Ligand Pharmaceuticals Inc (LGND) 2003 Q4 法說會逐字稿

Welcome to today's conference call with your host David Robinson.

I would like to remind everyone that today's conference call is being recorded, and also that there will be a question-and-answer session after the presentation.

Thank you, Mr. Robinson, I will turn the call over to you.

Good morning.

This is Paul Maier, Chief Financial Officer of Ligand Pharmaceuticals.

I would like to welcome you this morning to our call.

And with me is David Robinson, our Chairman, President and CEO.

And before I turn it over to him I just wanted to point out that during today's call we may make some forward-looking statements, and I would like to direct your attention to our SEC filings for a more complete listing of our disclosures.

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

Thank you very much, Paul.

I would like to welcome everyone, and thank you for joining us today.

As our press releases that have gone out yesterday and today are pretty comprehensive and cover a wide range of subjects, we clearly will want to keep our comments short here and provide ample time for Q and A for any of the questions that you all might have.

So with that in mind, I will make a few comments, ask Paul Maier to comment on our guidance for 2004, and then we will open for Q and A.

I believe we would characterize 2003 as a year of strong progress of our product pipeline, of foundation building for some of our future business and revenue growth and a testament to accelerating revenue and financial results.

Culminating towards the end of the year, in the fourth quarter of the Company's first quarterly positive earnings per share of around 11 cents per share basic before cumulative effect of a change in accounting principles.

We believe that that signals an important stage of evolution for the Company, and we will talk a little bit about that in our guidance.

The foundations and product progress that we believe are most noteworthy are the establishment of our AVINZA co promotion with Organon, the rollout of that promotion and the achievement of virtually all of the target goals for AVINZA for 2003.

In some cases exceeding goals that we set.

Second was the important progress and completion of the Targretin capsules, non-small cell lung cancer pivotal trials for Frontline in combination with chemotherapy.

The other important foundations and product progress were three additional new chemical entities, advanced human development from our corporate partners, three existing new chemical entities moving to Phase II, the extension of our very important ongoing research collaborations with Lilly and TAP for another year.

We believe that all of these were in fact rewarded and reflected in the Company's progress on share price improvement with our share price also up 174 percent for the year.

As we turn to look at measuring the Company's progress and assessing what it says for 2004, I think I would highlight a few very important things before we progress to talk about 2004.

The Company's overall revenue for 2003 was up 46 percent, representing in fact the usual variability we have in other revenue, which was actually down and a very strong net product sales performance, up 110 percent over prior year.

As the Company's product base grows, the variability of the other revenue, which is milestones and from year-to-year or quarter-to-quarter exercise purchase options by Royalty Pharma those things will have less and less impact on our overall financial results.

And therefore be much more predictable and reliable.

We believe that 2003 is a good example of that.

The fourth quarter was particularly pleasing with total revenues of 57.6 million, up over 111 percent on prior year with product sales in the fourth quarter up 205 percent highlighting, I believe the progress that we are making with AVINZA and even in a fourth quarter where we had some unusual charges for chargebacks and rebates, reflecting some changes in our patient mix that impacted our oncology business.

The overall results continued to be reflective of the acceleration of the Company's business.

We believe overall when we look at 2003 results, AVINZA had an outstanding year with the achievement of our market share goals coming out of the year in the upper range with 3.8 percent, exceeding of the targeted pharmacy distribution presence to serve our patient base, exceeding the goal of 18,000 to 20,000 pharmacies by year end.

We ended somewhere in the 20,000 to 21,000.

We certainly achieved or exceeded the guidance for AVINZA on a net sales bases.

We do recognize and point out that that some part of that was in fact related in the fourth quarter not just to the extraordinarily strong demand in prescriptions, but also to some wholesale activity buying a little bit ahead of a January first price increase.

We did work hard to limit that for both good inventory management and supply reasons, but we still do expect some small effect on the purchases in the next quarter.

Our inline oncology business, both ONTAK and Targretin had solid years with ONTAK up 22 percent in units for the year and 29 percent in net sales dollars, reflecting the price increases on the oncology products.

And Targretin had a growth in prescriptions of around 14 percent continuing to reflect progress in our registered indications, but a product still meeting the Phase III data, the Phase III data to move beyond its registered label.

The results for Targretin in net sales terms translated a little less clearly as we had several of our wholesalers in the third-quarter do some balancing of inventories, and so that did affect the overall net sales.

We do not believe that is a run rate going forward issue, and therefore we continue to look for both of these products to be solid growers in 2004.

As we look at the overall progress of the Company with solid foundations laid both in pipeline and accelerating financial growth, financial results, we do believe that the business got particularly stronger and that those are foundations that we will see further drive value for shareholders in 2004.

That certainly is highlighted by the most recent news where products that we advance to Phase II in 2003, are now moving to Phase III such as Lilly's LY818.

We have additional maturation of our corporate partner pipeline that we believe will occur in 2004, including we believe, the first filing of an NDA for a partnered product and multiple additional products advancing to both Phase II and Phase III.

So we see the maturation of some of the solid long-term foundations of the Company's business towards an other revenue stream that will be of a more recurring and predictable nature than some of the challenges we have had in predicting when milestones were to occur and when options might be exercised.

And so we think that might be a healthy next evolution for the Company shareholders and help make our business much more predictable.

So I believe with those comments I will make two other comments on now our other press releases, progress in securing second sources for AVINZA and expanded capacity for AVINZA, and progress in securing transition and alternate source for ONTAK Fill and Finish operations.

We are pleased with both the additional manufacturing and supply agreements announced in the press release.

We believe that in the case of AVINZA it will allow us to have additional capacity online in 2005 to meet what we believe is a growing success with AVINZA, of Organon and Ligand.

It also will allow us some redundancy or alternate supply for good risk management on our major product.

We have had a very productive working relationship with Cardinal for the production of Targretin capsules and so we are very pleased to add AVINZA to that relationship.

We are already well underway in working on the tech transfer, and as all of you know, the tech transfer on these kind of products typically will take 12 to 18 months.

And so we do expect some time in the course of '05 to have additional capacity from this second source and to begin purchasing from Cardinal.

In the case of ONTAK, we have had a very productive working relationship with Lilly for more than five years, and have anticipated the need to transfer the Phil Finnish operation on ONTAK to another third party, Hollister-Stier is that third party.

That process is also well underway and we do expect with the strategic inventories that we have built at the end of last year and in the first quarter of this year, we expect that combination of working closely with Hollister-Stier and inventories to be in a position to maintain supply to our customers of this important second product of the companies.

So on balance two important additional foundations have been put in place for reliability of supply and continuity of supply and that in many ways improves the risk profile of our supply operations.

So we are particularly pleased with those efforts.

They, of course, have been things we have been working on for quite an extended period of time and are pleased that they have come to fruition now.

I think with those comments I will ask Paul to make some comments on the guidance for 2004, and then we will open for Q and A.

Thank you, David.

In preparation for talking about 2004 guidance, I just want to reflect on a couple of our performance metrics for 2003 that set a very nice backdrop for our moving into '04.

First of all, we are very pleased that our results for the year 2003, including our fourth-quarter guidance, were within the range of our expectations and the range that we previously established.

And of particular note was, in addition to the growth in product revenues and total revenues, our gross margins for product sales in the fourth quarter was 79.6 percent, up significantly from the prior year and that contributed to a full year product gross margins of 72.4 percent, which was nearly 10 percentage points ahead of the prior year.

So we are seeing the benefit of the strong growth in product sales and the mix benefit where we see the contribution of AVINZA as driving the overall metrics.

On the expense side in 2003 for the full year, our total expenses were on the lower end of our full year guidance that we gave nearly a year ago, and those expenses behaved exactly the way we thought they would, we were up about 20 percent over 2002.

Also note that we ended the year very strong from a cash position.

We had in excess of 100 million in cash, which is the strongest the position the Company has been in, and provides a very sound basis for whatever our operating needs are going forward.

And in fact, in the fourth quarter we generated a positive operating cash flow, approximately $9 million, and that allowed us for the full year to be cash neutral.

So with that, we entered 2004 in a very strong position.

And as David pointed out, we expect the product sales to continue to accelerate, and we are particularly pleased with the progress of AVINZA with our co promote partner and this year we will have the full-year benefit of our combined resources and our increasing investment and increasing capabilities behind AVINZA.

So with that, our guidance is for total revenues to be in the range between 240 and $265 million for the year 2004.

We expect product sales between 210 and $230 million.

And AVINZA would account for approximately two-thirds of the total product sales.

We also highlighted our retail prescription market share at the end of the year when we exit 2004 our goal is between 6 and 7 percent.

And consistent with those product sales goals, our gross margin for the full year is expected to be in the range of 79 to 81 percent.

On the operating expense side and our definition of operating expenses, we exclude the cost of products sold, but we do include the co promotion expenses -- we expect that the total operating expenses will be between 180 and $195 million.

And as a result, our operating income guidance for the full year is between 20 and $25 million.

And that would translate to a basic EPS for the year 2004 between 12 cents and 19 cents per share.

And I think we would direct your attention to our further guidance, which we enumerated in the press release, that we expect full year profit and EPS consistent with that guidance I just enumerated, but we continue to expect at least one quarter of losses prior to consistent profitability, and we would expect first-half losses and strong profits in the second half.

With that, I think we will open it up for Q and A.

(OPERATOR INSTRUCTIONS) Jim Reddoch with Friedman, Billings & Ramsey.

This is David Ansalon (ph) for Jim Reddoch.

A couple of quick questions.

One is are you starting to see the impact from California adding AVINZA to the preferred list?

And also could you quantify the average revenue per script that you are getting just from the Medicaid portion of the market?

Thanks.

Yes, thanks David.

The short answer on California is it is probably too early to give any meaningful quantification.

California is a little bit different than our Tennessee, Florida and now underway Texas Medicaid formulary experiences.

In the -- where we go onto a formulary exclusively as the only oral or as the only opioid, then the response from the State is very quick and measurable and that certainly was the case in Florida, Tennessee, and we hope will be the case in Texas which really began last week.

California we've gone on in addition to all the other opioids so the effect is a growth curve over time.

We do believe we certainly have seen progress at the territory level, but it is too early to really be able to quantitate that.

We do believe that we will be in effect overall of '04 principally rather than the kind of quick shot in the arm that Tennessee brought because of the very substantial conversion of patients that took place.

So I wish we could be of some more help.

We will try to look at that and track it as we see California contribute this year in a more substantial way.

But we really don't have anything quantitative there.

As it relates to the average revenue per prescription, as you know, the average revenue per prescription for AVINZA during the September/October/November period of time was measured at WAC, the wholesale acquisition cost, around 120 to $125 per prescription.

Since we made some tactical tweaks to the coupon program, and we've made progress in the strength mix of AVINZA with higher dosage strengths gaining, that is the 90 mg and the 120 mg, and we increased prices, the combination of those three effects we have seen the average revenue measured at WAC rise to in early or late February between 150 and 155 per prescription.

So some rather dramatic progress, certainly ahead of our schedule.

We correspondingly have seen the percentage of coupons in the mix off overall prescriptions decline, and that is very positive and very pleasing to us.

We transitioned from one coupon supplier to another during January and February, and that was one of the contributors in addition to a soft market to a little bit of sloppiness of AVINZA prescriptions in January and early February.

We believe we are coming out of that period now.

We've reset the coupon level of participation in overall prescriptions towards where we would expect it to trend and settle down to.

We think that the rate of coupons in overall prescriptions should certainly be trending at 10 percent or below, and it is moving quickly in that direction from a high in 2003 between 20 and 22 percent.

So we are very pleased overall with that progress.

It is being reflected quickly in the average revenue per prescription.

Now on a look forward basis we would expect further progress from the 150 to 155 WAC price.

We would expect further progress in our WAC price going forward as we look at improvement in mix, improvement in patients, a little bit slower decline, not quite as dramatic as what we saw in the coupons between December and February, but there will be a gradual decline as repeat prescriptions grow.

So that combination of things we certainly believe and a possible second price increase would certainly add another 10 to 20 percent to the WAC progression going forward.

And so we think that would contribute to a very positive overall WAC for the year, certainly in the 160 to 170 range.

So when can you expect -- when do you expect the second price increase and of what magnitude do you think?

I think we probably wouldn't comment other than to say we assess the competitive situation.

We would expect that to be, if it occurs in the second half of the year, we did note that immediately after our price increase in January both of the market leaders took price increases in February.

So the closing of the gap strategically that we had hoped to accomplish with our price increase in January, that is to close the gap between AVINZA and OXY at the wholesale price level did not occur.

They moved their prices up.

In the case of their Duragesic it was the same or slightly higher, and in the case of OXY it was right at 7 percent.

We didn't really gain the strategic gap closing we expected to and so we will have to look at that with an eye to what the market is doing as we move towards the second half of this year.

That's helpful.

Thanks a lot.

Russell Gilbertson from Roth Capital Partners.

Congratulations on a great year.

Thank you, Russ.

My question is about ONTAK; it looks like the sales did slip a little bit in the fourth quarter and I was hoping you could comment on that and give me some reasons for that.

And also could you comment on the development of your new formulation for ONTAK and how you feel that will impact sales going forward?

Yes.

It is clear that at the user demand level in the fourth quarter what had been some particularly strong growth year-over-year for four straight quarters slowed down a little bit.

That is clear from the data.

And we believe that is a reflection, a real reflection of a little bit of slowdown in the use of the product in a couple of centers.

We have obviously gone to work with those centers.

We don't believe that is a recurring concern going forward.

We think that was a fourth quarter phenomenon.

We are watching two things that I think are worth commenting on; one that was reflected in the fourth quarter in actual booked net sales.

We had some increased chargebacks in rebates from the mix of patients and where they were treated.

If we reflect back on 2003 it was a dramatic year of CMS moves on reimbursement.

Early in 2003, CMS put in effect reimbursement prices that quite frankly penalized the use of drugs in hospitals, and forced many patients to seek treatment in admixture (ph) centers outside hospitals or inside hospitals, but not under the traditional part A HOPPS reimbursement.

So we saw a mixed change.

As the year progressed and CMS addressed some of the rather dramatic penalties that products were paying that shifted again, and that did shift beginning in '03, and it certainly will in '04 where a dramatic turnaround of reimbursement rates for ONTAK and many other oncology products has been put in place effective January first.

The hospital reimbursement rates for ONTAK were almost double for 2004.

So that will bring a shift back into hospitals and affect your chargebacks and rebates from both Medicare and on the rebate side Medicaid patient population.

We don't completely have because of the small patient population a real good handle on how to quantitate that yet.

We are tracking it.

Correspondingly while 2004 is favorable for the hospital reimbursement on ONTAK, it appears to be less favorable or negative for physician office use.

Physician office use on ONTAK is around a quarter of the business.

So it is the small end of the business, not the large end that is impacted this year.

So where that all shakes out we are trying to get a good handle on right now with our various customers without commenting much on 2004.

We don't see yet any dramatic effects that we think are going to impact our ability to progress to the kind of growth rate we have in our guidance.

We are watching it carefully, and even as we speak, reimbursement rates that were put in effect for January that are positive for us in the hospital and negative in the physician office are being appealed.

And there is some chance that physician office reimbursement rate will change again as early as April 1.

So it is a fairly fluid situation, and we are watching it carefully.

In the meantime we are working very closely with our customers and making sure that it is not a money-losing operation for them to be working with ONTAK in the physician office setting.

So I wish I could do better than that, but that is a pretty fluid situation.

So far we don't think it is going to change the kind of growth we saw in 2003 from being accomplished in 2004.

As it relates to the second generation formulation, that is a 2005 program for us now.

We are making good technical progress, and it is coming together such that we do believe we will be able to file that in 2005 and how quickly it comes out will be a regulatory review issue.

We will have to look at what its impact on sales could be.

Clearly an improved purity formulation, if it is accompanied by improved stability, would have two positive effects.

And that certainly what we are expecting out of the second generation program.

We are expecting that that improved stability will get a longer shelf life, so we will have fewer challenges of the shelf life and scrap materials, lower costs in the production of the product.

And with a little bit easier product to distribute, one that we can globalize that is take Europe and/or Japan to expand our market base and one that will be easier to distribute in the U.S.

So we do believe that will have a positive effect on overall physician uses, making it more like some of the other biologics rather than the deep prozin (ph) product that it is today.

So I think as we get to the final technical specs and see what the agency is going to sign off on, we will be better able to quantitate whether that is a substantial positive and additional sales or a modest one.

I think for now we would probably say it is modest.

Does that help at all?

It did, quite a bit.

Can you give me an idea what the pricing is in the physician offices versus the hospital?

You may the reimbursement?

Right.

The reimbursement for this year has gone to 85 percent of AWP.

Previously it was up at 95 percent of AWP.

And so in a very clear desire by CMS to eliminate any profit-making by the oncology physician, for all oncology products they rather dramatically reduced the reimbursement rate.

And that basically has put physicians in the situation where they used to rely upon a substantial amount of revenue from the actual administration of the drug, that has by design been eliminated by CMS.

Unfortunately, the formula one size fits all has meant that some products are still a modest profit for the physician and other products actually lose money.

ONTAK sits kind of right on the cusp where it is not a substantial amount, but it is a slight negative for physicians using it in the office-based setting.

And so we are looking at things that we can do to neutralize that effect.

Correspondingly, physician fees have gone up dramatically.

So the actual physician professional fees that they get to dispense ONTAK have gone up dramatically.

The net of those two is that physicians still have far less incentive across all of the oncology products.

And I think that a number of oncology companies are like us looking carefully at how we can make sure there is no disincentive to use our product versus anyone else.

It is unlikely that a macro change can be affected that would restore the situation in the physicians office of 2003 because the changes of reimbursement by CMS were rather drastic.

And it is certainly not possible for companies to overcome that.

So I think the best that we are looking at here and what the oncologists I think expect is that they will make their money on their professional fees.

They just want to be whole on the oncology drugs that they dispense to their patients so that they aren't actually subsidizing personally Medicare patients.

So I think we are looking carefully at that, and that macro picture where ONTAK is it is nowhere near as badly affected as many oncology products, and it is certainly not quite as good a position as a few.

Fortunately, we don't have a lot of direct competitors in the CTCL market.

So it is not a major issue for us.

But it is a good customer management and good customer relations issue.

We do not want physicians feeling any disincentive or that the company isn't working with them to deal with some pretty drastic changes to CMS.

On the hospital setting last year was famine and this year is feast.

We are up almost double the reimbursement rate for hospitals.

So hospitals are going to be very motivated to work with us on ONTAK this year.

All right.

Thanks, David.

Samuel Eisele. (ph)

From some of the numbers you presented it would seem that your forecast gross profit would be around $175 million for 2004.

What I simply did was take the midpoint of your sales range at 220 million and multiply it by about 80 percent, comes to about 175.

Inside that how much penalty or how much charge does it bear for amortization of the Elan transaction or any other non-cash charges that are charged inside the cost of goods?

The annual rate of amortization which comes from both AVINZA and ONTAK which is the technology amortization is approximately $11 million on an annual basis.

So that is the total for the two products?

For the two products, yes.

So it suggests about 5 percentage points of gross profit.

Yes, and of course that percentage points depends on the volume of sales and the mix of the two products.

But it is a fixed amount.

If I can go on a bit, your forecast for operating profit in 2004, does that include any more payments and estimate assumption of any more payments from Royalty Pharma?

Yes, there is one option that Royalty Pharma has in 2004, and we in our guidance we assume that that option would be exercised.

What amount is that?

It is 13.25 million.

Sam, in the other revenue portion that you can peel out from the guidance, what we tried to do this year because other revenue is always one of our challenge, what we tried to do is it should be a very robust year as you can see from the kickoff with 818 of substantial milestone revenue.

We have a real maturation of the pipeline underway, and with more substantial milestones.

So within that overall kind of the 30, 35, 40 million range of other revenue, there is the Royalty Pharma option, but we also have looked at trying to risk manage that pot with the milestone revenue and one portion that is stable, which is the funding from TAP and Lilly.

So there's a predictable portion of that that you can pretty much calibrate because its contract revenue.

Then there is the unpredictable portion.

So what we've tried to do is within that range say among the things that can happen to us, what is a reasonable range of risk diversified revenue for that basket.

And so hopefully within that range we can land with some upsides that we have that are not in there that would offset anything that doesn't take place.

And if I may also proceed the discussion of your price prescription at WAC, I believe you said in the fourth quarter '03 it was about 120 to 125.

Yes.

You then said you're running around 150 and you seem to expect something like 10 percent growth on that, so if I am seeing it properly and by the fourth-quarter of '04 that average prescription price should be maybe like 160 or 170.

I think you said that, so in other words the comparative would be 160 to 170 compared to Q4 '03 of 120 to 125.

Did I understand that right?

Yes, I think you are almost there.

What we would say is the going forward growth on the current situation which right now if you look at the weeklies, we are 150 to 155 at WAC.

So we think that will grow another 10 to 20 percent.

So if you take the low end 150 and it grows 20 percent it could be as high as 180, and if you take the 10 percent on 150 it would be 165.

So somewhere in that 165 to 180 is where we should come out at the end of the year with our WAC.

Did that help at all, Sam?

Yes, I am done.

Thank you very much.

Patrick Schnecklesberg.

Patrick Congratulations on a nice quarter.

Most of my questions have been answered, I just have basically one quick follow-up question, sort of more of a broader major. $100 million in cash as you going for full profitability this year, this is likely to increase.

Do you have any ideas for us what you might be doing or if you might be doing anything on the strategic front with that cash?

I think, as always we would look at two types of use of that cash, which we expect to build overall this year.

The first would be are the ways that we might use cash to improve the operating results.

And that could be investments to improve product gross margins, that type of activity.

The second area would be strategic product acquisition.

We would obviously like to add a second pain product and another oncology product to our asset portfolio to accelerate the buildup of our critical mass in both of those franchises.

So that would be what we would look to use that cash or any financial assets going forward in those two buckets.

Did that answer your question?

It did.

Let me just throw in one more question with regard to Targretin expansion to non-small cell lung cancer; what are some of the key data or scientific meetings I should look for to see data on that and see that growth?

As it relates to ongoing data, we expect for both Targretin and ONTAK based on what we've seen of abstracts going in a fair amount of information at ASCO this year on Targretin and ONTAK.

As it relates to Phase III data, survival data for SPIRIT I and SPIRIT II, we do not expect that data out until fourth quarter of this year.

That would not make ASCO or any of the other conferences;

I guess it could make the final year end of year ASH, but not certain there, either.

I think Targretin SPIRIT I and SPIRIT II will be end of year phenomenon.

The data we will see at ASCO will be a number of Phase II studies, let's say pertinent ones and important related to Targretin and ONTAK, so it won't be unimportant but its not going to rise to the level of the SPIRIT I and SPIRIT II.

Thank you so much.

Jason Zhang.

Good morning.

Thanks for taking the questions.

I have two questions.

The first is related to inventory.

You have said that it will probably impact sales in 2004.

Should we expect that impact mainly in the first quarter, or do we expect that to play out throughout the year?

And also, could you just kind of give us a little bit of detail on that?

What is the inventory level according to the demand you have seen right now?

And how do you expect to see that level going down over the year?

That's my first question.

Let's see if I can try to help with that one, Jason.

First, and I guess relatively simple answer is we think the impact is essentially a first quarter phenomenon.

We do not see it as a continuing phenomena for the year.

Secondly, how to think about that impact?

I think we would start by reiterating a very important product supply chain strategy of the Company.

Since all products in this category, the sourcing process starts with DEA quota release and that is often for a new product, one of the principal challenges is getting the formula used by DEA to work for a high-growth new product launch.

We have so far managed that, but not without some moments of nail biting.

And one of the ways in which we have decided to ensure that we do not short supply patients is to maintain what we would call higher launch inventories for an extended period of time following co promotion in our wholesale distribution.

When you are bringing online like we did last year almost 16,000 pharmacies, where those pharmacies buy, what DC out of the 150 DC's may buy from and when they buy, is impossible to know.

And so we decided we would make sure that unlike other product launches that have suffered dramatically, we would not give AVINZA a reputation of a difficult-to-find or acquire and patients complaining to doctors.

So from the point of co promo we have maintained anywhere -- I would say from looking forward three to six months of inventory in wholesalers, and we think that is a wise policy.

Now it is wise also because from the time DEA releases quota we have about a six-month supply chain.

So DEA releases quota, we ship and get production in our current supplier.

By the time we get it and we can meet a demand, it's about six months.

And depending upon the size of the demand, we are also working to build the quarterly capacity of our supplier.

So when we look at this whole supply chain management and we say how would we expect inventories to work, it would go something like this.

In year one we are not overly concerned about six months of forward cover on average in the wholesalers.

Year two, which is '04, we probably will see that come down to three to four months.

And going into year three, we will see it trend to an average that is more traditional for a retail product.

This year we expect to stock fewer pharmacies than last year to meet patient demand.

So the stresses on the system are becoming less.

So that will slowly work its way down to where we would expect going forward inventories to be one to two months in the overall distribution.

That is wholesalers, warehousing chains and second and third tier wholesalers.

So I think that we see that as a natural progression and very healthy to make sure that AVINZA doesn't have a lot of resistance because of supply chain issues.

So that is pretty much how we are managing the overall product.

And I think we are right on target with that wrapping up last year.

I think we highlighted out of full transparency that because you time a price increase January 1 for strategic reasons, you are always going to have some customers get a little bit ahead of your own plans.

We managed it tightly.

We, I think kept the effects to reasonable, both for good business and good inventory management reasons.

But I think we have to say there is probably some effect that will probably take place in first quarter and then we will be back to normal trend lines.

The second question was related to the long-term market share guidance; previously you have said that at peak you hope this product would be about 10 percent prescription basis in the extended opioid market.

Now you have already achieved 3.8, and if you do 7 percent this year we are really looking close to that peak.

And how do you see the future from where you are right now?

Great question.

I think the answer is obviously the partners feel comfortable that we are tracking very nicely to meet or exceed our goal at five years.

We are also working on right now a number of important strategic decisions related to resources based on the success, the responsiveness of the brand to our investments and our promotion.

We are looking at incremental resources that we might bring to bear to accelerate the brand share.

We expect those decisions to be taken in the course of this month, and we do expect to provide in our investor and analyst day meeting at the end of this month, additional guidance with regard to our long-term share.

We obviously would have to say that at this point we think we can probably do better than the 10 percent and we will try to quantitate that around that meeting once the additional resourcing decisions by the partners have been addressed.

I think that is probably as good as I can do for now, Jason.

But we will get through our resourcing decisions and provide that guidance certainly at or immediately prior to that meeting.

When you say resource decisions, do you mean promotion, marketing or more sales force because I understand Organon has pretty much given this product to all their sales force or to just part of their sales force now?

Very good question.

I think the answer to that is not principally issues of money.

Other media are not the most productive investments.

We are making already number two share of (indiscernible) investments.

So the principal issues are looking at the segments of the market; do you have your resource configurations optimized to get at them, and do you have adequate resources to push a product that is responsive to a deeper market share?

Those segments would be first and foremost do we have adequate sales force configuration for long-term care and hospice?

That is a big segment of this market; estimates would probably put it at 6 to 900 million.

And we have no specific sales force configuration to get at that.

So that is the first issue that we are focused on.

The second is additional capabilities in the primary care to accelerate our market share in that segment.

And that could be additional resources to improve frequency and/or reach.

And we do not believe that we are optimal yet in the primary care area.

We continue to outperform ourselves in the specialists area, which is wonderful because they are the opinion leaders, they are the early adopters, but we also want to bring that larger group of primary care physicians along faster.

And that usually comes down in a product-responsive market to sales force coverage.

And so we are looking carefully at that, and working together as the partners do to address those issues.

And as soon as we have resolved that, we will of course update the market on that.

Could I have a quick one?

I know you probably -- I (inaudible) could you share a little bit about the trial for the Type II diabetes -- is that placebo controlled trial or a product controlled trial?

I think I can probably answer that one, but I can't go much further, Jason.

It is a product controlled trial.

Okay, thanks.

As you would expect in this class, if you have market leaders one of the questions you want to answer in Phase II before you go to Phase III is what does your product look like?

And you can get a certain amount of that from animal modeling before you go human, and we did, but you also want to validate that in the big human/ animal experience.

I think we should see, Jason, the data in the not distant future.

We are aware and have reviewed the abstracts for presentation.

So assuming they get accepted on queue I think you should be able to see the data quite well in a peer review setting without too long a wait.

Is that ADA, diabetes association meeting?

That I can't comment on.

Thanks.

David Webber with First Albany Capital.

A lot of my questions have been answered obviously, but could you give us some more detail on the guidance for operating expenses and the size of the increase in 2004 over '03?

What would be most helpful, David, kind of something relates to the 2003 base and how it might grow by the two major categories?

Is that.

Yes, that's right.

I am sure you can kind of back into with the tiered royalty schedule we have what the Organon co promo percentage would be on the high low ranges of product sales.

So that one you know what our rates are, so you can pretty much back into that one pretty easily.

I think that we would look at R&D, and we would probably say that R&D is on a, we are on an investment track post the big bulge of expenses from our SPIRIT I and SPIRIT II trials having worked their way through.

I think we would probably say R&D is probably on a 15 percent growth track.

That is a level of investments we need to support going through 2004.

I think we would see SG&A obviously based fundamentally on the increased support to AVINZA and the growth of the co promo fee obviously growing much faster than that.

And so you are probably looking at R&D expenses that represent about one-third, a little bit more, of the overall expenses and then SG&A the balance.

Okay.

With co promo fee in there.

I think that is an accurate representation.

Is there anything you can say regarding the timing of the Royalty Pharma option this year?

I think that is public information.

No?

Okay.

I guess that means no.

Paul is telling me that it is not.

Okay.

So, we will have to let the double check -- if its not public, then we probably shouldn't comment.

Can you say what percentage of AVINZA sales in '04 you expect to be prescription related this year?

Good question.

I think when we look at 2004 we would say that the overall delta of inventory held in the channels is going to be very small growth.

We have the inventories we need to support the brand growth in 2004.

So what we would see as the drivers of the revenue are overall prescriptions plus new pharmacy stocking and distribution.

Overall prescriptions usually split out about 90 percent retail, 10 percent non-retail.

So of that prescription driven growth that is not new pharmacy stocking, you can expect pretty much the best proxy is you take your NPA retail and gross it up 10 percent and that captures what is not monitored by NPA.

If you then look at the total universe of revenue, I think we would probably say that certainly the total comes to 80 to 90 percent is going to be for this year overall demand driven.

And will pretty much be where we will be throughout the course of this year as it relates to the demand underpinnings of the product.

Absolutely, and where do you think you'll be in terms of total number of pharmacy stocking by the end of the year?

I think because pharmacy stocking is not quite as important as it was when we began with Organon, we have not set kind of individual goals out there in the public arena.

But I think it is fairly comfortable to say we would expect a brand in its second year or first full year of co promotion probably add another 10,000 pharmacies in absolute number that is, any pharmacy stocking of AVINZA we should add another 10,000 this year.

Then there will be some additional what we call additional SKU stocking by pharmacies that currently only stock one or two strengths.

So when you think of stocking or the demand from retail pharmacy, they are very, very tight on stocking.

So when they stock it will be one bottle of 30s, one bottle of 60s.

So you could certainly see that the 20,000 pharmacies that are out there that probably only have one bottle of two strengths will broaden out the SKU line to carry each strength of AVINZA.

So that will be the demand model for 2004; 10,000 new pharmacies and some basic improvement of SKU positions in the existing base.

Okay.

And then not to beat a dead horse, but just to go back briefly to the question about average revenues per script, you did say that September to November that it was 120 to 125.

What was it in December or alternatively what was it in Q4?

I can't off the top of my head tell you what the average was for Q4.

I believe the highest we got in December was in the 127 to 129 range.

So the improvement began in December prior to price increases because the beginning of the modulation of the coupon program began in December.

The bulk of the effects of the coupon program changes are January and February.

And so the biggest jumps were not just our price increase, but also the coupon program.

And if you had to look at the difference where we were 120 to 125 versus 150 to 155, that delta I would say is about 50 percent coupon and patient mix driven and 50 percent price increase.

So you can see that several forces are underway, some of which will continue.

The big onetime reset of the coupon program really is largely complete.

And so we will see a small improvement in WAC going forward as mix changes and coupons continue to decline slowly.

But the big reset really has taken place on the coupons.

So we will have some drivers continuing of a more modest nature and then some additional improvement as we look at additional pricing actions.

A final question since no one has asked, can you update us on the status of Pfizer droloxifene (ph)?

This is something I wish I had a very clear definitive piece of information.

What I can say at this point in time is I believe that from what is deducible from public comments and from public updates given by Pfizer, I think it continues to be our assessment that an NDA filing is very realistic.

And in the not too distant future.

I think we will just have to wait for Pfizer's confirmations; they appear to have shifted to an after the fact confirmation model rather than giving any forecasts for when they will do something.

But we certainly believe all the data and information is available and in-house.

And it is simply a question of translational activities by them.

And their position is no forecasts.

They will confirm when the filing is accepted.

So I think we will have to wait for that moment.

I wish I could help more.

Okay.

Thank you very much.

We are much more confident that we are getting close than what we've seen in the past, but we will have to wait and see.

Thank you.

Mike King.

(inaudible)

Robin Levin.

Congratulations on your quarterly earnings.

Its great news.

I just have one quick question that hasn't really fallen out of everything you discussed.

You gave the end-of-year weekly script rate as a 3.8 and I know we are looking at 10.

Do you have something for the most recent days, weeks, months, of this year?

I believe that the most recent weekly is right at 3.7 percent.

So what we've had in January and early February a little bobbing around in the marketplace; the market of January was substantially down.

With the adjustments that we've made to the coupon program our share bounced around a little bit.

I think the last two or three weeks it has been moving up again.

So I think to comment on where we would expect it to be going, we certainly expect that with the holiday weeks and the most recent one at 3.7 was a holiday week, we would certainly expect robust growth going forward in market share as we have the choppiness of the January market behind the coupon reductions and reset behind us.

I think we would fully expect that with Texas Medicaid coming on and a little bit more business back to usual, we will see a return to the share growth in March that was more typical of our second half of last year.

So I don't know whether that was helpful on the share front.

One other quick question, you have looked forward to Paladone (ph) entering into the marketplace this year and I know we haven't specifically addressed it for this meeting but there has also been some patent litigation pending with regards to generics.

Do you have any thoughts as to that going forward?

I think I can make a couple of comments, and hopefully they will be helpful.

I think we continue to expect that at some point in time this year Paladone will come out and be a new proprietary product in this category.

Having said that, I think we also are somewhat surprised that we haven't heard of the approval.

I think there was a rather strong effort made by Purdue late last year to try and get the approval out last year.

And so we haven't heard as to whether in fact it has been approved.

It appears that it has not, so will have to wait and see.

That may be an unfolding story.

There certainly was a fair amount of concern and controversy around the potential abuse of Paladone such that we just do not know without some comments from Purdue or the agency of where they are in that process.

I think our assessment of it is that when and if it occurs this year, it probably will help the market move to once-a-day products in two ways.

First, Purdue will shift all of its promotional support from Oxy to Paladone and that will -- let's just say make Oxy much more vulnerable.

And the story they will be telling doctors will have to be that once-a-day is better.

And so that very much instead of fighting Purdue they are going to be singing the song and the message that we've been singing, so with free to Oxy business that they are not able to defend anymore, we think that will actually be positive overall for AVENZA and a once-a-day products.

As it relates to the generics, I think there is an interesting and what we believe to be positive near-term environment unfolding as generics come on to the market.

First probably a generic to Duragesic, the patch business and later should the appeal that Purdue has underway be lost, the entry of the multiple generic Oxy's we actually believe that the natural competitor response by those companies would be to cutback promotion of their products.

That is a typical response as generics make rapid inroad promoting largely benefits them.

So we think that could leave AVINZA with a unique opportunity as about the only promoted proprietary product with a clear once-a-day profile to be the subject of dialogue in the physicians office.

That is one of the reasons that we are as partners carefully assessing whether an increase in resources might be appropriate we see moving into a very favorable market set of conditions as the generics come on.

As it specifically relates to the Oxy generic we don't really have an independent better judgment than anyone else.

I think you can make your own assessments of the timing and probabilities.

Clearly it appears that the generic companies do not want to enter prior to the appeal of that case being decided.

And probably for a sound risk and financial reasons.

So I think we will have to see what the timing of that appeal is and how it plays out.

I think that the picture is a little bit clearer on the Duragesic generics, and we do expect them this year.

As it relates to what is a favorable promotional near-term marketplace, as it relates to impact on overall price level of the generics over time, that is over the next two or three years, we continue to view that the average cost of an AVINZA prescription is so much dramatically lower than Oxycontin or Duragesic that we continue to believe there is quite adequate ceiling space for the generics to come in, move down their price level before any bumping of AVINZA.

There is a difference of between 70 and 80 percent between AVINZA average lack for prescription or average cost to managed care per prescription and Oxy or Duragesic.

So we think that even with generics coming in there they aren't going to wind up being cheaper for managed care or for the health care providers Van AVINZA.

So we feel pretty comfortable that any price effect is several years away.

That's great.

Perfect.

Thank you.

Jim Reddoch.

This is David (indiscernible)again.

Just to clarify does the operating guidance for the year include the exercise of additional Royalty Pharma option?

I just want to be sure that that is the case.

It includes, David, an other revenue assumption that has been risk managed to the best that we can with these binary events.

And that does include the Royalty Pharma option.

Now the way we try to approach it was to in the event that that doesn't happen there is a fair amount of milestone revenue that we should get this year, and we looked within that range, if it doesn't happen do we still have adequate other revenue to be within that range.

So I think the short answer is yes, it is in that basket, but it has been a basket that has been risk-adjusted so that we can try to bring that other revenue in within the range that is in the guidance.

Okay.

That is helpful.

Thanks.

Thank you very much.

We appreciate your attendance this morning, and as always, we will be available if there are further follow-up questions.

Thank you.