narrower band than we've given before, so things are getting a little bit more certain.

I think we started out thinking we were in the 30 plus with a range as high as 30 to 50.

So I think we're getting a more predictable handle on the demand level.

OK.

And where are we today on a run rate basis?

I think Tom mentioned that October is tracking a bit over 3,000 prescriptions.

So that's our latest data, if you add up the weeklies, add in the DDD, which is another 20 to 25%.

We're tracking slightly over 3,000 for that month.

We don't have final monthlies yet.

So and that is roughly a doubling from the prior month, and the prior month was roughly a doubling of the month before.

So, so far we're tracking on a monthly doubling, and while we don't expect that to carry through the month of December, we do and are looking for at least another month where we're doubling our prescription rates, then December maybe a little bit off of that pace.

But we'll have to see.

You know, it's - that's the [Inaudible] of the - of the demand curve.

But we think with the sales force adjustments and the program we have, we should be able to keep that rhythm through the end of the year, and that would give us a pretty good, solid run rate to build on going into next year where I think our thinking right now is we may want to do some further expansion of sales force going into next year in the specialist arena depending upon the shape and nature of the co-promo partner we have.

If that co-promo partner is very strong on primary care but not strong in our specialist area - pain specialist area, then we would probably want to expand Ligand further to get a more intensive coverage of the pain specialists.

And we think up to a total of 70 wraps is very much called for in that segment of the market.

So I think that as we look at coming out of the fourth quarter, our goals are to stick with that rhythm where we get somewhere in the 20,000 to 25,000 prescriptions total for the first six months and with a good run rate coming out, and then additional muscle will really help us move off that solid base.

Great.

And, but, just to be clear, the three thousand - does that - to annualize that - if you annualize that, you're saying that's 36,000?

Yes.

OK.

Yes, at that - at that October run rate.

Got you.

And is there any promotion - special promotions in October that makes that number an unusually high number?

Or is that a kind of true, you know, average promotion kind of run rate?

I would say October was very average.

We - our programs really did not kick in until October, so we anticipate the speaker programs, nurse educator programs, our coupon program and a lot more of focus on the pain specialists will all begin to show up in prescriptions in November.

OK.

OK.

So just to - just to recap, on - at 25,000 - and is it roughly $200 a script that you're realizing?

It'd be slightly under that.

Slightly under?

That's gets you to somewhere kind of the end market demand of somewhere in the neighborhood of $5 million give or take.

Driving off of which number again?

Just off the $25,000 - or 25,000 script number for the year - if we use that as sort of our end market demand number.

Twenty-five thousand or 36,000?

I was using - well, either one.

Let's - so, we - let's just use 25 to make the numbers easy.

At 200, that would be five million.

Is the difference between that and the sale number - that's what's in the trade in terms of stocking.

Is that correct?

Yes.

OK.

OK.

Both at the retail and at the wholesale level.

OK.

And is - are there shelf life issues?

You know, could you just talk about that?

Are there - what's the shelf life of the product and, you know, how do you manage that?

Could you guys just talk through that a little bit?

It's a two-year shelf life on the product.

Yes.

And obviously part of our revenue recognition formula is to insure that at extremely conservative sales forecasts, all of that is pulled through before we book revenue, and so that's part of our conscientious, conservative revenue booking policy.

We are not concerned with the current wholesale levels as it relates to dating.

Okay.

Thank you very much.

The next question is from William Slattery.

Mr. Slattery, you now have the floor.

Good morning guys.

The November-December timeframe is typically a problematic period of time for these types of endeavors to be launched; you lose about--anywhere from 10 to 15% of your selling days, and also your scrip days because of the holidays, so I think that this is a bit optimistic, but if anybody can do it, I'm certain that Robinson and the team can do it over there.

The question that I have is, can you walk us through the--what the specific incentives, without kind of tipping your--to your competitors, that will [incentivise] the retail pharmacist to carrying an extraordinary load of product?

Also, in the sampling program specifically, I know that it's not unusual for 21 days, or 7 days of sampling products; can you walk us through what the specifics of the sampling program are?

And then finally, as you alluded to, December is probably going to be a little bit of a lesser month because of the holidays most likely, what do you think, in your guidance for AVINZA, the 8 to $10 million guidance for the fourth quarter, what do you think will represent--and a potential inventory build for these incentive programs?

I know that your objective is to ship from wholesaler to retail, but you know, I'm concerned that maybe this may hint at continued build in inventory, rather than disincentive.

Thanks.

Yes.

If I can make two or three comments.

First, November is traditionally one of our best months Bill, across all of our product lines.

December, as you rightly pointed out, is a month where you lose a number of selling days, and everybody gets festive and doesn't necessarily focus, after about the 20th or 21st, so obviously most of our planning is centered on getting our job done and getting the business done before the Christmas holidays.

We do expect, though we hope it doesn't happen, we do expect some moderation of the growth rate in AVINZA in December.

I think we would have to do that to be conservative.

The program that we have right now on AVINZA for what we call new patient starter packs, is a coupon program that in fact has a co pay, which is different from competitors.

It is a co pay that doesn't give away free drug completely; a patient has to pay a certain small co pay.

Competitors in that coupon program do give away drugs.

We have taken a more conservative and what we would consider to be serious position.

We have not yet seen that as a deleterious part of the coupon program, and so we are going out virtually to gain additional patients with that coupon program on what we believe to be a competitive foothold with the other companies doing new patient starter packs.

David, the co pay, does that go to the pharmacies' income statement, or does that in any way make it back to an offset of the sampling program?

Nope, the pharmacy.

Okay, thanks.

Not us.

The third question I think you had--you have to picture the eight to $10 million for the fourth quarter is made up of two types of demand, OK?

It is not going to be, in our view, an increase in wholesaler stocking.

It's going to be a pullout from wholesalers by retail pharmacy due to our retail pharmacy incentive plan, and normal prescription demand.

So, if we're going to do 16 to 21,000 prescriptions in the fourth quarter, a certain percentage of that is going to land in pharmacies where they will have to order from wholesalers and pull-through stock.

That will create demand in the wholesaler for us to sell to.

The other part is an incentive plan, which is competitive with what other companies do, which is a certain discount off of a purchase price -- sometimes payable at a discount, sometimes in free goods.

Competitors do that to make the burden of the startup of a new business on the retail pharmacist less.

We were, in our first quarter, giving very modest discounts to the tune of six percent.

We have restructured and now have a plan which looks more like any of the two or three other competitors out there who don't yet have full retail pharmacy stocking.

We're now very competitive with them in terms of offering a package, or packages -- some of them starter packages put in two bottles, and there's a certain discount rate, or calculated discount rate, put in the full four bottles.

And all of those orders go to wholesalers and pull-through stock.

So, our revenue for this fourth quarter we do not expect to be the result of increasing wholesaler inventories.

We see it as pull-through demand for those two types of demand, and that's the basis of our forecast.

That's one of the reasons why -- if you look at the difference between our prior outlook and our current outlook, we have expected retail pharmacy to have more progress with retail pharmacy, such that they would have already pulled through in the third quarter the inventories, and we would have sold back in third quarter, and a correspondingly higher amount in the fourth quarter.

And all that has really happened is that retail pull-through is taking us longer to affect.

And so I think that hopefully that gets at your question.

We are not looking -- because we have adequate wholesale inventories, we are not looking to expand, substantially, wholesale inventories in the fourth quarter.

And our view is wholesalers would not want to.

So, even if we did, they would not want to.

They will buy as the pull-through takes place.

So, that'll be a pretty normal achievement in fourth quarter, other than whatever revenue recognition we take -- that 1.8 million -- the rest will be what we call normalized demand pull-through for the wholesalers.

David, if I could ask just one last question.

You haven't talked much on the large chain pharmacies -- the Walgreens, the Wal-Marts and the CVSs.

To the extent that they play a roll in going from 2000 to, say, 10,000 by year end, can you help us understand what roll they will play, and how quickly the chains help you get to the end gain?

I'll turn that over to Tom.

He's certainly way more qualified than I.

I will make one comment, which hopefully he'll cover.

If he doesn't -- we did, as a part of our improving our ability to predict and manage our business, Tom did expand his key account staff, doubled it in the last quarter.

One of the things we recognized is we didn't have enough manpower to liaise with all of our clients and help manage the flow of our business more predictably.

So now Tom has a beefed up group of key account professionals that deal with all of these key accounts.

And hopefully that will add to our ability to execute this program, particularly the change.

So I'll turn it over to Tom with that.

Your first of all, I'll make a comment that the chains, retail chains are very important to our fourth quarter program, and as David said, we recognize that and we earlier this year doubled our national account group

We are in the very early stages of contacting the chains.

I have only feedback, qualitative feedback from one meeting that was conducted earlier this week, and the program that was presented was received very positively and the chain that was called on is going to work with us to pull through product at their retail store levels.

So we have one call that we have made so far.

We have appointments over the course of the next seven to 10 days with all the major chains to, with our national account team, to go through the programs.

So our early feedback is very positive, but it's very early as well.

We haven't had an opportunity to reach all of them.

I would make one comment however, that at the independent pharmacy meeting, which was conducted in Nashville a couple of weeks ago, we did propose this program, just to see how they would respond to it, and there is an entity called a retail buying group, there's several of them around the country, and one of the retail buying groups that we met with in Nashville has already placed an order.

So for all of its stores, and I believe that's around 70 stores.

So we are, we're real pleased, that the organized headquarters approach to this seems to be received very positive and if the independent buying group is any indication, we hope to have the same kind of success with a major chain.

OK.

Thanks guys.

The next question is from Frank Zavero.

Mr. Zavero, you now have the floor.

Good morning.

Yes, on the sixth-month lock-up agreement with the Elan shares, I guess the one characteristic of the Elan, as a shareholder that you neglected to mention was that they're in the midst of liquidity crisis.

Is, are there any triggers for out, for getting out of the sixth month lock-up relating to either timing of debt payments, covenants, or filing for chapter 11 or anything like that?

I believe the short answer is no.

The lock-up relates, obviously to registration, a private sale is still possible.

So I think the lock-up relates to the registration and market sale I think I would answer that in the following way.

We continue to recognize that we haven't solved the problem completely and that it is of concern to our shareholders.

And so we would continue to work on solutions.

I'm not sure the solution I would say that we believe to be optimal is to necessarily place all those shares of another partner.

I think there are other possibilities that could come from cooperative relationships with a co-promo partner than necessarily placing the shares there.

Having said that, I think we do expect to continue to work on that issue.

I would say that we're trying to keep it in perspective that fundamentally the shares held by Elan - the most important thing is an orderly and, let's say, managed distribution of those shares through either a market mechanism or a private placement mechanism.

We believe that the capital of Ligand should go first and foremost to very attractive enhancements of our ongoing business such as we're doing right now with the restructuring of the AVINZA deal.

So while we have put a small amount of our funds towards bringing some certainty to that stock overhang, we want to be cautious about how much we elevate it to a priority of management.

Our first priority is drive our shareholders' business, and that means make AVINZA all it can be, get Targretin a big non-small cell lung cancer drug, enhance the Gel into hand dermatitis - those types of activities.

So, we'll continue to work on it with perhaps that perspective.

And, yes, there are still possibilities for us.

And my final question is that, you know, if I listened - if I got all this correctly, you guys just paid somewhere north of $100 million for a product that's currently running at five to 10 - or a fraction of the revenues from a product that's currently selling about five to 10 million run rate.

In your informal conversations with some potential partners, have they bandied about numbers that are anywhere near this level, which I guess I would view as kind of a floor for a deal where you guys are viewing a deal needs to get done as far as upfront payments, you know, somewhere in excess of 100 million or something like that or near-term milestones.

Let me - let me comment first on, you know, the future potential of AVINZA.

I believe that virtually all of the companies that we have spoken to view AVINZA as a very exciting asset and a very exciting product in a very, very interesting marketplace of sustained release chronic pain management.

I believe that it's fair to say that virtually none of them would be interested in the product were it to be only a product that could achieve the breakeven that we have highlighted for the financial analysis of this transaction.

That is, if they thought it were only a 70-million-a-year product, they wouldn't be very much interested in co-promo.

Yes, but that's not my question.

Have they been interested in - I mean I understand that this potentially could be a really attractive product.

But have they been interested in paying north of $100 million in either up-front or near term cash, you know, in order to get a co-promote with you guys?

Well, let's -- without commenting on discussions that either have been held or might be ongoing, let's suffice it to say that the value that Ligand believes is represented in the payments that we're prepared to make is not outside the either expected forecast range of partners or under different business terms and conditions what third parties view as the value of a stake in the product.

That number, obviously, is something which is derived by looking at relative sales volumes and valuing a stream of income from that.

And let's just say that other parties have done their math as well and we don't believe it's outside that range.

OK.

Thank you.

The next question's from Ross Margoles.

Mr. Margoles, you now have the floor.

Yes, I'd like to just review the rationale for, you know, the set of strategic actions that you've taken.

You know, the way I look at your Company you have an attractive product set.

You have a clearly undervalued stock.

You haven't executed on AVINZA so far.

You have a motivated seller in Elan who wants to, you know, sell stake.

And you've chosen to pay to this motivated seller a fairly high price both for your common stock and for a stream of income on AVINZA and finance that with an incredibly [dilutive] convertible bond, which, you know, if it goes like most convertibles do, which I'm sure you're aware of, will involve a lot of short selling on your stock, you know, to get it placed.

Two questions.

I'm clearly missing the rationale on this strategy because none of that stuff makes sense given the context.

And secondly, if you can't get the convert deal done, what are your options?

I appreciate your opinion.

I obviously don't share the perspective, but I appreciate your opinion.

I think in the event that we don't get the financing done, the amendment and restatement of the license agreement doesn't go into play.

And we remain with the previous so-so supply agreement.

And so we're kind of back to where we were.

You're back where you were, but you bought two million shares at $9.00 a share.

Yes.

Yes.

What I would say that I think is very, very important and very substantially different than your perspective is we have a product right now that I think it's fairly clear to the marketplace is in need of the flexibility that virtually all products at this stage have of having a single master be able to optimize the product.

Right now as between Elan and Ligand, it is simply not possible to do that because of the co-promotion option on the one hand and the split of the economics in the wrong hands.

Without this restructuring, it will be much more difficult to find the PNL (ph) space to put the muscle behind the product in the marketplace, and make it all that it can be in the marketplace.

Both Elan and Ligand recognize that.

Irrespective of Elan's desire for cash, they, first and foremost, make money going forward -- both in their plant and in the royalty they retain -- if the product succeeds big time in the marketplace.

If it doesn't, whether they got the cash or not is not going to be the only issue.

So, I think both companies recognize the absolute need to move ahead and get some additional sales force muscle on the product.

But, that's not the question.

The question is: there's all these other strategic options that you could look into and that would theoretically be available.

You have attractive drugs.

Why do something that dilutes the hell out of all your current shareholders, and doesn't take advantage of the fact that Elan needs the cash?

Why do something that goes the exact way?

You mentioned that you were running a company, you know -- I forget the phrasing you used, but it wasn't "shareholder value," it was "shareholder company".

I mean, your shareholders are -- company value is related to shareholder value, but doing bad financial moves -- no matter what you're doing to the company -- destroys shareholder value.

We do have a difference in perspective, there.

We believe that a financing to improve the economics and the ability to optimize AVINZA is a good thing for shareholders.

We believe the financial analysis, in fact, shows that it is not [dilutive], that this transaction is accretive.

And the more we build the sales of AVINZA, it actually becomes over $70 million -- extremely financially positive for Ligand shareholders.

You're telling us that this shareholding -- when you model this out several years out is accretive -- this convertible offering -- relative to all your other options?

That is mathematically staggering.

I'm not talking about the next quarter or the first quarter of next year.

Long-term [accretives] and net present value to shareholders -- your stock is trading at five.

You're talking about selling a quarter of the company at those levels.

For that to be accretive, you need some very powerful math.

Well, what we're saying is that when you look at the EPS on an if- converted basis with the financing as we have ...

Over what period of time?

Give us some credit for being able to do our financial analysis.

We had looked -- I think with our financial advisors -- over the '03 and '04 period of time, and looked at various volumes of AVINZA.

And we certainly believe that in that '03 and '04 timeframe that using EPS on an if-converted basis, it is accretive to shareholders.

And I think that the proof is -- and I appreciate that when you're in the early stages of the launch of a product, running the run rate -- when you are doubling the run rate monthly -- if you take the current run rate and project that forward as the most certain -- I understand there's a gap -- but if you recognize that the product is growing at a doubling rate monthly, what is right now a modest rate is fairly rapidly becoming a very interesting, going forward rate, which we believe -- both on our own and with partners -- we can further accelerate.

This agreement enables our going-forward partnering.

To be honest, without a restructuring, I think it would be extremely difficult, and if you look at the option, the economics remaining in Elan and our trying to bring in a co-promotion partner to a product with a 60 to 62% gross margin, there isn't a lot of room in the P&L for Ligand shareholders to bring in a partner with good economics for both parties.

So the ...

But the obvious key is to get somebody with a lower cost of capital to buy that Elan [Inaudible] as opposed to Ligand issuing equity of a $5 stock price.

Your cost of capital is inordinately high then.

Other people can, you can capture that value without the dilution that way.

And we agree that would be an optimum solution.

Obviously, parties with the capital that have low costs of capital extract their pound of flesh operational.

So the company is in a position where we have to negotiate to restructure and at the same time, get the capital from a lower cost of capital provider who then wants a bigger pound of flesh of the in-market economics, so, or other forms of extracting the pound of flesh.

So one of the keys to our strategy and belief is that if you try to do that simultaneously, the economies for Ligand shareholders do not come out as well, because you trade off the low cost of capital for a bigger chunk of the economics in the marketplace to he who provided it.

By getting it on our own, we stand to get the best economics of the product at the same time as we enable that dialogue or enable that transaction.

My last question on it.

What's your break-even on a stock price where given the nature of these convertible securities you're planning on issuing, what's your break even on your stock price for this, you know is diluted?

Because there's a point on your stock, if your stock's trading at one, I mean, I guess if you're not going to make any money, then it's always accretive.

If you're never going to make money, it's always accretive.

It becomes a mute question, but based on your analysis, how low can your stock go where this deal doesn't make sense.

I don't know that I know that off the top of my head Paul, do you?

You've announced a deal, you should know it.

We certainly have looked at that.

We've been encouraged, if not restricted from talking about the convert on this phone call.

It's not a convert question, it's a dilution question.

OK.

I can check that piece of information for you.

I apologize.

I don't have it off the top of my head.

I know we looked at a pretty broad range of share prices from six to nine, I just can't remember where in there it turns over.

I'll let the next person go.

Thank you.

The next question is from Jason Aria.

Mr. Aria, you now have the floor.

Good morning gentlemen.

Morning.

Couple questions David.

Just to follow-up on the last one, I guess the difference of opinion here lies mostly on your expectations for AVINZA probably being a lot higher than that gentlemen's or maybe a few of the other questioners.

Is that basically what you see, other than the fact that, you know, you're looking at a stock price dilution or accretion in the range of six to $9.

Obviously the stock's trading at five right now.

It's probably out of that range.

So I guess the second part of that question is, David, would you reconsider doing this deal if the stock price was out of the accretive range?

I think the board and management of the company have a fairly good track record doing both good business deals and solid financings within the strictures of market conditions.

I think that our goal here is to have an accretive transaction, and I think we have clearly recognized that the company and its shareholders gain if we are able to accomplish this and accomplish it in a solid way.

I don't know that I can give you a direct answer to the line of accretion or dilution.

I'd have to go back and look at where that actual share price is and answer the question that way.

But I think we have certainly acknowledged that we want to do this deal, but we're not going to be in a position where we have to do this deal.

We believe strongly this is very positive for the going forward, next several years, future of the company, and we obviously believe strongly that this is very much in the best interests of shareholders.

But we are not in a position where we have to do this.

So we will make good judgments as we go through the process, and that will include assessing the ability to finance, and the quality of the financing that we would do.

Great, that's certainly reassuring to us -- that you're not locked in.

And my second question, and this is a Paul question -- regarding what you expect the blended gross margins, Paul, to be for the entire year of '02, which I guess is in the high 60s, and then on a going forward basis, '03, and then maybe if you want to just comment into the future what you anticipate the approximate blended gross margin to be.

The -- first of all, we have not and are not in a position to give any guidance in '03 and beyond.

And part of that guidance ultimately will depend on the status of a co-promotion arrangement and the product mix, because that does determine a blended rate.

Sure.

And so at this point, based on the fourth quarter guidance, post -- assuming that we do close the transaction with Elan, based on the product mix guidance we gave, the range would be 71 to 72% for the fourth quarter.

And you can add that to where we are year to date, which has been 68% for the first nine months, and you know, you can do the calculation.

As I said earlier, the margin is very sensitive to the volumes of individual products and the amortization of the fixed components, and of course the AVINZA sales levels with a co-promote partner would be considerably different.

So that's the reason that we at this point in time haven't gone out any further.

And my last question, David is, again, just kind of following up on the last question, I was somewhat surprised by the $9 figure that you're paying Elan for 2.2 million shares.

You know, clearly it was about a 50% or 40% above current market price as of yesterday, and right now, it's nearly 100% above the current price.

Again, they seemingly are in a one-down position.

Why would you have to pay them such a premium, and I mean, was it just that the deal is so complex?

Was it just kind of giving money from one place to another?

I mean, I think it's related to a couple of things.

First of all, this is kind of a package deal.

You know, we're getting a tremendous advance for the shareholders on the operational and control side of AVINZA.

It also is a look at what the proper value of Ligand is.

I think we and Elan continue to believe that because of the [interlockedness] of our share holdings and the product, and a little bit of the strategic funk that the product is in, where it's difficult to act and drive it until we get some separation, that's been reflected in a depressed share price for Ligand that does not in any way reflect intrinsic value.

And so at the time we negotiated, we were a seven something stock.

It was a 30 percent premium, it wasn't -- and certainly still well below what we believe to be intrinsic value for the company on a share basis.

So we felt it was a fair price, and as part of the package made eminent sense.

Now, clearly what happens after needs some time to settle, and I think the market's going to need some time to digest this.

It's not an easy set of transactions.

Just as it's a complicated situation, the solution is a little bit more complicated than we'd like, but we believe it's a very important step forward for the company's shareholders.

And I think that as we get through it and are able to drive AVINZA and make AVINZA what it can be, there won't be much doubt six months or 12 months from now about the attractiveness of this for the company.

Well, thank you David.

And for whatever it's worth, we have a lot of confidence in you all as a management team.

We just -- as I said earlier -- hope that you don't get locked into this deal if the economics of it don't make sense down the road.

We hear you loud and clear.

We hear you loud and clear.

And thank you.

Thank you.

Jane, and I think we have time for one more question.

All right, Mr. Robinson, the next question is from Paul Bona.

Mr. Bona, you now have the floor.

Thanks a lot.

Most of my questions have been answered, but just a few odds and ends.

On the Elan shares, you're going to buy back 2.2 million, and they're going to lock up -- I think it's 11.8.

I think there's 400,000 that aren't accounted for?

Yes, those 400,000 are already registered, and so they're not subject to the lock up.

OK, that's great.

And then one other thing.

The Elan lock up is contingent on your buying the 2.2 million.

Is it contingent on the convert going through?

The lock up itself?

That's right.

No.

OK.

So if there's no convert deal, Elan is still locked up?

Yes.

OK, good.

That's all.

Thanks very much.

OK, with that, given the time, I think that we should thank you all for participating in the call, and as always, we will be available for additional questions over the course of the day, and appreciate your attendance this morning.

Thank you.

Thank you all.