Ligand Pharmaceuticals Inc (LGND) 2004 Q2 法說會逐字稿

Thank you everyone for holding.

I would like to welcome you to our conference call today.

At this time you are all on listen-only, but you will have a chance for questions later in the conference, and also the conference is being recorded today.

And at this time, Mr. Robinson I will turn that over to you and thank you for using Sprint.

Thank you.

Good morning.

This is Paul Maier, Chief Financial Officer of Ligand Pharmaceuticals and to discuss our second quarter financial results today with me is David Robinson our Chairman, President, and CEO.

Before I turn it over to David, I would like to caution that during today's presentation we may make projections or other forward-looking statements, and we wish to caution you that these statements are only projections and actual events may differ materially.

I would also refer you to a more complete disclosure in our various documents filed with the Securities and Exchange Commission.

Having said that, I will now turn the podium over to David Robinson.

Thank you Paul, and thank you all for joining us today.

We do have a robust agenda today.

So I would like to take a few moments to cover in my perspective overview four things.

I want to provide you with a thorough business and key product progress update on our business.

Since the business and our key products are strong and getting stronger, I would like to comment directly on rebates and returns on AVINZA as I know these are of concern as a slow down in financial translation above that business progress, and I know that all of our shareholders want to know what management is doing to put these behind us.

So, I will comment directly on that.

Third, I'd like to comment on our overall guidance update and some minor shifts that we are making to those guidance updates, and finally I will transition to Paul for a more detailed financial and other matters review.

So on the first of those four agenda items I would like to start in by saying that for the quarter our net product sales increased 49% and total revenues increased 39% over prior year.

We have been in the business for the quarter.

I believe in looking at all of the metrics many of which we have tried to include in our press release it is very clear that AVINZA and ONTAK demand growth during the quarter accelerated substantially.

We are pleased with the acceleration of demand growth during the second quarter for AVINZA and ONTAK, and we do believe that the AVINZA sales and exchanges and geographic demand changes that have impacted reported net product sales in the first half of this year, that is through increased rebates and returns are now much better understood and built into our forward planning.

I would like to now turn to AVINZA and go through in some detail our progress with our flagship pain product.

AVINZA accelerated growth and market share in the second quarter in spite of an overall market growth slow down, and we believe is poised for further acceleration in the second half of the year based upon ongoing investments and achievement of a tie for number one share of voice in the sustained-release opioid chronic pain market with those diversified investments.

We did rise to virtual parity with Duragesic for number one share of voice during the second quarter and that was let's say on time or ahead of schedule for our ramp up of investments.

Total prescriptions began to reflect that in the second quarter, up 21% over the prior quarter and that's based on IMS NPA monthly data, which does not include institutional use in hospitals, federal facilities, and other non-retail outlets.

Our weekly prescription market share of 4.5% for the last week of June continued to show progress and in our most recent July weekly, we rose to 4.7% for the week ending July 23.

That weekly and the monthly data is and continues to be in line with our previously announced goal to achieve a 6% to 7% weekly market share coming out of December of this year.

Increasingly, a more accurate reflection of AVINZA's market share is the monthly data.

That due to the fact that the monthly data is based on a much more robust size of pharmacy panel on which IMS bases its projections and it includes a more of the retail business including some long-term care retail.

When we look at the monthly market share data, clearly AVINZA increased from 3.5% market share from March to 4% for the month of June.

Quarterly prescription market share increased from 3.2% in the first quarter of '04 to 3.8% in the second quarter of '04.

When you look at the dynamics within the months as we have outlined in the press release, it's fairly clear that as we move through June and into July, AVINZA growth and market share penetration is beginning to reflect the stepped up resources with June being almost double the growth rate of over May as May was over April, and we believe that that is consistent with the size of investments and the share of voice that together Organon and Ligand have achieved in the marketplace.

We would note that that share of voice has been achieved, and during the second quarter there continued to be a substantial pullback of the share of voice from the number one player in the market, Purdue Frederick.

We believe that as a harbinger of the conditions that we face in the second half of this year and clearly momentum is growing on the brand.

We are now with sufficient experience that we have achieved a call rate of about 45,000 to 50,000 calls on primary care physicians during the second quarter and we sustained that, that is the rhythm we need to sustain for the second half of the year, and we are very pleased that we got there quickly and efficiently.

We also completed the sales force hire of 36 new representatives by Ligand and they are out effective July calling upon top decile primary care physicians with a target of an additional 5,000 calls per month on the very top prescribers.

In addition, we expect the second half 2004 sales to benefit substantially from a 9% price increase, which we effected July 1st of this year and through a continued improvement in dosage mix, that is the higher strengths utilization and the number of capsules per prescription being written, all three of which price, mix, and number of capsules are resulting in driving a higher VAT price per prescription for AVINZA tracking ahead of our expectations for the year.

The other dimension of the brand continued to move consistently.

We estimate that AVINZA retail pharmacy stocking expanded to between 26,000 and 27,000 pharmacies at the end of the quarter, consistent with our goal for year-end to be available for patients in about 30,000 pharmacies by year-end.

As we look at calibrating demand, we've looked at several parameters.

We estimate that greater than 135% of AVINZA's second quarter reported sales of $23.3m were covered by prescription demand across all segments and by new retail pharmacy stocking.

This calibrates nicely and is consistent with the IMS NSP estimates of second quarter AVINZA demand of around $31.5m.

Notwithstanding the price increase July 1st of this year, we estimate there was no overall expansion of wholesale and chain inventory during the quarter and that continues to be consistent with the goals we laid out for this year.

So, for both first and second quarter, with or without price increases, we have had a very good cooperative relationship where we have experienced no substantial change in the overall wholesale and chain inventories, and that's what we want to accomplish for this year.

Second quarter AVINZA sales were adversely affected by the continued impact of Medicaid rebates.

For this quarter, that's estimated at $2.6m which includes the price increase effect.

That resulted from significantly higher Medicaid prescriptions in one state where AVINZA obtained preferred formulary status.

I'd like to directly address what we've done to close that issue out and I believe that we now can say comfortably that we expect Medicaid prescriptions as a percent of total prescriptions not to grow and that we have sufficient data in hand to be comfortable today with that.

When we did the first quarter provisions for rebates, rebates always come in a quarter behind, we had virtually in one major Medicaid state where we became the exclusive product, we had only two months of actual experience data.

So, when we did our estimates for first quarter, we based it upon our experience of two months.

Today, we have six months of data points.

So, we can look back at six months of actual data for Medicaid prescriptions from that one state, and I believe it's accurate to say that we now believe that that business is not growing as a percentage of our overall business and that we have now calibrated with the second quarter around the appropriate rebate rates for the product.

We correspondingly would note that in all of the other Medicaid states except one, we have had consistent data and our estimates for those other 43 or 44 states have been comprehensively on target.

So, we've only wrestled with this one.

We believe that now that the brand growth has built-in the Medicaid base, this type of surge can now be with the data in hand behind us.

I'd like to comment also on the second set of events and that is Avinza sales were also negatively impacted by both increased returns and increased provisions for future returns of approximately $3.9m.

Those resulted primarily from development-stage batches with shorter than normal expiry dates and some smaller component that is local excess wholesaler inventories in certain sales geographies where demand and inventories were not well balanced.

You can imagine that as Avinza had surged in a large market, some states picking up Medicaid business that wholesaler is stocking in the 150 plus distribution centers that serve those markets, order up to supply to local demand, sometimes that demand surges and sometimes it's slower.

That has meant, we've had some geographic disparity and that has resulted in some higher returns.

We have done several things to work to put the returns issue behind us clearly by the size of the provision and by the nature of it not just recognizing the increased returns, but increasing our provision for future returns, we are clearly working to put this issue behind us as well in this quarter.

We would note several additional things through the implementation of our distribution-services agreements, that is, fee-for-service agreements with wholesalers, which we have implemented some

and are in the process of implementing others across our other product line.

Part of those services agreements where we pay our wholesaler partners for a range of distribution services, part of the agreements are full and complete information with regard to wholesaler inventories, which in the past has been somewhat spotty.

In the past, we've had to buy certain data from IMS, more recently some wholesalers have stopped supplying IMS with that data, then we've had to acquire the data directly with them, but without firm agreements for that data.

As we are putting the distribution-services agreements in place and that process is going very smoothly.

We are acquiring a contractual flow of information from the wholesalers that will give us a solid transparency across all of their distribution centers with regard to inventories and with regard to demand such that we can be full and better partners in balancing demand and location of inventories.

We do expect that as Avinza prescriptions continue to increase and given that there are no more development stage batches in the wholesale channel, we believe product returns will normalize to a more predictable level across all of our geographic territories.

A final comment on the development stage batches.

We are confident now that the development stage batches are cleared from the channels.

We had one or two blind spots in the first quarter where we did not have data with regard to some remaining development stage batches.

We believe that has been corrected, in the event that it has not, the development stage batch expiry dating are now beyond the six moths policy return limit, so that if there were development stage batches out there they would not be returnable to the Company for credit.

So, we believe that issue driven substantially by the development stage batches is now addressed fully in our current and our future provisions, built into our planning estimates going forward.

I would like to now turn to the oncology business.

We have been very pleasantly surprised by the progress of the oncology business.

We began the year with some concerns about the new CMS reimbursement rates and how our customers might respond to it, and how we might have to work with them.

I am pleased to report out that on our largest oncology product ONTAK, the demand for ONTAK has grown stronger each month and surged quite strongly in the second quarter with second quarter end-user demand growing 37% over the prior year, and that goes down as one of our strongest growth quarters in several years.

ONTAK shipments for the first half increased 29%.

So, clearly the brand has adjusted in the two user segments, that is the hospital setting and in the physician's offices, and we are seeing particularly strong growth within the hospital settings.

We believe that's an adjustment to favorable reimbursement within the hospital setting, and yet our physician's office business has remained solid, and we believe now the market has adjusted to the 2004 reimbursement rates.

We believe that the translation of that very strong demand, that is shipments from wholesalers to our patients in hospitals and physician's offices, that translation to net sales will increase and maybe reflected in the third and fourth quarter, and we believe is a harbinger for strong results in the second half building on that demand.

The Distribution Services Agreements going into place now will have several favorable effects.

They agree upon an inventory level for each product with each wholesaler, and that will eliminate some of the fluctuations in demand.

Our principal customers will be buying replacements to what moves out, and we believe that that will make for a smoother translation of demand.

We also have been able to put in place fixed fees for services, and those services are everything from inventorying to special handling and distribution.

Those fixed fees mean that as our volumes rise, the percentage that we pay our partners for their services goes down.

And we expect that to reflect in substantially improved prices and margins, first for ONTAK and then for our other products, as we move through the second half of this year.

The agreements for AVINZA, Targretin capsules and gel are in negotiation, and we do expect to complete the principal of those agreements during this third quarter.

I would like to turn to a few comments on Targretin capsules and gel.

We have seen strong growth of Targretin capsules in the US and Europe combined, around 50% in the second quarter compared to prior year.

That increase is a combination of demand and a 7% price increase that went into effect in the US, in Europe it's exclusively demand.

We believe that both Targretin capsules and gel are tracking slightly ahead of our expectations for the year, and we expect the conditions to improve further in the second half of this year with the June implementation of the CMS Section 641 demonstration project under the Medicare Modernization Act.

We expect the inclusion of reimbursement for Targretin capsules and gel to result in substantially improved access for CTCL patients during the second half.

We are actively working with our physician partners with the orphan drug patients groups to make sure that all patients who need access to our drugs can now benefit from the reimbursement under this demonstration project.

We estimate that 1/4 to 1/3 of all CTCL patients now come to have access through this project that did not have access before.

So, as a patient market of around 16,000 about half of which would apply to Targretin capsules and gel, we believe about a quarter to a third will have improved access.

How many will actually go through, I think is what we will wait to see as we work through with all the parties trying to serve these patients.

But we do expect relative to the first half and relative to the historical, substantially improved reimbursement situation for Targretin capsules and gel.

I would like to turn to a couple of final comments on the business side of things.

The Company continues to work and prepare quite strongly for SPIRIT I and SPIRIT II our two large Phase III studies evaluated in the survival benefit of adding Targretin capsules to standard frontline chemotherapy for non-small cell lung cancer.

Those are scheduled for data analysis at the end of the first quarter of 2005 and I'm pleased to say that the massive volume of case report forms, now totaling, so far over a 150,000 that have been received and processed is going exceedingly well, good co-operation from all the 285 centers around the world and we are well poised for that important unbinding and data analysis that will take place in March of next year.

The additional studies, Phase I and Phase II that were part of the FDA agreed supplemental NDA submission have been completed.

So virtually all of the overall program is in good shape.

We've looked at the demographic profiles of the patient populations in SPIRIT I and SPIRIT II and we believe they are well balanced between both arms in each study and that they compare well with the patient demographics in several recent large Phase III registration studies using similar chemotherapeutic regimens.

So, I would like to turn from SPIRIT I and SPIRIT II, then to a quick overview on the guidance.

We've taken a look at the trends in the business, a hard nose look at the progress in the first half of the year, the trends for the second half and we've looked at both the returns and rebates issues quite extensively and we are in this update doing some minor changes to the guidance.

We believe that our overall financial goals for the year can be achieved through a combination of reasonable expense discipline, continued strong product sales growth that we believe is there from the first half and some improvements in other revenue which will offset some of the higher, avenge the rebates and returns and that combination in shift we believe will allow us to achieve our overall operating income results and earnings per share results for the year.

We have taken a good, strong, careful look at that.

I would like to turn to now and transition to Paul, before I do that, I would like to comment on a second set of press releases and 8-K filings that the Company made simultaneously with the earnings results.

These filings are not related to the financial results but are coincidental in time with them.

Ligand is announcing the end of its four-year relationship with our current auditors, while this is coincidental with the announcement of 2Q results, I would like to clarify for all of our shareholders that this coincidence in time has, is not in anyway related to the financial results.

During the period, October 2000, that is the date that Deloitte & Touche were engaged as Ligand's independent public accounting firm.

Through this quarter, June 2004, there have been no disagreements between Ligand and Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedures which if not resolved to the satisfaction of Deloitte & Touche would have caused them to make reference to the subject matter of disagreement in connection with its reports.

So, I would like to reassure our shareholders that the disagreements do not exist and we are comfortable with that and I think with that I'd like to segue to Paul to comment further on the end of this relationship and then to segue into the financial results for the quarter and our guidance.

Paul?

Thank you, David.

As was noted in our press release this morning, we did recently receive note of in the 27th of July from the Deloitte & Touche that they would be resigning as our auditors and that would be effective with the filing of our 10-Q for the second quarter of 2004.

That filing is expected within the next week, and as was pointed out in the press release by David, we've had relationship with Deloitte & Touche as our auditors since October of 2000, and I would like to emphasize again that during this entire period, there have been no disagreements between Ligand and Deloitte on any matter of accounting principles or practices, on financial statement disclosures or the auditing scope or procedures, and if there had been disagreements, then Deloitte & Touche would have been caused to make reference to that subject matter of any disagreement in connection with its various reports.

And the details of our 8-K filing, I will just highlight.

Again, during this period since October of 2000 through the end of this second quarter-end 2004, there have been no reportable events, and Ligand has provided to Deloitte & Touche a copy of the 8-K and the disclosures included in it, and in return Ligand has been furnished with a letter by Deloitte & Touche addressed to the Securities and Exchange Commission and Deloitte & Touche does agree with the statements that Ligand has made in its filing.

And I think that should give us comfort that there have been no disagreements and they are in complete agreement with our disclosures.

Furthermore, I think going forward, we do look forward in the Ligand management team to working closely with our audit committee to engaging new independent auditors.

And in turn with our new audit partners, we will work towards realizing the Company's long-term strategic goal of building a profitable high-growth biopharmaceutical company.

With that now, I'd like to turn to our second quarter results and just emphasize some of the highlights there.

Our product sales for the second quarter were $37.5m, that's an increase of 49% over the second quarter of last year, and as was mentioned earlier, we have experienced strong demand growth for both AVINZA and our in-line oncology products, particularly in the in-line oncology products the actual sales growth over the first quarter of this year was 21%.

So, we are quite pleased with that trend.

For six months, the product sales were $71.6m or up 62% over the six months in '03.

Our total revenues in the second quarter -- we were a $40.5m, that's up 39% over the second quarter of '03.

And for six months, our total revenues were $77.1m, up 48% versus the six months in 2003.

Of particular note in those results, the gross margin percentage of our products improved in the second quarter of '03, it was 69% in the second quarter of '04, it improved to 74% and that's the same rate that we've experienced for the first six months of the year.

We do expect that gross margin percent will improve as our sales line increases, particularly because there is a fixed component of amortization in our cost of sales that is a non-cash item, it's roughly $2.7m per quarter.

As we look at our expenses, operating expenses for the second quarter as was indicated by David, we had experienced a slower growth rate, and that is something that we certainly will manage as we go forward.

The R&D expenses were up 8% in the second quarter of '04 versus '03, and for the first half of the year, they were up 5% versus last year.

We did expect our SG&A to increase as we've made investments, important investments in AVINZA, and so for the second quarter, those expenses SG&A increased 22.5% for the first six months, that was about a 20% increase over last year.

This has resulted in our operating loss for the quarter at $11.3m that compares to $9.1m in the second quarter of last year, and for the first six months, our operating loss is similar to '03, it's $21.5m, so that's very close to what it was in the first six months of last year.

This translates to a net loss for the quarter of $14.2m or $0.19 a share, and that compares to $12m or $0.17 a share for the second quarter last year.

And for the first six months of '04, our loss is $27.4m or $0.37 a share and that's down from $32.3m net loss for the six months of '03 or $0.46 a share.

So, overall, we are making excellent progress with the base business, and we do look forward to very strong growth in the second half.

With respect to the balance sheet, we've maintained very strong operating cash.

At the end of the second quarter, we had $87.5m in cash and the cash burn for the first half of the year was about $15m, and we do anticipate positive cash flow going forward in the second half of '04.

I'd now like to turn to the guidance that was included in the press release, and as David has mentioned, we have made some modest adjustments to the guidance.

So, for the full year, and as you know we don't give quarterly guidance, but we will continue to give the full year guidance.

We expect our total revenues to be between $235m and $255m and net product sales have been monetized to reflect a shift in realities of the gross to net adjustments that David discussed earlier, and so our net product sales guidance is between $195m and $210m with AVINZA product sales approximately two-thirds of that amount.

The gross margin on overall product sales is estimated at 79% to 80%.

And in respect to the expense growth, we do see slower growth in those expenses.

So, for the year, we are anticipating total operating expenses, which excludes the cost of products sold, but it does include the co-promotion expense between $170m and $184m.

That results in our full year operating income guidance of $20m to $24m and management is focused and is committed into achieving the operating income and the EPS guidance and our goal for EPS, basic EPS is between $0.12 and $0.17 per share for the full year with the trend towards the mid-range of that goal.

We believe that through reasonable expense discipline and continued strong product sales growth and improved other revenue, as you can see from the adjustments in our guidance, that we do have the AVINZA rebates and returns issue under control, and we do remain focused on achieving our overall guidance for the 2004 year.

With that we would now like to open it up to questions and answers.

So, Tim, if you could open the lines, we will begin to take those Q&A.

At this time, if anyone has a question, if you press star one on your touch-tone phone, that will place your line in the queue, and if someone has already asked your question and you would like to remove yourself, you can do that by hitting the pound sign.

And the first question comes from Michael King.

Go ahead please.

Mr. King, are you there?

Yes, I am sorry.

Can you hear me?

Yes.

I apologize.

Guys, I had a couple of quick questions.

Just to start based on Paul's commentary about guidance.

If I do the math, just sort of back of the envelope and look at your guidance for AVINZA, it would be about, once you've picked the mid-point of guidance and then say about two-thirds of that comes from AVINZA.

So, we are looking at about $134m, $135m.

I'll backup what you have done in the first two quarters.

It suggests to me that you are going to have to get about almost $90m for the remaining two quarters, which implies 20% quarter-over-quarter gross for AVINZA, and I know this particular quarter was strong, but given all the issues you faced with rebates and such, how achievable do you think those numbers are?

Clearly, we believe AVINZA growth is accelerating.

We achieved 20% prescription growth in the first half each quarter.

Clearly acceleration of that with the level of resources and investments that have been put on the brand by the partners, I think the data is, well, still not complete and still early.

We are in that 60 to 90 day lag.

I think the data is confidently pointing to an acceleration of that growth rate.

So, I think that underlined prescription growth rate will go up and we believe that the price increase on top of that the improvement in the mix is going to make that revised goal imminently achievable.

We continue to wait to see, and this is not part of our guidance, whether the level of efforts that were put on the other two leading brands remain the same.

Clearly, as we move through second quarter,

continued its systematic cutback of share

voice investments.

The investments by Duragesics were substantially higher in the fourth quarter of last year and the first quarter of this year, and we've caught up to them in the second quarter, such that when you look at the two principle things that move brands in this market; number of calls and peer-to-peer, what we'll call face-to-face meetings with and between physicians, we rose to the top of the share of voice during the second quarter order.

We expect to sustain that whether Duragesic will sustain that, they appear to be pulling back a little bit already in second quarter.

So, we'll have to wait and see.

If they pull back further, clearly the competitive environment improves.

We are not counting on that for our guidance.

We do believe that could cause a further acceleration.

The other comment I would make is if you look at Avinza progress in the second half of last year, and look at what we need to achieve, not only in the retail segment where we have increased call rates, we need to achieve substantially what we achieved last year, in the second half of this year.

So, it's not something new and dramatically different that we need to do in the retail segment.

On the other hand, we have launched, through our partner Organon, a major long-term care and hospice program and we're only beginning to see early returns for that.

Some of that flows through in the retail numbers and some of it flows through in the non-IMS audited segment of the market.

So, we'll have to wait and see, but we do expect a strong, substantial response from that substantial effort in the second half of this year.

So, if we roll all those things together, we believe that the overall is imminently achievable for us and that's why we're able to make only small modifications in the guidance to take into account some of our experience with gross to net.

And so, I think we're feeling pretty comfortable about that guidance, Mike.

If I can just follow-up, what proportion of sales should we figure into our assumptions that would be from Medicaid and the attendant rebates that come with that?

We obviously have not, for competitive reasons and proprietary knowledge reasons, we haven't given specific market share numbers for our progress in Medicare.

As you can imagine, that's been a central part of our strategy for market share penetration.

Our success has set us apart from some of the other brands that have tried and failed.

We may be catching up in estimating the gross to net impact, but I think it certainly helped put the brand on the national map.

And so, we are not anxious to disclose Avinza specifics.

What I can tell you is that if you look at the market, Medicaid tends to be in 15% of the overall business and it varies by brands around that.

We were lagging that last year.

And so, in the early penetration stage, we were the brand with the lowest Medicaid penetration.

We're catching up.

And so, without giving more specifics on that, I think we're catching up nicely to the overall market distribution and we certainly expect that we will be there and sustain that long-term as we build the rest of our retail business.

That's what you try and do of the Medicaid business, you get your intros to the doctors through the Medicaid business, and you help build yourself into their private practices off of that.

So, I don't know whether that was helpful, Mike, but that's kind of --

Well, it sort of calibrates it.

And then, If I might, just one final question just to see how the numbers add up.

You stated that -- you've reported $23.3m in Avinza sales, you had said that $2.6m came from -- I'm sorry just trying to get the exceptional items -- $2.6m in there was another amount in there of 3 -- for the rebates and such and destocking.

Can you walk me through those numbers again?

Because when I add them up they still come a little bit short of the $31.5m that's the demand, what is indicated.

I am just wondering with the delta...

Yes, I think, there is probably a couple of ways to calibrate that, but if you look at the $3.9m in returns and the $2.6m in rebates, I think by my math that comes to about $6.5m.

Yes.

So, if you add $6.5m to $23.3m kind of get $29.8 or around $30m.

So, basically as close as we can call the channel inventories.

We saw no change of substance to the channel inventories held by wholesalers.

So, I think that when you look at our reported sales, you calibrate it against NPS, IMS data, it all pretty much shows demand in the $30m to $31.5m range.

I think that's probably as close as you are going to be able to calibrate it, overall, at the kind of net range.

And so, I think that's a good going forward grow off of that base demand estimates.

So, if you look at forward growth rates, if you take a $31m run rate and you apply a prescription growth off of that, 20%, 25%, 30%, add your price effect to the dollars, I think you pretty comfortably, over the next quarter or two, get to a rhythm that brings us comfortably within the guidance range.

And I think we moved aggressively to put these gross to net variations and charges behind us, so that I think that the base of the second quarter is a comfortable planning base.

Okay.

Thank you very much for your time.

Thank you Mike.

The next question is from Russell Gilbertson.

Go ahead please.

Good morning David, good morning Paul.

Good morning Russ.

A few questions here if you don't mind.

First question, just a follow on with Mike's question.

In regarding the share of voice, it's great that you have achieved the number one position, but how does that correlate to the scripts and what obstacle do you see in terms of convincing clinicians to prescribe AVINZA?

Yes, great question.

What we have seen and this is, it's not magic, its just correlative factors.

We have enough experience now with AVINZA in the marketplace.

When we see a certain monthly aggregate call rate sustained for at least three months, we see an acceleration of market share gains, that's just the reality.

It's driven I believe by two things and that rate is 45,000 to 50,000 calls a month on primary care docs and a total of about 60,000 calls to 70,000 calls overall on the brand; that's specialists included.

So, we achieved that rate, that puts us pretty much right there at number one in the detail calls, share of voice.

We also, when you add all the other investments, journal media, peer-to-peer meeting investments, all the things that I am abstract, when you add those in, we also were tied for number one in second quarter.

That got stronger as we went through June.

So, what we have observed, is the market share penetration for AVINZA for this brand, given the current mix of competitors is in that range, and so as long as you drive the calls there and sustain them, you're back into rapid market share gains and I think that's what we've been seeing as the brand has moved through June and into July.

Even the most recent data for the week, not that weeklies are the most accurate measure but the most recent week was up 0.3% in market share.

That's the biggest gain we've had, I think this year.

So, I think the factors are relatively clear, we need to sustain that level of calls and we'll continue a rapid rate of penetration.

If our competitors continue to pull back, the share gains will be larger.

That's just less resistance.

But I think that what we've established now with the mix of investments and calls is we are gaining share in the face of this stiffest competition and if they pull back it's just better for us.

If the market grows faster, it's better for us.

But either way, we are in that market share penetration investment mode, and I don't think there's much that current competitors can do, the gap between number one and number three or four is so huge, we don't see any capabilities for anyone to step up and change that.

So, I think we are focused on, we have got the right mix, the right priorities, the right level of investments, it's now state of

in the retail segment.

In the long-term care and hospice, it's now full execution of that comprehensive plan that Organon has put in place and I think that's a totally different market segment.

There I think we've got to see the calls being made, the contracts been put in place with the hospice facilities and the long-term care facilities.

So, I think that one is slightly different than the retail market.

Right.

Were the sales reps running into any specific types of objections the clinicians?

I think amazingly enough the market research seems to point to a high level of satisfaction and a high level of trial.

So, we don't see anything in the market research or the feedback through the rep force that's causing us any concerns on the brand.

It's performing when they try it, the patients and the physicians like it.

The number one feedback from market research and to the reps is recollection.

We have moved up the unaided recall about 10 percentage points between the last two audits that we ran, that's a follow up market research audits that we ran and that's positive.

But the unaided recall still remains at the primary care level around 55%, that's too low and so our biggest challenge would appear to be a simple frequency of call to help the physicians remember there's a tremendous amount of noise in the primary care physician market and you simply need a high intensity frequency to get above it, so they remember your brand and that seems to be the principal thing, that's why the call rate is so important.

Once you get there, 45,000 calls, 50,000 calls a month and I will say that our 36 reps may sound like a small force, but we believe it's going to have a very substantial impact because they are calling on decile seven through tens.

So, we are going to get a frequency to a virtually, not match able level with that physician population.

We are going to be up in the, well above the 60 calls to 70 calls a year on those high decile primary cares and we think that's what they need, they need the support of the rep calling in more than once a week.

They need the reminder to build a new brand into their practices, they don't adopt quite as quickly or as easily as the specialists.

With the specialists we have had that kind of intensity, but their whole business is paying.

So, they have a few pain products to remember and they are not dealing with all the other problems of patients coming into a primary care physician.

So, a primary care physician has a much more daunting job of remembering the 100s of drugs he uses and pain is one part of it, but not the only part.

So, I think that's the dynamic that we need to just be patient and persist with and I think that's why if you look back on the history of sustained released brands in this market, all the penetration curves show the same thing.

A steady, long-term market share penetration once you have that investment level and they like the brand.

We believe they like demand, we think that we have that investment level.

Now I'd simply state a course.

Okay great.

Couple of more questions if you don't mind.

The average scrip price for AVINZA in the last quarter, have you calculated that and are you still on track to be at to the up to a $170 by year-end?

Yes.

Okay.

Was it 155 for the quarter?

What was it for the quarter?

I don't have the exact number for the quarter.

We were tracking in the 150 to 155 range as we moved through June and the price increase would be on top of that.

So that would move us quickly above that range.

I believe that the rest of the distance to that year end 170 is going to be made up of continued mixed changes, and I will say we have had a very important and very positive rapid increase in the number of capsules per prescription.

We were lagging in the market.

The market average is somewhere in the 26 to 27 equivalent capsules per prescription, a little bit less than the equivalent of 1 per day for a 30-day supply.

We rapidly caught up in the first half of this year, so that we have seen a very favorable effect on our average revenue per prescription coming from the increased number of capsules per prescription.

Still below the 30 mark, but right in that market range, so that's helped a lot.

We think the rest of the distance is going to be the mix changes between the higher dosage strengths and we are seeing good progress flow through with 90s and 120s.

And so that I think will take the rest of the distance there after the price increase.

Very good.

And just a quick question.

The 3.9m in returns, how much was that due to the developmental stage batches?

I don't know the exact number to that.

And I don't know whether our finance people do.

I think as good as we can do to break that down, probably the way to think about that is about half, approximately half of that 3.9m was for returns that actually came in the rest of provisions for the future, and the majority of the returns that came in were the development batches.

So I think that's kind of as good as I can calibrate.

Paul, you have any?

No, I think that's a good characterization.

Okay.

Last question sorry, and you were expecting a royalty pharma option some time this year, about $13m.

Is that included in your guidance and when can we expect that to take place?

Yes.

We continue to be confident that the lasofoxifene NDA will go in this year and we would say sooner rather than later, we don't have any information that we can give that's better than that.

What we would say is we think all of the information that Pfizer has shared on their global NDA filing plans clearly indicate multiple additional NDAs going in this year and certainly in their most recent earnings release, lasofoxifene was the top product on their late stage list.

So along with Indiplon, I think we continue to believe strongly and confidently that it will go in.

That triggers a milestone for NDA filing that we will receive from them and it triggers a 30-day option exercise for royalty pharma.

The exact timing by quarter is just not callable for us.

It's, and I am not sure it's that important.

I think it continues to be in our guidance, we continue to be confident that this is the year for lasofoxifene just as we have received updates from Wyeth on bazedoxifene.

The race between those two molecules now, if lasofoxifene goes in as expected, the gap between them with Wyeth now targeting a third quarter filing of bazedoxifene, the difference is less than a year.

So I think there is every strong motivation for lasofoxifene to get in sooner rather than later, and we believe that both of those are quite appropriate to be within our guidance for this year.

Thanks for answering my question.

Thank you Russ.

David Webber, go ahead please.

Good morning.

Good morning David.

Couple of questions.

First, could you comment on what percentage of prescriptions in the quarter were associated with free coupons?

Good question.

We have been seeing the coupon percentage of prescriptions in steady decline since we put the measures at the end of last year and early this year in place to ensure that it was one coupon per patient and couldn't be more.

I believe we have broken through, I can't tell you the average for the quarter, but we are now below the 10%, and that continues to decline.

We would expect, David, that it would level out.

There is going to be a certain level of new patient start coupons that we will not want to see decline any further.

We think that's somewhere around the 6% to 8% long run range and so that's where that program, I think, will continue to support the brand -- is in that range.

And we certainly broke below 10% during the quarter.

Okay.

And regarding Medicaid rebates, how many more states are currently considering either adding AVINZA to coverage at all or in particular adding it to the preferred drug list?

Yes, great question.

There is no large exclusive preferred drug list states that we are aware of.

What I mean by that is our experience which was unique with one state was that we not only became the only SRO opioid, but that the state Medicaid authorities unlike in most states obliged conversion of all patients on all the other sustained-release opioids and that really brought about a situation in that state that we have not seen anywhere else.

What's the chance that, that could happen in other states where you are currently on the PDL, but not exclusive?

We think, where you have multiple brands in major states you don't see obligatory conversion.

Anytime you have one, that have the option of obligatory conversion, but where you have two, it's physician choice.

They may prior off some of the other brands, but then that business goes between the two that are on there and so the effects are much more predictable and much more gradual.

So, as we look at -- keep in mind we are now in 44, roughly 44 State Medicaid formularies.

There are no big states that we are aware of going that we are bidding for going to exclusive one product formularies and when we bid, we are bidding, let's say, not to encourage one-product-only formularies.

We think, economically speaking, that's probably not a financial benefit to be the only one, because of where the discounts go.

So, we kind of moved to a position where our goals are beyond the PDL, so we are one of two, one of three, one of four, however many they have, but not try to push the states to a one-only or AVINZA-only.

So, if they do choose to go there, we are not providing additional discounts to get there.

So, I think to get back to your big picture question, we don't see anything this year of a major state.

There are one or two minor states that don't even rank in the top ten.

So, even in the biggest surprise scenario, it will be hard for them to make a difference in our rebate estimates.

So, we don't see the marketplace, now that we have penetrated all these formularies and we have our basic Medicaid business where it is, we don't see much more to do there and we don't see where new ones could come in.

Should one come up, next week, tomorrow, we clearly have a system in place now that we do prospectively a lot of work before we bid to estimate what that business is, by gathering much more data than perhaps the rapid pace of last year where we were in a pretty aggressive -- get into the formularies and get AVINZA accessible as widely as possible.

So, I think we have better prospective systems, should there be a state that comes up with the desire for a preferred.

A great example of how this works, when we became very -- let's say solid position in the Florida Medicaid, not exclusive, the business in Florida evolved nicely, but no dramatic surges like we saw with this one particular state.

So, I think on the basket of Medicaid business, it's pretty big now, and so any of the smaller states that could come in and go down that road don't have much of a chance of impacting our rebate provisions.

What's the average size of the rebate in the Medicaid states?

Well, you have a basic Medicaid rebate that all manufacturers are kind of obliged to give and then you have a supplemental agreement.

It's the combination of the two that you roll up the discounts.

I think the business out there can be anywhere from around 20% discounts between the two basic and supplemental, all the way up to 40% to 45% discount.

So, it's a full range.

Okay, and then one last question, if I may, before getting back in the queue.

Regarding Deloitte & Touche's decision to drop your account, was that due to or -- what was it due to, was it a reason specific to your relationship or is this part of a strategic move by them?

David, we don't know why they resigned, and what we do know though is in the 8-K filing, which we talked about the critical issues, there were no disagreements between Ligand and Deloitte on any accounting matters or principles or financial statement results or auditing scope for procedures.

However, you know, if you look at relationships with third parties, particularly third party auditors, there's more than just auditing the books.

You have to look at people relationships and business considerations, and so while we won't speculate, we would just point that out.

Okay, thank you.

Next question comes from Jim Reddoch.

Go ahead please.

Good morning.

Was the price increase of 9% announced in advance, which if it were, would typically allow stocking, and I am wondering -- could potentially be stocking in excess or overstocking, and I am just wondering why you didn't see that in advance of this price increase since the last time you did have a price increase, you did see that?

Yes.

Good question Jim.

We have pursued a policy with our partners in the wholesale channels since we rely upon them for fundamentally all distribution services direct to the customers for all of our products.

We have always provided them -- since we have contractual obligations to advance notice a number of customers, we've always provided them with some advance notice.

As we pointed out at the end of last year, we achieved working with our wholesale partners on AVINZA, the level of inventories, which we wanted them to hold to service the size market that we saw evolving on AVINZA.

They have been very cooperative with us in our working with them to ensure that during first quarter without a price increase and during second quarter with a price increase that they don't speculatively buy ahead, they buy to the demand levels.

And I am very pleased to say that in both quarters, as we mentioned in our first quarter call, our game plan for this year was the inventory service levels we had in the channel -- wholesale channel at year-end were what we wanted for the end of this year.

So, our game plan was, keep those constant and work with our partners to achieve that.

It's clear now with or without a price increase, our partners are working very constructively with us to buy to the demand and that's the game plan we have for the second half of the year.

We do not see a need for additional channel inventory to service the size demand we have growing on the brand.

We have done market research, we have got good pharmacy distribution now, we are seeing fewer and fewer concerns expressed on our market research surveys about access either at retail pharmacy or availability through their local distribution center wholesaler.

So, we think we've got the right mix, and so while we did notify them, we monitored carefully the orders and they cooperated with us to purchase fundamentally to the demand levels that we all saw in second quarter and not anything additional and, so we were very pleased with that.

Obviously, that is what we will roll in and formalize in our distribution services agreements or fee-for-service agreements is they will maintain a certain inventory level, which is pretty much where they are right now and they will buy to replacement demand on a quarterly or monthly basis, and that will provide for a nice smooth flow going forward and minimum fluctuations in quarterly channel inventory.

Thanks.

Does wholesaler inventory in absolute terms increase or decrease during the quarter?

Wholesaler inventories in absolute terms to the best that we can estimate it neither increased nor decreased.

It was where we expected it pretty much consistent with end of first quarter, and end of '03, in absolute terms.

In relative terms, with the growth in demand, the number of months that that absolute inventory represents has come down each quarter, and we expect that to continue to come down in relative terms.

The number of months on hand will continue to decline, and that's very consistent with making sure we have good service for our customers while the brand is in rapid growth phase, and keeping only that which we need in the wholesale channels to serve the customer base.

Did IMS catch long-term care prescriptions or does NDC catch that?

Some portion of long-term care business flows through the retail audit of IMS, but not all.

So, beyond what IMS captures we will see a growing part of that as we're successful that will show up just in wholesaler out movements as they service that segment and/or in direct shipments from time to time from distributor.

So, IMS is not going to be a complete monitor on that segment as it grows.

We will try in our going forward updates as we have metrics to share as much as we can that we have good solid data on what's going on with that non-IMS monitored segment.

It should be growing, and so we'll try to give you as much transparency as we can.

And lastly, can you just remind us where the Organon increase in their split haven't, and if that is a gross number or a net sales number?

It's a net sales number and the increase occurs after $150m in sales each year.

Okay.

Thanks Paul.

Thanks.

Thanks David.

Thank you.

The next question is from Lee

from

.

Just have a question related to the development stage batches.

Last quarter, you record $12m, and this quarter you record $3.9m, trying to have an understanding of how big this development stage batch could be.

How much has been materialized, and how much more should we expect?

The question David was with respect to the development stage batches and as it relates to returns, what would we expect going forward?

And I think the question can best be answered by saying we -- the development stage batches which were those first batches of product before the commercial loss, which had shorter dating that we used when we launched the product.

Those have all expired and so we've accounted for all of those through the end of the second quarter, and because the expiration dates of our return policy have lapsed, there is no more of that product if that wasn't sold could be returned for credit, so we believe that we've accounted for all of it and we have adjusted our provision for returns accordingly.

I think I would add to that also the provision in the first quarter, which was, I believe a $1m, and the provision in the second quarter, which is $3.9, I believe clearly shows that management is working diligently to put the adjustments behind us.

We believe the size of the provisions for second quarter largely accomplished that, and that's one of the reasons for the more substantial ample charges in the second quarter is we understand its important to put these behind us, and so I think that we believe we've accomplished that and, of course, a quarter reported out without those will give you the confidence as well, but I think we worked very hard to make the second quarter the end of that.

Okay.

Thank you, David.

Thank you.

Thank you.

If there is any further questions, please press star one now.

Okay, then the next question is from Bob

.Thank you.

Hi, it sounds to be the data force here, it's just a little hard to believe that Deloitte & Touche would have turned away alone, time

, a customer away without the real good excuse, and can you just give it a more color and can you just give as much as you can?

With respect to your question, there is process, a procedure that's prescribed for these situations and the regulations are very exacting.

And, so we submitted our 8-K on that basis and as I have mentioned earlier we do not know the reasons behind their resignation and we are not going to speculate.

All we know is what we put in the 8-K disclosures and, of course, we included the critical issues there in our press release.

And, again, I would focus you on the critical factors there since the beginning of our relationship with Deloitte back in October of 2000.

There has never been any disagreements between Ligand and Deloitte on accounting principles or practices, financial statement disclosures or auditing scope and procedures.

That is the most important thing and so, we can confirm that and they did submit a letter to the SEC, which reinforces that and has noted that they have never had any differences and there's really nothing else that we can say.

We do understand, there is always a curiosity, we do believe however that while it would be interesting to understand whether there were people, relationship or business reasons, we simply don't know, and we are not sure that, that's really what's important to shareholders.

Our view, and I believe the SEC's view, is what's important is to ensure that there are in fact no issues, disagreements or otherwise related to the financials of the Company and that I believe we and Deloitte & Touche have clearly put on the record and that in the end is the most important thing to the shareholders.

The rest of the soft issues, might be interesting to speculate about, we are not going to do it, we don't think it's the most important things for shareholders and in the end we don't know and probably never will.

So, I think it's like any other relationship that has been successful for a while, when it's time to move on, you make the transition, you do it as professionally as possible and that's where we are.

We are moving forward, we will find quickly and efficiently working with our audit committee, a new external auditor and continue to move the Company forward on its business goals.

Okay, thanks.

Thank you.

The next question is from Kevin Bergeson.

Go ahead please.

Yes, that was -- actually -- my question was what you were just addressing to, a second ago, is what's the timeline typically for handling a procedure like this, you mentioned that you were notified on July 27.

So, you are coming up on a week, how long should this process generally take and what should we be looking for?

I don't know that there is a right or wrong answer.

We provided the notification to the market, timely according to the rules and we will be working within this quarter very quickly to interview and narrow down with our audit committee, the successor candidates and so we will have a new auditor in place by the time we have our next quarter results.

I would not want to get any more specifics than that.

And our current auditors will be -- their work will be completed with the filing of this quarter's Q.

Yes.

Thank you.

Again if there is any further question, please press star one now.

And the next question is from Jason

.

Thank you.

How are you?

Good morning guys.

Good morning Jason.

Maybe one last jab at this.

The new auditor is, are they required to speak with the prior auditor and just in general on these situations so that if you have trouble or if you don't have trouble securing another auditor that would reassure the market that there was nothing wrong?

Jason, there is no requirement that a successor audit firm talk to the prior auditors.

Typically they do it and they are all aware of the rules and regulations and they see the 8-K filings and alike, and typically they do get into a dialogue before they sign on.

Okay, and I guess the last question on this and I know David, both you and Paul have said you don't want to speculate on this, but I mean did you guys just simply ask them why they chose to drop the account?

I would say that our previous comments stand, we don't want to speculate and all of the reasons we did put in our 8-K filing and in our press release.

And we just think that it's appropriate to stay away from the soft issues which are beyond the accounting that relate to the relationship.

And I guess the last question, more importantly, are we still on track for non-small cell lung cancer data first-line therapy in Q1 '05?

Yes, we are.

Okay, great.

Thank you.

Yes, we are.

Thanks.

And that's all the questions at this time but again if someone has a question, please press star one now.

I think we appreciate your attendance.

We've gone a little longer than we expected.

So, thank you again, and if there are any further follow-up questions, we will be available throughout the day.

Thank you.