Ligand Pharmaceuticals Inc (LGND) 2003 Q2 法說會逐字稿

I'd like to welcome you to your conference call with David Robinson of Ligand Pharmaceuticals.

This call is being recorded and you are in listen only until the question-and-answer session.

Go ahead, sir, and thank you for using Sprint conferencing services.

Good morning, everybody, this is Mike Watts, Director of Investor Relations for Ligand.

I'd like to welcome you all this morning to the call to discuss our second-quarter sales and earnings.

I'm here in San Diego with David Robinson, our Chairman and CEO, and Paul Maier, Senior Vice President and CFO.

Before we get started on the call I would just like to remind you all that we will be making forward-looking statements this morning and that there are risks inherent in our business.

If you'd like more information on those I would refer you to the Safe Harbor statement of our press release, as well as to our prior SEC filings.

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

Thank you, Mike.

And thank everyone for joining us this morning.

I'd like to make a few preliminary comments and then, as we have been doing in our past calls, to allow quite adequate time for Q&A, try and be as productive as possible for everyone on the line.

First I'd like to say that we had another good quarter with the second-quarter of this year, this one being a record both for revenue and for product revenues, led principally by our two major products, AVINZA and ONTAK.

This second-quarter performance now places us, we believe, more strongly at midyear tracking nicely to our overall guidance for the year.

While clearly the second half of the year is not a slam dunk and substantial growth in our products remains to be achieved, we are feeling the momentum or the rhythm of our business moving strongly upward towards our goals for this year.

A few comments first obviously on the revenues, which is critical to us going forward to achieve our financial goals.

Clearly we reported record revenues for the quarter with product sales up 140 percent and total revenues up 52 percent for the quarter.

Respectively for the six months that places us 82 percent up in product revenue and about 20 percent up in overall revenues.

Clearly the quarter's comparisons to last year are colored somewhat by second quarter of last year being a relatively weak quarter where we had some wholesalers that skipped buying.

So the comparisons to prior year perhaps are a little bit favorable.

We still believe, if you look at the momentum of both prescriptions and wholesaler purchases resulting from the retail prescription growth, that our business is moving quite strongly forward across most of our product lines.

I would comment on several of our principal products.

Before I do that, I want to comment on two other components of our P&L that moved nicely in the quarter.

The first is gross margin on product sales.

We believe now has been moving nicely in the right direction.

It was 69 percent in the second quarter of this year compared to 55 percent in the same period of last year.

That percentage should continue to improve as the volumes of our two major products, AVINZA and ONTAK, with large components of amortization of technology in the case of AVINZA, amortization of the restructuring of the AVINZA license and supply agreement become a smaller and smaller part of our cost structure as sales volumes increase.

We believe that will be a favorable feature of our business over the coming quarters and certainly, in the case of AVINZA, perhaps over the next several years.

In addition to favorable trends in gross margins, we also saw expenses, both R&D and SG&A, behaving as per expected.

Research and development expenses were up for the quarter about 23 percent.

That increase related heavily to the accelerating patient accrual in our two major pivotal trials for Targretin capsules and non-small cell lung cancer.

We're very pleased to reaffirm that we're actually ahead of our goals on both of those studies for this year.

Enrollment of the first 600 patient study is about 96 percent complete and is expected to conclude by the middle of the third quarter of this year.

Enrollment of the final second 600 patient trial is ahead of schedule and about 80 percent accrued with a target for completion in the middle of the fourth quarter of this year.

Those are the two principal trials driving our R&D investments at least the single largest component of that.

And with those complete we expect to have some P&L space going forward to add some additional R&D initiatives that we believe will continue to keep our specialty business -- product business in particularly strong shape long-term.

SG&A grew about 32 percent for the quarter, again in line with expectations.

And those principally driven by Ligand's investments with our copromotion partner in AVINZA and in the completion of the expansion of the AVINZA pain specialty sales force to 70 representatives.

We believe that that set of investments now is in place and that that additional sales force will prove to be particularly productive, contributing to the accelerating growth of AVINZA in the second half of this year.

A few comments, specifically on the products that are worth making.

AVINZA is tracking quite nicely to the company's goals for the year, both in terms of prescriptions, in terms of retail pharmacy distribution, and in terms of managed care and formulary acceptance across the country.

For the most recent weekly script data, our market share of 1.3 percent is consistent with our goals to be coming out of this year in December with at least a 3 to 4 percent overall market share.

We would observe that the sustained release opioid market is in fact growing faster than we had expected, a positive backdrop to our efforts on AVINZA, and yet we continue to track in line with our share.

So we're pleased with the prescription generation.

After a little bit of saw tooth choppiness in the month of November, those being related to Memorial Day holidays and to the Fourth of July holidays, and in the first several weeks of June both Ligand and Organon rotated all of our sales forces in for one full week of additional training, that is all 800 to 900 representatives went through another round of intensive training on AVINZA.

That did take them off the road, each of the sales forces, for about a week.

And with those tactical things behind us, we think the product is back on to its nice growth trajectory, and we certainly expect to see that additional training paying off in even more productive territories in the second half of this year.

We're particularly pleased with how ONTAK is responding to our additional activities over the last three or four quarters.

And that certainly culminated in a record quarter for ONTAK.

We hit actual net sales of 9.2 million for the quarter.

We had unit shipments to end-users increasing 35 percent compared to the same period of prior year.

And we're increasingly now seeing those increases in unit shipments being pulled through in wholesaler purchases.

So we're very excited with the responsiveness that ONTAK has shown.

We believe that is related principally to the improved focus that we have been able to put on ONTAK through our focused sales force activities now with the separation of ONTAK that is the oncology sales force and the pain sales forces and all related marketing activities, we're finding that kind of focus is really paying off nicely with a better dialogue with physicians.

We noted a similar positive trend, though not as marked, with Targretin capsules which increased 24 percent compared to the same period of 2002 based on IMS NPA data.

We don't have the full extranet data yet for the other channels of distribution, which have tended to grow a little bit more slowly than the retail.

But the retail growth is showing the best growth we've seen over the past several quarters for Targretin caps -- best growth we've seen in the past several years.

We are noticing a lag in the response of wholesaler purchases.

We're not overly concerned about that.

Some of that is just a little bit of leveling of wholesaler inventories, and some of that is a normal lag of response in their purchasing patterns.

We do expect that will improve in the second half of this year and allow Targretin to contribute more substantially to the overall revenue growth of the company in the second half of the year.

We believe that overall the company's business has moved nicely in the first half to confirm our overall guidance for the year with revenues behaving very consistently to our expectations, expenses doing pretty close to the guidance range, and we believe that means that our goals for making money in the second half of this year are very much on track.

We continue to stay focused on the overall accomplishments and goals for the year, so we won't be making too many comments about quarterlies, which quarter will be profitable, we're just comfortable that the second half of this year is tracking towards that goal and towards our overall goal for the year.

I think with that I will open the call now to any Q&A that anyone would like management to address.

(CALLER INSTRUCTIONS) Russell Gilbertson of Roth Capital Partners.

Good morning and congratulations on a nice quarter.

My question is in regard to AVINZA, and actually there are two questions here.

The first is related to the sales force, and I'm just curious as to how many visits per month each rep is having right now and would you expect them to have going forward?

That would be my first question.

My second question is, you mentioned that the total market for sustained release opioids is growing, and I'm just curious as to the actual percents that you're using in that?

Let me start with the second one.

I believe the most recent data for the sustained release oral market is either through May or June.

I'll have to doublecheck on that.

But the growth rates were 26 percent in dollars and about 14 percent in scripts, which is substantially higher on both counts than we have expected for this year.

As you would have observed, that market has been slowing somewhat under the pressure on oxycontin.

That appears to been reaccelerating in the first half of this year, that we believe is a very positive note.

Clearly all products are seeing some benefit from that.

We believe a bigger and more attractive market will be a particular benefit to AVINZA.

An increasing trend in AVINZA prescriptions that has been very positive, in the beginning we were getting a growing share of new patients and not too many conversions.

We have seen quite an acceleration in the conversions from other products to AVINZA.

We believe that's a very positive sign.

Some of the physicians gaining confidence and now converting some of their problem patients onto a product like AVINZA, very positive for the drug.

That, we believe, will be a trend for the future.

The larger the market, if you break down the market on a quarterly basis, the market research we've done indicates that physicians see about 20 percent of their patients -- these are the high prescribing pain physicians -- see about 20 percent of the patients that are new patients looking for a pain medication for the first time.

And then about 15 to 18 percent of those physicians say that they are actually looking to switch patients who are having problems with their pain medications.

So that means in any given month physicians say that about a third, a little bit less than 40 percent of the prescriptions they write are for patients that are available to us to compete to get new prescriptions for AVINZA.

To be able to get patients from both of those segments is quite a plus for the rate of up take on AVINZA.

So hopefully that answered your questions, Russ, on the larger market and growth.

Thank you, it did.

And your first question, again, was really related to the number of calls that we're seeing from the sales forces on pain docs on a monthly basis, if I recall correctly.

That was the question.

It's a little bit difficult to characterize because each of the sales forces is quite different.

But let me see if I can summarize it.

Across all of the four sales forces, we are expecting for those sales forces calling on pain docs, and I'll talk to our own first.

We have a minimum call target of eight doctors per day for our AVINZA reps on the specialty side.

And so far our reps are achieving that target.

Some are achieving higher, and some marginally lower.

But that is a minimum call rate we're expecting from our specialist reps.

On the primary care sales force of Organon, they are calling on somewhere between 6 and 8 docs a day on AVINZA.

And I think they're achieving that pretty consistently.

You have to remember that they're calling on a universe of physicians in addition to the normal call pattern.

And it's on those docs that are spread throughout their territories that they're seeing those doctors once every two weeks, and they're achieving both the reach and frequency that we have been looking for on the primary care sales front.

I think that's going to get better as we look at the second half.

Organon has gone through some realignment of their territories to get a better match on our call universe.

And that's just now settling down as we move through this second quarter.

So we think they're not only going to have the reach and the frequency, but they're going to get the doctors more consistently, and that's going to help a lot with the primary care up take.

We have noticed, as a sidebar, a growing percentage of the prescriptions of AVINZA being generated by primary care doctors.

That's a positive sign and certainly one we would expect for the success of the product.

We're doing very well with specialists, but we definitely needed to see the primary care, which counts for almost 55 percent of the total prescription market, respond and contribute more to our AVINZA growth.

The other sales forces, the specialty sales forces of Organon, the hospital and the psychiatric sales force that is now calling on pain docs, I'm not sure calls per day are the way to look at those sales forces because each one of them has a target group and they're not necessarily going to get to that target group with a high rate because they're not exclusively focused on them.

So I couldn't tell you what the exact call rates per day are, but I think we've covered the principal sales forces delivering the calls.

I will say that overall we're tracking very carefully the total calls on the product, and we're actually, in terms of total number of monthly calls, we're ahead of where we expected to be on the brand.

So I think the throw rate is clearly being delivered, and I think our focus now is not whether we're getting the reach or the frequency.

I think we are comfortable that we are.

Our focus is on improving the interface -- that is the delivery of the message and the actual sales call itself, and that's why we've been working intensively on training and technique.

In the end this is a drug delivery market, and it's the efficiency and effectiveness of the sales force at that doctor interface that's going to make the difference.

So we're staying focused on helping the rep forces to stay what we call on the improvement and learning curve on that.

It certainly would be normal to expect that it will take them 12 to 18 months to be optimally effective in selling AVINZA.

And we're going to keep a high emphasis on training to ensure that we help get them there.

Thank you, David.

Patrick Schnegglesberg (ph).

Thank you for taking my question and congratulations on a good quarter.

Quick question on your R&D line.

You said -- you mentioned remark around that you will spend some R&D to keep growing your specialty products.

Can you comment on that a bit more?

Then I have a couple of questions on AVINZA scripts.

I think our comments were meant to highlight two or three areas that we're very excited about.

First and foremost, we want to move Targretin into the monotherapy third line arena, similar to what you've seen with Iressa in non-small cell lung cancer.

So we have designed several trials to, when we have investment dollars available, to move Targretin forward in that setting as well.

So as we finish the large-scale front-line trials, that will be a second natural area or us to invest in.

The second area is, we have been receiving some interesting early data from ONTAK doing some assessment in non-small cell lung cancer as well in the third line monotherapy setting.

We're very intrigued by that, and so that would be a secondary that we would accelerate our investments would be in ONTAK in non-small cell lung cancer.

The third area would be the Targretin gel hand dermatitis large-scale Phase II-III trials.

We've just about finished the design of the next trial that we want to do on T-gel in hand dermatitis and expect to launch that later this year.

And so the availability of additional P&L helps us do that going forward.

Thank you.

Quickly on AVINZA this month, can you elaborate of your 11.6 million in sales -- how much was hospital sales or -- I guess more importantly how much was inventory stocking if you have the numbers?

Yes, if you conceptualize the goals that we have for this year, clearly the prescription goals we've outlined and so our prescriptions are ramping nicely towards that 3 to 4 percent share, that means each quarter the revenue that those prescriptions are pulling through will grow naturally, that's one goal.

And for this quarter we were pretty much right where we wanted to be.

First week in July, normalized week in July we had 1.3 percent market share.

That equated to about 3350 prescriptions in the retail arena.

That will grow towards the 9,000 or 10,000 prescriptions per week that we expect to exit this year with.

Well, that prescription backdrop is naturally pulling prescriptions through retail pharmacy and through the wholesalers.

In addition to that, we targeted to get between 12,000 and 15,000 retail pharmacies stocking the product.

As closely as we could gauge, without all the data in for the quarter but pretty close to all the data in, we think we got to about 12,000 to 13,000 pharmacies, which is right in that area that we wanted to be for the second quarter.

So for the second half of this year we want to get at least another 6,000 to 8,000 pharmacies stocking AVINZA.

Market research has, once again reiterated -- and this market research dated in the April time period, not the June time period when we had better distribution, but it once again reiterated that the principal reasons for physicians not trying AVINZA was concern about availability at retail pharmacy.

So they continue to speak very clearly to us.

We need to keep working on this job.

As a result, in the second quarter, if you kind of look at bringing online 6,000 or 7,000 new retail pharmacies stocking the product, and we don't know exactly the averages per pharmacy, but certainly they contributed the balance from prescriptions to our revenues with a little bit of increased stocking at the wholesaler level.

So let me see if I can break it down a little bit better.

So the second piece was retail pharmacy, and we brought on about 6,000 to 7,000 pharmacies.

The third piece is as your sales volumes grow wholesalers hold a little bit more of your product.

So between now and the end of the year we expect our normalized inventories, that is year end we expect to have around six weeks of stock in the wholesalers, and that six weeks related to the projected run rate for the product.

So if you look at those three components, retail prescriptions we think accounted for about half of the demand of the second quarter, half of that 11.6 million.

We believe that retail pharmacy stocking that 6,000 to 7,000 pharmacies and some modest increase in wholesaler holdings accounted for the other half of those revenues.

And what the breakdown is between retail pharmacy, stocking and increase in wholesaler inventories, I just don't have the final data yet for the quarter to know.

Did that help at all?

He dropped off the line, sir.

The next question is from Meirav Chovav.

One of my questions has been answered so let's focus on Targretin for lung cancer.

I was wondering what is the timeframe for results for that study?

Yes, each of the studies has a runway which is a maximum of 12 months from final -- from last patient in.

So the first study finishing here in mid third quarter would have results available about this time next year.

Thank you very much.

Keith Mayer (ph).

Just a quick question.

I guess you said the market is growing ahead of your expectations and where you need to be in terms of market share.

So why have you guys not increased your guidance going forward at this point?

Good question, Keith.

I think our perspective is we would like to see a quarter or two more under our belt to understand how quickly the up take of the product is going before we make any further comments beyond reaffirming our guidance.

We certainly would like to have a little bit more runway.

We've had one quarter with our copromotion partner.

We think that was the early quarter.

We continue to believe that with the training and the territories settling down and the size of the sales forces we have that the productivity of the second half is going to be substantially better than the first half.

We'd like to see a quarter or two under our belt before we alter guidance.

That way we all get a better feel for the product and how quickly it can ramp in the marketplace.

So if you graph out the scripts, you see a dramatic increase in the rate of growth starting to reaccelerate.

So where do you see -- as you think about it in terms of all the different people selling the drug now, how many people are there in total at this point?

We keep, in all four of the sales forces, between 800 and 900 representatives promoting the product.

So when do you think you'll see the full effect of those 900 people?

I think third quarter is going to be a very good barometer for us.

I believe that, while it's got summer vacations in there and so you always are a little tepid about what goes on with physicians and summer vacations, the reality is it should be a pretty good runway for us to judge.

We've got the training of all the -- retraining of all the sales forces in there, and the territories are settling down.

So I think it's going to be a real good quarter to gauge the productivity and the ramp rate of our prescriptions.

Certainly it will be the decisive quarter for this year, and probably will tell us if we need to shift our guidance for this year and going into next year from a share standpoint.

Thank you.

Jim Redditch (ph) of Friedman Billings.

Just wanted to try to get an idea of the addressable market for ONTAK on the basis of the sales looking like they're picking up a little bit.

NHL -- I suppose these are Retuxin failures, but are they people who have failed Retuxin once or a couple of times?

And pretty much the same question for CLL.

I assume that these are patients who have had Retuxin.

Can you comment on, just in general, the growth you're seeing into that market?

Yes.

In both cases they are the refractory segment of the market.

And they tend to be patients that have seen both Retuxin, other chemo-therapeutic agents.

So it's almost the equivalent of third or fourth line therapy or what we would call salvage.

So they are the toughest of the patients to treat, which is why I think the clinical data we published at ASCO was received so well is the product seems to be working and contributing to those patients in spite of the multiple failures on other products.

And there are patients in there who have failed multiple courses of Retuxin therapy.

But there are some that physicians have treated once and have chosen not to retreat with Retuxin.

So a little bit of both on the B-cell non-Hodgkin's lymphoma.

We are with a current study under way by a lymphoma expert that is combining ONTAK with Retuxin.

So the drug is being studied in both situations.

Being combined with Retuxin would probably move it a little bit earlier up into that refractory patient population.

Still refractory, but it may be added to Retuxin for the second round of treatment.

And I think there's a considerable amount of interest and that use of it.

In CLL it tends to be for the fludarabine refractories and for those that have chemoed.

So it's pretty equivalent to third line.

We are seeing some physicians who prefer it to Campath, but I think there are patients also that have been treated with Campath.

So once again, same refractory, third or fourth line treatments.

Now we are doing some additional studies with ONTAK, and I believe as we get more Phase II data out there, physicians are going to increasingly see ONTAK as a very, very viable alternative for that patient population.

So we'll keep working on those.

Our registration track target is CLL.

So as we move through larger scale studies that will be the one that at least now we believe is the best and most open field for registering and additional indication.

So that's where we'll stay focused with our investments.

Do you have a timeline on the registration for CLL?

We need to finish the ongoing larger Phase II trial.

We've got a significant one going on right now that will end next year that we really need to assess the data of that.

I think right now the timeline we believe would put it out in '06 for registration of an additional indication.

So, based on the larger scale Phase II data, we may be able to do a little bit better than that, but I think that's where we're tracking right now.

Great.

Thank you very much.

Jason Chang from Independent Research.

A couple questions.

The first is, do you know the average revenue per script right now?

And if you compare that to what you have seen in the first quarter, have you seen an increase?

And the second question is related to the new pharmacy you have trying to bring on board.

Do you know when we actually starting to stock AVINZA, how much do -- how many do they usually stock and can you give us an estimate of revenue per new pharmacy you bring on board?

Yes, I think I understand the questions.

The average revenue per prescription -- to put a little perspective on it, the overall marketplace across all products, that is sustained release products, averages about $200 revenue per prescription.

So that's a market average.

New product that get launched tend to take two years or more to reach their normal level in or around that $200.

And each product has a slightly different average revenue per prescription.

But it takes a new product about two years to get to their optimum level.

So AVINZA is still very much on its growth towards that.

Our guidance for this year and our best estimates for the year place AVINZA around $155 to $160 per prescription in revenue.

That's what we think AVINZA will average for the year.

We're below that in the first half from a prescription standpoint, and we'll expect to be above that as we go out of this year.

The first quarter and the second quarter, it's been a little bit choppy.

We've seen some increase where we thought we were a little bit ahead and now we've seen a little bit of a drop as the acceleration of new prescriptions from the Organon sales force has cut in.

And I don't have right in front of me the exact number for the first half.

But we're certainly below the 155 to 160 that we expected -- that we expect for the year.

We don't see anything there yet that overly concerns us.

But we would say that that's a factor that as we go forward foreign next year will become a critical one.

This year our sales are a mixture of retail pharmacy stocking, expansion of wholesaler inventories, and prescriptions such that a theoretical revenue per prescription is not quite as critical for this year as it will be going forward once we've normalized retail pharmacy stocking.

Then the revenue per prescription will be the single most important barometer.

For this year it's a bit of a mix.

It's probably not quite as critical.

As it relates to retail pharmacy stocking, typically a new pharmacy will stock the strength that they just got a prescription for.

And so very much you seen the pattern of retail pharmacy stocking following the mix of your strengths 30, 60, 90 and 120 mg strengths.

So as we look at retail pharmacy stocking, they pick up the strength that they just had a prescription for, and then they add one more.

So if they got a 90 in they'll order a 90 and then maybe a 30.

If they got a 30 in they'll order a 30 and maybe a 90 or 120.

So it's a little bit difficult for us right now to get an average.

Typically two SKUs of any strength is a minimum of $400 to $500 that a retail pharmacy would stock.

And if they take one lower strength and one higher strength, it can quickly get up into well over $1,000 for stocking of a pharmacy.

For pharmacies that are doing larger volume, they will put all for SKUs into their pharmacies.

So I wish I could give you an average, but we just don't have that on a per pharmacy basis.

I can tell you that they typically stock at least two sizes or strengths, and then they expand out from there.

And that's at least a minimum of $400 to $500 per pharmacy, and we believe we're seeing more than that per pharmacy on average.

The next question is related to your R&D, the Company's focus now is more on commercialization and product development of existing products.

Your internal R&D, I guess the discovery part is more to serve your partner, and do you still have a project that is aiming at getting new products into your pipeline in addition to the product on the market and also the product you have already licensed out through your partners?

I'm just guessing, two years or three years down the road what your own pipeline will look like.

That's a great question.

Because of the heightened interest in the commercialization activities of the company we don't get to talk as much about our internal R. Just to clarify, more than half, almost 60 percent of our R is internally funded now, not funded by partners.

So in fact quietly we are doing a significant amount of R towards our own product pipeline rather than corporate partners.

And over the next two or three years we expect that that will transition to where 80 to 90 percent of all of our R spending is in fact on Ligand internal programs for Ligand's future product pipeline.

An example of what we're working on, we have a number of oncology projects within R. Our lead project right now is a combination project which can serve oncology and several other very important fields, inflammatory diseases and autoimmune diseases.

And our lead project there has just resulted in a critical candidate selection, which we expect to fund the IND development beginning next year of a selective glucocorticoid receptor modulator.

These are products that are oral once a day, that will move into a broad range of oncology applications such as corticosteroids are commonly used for.

They'll be extremely helpful in autoimmune diseases like lupus and inflammatory diseases like rheumatoid arthritis.

That is our next product to humans and we'll begin the IND funding of that next year.

So we've kept a very active R program.

We just don't get to talk about it too much as the market seems to be more focused on our commercialization activities.

Great.

Thanks.

Samuel Issely (ph) from (indiscernible).

A couple financial and a couple AVINZA questions.

Can you make somewhat consistent, not precision, some of my possible misconceptions.

As I understand the market for morphine-like products, it's about 6 million scripts at $200 a script for a total value of about 1.2 billion.

And you speak of an exit rate of about 3 percent share.

But you're also talking about maybe 10,000, or just a little less than 10,000 scripts in sort of the final weeks of the year which suggests 500,000 scripts.

So 500,000 as part of 6 million -- or closer to 10 percent than 3 -- can you just kind of clarify some of these broad strokes on how AVINZA fits into the total market?

Yes I can, Sam.

Thanks for the question.

The sustained release oral or sustained release opioid market, including the Duragesic Patch, is a market that last year was about $2.8 billion, and prescriptions was just under 14 million prescriptions.

So probably the first parting point of the data is it sounds like you're way too low on the total prescriptions and in the dollars.

Now this year that market is growing at about 26 percent in total dollars and I believe about 14 percent in prescriptions.

So you can run the projections for this year.

Those growth rates, both in prescriptions and dollars, are substantially ahead of where we expected the market to be.

It had shown some signs of deceleration in 2002, and so we were a little bit conservative in looking at its growth in 2003.

So as we look at a prescription market that this year might be in the 15 million range, that puts it at I guess about 1.1 million 2 - 1.3 per month in total prescriptions.

So you can see that a 3 to 4 percent share of a prescription market doing 1.2, 1.3 million prescriptions a month is now 40,000 to 50,000 prescriptions in a month.

And so in the month of December our 3 percent to 4 percent share tracks pretty closely to that.

That helps clarify things.

Just a bit of a follow on to that.

However your average realization per script is going to be a little lower than this sort of $200 average.

So while you may have a 3 percent Rx share, your money share, at least in 2003 maybe 2004, might be a bit lower, is that it?

I think if you drive everything off of prescriptions, that's correct, Sam.

I think you have to remember that like every other new product our revenues this year will be a mix of a pure prescription and average revenue per prescription dollar and some mix of pharmacy and wholesaler distribution, where it's not directly related to revenue per prescription.

It gets pulled through in a different mix.

So that's why this year being a transition year the revenue per prescription is not quite so critical.

Next year with normalized wholesale and normalized retail stocking, then everything will be pretty much pulled through at the rate of prescriptions and our revenue per prescriptions will be a very direct link to the dollars.

A simple one on the debt.

What are the terms by which you can force conversion of the debt since you're far into the money on that right now?

Sam, the debt that we put in place back in November of 2002 is callable by us after three years.

So it would be November of '05 we could call it.

Before then we can't.

And of course we're always able to consider doing something creative in the marketplace in terms of taking that debt out early.

But at the present time we don't have any plans to do that.

Finally on your operating statement, you say you're expecting to be cash generative -- excuse me, I'm not sure that you said that.

You said your operating profit will swing positive between the second half and the third quarter.

Now what is operating profit?

As I look, for example, at your monthlies and quarter, you show a loss from operations of 9.1 million, and embedded in that seems to be 2.7 million of non-cash charges.

So can you just reconfirm to me that that number -- that would be equivalent to a 9.0-9.1, that's the number that's supposed to go positive.

Correct.

We pointed out the amortization of the technology just to give you a benchmark on some of the non-cash charges that run through the P&L.

But when we focused on the statement about the second half, positive operating income, that's what you see in the operating income line inclusive of all charges whether cash or non-cash.

Now your other expenses net are negative.

So while the operating number may be positive, the pre-tax number may still be negative?

That is correct.

We of course have the interest expense from the debt and some of the other nonoperatings, so we had focused on our guidance for the full year only down to the operating income line.

Okay.

With respect to your cash, again, your comments are more or less operating profit neutral.

Will you be cash generative in the third quarter or fourth quarter of this year?

What we have said is that in the second half of the year we have not been specific by quarter.

In the second half of the year we will be cash generative.

That's all my questions.

Thank you very much.

Thanks, Sam.

Michael King of Bank of America.

Thanks for taking my question.

Most of the matters I want to cover have been addressed already.

Just to follow up on a couple of items, actually the one question I had was on -- to start with was on ONTAK.

And could you talk about the -- in the quarter what the average cost per course of therapy is?

And relatedly, could you talk about in non-Hodgkin's lymphoma and CLL whether those doses, those averages are being used in the trials and whether those costs would be comparable.

Good set of questions.

We do not have in yet -- we track this quarterly but I won't have it for another couple of weeks -- the data in on the average revenue per patient or average course of therapy which translates to revenue per patient.

Do you remember what it was in the first-quarter?

It was right at $42,000, so that's what we were getting.

I believe that it's fair to say that in CLL and in B-cell non-Hodgkin's lymphoma we are seeing a larger number of courses being given to those patients.

We also would say that as we look at those patients that is non CTCL, clearly the physicians treating those patients believe that giving a larger number of courses than the typical three we're getting in CTCL is very positive for the patients, that there's clinical benefit and improved response.

So we know that those physicians are feeding back to us that they like to give more than three courses of therapy.

We don't have enough patients to produce a meaningful average, though we do know that they're going for five and six courses of therapy.

Okay.

And I apologize because I wasn't able to get on the call until you were basically to the Q&A, so you may have answered these questions.

But do you care to comment about when you think you'll be at your target of stocking in 20,000 pharmacies?

We've pretty consistently said that we're going to be there by year-end.

If we can get there sooner, it'll be a nice win for us.

That's the one area that our market research keeps telling us physicians clearly want us to address.

I think second quarter, got a good measure of the way there.

The 6,000 to 8,000 additional pharmacies we need, we're going to try to get there as quickly as possible.

If we can do it in third quarter, great.

If not, if we do it by year-end that will still be on track for the brand.

Could you give us a picture of reimbursement?

Do you have some update on penetration into the payers?

Yes, great question.

I think as it relates to AVINZA, we made some very, very good progress in both managed care, Medicare, and long-term care.

And we would say that we would attribute a substantial part of that progress to the strengths of our partner and their dedication of their infrastructure to that.

We now have AVINZA in a preferred national formulary status with pharmacy benefits managers, PBMs, that cover more than 100 million lives.

And we virtually are in all but the two biggest of those PBMs, and we're awaiting responses on our bids to the two biggest that would pretty much round out the AVINZA coverage.

That's obviously Merck-Medco, and -- I'm sorry, I'm blanking on the second one.

Maybe it will come to you.

I'm blanking on the second one.

But they're the two biggest, and we've put our bids in and we're waiting on responses there.

We also had tremendous progress in the second quarter.

We put agreements in place with the top eight GPOs which cover about 80 percent of the hospitals throughout America.

That's where I think we've had the biggest immediate impact of the Organon organization that really helped us move through there.

Such that we can say at the GPO level we really have accomplished what we need to accomplish on the brand and the rest is kind of mopping up a few additional accounts.

By the way, the other big PBM other than Merck-Medco that we're missing is Express Scripts.

And so those two we've had extensive dialogue and we're just waiting a final response there.

In addition, we've moved through quickly all the state Medicaid programs with the larger strength of the Organon organization.

We've got 38 Medicaid programs now covering AVINZA without restriction.

Five of those we've actually moved AVINZA into a preferred position relative to the market leaders.

And that includes of course states like Florida.

And that's been a very, very positive event for us.

The big ones that we still need to breakthrough we continue to work on.

They include California, which is always a tough one, and New York, which is another tough one.

Those are two that we have in our sights and we're working intensely on.

But we aren't there yet.

So that'll be a focus in the coming quarters is to finish out the Medicaid coverage.

Just to stay with that for a moment, can you say -- are your gains sort of a -- is this market zero sum?

Do you have to take -- push someone out of the preferred position to get on?

Do you have to push someone out to get on formularies?

What's generally the tone, or are they all covering.

It's a good question, Mike.

I think we would say the vast majority of the states it is not a zero sum game.

There are states that have preferred, meaning your patients don't pay a higher co-pay, nor are you on prior off.

They may have two or three products on preferred.

So it's not a zero sum game in most states.

Then there are the states where it is a zero sum game.

You don't get on the preferred unless you knock someone else off.

So there's a kind of a mix and match out there at the state level.

And we're working through each of those.

We clearly are not trying to buy the business.

So this is not to a price cutting, ruthless discounting game.

We think that's not productive for the overall market.

So we're being competitive and we're matching the competition.

But we want the preferred to come from a clear preference for the medical groups for the product, and not from some short-term economic incentive which goes away the next year the business comes up for bid.

Right, as the auto companies have done.

One other quick question, David, and then I'll get off the line, and that is -- my mind just went blank.

Why don't I just jump back in the queue and give someone else a shot?

David Cowen.

Good morning; congrats.

Could you comment on management?

Do you still have nine people with direct reports, has there been any change on the management structure?

And second, if you could comment on price, if you're put any price increases or have you got any announced price freezes?

And thirdly, if you could comment on the mix of the scripts between 30, 60, 90 and 120 [mg].

Okay, on the first one the answer is yes, there continues to be nine direct reports.

And I must admit, I'm quite enjoying working directly with marketing, sales and medical affairs.

Talked about how much fun it can be, and so yes, they continue to work closely with me.

On the price front, we did increase April 1st AVINZA prices by 7 percent.

And so that didn't have an effect on this quarter other than the normal increase effect.

But it didn't have a wholesaler or buying effect on this quarter.

We did see Purdue raise its prices in July by 7 percent.

And that is a departure from its historical rate of price increases.

That's an acceleration of its price increases on Oxycontin.

We consider that a positive for the overall market backdrop, and we expect that to contribute to faster dollar growth of the market in the coming quarters.

It does not explain the faster growth of the past few quarters.

We -- it relates to mix on the products, David.

We have not seen a major shift or even significant shift as it relates to the mix of the product over the past two or three months.

You do get some intra week variability.

So we don't see anything in that intra week variability that relates to a trend.

We're still seeing a good, solid mix of AVINZA towards I think about 60 percent is in the '30s and '60s and then about 40 percent in the '90s and 120's I think is the last data that we were looking at.

Now that varies week-to-week, but we aren't seeing a major trend variation from that.

We have seen the coupons, which help new patients come on to AVINZA.

We have seen that level out, and we think stabilize nicely at somewhere in the 16 to 18 percent of weekly prescriptions are generated by coupons.

So we see that as an important program contributing to new patients, and we are continuing that.

We have expanded in with Organon, and we think it's contributing nicely.

That gives patients for a small co-pay a 10 day supply of product so that they can get started, get stabilized and become happy users of AVINZA.

The good news is we've seen that stabilize, maybe even come down a little bit in terms of total prescriptions, and that's real positive for us.

Keith Mayer.

Just a quick follow-up to one of the questions asked before in terms of modeling.

When we look at the use of AVINZA, the way you track is the use migrating to a higher dose as people become more comfortable, and if that's the case should we increase the revenue per script as we model or is that how you guys are looking at it?

We think for this year the best proxy that we can guide to on revenue per prescription for AVINZA is probably between $155 and $160 revenue per prescription.

We'll be below that in the first half and hopefully we'll catch up and pass that in the second half as the mix normalizes more towards the market, and as more of our AVINZA patients graduate up the dosing scale.

Because we're seeing, at least our latest market research tends to indicate, that somewhere between 30 and 50 percent of AVINZA prescriptions are likely coming from conversions, that is patients that had problems with other opioids now moving on to AVINZA, we think some of our current mix already takes into account patients that were on other products who might have already graduated up that scale.

Whether that continuing mix going forward will mean a higher average quickly due to the conversions we just don't know.

And so I don't know whether that's making any sense to you, but we think the bigger trend is clear, we will see increasing revenue per prescription this year towards the 155 to 160 per script.

How quickly and whether it comes from our own patients who were naive graduating up, or from a larger mix of converts who are already on higher doses we just don't know.

Along those lines, do you have -- as you look at your -- the competitive landscape, do you have room to raise price going forward?

I mean, where you (indiscernible)

We are right now maintaining a differential, and certainly will this year between ourselves and Oxycontin of just under 9 percent.

Now that varies by strength, but on an equal analgesic dose we're just under 9 percent less expensive than Oxycontin.

That was higher.

That was substantially higher prior to Oxy's price increase.

Thank you very much.

They have shrunk that a little bit.

We would expect to keep that certainly this year.

On a longer-term basis as the brand is established, we're in all the formularies.

I think when that job is done, we don't believe that that pricing differential has to be maintained.

So I think longer-term, as we've accomplished the job of getting on equal footing throughout the formulary marketplace, we could certainly see that adjust.

Thanks very much.

At this time I show no more questions.

Thank you very much for participating in the call this morning.

And as always, we'll be available for additional follow-up as the coming days wear on.

Thank you very much.

Thank you.