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Schering-Plough Q4 2008 Earnings Call Transcript

admin — Fri, 16 Jan 2009 05:44:59 +0000

February 03, 2009 08:00 AM ET
Janet M. Barth – Vice President of Investor Relations
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Chris Schott – J.P. Morgan
Good morning. My name is Jennifer and I will be your conference operator today. At this time I would like to welcome everyone to the Schering-Plough 2008 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question and answer session. (Operator Instructions). Thank you. Janet Barth, you may begin your conference.
Janet M. Barth
Good morning everyone. It’s Janet Barth. Thank you for joining us to review our fourth quarter and the full year 2008 results.
Before we begin, let me run through our disclosures. Some of the statements made on our call today may be considered forward-looking statements. The company’s SEC filings including our 10-Q for the 2008 third quarter which identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made this morning.
The company’s SEC filings as well as today’s earnings release and tables are available at schering-plough.com. I would also note that during the call we may refer to non-GAAP measures including adjusted net sales or adjusted top-line sales, which is a non-GAAP measure that we define as our GAAP sales plus an assumed 50% sales contribution from our cholesterol JV.
We will also refer to as reconciled amounts or amount on a reconciled basis. As reconciled amount exclude purchase accounting adjustments, acquisition related items and other specified items.
Please refer to the non-U.S. GAAP reconciliation tables for our reconciliation of these adjusted figures to our reported GAAP results. These can be found under Financial Highlights in the Investor Relations section of our website.
This morning, I am joined by Fred Hassan, our Chairman and Chief Executive Officer; Rob Bertolini, our Chief Financial Officer and Carrie Cox, the Head of our Global Pharmaceuticals. We also have other members of management available here for Q&A.
Now I would like to turn the call over to Fred Hassan.
Thank you, Janet and welcome to our call. We are pleased that we’ve delivered another solid quarter concluding a very strong year. We can see that through our transformational action agenda we have built a strong and diverse company.
This morning I will cover two topics. First, what we have accomplished in ‘08 and over the past five years. Second, I will give you my perspective on the challenges ahead and why we have confidence.
So, first about ‘08. ‘08 saw extraordinary challenges at the macro level. This affected all industries including ours. Meantime, Schering-Plough was responding to two additional challenges. We had the challenge of the complex global integration of Organon BioSciences and we went through the challenge with the Merck Schering-Plough cholesterol joint venture in the United States.
In the face of all these challenges, our people delivered. Our reconciled EPS growth for ‘08 of 28% over ‘07 was a huge accomplishment. We surprised many people with that. Across the organization, we continued to execute well on the core strategy that’s been driving the transformation of our company. We have been growing the top-line, we have been growing the pipeline, we’ve been reducing costs while investing wisely.
Rx drivers of our top-line included REMICADE, TEMODAR, NASONEX and our Women’s Health Franchise including FOLLISTIM and our innovative contraceptive NUVARING. We also drove growth in our cholesterol franchise outside the U.S. Our combined Animal Health unit, which is now the global industry leader, delivered strong performance on a full year basis with sales of nearly $3 billion.
Our Consumer Health Care unit continues to drive important innovations. For example, with the strong growth of MiraLAX and the launch of CLARITIN Liqui-Gels this month, we now have a full year of our OBS combination. We can say that the strategic fit, the science fit and the financial fit that we talked about when we announced the deal in March ‘07 are coming through beautifully.
This happened because our people converged and aligned led by a management team with experience in managing complex integrations and our team has come through with a very successful integration.
Financially, our OBS combination delivered in ‘08. When many acquisitions are dilutive in year one and beyond, we delivered accretion early in year one and we generated good cash flow. And we started to pay down the debt taken on to finance the OBS acquisition as part of our financial management strategy.
Strategically, the acquisition has delivered on its promise of further building our strength and diversity. We gained further strength and diversity through our combined Animal Health unit. We continue to executive successfully on our geographic expansion strategy with strong growth in Russia, Brazil, China and other newer markets.
While this kind of newer market strategy is now in bow, we have been executing on ours for more than four years. We have now exceeded $2 billion in annual sales in these newer markets. Scientifically, we created a strong R&D engine through the combination. We advanced our strong late-stage pipeline, including approval of Sugammadex or VYTORIN in Europe and progress on our asenapine filing with the FDA. And we are on track to file asenapine in Europe this year. We’ve built, increased R&D strength in our combined Animal Health business and we also work to build more operational excellence into our company.
During ‘08, we started our Productivity Transformation Program or PTP for short. We had said we would take tough actions, if tough actions were needed and we did that with PTP. We reduced cost. We took actions to become stronger, leaner and more productive around the world. So we accomplished a lot in ‘08.
‘08 also marked five full years since our current management team joined Schering-Plough. Those five years saw a dramatic transformation on many fronts. Adjusted sales more than doubled from $8.9 billion in ‘04 to $20.8 billion in ‘08. In ‘04, we had just one product with sales over $1 billion. In ‘08, we had five products with sales over $1 billion. We increased reconciled EPS from roughly break-even in ‘04 to $1.75 in ‘08. We went from large, negative cash flows in ‘04 to generating strong positive free cash flows in ‘06, ‘07 and ‘08. In fact, for ‘08, we are in the $2 billion zone. And over that five year period, we transformed one of the weakest late-stage pipelines in our peer group into one of the strongest. Our industry leading late-stage pipeline now contains twelve new entities.
Now, let me turn to the future. The political landscape in Washington is going through a sea change. Also in the current economic climate, government peers around the including the U.S. now face enormous budgetary pressures. In the face of those and other challenges, let me say why we have confidence in our future.
Financially, our balance sheet is strong. We have a five year record of operational dynamism. We expect our PTP actions to continue to bring additive cost savings and productivity improvements. We have tested, resilient people, led by a very experienced management team. This is especially important in this period of turmoil and change and we have the strength of our innovation.
Innovation will make the decisive difference. We’ve built a strong innovation engine at Schering-Plough. We are excited about our pipeline in all three of our units. We have a strong innovation flow in Consumer Health Care unit, with many new products of line extension plans this year.
Our Animal Health innovation is also very strong. And we are very excited about our ex-pipeline which includes strength in Biologicals. Our late-stage compounds include the five stars we told you about at our R&D Day in November. TRA, SIMPONI or golimunab, SAPHRIS or asenapine, Boceprevir for Hepatitis C and BRIDION. We believe we are in the sweet spot on product flow and expected exclusivity. This gives Schering-Plough a special edge.
As health care reform becomes a focus in the U.S., we will be strong advocates of biomedical innovation with a new administration and a new congress. Chronic diseases account for around 75% of healthcare costs. They result in 7 out of 10 deaths in the United States. Prevention and wellness are key to containing costs and improving lives.
Biomedical innovation is important to achieving the goals of improving lives, cost effectively. The U.S. is fortunate to continue to be preeminent in biomedical innovation at a time when the locus of so many other industries has moved offshore. So, we will be explaining to policymakers why biomedical innovation must be nurtured and supported because of the competitive innovation edge it gives the United States.
Finally, I can tell you that we have the confidence because of our people. We were tested when we began our action agenda in ‘03, ‘04. We transformed and delivered. We were tested again in ‘08, again our people came through. Again they showed their resilience.
In recent months I attended many meetings with our people at many locations. I saw that our people are strong and confident in their resolve. That is why we feel confident as we see the challenges facing our industry.
And now, let me turn over to Bob Bertolini.
Robert J. Bertolini
Thanks Fred and good morning. Before I begin to review our fourth quarter financial results, I want to take a minute to highlight our very strong performance for the full year 2008.
Throughout this past year, we have executed on a broad front to drive growth and build diversity in our business. At the same time, we have exercised strong financial discipline. We’ve controlled cost while continuing to invest in R&D. As Fred said, our full year earnings per share grew 28% to $1.75 on a reconciled basis.
We are also pleased with our results in the fourth quarter, despite tough market conditions. On a reconciled basis, we earned $0.39 per share. These amounts exclude purchase accounting adjustments, special and acquisition related items and income from the termination of our respiratory joint venture with Merck.
Let me now review the key drivers of our quarter results including sales, operating performance and our Productivity Transformation Programs. Then I’ll finish up with some comments about our financial position.
On a GAAP basis, our net sales in the fourth quarter increased to $4.3 billion and include about $1.3 billion in sales of products from OBS. Recall there are sales in the fourth quarter of 2007 included about six weeks of sales from OBS products, totaling about 600 million. So starting in the first quarter of 2009, our results will be comparable on an apples-to-apples basis.
Foreign currency unfavorably impacted our sales growth by approximately 6% in the quarter. At current rates, we would expect some headwind going into 2009. And just as we have in 2008, we remain flexible and nimble in working hard to control costs in the face of this headwind.
Sales of our Prescription business increased 17% to $3.5 billion this quarter including a 6% unfavorable impact from currency. Sales benefited from more than $800 million in sales of products from Organon compared to about 400 million in the partial period last year.
We also saw higher sales of REMICADE, NASONEX, PROVENTIL and TEMODAR. Offsetting this growth, were sales declines for CLARINEX, AVELOX and PEGINTRON. Global sales of the cholesterol franchise in the fourth quarter were down 24% compared to the prior year period. In U.S., sales of VYTORIN and ZETIA were down 35% while international sales grew 6%.
Excluding the impact of exchange, international sales grew 17%. Carrie will talk more about our Prescription Products in a few minutes.
As you know, we have a lot of diversity in our business with our leading Animal Health business and an innovative Consumer Health Care business. Keep in mind, that these businesses are less impacted by public policy issues than the Prescription business. Sales of Animal Health products increased 33% in the fourth quarter to $674 million including a 9% unfavorable impact from currency. Sales this quarter include more than $400 million from the acquired Animal Health business, compared to about 200 million in the partial period last year.
In addition of foreign exchange, our Animal Health sales during the fourth quarter were primarily impacted by a couple of things; the divestment of certain products related to the acquisition of OBS and by factors resulting from current credit conditions, including inventory reductions by customers.
Turing now to Consumer Health; sales this quarter were $219 million, down 14%. The decrease was mainly due to OTC CLARITIN which was impacted by inventory reductions by some of our retail customers, private label competition and a timing of shipments in 2007. Offsetting these impacts were higher sales of MiraLAX, which grew 66% in the quarter to $30 million.
We’ve had strong performance of MiraLAX and we’ve recently surpassed Metamucil as the market leading brand in this category. And we continue to have a strong innovation cycle in Consumer Health. In fact, we anticipate launching more than a dozen new products in 2009. As Fred just mentioned, we recently launched CLARITIN Liqui-Gels, this was the first and non-drowsy liquid gel in this category.
Let me now review our fourth quarter operating performance. On a reconciled basis, our gross margin was 68.9% in the quarter. The gross margin was high this quarter, primarily due to a benefit from foreign exchange. Going forward, we would expect the primary driver of the gross margin to be product mix.
Before turning to SG&A, let me remind you that we would be making steady progress to achieving our $1.5 billion target for PTP.
For the full year 2008, we’ve achieved more than $600 million in PTP savings. So you can see we’re well on our way. And we are seeing the affects of these savings across all of our business units. In the fourth quarter, SG&A expenses were $1.6 billion, roughly flat quarter-over-quarter.
PTP savings and favorable currency partially offset expenses from OBS. On a reconciled basis, our SG&A ratio improved to about 37% in the fourth quarter from about 44% in the prior year. So as we control cost, we’re seeing a benefit in our cost base.
Moving to R&D. On a reconciled basis our R&D expenses totaled about $850 million consistent with the fourth quarter of 2007. Sequentially, R&D expenses were lower, primarily due to foreign exchange and PTP savings. While we continue to invest in our late-stage R&D projects, we believe the rate of growth in R&D spending will be lower than in the past few years. As you know, R&D spending varies quarter-to-quarter and is always subject to the timing of clinical trials and related activities. For the full year 2009, we currently expect R&D spending to grow in the mid-single digit range.
We’ve also strengthened our financial position in 2008. As of year end, we had about $3.4 billion of cash on hand. This is about $1 billion more than we had at the end of 2007. And with our positive cash flow, we paid down more than $1 billion of debt in 2008.
As a reminder, we have no scheduled debt maturities until 2010 when we have about €500 million coming through. And from a cash perspective, we remain invested in highly liquid and highly weighted securities. So as you can see, we continue to have a solid financial position.
In closing, you can see that our strategy is working. Despite the challenges in our business this year, we have grown the top line, grown the bottom-line and controlled cost while continuing to invest in R&D. Our investments in R&D have resulted in a rich late-stage pipeline with five stars that are progressing well. We believe our strategy positions us well for the long-term.
With that, let me turn it over to Carrie.
Carrie S. Cox
Thanks Bob. Good morning. Today I want to discuss the five brands that have each delivered more than $1 billion in the full year sales and also provide some additional perspective on the five stars in our late-stage pipeline that Fred and Bob have mentioned.
We are absolutely delighted that REMICADE reached another important milestone with full year sales exceeding $2.1 billion. To put this performance in perspective, REMICADE sales have more than doubled since 2005. Each of REMICADE’s six indications delivered double-digit growth despite increase in competition.
REMICADE has continued to capture market share and has played an important role in changing how biologic therapies are used today. We have developed important strength and expertise in this category. REMICADE provides power and speed which is especially important for rapidly progressing patients with rheumatoid arthritis. REMICADE also has a particularly strong clinical profile in Crohn’s disease and ulcerative colitis where it holds a leading market share position.
In the future, we believe SIMPONI can offer a unique proposition compelling efficacy and a clear competitive advantage with once monthly dosing and a state-of-the-art delivery device. As you know, other subcutaneous therapies require weekly or bi-weekly injections. SIMPONI will compete in a different segment of the market than REMICADE and will provide new opportunity to penetrate the larger office space segment.
We believe REMICADE and SIMPONI can both to be quite successful and are well positioned to deliver continued growth for this franchise.
Turning to Cholesterol, global franchise sales declined 11% to $4.6 billion. Q4 sales were down 24% to $1.1 billion. Outside the U.S., our Cholestrol franchise continued to deliver double-digit growth excluding the impact of foreign exchange.
In Japan, we are pleased with the continued uptick of ZETIA with its market share now approaching 7%. In the U.S., franchise sales were down 35% reflecting difficult comparisons versus the prior year. Sequentially, franchise sales were in line with the third quarter.
In 2009, we expect by VYTORIN and ZETIA to have competitive second tier managed care access, in line with other branded cholesterol lowering medicines. The FDA’s recent statement on their review of ENHANCE has again reinforced what we have believed for quite some time. Lowering LDL cholesterol and getting patients to goal is the corner stone of lipid management.
With more and more patients needing to reach a treatment goal of 70 or below, only VYTORIN provides more than a 50% LDL reduction at the usual starting dose and gets more patients to goal across the dosing range.
In allergy, NASONEX delivered more than $1.1 billion in full-year sales driven by strong double-digit growth outside the U.S. NASONEX has truly become a global brand delivering its second straight year $1 billion plus performance. In Q4, NASONEX sales increased 3%.
We’re very pleased that our teams around the world have defended their leadership in spite of new competition. And in Japan, NASONEX has recently been launched with good early progress.
In Oncology, global TEMODAR sales surpassed the $1 billion mark for the first time. During the quarter, TEMODAR sales increased 4%. Last week, we received European approval for TEMODAR I.V. as well as for an oral sachet. As you know, an IV delivery form can be a really important option for patients undergoing cancer therapy.
Our Women’s Healthcare portfolio delivered more than $2 billion in full-year sales. We made good progress this year with unique and innovative brands including NUVARING, IMPLANON and CERAZETTE. Each delivered double-digit growth in 2008 and collectively grew 24% based on recent INS sales data.
At our R&D Day, we highlighted the 5 stars in our pipeline that we believe offer the greatest near-term potential. In addition, we had the chance to discuss 14 other projects that we believe can be first-in-class and/or best-in-class. With many of our core brands having long periods of expected exclusivity, our upcoming cycle of new product launches can build from a solid base.
Last month, we received a complete response letter from the FDA for SAPHRIS, including proposed labeling for both the acute treatment of schizophrenia and bipolar mania. No new clinical trials were requested and we anticipate providing a full response to the FDA this quarter. We’re also pleased that SAPHRIS met its primary end-point in a long-term schizophrenia relapse prevention trial, which is the foundation for the European filing planned for later this year.
We believe SAPHRIS has a very attractive clinical profile that combines good efficacy with attractive metabolic safety. There is significant unmet need in this market and we believe SAPHRIS may provide sufficient and important medicine to treat new and existing patients, particularly given the high switch rate with current treatments.
In respiratory, MFF is a combination product in development for asthma and COPD. As you know, combination products are the fastest growing brands in this space and are the preferred agents for moderate to severe patients. As we discussed at the R&D Day, there is mounting clinical data supporting our belief that MFF can be an important treatment option for many patients. MFF is on-track for regulatory filing this year for asthma.
Lastly, I’d like to comment on Japan, where our full year sales have more than doubled since 2003. We are in an exciting cycle of new product introductions. Our success with the recent launches of PEGINTRON, TEMODAR, ZETIA and NASONEX has helped to drive strong growth and can help set the stage for future opportunities in Japan including REMERON, ASMANEX and Sugammadex each already under regulatory review.
In closing, we continue to execute on our core strategy of driving top-line growth, advancing the pipeline, reducing costs and investing wisely. We thank all of our Schering-Plough colleagues for their commitment and performance and we look forward to continuing our important work in building a high performance company for the long-term.
Now let me turn the call back to Janet.
Janet M. Barth
Thank you, Carrie. Jennifer, I think it’s time that we open up the call for questions. And before we do that, let me just remind everyone of you to just limit yourself to one or two questions we’d appreciate that. Thank you. Jennifer, are you there?
(Operator Instructions). Your first question comes from the line of Tim Anderson.
Thank you. Couple of questions. On golimunab, if I look at average European approval timelines it suggests you would get a decision in the first half of ‘09. Is that what we should assume and should we view this as a low risk regulatory review? Second question is on international sales, VYTORIN and ZETIA going forward. Ignoring the effects of foreign exchange, do you expect that both drugs will continue to grow for the foreseeable future? I am trying to gauge your latest thinking about… of ex-U.S. impact of ENHANCE coverage (ph)?
Thank you, Tim. I will ask Tom Koestler to respond to the first question and Carrie to the second.
Yeah, hi Tim. Thanks for the question. It’s always difficult to be absolutely precise when a regulatory authority is going to provide the final decision for approval. But, in this particular case, the timing scenario is generally between 12 and 18 months and golimunab in very late phase registration. So, I think we can look forward to hearing something positive coming out of the European Union, certainly this year.
Thank you, Tom. Carrie?
We have seen very good growth during 2008 for VYTORIN and ZETIA outside the U.S. That’s made up of a very nice performance for the launch of ZETIA in Japan as well as continued strong performance in established and emerging markets for VYTORIN and ZETIA both. And we see the opportunity for our projects to continue to do very well. They are well positioned and we have seen very, very little impact of any of the ENHANCE coverage outside the United States.
I think Carrie, it’s fair to say that the guidelines in Europe are now becoming more visible to their medical profession and their guidelines are not that different from the U.S. guidelines and there is a huge map of unlisted (ph) patients who need to be brought to goal. So long-term, the outlook should good for us.
And that remains true around the world. There are still at least half of the patients even in developed country where cholesterol management is well established, who don’t reach their target LDL goal. And as the goals continue to go lower and lower we believe that a medicine, particularly like VYTORIN has a very, very key role to play.
Thank you. And next question please?
So, our next question comes from Roopesh Patel.
Thank you. I have a couple of questions. First, for Bob, just wondering on the PTP Program, $1.25 billion are targeted to be achieved by 2010, 600 million, I believe, are achieved already. My question is what are the prospects of achieving the balance sooner than the 2010 target? What should we expect in 2009?
And then, separately, in terms of the SG&A and R&D growth reported this quarter, what would it have been excluding foreign exchange? I’m curious as to whether or not this rate of spend can be sustained through 2009, there’s almost a flat spend that was achieved in the fourth quarter? Thanks.
Very good questions, Roopesh. Bob?
Thanks Roopesh. So on PTP, I think we are very pleased on how we are performing on this. We are seeing savings across all of our business. Roopesh, I would think about it, we are on track with 1.5, I think we are comfortable with that number, we are not increasing it, but with the 600 million we’ve done today, we’ve accelerated that. We’ve pushed that up.
In 2009, you will see some of that annualize and it will increase, but we are working hard to kind of do what we can on the cost base, clearly in the face of FX as I said in some of my comments. So we are working hard on that cost base going forward.
On the pieces for SG&A and PTP, FX did benefit the quarter. If I looked at R&D sequentially, I think it was about $40 million benefit we had from Q3 to Q4 in R&D to give you some sense. And on the SG&A, I don’t have it in front of me, but it was by order of magnitude, maybe in the 70 to $80 million range, it’s kind of by order of magnitude as what I recall. Hope that answers your questions, Roopesh?
Thank you, Roopesh. And next question please?
Your next question comes from the line of Tony Butler.
Thanks very much. While, you have done an excellent job with respect to cost control in the quarter. I am curious, Fred, how you think about your infrastructure as you consider launching golimunab in Europe? Are the same individuals who carry REMICADE in their bag, will they carry golimunab or is this just a separate group?
And the second can be said for asenapine in the U.S. for it to launch later this year. How do you think about your current infrastructure in the U.S.; clearly I am interested in how SG&A changes? Thanks.
Very good questions, Tony. I’ll give you my own perspective and then I’ll ask Carrie to supplement what is said. I was on the ground in Germany a few months ago. There is a clearly separate office space market there, separate from the hospital market where REMICADE is the primary product and that’s a big expansion opportunity for us.
But in order to co-position the products properly, at least in that particular country, they are planning to use a similar approach so that the products are properly co-positioned. As far as asenapine is concerned, it’s a very good opportunity for us. I personally had experienced with Effexor at Wyeth, where Wyeth was not in that space before Effexor came along and it can be done very carefully and sequentially. First, penetrating the high ROI space which are the sites and then expanding to the high ROI primary care doctors and finally taking it to the broader audience.
And with those comments, Carrie, why don’t you respond on golimunab and asenapine?
Thank you. I believe very strongly that we can successfully co-position both REMICADE and SIMPONI and therefore continued to grow the franchise. So it’s important that we develop the products in such a way that the reps can carry both products. So as Fred was suggesting, we anticipate that each of our sales reps well be able to support both brands and help the physicians understand why the products are in fact so appropriate for different target patients. We have had some minor expansion of the sales forces in Europe to anticipate entering a different segment of the market where golimunab SIMPONI will be competing. But it’s being held largely in the existing infrastructure in Europe.
Turning to SAPHRIS, we are excited about planning for that launch and we do anticipate as Fred said, coming forward with our own psychiatry sales force and having the initial rollout be very much targeted to psychiatrists for the potential launch of acute schizophrenia and bipolar disease.
So overall Tony, we can assure you, we are very PTP sensitive in our company and we are going to use right resources at the right time to maximize the value of our pipeline. Thank you, thank you Tony. And next question please?
Our next question comes from the line of David Risinger.
David?
Yes, thank you very much. I have two questions. First Bob, I was hoping that you could please quantify the FX benefit to gross profits in the quarter and also the EPS in the fourth quarter? And then talk a little bit about how foreign exchange might impact the gross margin differently in future quarters even if exchange rates happen to be the exact same as they were in the fourth quarter of ‘08? And then second, this is for Carrie, can you discuss your taste-masking technology and how you plan to apply that to asenapine? Thank you.
Thank you, David. Bob?
Okay David, good questions. Let’s… there was about few things going on with foreign exchange, so let me try to walk you through it, to give you little sense of color with it. First as I said, currency went against us this quarter. It had about negative 6% impact on the top line that was about $240 million or so. Of that amount, we would estimate, because it varies by quarter, we’d estimate that about 35 to 40% dropped to the bottom-line or about $0.05 negative and that would include the impact in equity income in the JV.
Now as I said before, that impact could vary by quarter-to-quarter based on our mix of expenses outside the U.S. and inside the U.S. Additionally this quarter, we had a favorable impact in the gross margin of about 2 percentage points and that was a positive impact in the $0.05 to $0.06 range. So generally offset that translation impact. And then we had some impact with respect to just normal, I would say transaction exposures given the volatility of the currency in the quarter. That was about $0.02 and that’s reflected in our other income or so. So if you boil it all down, FX was roughly flat, if we take the translation impact offsetting that positive impact that I mentioned in gross margin for the quarter.
And Bob, you may want to mention about the future that there are some natural hedges and also the shareholder economic value based on our balance sheet.
Yes. So I think when you think… we think about currency, we think… we look at our mix of expenses around the world and as Fred just mentioned we have some natural offsets. And I would also say from an economic standpoint, keep in mind that about 2.5 million euros of our debt, we have it in euros acts as a natural hedge for us to some extent from an economic standpoint, not from a P&L standpoint, but from an economic standpoint.
And I think David the last part of your question, I think at the current rates, we would not anticipate such a large benefit in gross margin recurring in the first quarter at current rates to-date, maybe a small amount but not such a large amount in that quarter.
Thank you, Bob. And Carrie on the taste-masking?
The tablet that we currently have for SAPHRIS is a very, very rapidly dissolving tablet. And in the clinical studies, we see that there is actually a very minor impact of the taste and very few complaints. In the spirit of continue its improvement on life cycle management, we are working on another formulation with flavoring which is in development but will be a few years in the future.
Thank you very much, David. And next question please?
Your next question comes from Seamus Fernandez.
Thanks very much. Just a quick question you had a strong performance on the PROVENTIL/ALBUTEROL CFC side, we have the conversion in the marketplace going on today. I’m just wondering if you can talk about how pricing is actually acting in that market. Is pricing actually improving in that market now that there are no longer CFCs available?
And then again, separately, just to follow up a little bit more on the gross margin question. Bob, can you talk a little bit more about how your foreign exchange works with regard to the inventory? You mentioned that you wouldn’t see a benefit or as much of a benefit in the first quarter. I am just wondering if we would see actually some potentially detrimental trends in the second quarter as the inventory flows through and the exchange rates look a little bit different in that time frame. So those are my few questions, thank you.
Carrie?
As you mentioned, the federally mandate conversion of the CFC containing products to HFA, the deadline did pass in December of 2008. So in fourth quarter, we saw quite a bit of activity with the CFC products being converted to HFA. The overall value in the market has been affected to some degree, but we don’t comment on pricing or individual actions in that area. But I will say we are pleased with the share that we have obtained with PROVENTIL HFA, but I don’t anticipate that we will see ongoing conversion activity much past first quarter.
Thank you, Carrie. And Bob?
Yeah Seamus, I think on the FX, I think the way to think about it is, what actually happens is that it relates to the inventory movements we have to our global network. And as you may know, we have roughly 140 entities around the world. So in effect what’s happening is… what’s happening in this period is our foreign subsidiaries have purchased their inventory a few months ago when their currencies were stronger. So when it sells through, it’s basically selling through when the inventory comes to a lower. So it’s really going forward, it’s a function of the volatility. We try to watch it closely. We are estimating. We don’t think we’ll have as huge of an impact that we had in this quarter, recurring in Q1. But going forward in Q2, it would really be a function of the volatility of the currencies.
Thank you, Seamus. And next question please?
Your next question comes from the line of Jami Rubin.
Thank you. I have two questions. First question relates to Boceprevir, just was wondering why if you are completing Phase III enrollment, why the aspirational filing date is not until 2011 to 2012. And my second question for you Bob, it relates to reconciling U.S. prescription drug sales. My sense and I may not have seen all the foot notes, was that U.S. sales were up about 2, 3%. Can you tell me what U.S. sales were up in the fourth quarter?
And if you could provide more color around the mix effect in 2009 for the gross margin leaving foreign exchange aside? How we should think about the different factors? Because historically, REMICADE and what will be launched, hopefully if golimunab is launched in 2009, would likely have… or at least historically have been negative drivers on a gross margin whereas U.S. sales have been a positive factor, but just trying to understand all the different elements around the gross margin. Thanks.
Very good and very penetrating question Jami. So, Tom?
Good morning Jami. We have now completed full enrollment in the Boceprevir Phase III trial. So as you know, in order to achieve SVR which is the FDA requirement, you need 48 weeks of study with a 24 week follow up. Since, we completed enrollment in our pivotal trials in January that places us in mid 2010 to have the SVR date and the pivotal trials complete. And from a conservative point of view, we would be then in a position to make our submission. So, in that mid 2010 timeframe.
But the 2011, 2012 is probably quite conservative.
We tend to be conservative in these things Jami.
Okay thanks.
Bob?
And Jami, let me try to give you a little bit of sense on the U.S. sales. So if you look at it. We came in roughly about 981 on the prescription sales for the U.S. versus 855. If you back out OBS, that growth was about 2%. If you look at it.
Is that… what quarter? Fourth quarter or full year?
Q4.
Okay thanks.
Q4. And on the gross margin Jami, I think, based on the tone of your question, I think if you are thinking of it the right way. REMICADE is going to put some downward pressure on the rate as that grows and golimunab will be the same with respect to that.
Animal Health is also a product margin that has generally a lower product margin and we are very excited about that business. But I would think about that margin in the 60, low 60% kind of range. The legacy Organon price (ph) to tell you a little bit, offsetting that but generally with REMICADE and Animal Health growth, it will put downward pressure on that margin going forward.
Now as you know, we are working hard on our PTP program. Part of that includes, the rationalization looking at our plans. That does take a little bit longer. But we are hopeful to see some of that come in offsetting some of that negative downward pressure resulting from REMICADE and Animal Health.
Yeah.
Thank you.
Yeah, we’re absolutely committed Jami to getting savings out of our supply chain and we are just doing it in a very careful manner. We had said last year it was going to take a little longer time with the supply chains. But the people we have in charge of that have done a lot of work in other companies. So we are going to do this the right way and you can expect a lot of basis points coming out of the cost structure as a result of the supply chain rationalization. And thank you Jami. And next question please?
Your next question comes from the line of Bert Hazlett.
Yes, good morning thank you for taking the questions. My question is also a little bit on Animal Health. As that business becomes more significant to your overall operations, can you give us an understanding of the outlook specifically for that business as you have the different economic pushes and pulls counteracted by your pipeline. And how much of a focus PTP is on that business? And then secondly, regarding the cholesterol JV in the U.S., is that business right size in the U.S. and particular right now? Thanks.
Thank you, Bert, both are very, very good questions. I can tell you that the Animal Health has been an internal merger since the legacy for that (ph) business was larger than the Schering-Plough Animal Health business. We’ve approached that with some care. There is also a cultural integration going on in that regard. So some of the savings might take a little longer and there are opportunities there. And the most important opportunity is the very, very good pipeline in R&D. And the recent launches that have already occurred in Animal Health which make us feel pretty good, especially in the U.S. which is a growth corridor. Bob, would you like to add anything on Animal Health.
Just a couple of points, Fred. Clearly as I said in my remarks there was some impact from the economic crisis we had in Q4, primarily in a couple of areas. We saw a reduction in some of the distributor inventories as they look in to conserve cash and also a lack of credit from some of the producers. So, we have seen some of that.
But I will also say we are starting to see some of that demand come back in January. And we have a very full product portfolio with respect to Animal Health. And the only other point what I would remind you on this business, roughly 75% of this business is outside the U.S. So while some the credit issues were in the U.S. specifically this quarter, it’s a very broad based, diversified throughout many, many markets. So keep that in mind as you go forward.
And I think it’s fair to say that protein consumption per capita is unlikely to be affected because of a recession.
Overall.
Overall. Yeah, did we answer all the questions?
The question on JV.
Cholesterol… Carrie?
We did implement our PTP actions in the United States in 2008 and that is now resulting in our new focus with our sales force. But together with Merck, we continue to have a very competitive level of support for the JV cholesterol products and we are continuing to invest appropriately with an eye towards potential future growth in that category. We continue to see that there is a very large unmet need in getting patients to their LDL cholesterol goals. So we continue to be committed to the appropriate investment.
Overall it’s fair to say that the promotional intensity has started to come down in that whole market.
In the entire category, but we remain one of the strongest competitors.
Thank you, Carrie. And next question please?
Your next question comes from the line of John Boris.
Thanks for taking the questions. On the tax rate, Bob can you just give some color on the low tax rate in the fourth quarter, both from the contribution from the R&D tax credit and is that sustainable going into ‘09? On net operating losses, what were they in ‘08 and what’s the cumulative amount of NOLs that your are currently carrying? And then on the pipeline on Sugammadex, any thoughts on your interface with the FDA on what additional work needs to be done there to secure approval and then any update on timing for securing approval on BRIDION or Sugammadex. Thanks.
Very good questions, John. Bob?
So, just on the tax rates, John. We came in right around the mid-teens, kind of where we thought for the full-year. So that’s kind of where we’ve been running going… I would say if you think about ‘09, we are currently thinking that it’s generally going to be in that mid-teen rate in ‘09 as well going forward. On the NOLs, John we’ve published those when we filed our 10-K. I will say coming into the year, we had about 1.7 billion. We will be showing some taxable income, we will be finalizing that and we will be reporting that in our 10-K; so that 1.7 will come down a bit, but we will be reporting that in our 10-K.
Thank you, Bob. And Tim Koestler on the Sugammadex?
Yeah, John. We had a good meeting with FDA in December, just this past December. And their concerns, what they were concerned about had to do with hypersensitivity and we had a good meeting with them and we have a clear path forward. The path forward will involve a small study in normal healthy volunteers in a few hundred subjects and the final protocol is just being worked out, it still needs to be headed to the agency. So from a timing point of view, I would expect that we will be in position to conduct that normal healthy volunteer study this year.
What will the length be of the study, I mean for each patient?
Yeah the protocol is… we have the protocols developed and we have an agreement with FDA on that protocol. It will be in the 12 week range. I expect it to be a trial that could be run very quickly. In normal healthy volunteers, this is something that I don’t see as problematic long kind of trial, this will probably a trial that can be enrolled within about a 8 to 10 week timeframe.
Thanks.
Thank you, John. Next question please?
I think we have time for maybe two more questions.
Your next question comes from the line of Chris Schott.
Chris Schott – J.P. Morgan
Great, thank you. Just a couple of pipeline questions. Maybe first on TRA, how do we think about communications on TRA as it relates to trial enrollment as well as updates on the DSMB as the year progresses, maybe also an update on the timing about Lancet publication there. Second on asenapine, are you expecting a Class I or Class II response when…to your complete response letter?
And then maybe finally, just taking a step back, we’re about a year post on Organon transaction at this point. Where are we with the registered product investment particularly as it relates to the Organon human pharma business? At this point are we seeing the full impact, the top line from the reorganized sales force etcetera or are we still kind of early in that process? Thanks.
Good questions. Tom and then Carrie.
Yeah Chris. TRA continues to be really, really moving well on enrollment. We have exceeded 16,000 patients very recently. As you know the trial consist of… the little trials one of 20,000 patients, another one of 10,000 patients. So we are really will be moving on quite well. In fact, the TIMI trial, TIMI 50 trial which is our secondary prevention trial, this was the highest and fastest enrolling trial that they have ever conducted. So we are really pleased with that.
In terms of the publication, it is accept for publication in Lancet. We expect that very, very soon. I can’t say much more than that except we’re all waiting. But it is accept for publication and it’s in press.
And then your question on asenapine, for a Class I or Class II clock start upon… as Carrie mentioned earlier, we will provide a complete response to the FDA very soon in this quarter. It’s a difficult one to predict, but… the way I would think about it is to lean more towards the Class II response.
Thank you. Thank you, Tom. And Carrie?
May I… on the Women’s Health products. Actually this is a great franchise that we are very exited about. There are very innovative brands in there, they are highly differentiated. We are now a leading company in the Women’s Health Care arena and we’ve had a lot of fun in 2008, really strengthening the promotional platform in support for the franchise. So I would say there is still a lot of opportunity ahead of us and we are very bullish on continuing to develop that franchise.
We have a very strong double-digit growth on a worldwide basis for those products and I think we will continue to see further enhancement as we go forward. Another example of answering your questions though is a product like REMERON in Japan, it’s under regulatory review now and remains an additional opportunity to continue that exciting new product launch cycle that we have going on now in Japan.
Yeah, this is very exciting opportunity. The REMERON for example is going into a market that is still pretty early in Japan. The whole depression market got opened up by Paxil and this is now a big opportunity for REMERON. In Women’s Health, what’s very exciting is that because of the excellent signs that Organon had, a lot of the products have long exclusivity barriers, for example, NuvaRing goes till 2018. And this is the opportunity we have now to build brand strength while we build the backup pipeline to keep us going for the long-term in this important area. And it’s an especially good opportunity at a time when the larger companies have left this space open for the very few companies that are in this space. And we are ready for the last question.
Your last question comes from the line of Catherine Arnold.
Thanks a lot. Just an editorial comment about… I want to just say thanks for providing so much transparency on currency and I think if you take that to the next level even in the press release I think you would be further applauded. So thanks for that.
Thank you, Catherine.
You are surprised to hear me say that I know. And then secondly, I just wanted to ask you about BRIDION and the rollout in Europe. And if you can give us a little bit more granularity on how you are contracting, obviously there is a lot of national budget involved here in terms of BRIDION’s inclusion. So how might we think about starting to see BRIDION’s results in Europe throughout this year and next year?
Thank you. Carrie?
The rollout of BRIDION is going extremely well. We are launched now in about 10 countries outside the United States. And in every country that we have had a chance to launch into, we get excellent feedback from the physicians who’ve had an opportunity to use the product. From a budgetary point of view, you might want to recall that the hospital budget management is often managed differently in most countries than the retail reimbursement segment. So while this is clearly the normal part of getting access to hospital formularies and getting accepted for use, the budget impact is not typically the same as it might be in a retail product segment. So we are excited about seeing the rollout really start to take hold in 2009.
Again as I said in the… this is a similar situation to Women’s Health in the sense that it’s an underdeveloped and under-promoted space. And we believe that long-term, this is a very, very good opportunity. And we are also pleased that since Europe is regarded as a high science authority, we can use the free sales to get applications in other countries, many other countries as a result of our approval in Europe and we don’t have to wait for the FDA approval for that purpose.
And this brings us to the end of our Q&A. I would like to just make some concluding comments. As we look at the tough environment ahead, our R&D strength and expected exclusivity on our existing products gives us a special edge. Meantime, our combined operation with OBS is running well. Our greatest strength is the proven ability of our people who rise to the challenges and change. So they are ready for a challenging changing environment and that is the biggest reason we are confident as we look ahead. Thank you very much for joining the call this morning.
This concludes today’s conference call. You may now disconnect.
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AVANIR Pharmaceuticals F1Q09 (Qtr End 12/31/08) Call Transcript

admin — Fri, 26 Dec 2008 22:32:00 +0000

February 17, 2009 11:00 AM ET
Keith A. Katkin – President and Chief Executive Officer
Christine G. Ocampo – Vice President, Finance
Randall E. Kaye, M.D. – Senior Vice President Clinical Research and Medical Affairs, Chief Medical Officer
Ronald L. Chez – Chicago Investor
Good morning. My name is Joshua and I will be your conference operator today. At this time, I would like to welcome everyone to the AVANIR Pharmaceuticals Fiscal 2009 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions).
Thank you. Ms. Mullen, you may begin your conference.
Thank you and good morning everyone. Joining me on today’s conference call is Keith Katkin, President and Chief Executive Officer; Dr. Randall Kaye, Chief Medical Officer; and Christine Ocampo, Vice President of Finance. I will begin the call by addressing our forward-looking statements. Following that I will turn the call over to Keith Katkin.
As a reminder, the statements made on this call represent our judgment as of today, February 17, 2009. Our remarks and responses to questions during this conference call may constitute forward-looking statements including plans, expectations, and financial projections, all of which involve certain assumptions, risks, and uncertainties that are beyond our control and could cause actual results to differ materially from the expected results expressed in our forward-looking statements.
These forward-looking statements include, among others, statements about our expectations for the continued development of Zenvia and the likelihood of success in obtaining FDA approval, as well as statements regarding anticipated expenditure levels, future cash balances and clinical development timelines.
We encourage you to take the time to review our recent filings with the Securities and Exchange Commission which present these matters in more detail as well as related risk factors. AVANIR disclaims any intent to update any forward-looking statements made during this call.
Now I will turn the call over to Keith Katkin.
Keith A. Katkin
Thank you, Brenna and good morning everyone. Thank you for joining us on the AVANIR fiscal 2009 first quarter earnings call.
I will begin today’s discussion with a brief business update before turning the call over to Christine Ocampo, who will review our financial results and then followed by Dr. Randall Kaye, who will discuss the Zenvia clinical development programs.
As AVANIR enters our calendar year 2009, we are extremely excited by the year ahead of us. I believe that 2009 will be a transformational year for our company as we move toward key milestones and take critical first steps to turn AVANIR into a leading neuroscience company.
For the past two years, our organization has undergone considerable change in order to lay the foundation of our future success. Over the past two years, we turned the regulatory path forward with the FDA that included a commitment to reformulate a lower dose of Zenvia and conduct a confirmatory Phase III study in patients with PBA, to demonstrate that the safety and tolerability are enhanced and that the efficacy remains clinically and statistically significant.
We initiated the largest international study of PBA ever conducted with over 50 investigator sites in the United States and Latin America. We exceeded our initial enrollment estimates and as a result, we were able to expand the size of the study to increase the statistical power and enlarge the safety database without jeopardizing our timeline. We also advanced our Zenvia development program in neuropathic pain by conducting a large formal PK study to identify a new lower-dose formulation for the next Phase III study in DPN pain.
Now as we enter fiscal year 2009, we find ourselves nearing the completion of the clinical development of Zenvia for the PBA indication. Next month, we expect an overlap of approximately 300 PBA patients into our confirmatory Phase III trial and plan to have the pivotal top-line data available by September. With those data expected in the near term, we are now taking the initial steps to prepare our full response to the FDA’s approvable letter and to seek marketing approval for Zenvia in the treatment of PBA.
This year, we also hope to gain alignment with the FDA regarding the next steps for our Zenvia neuropathic pain program by obtaining an SPA agreement which we are currently working on with the agency. With pivotal PBA data in hand and regulatory clarity in neuropathic pain, we expect to be well positioned for future success.
There are very few small biopharmaceutical companies these days they have late-stage pipeline assets, adequate financial resources and near-term milestones. These are truly exciting times at AVANIR and I want to thank all of our shareholders for their support over the past few years.
With that, I will now turn the call over to Christine Ocampo for a discussion of the first quarter financial results.
Christine G. Ocampo
Thanks Keith and good morning everyone. My comments today will cover our financial results for the first quarter of fiscal 2009, as well as our expected cash burn for the fiscal year.
In addition to the results summarized in the press release we issued earlier this morning, you can find additional information in our 2008 annual report on Form 10-K and our most recent Form 10-Q. I will begin with a discussion of our results for the first quarter.
Total net revenues were $1.8 million for the first quarter of fiscal 2009, as compared to $2.1 million in the same period of the prior year. The decrease in revenue is primarily attributed to a decrease in grant revenue resulting from the completion of the government-funded anthrax antibody program. First quarter fiscal 2009 revenues consisted of the recognition of deferred revenue of $750,000 and revenue generated from our license agreement with GlaxoSmithKline for sales of Abreva in the amount of $1 million.
Total operating expenses for the first quarter of fiscal 2009 were $7 million, compared to $6.6 million in the same period of the prior year. Our first quarter 2009 operating expenses consisted of research and development expenses of $4.7 million, compared to $3.4 million in the same quarter in the prior year, and general and administrative expenses of $2.3 million, compared to $3.1 million in the same quarter in the prior year.
The increase in research and development expenses is attributed to the confirmatory Phase III STAR trial as well as other supportive studies for the full response to the approvable letter. The decrease in general and administrative expenses is attributed to our streamline organization as compared to the same quarter in the previous year. The net loss for the first quarter of fiscal 2009 was $5.2 million or $0.07 per share, compared to a net loss of $5.5 million or $0.13 per share for the same period a year ago.
We ended the first quarter with total cash of $36.5 million and cash used in operations of $5.7 million. We continue to expect our total cash burn in fiscal 2009 to be in a range of 24 to $27 million. We expect that our current cash on-hand will be adequate to fund continuing operations and the clinical development of Zenvia through the anticipated FDA approval decision date on our PBA application, which is expected in the second half of calendar 2010.
Now I’ll turn the call over to Dr. Randall Kaye, who will provide an update on the progress of our Zenvia clinical program.
Randall E. Kaye, M.D.
Thanks Christine and good morning. During the past quarter, our clinical development team continued to make significant progress with the Zenvia clinical programs. Our efforts have been centered primarily on our single confirmatory Phase III STAR trial of Zenvia for the treatment of patients with PBA, completion of our preclinical commitments as well as planning for the development of Zenvia for patients with neuropathic pain.
The current STAR trial protocol calls for enrolling approximately 300 patients with multiple sclerosis or amyotrophic lateral sclerosis, which is also known as ALS, who exhibit signs and symptoms of PBA. We are nearing the important milestone of last-patient-in or LPI with enrollment as of last Friday, February 13th, of 269 of the approximately 300 PBA patients that are targeted for enrollment.
In looking at the entire patient population in the study, the number of patient discontinuations appear to be favorable compared to previous studies of the higher dose formulation of Zenvia. In addition, the rates of the most common adverse events, such as those attributed to the central nervous system and gastrointestinal symptom, appear to be lower than reported in previous studies.
While these data are preliminary and they do not necessarily predict the final database, this does give us good confidence in the overall study conduct. Finally, we continue to have a large portion of our eligible patients rollover into the open label follow-on study which is an important long-term safety database that was requested by FDA.
Next, as part of our discussions with the FDA post-receipt of the approvable letter, we agreed to complete certain preclinical studies as part of our full response to the approvable letter. I’m pleased to announce today that we’ve completed those studies. The preclinical commitments include non-rodent chronic toxicology, reproductive toxicology, in-vitro pharmacology and a two-year carcinogenicity study. Overall, the data are consistent with our expectations and we had no unanticipated findings. We’re assembling this data to include in our eventual full response to the FDA approvable letter.
In addition to the agreed upon preclinical studies, AVANIR also embarked on additional preclinical and clinical work to further clarify the potential for cardiovascular risk. While these studies were not requested by the FDA, we felt that proactively developing a larger database would be an important component for eventual labeling discussions. The cardiovascular work included an investigation of preclinical data using a rabbit ventricular vet model. The preclinical vet data indicate that as expected the cardiovascular risk of Zenvia decreases as quinidine exposure in lowered.
In addition to the vet study, we are conducting a clinically Advanced Cardiac Safety Study or ACSS to determine the effects of the new lower dose formulation of Zenvia on the QTC interval. This crossover study of 50 subjects was to design to exclude an upper bound of the 95% one-sided confidence interval of 10 milliseconds which according to FDA guidance provides reasonable assurance that the mean effect of the study drug on QT interval is not greater than around 5 milliseconds.
By way of comparison, a previous study conducted to evaluate the cardiovascular effects of Zenvia in the 30-30 formulation, a three-fold higher quinidine exposure than the new formulation, demonstrated an upper bound of the 95% confidence interval of approximately 15 milliseconds.
The Advanced Cardiac Safety Study is being conducted in accordance with FDA regulatory guidance to industry, and we anticipate releasing the results early in the second calendar quarter of this year. We expect to incorporate these preclinical and clinical data plus the cardiovascular data generated from our ongoing STAR trial, into our plan complete response to the approvable letter and subsequent labeling discussions with FDA.
Now moving on to the neuropathic pain program; in May of 2008, we completed a large formal pharmacokinetic study where two Zenvia dosing regimens designed to provide an improved cardiac safety profile and enhanced tolerability were selected for the next Phase III study.
In September, we submitted a Zenvia Phase III study protocol and related program questions to FDA under the SPA process in DPN pain, which is a form of neuropathic pain. And in November, we received our initial response regarding the proposed study protocol. We continue to be engaged in positive discussions with FDA regarding the design of the next Phase III study, as well as the overall neuropathic pain program requirements.
In addition to DPN pain, MS pain represents an attractive neuropathic pain development opportunity. In a previous Phase III study in MS patients with PBA, where MS pain was evaluated as the secondary endpoint, Zenvia demonstrated a statistically significant reduction in MS pain. Based on these results and the pending data from the STAR trial, we are also considering further development to Zenvia for MS-related pain.
In summary, we continue to make considerable progress with our Zenvia clinical programs. 2009 will be an important year of key clinical development milestones that are necessary to seek regulatory approvals for Zenvia and PBA. We remain committed to making Zenvia available to patients as quickly and as safely as possible.
Thanks for your attention. I would like to turn the call back over to Keith.
Keith A. Katkin
Thank you, Randall. In closing, I would like to say that we are extremely excited for the coming months and the key milestones we expect to accomplish in the near term. We look forward to keeping you appraised of our progress during this transformational year at AVANIR as we continue on our mission to dramatically improve the lives of patients with the CNS disorders.
Operator, I would now like to open up the call for questions.
(Operator Instructions).
Keith A. Katkin
Great. While we take this pause to compile questions, I would like to remind everyone that we have our annual meeting of shareholders this Thursday, February, 19th in Newport Beach, California. By now, you should have received your proxy materials and I encourage you to vote if you’ve not early done so. Operator, do we have any questions?
Your first question comes from the line of Jim McKennitt (ph) with American Healthcare Fund.
Hi Keith. Thank you. In your ongoing discussions, I’m looking for a European partner; has the financial turmoil made a difference for people holding back till they see what’s going to happen in the larger world (ph)?
It’s a good question Jim (ph). I think that the current financial turmoil has affected everyone really throughout the globe. I think, as it relates to Zenvia though at least the Euro is still strong, which is… which bodes well. But, as… I think people have asked previously about our overall business development interest, I can say that on the business development front interest remains high, either for a global partner or partners within certain parts of the globe.
That said, a lot of people are very interested to see the results of the Phase III study. And I think that upon completion of the Phase III study in September when we address the new profile and hopefully demonstrate the efficacy is still there within approved safety profile, I think at that time the dynamic should change dramatically because then we will move from essentially a product right now which people believe and hope will be successful to one that has actually demonstrated sure success.
Do you have a preference for a single partner for the world or separate partners in the U.S. and in Europe and Asia?
Our stated objective as it relates to partnership has been that we believe that we can commercialize PBA ourselves in the United States. So our first I guess preference would be to partner the Zenvia just outside of the U.S. And then we’ll be open to doing that regionally.
That said, I can say that as we’ve had continual discussions with a number of people and they start to look at the asset on a global basis, but then they also start to look at all of the indications. So as we engage in the discussions, it may be more difficult to just pull out PBA separately and we may potentially be looking at some type of global arrangement.
Well, thank you Keith.
Thanks Jim (ph).
And your next question comes from the line of Ross Gordon with Gordon Capital (ph).
Good morning, Ross.
Could you give us some idea of what the market is for Zenvia for PBA?
Sure. And may be the best way to address that question, because you know Ross (ph), we haven’t given out specific revenue guidance. But let me talk about the market size, potential price points and then maybe I can allude to what some of the covering analysts projected going back to before we received the initial approvable letter.
Okay.
So first as it relates to the number of patients out there, as a reminder for all those listening, we’ve spent a considerable amount of time and effort really understanding and quantifying the market potential for Zenvia and as part of that exercise, we conducted a very large market research project with the patients who have the underlying neurologic conditions that PBA may be associated with. And in doing that, we sampled about 2500 patients that suffered from MS, ALS, dramatic brain injury, stroke, dementia and the likes and we asked them to take the tests that the doctor would typically give them to determine whether not the patients had PBA.
In conducting that study, we found that approximately 10% of the patients had moderate-to-severe PBA. So if you take that and extrapolate it to the population of those patients that have underlying neurologic damage or injury that’s about 20 million patients in the U.S. that have the trigger conditions for PBA. And our survey suggested that approximately about 10% of those have moderate-to-severe PBA, that’s PBA significant enough where they are going to the doctor and discussing the symptoms. So that leaves about 2 million patients that have moderate-to-severe PBA and we believe that that is the true target and addressable population for Zenvia when we launch.
So that’s… first to give you a sense of the number of patients that are out there. In terms of price point; originally when we had contemplated or get in way to launch (ph) Zenvia, we were really looking at it for across all indications. So both in PBA as well as in neuropathic pain; and neuropathic pain was putting somewhat of a cap on our potential pricing models, and neuropathic pain drugs like Lyrica and Cymbalta are about 6 to $7 a day. So you could easily annualize those numbers.
As we starting to go through the process again and preparing for commercialization, we’re really challenging those assumptions. And we’re also very interested and intrigued to watch Acorda Therapeutics, that’s got a drug and development for MS spasticity. And there have been reports that they plan on pricing their product in excess of $5000 a year for the treatment of MS spasticity. So I think it will be interesting to watch what adoption looks like if they do choose a price point and what kind of upticks they get. But I think if you want to conservatively build your models, you can use the upper bounds of the pain price point which is 6 to $7 a day and then if ultimately if the price is higher that will just represent upside to your models.
So hope that will give you enough of the sense that you can build out your own revenue assumptions. By way of comparison back…. before we receive the approvable letter, we had about half a dozen or more covering analysts. Those analysts gave revenue projections on the low end, which is roughly three years out or three years post-launch. On the low end, they were I think just shy of $100 million. On the high end, they were in excess of $400 million three years out. So hope that will give you a sense of what some of the people were putting together by doing their own market research and their own modeling.
Is this the worldwide market or just the NASDAQ?
Sorry. Thank you for clarifying. No, that’s just the U.S. market.
What is the world market likely to be outside U.S.?
From the perspective of PBA, we have done research in different parts of the globe. We think the European prevalence rate as a percentage of the patients to have similar underlying neurologic disorders is very similar to U.S. Interestingly in Japan and Asia and the likes, in our preliminary market research we found that it’s less accepted to have these emotional outbursts, to not be able to control your emotional displays. So we think it probably be a pretty large treatment barrier just to overcome cultural concerns there. So for that region, we’re particularly focusing on our neuropathic pain, but also obviously within the U.S. and Europe as well.
With respect to neuropathic pain, would the same partner are likely to be selling both the… for PBA and DNP or would those be different companies? Same medication right?
Yeah, likely. I mean there are some examples where the agency has given different brand names to products with different indications, but the FDA has started to move away from that. So I don’t know that’s realistic possibility in these times. Our ideal goal as I mentioned for would be to commercialize PBA in the U.S. by ourselves. It’s a concentrated enough market. There’s not a large number of doctors again to be called in order to access the majority of the patients.
That said, as we have more and more conversations regarding the potential for Zenvia, the conversations generally do move to an-all indication type of conversation, just because of the potential barriers associated with carving out each of the different indications. So everything is still on a table. Our preference would be for PBA-only outcome. But given the market dynamics, it is conceivable that it could be something that comes to all indications.
When are you likely to be able to bring the end piece to market?
I’ll better be able to answer that question after we resolve the special protocol assessment process with the FDA now. So it would be great if either in the next quarter of if it takes a little bit longer, we will be able to give specific items on exactly how long we think the travel (ph) program will take for DPN pain. Obviously, it’s somewhat related to resources. DPN pain studies are not inexpensive to do. So the first limiting factor is to have excess capital that will allow us to fund the program.
Great. Thank you. One last question; did I hear you say you have enough cash on hand to bring it to market for PBA?
We… at the current time based on our burden, we have enough cash to get to and through the FDA’s anticipated action date for Zenvia. So that gives us flexibility in terms of future capital raising options. I should be clear though, the cash on-hand does not give us enough money to fully commercialize Zenvia, but we hope there will be a number of options either for licensing arrangements and the likes or with positive PBA data for additional capital raising that could give us the money that we need to fund the ultimate commercialization of Zenvia.
Great. Thank you.
Thanks.
Operator: (Operator Instructions) And your next question comes from the line of Ron Chez, Investor.
Good morning.
Good morning, Ron.
What is the significance of the rollover rate into the open-label study?
I will turn that question over to Randall.
Randall Kaye, M.D.
Hi Ron. The significance is that it was one of the requests of the FDA. They asked specifically to have a large number of patients with rollover. This predominantly yields some additional time to provide additional safety data. So what it does in essence is it gives six months of exposure data. That’s the kind of data the FDA would like to see in order to be able to have a sense of what are the potential longer term effects of patients that are taking medication chronically.
And is there some significance qualitatively to the fact that a large number of patients are going into the open-label extension study. I mean is it indicative of prospective success or not?
Randall Kaye, M.D.
It’s really… Ron that’s really hard to say. I will tell you that if trial of substituent stays for (ph) 15 years, it’s generally looked at as a positive. It’s further positive from two standpoints. Number one, you have patients that are willing to continue to be involved in the study that have a belief that products may be providing them with some benefits. But on top of that, you have investigators that are seeing lots of patients that are involved in studies that are still interested and motivated. And that’s a real driving factor for me is the trial is when I see the investigators that are continuing to encourage patients to complete the formal part of the study and then move into the open label. It’s very hard to make conjectures about efficacy if it’s quite, but it’s clearly a positive where the people are moving into it.
If you think about it Ron, two-thirds of the patients in the clinical study is blinded, obviously but two-thirds of them are on study drug given there is two active arms and one placebo arm. So I think the hypothesis that Randall’s potentially speaking to you is if 67% of the patients are on active drug and I didn’t think that they were getting a benefit, why will they rollover into the open-label studies. So I think that’s why some people look at the conversion rate as a sign. I think Randall have provided good caution in that and have been involved in a number of clinical studies. You never know what the data is going to say until it’s unblinded. But certainly we’d like to look at some of these factors that gives us some increased confidence.
Okay, thank you.
Okay, thanks Ron. Any other questions?
Operator: (Operator Instructions) And there are no further questions at this time.
Great. Well thank you everyone for joining us on the first quarter conference call. And we look forward to keeping you update on key milestones for this year.
Operator: Thank you. This concludes today’s teleconference. You may now disconnect.
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Transcript of today's OSU men's basketball online chat

admin — Sun, 05 Oct 2008 07:04:16 +0000

During Ohio State basketball season, Dispatch.com and BuckeyeXtra.com readers can chat online
with Bob Baptist, The Dispatch’s OSU men’s basketball beat writer.
[Rob_(moderator)] Hi, everyone. Welcome to our Ohio State men’s basketball chat. Dispatch beat
writer Bob Baptist will join us at noon and will answer your questions for an hour. You can start
submitting them now by typing them in the shaded, horizontal box below and clicking “send.” Thanks!
[Bob Baptist] I’m here.
[Rob_(moderator)] Hi, Bob. Welcome to chat world. Ready to take that maiden voyage?
[Bob Baptist] As long as there’s someone to take it with besides you — no offense, Rob.
[Rob_(moderator)] None taken. Let’s get started …
[woody for BB] Any update on David Lighty’s return from injury?
[Bob Baptist] Dave said during the Indiana game the other night that it will be a couple of
weeks yet before he can take the boot off and try to run on it. Then, I guess, it’s a matter of
what kind of pain he has.
[threes and zzzzs] howe much do they miss lighty?
[Bob Baptist] It’s certainly realistic now because they’re 2-2 in a league that has a lot of
teams in the same boat, around .500, and maybe will get 7 bids. But there’s a long way to go. Two
tough games coming up on the road.
[scarlet-grey] Is Crater good enought to run the point for 3 more season?
[Bob Baptist] Crater transferred to South Florida. Trick question? Trying to see if I’m awake?
[Rob_(moderator)] Well, obviously the moderator was dozing …
[woody for BB] What has been the biggest surprise this season for you?
[Bob Baptist] Other than Crater transferring, I’d say the inability of their point guard(s)
to penetrate the defense. I thought they would have solved that in recruiting last year, but
Simmons is clearly not comfortable doing it and Crater showed no signs of being able to before he
left. It’s a big problem. Forces you to rely to much on perimeter shots.
[scarlet-grey] it seems william buford has made great strides in a short time. is the
coaching staff surprised?
[Bob Baptist] No. Buford has a lot of talent. It was a matter of him getting comfortable with
the competition at this level and making better decisions as far as shot selection and defensive
rotations. It was like night and day the way he played at Michigan State and before that, and he’s
continued to be solid in the games since.
[Rob_(moderator)] What are some of his biggest strengths, Bob?
[Bob Baptist] His biggest strength on this team is he can get his own shot. Turner is the
only one who can. He’s also beginning to show improvement as a rebounder, someone who can soar in
from the perimeter and grab one that might otherwise go to the other guy. Reminds me of Daequan
Cook in that respect.
[Bob Baptist] Turner is the only other one who can, I should say.
[JimmyC] no way mullens leaves eearly, right?
[Bob Baptist] Sorry, Jimmy. At this point, I can’t see him staying strictly from a business
standpoint. If he can get lottery money, he has to go. But I don’t know what he’s thinking because
I haven’t asked him about it. Even if I did, he’d give the standard answer Ohio State tells him to,
which is to say he hasn’t thought about it.
[Corey] Bob, you have mentioned plenty of times this year about the faulty rotation within
the zone. Do you think we will see any man to man or are the players too young/slow footed to play
that defense?
[Bob Baptist] I’m not holding my breath on man-to-man. Matta is asked about it often. The fact
he hasn’t gone to it yet, as badly as they’re still rotating inside (such as against Indiana), they
must be really awful in man-to-man for him not to try it. Hard to figure, but I don’t get to watch
practice so I can’t make my own assessment.
[Rob_(moderator)] Bob, are practices ever open to the media? Is that unusual within the Big
Ten?
[Bob Baptist] The only practice I got to watch this season was an Agonis Club fund-raiser that
was open for a price. Ronnie Stokes picked up my tab; bless him. Other than that, if they have a
scrimmage some Saturday during football season that’s open to the public, I can watch that. Other
than that, I have never been to a practice. The only “media” who get to watch are former players
who do radio or TV work and the TV folks who come in the day before a game they’re broadcasting.
It’s not unusual in the Big Ten, but some beat reporters have access, such as at Purdue and
Michigan State, I think. And Wisconsin.
[beaverton] As bad as that zone is w/o Lighty, it’s really hard to believe they didn’t try to
go man vs. Baptist and Indiana, wasn’t Matta struictly man-to-man at Xavier?
[Bob Baptist] No, Matta has said he played some zone at Xavier, particularly the year they went
to the Elite Eight with David West and Lionel Chalmers. And against Baptist, any defense will do.
[Corey] Are you surprised at the level of play displayed in the Big Ten so far? Which team
has shown the most improvement?
[Bob Baptist] I like what I’ve seen of the Big Ten so far. As far as most improvement, I’d have
to say Minnesota. I turned that game off last night because Wisconsin had full control of it. I
hear on the radio this morning that Minnesota won in OT. What the heck happened?
[woody for BB] Do you think Jon Diebler will ever become the player we all thought he would
be? 11 PPG for a highly touted scorer?
[Bob Baptist] I don’t know if Jon can ever become “the player we all thought he would be”
because I don’t think anyone could. I sense people expect him to hit every shot. The one thing I’d
like to see him improve is his consistency, more of an even production rather than the highs and
lows, hots and colds he gives us now. But he’s better than last year, and he’s got 2 1/2 years
left, don’t forget.
[alex] If Matt Sylvester had been an OSU football player, Matta would have had to answer
questions for a week. Yet Sylvester’s arrest went unnoticed for almost a week. Why?
[Bob Baptist] If Matt Sylvester had been playing on the team now, Matta would be answering
questions and I doubt it would have taken a week to uncover. I don’t check police reports every
day. The news reporters who do might not have known the difference between Matt Sylvester and Matt
Lauer.
[threes and zzzzs] Will a .500 record in the big ten be enough for the ncaa tournament?
[Bob Baptist] Too soon to tell. Depends on who has the .500 record. Then your out-of-conference
showing comes into play. Ohio State is in good shape in that regard.
[delaney-stinks] why do they keep having the NIT? don’t they know that no one — even the
players — care that much?
[Bob Baptist] Someone’s still making money off it and the coaches like having more practice
time. And after the initial disappointment of not making the NCAA Tournament last year, I can tell
you the Ohio State players were pretty happy to hoist that trophy in New York.
[woody for BB] Where do you think Ohio State will finish in the Big Ten?
[Bob Baptist] I revised my pick at the start of the Big Ten season because of Lighty’s injury. I
originally had them 10-8 and tied for fourth. I downgraded them to 8-10 and tied for seventh. I
could change my opinion again if Lighty gets back early enough and their defense suddenly improves
again, but for right now, I don’t have any reason to think differently.
[Justin_Tyme] Hi bob, thanks for doing the chat. What’s the toughest arean in the Big Ten for
opposing teams to playin?
[Bob Baptist] You’re welcome. This is kinda fun. Toughest arena? I’ll tell you what, anyone
anymore whose team is good is becoming a tough place. Breslin for sure, but so are Purdue, Indiana,
Illinois, Wisconsin and Minnesota. Loud is loud. When it’s hard to think straight, it’s hard to
execute no matter where you are.
[JimmyC] which do you prefer, the O’Brien way (recruit guys you think will stay 4 years), or
the Matta way (get the best talent and don’t worry how long you’ll have the player)
[Bob Baptist] You’ve got a better chance to be good each year recruiting the players Matta
does. But I wish O’Brien was next to him on the bench drawing plays on the greaseboard.
[scarlet-grey] what’s obrien doing these days? will he ever get back into coaching?
[Bob Baptist] Laying very low in a nice condo on the Back Bay in Boston. It would have to be the
right opportunity for him to get back into coaching, something low profile where he could just
coach his team and not have to deal with a lot of outside influences. And I think it would have to
be somewhere around Boston. I heard but never confirmed that Harvard approached him before it hired
Amaker.
[Justin_Tyme] are you saying matta isn’t a good game coach?
[Bob Baptist] I’m saying I’m not the biggest fan of his offense. I like more screens. But I
can’t say he’s not a good game coach because look at his record. Not too shabby. But he needs good,
athletic players to succeed on offense, and he’s a little short of a full cupboard right now.
[graybuck] I know the horse is out of the barn, but this one and done player situation is
really killing fan interest and making it difficult for coaches. Your thoughts?
[Bob Baptist] I agree. I’d like to see basketball adopt the football model of three-and-done.
But the NBA Players Association would have to agree. What’s worse than just the one-and-done is the
influences that are telling kids they’re better than they are and causing them to think they’re
one-and-done when they’re not even close.
[woody for BB] Can you explain the medical redshirt rules?
[Bob Baptist] If, because of an injury, you play in fewer than 30 percent of your team’s 29
regular-season games during the first half of the season, you qualify to apply. That’s why Lighty
and Kecman qualify. Lighty played 7 of 29, Kecman 1 of 29. The 12 games for which Kecman was
suspended do not count against him.
[accountessa] I like what I am seeing in this young team. Yet, when the Buckeyes are down,
why don’t the coaches take the risk of the big guys fouling-out and send in them in to get back in
the game? We can worry about fouls if we are close.
[Bob Baptist] I’m not sure what situation you’re referring to.
[Corey] What do you attribute the rebounding woes to?
[Bob Baptist] It has to be the zone, and the rotations that take the big men on the baseline
away from the basket so they can’t get back in time to box out. Matta doesn’t want to hear about
it, but I’ve heard more than one opposing coach say that’s an inherent weakness in a zone defense.
[delaney-stinks] a lot was written about matta’s bad back, then we didn’t hear much. i
remember reading it might never be 100% how is his health?
[Bob Baptist] His leg might never be 100 percent. He has another nerve-conduction test scheduled
in February, I think. If it hasn’t sufficiently regenerated by then, I don’t think it’s going to.
[woody for BB] Which current player has the best chance to become a good pro?
[Bob Baptist] B.J. Mullens, William Buford and Evan Turner, in that order.
[scarlet-grey] does matta’s leg impact his ability to run practices or coach in general, in
your opinion?
[Bob Baptist] No. It only prevents him from jumping in to show by example, but he has assistants
who can do that for him. He doesn’t slide back and forth in front of the bench in a defensive
stance like he used to, though. I miss that.
[ForThor] Were you surprised Crean left Marquette to take on that mess at IU? Seems like he
had a great situtation in Wisc.
[Bob Baptist] He took Marquette as far as you can in a league it will never dominate, the best
league in the country, a killer conference. He can win Big Ten championships and NCAA championships
at Indiana. It was a no-brainer. He’ll have the mess cleaned up in a few years.
[JimmyC] you seem to be well connected in the college bb world, bob. was it well known, even
when sampson was at iu, how much of a dirtbag he was? if so, how in the heck could indiana hire
him?
[Bob Baptist] Well, the only thing he got found guilty of was making impermissable phone calls,
and I’m jaded enough to think he might not be the Lone Ranger in his profession in breaking/bending
such rules. He did bring in some JC transfers of questionable character, as we recently found out
from Eric Gordon. I don’t know how Indiana could have hired him, which is why the AD who did is no
longer the AD. I wonder how long it will be before someone else does, though.
[scarlet-grey] Along the lines of the Crean question, I’ve been impressed that the Gonzaga
coach (can’t think of his name) never has bolted. Your thoughts?
[Bob Baptist] Mark Few. He’s got a nice little empire there. He can recruit as well as Pac-10
schools and not have to play them, win his league every year and get to the NCAA Tournament. It’s
not a bad life as long as you get paid and you have the support of your administration.
[Rob_(moderator)] Last question …
[itcjv] Last year i often wondered why wallace did not play more, then we saw him struggle in
a couple of games and i knew why coach did not play him. Now I wonder why Offutt does not play
more, is he just not good enough?
[Bob Baptist] Still regaining form from knee surgery and not a lot of minutes available at the 2
with Diebler and Buford playing as they are. He’s a 4-year player. He’ll be a contributor. I like
his moxie.
[Rob_(moderator)] Thanks for the questions, everyone. And thanks to you, Bob. We’ll have a
transcript of the entire chat posted in a few minutes on Dispatch.com and BuckeyeXtra.com. Stay
warm. That’s a wrap.
[Bob Baptist] Thanks to all who participated. Let’s do this again.

Amylin Pharmaceuticals, Inc Q4 2008 Earnings Call Transcript

admin — Sat, 26 Apr 2008 19:12:20 +0000

Amylin Pharmaceuticals, Inc (
January 27, 2008 5:00 pm ET
Mark Foletta – SVP, Finance, and CFO
Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Amylin Pharmaceuticals Incorporated earnings conference call. My name is Stacey and I will be your conference moderator for today. (Operator Instructions)
I would now like to turn the presentation over to your host for today’s call, Mr. Michael York, Senior Director of Investor Relations. Please proceed.
Good afternoon and welcome to Amylin Pharmaceuticals quarterly update conference call. Today’s discussion will contain forward-looking statements that involve risks and uncertainties. These risks and uncertainties are outlined in today’s press releases and in our recent filings with the Securities and Exchange Commission. Our actual results could differ materially from what is discussed on today’s call.
Let me introduce the other members of the Amylin management team here today: Daniel Bradbury, President and Chief Executive Officer; Mark Foletta, Senior Vice President, Finance, and Chief Financial Officer.
I’ll now turn the call over to Dan Bradbury.
Thanks, Michael. Good afternoon and thank you for joining us today. The New Year is off to a busy start. Today, we will brief you with current progress with the business in 2008 and then, the majority of our time, we’ll focus on the company’s plans for the coming year.
In 2009, we plan to create value for stakeholders through five areas. One, for BYETTA, we have the opportunity to retain the product’s growth with the modern therapy indication approval and an updated label, in addition to our efforts to capitalize on the shifting diabetes market and BYETTA’s addition to the revised ADA/EASD consensus treatment guidelines.
Two, with Exenatide Once Weekly, which demonstrated unprecedented efficacy in the DURATION-1 study, we are leveraging knowledge gained from BYETTA to submit the NDA and are executing a clinical program based on demonstrating superiority of existing agents, which will position Exenatide Once Weekly for successful launch when approved.
Three, we intend to continue growing SYMLIN prescriptions by highlighting how the product addresses the key unmet needs of patients using mealtime insulin.
Four, in our obesity program, we intend to complete our two clinical trials with Amylin and Leptin Analog and finalize our funding and development strategy to these compounds.
And five, we took action in the fourth quarter of 2008 to lower our cost structure and in 2009 we will continue to reduce expenses and improve operating results, and we will make significant progress toward achieving positive operating cash flow by the end of 2010.
With our growing market, innovative products gaining momentum, and disciplined management, we see 2009 providing many value-creation opportunities for patients, physicians, payers, and our shareholders.
Before I get into a more detailed discussion of recent activities, I’ll now turn things over to Mark Foletta to review our financial results released earlier today.
Thank you, Dan, and good afternoon. Today we announced our financial results for the quarter and year-ended December 31, 2008. I’ll start by reviewing the results for the fourth quarter. We reported total revenue of $202.5 million for the fourth quarter, which includes net product sales of $184.9 million.
Product sales are made up of a $162.7 million for BYETTA and $22.2 million for SYMLIN. The 9.6% sequential decline in BYETTA revenue from the third quarter reflects an appropriate 9% reduction in total prescription for BYETTA quarter-over-quarter, following the FDA alert in August 2008.
While we did implement an 8% price increase for BYETTA in the fourth quarter, we believe the impact of this was partially offset by a slight drawdown in channel inventories.
Our revenue under collaborative agreements was $17.6 million, compared to $27.3 million for the same period in 2007. The decrease reflects lower cost sharing payments from Eli Lilly and Company for BYETTA and Exenatide Once Weekly development expenses.
Cost of goods sold was $21.5 million, reflecting a gross margin of approximately 88%. This compares to cost of goods sold of $22.1 million for the fourth quarter of 2007 and the gross margin of approximately 89%.
Selling, general and administrative expenses for the fourth quarter of 2008, decreased to $86.1 million, compared to $122.4 million for the same period in 2007. The decrease primarily reflects lower promotional spending for BYETTA and our reduced cost structure following our November strategic restructuring and workforce reductions.
Research and development expenses decreased to $67 million for the fourth quarter of 2008, compared to $83.9 million for the same period in 2007. The decrease primarily reflects lower development expenses for Exenatide Once Weekly and our reduced cost structure following the restructuring.
I’d like to note that sequential operating expenses in the fourth quarter were approximately $20 million or 12% lower than the third quarter of 2008. This reduction reflects deliberate efforts to reduce spending. I will comment more on this in a moment as we look to 2009.
Eli Lilly share of the gross margin for BYETTA, which we refer to as collaborative profit sharing, was $73.2 million for the fourth quarter of 2008, compared to $78.6 million for the same period in 2007.
Our results for the quarter-ended December 31, 2008 included charge of $54.9 million associated with our restructuring, which consists primarily of one-time expenses related to facility leases including impairments of related tenant improvements and employee termination assets.
Net loss, excluding the restructuring charge, was $49.1 million or $0.36 per share. A key metric to track our progress is non-GAAP operating loss. We believe that this metric is an important measure of the performance of our business as it approximates our use of cash for operations before working capital changes as we drive towards our stated goal of positive operating cash flow by the end of 2010.
This operating metric represents GAAP operating results adjusted for non-cash items including depreciation, amortization and stock-based compensation and the restructuring charge.
Non-GAAP operating loss was $20.2 million for the quarter-ended December 31, 2008 compared to $47 million for the same period in 2007. Including the restructuring charge, our reported GAAP net loss was $104.1 million or $0.76 per share for the quarter-ended December 31, 2008, compared to a net loss of $76.9 million or $0.57 per share for the same period in 2007. At the end of the fourth quarter, we held approximately $817 million of cash, cash equivalents and short-term investments.
I will now quickly review top and bottom line results for the full year. Total revenue for the year was $840.1 million, including net product sales of $765.3 million, resulting in growth and net product sales of 9% over 2007.
BYETTA revenue for 2008 was $678.5 million and SYMLIN revenue was $86.8 million. This compares to total revenue of $781 million for 2007, including net product sales of $701.5 million, consisting of $636 million for BYETTA and $65.5 million for SYMLIN.
Net loss, excluding the restructuring charge, was $260.5 million or $1.90 per share. Non-GAAP operating loss was $137.2 million for the year-ended December 31, 2008 compared to $147.2 million for the same period in 2007. Our reported GAAP net loss for 2008 was $315.4 million or $2.30 per share, compared to 211.1 million or $1.59 per share for 2007.
I’d now like to highlight some information regarding key trends and assumptions as we look to provide guidance for 2009. Most importantly, I want you to know that driving toward positive operating cash flow and maintaining a strong cash position are our top priorities in managing the business.
For a number of reasons, we have unique challenges in forecasting 2009 products sales. In addition to macroeconomic factors that may affect our business, we have a number of uncertainties specific to our business for which we expect to gain more clarity as we move through the year.
Among these uncertainties are the pending label change and mono-therapy indication that we expect for BYETTA later in the first quarter and potential competition in the GLP-1 agonist class later in 2009. As a result, we have elected not to provide revenue guidance for 2009 at this time.
Simply put, there are things that we can control and things that we don’t control. We have developed a number of financial scenarios for our business and we are committed to improve our operating results under each. We have the ability and intent to control our expenses and we will manage our operating results through effectively anticipating revenue as we gain more clarity on the uncertainties I discussed a moment ago.
The key measure that we will guide you is to the cash that we expect to use in our operations, which again, we define as non-GAAP operating loss, and which I discussed earlier and was highlighted in today’s press release.
To remind you, this measure is defined as our reported GAAP operating loss plus non-cash expenses including stock-based compensation, depreciation and amortization. We believe this is an important to track progress toward our stated goal of being cash flow positive from operations by the end of 2010.
To that end, we expect our non-GAAP operating loss to be $75 million to $100 million in 2009, compared to a non-GAAP operating loss of $137 million in 2008. The midpoint of this range for 2009 represents an improvement of appropriate 40% year-on-year.
Non-cash expenses projected for 2009, are approximately $100 million, and consists of $60 million to $65 million of stock-based compensation and appropriately $35 million to $40 million of depreciation and amortization. Non-cash expenses in 2008 were appropriately $105 million.
As a result, our expected GAAP operating loss for 2009 is between $175 million and $200 million, compared to $242 million in 2008 before the restructuring charge. While non-GAAP operating losses the key measure for 2009, I will now provide some further quantitative and qualitative guidance to assist you in understanding the rest of our income statement.
One, we expect collaborative revenue in 2009 to be comparable to 2008 and will consist primarily of cautionary payments from Lilly to equalize Exenatide development expenses. As to BYETTA performance outside of the United States, Lilly has launched BYETTA in approximately 50 countries.
With the fourth quarter launch of BYETTA in Spain, BYETTA has been launched in all five major European markets. Based on results to-date and forecasted OUS revenues by Lilly, we now expect to begin receiving royalties on BYETTA gross margins from outside the United States in the second half of 2010 from our previous guidance of the second half of 2009.
Two, we expect that our gross margins will remain strong in 2009 at approximately 87%.
Three, with respect to our operating expenses, I remind you, that on our third quarter conference call the midpoint of our combined GAAP operating expense guidance for 2008 was approximately $725 million, which included combined totals for both selling general, and administrative and researching and development expenses.
In November 2008 we announced our strategic restructuring in the attempt to reduce our GAAP operating expenses by over a $100 million from 2008 levels. We plan to deliver on that commitment. In fact, our combined GAAP operating expenses for 2008 reported today were $689 million, well below the guidance we provided last quarter, as we were able to accelerate some cost savings into 2008. Consistent with our prior expected reductions, we believe our total GAAP operating expenses in 2009 will be between $600 million and $625 million.
And four, we expect net interest expense to be $35 million to $40 million for 2009. This guidance reflects approximately $20 million of net cash interest expense, plus an additional $15 million to $20 million of non-cash interest expense associated with the adoption of FASB staff position APB 14-1, which impacts the accounting for our 2007 convertible notes effective January 1, 2009.
To finish up on the cash flow front, we offer the following additional guidance.
One, we expect capital expenditures to be approximately a $100 million in 2009, driven largely by activities necessary to complete and validate our Ohio manufacturing facility. This is down from approximately $300 million in 2008.
Two, maturities of our long-term secured debt will result in payments of approximately $30 million.
And three, we are continuing to pursue options to offset the R&D expense associated with our obesity and early stage programs through potential partnerships and/or project financing.
The cumulative impact of this guidance suggests that we expect to finish 2009 with a substantial cash balance of approximately $600 million with access to an additional $165 million from Lilly, if needed.
In summary, we can control our spending and we have taken deliberate action in our business in late 2008 to reduce spending and we will continue to align our spending with revenue expectations, enabling us to reach specifically stated operating results in 2009 and our goal of positive non-GAAP operating results by the end of 2010.
I will be available at the end of the call to answer any questions, and I will now turn the call back to Dan for an update on recent business activity.
Thanks, Mark. First, I would like to comment on how excited I am that Vince Mihalik has joined Amylin as Senior Vice President of Sales and Marketing and Chief Commercial Officer. As we announced yesterday, Vince brings a wealth of experience to our Exenatide team and a track record for success in marketing diabetes products. I will talk more about Vince later.
Now, I will provide a commercial update starting with BYETTA and then moving on to SYMLIN.
BYETTA is the first and only FDA approved GLP-1agonist. It is the only medicine available which addresses the significant unmet needs in type 2 diabetes, with the dual benefits of powerful glucose control with weight loss, supported by low risk of hypoglycemia and a favorable cardiovascular risk profile.
2009 will mark BYETTA’s fourth year on the market and has been used by more than 1 million patients since its launch. BYETTA not only has been accepted by patients, but also by efficacy groups and key opinion leaders.
At the end of 2008, the American Diabetes Association and the European Association for the Study of Diabetes treatment guideline endorsed the approach of treating diabetes with glucose control therapy to promote weight loss without increasing hypoglycemia.
The revised treatment guidelines introduced BYETTA as the only new addition, placing it in a much more prominent position and suggesting it as the treatment of choice in patients for whom, both weight management and hypoglycemia are of concern.
This represents 80% to 90% of the 25 million people living with type 2 diabetes in the United States. More importantly, it is further evidenced that the way key opinion leaders new diabetes therapy is shifting, these guidelines have not been updated in over two years and were written after careful consideration of a treatment’s efficacy, safety, tolerability, cost and ease of use.
Now let’s talk about our results in 2008. Total prescriptions of BYETTA were flat compared to 2007, despite declining in the second half of the year because of the FDA posting on pancreatitis. At the time of this posting, we committed our field resources to educating the medical community on the facts of our BYETTA, pancreatitis and the product’s robust safety database as opposed to promoting the product’s unique profile.
That’s what we have done since the detection of the pancreatitis signal. We continue to thoroughly investigate the details of all reported cases. Today, a closer relationship between BYETTA and pancreatitis has not been proved. We have provided the FDA with epidemiologic data from a very large insurance database that found the patients initiating BYETTA have no increased risk of acute pancreatitis compared with those initiating other diabetes therapies during the same period of observation. We expect this and other data will be published in peer-reviewed journals in the very near future.
Despite the FDA posting, through coordinated education efforts with Lilly and a return to focusing on key messages of the benefits BYETTA offers, we have halted the decline in BYETTA prescriptions and stabilized demand at the end of the fourth quarter.
And as I mentioned earlier, based on current interactions with the FDA, we estimate receiving the mono-therapy indication approval and updated safety labeling language later this quarter, which will remove uncertainty and be a positive signal in the marketplace and support BYETTA’s return to growth. To be clear, however, there is no formal action date from the agency.
Now moving on, let’s discuss our enhanced BYETTA sales and marketing efforts. While BYETTA’s inclusion in the consensus treatment guidelines and the mono-therapy indications are important, we are also continuing to take aggressive action to promote BYETTA unique profile, capitalize on the market shift and return the product to growth.
To do this, we continue our focus on improved commercial execution. Indeed, the focused and better aliened Amylin and Lilly sales force has resulted in increased call time with physicians and increased cold dialogue.
Additionally, our physician and patient support programs to the primary care market are having a positive effect. These programs are designed to better support BYETTA new patient starts and improve long-term patient appearance. Further, we continue to educate physicians on the broad 85% Tier II access for BYETTA across commercial managed care providers.
The results of the market shift in the medical community and our enhanced marketing and sales efforts positioned BYETTA well for future growth.
Now, let’s move on to SYMLIN. A synthetic analog of human amylin and naturally occurring hormone, that is made in the beta cells of the pancreas, the same cells that make insulin.
SYMLIN is the first and only FDA approved Amylin agonist and it’s been on the market for nearly four years. It addresses the key unmet needs of insulin therapy by reducing blood glucose fluctuations, improving glucose controls and causing weight loss to people with type 1 and type 2 diabetes that use mealtime insulin.
With the help of the innovative and convenient SYMLIN Pen, which was launched in January 2008, SYMLIN total prescriptions grew 10% in 2008, compared to 2007 and that were approximately 20% more patients on SYMLIN since the Pen launch.
Now, to enable continued growth, our plan is to sharpen focus on physician targeting and patient selection, while managing expectations and supporting patients to increase assistance through a high touch, high support marketing strategy.
In 2009, we plan to grow SYMLIN by increasing the number of people who use SYMLIN and increasing that assistance by further leveraging our customer support program, A Pen and a Partner.
Now, I will share with you the latest regarding Exenatide Once Weekly. In the current regulatory environment, having the opportunity to leverage the knowledge gained through the development and commercialization of an existing product is a real advantage. That’s exactly what we are doing with the development of Exenatide Once Weekly. Leveraging the experience gained with BYETTA.
This product candidate is poised to become the first weekly therapy to treat type 2 diabetes, with unprecedented efficacy through powerful glucose control, sustained weight loss, favorable effects on cardiovascular risk markets and improved tolerability. This unique and compelling value proposition offered in just one dose per week, finally offers patients, payers and physicians the long-term adherent solution needed to improve health outcomes for this disease.
In our DURATION-1 trial, after 52 weeks patients experience an average A1C decline of 2 percentage points. This level of A1C decline is unprecedented in a pivotal study in patients with a mean baseline A1C of 8.3% at entry.
74% of old patients in the study achieved an endpoint A1C of 7% or less which is ADA recommended target. Patients reported a sustained average weight loss of 9.5 pounds accompanied by improvements in blood pressure, cholesterol and triglycerides with no increased risks of hyperglycemia and improved tolerability. A market research not surprisingly indicates doctors are excited by these results and eager for the medicine to come to market.
I want to assure you, we are doing everything we can to bring Exenatide Once Weekly to market as quickly as possible. And I will walk you through our progress on this front in 2008, and more importantly, the key regulatory milestones to look forward in 2009.
Our investors most often ask us about three areas regarding the regulatory pathway for Exenatide Once Weekly: Our pre-NDA meeting with the FDA; the method by which we will show comparability between clinical scale and commercial scale material; and the need to evaluate cardiovascular risk.
First, following the pre-NDA meeting and the ongoing interaction with the FDA, we continue to believe that the DURATION-1 study alone provides the necessary pivotal safety and efficacy data for its submission. With safety, we confirm that we will be able to reference the entire Exenatide database in our submission.
Second, we have discussed strategies with the FDA on how to show comparability between drug products manufactured that unused commercial scale facility, and the intermediate scale material manufactured Alkermes that was used in the DURATION-1 study.
Last month, we received FDA feedback that the amended extension of DURATION0-1 is appropriate as the basis for demonstrating comparability. We anticipate having data from this study by the end of this quarter.
Third, as many of you know, last month the FDA published guidance on requirement for all IND holders of anti-diabetic therapies to show that their product candidates do not increase the risk of cardiovascular events.
As a result of this guidance, we requested agency feedback which, when received, indicated that we can proceed with the meta-analysis of the controlled clinic trial Exenatide safety database to evaluate cardiovascular risk.
I can tell you that a preliminary analysis has already been completed and indicates no increased risk of cardiovascular events associated with Exenatide treatment. All of this means we continue on track to submitting an NDA before the end of the first half of 2009.
Now given our confidence from the DURATION-1 data, we put in place an aggressive head-to-head program that compares Exenatide Once Weekly against alternate therapeutic choices to demonstrate superiority.
The objective of these studies is to support the launch and demonstrate the transformational nature of Exenatide Once Weekly therapy. These trials are on track. DURATION-2 compares Exenatide Once Weekly against the thiazolidinedione, also known as the TZD, or a DPP-4 inhibitor on a background of metformin therapy. We expect results from this study in the second quarter of 2009.
DURATION-3 compares Exenatide Once Weekly against insulin glargine on a background of oral agent therapy, and we expect results of this study in the third quarter of this year.
DURATION-4 which looks at Exenatide as a stand-alone therapy against either metformin, TZD or DPP-4 inhibitor, was initiated last quarter with results expected in 2010.
Lastly, given the positive effects on cardiovascular surrogate outcomes seen with Exenatide, the encouraging data seen in the ACCORD trial, and the importance of cardiovascular outcomes in type 2 diabetes, we have engaged a steering committee composed of outside experts to assist us in designing a robust cardiovascular outcomes trial for Exenatide Once Weekly.
This study will give us the opportunity to demonstrate the effect of Exenatide once weekly on cardiovascular outcomes as well as other endpoints of interest to our stakeholders. This design will be reviewed with agency. We plan to initiate patient enrollment this year with interim data in 2012 and final data in 2016.
Clearly, we’re positioning the Exenatide franchise for near and long-term success and addressing the possible entrance of competitors in our class.
In summary, we’re excited by the opportunity to transform diabetes treatment with Exenatide Once Weekly. When approved, it will be the first once weekly diabetes therapy ever.
Now, I will move on to describe our opportunities in obesity, which represents the next frontier of Amylin, in addressing metabolic disease. Here, we are leveraging our diabetes and peptide expertise that we gained over the last 20 years by utilizing a risk advantage development strategy, focus-purposed on peptide and protein mimics of human hormones.
We believe this approach will enable us to develop safe and effective obesity treatment that meets the needs of patients, doctors, regulators and payers. We previously announced our commitment to pursue a medicine for obesity that is a combination of analogs of human hormones amylin and leptin: Pramlintide, which is an analog of human amylin, and the same molecule in SYMLIN and metreleptin, an analog of human leptin. This combination is based on an impressive proof-of-concept study result. Patients achieved a 12.7% reduction in body weight over 24 weeks when pramlintide and metreleptin were used together.
In the third quarter of 2008, we completed enrollment of the Phase IIB study to evaluate different dosing combinations of pramlintide and metreleptin. This 6-month multi-arm study with approximately 600 patients will be completed in the third quarter of this year. We believe this product candidate has the promise to meet the unmet medical needs for a safe and highly effective weight loss therapy.
Another exciting opportunity we have in our pipeline is our second generation Amylin analog AC2307, which is now known pramlintide. This compound is in a Phase II trial with results expected in the fourth quarter of 2009. pramlintide is an Amylin analog optimized for obesity with increased potency that offers the potential for enhanced efficacy and less frequent dosing.
Lastly, keeping in mind our earliest statements of regarding a close watch on controlling costs, we are actively managing our R&D expenses. We are also pursuing options to offset R&D expense associated with our obesity and early stage programs through potential partnerships and/or project financing. We anticipate having more to report on our obesity strategy by the end of this year.
Now, I’ll add a few more comments before we close. In the fourth quarter, we promoted Paul Marshall from Vice President to Senior Vice President of Operations. Among his many responsibilities, Paul’s most crucial role, has been managing both our global supply chain and the construction of our manufacturing facility in Ohio.
Recently, Paul also assumed management responsibility of the quality department. And as I mentioned earlier, we announced an important management addition, Vince Mihalik has been appointed Senior Vice President, Sales and Marketing, and Chief Commercial Officer.
Vince brings more than 30 years of experience across multiple commercial roles including global product development, sales and sales management, product launches and brand management. His career has focused on diabetes with numerous leadership roles at leading pharmaceutical company including Roche Diagnostics, Boehringer Ingelheim and Baxter Healthcare.
Before joining Amylin, Vince was Vice President of Global Brand Development Diabetes and Endocrine platform team leader at Lilly where he was responsible for product development beyond Phase IIB to launch life cycle planning and commercialization.
Previously, Vince was Business Unit Head of Diabetes Care for Lilly U.S., where he was responsible for sales and marketing of Actos, Humulin, and Humalog injection pens and the preparation for the launch of Cialis in the United States.
Vince will report to me and will oversee marketing and sales for Amylin’s two marketed products, BYETTA and SYMLIN, as well as the launch and commercialization of Exenatide Once Weekly. He will become a member of Amylin’s executive committee and the Amylin-Lilly alliance steering committee.
So to finish, a goal of Amylin is to create shareholder value and a sustainable profitable company. Our value creation opportunities come from these areas of focus in 2009.
With BYETTA, we have the opportunity to return the product to growth with the mono-therapy indication approval and an updated label in addition to our efforts to capitalize on the shifting diabetes market and BYETTA’s addition to the revised ADA/EASD consensus treatment guidelines.
With Exenatide Once Weekly, which demonstrated unprecedented efficacy in the DURATION-1 study, we are leveraging knowledge gained from BYETTA to submit the NDA and executing a clinical program based on demonstrating superiority over existing agents to position Exenatide Once Weekly for a successful launch when approved. We intend to continue growing SYMLIN prescriptions by highlighting how the product addresses the key unmet needs of patients using mealtime insulin.
In our obesity program, we will complete two clinical trials with Amylin and Leptin analogs and finalize our funding and development strategies for these compounds.
Lastly, we will reduce expenses and improve operating results and make significant progress towards achieving posted operated cash flow by the end of 2010.
With that, I will conclude the formal portion of today’s call and turn things back over to the operator for your questions. I would like to ask that we limited to one question per person, so we can take as many questions as possible today. Thank you.
(Operator Instructions).
Your first question comes from the line of Thomas Wei with Piper Jaffray. Please proceed.
Hi, thanks very much. I wanted to ask about the discussions with the agency on the new label. I guess, how important is the United Healthcare data and the back and forth with the agency on the pancreatitis question?
And I will flip in, if I can, one here: if you do get a black box warning for pancreatitis, is your assumption that that would lead to pressure on BYETTA sales and is that the big swing factor in preventing you from giving revenue guidance?
Hi, Thomas, it’s Dan here. Thanks very much for your question. Firstly, Thomas, I think it’s fair to say that we have been very consistent in the past and I will continue with that consistency, and that it’s not appropriate for us to comment on interactions and where they stand with the FDA.
I will comment, however, about the importance of the insurance, large healthcare insurance database, after the immunologic study that we’ve done. The reason why we think this is extremely important is because this represents true clinical evidence, which enables us to compare BYETTA against other diabetes agents.
It also enables us to put into context the risk of pancreatitis in people with diabetes relative to those people who don’t have diabetes. And as we reported before, there is a significantly increased risk in people with diabetes or pancreatitis over and above those people who don’t have diabetes.
Now, with regards to the forecast, I should say, revenue guidance, there were actually, as Mark mentioned in his prepared remark, there is actually a number of reasons that we are not prepared to give that at this time.
I would stretch that, we are living in pretty unusual times; that the microeconomic conditions are pretty significant at the moment in terms of impacting business. There are regulatory challenges in terms of exactly what will be the regulatory outcome with regards to our discussions with the agency.
But also I would point out that there is competitive uncertainty as well, again, linking to the regulatory uncertainty. In that, there are now potential direct competitors in the GLP-1 agonist class that was being considered for regulatory review this year.
I guess may be just to press you a little bit on that. You’ve listed them out. But you must have a sense of quantitatively how those might affect revenue in 2009. Can you give us a sense of order of priority at least?
Well, I wouldn’t give you an order of priority, but I would say that there is a very wide range of potential scenarios that we’ve look at. The key is, and the guidance that we’ve given is, towards non-GAAP operating loss, because we think this is the really important measure of our business.
And specifically, what we’ve guided to is that we will reduce our non-GAAP operating loss by appropriate 40% from 2008 to $75 million to $100 million. The reason why we’ve guided to that, one of the reasons we’ve guided to that is, first and foremost, we think it’s a primary measure of business performance.
But secondly, because it actually reflects our ability to control our business in that given the wide range of potential revenue scenario there are, that we’re able to control our expenses to achieve that operating result.
Thanks very much. I’ll jump back in the queue.
Thank you.
Your next question comes from the line of Matt Osborne with Lazard. Please proceed.
Hi, and thanks for taking the question. Dan, can you give us a sense of the number of patients you had put together conducted to perform the meta-analysis, and in the guidance the FDA is specifically looking for high risk individuals. Were there enough patients that you could find that had high risk disease that you’re going to include in that meta-analysis? Thank you.
Hi, Matt. Yeah, thanks for the question. Just to clarify, I believe you’re talking there about the analysis for cardiovascular events that we conducted on the Exenatide clinical studies database, is that correct?
Correct.
Yeah. So, without getting into a specific numbers then, one of the advantages that we have with the Exenatide Once Weekly submission is that we can leverage the entire Exenatide safety database. So, that includes all the completed clinical studies on BYETTA as well.
So, we are talking several thousands of patients that are in those Phase studies, and that also does include a number of high risk patients as well, and I guess, probably the bottom line is here that the preliminary analysis that we have conducted clearly meet the agencies guideline with regards to fact that it shows that there is no increased risk of cardiovascular events associated with Exenatide use within the confidence into both that the agency has requested.
Great, thank you.
Thank you.
Your next question comes from the line of Jason Butler with Rodman & Renshaw. Please proceed.
Hi, thanks for taking the question. You said earlier that you have approximately $30 million in long-term notes due in 2009. From your latest filings you had approximately or were approaching a 100 million in 2010. I was just wondering, if you could give us an idea of how you’re looking at those repayments in 2010 and if there’s any potential for restructuring?
Hi, Jason. This is Dan here. Yeah, let me pass that over to Mark and he will probably give you the best answer on that one.
Yeah. Jason, thanks for the question. Mark Foletta here. The $30 million that we referred to in the prepared remarks are scheduled amortizations on our secured debt with the banking group here that will continue as you indicated, it’s actually little less than a $100 million, $95ish million in 2010.
Certainly there are opportunities to look at that. We are conservatively planning, assuming that we fully amortize that debt over the next two years. And our cash plans to 2009 and 2010 provide adequate flexibility for us to do that.
Maybe, I’d add, for Jason here, Mark indicated that we expect to end 2009 with over $600 million in cash. And at this time, we don’t have any further restructuring plans.
Right. And of course I’d also add we have access to $165 million I mentioned in the prepared remarks of additional funds and in the form of the line of credit from Lilly that we could elect to draw at the end of 2009 or beyond.
Thank you.
Your next question comes from the line of Salveen Kochnover with Collins Stewart. Please proceed.
Thank you for taking my question. Dan, could you may be elaborate on your earlier comments on an expectation for an acceleration in BYETTA scripts on the adjusted labels and mono-therapy indication?
Yes, thanks Salveen. We are happy to do that. So, in 2008, we were facing a very difficult situation in the second half of the year. And as I commented in my prepared remarks, one of the key things that we did in the first quarter and towards the beginning of the fourth quarter was that we spent a lot of time educating physicians on the adverse event profile of BYETTA and putting into perspective the FDA posting on pancreatitis.
In the second part of the fourth quarter, we directed both the Amylin and Lilly field forces to promoting the benefits of the product. And, in particular, why I think that was most important that happened at the end of the year, last year, was the fact that BYETTA was included in the American Diabetes Treatment Guidelines. It was actually the only new medicine that was added to the American Diabetes Treatment Guidelines.
And one of the key things about that is the fact that in the guidelines, it was specifically highlighted as a product that could be considered when physicians were concerned about managing their patient’s weight or in patients who had a high potential for hypoglycemia.
This is actually a very large proportion of the type 2 diabetes marketplace. And I think given these guidelines in place as well as the potential for gaining a mono-therapy indication and clarifying the situation with regard to the safety data on our label, we will have the opportunity, I believe, to take out uncertainty regarding that but also stress the benefits of the product in the context of expert opinion leaders stating that this is important in the treatment of type 2 diabetes.
Thank you.
Thank you.
(Operator Instructions).
Your next question comes from the line of Jim Birchenough with Barclays Capital. Please proceed.
Yeah, hi guys. Just a question on sufficiency of data to demonstrate comparability, and I think in the past you’re confident that the IVIVC data would be sufficient to demonstrate comparability in that, but didn’t end up being the case.
And I am wondering if you can comment on, I guess, any experts of opinion you had with FDA at the time of that review. And that leads into a question on the extension of DURATION-1. And that is, how exclusive has FDA been on the parameters you need to show to demonstrate comparability. Could you share those with us, so we can make a judgment when the data comes out?
Hi, Jim. Thanks very much for the question. So, regarding demonstration and comparability, I think one of the things we’ve been clear about all along is that there is no real guidelines in place with regards to demonstrating comparability for long-acting injectable product, and that’s why we took a kind of a three-form approach to different ways to demonstrate comparability.
You mentioned the IVIVC, actually scientifically we believe the IVIVC approach does demonstrate comparability. Based on feedback we had from the agency, they still want to have actually a clinical study to demonstrate comparability. So I believe scientifically, we feel very strongly that that approach is valid. It doesn’t meet the current expectations within the agency.
The good news is, however, that we did have a backup strategy and that’s backup strategy was looking at our revision to the DURATION-1 extension study and we’ve sent this specific protocol amendment to the agency and ask to comments on that. And as I know you are aware that in the fourth quarter, we received feedback from the agency with regards to that protocol amendment and spacing that the protocol amendment as presented to them would results in a study that could provide the necessary data to demonstrate comparability.
And particularly, in terms of endpoints and I don’t want to get to this specifics of your question, the agency ask for endpoints relating to pharmacokinetic data as well as clinical endpoints. And indeed, they actually gave us the opportunity to demonstrate comparability through either method, either demonstrating comparability with regards to PK analysis or clinical endpoints. But hopefully that’s complete for you. Thank you.
And just a follow-up on that, are they looking for antibody data as well?
Antibody data was not a specific requirement in terms of demonstration of comparability.
Okay. I am just trying to understand how specific the data is, have they delineated what margin of difference would be acceptable between the two scales of manufacturing product?
We’ve submitted a statistical plan to the agency, which is currently under review, and we believe that that is consistent with the agency current guidance from the PK standpoint for oral meds. And with regards to the clinical endpoints, we’ve suggested to the agency the basis for clinical comparability.
Okay. Thanks for taking the question, Dan.
Thank you, Jim.
Your next question comes from the line of Cory Kasimov with JPMorgan. Please proceed.
Hi, good afternoon guys. Thanks for taking the question. Dan, I know you spent a quite bit of time in the field lately and I’m wondering if you can talk about the dynamics of actually getting a patient onto BYETTA? And basically, I’m wondering if you think that the primary hurdle here lies actually with the patient, I mean, for example, maybe they are afraid of the injections or the potential nausea? Or do you think this lies with the physician themselves and, especially in the primary care market where the time involved with educating the patient, teaching them how to do the injection and kind of dealing with the patient after the fact if they are calling about nausea and things like that? Thanks.
Hi Cory. Yeah, thanks very much for the question. Well, there is no doubt about it that the education required for the initiation of patient on BYETTA is greater than it is required for an oral mode. And, in fact in that regard one of the challenges that I do believe that we do we have is that results in that being; it’s a more timely process for physicians.
In that regard, that’s why we have actually initiated and I talked about this on previous calls a lot of support activities for physician to reduce that burden to put physicians at the time of initiations. In particular to that, I pointed out our first BYETTA easy start line, which is basically a 1-800 number, that a patient can call and they can get direct feedback from an educator or pharmacists with regards to how to initiate BYETTA therapy.
Of course in the physicians office, we always provide the physicians with demonstration pens and of course samples to try and encourage the physician to at least initiate the first dose with the patient in the office.
The other initiative that we have undertaken, which I think the key is the BYETTA By Your Side program, is a program which the patients sign up for and on a regular basis the patient gets information about both BYETTA, the disease that it’s being used to treat, diabetes studies and other key aspects of managing that disease such as diet as well as exercise.
So, we’ll try and create a complete product offering which is more than just a medication itself. It’s also the support to the patient as well as the support to the physician to ease the initiation of use.
All right. Even though it’s not shown up in those script trends yet. You are getting positive feedback on these various programs?
Certainly on the BYETTA By Your Side program we are seeing positive effects, one of the things that you may know when you look at the NRx state of this, this is a TRx state you will see that the repeat prescriptions are actually increasing and what that indicates is that we ask them increasing the appearance and persistence the patients have to the product.
Great, thanks for taking the question.
Yes, thanks Cory.
Your next question comes from the line of Steve Harr with Morgan Stanley. Please proceed.
Yes, I wanted to just explore the DURATION-2 and 3 data coming now this year. The two-prong question: Number one, what gives you confidence at the FDA given its ongoing safety scrutiny, when do want to see the data?
And number two, given your own desire for a strong label on the potential of these data could differentiate by the LAR from competition. Why wouldn’t you want to wait to incorporate that data into your label?
Great question Steve. Thanks very much. Well, firstly, I guess the confidence is driven by the feedback that we received from the agency in our pre-NDA meeting with them in the second quarter of last year. That pre-NDA meeting was specifically geared to determine what information we would be required by the agency at the time of submission.
And one key question was: what’s the extent of the clinical data that would be required? Now, we have gained very clear support from the agency that the DURATION-1 study would provide adequate data for clinical submission as part of the Exenatide Once Weekly in our program.
Again, I think one of the key things to remember here, is that the Exenatide Once Weekly submission would be a 505(b)(1) application. And that it is leveraging the entire Exenatide database, so, all the data that we have with BYETTA, and that was actually key in that pre-NDA meeting.
Now your second part: The second part of your question was relating to: Wouldn’t you want DURATION-2 and DURATION-3 to be available at the time that you will be promoting the product to differentiate it? Well, both studies will complete this year, DURATION-2 in the second quarter of this year and DURATION-3 in the third quarter of this year.
We expect that the data from those studies will be available and published at the time that we launch the product. And so, we do expect to be able to refer to the data from DURATION-2 and DURATION-3 in the promotion of Exenatide Once Weekly.
The regulatory challenge there is that if you are going to use studies which are part of your initial submission, you should be consistent with the data that is used for the basis of approval. And we have no expectation that the data would not be consistent.
Thank you.
Thanks Steve.
Thanks Steve.
Well, just a few final remarks to say, thank you to everybody for being on the call today. We appreciate your time and interest in our company. If there are any additional questions, please contact Michael York in Investor Relations. And once again, thank you for joining us today.
Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.
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Gentiva Health Services, Inc. F4Q08 Earnings Call Transcript

admin — Sat, 08 Mar 2008 08:35:07 +0000

Gentiva Health Services, Inc. (
February 18, 2009 10:00 am ET
Stephen B. Paige -General Counsel
Ronald A. Malone – Chairman of the Board
H. Anthony Strange – President, Chief Executive Officer
John R. Potapchuk – Chief Financial Officer
Whit Mayo – Robert W. Baird & Co.
Arthur Henderson – Jefferies & Co.
Good morning ladies and gentlemen, I am Steve Paige, General Counsel of Gentiva Health Services. Welcome to the Gentiva Fourth Quarter 28008 Earnings Results Conference Call. Speaking on the call today are Ron Malone. Gentiva’s Chairman, Tony Strange, Chief Executive Officer and President and John Potapchuk, Chief Financial Officer.
We hope that each of you had a chance to review the company’s earnings report, which we released this morning. All statements made during this call relating to future results and events are forward-looking statements that are based on our current expectations. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings and in the cautionary statements contained in our press release and on our website.
Our call today will be consistent with the SEC’s Regulation FD. We encourage participants to ask their questions during the call since we have certain limitations on comments that can be made in individual inquiries. Today’s call also conforms to Regulation G regarding the reconciliation to GAAP and non-AAP disclosure. As a result, we will not discuss non-GAAP financial measures on this call except for those set forth in our press release. You may access a replay of this call on our website for the next seven days. Transcripts of the call will be posted on our site within the next 36 hours and will be available for the next 12 months.
Following today’s prepared remarks we will open the call to questions. Please limit your initial comments to one question and one follow up, so that we can accommodate as many callers as possible in the allotted time.
Let me now turn the call over to Gentiva’s chairman, Ron Malone.
Good morning and thank you for joining us. Gentiva produced a very solid fourth quarter that wrapped up an outstanding year for our company. In addition to delivering excellent financial results, we completed and integrated three acquisitions that expanded our footprint in the core business. We grew our clinician base significantly while improving retention. We saw the continued growth of our leading specialty programs with the launch of two new services and the expansion of existing programs into many new markets. We divested our sales of the majority of the CareCentrix business and we significantly strengthened our balance sheet to support our future growth objectives. These achievements left Gentiva stronger and healthier than ever before as we entered 2009.
We are sharply focused on growing and improving our business. Our fourth quarter results, which represented our first full quarter since the closing of the CareCentrix transaction, illustrate the benefits of this focus.
I want to take the opportunity to thank all of our employees who have worked so hard to accomplish all of these key objectives. They continue to demonstrate a strong commitment, not only to performance, but also to delivering on our mission of improving the health and well-being of our patients and their families.
As you know we know we transitioned the CEO role to Tony Strange effective January 1. I have high expectations for Tony and his team as they continue to drive a vision of growth, excellence, and service to the patients and communities where Gentiva operates. During 2009 I will serve as Chairman and advocate for our patients and our industry, as we continue to drive the message to policy makers and regulatory leaders that home health is a key part of the solution to the nation’s healthcare challenges.
With that I would like to turn the call over to Tony.
Thanks Ron and good morning everyone. I would like to take a moment to personally thank Ron for his support and guidance over the last couple of years and for his continued support in the role as chairman. I would also like to thank our entire board of directors for the confidence that they have displayed in me and the rest of the management team at Gentiva.
Over the past several weeks I have been asked on more than one occasion, as the new CEO of Gentiva, what change in direction can be expected. Based on our results over the last several years, including improved clinical outcomes, success in becoming the employer of choice and the continued growth and improved profitability in our Home Health business, the answer is clear. Our current direction is a good one, the stage has been set, and I believe that we are well positioned to accelerate our performance in 2009. With that, let’s turn our attention to our results.
Overall we delivered outstanding performance for the quarter as well as for the whole year. Our 2008 EPS exceeded the raise that we established at the beginning of last year. It is particularly worth noting that we did this in spite of the divestiture of CareCentrix late in Q3. Revenue for the fourth quarter totaled approximately $283 million, which represents a 19% growth rate excluding CareCentrix. Our reported EBITDA for Q4 was $30 million, which represents an increase of over 50% year-over-year excluding CareCentrix. Finally our adjusted net income was $0.44 for the quarter and $1.55 for the year, which is about $0.04 better than the high end of our most recent outlook.
The major drive of these results has been the performance of our core Home Health business. Our Home Health revenues grew by 20% year-over-year and 4% sequentially. Medicare revenues were up 26% compared to last year and we continue to see positive movement in all of our key metrics.
Within Home Health, an underlying driver to continued success is our specialized clinical care. At year end we had expanded our specialty offerings to 300 programs compared to 268 at the end of Q3. Clinical care offered through one of our specialty programs now makes up more than 1/3 of our Medicare revenues for Home Health.
We have made progress with our two newest programs, Senior Health and Neurorehabilitation, expanding them into 24 locations at year-end. The addition of Dr. Charlotte Weaver as our Chief Clinical Officer and our commitment to advancing the care delivery system for the aging populations sets the stage for Gentiva to be a leader in clinical innovations specifically targeted to produce better outcomes for our senior population.
We’ve also made good progress this quarter in our efforts to become the employer of choice for clinicians. Excluding acquisitions we’ve added approximately a net of 700 new clinicians in 2008 including 160 in Q4. I’m particularly proud of these results given that the holiday season is usually a fairly slow period for people to change jobs. With all the emphasis on recruiting we’ve also maintained our commitments to retention. We saw a continued decline in turn-over making eight straight quarters of improvement.
Along with increasing our capacity we continued to make progress towards meeting our productivity targets by converting our clinicians to a pay per visit model. During the fourth quarter 60% of our field commissions were paid on a per visit basis. This compares to 53% and 56% for the second and third quarters respectively.
Overall, our Home Health business is performing very well and I’m confident that with continued focus and discipline that trend will continue.
Turning to Other Related Services, overall revenues were up 11% compared to last year. Revenue in EBITDA improved sequentially as HME and respiratory services had another good quarter. Hospice revenue increased 12%, but I’m still looking for that growth to translate into higher earnings.
To wrap up on the results, the fourth quarter was a strong finish to a terrific year for Gentiva. We expect another good year in 2009 as is indicated in our press release this morning, where we announced that we are raising our outlook for the year. John will provide some more insight on our outlook in just a few minutes.
We expect 2009 to be a very active year for us on several fronts that compliment our operating goals. This year we will officially establish Atlanta as the corporate headquarters for Gentiva. This decision is driven by the need to strategically align our support services with our field offices. Our goal is to create a corporate structure that is efficient as well as effective.
2009 is also a year when we will be stepping up our advocacy efforts for the home health industry in Washington. You’ve heard a lot about the incoming administrations plan to focus on healthcare reform. There is already speculation about how any reform might affect programs like Medicare. We will be working to ensure that one constant message is communicated and that is that home health is among the best solutions to the nation’s health care challenges. It is among the most cost effective forms of care for seniors in particular. It’s preferred by our patients and care is being delivered with increasing sophistication yielding improved outcomes for those dealing with acute episodes as well as chronic diseases.
Along with other industry leaders, we will co-sponsor data analysis, research and education, as we collaborate with government agencies and patient advocacy groups, clinicians, and others interested in shaping policy and benefits.
I started my comments by indicating that our strategic direction will not change. In closing I’d like to reemphasize the three core strategies for the company in 2009: first, growth, both in same source sales and in acquisitions; second, enhancing our clinical and operational delivery systems both in their effectiveness and in their efficiencies; third, expanding capacity through our recruitment and retention efforts.
I’m proud of our employees and the role that they play in the success of Gentiva. I’m particularly proud of the care that they provide to our patients. I believe this level of commitment makes Gentiva the place to work in home care.
With that, I’d like to turn the call over to John for some further insight in to our results. John?
Thanks Tony and good morning everyone. Gentiva 2008 fourth quarter and full year were highlighted by the successful execution of our growth strategy and a strong overall financial performance from our core Home Health business.
Before I detail our results, I want to note that the 2008 fourth quarter does not include the operating results of CareCentrix, but the prior year quarter does. Full year 2008 results also included CareCentrix’s operations through September 24, as well as a non-recurring pre-tax gain net of transaction costs for about $108 million with $3.72 per diluted share from the sale of the majority interest in that business.
During my discussion, I will provide adjusted numbers, which exclude the non-recurring gain in 2008 as well as special charges relating to restructuring, integration and merger and acquisition activities for all periods, to give you an apples-to-apples comparison.
During the 2008 fourth quarter revenues were $282.9 million, compared to $313.4 million the same period last year. Excluding CareCentrix net revenues grew 19%, driven by the Home Health segment that contributed 20% revenue growth. For the full year 2008 net revenues were $1.3 billion versus $1.23 billion for the full year 2007, representing growth of approximately 6%. If we exclude the revenue contributions from CareCentrix from both years, net revenue grew 14%.
EBITDA results were strong as well. EBITDA increased 19% to $30 million and EBITDA as a percentage of net revenues increased from 8.1% in the fourth quarter of 2007 to 10.6% in this years fourth quarter.
On a full forward basis, the CareCentrix operating contribution and related corporate expenses were excluded from the fourth quarter of 2007 and its special charges were excluded in both the current and prior year periods. EBITDA would have increased 51% in the fourth quarter of 2008 compared to the prior year period. As a percentage of net revenues pro forma EBITDA increased from 8.6% in the 2007 fourth quarter to 10.8% or revenues in the fourth quarter of 2008. This clearly demonstrates the leverage we can generate as a home health focused company with a better mix of episodic revenue.
For the full year 2008 adjusted EBITDA excluding $2.7 million of special charges increased 14% to $116.8 million. This is at the high end of the original guidance of $112 to $133 million that was provided on our Q4 2007 earnings call. As Tony noted earlier, this is particularly noteworthy as the original guidance included CareCentrix for the full year.
Gentiva’s adjusted net income rose 44% for the quarter to $13.1 million and 33% for the full year to $45.5 million. That translated into $0.44 per diluted share in the fourth quarter and $1.55 per diluted share for the full year 2008. Our growth was again driven by our emphasis on increasing the percentage of revenue we received from Medicare and higher rate commercial programs.
Our Home Health Medicare revenue grew 26% over last year, driven by double digit increases in number of episodes and revenue per episode. Excluding the acquisitions we have made, our same store Medicare growth in the 2008 fourth quarter was approximately 19% compared to the fourth quarter of 2007. Total episodic revenue for the quarter grew by 28% to over $191 million, with about $176.5 million of that amount related to Medicare EPS.
During the quarter 77% of our total Home Health revenue was paid on an episodic basis and all but 6 percentage points of that figure was Medicare revenue. This 77% figure of episodic revenue to total Home Health revenue is 5 percentage points higher than the comparable period in 2007. For the full year episodic revenue and Medicare Home Health revenue were up 21% and 18% respectively.
Moving to Specialties, Tony talked about the momentum we have achieved in the roll out of these programs. During the quarter Specialty comprised 33% of our total Medicare Home Health revenue, compared to 28% in the fourth quarter of last year. Specialty programs have driven our revenue growth and margin expansion. This is evident in our fourth quarter results.
Fourth quarter operating contribution margin for Home Health, which represents EBITDA before corporate expense allocations, was 16.8% up from 14.5% in the year ago period.
I’ll discuss some of the underlying operational statistics that are supporting our Home Health segment growth. During the fourth quarter there were about 39,900 Medicare admissions, an increase of 8% from the same period last year. For the full year we have had 160,400 Medicare admissions, an increase of 9% over the full year 2007. With regard to episodic admissions, we experienced 43,400 admissions in the fourth quarter and 174,700 admissions year-to-date. This represents increases of 9% and 12% respectively.
Total episodes in the fourth quarter were approximately 62,700 up 13% over 2007 fourth quarter. Revenue per episode was about $3,040.00, up about 13.5% from the prior year period. For the full year, total episodes approximated 246,000 growing 13% from last year. Revenue per episode for the full year is approximately $2,850.00, an increase of about 7% over 2007.
Fourth quarter revenues for Other Related Services, of which hospice represents about 56% of the total, showed some improvement in the quarter with an 11% increase compared to the prior year period. Operating contribution for the segment increased 3% to $3.5 million compared to the fourth quarter of 2007.
Fourth quarter hospice revenue grew about 12% over the prior year quarter. Hospice had a census of about 1,350 patients at the end of the fourth quarter.
Aggregate net revenues and contributions of the Other businesses in the segment, which include respiratory services and HME, infusion therapy and consulting, showed improvements compared to the fourth quarter of 2007. Overall, the Other Related Services segment performed better in the fourth quarter than any other quarter during 2008; however, we are not yet satisfied with this segments overall performance.
Shifting now to cash flow and balance sheet highlights, operating cash flow was about $71 million for the full year 2008 compared to $63 million for the prior year. Day sales outstanding or DSO’s were 57 days at the end of the 2008 fourth quarter, well below the 61 day level at the end of September and 50 day at December 2007.
Our billing and collection personnel have done a great job in allowing us to fulfill our commitment to achieve DSO below 60 days by year end 2008 and I thank each of them for their efforts. Each day of reduction in DSO translates to significant improvement in operating cash flow as we clearly demonstrated this quarter.
Cash and cash equivalents were $69.2 million at December 28, 2008 compared with $61.5 million at the prior quarter ’08. Long-term debt at December 28 stood at $251 million, a reduction of $10 million since the end of the third quarter as we repaid our remaining outstanding revolving credit borrowing in early October.
Our consolidated revenue ratio stood at 2.2x at December 28, compared to 2.4x at the end of the third quarter and 3.0x at year end 2007. Based on our cash position and borrowing capacity under the credit facility, we entered 2009 with approximately $75 million available for M&A activities. We are very comfortable with our current financial position and our ability to access financing to participate in M&A opportunities.
Now let me speak about our 2009 outlook. We offered a preliminary 2009 outlook in our third quarter earnings announcement and we are raising those target ranges today. Full year net revenues are expected to be in the range of $1.14 billion to $1.18 billion, compared to prior guidance of $1.12 billion to $1.17 billion. Our 2009 outlook reflects double-digit revenue growth after excluding the 2008 revenues from CareCentrix.
Diluted earnings per share, we expect it to be in a range between $1.72 and $1.80, up from the $1.62 and $1.72 range provided in October.
Gentiva’s 2009 outlook represents a diluted earnings per share increase of 20% to 30% as compared with 2008’s pro forma results, which assumed that the CareCentrix divestiture had incurred at the beginning of 2008.
Our outlook excludes any impact of future acquisitions and any special charges. Also, please note that our fiscal year ends on a Sunday nearest to December 31. The outlook 2009 will include 53 weeks of activity.
Gentiva is in a strong financial position and we are confident about the growth opportunities ahead. We are successfully executing on our strategy of focusing on our higher growth Home Health business and making investments in our specialty programs and in one of our most supported assets, our clinicians.
That concludes my comments. Operator, we will be happy to open the call for questions.
(Operator Instructions) Your first question comes from Whit Mayo of Robert W. Baird & Co.
Whit Mayo – Robert W. Baird & Co
My first question is starting out with the specialty programs. Could you kind of give us a sense of what the biggest challenge is that you face rolling that out right now? It sounds like it’s frankly just the people, but is there anything more mechanical there? Also, do you have any sense of just how penetrated you think you can be with those programs this year?
Well Whit, to answer the first part of your question about what’s the biggest challenge, it is the same one we’ve been talking about now for a couple of years. As the demand for our services continues to increase so does the ability to create the capacity to say yes, so a lot of our specialty programs are really focused around highly trained clinicians being physical therapists as well as highly educated RN’s. Our ability to attract and retain that talent is going to continue to be our challenge, to get those specialties rolled out faster. Outside of that, mechanically there is really nothing that would slow us down.
The second part of your question was related to kind of, I think I understood it to be what the denominator is. If we put every specialty in every location, we can have in excess of 1,500 programs out there today and our current number is just over 300, so we’ve got a lot of room before we start fluffing up against the ceiling.
Whit Mayo – Robert W. Baird & Co
Okay but any sense of what a target is just for 2009?
Well if you looked at our current pace, we’re probably rolling out somewhere in the ballpark of about 120 or so a year. So, provided that we can attract the clinicians, we can pick that up a little bit, but in the event that there is a gating factor related to our recruiting efforts, again as the demand increases we’re going to have to stay focused on the ability to recruit those. But, we’re going to be able to keep the pace we’re at and if we can step up our recruiting efforts, we might even pick that up a little bit.
Whit Mayo – Robert W. Baird & Co
Okay, that’s great. Could you provide us with some details regarding the announcement yesterday that you sold some of your pediatric home care agencies? Just any sense for the revenue or the contribution margin, or just any comments you have about that sale would be great.
First of all let’s look strategically at the default process behind it. Gentiva had in total roughly $25, $26 million of pediatric business in total and for the most part pretty easily segregate able. They are in different branches, where we had pediatric focus branches. I think staying consistent with the strategy that we’ve been talking about now for the better part of two years, is really focusing on the adult and geriatrics businesses. The pediatric business really didn’t fit within our mission. A noble mission, but it’s just not the core competency of our company. The clinicians we’re hiring aren’t pediatric specialty type clinicians, so strategically it made better sense to find a home with a company that that’s what they’re doing, really focusing on the peds business.
Overall, the piece of the revenue that we sold was somewhere between $20 and $215 million in revenue. The contribution of that was probably in the $2.5 to $3 million range ballpark; but, if you look at our ’09 guidance that is built into that. The taking out of the revenue as well as the earnings is built into our ’09 projections.
Did that answer your question?
Whit Mayo – Robert W. Baird & Co
Yes, that was perfect. I appreciate it.
John, can you give us a sense of looking at CareCentrix, just the equity earnings and the P&L that was negative for the quarter. Can you give us any idea for what drove that?
Yes. In terms of their operations they had a pretty good quarter in terms of revenue and just basic EBITDA. There were a number of one time items in the fourth quarter as they’re setting up their new company; you know there are the specialties, legal fees and that sort of thing. Then some amortization of intangibles that brought that down to roughly a break even number. But, operationally we actually did pretty well.
Whit Mayo – Robert W. Baird & Co
Okay, so if you were to normalize for some of those one time items in a quarter and you share your ownership percentage, would that have been a significant needle mover?
Yes. I’m thinking in our guidance for 2009, which I think is really where you’re headed, we’re looking at our share of the net earnings in CareCentrix to be roughly about $1 million or so in 2009. Also, keep in mind that along with that we are getting additional interest income because of the annual amount of $2.5 million on our seller note and if we reduce the corporate expenses. So, those are bills that we individual line item, but the equity would be roughly about $1 million.
Whit Mayo – Robert W. Baird & Co
Okay, that’s helpful. Then I have just one final question. Tony, if you could maybe elaborate a little bit on the advocacy initiatives you mentioned in your prepared remarks. Just specifically maybe some of the data analysis that you were talking about and kind of where you guys are with that initiative.
Well, Ron is still involved with the alliance that we’ve set up in Washington. The alliance is meeting now on a very frequent basis and we’ve hired some additional professional help in helping us build some models related to being able to demonstrate that the outcomes are overall going to save CMS money in the end. It’s going to take a concerted effort from all of the companies to make sure that we get that clear and consistent message throughout Washington.
Whit Mayo – Robert W. Baird & Co
Okay, thanks.
Your next question comes from Ralph Giacobbe of Credit Suisse.
I have a couple of points I would like clarification on. In terms of Medicare same store home health revenues, there was 19%, is that right? I am just looking for the organic home health revenue.
Yes, 19%, right.
And then what is the break down between pricing volumes in that 19%?
What we indicated, Ralph, was the revenue per episode, again this is the quarter, was up 13% to 13.5% and the volume same store was kind of mid of single digits, six or so.
Okay that’s helpful. Then you mentioned that 33% of your Medicare Home Health revenue was from your specialty programs, is that right?
Correct.
Then I guess what percentage of your admissions have a therapy visit associated with it?
Right now we’re up to about 2/3 of the episodes.
Do you have any sort of point of comparison from maybe a year ago or?
Actually if you go back to a year ago that number was in the, let’s call it today in the low 60% range. That number a year ago was in the high fifties; however, with the launch of one of our newest specialties, with senior health, we’ve actually seen that number drop back just a little bit. So it’s kind of hovering in that, as John said, that 2/3 range.
Okay that’s great. Then can you help us, what percentage of admissions come from an acute or post acute setting versus directly maybe from a physician’s office, without prior stay at another setting?
I don’t think we disclose much information about our referral trends; however, to give you a qualitative answer as opposed to a quantitative answer, when you look across our business it’s pretty diverse. We’re not heavily weighted in physician referrals or heavily weighted in hospital referrals, or heavily weighted, for that matter, in acute settings. Rehab facilities as well as assisted living facilities and even nursing homes. So when you look across that entire spectrum our business is pretty well spread out fairly even.
Your next question comes from Newton Juhng of BB&T Capital Markets.
I was curious as to your thoughts on, kind of looking out a little bit longer-term, the pricing. I mean obviously Ron’s efforts are going to be to try and get the market back, but just in terms of the pricing environment as we look out to like 2010, obviously that is in discussion now. I’m wondering what your thoughts are at this point.
That’s a great question, Newton. When we look out, obviously there has bee a lot of discussion about MedPAC and what MedPAC is recommending. I would like to remind everybody that MedPAC is one force and they make recommendations every single year. They sometimes GMS takes their recommendations, as well as congress, and sometimes they don’t, as evidenced by last year: MedPAC recommended that we would not have gotten the market basket increase for 2009, and we ended up getting the market basket increase for 2009.
When you look out over the last seven or eight years, I believe there was just once where we didn’t get the market basket increase or there about and the rest of the times we have. The rural add on has come in and gone out on several occasions.
So, when I think about 2010, I think we would be remiss if we didn’t think that there was a possibility that the market basket increase didn’t happen, but likewise there might be a likelihood that the rural add on might come back in. Projecting as to what it may or may not be, I think, at this point is a little premature on our part.
The one thing that I would like to point out though is that healthcare calls for doling out. We are paying for fuel; we’re paying for medical supplies. Wages are not going down. The ability to recruit and train our clinicians that cost is going up. When our legislatures put the market basket update methodology into place, it was an effort to make sure that healthcare providers had a methodology to keep up with the rising costs. I think it is a critical component of our healthcare delivery system and one that we’ve got to fight very diligently to protect.
The other comment that I’ll make is that larger companies and I know that you guys follow the public companies, but larger companies are probably better positioned to handle these kinds of variations in reimbursement. Whether a rural adult comes in or goes out or where the market basket stays in our goes out, I think the larger companies are better positioned to withstand some of these changes. But, I will make a comment and I think the National Association of Home Care has backed this up, should MedPAC’s recommendations be taken wholeheartedly for 2010, over 50% of the home health agencies in America would be put at risk, putting them in a loss position. I think that message needs to be carried very clearly through our alliance and through our advocacy efforts in Washington to make sure that we fully understand the impact of the whole industry, not through the largest providers.
With all that did I answer your question Newton?
Yes, it’s just helpful to get your input on that. I do have a follow up that’s actually more geared towards John.
John, the provision for doubtful accounts looked like it came in a little bit lighter this quarter. I was just wondering if you could help us understand the factors that caused the sequential drop offs in that number?
Yes. I think we specifically, this quarter, it was $1.5 million with the provision. Third quarter was $3.3 and the fourth quarter of last year was $3.3 too; so you are right in your observation. In the third quarter of ’08 CareCentrix provision was $1.5 million, but that’s gone away, so that’s really the explanation relative to the third quarter. At the end of last year we did have some continent that there was some additional provision that we took with respect to our G&A and the future operation to short that reserve which didn’t reoccur, those are frequently different.
Okay, so going forward we should be looking more at this level in the $1.5 million range?
Somewhere in the, I think, $6 $7 million during the year net [interposing].
Internal, okay great, thank you.
Your next question comes from Arthur Henderson of Jefferies & Co.
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I know you talked about $75 million dollars being available for acquisitions or M&A activity and I was just wondering, Tony, kind of, as you look to this year as I recall previously you guys were kind of in the market looking for bigger things. What is your appetite today in light of what could potentially happen on the reimbursement front going forward? I assume you are going to continue to do smaller stuff, but is bigger stuff potentially in the pipeline as well?
Well Art, that’s a good question. We’re open for business as it relates to acquisitions. With that said, I don’t think we are going to change our thought process. We’re going to be very disciplined in our approach. As John mentioned, our balance sheet is in really good shape. We’ve got cash put aside to do acquisitions. We have access to financing to raise capital if necessary. So if the right opportunity presented itself, whether it’s a large acquisition or a small acquisition, I think we’re prepared to move opportunistically.
With that said, I think we want to be very disciplined because the credit markets, at least in our opinion, for the foreseeable future aren’t going to change a lot. So, we want to make sure that we’re spending that cash wisely in making acquisitions that are going to be most accretive to our business. We’re going to stay disciplined, we’re going to look for well run companies, we’re going to stay focused on our core Home Health business. As it relates to size, whether it’s a larger acquisition or a smaller acquisition, we’re open to both.
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Are you more comfortable with this leverage ratio or something a bit higher, I guess, given the current credit market environment?
Right now we’re 2.2 and again we’re very favorable terms, I think. We certainly have the ability to go up a little bit on that. I wouldn’t be uncomfortable in the range up to three-ish.
That’s big words coming from John.
Your next question comes from Darren Lehrich of Deutsche Bank Securities.
It’s actually Pito Chickering in for Darren. I have two questions for you. Back into the EBITDA margin guidance from your new EPS it’s at 11% EBITDA margin. I was curious what sort of cost cutting measures you guys are taking since the third quarter in order to get to that margin level?
I don’t know that it solves any cost cutting. If you go back and remember one of our goals is to continue to change our mix. I think John mentioned that 77% of our revenues today came from an episodic reimbursement on an episodic basis. That number, if our plans all work as we hope, that number will continue to increase over 2009; that in and of itself will help improve gross margin.
If you look at the other issue that we talked about, making sure that we continue to make our productivity targets, as we move our clinicians from, I think what I said in several calls was 53%, 56% and now 60%. As that number moves up to 65% and 75% of our clinicians paid on a per visit basis, that will also help protect the margins.
Then I think we made a couple of comments during the call about making sure that our operations were both effective and efficient and so there are some things that we want to do from an organizational structure perspective to help take a little bit of cost out. All of those things combined will help continue to move that margin in the right direction.
Okay. In looking to 2009 what is your target pay per visit for your [inaudible] set stuff on the variable comp?
You mean what percentage do we expect to be on a pay per visit basis by the end of 2009?
Yes.
I don’t think we put a hard number out there. As a matter of fact, more specifically, we’ve talked about that this is a tool in which we use to help address where we have productivity issues. In places where our clinicians are fully productive today, our margins are protected. Those are places where it might not make sense to implement pay per visit. So, I don’t want to arbitrarily put a number out there and go this is a number we’re working toward. This is a tool. This is a wrench within our bag that we use to address specific margin issues in specific locations.
Your next question comes from John Ransom of Raymond James.
John you mentioned that your Q4 revenue per episode was $3,040 versus $2,850 for the year. What explains the higher number in the fourth quarter versus the full year?
We mentioned earlier, John, about the increasing use of therapies that 67% of our episodes now involve therapies and that certainly, with respect to our specialty programs, are a driver of that increase.
And another thing, it’s not just that we’re doing more therapy on the same patient, as a matter of fact to the contrary. As we roll out these specialty programs, a lot of these specialty programs really bring us a higher level of acuity in the patients that we’re serving. Those patients, for example coming out of rehab settings or coming out of skilled nursing facilities are more acute patients demanding a higher level of service and that is really what is changing that revenue per episode.
So how much of the 13% growth per episode is higher acuity versus just technical changes in the new 2008 version of the HHRG’s?
The majority of it is acute.
It’s really changing the mix and the kind of patients that we’ve been taking care of.
Your next question comes from Sheryl Skolnick of CRT Capital.
I have a question that I hope you can help me to understand. You’re getting very significant demand growth and I’m trying to understand where the demand growth is coming from. I recognize that specialty programs are having a big affect on that, but do you believe that the margin at 11% perhaps and you’re growing at 13% because you’re taking share from someone and if so where are you taking the share from? Also, how sustainable is it to continue to take that share, recognizing that you could do 1,500 programs. Realistically how many years do you think you would be able to take share before others aggregate and come in and maybe mitigate some of that growth?
You know Sheryl, that’s a very insightful question. If you look back into 2008, how much of the growth was just that the market is growing versus how much is taking market share? I think in 2008, from a mentioned perspective, we did a pretty good job of keeping up with the market growth and protecting our market shares. If you look towards the last quarter or the last 30%, 40% of 2008, I think we began accelerating our ability to take market share from other people. So, when I look into ’09, let’s say in ’08 the ratio between what was taking market share versus what was keeping up with the growth, we’re going to inverse that relationship in 2009. Specifically, if you look on average on any given day in 2008 we had about 450, 460 sale [inaudible] on the street. We ended the year with a number the a little bit higher than that approaching 500. One of the things that we’re targeting to do in 2009 is really invest in those sales resources and put more feet on the street and begin taking it and being really more aggressive about taking market share.
Did that answer your question?
It sure did. Then my second question is more another sort of strategic question. You’ve said a number of times, Tony, and I want to compliment you on how well you’ve done solo. You’ve said a number of times that you are focusing on the core Home Health operation, yet you have this other related services business which I would look at as while improving, still lagging the much improved performance you demonstrated in ’08 in the Home Health business. So, why shouldn’t I assume that that means that you’re, or I’ll put it positively, what are you going to do with that other related services business and why, if you want to focus on the Home Health business, do you still retain that other related services part?
Well, that’s a fair question and I think the answer is really the same; I’ve said this before. I think all of our businesses; we’ve got to continually look at to make sure that they’re strategically aligned with the mission of our company and really any business. As a matter of fact, it’s not only any business line it could be any branch. It could be just like the pediatric business, which was within our Home Health business already. So, it’s really not related to just our segment reporting. It’s really across all of our business and even within branches i.e. the pediatric business that we did, that we just sold.
I do believe that hospice is a core component of the home health industry. I think that over the next couple of years we’re going to experience some change in reimbursement related to hospice whether it comes in another HHRG within home health or not, I don’t know. But, your point is well taken. I think it is something we’re going to constantly have to focus on, in our company, is going to be what our strategic focus and how do we continually adjust that while we’re still flying the airplane.
Your next question comes from David Macdonald of Suntrust Robinson Humphrey.
I have two housekeeping questions. Could you give us some sense, in terms of timing, talking about moving corporate to Atlanta and then secondly on the extension side, could you give us a sense of where that number is at? I know it keeps improving, but give us a sense of what the actual number is?
I will try to do both, David. As it relates to moving the corporate headquarters to Atlanta, there is a technical aspect of that and that is going to be when are we going to officially change the corporate headquarters to Atlanta? I think we’re planning on doing that this proxy season when we file this year. So, within the next several weeks we’ll be making a formal announcement and publicizing that Atlanta will be the corporate headquarters for the company.
As it relates to kind of more pragmatically when we move things, we’ve already begun that process. We talked about it on some of our previous calls. Some functions we’ve already moved here. Some of the finance functions, some of the procurement, we’ve already moves. We’ve recently moved the marketing and sales support functions to Atlanta. We’ve moved some additional HR functions to Atlanta and some training functions to Atlanta. We’re in the process of doing those as we speak.
I think to give you a quantifiable end, our goal is by the end of the year 2009 that all of the corporate functions for Gentiva will be here in Atlanta. All of the executive team and corporate functions will be in Atlanta.
Okay and then just on the retention side?
On the retention side, if you look at kind of the health care industry retention rates, late in 2008 our results, say third quarter, got to be what I would consider to be even with the healthcare industry. I think as we ended 2008, in my opinion, we are beginning to see results that are better than you might see in the health care industry. Without getting into specifics, my goal is that from a retention standpoint there is going to be the healthcare industry in general and then there is going to be Gentiva. We are going to continue to focus and I would like to make Gentiva kind of the magnet status of what it means to retain employees in healthcare.
Your next question comes from Jeffrey Englander of Standard & Poor’s.
In terms of the other side of the retention can you talk about recruiting? And given the current economic conditions what are you seeing both on the therapist and RN side and given my presumption that that is probably a little easier now, any sense that you’re going to try and speed that up a little?
I think in theory your assumptions work. I would think that with the way the economy is there ought to be more clinicians staying in the work force as well as possibly coming back in to the work force. That makes a lot of sense to me. We really haven’t seen that yet.
Now, I happen to agree with you. I think that as time goes on and the economy doesn’t improve, we are going to see people that might have been considering retirement two years ago, they may say well we’re going to have to stay and work another three or four years longer. We think that that will help us in the long run, but we’re not going to take our foot off the gas as it relates to our recruiting efforts.
The demand for our services is growing at such a high rate that it’s going to take, in order to go back to Miss Skolnick’s question about taking market share, the company with the ability to take market share will be the company that is excelling its recruitment and retention efforts.
Just so I’m clear, but you are saying you are not at this point seeing or experiencing any easier recruitment of either clinicians or RNs?
I can’t see a noticeable difference. We very well may have clinicians that were considering retiring that are now staying in the work force, but in terms of us seeing a significant decline in our recruitment dollars, a significant decline in our training dollars that we’re spending, we haven’t seen that.
Thanks very much.
Your next question comes from Brian [Tenkolat] of Jeffries & Company.
Hey it is actually Brian this time around, but John just a quick question on wage inflation related to the last question on recruitment. Are you guys seeing a change in wage inflation yet for nurses?
Nothing remarkable, I mean there is certainly a market here or there that you may have to pay more, but overall when you look at our costs and we are up in that 3.5% range barely.
Okay and then corporate headquarters relocation, should we expenses related to that?
Yes, there will be certain special charges that will go through the year. I am still in the process of quantifying that. I would say right now, and I will give a fairly wide range, somewhere in a $3 to $5 million range, but as the year goes on we’ll tighten up that number for you.
Your next question comes from John Ransom of Raymond James.
John, on the corporate overhead what are you building in for 2009 for the cost and/or savings?
I just mentioned that in terms of a special charge, which isn’t built into the guidance, right now the range in terms of cost would be $3 to $5 million.
No, I heard the special charge. I wanted the net savings involved, outside the special charge.
It’s a toying point, as there is movement through out the year. 2009 would be a significant savings from that standpoint.
So as you look at 2010 then, what’s the new baseline? I should only say 2009 is a wash for the special charge, what is a kind of savings baseline for 2010?
Really from a savings standpoint, John, it is more rent expense in the area of $1 million, $1.5 million, something like that.
So there is no FTE reduction?
There may be FTE reductions, but we’re also growing and then we maybe spending those dollars in other places.
Your last question comes from Sheryl Skolnick of CRT Capital.
I just need a clarification and then a follow up. Did you say, John, that you only have $75 million available for acquisition?
On our situation today, Sheryl, I used the number $75 million, but keep in mind we have a $96 million credit facility. I mean take out what we have on the letters of credit and the fact that the facility, at the date of acquisition we had that $20 million available, we have roughly $30 to $35 million available on the facilities. When we look at our cash position today, $70 million, roughly $69, $70 million, we want to maintain some level of cash on the balance sheet.
So, I’m saying at any given time I would want to hold on to $20, $25 million. With that, today we have $75 million, but keep in mind we do have an effective shelf registration out there, more up to $300 million and that gives us maximum flexibility with respect to cash warrants, equity, etc… which we haven’t touched at this point.
Okay, that’s kind of where I was going. Also, you’re not including any incremental excess cash flow that would be committed to your term loan?
Right, as we ended 2009 this is our position. [Interposing].
Okay, I was a little bit concerned about that. Then my follow up is clearly your number of episodes is greater than your admissions. Can you just give us a sense of what’s happening with recertifications’ within the business? With the specialty programs do you note that recertifications with the specialty programs are significantly higher than they would be in, sort of, normal course of home health business? And, what is the average number of episodes per patient that you treat and how that has changed?
Let me use one example to tell you about that. One of our newest specialties that we’ve launched is the neurorehabilitation program. The typical profile of the patient that enters into that program is a post CVA patient. That patient is going to be on our service longer than a patient who has just had his knee replaced and is working his way back onto the golf course.
To answer your question broadly, as we bring out more and more of these highly sophisticated specialty programs related to senior health, related to neurorehabilitation, we would expect length of stay to increase specific to those patients. Hourly per stay for our joint replacement for example, that number is not going to go down. So, as those programs become mature, I would expect that length of stay to go up.
Cheryl, I did give the typical information and when you go through the math for the year, we’re at episodes per admit of 1.4 and for the full quarter was 1.44, so it hasn’t changed remarkably.
I would now like to turn the conference back over to Mr. Tony Strange for any closing remarks.
I would like to thank everybody again for joining us on today’s call. We look forward to keeping you updated on Gentiva’s progress and our results throughout 2009. I hope each of you have a great day. Thanks a lot.
Ladies and gentlemen, that concludes Gentiva Health Services Fourth Quarter and Full Year 2008 Earnings Conference Call. We appreciate your time.
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Schering-Plough Corp. Q3 2008 Earnings Conference Call Transcript

admin — Tue, 03 Jul 2007 12:51:38 +0000

October 21, 2008, 8:00 AM ET
Janet M. Barth – VP, IR
Robert J. Bertolini – EVP and CFO
Carrie S. Cox – EVP and President, Global Pharmaceuticals
Thomas P. Koestler – EVP and President, Schering-Plough Research Institute
Chris Schott – J.P. Morgan
Good morning my name is Marsha and I will be your conference operator today. At this time I would like to welcome everyone to the Schering-Plough Third Quarter Earnings Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions].
Thank you, I would now like to turn the call over to Janet Barth, Vice President of Investor Relations. Ms. Barth, you may begin your conference.
Janet M. Barth – Vice President, Investor Relations
Thank you Marsha and good morning everyone. Welcome to the Schering-Plough 2008 third quarter conference call. Given that there are other earnings call today, we will be mindful of our time and plan to finish up with the Q and A portion of the call by 9 AM. Before we begin, I would like to cover a few items.
First, some of the statements made on our call may be considered forward-looking statements. The company’s SEC filings including our 8-K filed today in Item 8.01 risk factors identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made this morning.
The company’s SEC filings, as well as today’s earnings release and tables are available at schering-plough.com. I would also note that during the call we may refer to non-GAAP measures, including adjusted net sales or adjusted top line sales, which is a non-GAAP measure that we define as our GAAP net sales, plus an assumed 50% sales contribution from our cholesterol JV. We will also refer to as reconciled amounts or amounts on a reconciled basis as reconciled amounts exclude purchase accounting adjustments, acquisition related items and other specified items. Please refer to the non-U.S. GAAP reconciliation table for a reconciliation of these adjusted figures to our reported GAAP results. These can be found under financial highlights in the Investor Relations section of our website.
This morning, I am joined by Fred Hassan, our Chairman and Chief Executive Officer; Bob Bertolini, our Chief Financial Officer; and Carrie Cox, the Head of Global Pharmaceutical. We also have other members of management available for Q&A. Also as a reminder, our R&D update meeting is scheduled for November 24th, here in Kenilworth, New Jersey. This meeting will be webcast and invitations will be going out soon.
Now, I would like to introduce Fred Hassan.
Thank you Janet, and welcome to our call. We’re pleased that we’ve again delivered a strong quarter. Despite the global challenges affecting our industry and the challenges with our U.S. cholesterol joint venture, we continue to execute on our three-pronged strategy. Number one, we continue to grow our top line. Number two, we continue to grow our pipeline. And number three, we continue to reduce costs while continuing to invest wisely, especially in our rich late stage pipeline.
We also had some currency tailwind in the quarter; but the fundamentals were strong. Our good performance in these tough times reflects the strength and diversity we’ve been building into our company over the past five years. Our good performance also reflects our financial discipline. This is visible in the early success of our Productivity Transformation Program or PTP.
Through PTP, we’ve been systematically reducing costs and enhancing our productivity for the long term. Step-by-step, we’ve been advancing the Action Agenda that we set out five years ago to transform our company. It is delivering.
Let me begin by talking about the new strength and diversity we’ve built. Next month will be the first anniversary of our acquisition of OBS. Now that we’ve had almost one year of experience, we can see that this is proving to be a powerful combination. We bought a strong R&D based global company with solid products and good cash flows. We have integrated it well. It was the right move at the right time.
As a result, we have further transformed Schering-Plough into a company with the size and scale to be a strong global competitor. Through the OBS combination, we’ve also created the world’s leading animal health company with sales of nearly $2.3 billion year-to-date. Our people have executed with excellence; recreating value from our combination by leveraging our strong combined global platforms.
Let me give you some examples. With sugammadex, we’re already launching our first new product from the OBS combination in Europe, using a strong combined sales and marketing platform. Another example, NUVARING. NUVARING is an important innovation that came out of the Organon Labs. We’re looking at markets like Spain where NUVARING has an 18% market share. We are leveraging the strong Schering-Plough global sales and marketing network to share these successful experiences in order to drive growth in other markets.
And a third example, our combined global Animal Health platform. The animal health integration is making very good progress. The combined organization is beginning to operate as one team. The depth and breadth of our combined animal health portfolio is making us more relevant to customers. Our combined field process are starting to leverage the new broader portfolio. We’re also benefiting from what we believe is the strongest Animal Health R&D platform in the industry.
Now, let me turn to diversity. We’re benefiting from our successful long-term strategy to build diversity on many fronts. The OBS combination has been an important part of that strategy. At the macro level, we’ve been implementing our long-term strategy of business diversification via three pharma based segments; Human Rx, Consumer and Animal Health, which all benefit from a strong science platform. We began investing in the consumer health and animal health back when the fashion was to be a pure play Rx company. We stayed with our strategy and it’s proving to be a wise one.
We’re building diversity; close to a quarter of our total sales from these units came in the third quarter. At the macro level, we re also seeing our long-term geographic diversification strategy coming through. About 70% of our GAAP sales came from outside the U.S. in the third quarter and delivered strong growth.
We’ve become much stronger in the other established markets, like Japan, the world’s second largest market. In Japan, we’ve almost doubled our sales in the past five years, and we have a chain of new drugs coming through the pipeline for Japan. This makes us excited about our future in this market.
We’re also becoming strong in a group of newer markets that we’ve been prioritizing; markets, such as China, Russia, Brazil, Central-Eastern Europe. Their relatively fast growth is contributing to our company’s overall growth. So our diversification strategy is working at the macro level, it’s also working at the micro level with product diversity in our Rx unit. We continue to be committed to our cholesterol franchise. VYTORIN and ZETIA are very effective in getting people to their LDLC goals in countries around the world.
We continue to be committed to these products, because they are so important to physicians and their patients. Meantime, however we’ve built strength with many other products from REMICADE to TEMODAR to NASONEX and to our new women’s health franchise.
We’ve build special strength in biologics, led by our biologic REMICADE which is now annualizing at over $2 billion in sales. Overall, biologics now account for nearly 30% of our total Rx sales and growing.
Today, we’re among the top companies in biologics. So, we’ve built diversity on multiple fronts. Given the challenges in today’s environments, this diversity is an important strength.
Now, let me turn to our financial management and our progress to the Productivity Transformation Program, PTP that we launched in April. Our strong quarterly performance reflects sound financial management. Our company is generating good cash flow. Bob will talk more about our financial strength in a moment.
About PTP; we launched PTP in early April this year to achieve important savings in our cost structure and to make it even more effective as a company. We’ve moved quickly and decisively. Our goals have been to take costs out of the system, to become more efficient, to make Schering-Plough even more resilient and even more nimble.
We’re looking at every part of our business and at every process, including sales, R&D, our supply chain and our global functions. Earlier this month, we completed a strategic realignment of our U.S. sales force. The realignment is one of the many actions to reduce our cost base in the US. The realignment is designed to give us even more flexibility in a fast changing environment.
Looking ahead, we continue to be very excited about the strength and diversity of our late stage Human Rx pipeline. With 10 projects in Phase III, we believe we have the strongest late stage pipeline for our size in our peer group. We also have relatively long expected pattern exclusivity on key Rx projects; mostly well into the next decade.
Thus our late stage pipeline is expected to be additive to the current inline portfolio. So at a time when there’s a lot of anxiety in the industry about the approaching patents flip [ph] in pharma for many of our peers, we are a company that has a lot of positives to work with. We look forward to talking more about the pipeline at our R&D day next month.
So overall, in a tough and changing environment, we’ve again come through with a very good quarter. This reflects the diverse strength that we have built in our company, strengths that also give us confidence that we can continue to power through.
Now let me turn over to Bob.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Thanks Fred and good morning everyone. Our performance in the third quarter continues to reflect our diverse and broad-base portfolio as well as our ability to manage the challenges in our business. As Fred mentioned, we are pleased with the positive impact that Organon Biosciences is having on our business. On a reconcile basis, we are in $0.39 per share in the third quarter. This amount excludes purchase accounting adjustments, special and acquisition related items, about $90 million of income from the termination of our respiratory joint venture with Merck and the gain of $160 million from the acquired divestiture of certain animal health products.
Now, turning to our results. First, I’d like to discuss the key drivers of our quarterly sales and operating performance. I’ll also provide an update on PTP and the ongoing OBS integration.
First, our sale performance for the quarter. On a GAAP basis, our net sales increased to $4.6 billion and include about $1.4 billion in sales of products from OBS. Excluding sales of price from OBS, net sales for Schering-Plough on a standalone basis would have been $3.2 billion, an increase of about 13% compared to the prior year.
Currency was again favorable this quarter. Excluding sales from OBS products, currency contributed approximately 6% to the Schering-Plough standalone sales growth. If we include and assume 50% contribution from the cholesterol joint venture, our adjusted net sales were $5.1 billion this quarter.
Global sales of the cholesterol franchise were down about 13% compared to the prior year period. Overall, our prescription pharma sales this quarter benefited from nearly $900 million in sales from Organon, including contributions from FOLLISTIM and NUVARING and higher sales of REMICADE and TEMODAR. Offsetting this growth were declines in our U.S. prescription respiratory business. Our sales also benefited from foreign exchange.
Carrie will talk more about the performance of our global prescription brands in a few minutes.
As Fred mentioned, our overall business diversity is stronger today than a year ago, with Animal Health and Consumer Healthcare contributing a combine 23% of sales. These important businesses provide solid revenue and generally positive cash flow while extending the value of our R&D investments.
In Animal Health, third quarter sales were $759 million including more than $500 million from the acquired Animal Health business. Our Animal Health sales this quarter were roughly split between vaccines and pharmaceuticals, including a wide range of products to treat livestock and companion animals.
Turning now to Consumer Healthcare; our sales this quarter were about $278 million, up 2%. Sales of OTC MiraLAX continue to be strong and nearly doubled in the quarter to $31 million. In fact, within just two years of being on the market, OTC MiraLAX is already a category leader, vying neck-in-neck with Metamucil.
Let me now review our third quarter operating performance. On a reconciled basis, our gross margin in the third quarter was 66.9% roughly flat with last year. Sequentially the gross margin decline was primarily due to the seasonality of our business.
Moving to SG&A; this quarter, SG&A expenses were $1.7 billion. On a year-over-year basis, the increase related primarily to the OBS acquisition. Also, as we continue to focus on controlling cost with the PTP program, we’re seeing the benefit in our cost base.
Moving to R&D. Our R&D expenses were higher on a year-over-year basis this quarter and totaled $893 million. The increase relates to the addition of OBS and continued investment in our R&D pipeline. Sequentially, R&D spending was slightly lower. However, we do expect R&D spending in the fourth quarter to be higher than the levels this quarter.
Now let me provide an update on our ongoing PTP program, which includes the integration of OBS. After nearly one year of intense work on integration, the acquisition of OBS is proving to be a powerful combination. Our combined operations are benefiting from new product and geographic strength, new strength with our customers and new strength in R&D including a late-stage pipeline that we believe is now one of the strongest in our industry.
We are also making steady progress to achieving our $1.5 billion PTP target. To-date, we have achieved more than $300 million in savings. Now we are seeing savings across all business units with most of the savings this quarter in SG&A.
Before closing, I also want to comment on our solid financial position and how this relates to the current global financial environment. While a number of global companies may be challenged to their meet liquidity needs, Schering-Plough does not have any current need to access the capital markets. Additionally, we are not relying on commercial paper to fund our liquidity needs.
We do not have any debt maturities coming up in either 2008 or 2009. We currently have more than $3 billion in cash on hand, which represents an increase of about $300 million since last quarter. With our positive cash flow, we have also made progress on paying down debt; in fact we’ve already paid down approximately $1 billion in debt this year.
From a cash perspective, we remain invested in highly liquid and highly rated securities. Primarily instruments such as bank term deposits and government backed money-market funds. So, you can see, we have a solid financial position.
In closing, our strong top line and bottom line performance this quarter shows that the integration is working. We are building diversity on our business and making steady progress with our PTP program. Together with our robust R&D pipeline, we believe we can continue to manage the challenges in our business.
With that I’ll now turn the call over to Carrie.
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
Thank you, Bob. Good morning. Despite continue challenges in our global pharmaceutical business, our core strategy remains the same; driving top line growth advancing the pipeline and reducing cost.
With long periods of expected exclusivity on many of our core brands, we can leverage our investments in our existing portfolio. We are also focused on capturing opportunity through our continuing geographic expansion program, and we’ve seen a number of success stories around the globe.
Our international business continues to perform well with solid growth in both emerging and established markets. Outside the U.S., our international product portfolio is broader and includes product like REMICADE, CAELYX, CERAZETTE, SUBOXONE, and now BRIDION. Along the same line product like NASONEX, PEGINTRON, and NOXAFIL have even broader indications in international markets, which may provide additional growth potential for these brands over time.
Maximizing geographic opportunity is a critical component of our lifecycle management plans. As Fred mentioned, we’ve seen our country performance in Japan transformed through the launches of PEGINTRON, TEMODAR, ZETIA and most recently NASONEX. Combined with future opportunities, including REMERON, ASMANEX, and sugammadex, each currently under regulatory review in Japan, we believe there may be good growth potential over time in this important market.
In the U.S., our business environment is particularly challenging. We have recently taken steps to address some of these marketplace dynamics through PTP, including the reduction in the size of our U.S. sales force and the launch of a new selling model for our primary care sales team. This new approach is tailored to individual prescribers’ interests and focuses on better capturing local opportunity. Because we place such a high value on our sales professionals, we worked hard to retain high performers and to preserve the important customer relationships that they have built over time.
Turning to product results for the quarter. Sales from our Global Cholesterol franchise were down 13% to $1.1 billion. We continue to see sharp differences between the U.S. and international markets in sales of our cholesterol products. Outside the U.S., franchise sales increased 37%, driven by strong performance across much of Europe as well as Japan.
We are pleased to report that ZETIA is benchmarking well with other major launches in Japan. In the U.S., franchise sales were down 29% versus the prior year, consistent with declines in prescription volumes. We have seen a continued shift towards generic preference in U.S. managed markets, including Medicare Part D.
For 2009, we expect both VYTORIN and ZETIA to have competitive second-tier access in line with other branded cholesterol-lowering medicines. VYTORIN and ZETIA each continue to have an important role in lowering LDL cholesterol. VYTORIN gets more patients to goal than the competition. In head-to-head clinical trials using comparable doses, 52% of patients taking VYTORIN achieved their LDL cholesterol goal versus only 35% with Crestor. More than twice the number of VYTORIN patients achieved their LDL goal versus LIPITOR, and more than six times the number of VYTORIN patients achieved their LDL goal versus simvastatin.
ZETIA used alone or in combination provides physicians flexibility to help get their patients to goal, especially for those patients who cannot tolerate higher dose statin. We will continue to remain focused on the many patients who require the dramatic LDL cholesterol lowering that VYTORIN and ZETIA can both provide.
Turning to immunology, we are delighted with the strong performance of REMICADE with sales increasing 32% to $564 million. A key to this excellent performance has been the good growth across all indications despite increasing competition. Although the utilization of biologics has increased, market penetration in Europe is still substantially lower than in the U.S. and with our growing strength and expertise in this segment we believe that REMICADE and in the future once monthly golimumab, position us for long-term in both the hospital and office based settings. We’re very excited about participating in the 70% of the market which is currently occupied by subcutaneous anti-TNF therapies.
In allergy, global NASONEX sales increased 6% with our international markets continuing to deliver strong double-digit growth. NASONEX remains the leader among all nasal and health steroids with a global value share of more than 45%.
Our teams have done an excellent job, blunting the uptake of Veramyst. We are also excided about the opportunity to extend our leadership position with the launch of NASONEX in Japan just a few weeks ago.
In the U.S., NASONEX sales fell 8%. We are pleased however that NASONEX market share has held firm against increasing competitive pressures. I also want to cover our new portfolio in women’s healthcare and CNS.
I’ve been very pleased to see the enthusiasm of our people and the strong performance of our women’s healthcare franchise in many countries around the world. In first half IMS data, we have seen NUVARING, CERAZETTE and IMPLANON each deliver strong double digit growth versus the prior year.
From contraception to fertility, our women’s healthcare franchise is among the broadest in the world today and our pipeline should keep us in a leadership role in the future. In CNS, sugammadex or BRIDION as it is called in Europe is in the very early stages of its launch roll-out as an agent to reverse muscle blockade during anesthesia.
BRIDION has the potential to modernize and transform the practice of anesthesia around the world though changing paradigm takes time. Early feedback from physicians already using BRIDION has been extremely positive. We are proud to be associated with such an important treatment innovation for anesthesiologists, for surgeons and for their patients.
In the U.S., our CNS product asenapine remains under review with the FDA. Review of asenapine has taken longer than we expected. We look forward to FDA response, but we do not have any additional information at this time.
In summary, we continue to execute on our core strategy. We will optimize our product investments to build new growth drivers over time and our people are committed to continuing to build a high performance company for the long-term. Now, let me turn the call back to Janet.
Janet M. Barth – Vice President, Investor Relations
Thank you Carrie, Marsha, we would now like to open up the call for the question and answer session.
Thank you ma’am. [Operator Instructions]. Your first question comes from the line of Chris Schott with J.P. Morgan.
Chris Schott – J.P. Morgan
Great. Thank you. Just a couple of questions on ZETIA-VYTORIN franchise, can you talk a little bit more on your outlook for the formulary status in the U.S., I guess, specifically as it relates to Medicare part D looking out to 2009? And I guess just what percent accounts you are targeting to get to tier II with this franchise looking out to next year? And along the same lines, talk about the investment associated with cholesterol JV right now, are you rescaling any of your investment level on this business given what appears to be lower sales base on the U.S. side? Thanks.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Very good questions Chris. Carrie?
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
In general if you look at the availability of the products going forward currently and as we anticipate it could be for 2009, we feel very comfortable that there is good access. As I mentioned, we believe we have very competitive second tier access for our products, and we are quite comfortable with that. We also are continuing to have a market leading share with [ph] the sales force promotion with these products and again we’re comfortable with the promotional levels we have; we reassess them continually, but we think we are in a good position now.
It’s clear there’s continuing generic pressure across the entire market; we see this to be similar to other large categories in the U.S. but there continues to be a strong role for the high performance products with significant impact on LDL like VYTORIN and ZETIA.
So, I think Chris what really is needed is more work on LDL and I think when it comes to be stronger product, the more effective products, they have a very important role to play. And we do not see any big new products following the category of product that are on the market at this time. So our goal really is to expand the population that gets to their LDL goal. And next question please.
Your next question comes from the line of Roopesh Patel with UBS.
Thanks for taking my questions. I just have a couple of questions, the first one for Fred. If we do experience a global economic slowdown, I was wondering if you could give us your perspective on how deeply that might impact the industry and the company at this time around relative to what we’ve seen in the past? And then my second question is for Bob. On a year-to-date basis, I see… by my calculations the FX benefit to net income is somewhere in the $0.17 to $0.18 range, that’s about 12% to 13% of net income reported so far. I was wondering if you could discuss how the company plans to manage net income exposure to FX headwinds potentially as we look forward to 2009? Thanks.
Thank you Roopesh, a very good question. So first, we are encouraged to see the governments are working together around the world to make sure that the downturn is moderate or a mild one. And this interaction is very helpful as you’ll recall in the past, this kind of interdependence and interaction has not been very good. So this is a new model and we hope that it will be a mild downturn globally.
We are one of the defensive sectors, and that is one of the advantages of being in the healthcare industry. And within this sector, those companies that have diversity and innovation will always do well. There is always an innovation premium for important products for example a product like REMICADE has done very well in already price controlled economies, because there is a need for a product like that. It creates dramatic results for the patients that benefit from that medicine.
So, we really are working very hard at managing for the new events. We have already demonstrated that we can move with speed and inflexibility when circumstances change around us. And we do believe that if there are more government price controls we will deal with those, but in the end it’s the innovation that really drives the premium that companies deserve for their products. And next question please.
I think the… that was my FX question Fred?
So Bob… yes, please.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
So Roopesh let me talk about FX a little bit. Clearly we have been benefiting both on the top and the bottom line from FX. Now this go to the quarter, the impact on Schering-Plough’s standalone this quarter on a top line was about 6% or so or roughly $170 million. And while the percentage that drops to the bottom line will vary based on country and product mix of expenses and inventory movements, and that we estimate that roughly half of that drop to the bottom line.
Now on OBS, remember OBS was not in our sales base in 2007. So that’s not included in the 6% SP standalone base. But if you look at the expense base for OBS it’s more weighted to outside the U.S., so we would estimate that less than half at 50% would drop for the OBS business on an overall basis when you start to see that contributing starting in the fourth quarter.
Now on a cash flow perspective… on an economic perspective, our largest exposure is to the euro, and given our euro debt and our anticipated euro debt repayments and our euro expense base, those are fairly well balanced from a cash flow perspective. Now there is a P&L impact but from a cash-flow perspective, we are generally well balanced given that euro debt and that euro expense base.
Thank you very much. And next question please.
Your next question comes from the line of Tony Butler with Barclays Capital.
Thank you very much. The growth of REMICADE continues to be quite strong and really two questions around that. Carrie, what is it about, which in sub indication, can you give us some level of comfort that really is the principle driver, I realize there may be all indications. Which one really is generating the principle driving force there?
And number two you alluded to 70% of the market occupied by subcu therapies, is that also true internationally? And then the third question’s around the non-U.S., non-European strategy of the products that you sell in Brazil, China, or Central or Eastern Europe. Can you tell me, what the top three to five products actually are in those countries? Thanks very much.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Carrie?
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
Thanks. I think one of the things that we are most excided about with the growth of REMICADE is that we see good growth across all of the indications. And as you know the penetration of use of Biologics in Europe particularly is right now only in a range of about half of that we see in the U.S. and more develop markets. So, we think that there is still potential for the entire category to continue to grow.
Rheumatoid arthritis has been the largest segment of the market and continues of course to be the largest portion of our sales as well. But, we have been delighted to see again consistent growth but I think the GI indications, the use in Crohn’s and in ulcerative colitis are some of the others there; they are most exciting because the potential for life changing therapy for patients is there. But also the impact in terms of the available patient force the size of the afflicted populations for those markets is fairly substantial. Sorry, I think Arthritis is important; Psoriasis again the impact that REMICADE can have on patients suffering from severe Psoriasis is pretty outstanding.
So, it’s very motivating to physicians and frankly to our people to be able to be part of a product that has such a potential to change people’s lives. When you look at the subcu portion of the market that is essentially that 70% refers to the portion where you see Enbrel and Humira sales today.
The reason that’s important for us is because, in Europe, particularly the hospitals channel is often where you find REMICADE because of the need for infusion. Now we believe that REMICADE may have the best efficacy profile of all the products out there today. But it does require infusion.
So the opportunity with golimumab in the future to participate in the subcutaneous portion of the market is exciting to us because in some country that takes us into a whole new channel and a new set of prescribers. We think we have built such strength already that we clearly have potential to take that strength into the other portion of the market.
Looking into our emerging market sales, we tend to see particularly in those markets where there’s a substantial amount of government business, that the specialty products generally are the ones that are doing the best. These are new areas of treatment for many of these countries where the depths of use of products in these areas such as hepatitis is still fairly low. So there is now more opportunity for treatment.
Our market for example like China represents one third of the hepatitis B opportunity in the world. We do have the hep B indication there as well and you see clearly PEGINTRON is one of the major opportunities for continuing growth in all of those emerging markets.
I was in Russia not too long ago and I was just delighted to see though in a country like that that we are doing extremely well not only with the specialty products but also in growing the primary care portfolio and particularly in women’s healthcare. We have a very strong franchise opportunity in China and we’re doing well in all those emerging markets. So I’m delighted to see that the potential there continues to be strong.
Carrie, I think there is a reimbursed component in every market and there is a private base component and we let our country managers customize the local portfolio to take advantage of the local opportunity.
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
Yes.
But, it’s good to have a broad range of products available.
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
Yes.
Okay. Thank you Tony and next one please.
Your next question comes from the line of David Risinger with Merrill Lynch.
David?
Yes, hi. Thanks so much for taking the question. In terms of currency you provided a little bit more color this quarter, but Bob I was hoping you could be a little bit more specific about the currency benefit for Organon’s top line you said less than half would drop to the bottom line, but if you could characterize that for us so that we can understand the Organon piece? And then in terms of the joint venture, there is obviously a currency benefit there given that the IP is in Singapore, if you could help us understand the currency benefit for the joint venture also. Thank you.
Bob.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Yes, I am always talking Organon first. If you look at the overall percentage impact which is roughly 6% for Schering-Plough on a standalone basis, while the skewing maybe a little bit weighted outside the U.S for Organon, it wouldn’t change that 6% materially. And so there is a bit of an incremental revenue base if we were to do on a pro forma basis David, that would drop but again it would be less than the 50%, obviously what we’re seeing right now. Now going forward that could vary, it could vary by inventory movements, it could vary by inventory mix that’s kind of what we’re seeing right now.
And I think Bob, it is fair to say, that country makes matters a lot. We have for example a very important animal health business that happens to be a very large business in a country like Brazil, which is not in the Euro zone. So, we need to be looking at a… the diverse portfolio that we have here that gives us lot of shelter.
And inter-company sourcing… inter-company product sourcing also impacted [ph].
Yes. And, we’ll give more color David next year on this subject as we also understand the full cost base of Organon in countries outside the U.S., but there is a lot of natural hedges here in our company as we go forward. But, we do recognize that foreign exchange is going to affect all companies with international operations. And next question please.
Your next question comes from the line of John Boris with Citi.
Thanks for taking the questions. Bob, can you just remind us exiting 2007 what NOLs were and through third quarter of ‘08 what cumulative NOLs were through 3Q ‘08? And then on R&D, is it possible to get any update on your response on sugammadex to the non approvable and what additional work you might have to on sugammadex in the U.S.? And then also on asenapine, was there no official action on asenapine and what is the status of asenapine around the world? Thanks.
I will ask Bob to answer the first question and our head of R&D Tom Koestler who is overseas at this time but calling in, he will answer the R&D questions. Bob?
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
First up John, on the NOL coming into the year at the end of ‘07, we had roughly 1.7 billion or so of net operating losses. Now as we indicate in our SEC and 10-Q filings some of that could be used to settle ongoing lot of issues and we have disclosed that. With respect to where we are, we do that once a year John. So that will be in the 10-K cause I think it’s very bogged [ph] throughout each individual quarter. And those tax updates on a tax basis gets done once a year. So, we will disclose that at the end of the year. But we have not need from a cash standpoint to access international cash to fund U.S. operation of that option.
And, Tom Koestler?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Yes John, thanks for the question on sugammadex. This is… as you know, we are fully committed to working with FDA to bring sugammadex to market in the U.S. over time. But it’s a process, and the first step will be to have a meeting with the agency, we have not yet had that meeting with agency but we will in fact have one. And at that meeting we just learn about the FDA’s expectation and work with them to find a common pathway forward. So that will be a process and we’ll keep you updated along the way as we go forward.
With reference to asenapine, yes, the FDA has missed their PDUFA date, their action date. The application remains under review. And as we’ve mentioned before in terms of outside the U.S., the European Union requires a very specific trial called arevas [ph] maintenance trial and that trial is still underway, and we expect to get results from that trial sometime early next year and hopefully by the time we get… may perhaps by the time we get the R&D date we might be able to give you a little more color on that. Thanks for the question.
Thank you, Tom and next question please.
Your next question comes from the line of Craig Baskin with Putnam Investment.
Hi, Craig.
Thanks for taking my question. I only have one left that’s not been asked. Bob, you talked about $1 billion of debt being retired this year, but if I look at interest expense over the last three quarters it was pretty flat. So, I am hoping that you could explain why that’s so, if that has been retired?
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Sure, Craig. The majority of $600 million that was done just this quarter… this past quarter
Okay.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
So, if you look at it today Craig, we have roughly $8.4 billion of debt outstanding
Yes.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
And I would say the current annual run rate on interest is going to be in the low five… there’s some variable debt there that can move around, but in the low $500 million range.
Okay, great. Thank you.
And Bob do you want to draw a bit public information about the next front that has to be repaid?
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Next maturity… we don’t have maturities until 2010 and that’s a €500 million debenture.
So, our free cash flow is quite strong?
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
We have no maturities due in 2008 and 2009.
Thank you. And next question please.
Your next question comes from the line of Barbara Ryan with Deutsche Bank.
Barbara?
Good morning. I guess, Fred you highlighted for us a number of things, I mean number one that the industry is defensive and number two within the industry you are more diversified and don’t have the punishing impact at generic competition that many of your peers face. And so I am just wondering in light of those things and the uncertain environment, don’t you feel some sort of obligation to give some earnings guidance. I mean you are the only one of your peers that hasn’t done that?
Barbara, if you’ll recall I have been CEO elsewhere and I did have guidance there, so I am not against guidance. It’s just that under the circumstances and given the fact that Schering-Plough has been through a lot of transition and has important alliances with large products with partners and the fact that we did OBS, that’s just caused us to pause when it comes to giving numerical guidance.
But the issue is going to be looked at repeatedly inside the company and at the right time we’ll certainly see if we would want to do that. We’re not totally opposed to it even though some companies have said that it promotes short-term behavior, we’re much more pragmatic about it. But at this point this is not the right time, especially in light of what’s happened in the global environment in the last month or so. But, hopefully in the future we might be able to give more color on our policy and guidance.
Thank you for your honest answer. I appreciate it.
Thank you Barbara. Next one.
Your next question comes from the line of Bert Hazlett with BMO Capital Markets.
Thanks I’ve got a couple. First, when should we see the impact or begin to see the impact of the most recent sales force changes or alignment in the U.S. And then two pipeline questions; Fred, specifically to you, Novartis continues to mention in their pipeline and in the presentation, a respiratory collaboration with you. Our tracking indicates that’s in Phase III and it’s in wrap… it’s wrapping up here, maybe a filing in 2009 and another one in 2010. So, my question is given the significance of this combination, a potential significance, is this meaningful to Schering-Plough, when do we get clarity on terms and more importantly when do we get clarity on data for this?
And then the last, given the golimumab and another pipeline question, given the significance of the GO-AFTER data, should we be considering golimumab for second line initially in RA, thanks.
Very good questions. A lot of these are going to be answered in some detail at the R&D Day. But I can show you that we are very excited about the MFF product, which as you’ll recall is a product in the Advair space and we have had a successful launch of ASMANEX in the U.S., we also have a product called FORADIL on the market in the U.S., this would be a combination product similar to the category that Advair belongs to and we are absolutely committed to the respiratory space.
We are one of the innovators in this area from the past, and the way we’ve invested in this area and especially new approaches like the GRAZAX vaccine that we’re working on just shows our commitment to this space. And you’ll learn a lot more on this in R&D day. Tom Koestler, anything you would like to add to these questions [ph] that were asked?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
No, Fred I think you covered the MFF, we will provide some color on that market at the R&D day next month. So I would… we’ll be… I will give you some good color on that. And then as far as the… to go after your question on second line and first line positioning for golimumab, golimumab is under regulatory review as you know and… for both RA, starting with rheumatoid arthritis and ankylosing spondylitis and we have an ongoing trial in ulcerative colitis as well.
So that’s under regulatory review. So I think it will pretty mature for us to make any comment on online positioning and total regulators get through their review but maybe we will also be able to provide some more color at the R&D day. Thanks for you question.
And, Carrie will give a brief response to the field force question. Carrie?
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
The changes in the U.S. field force were done to be effective for October 1st. We are nearly through the training stages and the alignments that are necessary and I think right now our people are feeling pretty good, pretty energized and very focused on the future.
Thank you. And next question, please.
Your next question comes from the line of Jamie Loubens [ph] with Goldman Sachs.
Hi Jamie.
Hi, just a quick question on gross margins. The gross margins were about flat with where they were last year in the third quarter and while I understand there’s seasonality, I am just curious to know why you weren’t able to show some improvement?
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Okay, I would be happy to. Thank you, Jamie for the question. Here is what really happened. You look at it, Jamie, we had REMICADE, we had AVELOX and CIPRO from there, I would say some higher animal health kind of pulling down the margins, that’s some of the product mix issues. While saying that was generally a higher margin on the Organon products that we had. When you look at those two net together, it roughly was flattening out. Going forward, Jamie, as we have said, gross margins are going to be a function of product mix and as REMICADE and animal health business grow we will put some downward pressure on the gross margin. I think longer term we are looking at gaining manufacturing efficiencies from our PTP program and also our new product launches going forward should help the product margin.
Thank you.
Jamie, we are fortunate that some of the newer products that have entered our portfolio are high margin products. The women’s health products have very good margins.
Okay. Just as a follow… can I just follow up. Is it safe to assume that without those new product launches in the U.S. and with the growing contribution of REMICADE and the expected launch of golimumab next year and the change in royalty rate, is it safe to assume that we should continue to see sort of flattish to potentially pressure on the gross margin line at least until we start to see new product launches in U.S.?
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
I think that’s right Jamie, but just keep in mind though, as we grow REMICADE we make bottom-line profits, so our margin line may get a little pressure, the operating margin line improves, so just keep that in mind as you go forward.
Right. Okay, thank you.
Next question please.
Your next question comes from the line of Steve Scala with Cowen.
Thank you, I’ve two questions. First, traditionally Q3 has not been the strongest quarter for non-ethical businesses and there would appear to be both seasonal and economic reasons why Animal Health would not have had a great quarter yet you delivered a quarter-over-quarter acceleration, so is there anything unusual in Q3, not known as of the revenue such as maybe new launches or stocking that boosted this quarter?
And secondly has Schering looked at all available public and non-public data on VYTORIN including registrational trials to see if there’s a cancer signal. The recent New England Journal of Medicine article did not consider all available data, so I am wondering if you’ve done that analysis? Thank you.
So I’ll ask Tom Koestler to answer the second question. Bob, I guess it’s fair to say that at least in consumer healthcare this year the allergy season has not been that great. So VYTORIN has been affected on the… in the unfavorable direction. In Animal Health I think it’s been innovation driven. Yes.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
There’s also a couple of things in Animal Health that we still have still increasing market penetration for the bluetongue vaccine which started in Q2. We’ve also had a patented fish vaccine that was launched in the quarter. So those are two areas in animal health and are helping us, really new product launches.
Yes. It’s too early to tell what the economic cycle is going to be when it comes to farm animals, but we’re in very good shape because of the strong innovation cycle that we have in that space. And Tom Koestler if you can answer the second question please?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Hello, Steve. The way I would answer your question is that as you know Sir Richard Peto and his colleagues in Oxford concluded that if you take the randomized control trials which you see is sharp and improve it together, there’s no evidence to provide any credible evidence on the adverse effect on cancer. So it’s the joint venture’s belief right now that cancer finding and seize is likely to be an anomaly. They are taken in light of all the available data, does not support an association at all with VYTORIN. In fact, the meta-analysis conducted by Petoand his colleagues in over 20,000 patients in these going trials is pretty persuasive.
I’d also add that there’s no preclinical evidence of oncogenecity and is out of my carcinogenicity studies. So, as appropriate, the BSMBs will depend at monitoring review boards will continue to monitor these trials going forward. But just to conclude again, we don’t… we think that this is an anomaly.
Okay, thank you. And next question please.
Your next question comes from the line of David Moskowitz with Caris & Company.
Yes, thanks. Good morning guys. Fred, you had mentioned something… there was something I had read in the press about the global credit crisis having an impact on international sales. I know, there was an earlier question about that, but could you specifically talk about what you meant when you were making those comments? Are there… is there anything out there in Europe or other markets internationally that we need to think about, from my perspective its government sponsored coverage; so, like some clarification on that? And also just on some pipeline questions, number one, is ZETIA atorvastatin product, is ZETIA a Lipitor product, is that still moving, could you give us an update on where that stands, and also could you just quickly name the products that you’re most excited about in the late-stage pipeline, the top 10 products that you talked about? Thanks.
Okay. So, in terms of the product that are the most exciting as far as I am concerned, it’s obviously TRA that looks like very, very interesting product. And the Phase II trials have been very encouraging and it is a large space; if you look at the global rank order of sales in products you are looking at Lipitor and then you’re looking at Plavix, so we are in here in a space that looks very interesting to us and the Phase II trials give us a lot of encouragement. When it comes to the comment on the global economy, in fact, I do claim a little credit for being a little early on the comments regarding Europe because at that time we were focusing entirely on the U.S. and we are a global economy and things happen around the world.
On the positive side, the European governments are very sensitive about the access to healthcare in their own populations and when we have important products like NOXAFIL, like sugammadex, like REMICADE in environments like these, we feel pretty secure that these are the kinds of products that will be protected even as healthcare budgets get tighter and Tom Koestler any comments on the last question?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
No, but I think that what I would add just Fred is that we are pretty excited, we are looking forward to the R&D day and I think you will get a good flavor at our R&D day. We will update you on our rate phase portfolio and we will also give you some insight into some of our earlier programs that we haven’t talked about before as well as the Biologics. So, I would just say that’s all… only a month away and we will have an opportunity to share that information with you then.
And ZETIA atorvastatin?
Yes. So, Tom, anything on the combo?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Yes, the combination is, the joint venture is working towards the goal as we have reported in the past, that full process is underway and our goal is to have that program viable at the time prior to the patent exploration.
Will that be something that you’ll talk about at the R&D day?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
We will see.
We do note that now the timing of that event might be November 2011, so, there is some time for Tom and his colleagues have more to work on this project. I think we have time for one more question.
Your final question comes from the line of Tim Anderson with Sanford Bernstein.
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Tim?
Hi, thanks. There’s been concern the some sort new negative analysis may surface at the upcoming HA [ph] related to SEAS data that first came out in July and I’m wondering if you are aware any such analyses being performed, if you can otherwise talk about SEAS news flow that we may have over the next few months, if any from Schering or Merck or otherwise? And a question going back to Carrie’s comments on formulary positioning, are you saying you don’t expect any disproportionate slippage in tier II formulary coverage for VYTORIN for ZETIA relative to the other cholesterol drugs as you go into 2009 needed for Medicare’s commercial plan?
So I will ask Carrie to answer the second question first and then we will come back to Tom.
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Okay.
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
When you look at the formulary access going forward and the availability of the products and remember formulary is only one type of availability, we feel confident that we have good access that is competitive to the other branded statins. It is clear, however, that across the entire category there is a growing preference in the managed care segment for the use of generics compared to other branded products however, we’ve remained in a competitive position.
And Carrie it’s fair to say that at some point people are going to become more aware again of the need to get people to the LDL goals. And in that regard there are very, very few products that can do that.
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
Yes, so…
In the high risk patients.
Carrie S. Cox – Executive Vice President and President, Global Pharmaceuticals
We do see that there is some diminution in second tier access compared to 2008; we are very comfortable that that also has occurred across the category for the branded products and therefore we remain competitive.
Thank you Carrie. And Tom?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Yes Tim, we are not aware of any data being presented in the near term. As you know, we had full data presentation from SEAS which is already presented of the European society of Cardiology and it was published in the New England Journal of Medicine just this September. So, we are not aware of any new negative data and if of course that there is some information that is going to be presented we would trust that would be handled in a appropriate scientific fashion and given the appropriate scientific process.
And, how about just rehashing the prior data that was presented July, because I think that’s the concern?
Thomas P. Koestler – Executive Vice President and President, Schering-Plough Research Institute
Yes, Tim, but again, as I said there’s really no new data. There’s been pretty good transparency on the full disclosure of the SEAS trial already and so we are not aware of any new data being presented.
Thank you,Thanks.
Robert J. Bertolini – Executive Vice President and Chief Financial Officer
Yes. So, Tom if I can just add to that while there is… we are not aware of any new data being presented and there’s always a chance that people could rehash data and present it before.
Yes. And I think we’re now at the end of our call. I just like to say that the OBS Integration is succeeding and adding value with better strength and diversity on many fronts. Our strong late stage pipeline and exclusivity profile on key products gives us special edge as we look ahead. And in a tough environment we are showing that we can power through. Thank you very much for joining us in this morning’s call.
This concludes today’s Schering-Plough third quarter earnings conference call. You may now disconnect. .
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Obama on Blago Transcript: “This Is a Family Program”

admin — Sun, 01 Jul 2007 23:44:19 +0000

just tried to reintroduce us to Tom Daschle, his new Health and Human Services secretary, but the press just wants to talk about bad Governor Blagojevich. Question time!
“Like most of the people of Illinois, I was appalled and disgusted by what I heard in those transcripts.” Barry did not get into politics to make money, but rather to “reclaim a tradition of public service.” And also he wanted to be president! “Let me be absolutely clear: I do not think that the governor at this point can effectively serve the people of Illinois.” He hopes Blago resigns, the legislature will hopefully take this up too. Obama had no contact with the govenror’s office, “I did not speak with the governor
about these issues,
” he is pretty sure! Hah! Obama’s office is absolutely sure that they didn’t do anything wrong.
Obama hasn’t been contacted by any federal officials, and “we have not been interviewed by them.” He points out that his office was “not perceived by the governor’s office as being amenable” to all the crime.
HAH: “I won’t quote back some of the things that were said about me, this is a family program, I know.” There is your patented “single moment of levity” moment. Let’s move one!
Obama attempts to defend his corrupt state: “There are extraordinary examples of public service coming out of Illinois, even after Abraham Lincoln.” Like Paul Simon and Dick Durbin, and that’s about it.
Last question. Is it about the puppy? No, it’s about funding his health care program. WTF! A wasted opportunity. Boring! Now Barack Obama will explain how “costs” work.