Ligand Pharmaceuticals Inc (LGND) 2003 Q3 法說會逐字稿

I would like to remind everyone that you are on a listen-only mode throughout the presentation but there will be a question-and-answer session later in the conference call and also this conference is being recorded for replay purposes.

At this time I'll turn it over to you, sir, and thank you for using Sprint Conferencing.

Good morning, everybody.

This is Mike Watts, Ligand's Head of Investor Relations.

I'm here with David Robinson, our Chairman and CEO and Paul Maier, our Senior Vice President and Chief Financial Officer.

We would like to welcome you-all to this call this morning to discuss our third quarter financial results.

Before we get started, I would like to cover one administrative detail and that is, as you all know, there are risks and uncertainties inherent in our business and we will be making forward-looking statements this morning.

If you would like more information on these risks, I would refer you to the Safe Harbor statement in our press release, as well as to our public filings with the SEC which are available on our website.

With that detail out of the way, I will turn it over to David Robinson.

Thank you very much, Mike.

Welcome, everyone, and thank you for joining us this morning.

I'm going to offer a few perspective comments on our results for the third quarter and our overall progress for the year and then I'm going to ask Paul Maier to provide further information on our revised guidance for the year.

First and foremost, I would like to say that we're pleased with the financial results as they have emerged in the past three quarters, and the most recent quarter I believe further underscores the company's progress.

At the beginning of this year, we expected substantial growth in our overall business, but there was some uncertainty as it relates to the timing and that is of both product growth and of other revenue growth.

As we now stand in the early fourth quarter with third quarter results known, we're very pleased to see that we've had steady product growth throughout this year.

I think we're particularly pleased that AVINZA and ONTAK are tracking very much on or ahead of our expectations for the year and in a relatively smooth fashion.

We also are pleased that our other revenue which by quarter is traditionally uncertain has begun to firm up for the year with the exercise of the first of the Royalty Pharma options and now the second one expected in this quarter.

We believe the third quarter results further affirm those trends for the year.

That is, the settling into a nice growth pattern of our product sales and the firming up of our other revenue lines and that we're particularly pleased that those trend lines, together with a predictable growth in our expenses, are going to allow the company to come to its first profitable quarter in its history with positive EPS expected in the fourth quarter of this year.

The net product sales for the quarter were up 70% and total revenues were up 24%.

We believe that's a very solid result and reflects the underlying strength of our products.

So I'll make a few comments now on each of the products and the progress we've made this year.

Starting with AVINZA, it's very clear that AVINZA had another record quarter and a very solid quarter.

If we look at total prescriptions, they increased for the quarter over 84%, and that is pretty much consistent with the share rises and with our goals for the product.

We, in our most recent weekly prescription, hit 2.5% market share, which is very much in line with our goal to achieve a 3% to 4% run rate as we exit this year, 2003, and very consistent with our goal of becoming the third largest proprietary brand in the sustained-release open opioid market this year.

We would further highlight when you look at the trends of market share gains for AVINZA, we're particularly excited that when you look back over the first two quarters or six months of co-promotion, in the initial months of April, we saw big jumps in market share, and those were probably the initial effect of larger sales force expansion.

May, June, and July we made solid progress, but we settled into a rate of growth of market share, and what we've seen in August and September is a very solid acceleration of that rate of growth of market share, and in October again, the first several weeks of data indicate a further acceleration of AVINZA market share gains.

And that is occurring against backdrops of both faster market growth overall and slower market growth overall.

So it appears to be a clear linkage to the learning curve and improving productivity of our commercial efforts.

That's both at the sales force level and at the execution of the combined partnership marketing activities for the second half of this year.

We're particularly pleased with that, and it gives us great confidence that we will be solidly within the range of our share goals for this year.

We believe that there's still further productivity gains that will come in the fourth quarter of this year and in the first half of next year that are related to the solid progress we've made in accomplishing several productivity-enhancing market barrier-reducing activities.

First of those is substantial progress in increasing AVINZA's managed care formulary position.

It's been expanding to now where it already has over 115 million lives and we're poised with several major additional PBM contracts currently in process to double that during the fourth quarter.

In addition, we have made quite dramatic progress within the state Medicaid programs.

We now have about a dozen states that have placed AVINZA in a preferred formulary position and more recently in the past several weeks, two Top 10 Medicaid formularies that have added AVINZA, one which is putting AVINZA in a preferred position relative to all other current leading sustained-release opioids.

We believe that that Medicaid market, which is well over a $300m segment of the overall market is going to provide a nice boost to representative productivity because in many, many states and territories, Medicaid patients are an important part of this chronic moderate to severe pain market.

We believe those progresses are matched also with continuing progress in the GPO segment such that through formularies and through the larger sales force activities at the hospital level, hundreds of hospitals have been bringing AVINZA into the formularies across the country.

That makes all of our 800-plus representatives much more productive because now physicians with confidence can use the products.

We also would note continuing and consistent progress in the availability of AVINZA in retail pharmacy where now we estimate we're 15,500 to 16,500 pharmacies where patients can find the product and get their prescriptions filled quickly on site.

We think that's very consistent with at least 18,000 to 20,000 pharmacies by year end.

Those are important support activities to the product, and we think that they will, together with the productivity of the primary care sales force, Organon, we believe continue to support an acceleration of share gain in this segment of the market.

We believe that with recent news on some competitive products that now appear to be delayed, we believe the runway for AVINZA is clearer and longer to see the solid ramp of share in this segment as the only once-a-day product competing for frontline prescriptions.

We feel very pleased with the overall evolution as it relates to AVINZA.

We would turn our comments now to ONTAK.

It is the second largest driver of our revenue, and I believe throughout the year, it has consistently performed both at the level of demand creation, that is, out movement of product from the wholesalers to the patients.

We had another very good quarter with a growth of end-user demand of around 29% compared to same period prior year.

This growth is obviously now each quarter being translated better to wholesaler purchases, and that gives us great confidence that the additional clinical data on ONTAK and the increased marketing activities and the focus of our oncology group is producing a very nice trend line for ONTAK, and we believe that trend line will carry nicely forward into expanded activities and expanded clinical data for next year.

We therefore are very pleased with both of our two biggest drugs and would say that they have tracked very nicely to our original expectations.

We have and would note a different pattern with our efforts on Targretin capsules, kind of a good news bad news.

We have seen some slowdown in the rate of prescription growth, still seeing 11% in the quarter, but that is a slower growth rate than we saw in the first two quarters of this year and slower still in the fourth quarter of last year.

That does indicate, and this is part of our adjustment to our guidance, that our original goals probably are not achievable there, and it has caused us to, from a management perspective, want to make sure we keep, as we move forward, balanced inventories, and that has caused us to do some inventory management with several of our customers just to be sure we keep a balanced situation within the pipeline.

That has reflected in impacts in our reported sales for this quarter.

We do expect that to be returning to a normal pattern in the fourth quarter and so I think that one has been taken into account in our guidance.

We do believe that there's good news, bad news with Targretin capsules.

On the one hand we see some slower pattern of experimentation with the product related to our non-small cell lung cancer clinical data that's been published, yet we see the interest in the product peaking quite dramatically and allowing us to finish our pivotal trials ahead of schedule.

What we believe is going on from talking to some of our experts is with the failures in frontline of arisa and Tarciba (ph) where a large segment of the oncology community experimented with the products in advance of Phase III data, we see an increased reluctance because of those failures of oncologists to do the traditional experimentation, yet because Targretin is now one of the few remaining actively being studied as the third agent in frontline, a lot of interest to use ONTAK within the context of clinical trials and so we had a large surge of interest in both of our trials that allowed us to finish early, and I believe a lot of interest on the part of physicians to see a new product succeed, but at the same time not willing to translate that to prescriptions outside of the clinical trial context.

So I think that has contributed to some shortfall in our ability to keep the brand growing at the rate we had expected.

We believe that if our clinical trial data next year is positive with the amount of involvement by hundreds of centers throughout the country, we do expect that to be a significant trigger for translation to use of Targretin in that frontline setting with positive clinical news.

So we've adjusted that, and we believe that what that will say to us is growth in Targretin at a much accelerated rate upon clinical data news, and between then it will be the growth of our traditional market segments.

We would now, I think with the comments on our three principle products, turn to a couple of comments and then ask Paul Maier to talk to our guidance.

We would note that the trends on expenses are really quite consistent and quite predictable and well within the lower range of the company's guidance for the year and so, married to the growth in our revenue, we see the lines now finally converging for the company into a nice positive fourth quarter.

The perspective I would offer as we transition to have Paul talk to the guidance, we at the beginning of the year provided annual guidance for the year and now with the three quarters available, we've tried to be helpful and focus our guidance on the one quarter.

We know that when you add the two together, we are clearly doing a moderate revision of our guidance down on total revenue and on product revenue, adjusting to the realities that we've just described in the three major products.

We are confident that with the focus on fourth quarter, that's our way of trying to be most helpful to those trying to model the company.

What we would say is, as we complete our forward planning with our co-promotion partner on AVINZA, putting our budgets for next year to conclusion, and we complete our internal processes, we will try to provide 2004 guidance that can be helpful and build on the results of this year that we see emerging.

I think with that I'll ask Paul to talk to our guidance and then we'll try to open it up for Q&A.

Thank you, David.

As David mentioned, now that we have three quarters under our belt, we felt it was appropriate to revise our annual guidance by focusing on the fourth quarter, and as you've noted in David's earlier comments, AVINZA and ONTAK continue to lead the strong growth of our product revenues.

So for the fourth quarter of this year, we expect the product revenues to be in the range of $40m to $45m.

We also expect the other products to return to a more normal growth pattern after the third quarter actions we took.

We expect total revenue for the fourth quarter to be in the range of $68m to $76m, and that includes an assumption that Royalty Pharma would exercise its remaining fourth quarter option which would amount to $12.5m.

I would just reiterate that that is their decision and so we're waiting until the end of the quarter to hear where they want to go on that.

Also as David mentioned, our operating expenses which would be SG&A and R&D and not include cost of goods we expect to be on the low end of our guidance for the year, and for the fourth quarter that translates to a range of $37m to $40m.

As a result, we anticipate strong operating income in the fourth quarter in the range of $20m to $28m, and with that we expect that it will generate positive EPS for the quarter.

I think those are the only comments I have at the moment, David.

Yeah, I think we might just add one additional and that is that when you look at the fourth quarter guidance, obviously there are two unusual items in there with the Royalty Pharma, one of which has been exercised and the other we will hear about under the restructured option agreement.

We believe the probability of exercise has increased versus the original structured options.

Otherwise we wouldn't have renegotiated the option prices to the new time lines.

So we think probabilities have gone up.

We would note that things that can affect the probability of exercise of that option, for those of you who want to make your own judgments and assessments there, things that might affect that would be obviously the liquidity of the buyer; that is, cash position; the information flow that might come from the two companies responsible for Lasofoxifene and bazedoxifene.

So time line information as to the targeted NDA filing time line, timing of release of Phase III data results or additional clinical data, those would all be things that during the course of this quarter would clearly increase quite substantially the probability of exercise.

We think that from the company standpoint, we've done all we can do to make the options attractive and now it's a risk return and information flow decision of Royalty Pharma.

Clearly we think we're in a lot better position than prior with one under the belt and new attractive option prices on the table.

The second comment I would make is if you take away the Royalty Pharma options for the quarter's guidance, I think it's important to note that with the usual rate of other revenue that we have and the $40m to $45m of product sales, we really are transitioning to our going-forward, breakeven run rate of revenue and so with or without, I think we're crossing an important point for the company's going forward profitability breakeven.

Clearly without those options, we're just about there, and with those options obviously we're way ahead, but those options will not be repetitive quarterly revenue.

So I think with those observations, probably it's time to open it up for Q&A.

Paula, we're ready to take questions.

Thank you.

Yes, at this time if anyone would like to ask a question, please press star 1 on your touchtone phone.

When your name is announced, you'll have the floor.

Again to ask a question, please press star 1.

The first question is from Jason Zhang.

Go ahead, please, you have the floor.

Okay.

Thanks, good morning.

Thanks for taking my question.

My first question is about the guidance for the fourth quarter, product sales of $40m to $45m.

What would you say the percentage because --

I have an entry.

I'm sorry?

Go ahead.

What would you say the percentage of oncology products versus AVINZA amount of $40m to $45m?

I think probably the best guidance is you can see the growth trends that have been established now each quarter, and I think that going forward, the AVINZA growth rate will continue to outstrip the ONTAK growth rate such that AVINZA will continue to be a larger and larger portion of our quarterly product sales as between those two products.

The Targretin caps, gel and Panretin gel, in a normal quarter will return to a more normal level in the fourth quarter.

So I think if you look at the run rates of those products and look at the growth rates of those products, you'll see that AVINZA needs to continue, and we expect to be a growing share.

I think for the overall year, we had expected AVINZA to be slightly less than half of our total year revenue.

Clearly we're going to be above that with a little bit slower growth of Targretin caps.

ONTAK will be a slightly higher percentage than expected.

So I think somewhere in that range, you can expect AVINZA will perform in the fourth quarter is somewhere in the greater than half and probably less than the 60 something percent.

That's probably the range it's trending to.

Okay.

And you have said the Targretin caps or Targretin gel will return to normal range and so what would be your definition of a normal quarter for those two products?

Yeah, I mean, I think if you look at the prescription trends on a quarterly basis and the growth rate there, it's pretty clear that the quarterly rate between the two products is somewhere in the $4m to $5m range of revenue and so trending towards that is what we would expect.

That is a normal run rate for those products if you take the available data publicly and just break down the movement.

That's what the two products tend to trend to.

And then you've got a little bit of growth trend and a little bit of variation due to wholesaler buying patterns.

Okay.

Then a couple of data points if you can provide.

The first one is the average cost pre script of AVINZA and the second one is the average cost for new pharmacies, I guess every product that a new pharmacy will stock AVINZA, what is the average of revenue you can gain from additional new pharmacies?

Yes, good set of questions.

I can probably help you with one, and the other is a lot more difficult, but I'll try to be helpful.

Average revenue per prescription at the whack price level we would say is probably right now in the $1.25 to $1.30 range depending upon whether you take weekly, monthly, or last three months data points.

That has come down since the initiation of our co-promotion relationship.

It was higher than that, and the coming down is related to two or three factors which we've begun to see stabilize and we believe reverse.

The three factors are the large primary care utilization of the coupon program has been very productive for helping new patients get titrated onto the product.

So it's been very helpful from that standpoint, but it does artificially in the short-term depress the prescription size and the average revenue per prescription.

So we have seen a rapid expansion of the coupon program.

That has stabilized, and we believe those percentages are now coming down, and they will contribute to just a natural technical increase in the average revenue per prescription.

The second factor is with a large sales force, there have been a large number of new starts on the lower dose,.

Typically naive patients start on a 30 milligram dosage.

As they get stabilized, normalized and then their pain naturally increases, they use higher doses.

So in the initial capture of a large number of new patients, you tend to have a mixed shift of 230s and 60s.

We're beginning to see now a strong shift to 90s and 120s, and that also will now trend towards the market mix of higher doses.

That will also re-establish strong growth in average revenue per prescriptions.

The third factor is really the patient mix.

I think that when you first penetrate a physician's practice, you tend to get a mix of patients, either the naive patients that haven't used sustained-release opioids, or you get the problems, the switchers from other opioids.

In either of those cases there begins a titration program and so your mix tends to be in the early use in a practice, richer on the lower doses.

As the physician gets comfortable, likes your product, he tends to put you on the more normal mix of patients.

So as we see our share rise, we're getting a much more representative group of patients, including the oncology patients, the back pain patient, the osteoarthritic patient and so that third factor we believe is also beginning to drive a rise in average revenue per prescription.

Now, as we move into next year and have our normal round of price increases, we'll see further growth in that average revenue per prescription.

We do expect a substantial increase in this fourth quarter, and that's one of the factors we're looking at to have a good handle on our guidance for next year is how quickly have we now absorbed the co-promotion and early penetration and how quickly does the average revenue rebound I think is one of the important variables we're trying to get a good handle on for next year's guidance.

Okay.

The second question as it relates to pharmacy stocking, typically a pharmacy will only stock one bottle of one or two strengths to begin with and because these are bottles of 100s and cover roughly three prescriptions for three patients, they typically are very conservative and so they will put a bottle in when they have had prescriptions but usually not until.

So stocking tends to track pretty strongly to prescriptions.

So what we're seeing is a typical pattern is a pharmacy will start with a 30 and/or 60 milligram bottle of product and they will only expand the doses as they see other prescriptions for those strengths show up.

If they stock all four of the sizes, it's a $2,000 investment.

If they stock the two lower strengths, I believe it's around $600 that a pharmacy invests in the product.

So that is kind of the gauge.

Most of the pharmacy stocking begins with a 30, or a 30 and a 60 milligram and then expands as prescriptions drive it.

We've seen a pretty steady rate of growth of pharmacy stocking now with the larger sales force effort calling on them and facilitating their engagement with the product.

In the past quarter, we also saw several of the big central warehousing chain pharmacies expand their systemic distribution of the product.

They typically have specialized DCs that handle scheduled drugs and typically what you want to do is get into those DCs and then spread throughout their pharmacy system.

And we were pleased that in the third quarter, we made very solid progress in getting into those DCs and out into the chain pharmacies.

So as between the chains and then the independents, whether they warehouse their own or they order from wholesalers, we're making very, very good progress with the chains as well.

Okay.

So one more question and then I'll go back to the queue.

In the fourth quarter, certainly we have more holidays than in the previous three quarters.

Have you taken that into consideration for your fourth quarter guidance with regard to AVINZA?

More holidays in the fourth quarter.

Oh, I guess the Christmas holidays is what you are referring to.

Typically October and November are strong months and then December tapers off a little bit.

So yes, we've looked at the seasonality that December brings.

The falloff is probably not as great as one would expect with the holidays, particularly with our classes of drugs.

There is some seasonality, and December is typically a little bit lighter, but what tends to happen is they get their business done.

In the oncology sector, patients on treatment are not going to miss their therapies if they are being treated for serious cancers.

So the seasonality just tends to drive a little bit earlier buying so that they can focus on holiday sales.

In the case of AVINZA, there is a bit of a fall-off in the market in December.

That pattern of earlier business tends to be repeated.

So in short, yes, we've taken a good close look at that, and we think that's been incorporated in our range of guidance.

Okay.

Thanks.

Our next question is from Anthony Zaffle Go ahead, sir, you have the floor.

Yes, hi, good morning.

I had two questions.

The first question is, it seems that the push-back that Purdue has been using versus AVINZA has been that it's better perhaps to have a BID or TID drug rather than a once-a-day drug.

I was wondering regarding their development of Paladone should be once a day and the arrival of generic versions of OxyContin, whether there's sort of like a conflict in that story would be beneficial to you guys.

That's part A. Part B would be Penwest's approvable letter sort of intimating some what of a regulatory delay in their arrival of a market.

Does that give Ligand and Organon a clearly path to drive the AVINZA ramp.

And lastly, how are you guys progressing on the state Medicare/Medicaid and other state programs in terms of being the preferred opiate analgesic of choice?

Yes, thank you for the three questions.

I believe the answers to the first two are yes, and yes.

The yes on the first one is, we do believe that it's very difficult, though obviously good marketing people will try to position a once-a-day product like Paladone and a twice-a-day product like Oxy, try to position them differently.

I do believe it's very difficult.

I think it's particularly difficult, even though you might get a marketing position that way, the underlying business reality is that Purdue needs to convert a large part of the Oxy business as quickly as possible or they have a massive downside, even if they restrain the generics from coming in early, they have a very short time clock to penetrate the market and protect their Oxy dollar franchise.

So I do believe it's going to be very difficult, and I think that any company would know in advance what priority would win, and the priority that would win is build your once-a-day product at the expense of your twice-a-day.

That was certainly what Purdue did when they launched Oxy and abandoned MS Contin.

So I believe that the reality, no matter how you marketing position it, the underlying reality is they want to move that business as quickly as possible because there really is no other defense to Oxy.

It will be halved quite quickly when generics enter, and no company would de-prioritize that risk.

It's just too financially massive.

So we do believe that that is a positive trend.

We are not yet certain of the timing.

I think we've got to see what comes out of the FDA's deliberations.

But when it happens and we would hope that it will be next year and a little more time for us to have runway won't hurt, but when they enter, I think quickly, they will face that challenge, and having two once-a-day products in the market will help doctors to focus on the importance of once-a-day, and I think that will, in the end, unfreeze Oxy business and help us.

On the second one, yes, we do interpret from the information that's been released by Penn West and Indo that they clearly have a delay in their product.

What we don't know, we were quite clear and, in fact, expecting a slower emergence of the Penn West product than either of those companies were expecting.

So this does not surprise us.

What we do not know is how long is the delay.

That will depend upon additional information they release as they have their dialogue with the FDA.

As to whether, in fact, the delay means conduct additional clinical studies prior to full approval, in which case it could shove the product out of '04 altogether.

So I think we'll all have to wait and watch.

Since it is a twice-a-day product, we don't see it as a challenge to the evolving paradigm towards once-a-day products in the marketplace, but it would be another product out there competing for prescriptions and so it would be a competitor.

We think on balance, a delay is good for us and so we're pleased with it.

How long the delay, we'll have to wait for the FDA's ruling on what additional clinical safety and efficacy information is needed.

My suspicion is the parties involved are working very hard right now to get clarification of that and, upon clarification, we'll all find out how long the delay is.

I think it's comfortably going to be second half of next year, and it may well slip into '05.

So we see that as a positive trend.

The third one is we have been very pleased with the emerging progress on the Medicaid formulary front.

We're pretty much listed on about 42 state Medicaid formularies.

So we have widespread access for Medicaid patients to AVINZA.

We have preferred status, at least equal to the leaders on 12 of those states, and in several major states we have preferred, and in the most recent ones, preferred only as it relates to the market leaders among some of the top 10 Medicaid states.

The two most recent ones that we're particularly pleased about will really only be seen in our prescription acceleration in the fourth quarter.

They have not yet showed up in September and October data.

So we're very expectant that these large states, when you have a state that puts you on as the only preferred drug and others become either prior offed or difficult to access, it really does tend to bring about a quick conversion of patients and all new patients tend to go on your drug.

It's just too much trouble for the physicians to do the prior off.

So we saw that pattern in Florida, and that fueled our business nicely, and now we have several other major states that we can't yet mention their names until the official publication by the Medicaid authorities.

But we see that as another positive factor.

And I think we then are down to probably three or four states that we need to continue to work on, and they tend to be some very difficult states to penetrate, but they are not the largest of the states.

I think right now, we feel like we're well positioned in about 85% to 90% of the Medicaid market, which is around 300 million, 350 million segment of this overall market.

Thank you very much.

Thank you.

And congratulations.

Thank you.

The next question is from Catherine Kim.

Go ahead, please, you have the floor.

Yes, hi.

Thank you for taking my questions.

I have several questions on AVINZA.

First is, what is the breakdown of the different strengths that you've seen for this quarter and going forward, how should we assume the split?

And what I'm trying to gauge at is for the average revenue per script, do you expect it to go down -- I mean, to stabilize at this point or to go up?

We do expect, and I think we're pretty confident that we are going to see a reversion.

The decline is really due to two or three of those technical factors, and to the extent that we can effect those technical factors, we've already started to move the needle.

I can't point to sufficient weekly data yet to say that we have a confirmed trend, but I believe the most recent weekly data is already showing in the extended unit data a mixed shift towards 90s and 120s, and I believe that therefore the mixed shift, I believe you are going to see throughout this fourth quarter.

We have and are making some modifications and fine-tuning to our coupon program which we believe will accelerate the decline in percentage of prescriptions that coupons represent, and that brings about an immediate technical adjustment.

So we are focused on this.

We'll try to give some guidance for next year as we see how quickly some of these technical factors just self-adjust.

I think we're quite confident they will once again.

The rate of adjustment is what we're trying to get better data on to help ourselves and everyone else do better with it.

Right now if you look at the most recent data, weekly data on extended units, 30s and 60s represented more than half of the mix of units, somewhere around 53 to 55%, and 90s and 120s represented the balance.

Now, that's just in calculating the flow of capsules.

Our pricing is pretty consistent across the dosage strengths.

So that's just taking the number of capsules that moved through those various strengths.

So we do expect a progressive growth in that mix and as the coupons decline as a percentage of total prescriptions, that is one of the biggest boosts.

To give an example, if you look at the total percentage that coupons represent of our prescriptions, it has grown from around 6% to 20%.

That reversion we believe will take place now that the Organon larger sales forces are settled into a more normal prescription growth pattern.

We believe that that will decline and if it declines back down into the range of 7% to 10%, you'll see just from that fact alone a 10% to 15% jump in average revenue per prescription, and that's a technical factor.

We think that that will take place.

We just don't know yet how fast.

So that's one factor.

The mix is another factor.

And then the patient mix is a third.

So we are expecting substantial growth in average revenue prescription during this fourth quarter, and we expect that to continue pretty much throughout next year.

I think for better guidance than that, we're going to need a little bit more data to get our hands on the time line.

So this 53% to 55% that you've seen in 30 to 60, that's as of what time point?

That's just the most recent prescription data week.

If you take the extended units, that is, all the units that move through wholesalers and that were represented by the prescriptions, you look at the number of capsules that moved, that is the percentage of capsules that moved by strength.

Okay.

That's in the announced prescription data.

And then in terms of the split between pharmacy stocking and end user, what do you expect this quarter to look like?

I think we continue to believe that the percentage of our quarterly sales that is represented by the NPA prescription plus the non-retail segment, that is going to continue to rise, and pharmacy, retail pharmacy and wholesaler purchasing and chain pharmacy distribution will continue to decline as a percentage.

So I think we're around 55, 60 now, and we expect another 10% to 15% jump for the fourth quarter, and as we move into next year a large part of that pharmacy stocking job will be done and we're very pleased that two things have happened as a result of a nice, steady movement of product from us to the wholesalers to pharmacies and patients.

Two very positive things have happened, and that is that we have had no complaints from our physicians or from our wholesalers about supply shortages.

As you remember, Catherine, several of the other products that have entered this market or compete in this market have had severe supply problems, and it has really crippled the brands.

So we were very sensitive to make sure that we had none of those problems and I think we've been very pleased with that.

We also have had a very good working relationship with the DEA who monitors the progress of products as measured by wholesaler purchases, and their release of quota for new products is always gated around the growth of the product as it's measured by shipments and prescriptions.

So the two things we've been very pleased with is we've been able to bond with the DEA group to ensure that quota releases so far have not, because they tend to be by formula, have not been so rigid that they have caused us any production and supply problems for AVINZA.

So those two goals have been greatly facilitated by the nice, smooth uptake of the product since our co-promotion relationship.

So I think that we're continuing to see a natural growth and evolution of the business with prescription demand and other non-retail demand growing and becoming a higher and higher percentage of our quarterly revenue, and we think, as an example for next year, we expect that pharmacy stocking, the wholesaler and chain stocking to be certainly less than 10% of our overall pattern for next year.

So I think as we move through this fourth quarter, we'll stay on that trend line to where pretty much it settles down to a normal demand pull-through business.

Okay.

And then I just have a couple of financial questions.

In the cost line, the 2.7 amortization expense, do you expect this to be an ongoing -- is that -- I'm just wondering if the 2.7 continues forward.

Yes, Catherine, it does.

That reflects the fixed amortization for both AVINZA and ONTAK, and that's the run rate on a quarterly basis.

Okay.

And then for your guidance which includes an additional Royalty Pharma option, is it possible that this option could come late in December around, like, the end of December and then this could be pushed into the first quarter?

I would say that the option exercise date is during the fourth quarter.

So we will know one way or another before the year is over.

Okay.

Thank you.

Our next question is from David Aslam.

Go ahead, please, you have the floor.

Thanks for taking my question.

Just wanted to go back to guidance.

For the full year range of -- for the fourth quarter guidance of $20m to $28m in operating profit, we would get to a loss for the year of $2m to $10m and that includes the two RP payments.

So I guess is it safe to say that you are backing off of your previous guidance of a full year operating profitability of $2m to $8m?

That is correct.

Okay.

Thank you.

Our next question is from Jim Reddock.

Go ahead, sir.

Thanks.

Follow-up question to Catherine's question before.

Just so I understand this correctly regarding stocking, do you anticipate stocking to increase or decrease in the fourth quarter on a dollar basis sequentially compared to the third quarter, that is, and actually if you could, could you break that out in terms of wholesale stocking versus retail stocking?

Thanks.

Yes, I wish it were scientific enough that we could answer that quantitatively.

I think the short answer is, as the brand grows in volumes, the system of distribution naturally grows in its absolute dollar holdings of a product.

So I think the short answer is, each quarter, as the brand prescription volume grows, wholesalers holding a normal inventory would hold more in dollar terms.

So yes, we would expect some growth in dollar holdings of wholesalers, also in the fourth quarter, and that would hold true for the long term of the product.

They don't lock and load a fixed quantity of product.

They have to keep a certain amount in their system to supply it, and we right now are much more sensitive to shortages or stockouts because sometimes it does take a patient three days or more to get a product through the system when it isn't stocked.

Sure.

So --

But the question that I'm asking is not what's in the channel at any given time necessarily but what the incremental amount in the fourth quarter is going to be because it looks like there was about $7m, $7m to $8m of stocking that occurred in the third quarter and my question is, will there be more than $7m additional stocking that happens in the fourth quarter or less?

Okay.

I think, first, I'm not sure that your number for the third quarter is right.

It's probably not too far off, as close as we can tell, but it's probably a little bit high.

It's probably not quite that much.

Looking at the fourth quarter, we would certainly expect the number of new pharmacies stocking the product to be at least as high as initiated stocking in the third quarter.

We don't see that rate dramatically changing.

So I think the portion of it that represented new retail pharmacy stocking we would expect to be about the same as the third quarter.

The percentage --

What percentage of the $7m or whatever the number that was in the third quarter?

Yeah, I mean, I think we probably closed in on it about as well as we can.

If you've got 55% to 60% of your quarterlies that you can say are coming from prescription and retail and non-retail demand, then the balance is related to those other three factors.

I don't know that we can actually track and break it down more finely than that.

I think that if we looked, therefore, at some absolute number, would we expect that absolute number to be higher, whether it's $5m or $7m in the fourth quarter, I think we would expect it to be about the same or a little higher.

That will be driven largely by how quickly the prescription ramp takes place in the fourth quarter.

If the rate of early October keeps going, then we would certainly expect wholesalers to increase even more their stocking of the product because their coverage of the demand would be shrinking and so they would naturally buy more.

So I think the best we can do for you there is to say it's probably is going to be at least as much as third quarter and could be a little bit more.

Okay.

Thanks very much.

The next question is from David Cowen.

Go ahead, sir, you have the floor.

Yeah, hi, I have a few questions.

One is, did you say the average Rx was at 134 per Rx, or did you say -- I missed what you said at onestage.

Yeah, sorry, David. 125 to 130.

It depends on what measurement you are using, most recent week, last four weeks, last three months.

It's in that range.

So four to five per day or something like that.

I'm sorry?

$4 to $5 a day?

Yes.

The second thing was just if you could, if Paul could go through the shares outstanding given the parts and just give us a breakdown of exactly where you are on the shares, options, warrants, et cetera.

Yes, the shares outstanding, primary shares outstanding are approximately 73 million, and our fully diluted number which would include the warrants and options and the convert would give us 105 million total.

Thank you.

And David then, last question, just wondered if you could just give an update on how many people are reporting to you on just the management side of it, an update on what's going on there.

Yes.

Right now I have in the range of 10 direct reports, all of whom are either Senior Vice Presidents or Vice Presidents of the respective functions, and that covers the full span of a normal, what I would say small but integrated company.

We have an executive that heads up R&D, one that heads up regulatory and we have the heads of marketing, sales and medical affairs, Paul, in the finance side, and then we have an operations head who reports to me.

So those are pretty much the classical functions.

That's great.

Thank you very much.

The next question is from Robin Levin.

Go ahead, please.

Hi, David, congratulations on your quarter.

That's great news.

Thank you.

We have a couple of questions.

I have Jenny Freeman here with me.

Do you have any clarification on the guidance from Pfizer regarding lasofoxifene NDA filing?

I think that's becoming the secret of the decade.

The short answer is, no, I don't.

I think that we are all expectant of some further information from Pfizer and not just on lasofoxifene.

I think from the people I talk with, a large number of products that are in very late stage are pending some clarification as to when they come out.

And I think that lasofoxifene is one of those.

About the only thing that I can say is we are expecting in the fourth quarter an update report, and where we believe the product is, is they have from the Phase III program the data in hand this second half that should enable the plotting of a time line to an NDA filing or an NDA filing.

So I think that what's remaining is not so much the clinical data.

It's a decision and choice and commitment internally from Pfizer, and that's as near as we can calculate where it is.

So I think that we do have some expectations that Pfizer will clarify, not just lasofoxifene but among a range of products that are in their pipeline, when will they come out, we're pretty expectant.

We think we should hear something.

Typically Pfizer makes a public statement before we get it in the report, but I guess there's a chance that we could find out in the report the clarification of the time line, but I think that's as good as we can do as to where it is.

That's good.

Thanks.

That's good news.

Any other guidance from Lily regarding the PPARs advancing?

We believe that the guidance on 818 is, from what we see going on, the guidance on 818 which is going to Phase III next year and a targeted NDA filing in '06 is very much what they are prioritizing and tracking to.

We are expecting to see the Phase II results still this year.

When they will release those Phase II results, I do not know, but we are scheduled to see those Phase II results still this year.

So that's very much in line with the go to Phase III next year.

So I think what we see is tracking quite nicely.

The Phase I on 674 which they spoke so highly of I think we're expecting the second part, the multidosing part of that Phase II to be completed this year and hopefully we'll get a look at that data.

Once again, when they choose to release that, we don't know.

But I think both of those products which are high priorities are tracking quite nicely to Lilly's most recent public announcements.

One last question.

It looks like you revised your growth rates or your guidance on the growth rates of the sustained-release opioid market, not just your share but actually the growth rate of the market in general.

I'm not sure what you are referring to, but I can, I think, address your question.

We had looked at, over the past year, we had referenced a five-year growth rate of the sustained release opioid market.

We had been very conservative and said we expected it to grow around 10%.

What we are seeing is obviously much faster growth than that.

I don't know that we've formerly revised our guidance about the five-year growth rate.

We tried to be very conservative about the five-year growth rate.

Clearly the market for the eight months of this year that we have available has grown about 27% in dollars, and I believe about 15% in prescriptions.

So it's clearly growing faster in the near term than our five-year conservative growth rate.

So I think we would say prima facie that we've probably been too conservative.

Now, as part of our going-forward guidance, we will readdress, are we going to shift our five-year expected growth rate, keeping in mind that the five-year has to take into account the coming online of the generics in '06.

So that's part of why our guidance is more conservative.

We probably will increase our expected growth rate of the market over the five-year period, but I think we, to my knowledge, we haven't done it formally yet.

I don't know whether that answered your question.

So in essence, you are projecting a 10% market share of a market that is growing at 10% to 15% per year over the next five years.

Is that correct?

Yes, I think our original 10% share of a market growing at 10% was a very conservative estimate.

We haven't yet upped it to 15% in a formal guidance sense, but clearly the market is growing faster than we expected even in the near term, so clearly we will address that in our next round of guidance.

The market's going to be bigger than we expected.

How much, I think we've got to finish the quantifictions of.

But clearly it's a pleasing market.

There have been a little bit of slowdowns in recent weeks and what we don't know is whether that's a short-term Rush Limbaugh effect on Oxycontin or a more general, another round of caution.

We'll have to wait and see.

I think we'll try to absorb that, make sure we see what happens throughout this fourth quarter and then we will try to address the market, but clearly it's going to be upwards of 10% and we'll try to put a new five-year growth rate number on it.

It obviously has a big effect on what a 10% share is.

Good news is I think we're tracking on or ahead of schedule for our share goals so far after two quarters and it looks like strengthening.

So we'll try to address both issues in our next round.

Well, thank you very much and congratulations on your progress.

Thank you.

The next question is from Stefan Loren.

Go ahead, please.

Thank you very much and yes I do like the name Limbaugh effect but very quickly I was just wondering if you could comment on ONTAK wholesaler levels and whether or not there was a lot of buying in the quarter.

Yes, if you look at the whole year, we try to help everyone wrestle with this issue on a consistent basis by providing two barometers.

The growth in end-user demand, which if you look at the three quarters of this year has been pretty strong growth each quarter.

For the first quarter and the second quarter, wholesaler purchases probably lagged end user demand.

And so we had faster growth rates in actual shipments out of wholesalers.

Third quarter we saw some catchup of that.

So there was clearly some increase in wholesaler buying.

That's that lag effect that's difficult to predict.

I think what we would say is where we are at third quarter is a pretty normal pattern of wholesaler inventories on ONTAK, and we think a balanced pattern for going forward.

So I think with that observation, a little bit of lag in first and second quarter where they weren't keeping up with the demand and third quarter they have caught up a little bit and so we think it's a solid position for going forward.

Demand should pull through the product, and we don't see any significant imbalances there that are concerning us.

Could you just venture a guess at the proportion of sales from the quarter that were due to stocking and reinitiation of inventories?

It was relatively small.

I mean, if we look at the end-user demand shipment numbers, that we have referenced, it was not a large portion.

I can't come up with a number off the top of my head, but it's fairly small.

So while there was some portion of it that clearly related to wholesalers adjusting to the higher overall demand of the last three quarters,, it was not a big portion of that demand.

A little bit but not a big portion.

Okay.

Thanks.

The next question is from Jason Zhang.

Go ahead, please.

Okay.

Most of my questions have been answered.

Thanks.

Okay.

The next question is from Anthony Zaffle.

Go ahead, please.

Yes, a follow-up question.

I was at the Axco-Noble Investor Meeting and Organon Division had cited that AVINZA is now the first product in their detail bag to sell, being that Remeron, which was formerly their first product, is going generic.

The question is how in line, how incentivized are the Organon sales force in terms of selling AVINZA and is that something that is a strong tie there to get sales ramped up and the second question would be regarding Targretin in terms of the hands dermatitis, moderate to severe indication.

I recently read some dermatologist who felt that there was progress being made there and that in addition to steroid cream in the moderate to severe category, there was utility in that area and then I guess those would be the two things and the third would be with a very specialized market like cutaneous T cell lymphoma, and knowing a lot of the treaters as a physician in that area, or enough people that would order stock and not use the drug, is sort of an inventory issue in that particular product generally a cause for concern, or is it just your end-user sales are sort of the hallmark of treatment in that particular disease?

I got two of your three.

Could you repeat the first one again?

The first one was that the Axco-Noble in terms of Organon in their sort of focus on AVINZA now as their first product as posed to Remeron which is gone generic or is going generic as their former first product.

Yes, okay.

First of all, it's pleasing to hear that they are affirming their priority to AVINZA.

We don't believe that is a new phenomena.

That has been the building block of the relationship from the first time they started promoting the product.

They were committed to deliver from their primary care and their specialty sales forces a clear number, minimum number of calls on AVINZA in the first position, and they have, as far as we can monitor it from their reporting to us, behaved quite consistently with that from day one.

What I will say is I think what's much more important is that Organon USA had to go through some significant territory restructuring and restructuring of effort around AVINZA and the deprioritization of remeron as a result of the genericization of the product.

That caused in the first quarter of co-promotion, that primary care sales force to not be optimally productive.

Productivity clearly improved in the second quarter of full co-promotion and we believe now in the third quarter with that first position priority and the territories settling down and the representatives knowing their doctor and making the fifth and sixth and tenth call on those physicians, we believe productivity is rising quite dramatically, consistent with that first position priority, and we think that's the most important new factor is the growth curve and the productivity curve of Organon now having gotten through its territory restructurings.

As it relates to hand dermatitis, we are committed to moving Targretin gel into a large-scale Phase II-III trial next year which would be a randomized comparator of around 500 patients to be one of the registration trials for the product and that's going to be a major initiative and investment for next year.

We think that data will fuel a round of growth for the product in '05, probably is not going to drive growth next year because that will be the conduct year and then the data analysis and publication and release will be the following year.

So we do believe that's going to move Targretin gel as a brand forward in the '05 time frame.

We think in the meantime the business we have in the Stage 1-A, 1-B and 2-A patient population will continue to bring modest growth to the CTCL franchise, and what we have noted that we've experienced a little bit this year, typically the product moves on a prescription demand pull-through basis.

We do have, and we vary as with all our specialty products, somewhere between two and six months of inventory throughout the system.

When you experience a slowdown in prescriptions, and we have seen the rate of growth of T-gel slow down as we prioritized our ONCO sales force to ONTAK and Targretin caps, we have seen a little bit of a slowdown and that's what tends to cause a little bit of a need to adjust through holding back purchases by wholesalers to adjust the inventory levels and make sure they are balanced.

So that's what we saw in the third quarter.

I think we do see continued growth but at a modest rate on T-gel until new clinical data is brought to the marketplace and so I think that's the way we would position it.

It is our third priority and so it's not getting a large volume of detail time and so its growth rate is going to be slower until new clinical data drives its usage.

Did that answer your questions?

Yes.

Thank you.

The next question is from Russell Gilbertson.

Go ahead, sir, you have the floor.

Good morning.

Good morning, Russ.

You've answered most of my questions about AVINZA.

So I'm going to focus on ONTAK here, and I would like to get an update in terms of what's going on in developments of ONTAK and non-Hodgkin's lymphoma and chronic lymphocytic leukemia and also an update on your second generation ONTAK, if you would.

Yes.

We are running trials.

We have two arms of our medical groups.

We have the clinical group which tends to work on clinical registration trials, or trials that would be used for registration.

So right now clinical is running CLL trials with some key opinion leaders in a multi-site Phase II trial, a fairly large one, that will be one of the affirmatory Phase II trials for registration in CLL.

We're trying to get the true response rate.

We know the drug has significant activity from other trials we've done.

Now we're trying to get a true response rate.

So that's going on in our clinical research group.

We have a number of trials going on in our medical affairs group.

We also expect to publish additional data in B-cell non-Hodgkin's lymphoma at ASCO next year.

So what's being looked at in the B-cell, and we have several trials that have been conducted and several that are ongoing in the medical affairs group to assess the rate of response in refractory B-cell non-Hodgkin's lymphoma patients.

We know it has activity.

And so now we're just trying to establish the true response rate.

And the refractory populations we're looking at are refractory to chemo, at least one course or more of Retuxin and refractory to the hot antibodies.

So we're looking at that refractory patient population.

We think that either after the hot antibodies or prior to the hot antibodies and in some combination setting is where ONTAK probably has its clinical utility.

That would make it probably third line or refractory patient population.

So we have some medical affairs trials looking at mono therapy in that refractory patient population and combination.

So those are ongoing.

We also have some, what we would call mixed B- and T-cell trials ongoing where we're looking at B-cell non-Hodgkin's and T-cell.

The T-cell being peripheral T-cell, not the cutaneous which our label encompasses.

And we're seeing good activity in the T-cell population as well and, in fact, one of the more significant surges of use we have is, as we publish more information on its use in T-cell, there's very little, if anything in development for T-cell patients.

They make up about 15% of the non-Hodgkin's lymphoma market and so they are a very significant patient population and there really is nothing for them.

So one of the surges we're seeing in the usage of ONTAK is in the peripheral T-cell lymphoma market, and we're trying to get more data out there.

It's a very heterogenous patient population.

So it's very difficult to run clinical trials, but we do have two trials ongoing where we're accruing T-cell patients, and we also hope to get some additional clinical data out there next year at ASCO in that indication.

As it relates to the second-generation development program, we've made quite positive technical progress in that program, and we are tracking to a fourth quarter of '04 filing which would be a supplemental BLA on ONTAK second-generation.

It is going to be both a purer product, so we have improved both the fermentation and purification process.

It's going to be an improved formulation.

So in addition to the improved purity, there will be an improved formulation which will be a lifelized(ph) formulation.

That will allow us to move away from the deep frozen product and have a product that we can now ship and market around the globe.

So we do expect that product to get filed.

It will also be lower cost.

So we will have some modest margin improvement on the product as we go to market with it in '05.

So I would say we're very pleased with where we are with that, and we expect by early next year to have completed all the validation batches and be generating the stability data for filing at the end of the year.

Thanks for that update, David.

Your next question is from Stefan Loren Go ahead, sir, you have the floor.

Yes, I'm sorry, I got cut off the call if you've already answered this but I was just wondering if you could highlight any presentations or presence at [INAUDIBLE] or ASH.

I'll turn that over to Mike Watts.

I apologize, I don't have it at the top of my head.

Stefan, the big one for us coming up, as you know, is certainly ASH.

The abstracts for ASH are not yet public.

They are posted on the ASH website.

They say in early November.

So we'll have to keep our eyes open for those.

In the past, the data that we have presented there relates to ONTAK in any combination of CLL, NHL, and graft versus host disease as well as peripheral T-cell lymphomas.

So you might expect to see some combination of that kind of data this year.

Great, thanks.

That's all the questions that we have from the phone lines.

Great.

Thank you very much, everyone, for attending the call, and we look forward to taking any follow-up questions over the course of the day.

Thanks.

Thank you.