Alkermes plc
Q4 2008 Earnings Call Transcript

Published: 23 May 2008

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes Conference Call to discuss the Company's Fiscal Year 2008 Financial Results. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Alkermes' request. At this time, I would like to introduce your host for today's call, Ms. Rebecca Peterson, Vice President of Corporate Communications at Alkermes. Please go ahead.

[Rebecca Peterson:]

Thanks, Matt. Good afternoon, and welcome to the Alkermes conference call to discuss our financial results for fiscal year 2008, which ended on March 31st. With me this afternoon are David Broecker, CEO of Alkermes; Jim Frates, our CFO; and Richard Pops, our Chairman. Before we begin today, let me remind you that during the call, we will make forward-looking statements relating to among other things our expectations concerning the commercialization of RISPERDAL CONSTA and VIVITROL, our future financial expectations and business performance, and our expectations concerning the therapeutic value and development of our product candidates. Listeners are cautioned that these statements are neither promises nor guarantees, but are subject to risks and uncertainties that could cause our actual results to differ materially from the results contemplated by these forward-looking statements. You can find a list and a detailed description of these and other risks in our Annual Report on Form 10-K, which will be filed shortly, as well as other periodic reports filed with the SEC under the Securities and Exchange Act of 1934 as amended. We undertake no obligation to update or revise the information provided in this call. This afternoon, Jim Frates will discuss our fiscal 2008 financial results, and David Broecker will provide an update on the company. We'll then open up the call for Q&A. But before I turn over the call to Jim, I'd like to tell you about an exciting new development. We are very pleased to disclose that Alkermes has signed an agreement with J&J for the development and commercialization of a four-week formulation of RISPERDAL CONSTA. The two-week formulation is now a growing, blockbuster product, and we are excited to announce that we are pursuing this new formulation, which could offer patients and physicians another dosing option. David will provide additional details about the program and our pipeline shortly. Now, I'll turn the call over to Jim.

[Jim Frates:]

Thanks, Rebecca. Good afternoon, everyone. Fiscal 2008 was a very successful year financially. On a GAAP basis, we achieved record net income of $167 million or basic earnings per share of $1.66 and diluted earnings per share of $1.62. Our earnings were driven by manufacturing and royalty revenues from RISPERDAL CONSTA and significant incoming cash from the sale of the company's stake in Reliant Pharmaceuticals. On a pro forma basis, we reported net income of $31.8 million or $0.32 per basic share and $0.31 per diluted share. Our financial performance for fiscal 2008 was at the high end of our financial expectations we provided in May 2007. For a reconciliation of our pro forma net income to GAAP, please see the press release we issued earlier today. Behind the numbers, I view our performance as an indication of the strength and resiliency of our business model. Despite Eli Lilly's termination of the AIR Insulin program, we delivered positive cash flows from operations of over $40 million last year. We enter fiscal 2009 with a number of unique strengths, a solid foundation with over $460 million in cash and investments, a strong and growing economic engine in RISPERDAL CONSTA and multiple drivers for near-term growth. We have an opportunity with VIVITROL to build a meaningful franchise in the treatment of addiction. We are managing our investment through our partnership with Cephalon. We have a major late-stage opportunity in exenatide once-weekly, a product with important clinical benefits that is approaching NDA submission. We have an emerging pipeline of proprietary products to provide long-term growth. And we are investing in a share repurchase program to further leverage our earnings potential. Today's press release details our fiscal 2008 results and is quite comprehensive, so our focus on the most important elements of our business. If you have any questions, we'll be happy to answer them during the Q&A session. I'll begin with RISPERDAL CONSTA. The momentum of the product continues to build. End market sales by Johnson & Johnson were $309 million for the quarter and approximately $1.2 billion for fiscal 2008, representing a 27% increase over fiscal 2007. Manufacturing revenues related to RISPERDAL CONSTA were $29.1 million for the fourth quarter and $95.2 for the fiscal year. Royalty revenues related to the product were $7.7 million for the fourth quarter and $29.5 million for the fiscal year. We are gratified to see RISPERDAL CONSTA continue to grow, particularly outside the United States where price and value pressures from government payers are most intense. In our fourth fiscal quarter, 67% of RISPERDAL CONSTA sales came from outside the United States. As J&J said on their most recent earnings call, when change in wholesale inventory normalized, RISPERDAL CONSTA achieved sequential first quarter sales growth of over 10% on an operational basis in the United States and 16% internationally. RISPERDAL CONSTA is marketed in over 60 countries worldwide and with patent protection through 2020. We look forward to the continued growth and success of this product. Today's news that Rebecca mentioned only adds to that. With respect to VIVITROL, gross sales by Cephalon during fiscal 2008 were $18 million and are in the range of the financial expectations for VIVITROL that we provided in May 2007. Gross sales for the fourth quarter of fiscal 2008 were $4.3 million compared to $5 million for the third quarter. Sales were sequentially lower due to the realignment of the sales team in the third quarter. In the fourth quarter, we further reduced the total ops in the product to $5.7 million, down from approximately $7 million for the third quarter. Keep in mind that we now share this loss with Cephalon. So our portion of the loss was approximately $2.85 million for the fourth quarter. Based on its efficacy profile, we believe strongly in the value of VIVITROL and will continue to work with our partner to drive sales. We are confident in our long-term outlook and therefore, we initiated our first share repurchase program in fiscal 2008. With our EPS goal of $2 to $3 a share in 2013, we view the repurchase program as an excellent investment. With the completion of the accelerated share repurchase program we announced in February, we've repurchased 7 million shares of our common stock for $93.4 million, which represents approximately 7% reduction in our shares outstanding. This is all part of the $175 million share repurchase program authorized by our Board of Directors last November. We will continue to make repurchases through out this year. As a result of our share repurchase, we currently have approximately 95 million basic shares outstanding. I will now outline our financial expectations for fiscal 2009, and I remind you that these statements are forward-looking. Again full details can be found in today's press release. Before I provide the details of our financial expectations, you should understand the way we view our business. First, we've been building our preclinical pipeline over the past few years, and have had some real successes. As a result, we're advancing several development programs into the clinical this fiscal year. Second, even while investing in our pipeline, we remain disciplined in the way we operate the business and are targeting positive cash flows from operations. Let me also give you as little bit more detail on VIVITROL. We have worked hard through the fiscal year to reduce the collaborative losses on VIVITROL and had delivered on that, bringing losses from approximately $25 million in the first quarter down to $5.7 million in the fourth quarter. The key for this year is to drive sales growth. For fiscal 2009 we expect gross sales from VIVITROL to range from $25 million to $35 million, and we expect spending on the product to be approximately $40 million. We will continue to manage VIVITROL through the year and if there are any losses, those loses would be shared with Cephalon and would not be immaterial. We think the product is on its way to breakeven, and we believe that we have an exciting commercial opportunity in VIVITROL. With that, I'll turn to our specific financial expectations for fiscal 2009. We expect total revenues to range from $175 million to $200 million, which we break out as follows

[David Broecker:]

Thanks Jim and good afternoon everyone. Jim described how we ended the fiscal year in a very strong financial position. Most of you are well aware of the products and candidates underlying this strength. RISPERDAL CONSTA is a blockbuster product that continues to grow, and at the same time we feel that the competitive threats around it are diminishing significantly. We continue to develop the market for VIVITROL, while managing the business for breakeven. Behind our commercial products, Exenatide once-weekly is increasingly recognized as one of the best new diabetes products in development, and the progress in the commercial facility is on track. The bottom line is that we continue to manage this base business towards the $2 to $3 earnings per share objective in 2013. As we enter this new fiscal year, one of the commitments we are making to you is to provide more visibility into our pipeline. While our recent communication are focused on our commercial and late stage products, our development teams have been working steadily over the past few years to build a very exciting pipeline, which has now reached a stage where multiple products are entering clinical trials. These products will be important value drivers for us going forward. The rationale for these programs leverages our experience in developing products in psychiatry, addiction and respiratory and also builds on our existing proprietary platforms as we push the technology to new levels. And we have the expertise to scale up and commercially manufacture these types of products. We expect to disclose three new development programs from our pipeline during the remainder of calendar year 2008. Today, as Rebecca mentioned in her introductions, we're disclosing the first of these candidates. We are discussing for the first time our agreement with J&J for the development and commercialization of a four-week formulation of RISPERDAL CONSTA. The lead formulations have already been identified and we expect J&J to begin clinical studies in the first quarter of calendar year 2009. The net economics for the four-week RISPERDAL CONSTA program are the same as what we receive on the two-week formulation. We believe that this product will build on RISPERDAL CONSTA's tremendous success in treating patients with schizophrenia and leverage the wealth of data that has been generated around the world in support of this brand. Our new agreement with J&J is a testament to both our extended-release technology and the commercial success of the two-week formulation of RISPERDAL CONSTA. Earlier this month, at the American Psychiatric Association meeting, 14 posters were presented on RISPERDAL CONSTA. These data underscore the fact that RISPERDAL CONSTA is evolving into a gold standard of efficacy in the treatment of schizophrenia. Let me briefly touch upon three of the most important highlights from this meeting. First, J&J presented positive results from a large groundbreaking study comparing RISPERDAL CONSTA to quetiapine, which is also known as Seroquel. And Seroquel is the best selling oral atypical antipsychotic in terms of both revenue and prescription. The study results were striking. Over a two year treatment period, almost twice as many patients taking quetiapine relapsed compared to those taking RISPERDAL CONSTA. This is the first study conducted in more than 30 years to compare a long-acting injectable antipsychotic to an oral formulation. And we are pleased to see such positive outcomes. Second, J&J presented from a study RISPERDAL CONSTA comparing outcomes in patients with early schizophrenia to those with more advanced disease. Nearly 90% of the patients with early schizophrenia were relapse-free over one year compared to roughly 78% of patients who had been diagnosed more than three years prior. These data are remarkable and underscore the important role that RISPERDAL CONSTA can play as a frontline therapy in schizophrenia. Third, J&J presented key data to support the two recent sNDA filings for RISPERDAL CONSTA. J&J submitted the sNDA, seeking approval for use as a deltoid injection last November, and we expect the FDA to respond to this submission later this calendar year. Last month, J&J submitted an sNDA, seeking approval for use in patients with frequently relapsing bipolar disorder. These submissions represent new growth opportunities, and we look forward to the FDA's responses. Let me conclude the discussion of RISPERDAL CONSTA with a comment on paliperidone palmitate, a long-acting formulation of INVEGA. Results from the Phase III program were presented for the first time at the APA meeting this month. And many of you have asked for our perspective on this. Our view is that in contrast to the wealth of data accumulating year-after-year for RISPERDAL CONSTA, the two posters on paliperidone palmitate provided little information to generate interest within the physician community. We believe that the scarcity of even early data for this product candidate stands in striking contrast to the enormous amount of clinical experience and outcomes data that support RISPERDAL CONSTA in markets around the world. Now, I'd like to turn to VIVITROL. We believe in the ability of this product to help people face with the challenging disease of alcohol dependence. We are continuing to work with Cephalon to increase sales and manage the business to breakeven performance by the end of the year. Our job is to show you results in terms of sales, and we remain optimistic about the potential of this product. We are also working on multiple opportunities to grow the brand. Our partner, J&J, recently submitted a new drug application to the Russian regulatory authorities, seeking approval for the treatment of alcohol dependence. This disease has a major problem in Russia, and patients there have few treatment options. In addition, we expect to initiate a Phase III registration study of VIVITROL for opioid dependence by the end of June. The main study will be a six-month multi-center study in approximately 200 opioid-dependant patients. Participants completing the six-month study will have the opportunity to continue on in an extension phase. We think opioid dependence could be an important new indication for VIVITROL and look forward to updating you on the start of this trial. Turning back to our pipeline. Exenatide once-weekly continues to generate a great deal of interest both in the investment and healthcare communities. We look forward to sharing with you both the 30-week and 52-week data from the Phase III or duration 1 study at the upcoming American Diabetes Association Annual Meeting in June. Like you, we are eager to advance exenatide once-weekly through the development and regulatory processes, so that the product can reach patients in need of this treatment option. We have an aggressive timeline and are on track. We are manufacturing material at the commercial scale and continue to plan for commercial readiness by the end of calendar year 2008. We have extensive experience scaling up extended release injectable products and we feel very good about where the project currently stands. On the clinical side, the collaboration is working to further demonstrate the value of Exenatide once-weekly through additional clinical studies, designed to support commercial launch of the product. The first of these three trials is under way with study results expected in the first half of calendar year 2009. Beyond Exenatide once-weekly we have a robust pipeline of candidates that we are moving forward. We intend to announce at least two additional new development programs during the calendar year, and will share details about these programs once the clinical plans are in place. We are very excited about this pipeline and expect to have eight products in clinical trials by the end of March 2009. These eight candidates includes, Exenatide once-weekly, VIVITROL for opioid dependence, ALKS 27 for the treatment of COPD, ALKS 29, an oral candidate for alcohol dependence, ALKS 33 a novel opioid-receptor modulator with potential across a range of behavioral [work] disorders, four week RISPERDAL CONSTA, and two undisclosed product candidates. In conclusion, over the next few months, we are focused on the following milestones

[Rebecca Peterson:]

Thank you, David. And operator, with that we will now open it up for Q&A.

[Operator:]

(Operator Instructions) Our first question is from Cory Kasimov of JPMorgan. Your question please?

[Cory Kasimov:]

Thank you. Good afternoon guys. Thanks for taking the questions. I want to start with this new disclosure about the once-monthly CONSTA, and maybe give a little bit more visibility into that. With this going into the clinic next year, given the extensive experience supporting the twice-a-month version, what type of clinical data do you at this time anticipate is going to be necessary to gain approval of this product?

[David Broecker:]

Cory, this is David, great question. Obviously, we are very excited about taking on this project as well. And as we mentioned, the plan is to do a Phase I essentially PK study first quarter of next year, and then based on that and looking at their profile, it will inform us about what the rest of the development program will look like for this product. So we are going to have to kind of wait for those results before we know exactly what the timeline to clinical strategy is going to be going forward

[Cory Kasimov:]

Okay. And I'm not sure, but this is follow-up if you can disclose any of this information, but curious to know when this agreement may have been reached and then from there if you can speculate, you care to read into what this may or may not say about J&J's expectations for palmitate?

[David Broecker:]

I don't want to comment on the perspectives or expectations around paliperidone palmitate. Again I would refer you to J&J for further details on that. But suffice it to say, this is a new agreement that we entered into just very, very recently. And so we're looking forward to doing all the work together in the clinic first quarter next year.

[Cory Kasimov:]

Are there milestones attached with this agreement, milestone payments, okay?

[Rebecca Peterson:]

We've guide you to right now. And Cory I'll just add to that, that clearly we are very encouraged to have lead formulations identified and are very excited about the prospects for this program.

[Cory Kasimov:]

Okay, sounds great. And with regards to ongoing progress to validate the third bulk line for the existing formulation of CONSTA, can you comment on that?

[David Broecker:]

Well, we still that's based on the capacity requirements and outstanding jobs that our Ohio Group is doing in terms of improving yields. We haven't had to pull the trigger yet on validating that line. It's basically in place ready to go whenever we need it.

[Cory Kasimov:]

Okay.

[David Broecker:]

So the expectations that Jim outlined in the supply requirements for next year, we envision coming out of the two existing bulk lines.

[Cory Kasimov:]

Okay. And then lastly just to get a better sense of the impact of AIR Insulin on that discontinuation. Can you discuss at all or just mention the impact if any that this has on the 2013 EPS goal?

[David Broecker:]

Yes. I mean it really doesn't impact it at all. Obviously, we were disappointed that Lily made the decision to terminate the program. But I think as you know, we made the decisions we needed to make to do the restructuring back here. And we are now ready to go forward and invest in this proprietary pipeline that we're excited to talk about, and over the course of the year.

[Cory Kasimov:]

So generally speaking, the P&L did not have that much sensitivity to the AIR Insulin?

[David Broecker:]

Exactly.

[Cory Kasimov:]

Okay, great. Thanks for taking the questions.

[Rebecca Peterson:]

Thanks a lot, Cory.

[Operator:]

Our next question is from Jamie Rubin of Morgan Stanley. Your question, please?

[Jamie Rubin:]

Thank you. I just wanted either you, Jim or David, to further elaborate on the self-forced dislocation on VIVITROL which caused the sequential decline in the fourth quarter. And where you are in terms of numbers and what you'll expect that will look like for your first quarter 2009? And secondly, so the difference in the R&D revenue guidance for 2009 was the absence of Lilly AIR Insulin. Did I hear that correctly?

[Jim Frates:]

Yes, we had over $50 million of revenue from Lilly last year, Jamie. And obviously, we were in the throes of late-stage Phase III development. So, that was a major loss. At the same time, though, we are losing some revenue from Amylin as we go forward, because we are winding up our work with them to turn over the facility, which is we talked about we're targeting the end of calendar year 2008 for that. So, that's the R&D revenue from Amylin is also coming down a little.

[Jamie Rubin:]

So, that number, that $20 million to $25 million then, that's mostly R&D revenue related to exenatide LAR, and then…

[Jim Frates:]

Yes.

[Jamie Rubin:]

And then 2009, that should go away essentially?

[Jim Frates:]

Some of that will go away. I think there will still be some of it there, but now we just announced our four-week program with J&J. So, there is anticipated R&D revenue with Johnson & Johnson on the four-week concept that will be going forward. And we're going to announce new programs as we go through the year, as David discussed. So, we'll look forward to keeping both the partner R&D business, but also the loss from Lilly, the R&D revenue just earlier in March was significant for us.

[David Broecker:]

And, Jamie, I'll pick up a little bit on the sales for VIVITROL. And the first quarter obviously was the first full quarter with the new organization in place. And just to remind you, we basically reduced total resources by about 50, 60% crossable to organization. So, it really reflects the new team getting in place, getting their territories sort of aligned and meeting the doctors in them and then putting the plan in place going forward. So, we continue to be very optimistic about the product. We continue to hear about its impact in terms of patients-wise. And the focus of the efforts right now are trying to really develop the market and go after big opportunities. And that could mean that sales could be a little lumpy over the course of the year, because some of these opportunities do take time to sort of bear fruit.

[Jamie Rubin:]

And if I can just follow up and just with one more question. You just said that AIR Insulin does not impact your 2013 goal of $2 to $3, but then you also said that the loss of revenue was significant. So what are you making up that $2 to $3 with or what are you making up within your P&L to get to that $2 to $3 of that AIR Insulin?

[Jim Frates:]

Well, I think the major difference between where people stand looking out and where we believe we will be in four to five years is the growth of RISPERDAL CONSTA. And as I look out at all the analyst models that folks have, people have RISPERDAL CONSTA peeling off even as early as this year. So, RISPERDAL CONSTA is obviously a major part of that component and not requiring heroic growth from here. We have exenatide LAR or once-weekly exenatide in those numbers. And we believe in four to five years, VIVITROL can be quite a substantial contributor. So, those are the three main drivers that we have. Now, of course, we expect profitable results from pulmonary insulin out in those years as well, but even with the loss of that program and the significant loss of R&D revenue right now, but that product should have been on the market in that timeframe. And that would help us in that regard, but we still feel confident that we can hit those targets without pulmonary insulin.

[Jamie Rubin:]

Okay. Thank you.

[Jim Frates:]

You're welcome.

[Rebecca Peterson:]

Thanks, Jamie.

[Operator:]

Our next question is from Dave Windley of Jefferies & Company, your question please?

[Dave Windley:]

Hi, thanks. Jim, on the R&D expense, if I did my calculation correctly, it looks like the under-funded R&D from '08 to '09 increases about $50 million. Is that fair?

[Jim Frates:]

Well, I think you are probably over estimating, because we are taking some cost out of R&D days with the loss of Lilly. So, you got to do in a couple of step process. Lilly is coming out and some of our proprietary R&D is going back in.

[Dave Windley:]

Okay. All right, I took R&D revenue minus R&D expense and took the difference between the two years for that calculation, got about $48 million.

[Jim Frates:]

That's in the Ballpark.

[Dave Windley:]

Okay. David, you talked about several programs that you expect to have in the clinic. Is it possible to kind of rank order what's going to consume the majority of that R&D expense?

[Jim Frates:]

Well, I think rank ordering, we haven't got into that kind of granularity, Dave, but we talked about the eight programs that we are going to have. We have to more to announce. And I think the other thing is, as you know, the Lilly revenue was covering a lot of overhead. It's now being borne solely by Alkermes.

[Dave Windley:]

Okay.

[Jim Frates:]

And that also gets factored into the mix. But I think when you look at the totality of the programs, that's where the R&D expense is coming from.

[Dave Windley:]

Okay. Maybe another way to ask, of those eight, how far along would the most advanced project be?

[Jim Frates:]

Dave, there is usually correlation between spend and stage of development.

[Dave Windley:]

Sure.

[Jim Frates:]

The late stage programs clearly are Exenatide once-weekly in Phase III, scaling up in Ohio. The initiation of the VIVITROL study for the opioid dependence, that's a Phase III program. And then from there you get into sort of the Phase II programs OX-27, OX-29.

[Dave Windley:]

Yeah, okay.

[Jim Frates:]

And then you get into the Phase I programs, OX-33, four-week transfer. And fair to say that probably that the two undisclosed programs will be Phase I programs as well.

[Dave Windley:]

Okay. Changing gears a little bit Jim on CONSTA manufacturing. I try to do a quick calculation on gross margin and it looks like if I use mid-points again on the guidance for next year, you are looking for gross margin to improve about five percentage point is that approximately accurate, and if so what's driving that?

[Jim Frates:]

Yeah, I think it's in that range Dave, and its volume.

[Dave Windley:]

Okay. So continue generating more volumes but still only using the two lines?

[Jim Frates:]

Right, exactly.

[Dave Windley:]

And on that third line are you – do you to have to take any cost on that or is it not essentially placed in service yet?

[Jim Frates:]

It's not placed in service. And I'll also remind everybody that it's actually on J&J's books because they paid for the line.

[Dave Windley:]

Right good point.

[Jim Frates:]

So we do not have the depreciation associated with that.

[Dave Windley:]

Good point. And then my last questions in on VIVITROL you are including some manufacturing revenue in your guidance, but no royalty revenue. Is it possible that it could work that way or you are just being conservative or could you reconcile this, do it for me?

[Jim Frates:]

Well our deal Cephalon, Dave runs through the net collaborative profit line.

[Dave Windley:]

Right.

[Jim Frates:]

So we won't royalty revenue from that. And there is a third sheet in our press release lays out the changes in numbers there. So, when the product breaks even, we ought to see that net collaborative profit line go up as we share 50% of the profit.

[Dave Windley:]

Okay, all right. Thank you.

[Jim Frates:]

You're welcome.

[Operator:]

Our next question is from Jim Reddoch of FBR, your question please.

[Jim Reddoch:]

Hi, thanks. David, when you said that you have seen competitive threats falling away, competitive threats to CONSTA falling away, what's the size of that [perhaps] long-acting were you referring to? Another question after that.

[David Broecker:]

Jim I'm sorry, you broke up a little bit there, just the diminished competitive threats around RISPERDAL CONSTA?

[Jim Reddoch:]

Yes, when you said the competitive threats were falling away, what besides that long-acting were you referring to?

[David Broecker:]

It was specifically about Zyprexa Adhera not getting the FDA approval. And again as I mentioned, I think it's still little too early to tell what the impact of paliperidone palmitate is going to be. We saw two posters but we saw 14 posters for RISPERDAL CONSTA, and obviously now with today's news about four week, we see RISPERDAL CONSTA being a growing brand for many years to come.

[Jim Reddoch:]

Is this once every four weeks also Medisorb technology?

[David Broecker:]

Yes. It leverages everything that we've done on the two week program.

[Jim Reddoch:]

Has there been any technological improvements with the beads that will allow you to [wear the spheres], that will allow you to have smaller gauge needle?

[David Broecker:]

Little early to really comment on that at this point. We've chosen some of the leaf formulations and we're just going to have to see how they perform before we give you some specifics around that.

[Rebecca Peterson:]

But Jim let me just add to that.

[Jim Reddoch:]

Okay.

[Rebecca Peterson:]

But keep in mind it would be a physician or nurse-administered product.

[Jim Reddoch:]

All right. And then what percent of oral RISPERDAL is bipolar right now and what's the expectation for the proportion of bipolar with CONSTA?

[David Broecker:]

Do you Rebecca? Off the top of the mind I’m not sure.

[Rebecca Peterson:]

So Jim I don’t have the break out in front of me, but clearly bipolar is a growing indication for the field, and as you see many of these products getting label indications for bipolar, sales are increasing for these products. So we are very excited about the opportunity for RISPERDAL CONSTA in the area of bipolar.

[Jim Reddoch:]

Right. And then lastly, J&J is not covering the development expenses for the once monthly?

[Rebecca Peterson:]

No, in fact they are.

[Jim Reddoch:]

Oh they are. Okay. So that is not contributing to higher R&D [issue] right?

[David Broecker:]

There is a little bit of that in that 20 to 25 number that Jim quoted. We have it in

[Rebecca Peterson:]

They would contribute to the R&D expense.

[Jim Frates:]

Yeah, it will be offset essentially. They are going to cover all our expenses for the development Jim actually, and it would be in R&D revenue and you’d also see it in R&D expense.

[Jim Reddoch:]

Okay and those two should totally wash?

[Jim Frates:]

Yeah. For Amylin and for the long acting J&J four week.

[Jim Reddoch:]

Got it. Okay. Thank you.

[Jim Frates:]

You are welcome.

[Operator:]

Our next question is from William Ho of Banc of America. Your question please.

[William Ho:]

Hey, guys. Thanks for taking my question. I guess the first questions, with respect to RISPERDAL CONSTA, and going from every two weeks to every four weeks, what's the difference in the formulation, and do you need technological improvements to get there? What exactly is involved?

[David Broecker:]

William this is David. I’ll remind everybody that VIVITROL is a once a month injection as well. And when you look at the dose, we think we certainly have the capability from our polymer perspective and from a manufacturing process perspective to do what we need to do. At least, the work that we’ve done with generating these lead formulations, we’ve got all the capabilities to do that.

[William Ho:]

Okay, great. And then just one follow-up question on LAR. Last week at our conference, as Amylin had indicated that some of the issues that they were having or that they were trying to deal with was that the FDA doesn't really have guidance towards developing a long-acting injectable. That being said, you guys developed a few of those and they characterize that perhaps they may have to do a PD bridging study. Can you talk a little bit about what you may have done in the past? And if you do have to do such a study, what that might impel from your knowledge?

[David Broecker:]

Good question. Just maybe the best example is VIVITROL. When we got VIVITROL approved, all of the material that we supplied for that clinical program came out of a unit that was basically one kilogram in scale. And we produced dozens of batches at the one kilogram scale to meet all the requirements for the Phase III in safety clinical for VIVITROL. We've had discussions and had ongoing discussions with the FDA about how we were going to demonstrate comparability of that material to the 20 kilogram process that we knew we needed to have in place in order to launch the product. And once we produce the material at the 20 kg scale, once we got the data, we were able then to sit down with the FDA and talk to them about an in vivo-in vitro correlation strategy, and basically we're able to do it based on the data, the science and the conversations that we had with the FDA. And so, I know people are trying to say is that possible with once-weekly exenatide, and the answer is yes. And I think as we've talked, it comes down to making [material-led] which was something that we've done at the West Chester facility. It's gathering that data and now it's having the conversations with the FDA and showing them the science behind it. So, we think they are very parallels between these programs.

[William Ho:]

Great. Thank you.

[Operator:]

Our next question is from Bert Hazlett from BMO Capital Markets. Your question, please?

[Bert Hazlett:]

Thanks for taking the questions. Just a couple of them. The $18.1 million regarding Eli Lilly in the termination of the program, should we expect any residual charges with regards to AIR Insulin or do you think that's it?

[Jim Frates:]

No, Bert, that's it. We've written off the equipment that was dedicated to it and the restructuring charge related to the termination of the 120 people that we had to let go because of that.

[Bert Hazlett:]

Okay. Second, clearly good increase with regard to CONSTA. Did J&J or do you, with regards to the 27% increase, have a volume versus exchange mix of the breakout of that? Clearly, the weak dollar might have helped that. I'm just trying to tease out exactly how much was volume related there?

[Jim Frates:]

Yeah, absolutely. It was absolutely positive impact of the currency, but units increased approximately 15%.

[Bert Hazlett:]

Okay. And then with regards to the four-week formulation, maybe you answered this, maybe you got to it, are the economics of the four-week formulation the same as CONSTA? And I guess the answer, just to maybe split hair a little bit with the answer you gave a little earlier, you haven't guided to any milestones. But are there any milestones in the agreement?

[Jim Frates:]

Sure, Bert. No, there are no milestones. They'll just be covering our R&D costs essentially, which is fine from our perspective. And in terms of the economic yield, it's essentially the same. It's meant to be the same. Of course, we don't know what price they're going to charge, and we don't know what our manufacturing costs are going to be but we've agreed to essentially make it the same to Alkermes.

[Bert Hazlett:]

Okay.

[Jim Frates:]

We'll be dealing with that in the future.

[Bert Hazlett:]

That's great, that will be a nice product. And in terms of the Phase I PK study and in terms of the expectations for timing, what can we think about, how long this might take? I mean, I know it's early days you just announced this, but how long do you think this might take? Are you able to do it as without full blown clinicals or what do you need to do to get this through to fruition in terms of FDA approval?

[Jim Frates:]

You know, Bert, it will be a typical Phase I type of study where we'll be looking at some PK and safety data. Now because it's a month in duration, it's going to take at least a month but it's not going to be a six month type of thing. So it's going to be a fairly quick study.

[Bert Hazlett:]

Okay, thanks.

[Rebecca Peterson:]

Thank you.

[Operator:]

Our next question is from Scott Henry from Roth Capital, your question please.

[Scott Henry:]

Thank you. I just had a couple of questions. First, with regards to the Lilly agreement, are there any expectations for any sort of payment coming from them similar to what we saw with Nektar and Pfizer?

[Rebecca Peterson:]

So Scott, thanks for the question. We are currently working things out with Lilly right now and we'll update you as soon as we can.

[Scott Henry:]

Okay, fair enough. Secondly, just when we look at the fiscal year 2009, how should we think about the quarterly progression? Should we expect the loss to be at highest and then improving throughout the year or is there anyway we should think about that trajectory?

[Jim Frates:]

Yeah I think, just trying to put this in the right context because we typically don’t give quarterly guidance, and I think as we get into some of these clinical programs though you’ll see some more spending through the course of the year. Of course that’s going to be offset by increasing sales of VIVITROL and increasing sales of CONSTA we hope. So, at this point we are not going to get into giving quarterly guidance right now.

[Scott Henry:]

Okay. That’s helpful. And then just a final question in terms of RISPERDAL CONSTA in Japan, any updates there, how should we think about the timing there?

[Jim Frates:]

Rebecca, you are probably --.

[Rebecca Peterson:]

So Scott J&J hasn’t given specific guidance on when they expect to get approval. Clearly the cycle is a little bit longer than what's here in the US, but if the Japanese regulatory authorities stick to their timelines, we should be hearing later this year.

[Scott Henry:]

Thank you.

[Rebecca Peterson:]

Thank you. Operator, we have time for one more question.

[Operator:]

Our final question is from Cory Kasimov of JPMorgan. Your question please.

[Cory Kasimov:]

Yeah, thanks for taking the follow-up. Just one question quick, regarding the technology being used to potentially move CONSTA from a twice a month to once a month product, could that eventually be applied perhaps to the LAR program to further optimize or extend the dosing of that molecule?

[Jim Frates:]

Good question. It's something that we’ve considered and I think we’ll – that’s something we’ll do, we’ll inform you about it later/

[Cory Kasimov:]

Okay. Thank you.

[Jim Frates:]

Okay.

[Rebecca Peterson:]

Thanks Cory. Thank you everyone for coming in and if you have any additional follow up questions, we’d be happy to take them. Have a great evening.

[Operator:]

Ladies and gentlemen thank you for participating in today’s conference. This concludes the program. You may now disconnect. Good day.