Ligand Pharmaceuticals Inc (LGND) 2004 Q1 法說會逐字稿

I would like to welcome you to your conference call with David Robinson and remind everyone this call is being recorded for playback purposes. We are in lecture mode only. We will be doing a Q&A at the end of the call. At this time I will turn the call over to Mr. Robinson.

Thank you and good morning. This is Paul Maier, the Chief Financial Officer. Welcome to our first-quarter 2004 financial results call. With me today I would like to introduce Deborah Demarast (ph) who is our Director of Investor Relations and Corporate Communications. Also with me is David Robinson, our Chairman, President and CEO. Before we go any further, I would just like to point out our Safe Harbor statement.

During the course of this presentation we may make some forward-looking projections and statements about future events. I would direct you to our Securities and Exchange Commission filing for a more complete record of our disclosures from what has been filed in the past.

Having said that, I will now turn over the call to David Robinson to make the opening remarks.

As is traditional on our calls, I will try to make some perspective comments and then allow plenty of time for Q&A. We want to thank you very much for joining us this morning. We are pleased to report out our first-quarter financial earnings results which we believe are a solid start to 2004, not quite the blistering pace of the fourth quarter 2004 but nonetheless representing a 58 percent in overall revenue growth and an 80 percent growth in net product sales over the first quarter of the prior year. These results are consistent with our annual financial guidance and our overall business plan goals for 2004 such that we are comfortable reaffirming the annual guidance range established at the beginning of this year.

We would characterize the product sales performance of 80 percent increase as particularly pleasing. It was driven by an even stronger growth in prescriptions and units on both AVINZA and ONTAK, which were partially offset by a near-term surge in chargebacks and rebates. I will have some more comments on that as I go through the MB&A (ph) in the products sales section.

In addition, we are fully engaged with our partner Organon in the roll out of the recently announced expansion of both our primary care and our long-term care hospice sales calls. Targeting a completion or full execution by the end of this second quarter now of 2004. We expect that to further accelerate what we would characterize as moderate first-quarter market share gains of AVINZA during the balance of this year. We also continue to monitor the level of competitor activity as generic entries impact the investment level of the major market leaders. And I will have several more comments on that during the AVINZA discussion.

We were likewise pleased with the gross margin performance and the financial structure of our first quarter. Gross margins were 74 percent of product sales during the first quarter compared to 65 percent in the same period of 2003. That increase was due to relative increases in AVINZA sales, the impact of price increases across our key products. Because the amounts of these quarterly non-cash expenses as part of cost of sales are fixed for AVINZA and ONTAK, the product gross margins should continue to improve during 2004 as sales volumes increase. That we expect to be quite consistent with our annual financial guidance for gross margins.

Our expenses behaved quite modestly in the first quarter with research and development expenses of 16.9 million only up slightly on the first quarter of 2003. We do expect to see some acceleration as we move through the year in those costs; however, they are behaving quite modestly within the range of our financial guidance.

SG&A expenses were 14.5 million in the first-quarter compared to 12.4 million in the first-quarter of 2003. Those expenses are reflecting the investments that Ligand and Organon are making. Ligand in additional sales representatives for AVINZA and the partners in an increased level of activity compared to prior year.

As we complete the hiring of the additional 36 pain specialists that Ligand will focus on the high prescribing primary care physicians targeted for completion by June of 2004, we do expect those SG&A expenses to also accelerate as we move through this year.

We are pleased that in a quarter in which we had very little variable other revenue in the form of milestones or royalty options that with just the normal run rate of other revenues we were still able to reduce loss from operations to 10.3 million in the first quarter of 2004 compared to 12.6 million in the same period. That is an improvement of 18 percent and we do expect that to shift quite substantially in line with our annual guidance as we move through this year.

Finally it is particularly pleasing to note that during the quarter our operating cash burned in spite of the loss of 18 cents per share, our actual operating cash burn in the first quarter was 3.6 million indicating the Company is moving from the period of burning cash towards in future quarters, cash flow positivity along with the earnings positivity. That left us with short-term investments, cash, cash equivalents, and restricted cash of just under 100 million, 98.8 million for the quarter. Quite adequate for our ongoing working capital needs.

Now I would like to make a few more specific comments on AVINZA performance. AVINZA grew solidly in the first quarter which really reflected a mix during the quarter of slowness in January and February and a very strong acceleration in March, a month in which we hit a new all-time monthly prescription record. And that following a very robust fourth quarter of 2003. The little bit of slowness in January as we have previously commented was principally related to an intense period of retraining of all of our sales forces. We take that very seriously both for our sales force and for the Organon sales forces as they are promoting and liaising with doctors on C-2 drugs.

That left us with a very light number of calls in January and February on the primary care physician audiences, quite substantially down from the strong activity of the fourth quarter and that was reflected in slowness in prescriptions in January and February. That call pattern was substantially improved in March, has continued to substantially improve in April and we believe is now moving quickly toward the partner's new pace of calls on primary care which is to make in excess of 600,000 calls on an annualized basis or about 50,000 calls a month. We are moving quickly toward that target.

Total prescriptions for the quarter were up 20 percent. In addition, our weekly prescription market share of 4 percent for the last week of March was in line with the target for the end of the year for weekly prescriptions of 6 to 7 percent. Monthlies have started to show an interesting acceleration that sometimes it is not able to be detected in the weeklies. Monthly prescription market share increased from 3.1 percent in December of '03 to 3.5 percent in March of 2004. Not quite the blistering pace of the fourth quarter but nonetheless solid progressive share gains during the quarter.

The quarterly prescription marketshare showed an even stronger growth from an average market share in the fourth quarter last year of 2.7 percent to 3.2 percent in the first quarter. As we are moving to implement the three pieces of our primary care sales call expansion and our long-term care and hospice expansion, I am pleased to report that we are in April, with full implementation now of our long-term care and hospice sales call efforts. As the end of the month, we were calling on all of the key target long-term care and hospice physicians and institutions on our call list. All of those representatives are trained and out there. We've also seen a progressive increase in the sales calls by Organon as they are shifting targets and sales resources to beef up the primary care calls. That is progressing nicely through April.

Finally our recruiting activities for the 36 new representatives are going quite well and we are pleased to say we expect to complete that by June of this quarter. Some of those representatives will be trained and out and productive during this quarter, however, we expect the principal impact to begin in the third quarter. That is a timetable for implementation of the sales call expansions that we are pleased with. That is what we consider to be as fast as we could see that ramp up take place. We expect those to strongly underpin the business moving forward and allow us to move the needle more rapidly in the coming months.

We are also pleased that the revenue per prescription has been consistently around $150 per prescription for AVINZA at Whack price and we expect that to grow as previously guided about 10 to 15 percent during the second half of this year. Those are quite consistent with our overall business plan goals for the year and we are very pleased to see the product tracking that way.

As it relates to progress on the distribution and managed care fronts, we continue to see AVINZA taken up in retail pharmacy. We move to approximately 24 to 25,000 pharmacies by the end of the quarter, up from 20 to 21,000 at the end of the year and quite consistent or slightly ahead of the Company's goals for the total year to have AVINZA available for patients in more than 30,000 pharmacies.

We are also pleased that the quality of sales in the quarter was good. We estimate greater than 95 percent of AVINZA's first-quarter sales of 22.4 million were in fact covered by prescription demand across all of the segments. We would note that first quarter AVINZA sales were adversely impacted as we had expected and included in our last press release by several wholesalers who had bought a little bit strongly in the fourth quarter of last year prior to the price increase. There were two other events which impacted the reported sales. We had a near-term surge in Medicaid rebates, which were a phenomenon of several Medicaid states where we obtained preferred formulary status and there was a much faster uptake. Some of it in the fourth quarter and some of it in the first quarter and that clearly had to result in a higher rate of rebates in the short-term.

We also had the -- we had returns from the last of a few development stage batches that we had distributed to the market. They were approved commercially of course. They had shorter than normal expiring dates so we had some of those returns come back. That was the smaller portion of the total charge. Combined it was about $4 million between those two events. When we look at AVINZA overall for the quarter, we are quite pleased with the overall results and we believe that AVINZA is nicely on track for another strong growth year as we move through the second half of this year.

A few comments on the inline oncology products. We have continued to see demand for ONTAK as measured by unit shipments to end-users demonstrating strong growth, increasing 20 percent in the first quarter this year over the first quarter of last year and continuing to improve on a sequential basis up 7 percent over the fourth quarter of last year. At the unit level, that is very pleasing. What we are seeing with ONTAK is the new reimbursement rules employees for this year have improved AVINZA's prospects in hospitals and caused a little more complexity in the physician offices with the new CMS reimbursement rates. We're having to work closely with certain physician offices and that has caused a little bit more slowness in that sector but strong growth in the hospital segment.

As we move through this second-quarter, we're making some adjustments to how we are working with those physicians and we believe that ONTAK will continue to show strong growth going forward in the second half of this year with these short-term mix exchanges. We are seeing also for ONTAK that where physicians are treating these patients has shifted in 2004 compared to 2003. So '03 was much stronger in the physician office area, now some of the physicians are referring the patients to hospital centers where they are being treated. That is a reflection of the reimbursement rates.

That has also caused a little bit of shift in the rebate structure as we tend to get more chargebacks and rebates when they are treated in the institutional setting. That resulted in the quarter, in some increased charges and rebate -- chargebacks and rebates for AVINZA, to a much lesser extent the phenomenon with Targretin as well. We think that the two products are overall demonstrating solid performance in the first quarter and we believe ONTAK will strengthen further as we move through the year. We believe that Targretin within its niche market of CTCL in the USA is going to continue to perform at its historical levels and our growth will be coming until we report out the lung cancer data, our growth will principally be coming from expanded markets in Europe and the growth of a European markets which are much earlier in their curve than the US.

We were very pleased with European distributor purchases of Targretin and with European Union sales which were up 52 percent over the prior year. With launches in Italy targeted for this quarter, we believe that Targretin is very much tracking nicely to our goals for this year.

We would add, I think, just two or three additional comments to the perspectives up front. First, with regard to updates on SPIRIT one and SPIRIT two; Targretin capsules in lung cancer with the final statistical plan agreed with the FDA, we have moved quite effectively with strong cooperation from the more than 250 sites that participated in these two trials to bring all of the CRFs in and to have those CRFs scrubbed and entered such that when we reach the trigger point for the efficacy analysis in the first quarter of next year, we are fully prepared to hit the buttons on the computer and have the results efficiently. We are very pleased with all of the site cooperation. We are on or ahead of the processing of hundreds of thousands of CRFs and pages of CRFs that trials of this magnitude imply. There appears to be a genuine strong desire by the participating investigators to ensure that the study reports out results on schedule. So we are very pleased with that and tracking to that goal.

We also would comment that the data for Lilly's LY519818 for which they have made a decision to proceed to Phase III, the Phase II data is expected now to be reported out in a presentation at the upcoming American Diabetes Association meeting in June of this year, allowing everyone to see the data that formed an important part of the foundation for the Lilly Phase III decision. We also expect Lilly to move expeditiously through their dialogue with the FDA which would be an end to Phase II, Phase III design and the agreement call. Once they have completed that we will be in a position to know more specifically the timetable for initiation of the Phase III program. Nonetheless we believe that the data that will be presented out will give a good sense to the market as to the profile of the drug at its prospects to compete in a very exciting oral diabetes market.

I think with those comments, I will cease and open the call for Q&A.

(OPERATOR INSTRUCTIONS) Jim Riddock (ph), Friedman Billings.

Couple questions on AVINZA . First, do you expect further impact from Medicaid rebates being a little higher than your expectations and also via it sounds like stale inventory issue? Secondly, would you say that your share of voice in the primary care market has reached the number one share of voice level yet?

I will try to address your two-part questions and maybe I missed a third one in there, so shout if I do. The Medicaid rebate issue is an interesting one. We brought on board two or three new Medicaid contracts that were PDLs that when you look at the history of PDLs that we have with AVINZA, there is a certain curve of adoption that comes from PDLs and then there is a rollout from the Medicaid customer to the private patient. So it is a physician adoption curve. What usually happens is first they move their Medicaid patients, then they start bringing private patients on. That is why you do the Medicaid business. What happened with these and Tennessee is a classic example, there was quite a strong enforcement, unusual in Medicaid states, of the must convert the patients and very little or no prior authorization for any nonformulary product. Those are unusual disciplined activities of state Medicaid authorities and that caused the surge. That surge peaked in the first quarter of this year and in fact is a little bit down.

So the short answer to your question, we have looked at each of those states and we do not expect a recurrence of that event. It was an event that was much faster adoption than anyone would have expected from previous state histories and certainly only happened in two or three states. So we think that has peaked. We have made the adjustments that are appropriate and we should now benefit from in fact a surge in the private market business which would in fact shift the mix away from Medicaid and in fact improve our business mix going forward. So as we view it, we have appropriately taken care of that issue and would not expect a repeat of that magnitude. You always get a little bit of fluctuations, but nothing like that. The second one --

I'm sorry, David, Medicaid is not -- this charge was not a one time, it is actually what would you called it a percentage?

What we do is we make provisions for Medicaid rebates in our ongoing accruals. What happens when you get a surge is you are above the expected level so there is a one-time component because you basically make adjustments for what you think you need in the quarter to bring it to proper balance. So there is very definitely a one-time component to this that we think we have taken care of and that is why we characterized as a surge. Otherwise we are comfortable that the normal historical rate of provisions that we have been using and will use in the future are appropriate. Does that answer your question?

It did. You were doing a catch-up essentially?

It is a catch-up but you have some component that you make an adjustment for what you have in the pipeline. So that is where some of the one part comes from.

Great.

Second, with regard to the inventory situation, typically when you go to market with a product Udall want to write off all of your investment in development lots so you have development stage lots that were produced under GMP commercial conditions, they are approvable and releasable for commercial distribution but they often have shorter expiree (ph) dating. So since they are the first lots you go to market with, you sometimes have where you’re first distributing the product, some part of that that ultimately because of the shorter dating comes back. We are in very good condition. We have two years of expiree dating on our normal commercial batches so we are in very good condition. This was simply cleaning up the last of the development stage lots that made their way out there first and had a little bit shorter dating.

We are quite comfortable we don't have dating or staleness issues with our normal commercial inventories. This just happened to be the final cleanup. It is a relatively small part of the 4 million charge. Most of that was in fact the rebates and charges on Medicaid. Does that cover your question, Jim?

I had a second question about share of voice and actually I did have a third question, I was just trying to keep it to two. My third question would be, we actually calculated that the wholesaler stocking and advanced price increase in the fourth quarter was in the range of $8 million. Can you say if that is roughly what came out of the channel this quarter?

First, to your question on share of voice and then on the estimate. Share of voice, I believe that we will achieve a fully competitive with first share of voice confidently in the second half of this year. We are certainly in the second quarter of this year at number two share of voice with the level of investments we are making. In the first quarter activity we were probably in second position, but I don't have all of the data yet. I think with the level of calls we have grown to in the second quarter I think we will be confidently in the number two and maybe competing for the number one share of voice.

Certainly when we hit our peak, without any further pullbacks by the two leading competitors which we have not been able to detect the major downsizings yet, we hear lots of rumors but we have not seen yet the representative downsizings that are rumored out there. So their call level still remains high. I think in second quarter we are going to be right at number two or competing for number one. On the sales call front and total investments, we should be right there too. I think by the second half of this year, I will be surprised if we aren't right at the top, number one share of voice with the level of calls. We are targeting about a million calls overall on AVINZA. That run rate throughout the second half of this year and we will have the infrastructure in place. I will be surprised if that doesn't make us number one in sales calls.

The inventory question I would say that bottom line that is probably a little high for what was in the wholesaler but there is no real way to know for sure what that number is. I think plus or minus 20 or 25 percent, that is probably around that ballpark, Jim. I think that is as helpful as I can be.

Plus or minus 25 percent from the 8 million (multiple speakers) ?

Yes, I think that number you gave is probably high. But I can't get any more accurate because there is too many variables and not enough firm data on that issue. I think our judgment would say that is probably a little high but the degree of confidence is plus or minus 25 percent. That is as good as you can get. There are too many things going on out there in the channels. I hope that was helpful.

That's very helpful. Thanks.

Sam Igree with (indiscernible) .

With respect first on the accounting, these $4 million of charges plus or minus, I guess it was divided maybe 2.5 and 1.5, where do they show in the income statement? Secondly, I believe if I recall in your last call, you said that at least one of the first two quarters would be negative -- I think that is what you said. We've had a negative quarter. Do we expect a second negative quarter or do you turn positive now from here on out? Last, with respect to -- when you said 95 percent of AVINZA sales looked like they were covered with prescriptions and in demand, make it 21 million out of 22, so the 21 million or so is your estimate of current or last quarter's demand by the trade, independent of these inventory swings that might have been influenced by price changes? Do I understand that correctly?

I will tackle the last one and Paul maybe I will let you tackle the other two. I think your understanding is accurate, Sam, as it relates to our assessment of the demand for the quarter. We think in any quarter, 95 percent of demand coverage by prescriptions probably is as good as we are going to get. In any given in quarter, you can't be 100 percent sure what your demand is so you do your cross calculations and I think that is about right. I think we are at least 95 percent. It could be a little more but at least 95 percent of that is straight demand. That is a very positive solid base off of which we will go. The 4 million that you referred to, since they were charged to revenue and product sales means that the overall sales for AVINZA for the quarter would have been higher without that surge in chargebacks and rebates.

I think if you look at that number, the difference between what was covered by prescription demand and that higher number is what is going on with expanding distribution, new pharmacy stocking to take care of patient prescriptions; that is what went on in the first-quarter above that 22.4 million. So hopefully that was clear.

Along that line, have you got some trade inventories out there that you still expect to be destocked, so as we move forward would you expect some quarters where your underlying demand is actually greater than your reported sales?

I think our sense and our relationship with the wholesalers who really are working with us wonderfully on AVINZA, our sense is where we are with inventories in the channel right now is pretty much where we want to be. The wholesalers are working with us quite nicely, such that what we expect is the current level of inventories that we have will be largely sustained. You can always have some small fluctuations but the level of inventories we expect to be sustained. They will go down as volumes rise as months of inventory in the channel but the absolute levels we believe are pretty much what is needed in the system right now. So far our wholesaler partners are working with us on that.

We are not expecting substantial destocking, and certainly our partners have been working with us quite nicely on that. You can always have a little bit of fluctuation, Sam, as you know but we are not expecting that the current level has to be substantially destocked. As the demand rises and you can kind of look at the share guidance, 4 percent weekly; we go to 6 to 7 percent by year-end weekly. That is almost a doubling of the share which means in months on hand you are going to cut the months on hand in half. That is why we are fairly confident that as we move through this year the current level out there is what we need and what we need to maintain.

Thanks for that. Paul, it’s your turn.

I think David touched on the first question but I will reiterate it. The question was how did those Medicare or Medicaid chargebacks and rebates and inventory reserve changes affect the P&L? Actually you don't see it on the P&L because it was an adjustment from our gross sales to net so we had, as David outlined, a lower net sales that was reported. Had we not had that $4 million in there, the sales would have been $4 million higher in other words.

That goes for ONTAK and Targretin as well, which helps you understand why there was a good growth in units that didn't quite translate to the dollars. Some of that was -- part of that was offset by the rebates that come off of gross to net.

Let's suggest something else. Your cost of sales was 8.8 million. I think the amortization charge was 1.7, was it 1.7?

It was 2.7 for both AVINZA and ONTAK combined?

If you would back that out, your cost of sales would become 6.1 on a cash basis? And the 6.1 then relates to product sales of 34 million, but you are suggesting the product sales in a sense weren't really 34, they were 38 an extra 4 million? So is that a way to calculate an adjusted cost of sales ratio, 6.1 divided by 38?

I think in the big scheme of things the timing on these rebates and chargebacks and other adjustments fluctuate during the year and it is a part of our ongoing business and if you look at it on an annual basis, I think you get a more normalized view of what our gross margin really is and you can adjust out the noncash portion if you want. But I think if we are going to be in this business, we will have periodic rebates, chargebacks and returns and hopefully on an annual basis or a longer-term view there will be a sort of an underlying level.

Okay for that piece, Paul. There is one more piece.

The other question you asked is whether we are going to have income or loss in the second-quarter. I think I may not have paraphrased it the way you asked it. I think that the best way I can respond to that is that we really don't give quarterly guidance and that as we provided our annual guidance for the year we said to expect that we would have at least one quarter of losses and that for the first half of the year we would have cumulative losses. And then the second half, we would have profits sufficient to generate profits for the full year. We just can't get any more definitive than that in providing guidance going forward. We really think that we want to stay focused on the year and not so much on a quarterly basis. There are too many variables that can affect what happens in any individual quarter.

I think David outlined earlier the prognosis for the improved sales that we see in the future. And in our press release we did comment on expecting in the second half of the year, higher other revenue items which should bring us a nice growth pattern for total revenues.

Okay, Paul, thank you.

Jason Zang (ph) .

Thanks for taking my question. First of all, David, what is the scripts number for this quarter?

Your question is what is the total script number for AVINZA for the first-quarter?

Yes, that is direct.

I can't give you the total 100 percent script number because I don't have any monitoring. I can give you a rough number for the monthly MPA or quarterly MPA prescriptions. Keep in mind that there is another 10 to 15 percent and it varies from quarter to quarter that is on top of that that we don't have any good monitoring for. So I think AVINZA MPA prescriptions would be for the first quarters somewhere in a range of 100 to 135,000 prescriptions.

100 to 130?

130 to 135,000 and that is the NPA monitored portion. So how much exactly on top of that is what we can't fully estimate but it can be anywhere from 10 to 20 percent. You will have to pick your own number and decide what you're comfortable with there.

So based on that number you said, the number grows quarter over quarter sequentially is actually about 20 (ph) percent.

Yes.

The second question I have is the new pharmacies that you have the products for it now and if you back out the 95 percent prescription based revenue and the remaining part of about 1.1 million and that translates into a $280 revenue per store, that sounds really low as compared to what we have heard of in terms of historical number within the last year. Is that unusual for this quarter or what should we do if you continue to have some new stores going forward -- what kind of revenue do we project for new store?

I am not sure I followed your calculations. I think I understood how you tried to back into a number for the new pharmacy's stocking. You took the difference between need 22.4 million or five percent of 22.4 million and divided by the number of pharmacies that we increased stocking on, is that correct, Jason?

That is correct.

What is missing from that is the issue of the deduct from gross to net. Do you see? Because we took the 4 million in charges, you can't take just 5 percent and say that is what went into pharmacies, because the number is actually bigger, so you have to do something and this is not accurate. You would have to do something to move to an unadjusted net sales and then say what percent of that was covered by prescription demand and then divide your number of pharmacies into that. That would give you a much larger number, probably two or three times the number you just calculated. I think that what is different in the big picture concept. Was that helpful at all?

Yes, that was helpful. Also I would like to ask the year-end guidance, you reaffirmed your guidance for the year revenue and EPS and particularly focusing on AVINZA, you take your low end guidance of 210 million product sales and take two-thirds of that as AVINZA, would come away with about 140 million and that really again (indiscernible) into about a 30 percent in quarter-over-quarter sequential growth. How confident based on what you have seen today that you really are going to keep that number? Is that growth mainly going to be from prescription growth or you are going to implement another price increase and if in fact do so, when do you think that will happen?

I think that the answer is yes to both. Yes, we believe most of the growth this year will come from prescription growth. We are achieving pretty substantially our distribution goals. We ended last year with 20, 21,000 pharmacies; we're going to go to 30,000. The stocking of those pharmacies is in that estimate, but the largest part of our growth this year for AVINZA will be in prescriptions. That's why we are so heavily focused on driving the increase in sales calls, both with our sales force at primary care, Organon's increased calls at primary care and the fairly substantial effort at long-term care and hospice. That will bring an overall increase of more than 50 percent in total AVINZA calls.

That simply must translate, given the product sensitivity to promotion, to a very substantial increase in prescriptions and we are confident of that. That is why partners are making a level of investment and nothing we see in the business right now changes that view. We will obviously continue to monitor that. So that is yes, to the first one.

We have stated clearly that our pricing strategy for AVINZA is to close the gap with the principal leading product Oral sustained release on the market and to a eliminate at least the difference nominally between wholesale prices of the two products. That indicated that we would look carefully add a second price increase in the second half of this year. Without commenting on any more specifics, we continue to assess and believe that the conditions are such that we will be able to make further progress towards that in the second half of this year. I would not comment on when or how much.

Okay.

But that is included in our comments about the increase in prescription revenue per prescription on AVINZA from our current rate of about 150 we have included that in our assessment of 10 to 15 percent growth in that. That includes price, that includes the mix and strength change, it includes the patient mix and the normal upsizing in prescription size. All of those go into that 10 to 15 percent for the second half of this year.

Okay, thanks. I will come back to the queue.

Russell Gilbertson.

Most of my questions on AVINZA have been answered but I did have a question regarding the potential exercise of an option by Royalty Pharma and I believe that is around $13 million. Could you give us an idea what the likelihood of that event is and it when it would occur?

Yes, I think we would all like to have that definitive piece of information and we are all in the same mode of waiting for Pfizer to announce the timeline or the event of the Vasadoxaphine NDA (ph) filing. I believe that our assessment is that based on everything we know, the timeline for an NDA filing has got to be this year and sooner rather than later. We believe that from Pfizer's public comments they are making that clearer and clearer and it is simply a question of when they are going to either announce that they have or announce when they will. They seem to be following the pattern today of announcing things after the fact and only after the FDA has accepted the NDA filing. We don't know how quickly after that acceptance they are making the announcement; whether they roll it into an R&D update, I think they have one now slated for June. We just don't know the technicals of how they do that.

But we continue to be confident that this is the year that Vasadoxaphine NDA (ph) should be filed and we will just have to see how soon. We believe that the filing of the NDA would make it highly unlikely that Royalty Pharma would pass on that option. With revenue clearly then on a time clock near-term, the productivity of their investments we believe would make the exercise of that option and the final one a high probability event. Particularly in the context that the second product that they would have Royalty option on, Vasadoxaphine (ph) continues to be in Pfizer's public statements, on track for filing next year.

With two NDA filings, one this year and one next year you will have to make your own assessment about probability. But I would think financially they would be highly unlikely to pass on that option. They certainly as we are aware had the cash flow and cash capabilities now in place to exercise that and much more. We don't believe that there is any component of cash issues that we are aware of. Hopefully that was helpful Russ?

It was. So we could expect if they were to exercise this option that it would follow an announcement that the FDA has accepted the NDA filing?

I believe the timeline for the option is third quarter. Though I believe they have some carryforward rights on that, should Pfizer not have filed or announced Phase III data, so they have some carryforward rights that would not make the option go away but rather be carried forward for exercise as soon as the trigger event happened. So I think there is some movement capability on that option.

So if these events all occurred, most likely the option would take place in the third quarter but possibly shortly thereafter?

Yes, I think when they exercise it, I believe is gated by an event and they have a certain period of time after that event to exercise it. If that event doesn't happen, then they get to retain that option going forward and that gap between the trigger and exercise continues. I think that is the way it works.

Okay, thank you very much.

Walter Vicks (ph) .

Just one quick question here. Can you give us a bit of a preview of the presence of Ligand compounds at the upcoming ASCO meeting?

Paul, do you have handy where you are the short list of what is going to be presented at ASCO?

I do not, David. The one I know of is Targretin with respect to the gemcytaphine (ph) Phase II trial but I don't have the list with me.

Walter, maybe we can help by trying to follow up with what information might be publicly available on that. I do know that we have information to be presented both on ONTAK and on Targretin. I believe it is either or three or four abstracts or presentations. That is kind of the scale of activity and I apologize we don't have that at the tip of the tongue here. We will try to get you what is publicly available as a follow-up here.

Thank you.

David Webber.

First, could you tell us if you expect AVINZA to be added to preferred drug lists any more state Medicaids?

There are two things going on, David, that I will preface my big picture comment with. I would say that we do not expect of the order of magnitude of Florida, Tennessee, Texas, those big Medicaid states that moved to preferred drug lists. We do not expect additional big PDL formulary additions this year. We expect the rollover of some of them that we put in place last year. We expect some smaller states. There is a small trend to preferred drug lists but then each preferred drug list is quite different. Some of them are not really preferred drug lists, they may have two or three different products so they are only preferred drug because one is not on. When we look at what is going on there, there are several states that are trying to move to some preferred drug lists. We don't expect major states to be added to that list that would produce the kind of surges that we have seen first quarter of this year and late fourth quarter of last year.

So yes, probably a couple of smaller ones that we have participated in but nothing that we expect to dramatically changed our mix the way we saw in this quarter.

Okay, thanks. Looking at total prescriptions for the sustained (indiscernible) class in a first quarter. It looks slower than what we saw during 2003 compared to 2002 so it looks as if growth in this class is decelerating. Can you comment on that and how extensive you expect deceleration to be?

I think we had the same observation as you, David. So far, we believe it is a phenomenon of the first two months. Not necessarily a new phenomena or trend for the year. We are not ready yet to say that the strong growth of the last year or exhilaration of the growth of the last year is becoming a phenomenon of this full year. Certainly that is what the numbers say, but then you look at March and March was a very strong growth in the overall market. I think what you see is fourth quarter in this SRO market is usually a strong market; certainly December of '03 was a blistering 25 percent growth in prescriptions for the overall market. That clearly always produces a down January. We certainly saw that and a sluggish February. Those are short months, short days on hand; here comes March and March surged 21 percent. I'm sorry -- not 21 percent -- that was AVINZA, but March was a resurgence of the market growth as well.

We want to wait and see a little bit more market before we are going to conclude that this year there has been a shift down in the prescription growth rate of the market. I think we want another month or two of data before we would come to that conclusion.

Okay. And final question. Do you have any insight as to the status of the Purdue's new drug application for Palladone? What the chances are that that might or might not reach the market this year?

It is really interesting. I have, as you can imagine no firsthand new information. I can't help a lot there. Why I can do is state several things that we are aware of from the competitive intelligence out of the marketplace. The first is I think it has been announced that Purdue has done a major downsizing of their head office personnel, including medical personnel. Those downsizings clearly were done in the context of the prospects of the company as generics have begun to enter their market and we are aware that they have sent tentative notices to their salesforce saying that there may well be downsizings of the salesforce in the next 60 to 90 days as they monitor the impact of generic entry. Those actions which we see and the marketplace are difficult to reconcile with a -- we are expecting approval of a brand-new drug in the class that will be an important revenue replacement for Oxy as generics come and reduce the revenue. One would not think of those things as consistent, particularly in a private company that does not have public shareholder or quarterly profit challenges.

One would expect the longer-term view of retaining critical infrastructure in the head office and in the field if you are gearing up to launch Palladone. The only thing that we can surmise is there must be some continuing challenge that makes the near-term approval of Palladone complicated and therefore, the other actions to manage costs and reduce infrastructure are necessary. That is as much as we can piece together. We have no solid firsthand information. We are piecing this together from competitive intelligence out in the marketplace. There may be another answer. I think you may have intelligence sources that are now as good or better than ours, but that is as far as we can form judgments on it.

I'm sorry, just one other question if I could. The convertible debt that is on your books, could you comment on your long-term strategy regarding that debt?

Yes, David, it is obviously callable as early as November of 2005, and it is due in November of 2007. Since it is significantly in the money now, in all likelihood we will be in a position in 2005 that we can take steps to take that debt out, and we will be examining our options on a regular basis as we go forward, based on the market conditions and our cash position and all of the other considerations that would go into it. But I think long-term, we have flexibility now. We don't need to do things, but based on the interest and all of the other variables, we will look at that in the future, and based on the strength of its performance we would expect it to be converted out at some point.

Okay, thank you.

Michael King (ph).

Just a quick question on AVINZA. I was just wondering, do you have any data on the breakdown of sort of who is writing your scripts, sort of breakdown between primary care versus specialists? And then within those two groups, sort of what percent of the primary care docs that you guys are detailing are actually writing or count for the scripts that are being written?

If I have both of your questions, Michael, we do have a breakdown. We believe that primary care prescriptions right now can oscillate between 40 and 45 percent of total AVINZA prescriptions. That has been growing. Certainly through the end of last year, that was growing robustly. We believe it needs to grow towards the market breakdown, overall SRO market. Primary care physicians account for somewhere between 50 and 55 percent of total SRO prescriptions. So we believe that we need to continue to penetrate that primary care physician prescription market, and that is why the emphasis between Organon and Ligand on that primary care physician segment.

The other prescriptions are broken down into probably a dozen different specialties or specialists. Pain specialists, rheumatologists, oncologists, there is about a dozen different specialists that make up the current AVINZA prescriptions base. We want to continue to build both in absolute terms, but we want to see primary care contribute a larger share of those prescriptions. We have quite a lot of salesforce power in that primary care segment. It is a tougher segment to get at, so it is a more diffuse segment. It is a much more competitive segment. The level of activity at primary care is really quite stunning. So it takes quite an investment to take share in that segment. We have made a pretty good calculation of what level of calls we need to be market share penetrating that segment, and it is at or above the level of calls we sustained in the fourth quarter of last year. That is why we are building to that or above.

In the fourth quarter we averaged somewhere in the 40,000 to 45,000 calls per month on primary care. We fell below that substantially in January and February. We are close to that in March, and we should exceed that substantially in April. We expect to build to that 50,000 plus calls a month by June. That will give us a market share penetration rate of calls in primary care. So that is pretty much the underpinning of the mix and why we expect it to come more substantially from primary care. We will keep the call rate on specialists that we have been sustaining. We are penetrating market share with the level of calls we have there. Did that help at all, Mike?

Yes, it does help. And just to follow up with that, so within the primary care docs what I'm trying to tease out is, I guess it is sort of like when you convert a primary care doctor; you suddenly write, let's say, 100 scripts a month. Or is it, you know, each primary care doc writes 10, but you're getting 10 reps per month; do you know what I mean?

Yes, I think the answer is you have a little bit of both, but the norm I would say is not a primary care doctor converting all of his practice. What you do is you get him started, and then the frequency and quality of the representative interaction, how often he is there helping to remind that physician of the advantages of AVINZA, is really what determines the number of scripts you get. The more calls, the more prescriptions. Primary care physicians are absolutely swamped with patients, swamped with representatives, and it takes a significant effort to get the noise level. So your adoption curve there is the more you see them, the more they understand the value proposition of AVINZA, the more they write.

So it isn't a new one comes on and he writes 100 prescriptions. That happens occasionally and we have those success stories. The norm is the physician Welford did not until he makes it is front-line therapy. That takes some months of persistent effort by the same representative with the same physician building the AVINZA value proposition and reminding the physician. At a certain point in time, he gets it in his repertoire and then that is what he remembers. That is what we are doing right now. We have some of those primary care physicians who you could almost AVINZA is front-line and we can see by territory AVINZA may have a 15 percent of that physician's practice or even higher.

Other territories the norm is more like two or three or four percent. That is what we expect to be the work of this year and next in building that primary care physician base. That is why it is so important to have the same reps in the same territories calling on the same doctors, getting a high degree of frequency, that is how you help that primary care physician adopt the product.

With Organon, we are still very early in getting AVINZA and the AVINZA territories and covered doctors into that kind of consistent pattern. That is why we believe Ligand's 36 specialty reps calling on primary care, the very top prescribers will make a big difference. It will provide another stable, frequent contact with a specialist tilt that is all our reps do is AVINZA. The Organon reps are calling on AVINZA docs, but they are also calling on their own product docs. So they are not always focused on AVINZA.

When they call on an AVINZA doc, it is AVINZA first up. But we think that by doing that mirroring, we are going to have a better chance to really help the primary care physician understand the value proposition and adopt the product.

The final piece of that would be pain docs? What percentage of the pain doctors are you detailing are responsible for the total prescriptions of AVINZA? The just the best background -- part of what made Purdue successful was that they had a small number of very high prescribing physicians. I was just wondering if your break up is anything similar to that?

I don't have the data on the top of my head. The most recent data, Michael, about the number of or the percentage of specialist physicians who have tried and/or are prescribing in this quarter AVINZA. I apologize, I don't have that handy. What I can tell you is when we looked in the fourth quarter of last year in terms of awareness we had between 65 and 75 percent awareness, unaided awareness of AVINZA by the specialists. That tells you that our efforts as at that time had brought pretty good level of unaided awareness, a product like Oxy would be 85 to 90 percent unaided awareness. So we're not yet where they are in terms of unaided awareness, but we're moving there quickly with the specialists.

The leading adopters, which is a good thing, of AVINZA are the top-notch specialists. We are making good progress there. When we look at our undated awareness for primary care physicians, we are still down in the 40 percent category. We have a tremendous amount of work to do in building AVINZA at primary care physician level and that work has really just begun with Organon. It is going to be several years before we can get to unaided awareness that is more competitive with DurageSic and Oxy with the primary care physician that is more and the 80 percent plus category.

It is harder to get because of the more diffused population, but I expect our next read of awareness to show a substantial jump in primary care now that we are getting the call rate frequency in reach way up. So we will make progress. That always translates to prescription share in this kind of a sensitive market. I think we are focused on the right fundamentals and hopefully we'll have some substantial improvement in those numbers to report out going forward.

So awareness would be -- has prescribed the drug, knows the drug, knows of the drug or --?

Unaided awareness is just a market research measure of whether a physician responds in a survey. That he knows AVINZA, or that he knows AVINZA without being prompted to know AVINZA. So it is a question of your brand-name recognition. What that usually means, physicians don't remember products that they don't prescribe. So there is a good correlation between unaided awareness and prescription adoption. When you marry that to other market research measurements like what is your intent to prescribe? And we ask that in the same surveys, they usually respond with I expect AVINZA to be 10 percent of my prescriptions going forward, 15 percent of my prescriptions going forward or more than 20 percent. There is usually a very strong correlation between those two things.

It is an important measure that most brand marketeers track closely, those two things.

But you guys don't have any hard numbers in terms of percentage of doctors, detailed that are running what percent of (inaudible) ?

We do, we do. I just apologize I don't have that in front of me and don't want to give you bad information.

I appreciate it, thanks a lot.

Jim Riddock (ph) .

A follow-up on the stocking issue. Can you say was there net destocking for the quarter when you add wholesale and retail together? It is a little confusing on how your press release reads?

I would say, no. Not for AVINZA. I would say that inventories were pretty constant for the quarter across all channels. You can always see one going up, one going down, but I would say for AVINZA we would not see any substantial destocking in the quarter.

When you referred to it in the press release that sales were adversely impacted by wholesalers purchase in the fourth quarter, that is referring to sales that you could have gotten in the first quarter had they not been essentially taken in the fourth quarter.

Yes.

So an opportunity lost.

Yet, I think we have tried to give transparency to the market starting with our end of year press release that when we look at fourth-quarter sales we wanted to be sure that everyone was aware that there was probably some buying behavior of wholesalers, that they wanted to buy a little bit more than they normally would in the fourth quarter anticipating the price increase. We managed that, we kept it to moderate levels because we didn't want that huge impact on first quarter but there was some part of that and it is very difficult to quantitate or control. What that usually means is there is some impact rolled forward in your first quarter. So we wanted everyone aware of that. That is what we are reasserting here is that same phenomenon. I think the overall level in the channels did not destock substantially.

Sales rise so wholesalers are always comfortable holding the same amount of inventory when sales rise and when a product is growing strongly and that appears to be what they did in the first quarter.

Okay, thanks.

Jason Zang.

My question on AVINZA has been answered but I would like to still get back to the stocking or inventory. With anticipated huge prescription growth, do you anticipate some of the wholesalers to actually stocking more aggressively with anticipation of huge demand if indeed that the prescription growth you have anticipated will happen? So when and how do you manage that process or actually when do you know that some of the wholesalers will be stocking up in anticipation of the growth?

Yes. I think our overall judgment for the year, Jason, and you always have a little bit of movement inside the wholesalers. You have three or four major wholesalers then you have the stocking retail chains that operate like wholesalers and then you have the Tier 2 and Tier 3 wholesalers. Characterizing the behavior of all of them is not a homogenous market. What we would say on average is the amount of inventory in absolute terms that we have out in the channels we believe is adequate and we don't believe that the wholesalers in absolute terms will want to expand that over the year substantially or dramatically. What we do it expect is as volumes rise, the amount that is out there will represent fewer and fewer months on hand. Typically, a wholesaler will want to keep somewhere between four and eight weeks or one to two months of inventory on hand in their system to supply demand. With a C-2 product, that is pretty much the minimum if you want to have a good customer service level.

As we move through the year, we have certainly more than one to two months right now and therefore we would expect that wholesalers will allow the natural growth in demand to reduce the number of months on hand toward that one to two months. That is for the full year. In any given quarter you can have a wholesaler want to buy a little bit more, want to buy a little bit less, but we're talking now on averages for the distribution system.

I think that is why we have tried to say that last year we wanted to build and maintain a certain inventory in wholesalers. We largely accomplished that and we think what is in the system now is adequate. We can't say that there won't be one wholesaler though that will want to buy a little more or another that will buy a little less but on average the system is well served. And we don't anticipate either a substantial destocking in absolute terms or a substantial or major growth in stocking. That is within our guidance range.

Should we exceed our guidance in prescription generation, then I believe there is always a chance that wholesalers will respond with expansion of inventories because our guidance is calibrated around a prescription volume being able to be serviced by a certain amount of inventory in the system. If you exceed that you are going to see more buying and holding in the wholesalers. Did that help but all, Jason?

Yes, thanks.

Paul Bond (ph) .

I apologize if you went over this. On the Medicaid rebates I think you made a comment that some of this was a catch up from fourth-quarter? Can you break out what part of this was from fourth quarter sales and what part was related to first quarter sales?

I don't know whether we said it was a catch up from fourth quarter. It is hard to separate -- each quarter we do based on the information we have, an appropriate provision in our deductions from gross to net for rebates. What I think we said was events of the fourth-quarter, that is new contracts put in place which we don't have any data or information on how products are being uptaken and what rate they are being uptaken. We don't have good visibility on that usually until the next quarter.

I think we were referring to some contracts put in place late in fourth-quarter that were part of this surge that we had to when we had good information in the fourth quarter, make the appropriate adjustments for. Where the catch up comes, is you have to make the adjustments in the quarter in which you have the good information and you have to adjust whatever you have in the channel. So the adjustments cover both components. I don't know whether that is helpful, but there is no way we have of doing any kind of retrospective separation.

That is helpful, thanks.

That I am aware. Paul, do want to comment on that?

I think you said it appropriately. This is still something that evolves and we have to assess it as we get information and it is hard to know when you are in new areas such as the launches that David described earlier in the Medicaid states where we were on an exclusive footing.

What we do have that I think we are comfortable with, we have a very good handle on several Medicaid states that drove the need for these adjustments and obviously that information and data is what allowed us to make the appropriate adjustments, have a good comfort with them, have reviewed by our committee and auditors and reflect it in the first quarter of financials. So we are quite comfortable that that is well taken care of.

Is the 2.5 million the entire Medicaid rebate for this quarter or was that just the amount that is unusual?

I am not sure the 2.5 million you are referring to. We quantitated Medicaid rebates and the last product returns from the last of the development stage batches at around 4 million. So the 2.5 million you are referring to is probably a number that someone earlier on the call referred to. I think someone made an estimate of what part of that is Medicaid rebates and what part is returned. We combined them and said the two are 4 million. I don't recall what part of that 4 million is specifically the total of the Medicaid rebates. So I can't validate your 2.5 million number.

There is a number in the release of 2.5 million.

Where is that?

It is in the paragraph where this is discussed on my page 3. The point of the question is whatever portion of the 4 million is the Medicaid rebate issue, is that the entire amount of Medicaid rebates that was provided in the quarter or was that simply the amount that was -- that you mentioned as a catch up or the trueing up?

Paul, I think I know the answer but I probably should let you do that one.

The answer is that was the increase in the amount that is reflected as the increase in the rebates so it would be an incremental amount during the quarter.

I think in short it is the trueing up. It is not the total amount. We would have had more Medicaid gross to net deductions than just that.

Good, thank you.

Michael Higgins (ph) .

Thanks for taking my call. On the 6 to 7 percent market share at year end that you are targeting, just to clear that up is that in dollars or is that in prescription volume?

We consistently give those shares in prescription. As you will note, we try to give additional transparency in they average revenue per prescription that we are realizing and expecting on AVINZA as the way to help everyone translate that. We don't have the same average revenue per prescription as the market. We are below that. So that is why we give both of those dimensions. It is easier for everyone to take the prescriptions and then translate with an average revenue per prescription because that share percentage does not translate precisely on the dollar front.

Can you give us a list of the products that you are considering in this market that you are talking about 6to 7 percent of which product names is that?

Yes, we report out market share including the generics. You may see from time to time that some analysts refer to the proprietary SRO market excluding generics. So if you look at the IMS basket of SRO products, we include all of them including generics. So our shares typically are a little bit lower than if you exclude the generics. So they would include products like OxyContin, DurageSic, Ormamorph, Kadian, AVINZA, the generics. What did I miss, Paul.

MS Contin is the other one.

MS Contin would be in there and generics of MS Contin. The generics make up I believe about 17 to 18 percent of the market. When you see market shares that are higher, it is because generics have been included and they will usually be a little bit higher by somewhere between 15 and 20 percent. That will change and so the generics in or out will become a bigger issue as the generics to OxyContin and DurageSic enter the markets. That's why we have always kept them in. It is a truer percentage of the total prescriptions and there will be some fairly substantial share changes as the generics to Oxy and DurageSic come in. As between the proprietary products and the generics.

Do you have any presentations coming out at ASCO that you are able to talk about?

Yes, I believe we have three to four abstracts or presentations covering Targretin and ONTAK. We know that there will be a presentation of ONTAK data in combination with Gemcysidabine (ph) in the Phase II trial and those results will be reported out. I believe there is one or two others on Targretin and then the abstracts on ONTAK. I apologize that I don't have the list in front of me. I think we've committed to Walter to try and provide what is available publicly that we expect to be presented. So if you would like that, we will do that as well, Michael.

Okay, thanks.

Bill Slattery (ph) .

David or Paul, I am a bit concerned on one front that hasn't been covered and this is the way the DEA handles the allocation of C2 products into the marketplace on a quarterly basis. Just to relieve some of my anxiety, how does it work when you come off of a lower base getting DEA to agree to expanding that base so that you can address number one, address the market demand? Never two, address the DEA's demand to not make product more available than they wish it be available at a rate that they are comfortable with?

Number three, accommodate a sales and detailing effort that is going after a broader prescribing base? So just help me understand how we should be thinking about how you interact with DEA to get them comfortable with how you intend to grow the marketplace? And how they need to accommodate product being released so they can sell it out there? Thanks very much.

A great set of questions, Bill, and very important. I think if I tried to provide some big picture perspective, first, I would say that from the time that we have gotten involved with AVINZA, the formal relationship for quota gathering is a relationship between Elan and DEA. We have been successful in becoming a full partner in that process. Such that we are now one-on-one face-to-face working with the DEA to ensure good communication of our needs and good dialogue where they appear reluctant to supply the full amount of the morphine that we request. It is not unusual for DEA to have a different view of your needs than you. So there is a very important dialogue in interphase.

We are a full partner with Elan in that. We are having independent direct contact. That has been expanded to include a second formal interphase with Cardinal who is our second source of supply. We have successfully negotiated with DEA for full development quotas of morphine and those development quotas are what we are using to do the tech transfer, the scale up, and the development batch and validation batch production with Cardinal. We now have two partners and two interfaces.

The way it works is based on the prior quarter's sales, the latest sales data and the Company's forecast for future prescriptions and sales growth; you file for additional quota release. You do this first on an annual basis but then they don't release the full annual quota. They typically release a portion of it. Then they release and authorize the take down of that quota, typically on a quarterly basis and that is what you get the formal releases from. We are engaged virtually monthly with DEA. Our last quota release was based on fourth quarter wholesaler orders and our estimates for demand for the 2004 period by quarter which is what we provide them.

We were quite consistent with our first-quarter results, with what we had forecasted to them. We are quite comfortable that DEA is seeing strong fourth-quarter sales consistent with what we have been providing them first-quarter sales. They don't get involved in gross to nets. What we provide them are the gross sales estimates.

We feel pretty good. The most recent releases were at least the minimums that we needed to stay on track and we are already back in dialogue with them about additional releases. We believe that with continued improvement in second quarter and going into the second half of this year that we are so far, saying up with the DEA release rate that is necessary to supply our demands for the market. We are beyond that trying to build some additional not in the wholesalers but in our distributor inventories that will give us a little safety buffer. I can't tell you that we have gained the quarter releases for that but we are working even as we speak to do that.

I think for now what I can tell you is we are very much focused on that. We are very clear about its importance and so far the DEA is partnering with us and we are meeting at least the minimum needs to keep the system properly supplied with product.

Much clearer, thank you very much, David.

We have no further question at this time, sir.

We thank you very much for your patience and for your questions. We hope that we have been helpful and as usual Paul and I will be available if you would like to ask any follow-up questions after this call. Paul, I will turn it over to you to wrap up.

Thank you again for your participation and as David mentioned, if there are any further calls we will follow up with you off-line. Thanks again.